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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
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Hello, I am Hishinuma, serving as the Director in charge of finance division at Bridgestone Corporation. Thank you very much for participating in this call. I am to report to you on the financial results for the third quarter fiscal 2018. I am going to go through my presentation reference -- presentation material that you can find in the company's webpage and to be followed by Q&A. So if you have means to access the presentation material, please go there. I'm going to first start with the business and the finance performance for the third quarter FY '2018, to be followed by consolidated projections for the same fiscal year. First, business and finance performance for the third quarter. Page 4, stating the business environment surrounding Bridgestone Group in the third quarter. Currency exchange, the weaker Japanese yen versus -- vis-à-vis the U.S. dollar, the stronger Japanese yen vis-à-vis the euro versus previous year, and the weak emerging currencies persisting. Raw material prices. Natural rubber prices trended lower than last year. At the same time, crude oil prices were higher than last year. Tire demand in Japan -- there was the early buying in 2017 in anticipation of the price hike coming for the winter tires. But all in all, global tire demand continued to grow steadily. Page 5, tire sales growth for the third quarter fiscal 2018 on the year-on-year unit basis. Net PSR on the global, the third quarter have been 98% from the previous year. And for the TBR, 102%. On the 9 months basis, 99% for the OE and the PSR -- OE and the REP and PSR. And TBR 9 months basis, 103% up (sic) [ up versus ] last year. And from the OE sales, were quite robust because of the priorities supplied to the segment. But at the same time, the core is suffering in the replacement segment because of lack of the tires to be sold, or [ on the ] tires and high rim diameter tires continue to sell well. Consolidated results for the third quarter fiscal 2018. Net sales JPY 898.7 billion, JPY 91.4 billion operating income. The drop was in the top line and operating income. For the tire business, Latin American currencies trended lower, weaker. However, sales increases they came about, and therefore the sales of high rim diameter tires as well as all-around tires, or the so-called value-added tires. For the diversified products, one-off charges were there in order to reconstruct the diversified and the products base, gearing more to established solution business. So the [ OS ] negative in operating income on the year-on-year basis. Profit attributable net to owners of the parent, the positive growth for this in the third quarter. On the 9 months basis, net sales was JPY 2,674.1 billion, more or less constant from the previous year. Operating income came in at 3% at JPY 290.8 billion. Profit attributable to owners of the parent over the 9 months period trended higher year-on-year.
Analysis of consolidated operating income for the third quarter fiscal 2018 on Page 7. Price, mix, volumes and et cetera, including the weakness of Latin American currencies [ as follows, ] a substantial negative in the diversified business. Those are the factors behind the minus JPY 3.9 billion. At the same time, for the operating net income over the 9 months basis, JPY 17 billion was the negative on SG&A, more or less offset by cheaper raw materials. They're cheaper by JPY 18 billion. The price, mix and volume, et cetera, minus JPY 4.8 billion. These are all in all in the JPY 8.8 billion negative over the year. Page 8, financial results by geographic segment. In Japan, as we felt the impact of year-on-year decline in demand due to early buying in 2017 as well as temporary expenses in the diversified products, lower sales and profit for the third quarter. But for the 9-month period, both sales and profit were higher. In the Americas, due to weaker currency in Latin America and increase in material cost and diversified product, profit decreased. In Europe, Russia, Middle East and Africa, higher sales volume resulted in higher sales and profit. China, Asia Pacific, especially in China and Thailand, sales volume decreased, resulting in lower sales and profit. Page 9, consolidated projection for fiscal 2018. Page 10, business environment. For currency exchange, we are assuming the yen to strengthen against the U.S. dollar, and weaken against the euro. We expect weaker emerging currencies, centering on Latin America, to continue in the fourth quarter. Raw materials prices. We expect natural rubber to be lower year-on-year and crude oil to be higher year-on-year. We expect tire demand to continue to show steady growth globally. Page 11, tire sales growth projection for fiscal 2018. PSR, no change year-on-year. TBR, slight increase year-on-year. Similar to the third quarter, we expect OE sales to be strong in each region. DSR (sic) [ PSR ] and ORR are expected to be strong, in line with the forecast announced in August. Page 12. Consolidated projection. Based on the third quarter results and fourth quarter projection, we have revised the forecast announced on August 9. Reasons for revisions include sales volume decline in the REP market due to OE priority, product mix and weaker emerging currency and cost increase in diversified products, including higher petrochemical feedstock. Page 13. Analysis of consolidated operating income after the revision. We expect ORR and HRD to make positive contribution in terms of sales volume, price and raw materials. But due to the impact of foreign exchange and one-time expenses in diversified products, we have revised the profit by JPY 9 billion on a full year basis year-on-year. Summary of the third quarter results and full year projection. As for the third quarter result, operating profit was down year-on-year due to weak Latin American currencies and temporary increase to restructure the diversified product business. As for full year projection, we revised 2018 guidance announced on August 9, given the external market situation. As for highlights, we revised sales forecast for PSR and TBR, but we expect strong growth to continue for HRD and ORR. As for price, we are implementing price hikes in the Americas and Europe to keep appropriate price positioning. In North America, OE priority is continuing for PSR and TBR for the future recursion to more profitable replacement tires. For diversified products, we are focusing on restructuring to strengthen solution business, centering on chemical and industrial products in Japan. That concludes my presentation. Thank you. So now, we are ready to take questions from you. So if you have questions, please signal us.
So to start, we would like to ask Mr. Matsumoto from SMBC Nikko Securities with your questions.
So my 2 questions. Question number one. I guess, the key point of focus would be price, mix, volume, and this is a customary question by now. But for the third quarter, minus JPY 3.9 billion, would you please give me the breakout of that? And also on a full year basis. So on the [ 40 -- ] third quarter and full year, or the final quarter, however that will be convenient for you to answer. And also, are there any factor or item outside of your expectation? If you would share that information with us, that will be appreciated. My second question refers to the price increases in Europe and North America. This progress to date, first of all, has it started already and which other region? And if so, what is the penetration to date this would have on the status quo? So those are the 2 questions.
Thank you. So the price, mix, volume in the third quarter on year-on-year basis, minus JPY 3.9 billion prices. Because of the lower raw material [ hana ] charges, [ all our may ] effect was negative. In the meantime, Latin American on the weaker -- the currencies caused us to hike prices. And also, on the price increases, in the diversified business area products and given raw material, the cost charges. So all in all, the plus JPY 2 billion. Volume. Of course, the last year in Japan, there was early buying of winter tires. However, all in all, with that repercussion effect and still positive JPY 2 billion, including, among others, specialty tires sales increase. In the second half, by the way, the unrealized on the gains in inventory is what we haven't expected. And that more or less speaking offsets minus the JPY 7 billion which is the magnitude of Latin American currency weakening. And there also, we had a negative number on the -- coming from the diversified business, all inclusive, minus JPY 3.9 billion there was for volume. For the second half of the fiscal period, the details -- the breakdown of the JPY 15 billion, which is a positive JPY 15 billion. Price, as I said, the effect of price increases this sort of positive several billion yen volume. Winter tires and/or our -- the tires, and given the progress of sales, plus JPY 30 billion. Others, as I said, we are likely to apply unrealized gains on high inventory. But that more or less, that has to be taken -- work against the negatives coming from the weaker Latin American currency and the diversified business negative. By the way, the currency as a factor was reflected in the August projection. However, the fact that emerging country currency weakening has been persisting, kind of beyond August is, in a way, outside of our expectation.
So full year impact coming from the currency weakening, I think, originally you started with the expectation how it should range between JPY 10 billion to JPY 20 billion. But in actuality, during this first half, several billion yen negative effect. And the third quarter, there was JPY 17 billion, combining the 2, that's already JPY 20 billion. On a full year basis, [ modestly ] speaking, JPY 22 billion is the effect of the weaker currencies. And then, to your second question in reference to price hikes in Europe and North America. North America announcement appointed to the PSR, their price increase as of October 1. And for the TBR, the products in the price increase as of the 1st of November. But I would say that it's really too premature for us even to state the penetration here of those announced price hikes to the market. So we'll make the judgment as we go forward.
So the next person that I would like to, the name is Mr. Yoshida from Citigroup Global Markets Japan.
My first question then refers to your diversified business operations, JPY 10 billion for this year. But if I focus only on the final quarter, it seems that it isn't going to be in the red ink. So what's going on? Would you please give us further details? And also, my impression has been that through last year and for the past 4, 5 years, on a stable note, the diversified business was able to generate profits ranging between JPY 30 billion to JPY 40 billion. Now how much longer should we wait before you are diversified in the business and the operation goes back to that level of profitability? Of course, I understand about one-off cost associated with the solution-oriented business model, and the staggering effects of some of the higher -- or the lower material cost. But anyway, would you please analyze a little bit further? My second question has to do with the situation, the downward adjustments by region. It seems that Japan, Europe, North America and Asia Pacific, they're all under JPY 10 billion each before the adjustment. And at the same time, the corporate determination, minus JPY 20 billion. So I would like to know more.
So let me start with your first question. Back in August, we made a projection and we decided to make downward adjustments to the guidance per year by JPY 6 billion, mainly in U.S., the commercial roofing material business was the key cause behind the downward announcement. Raw material, the cost are rising, for the diversified business. And as you would imagine, petrochem-derived materials are weighing relatively highly, therefore, the mix of raw materials and used, which is the fundamental difference between the raw material effect between the diversified and the product and tires where natural rubber and others weigh in more heavily. And at the same time, because of the higher crude oil prices, the freight charges in the United States have been going up. So those are the factors behind the negative factor, which persisted through to November, which caused us to give you this downward guidance. So I talked about the U.S. and diversified business, how the costs have been increasing. But our expectation is that, basically, we will recover those increment costs payable by charging higher selling prices. For the current fiscal period alone, the spread between the 2 is negative. But certainly, we expect that into next year, we will be able to recover those, the incremental costs with higher selling prices.
So my additional question related to that. You keep on talking about one-off charges associated with the solution business or the business model. How long do you think you'll be in this period to have to spend?
The solution business model basically refers to Japan domestic chemical and industrial product business that we are working quite aggressively to enhance the business infrastructure. Basically, even in the area of safety, quality, disaster and the prevention, the operation base where, typically, we did not spend so much money this year, we are more aggressive in the deployment of resources. So that's this year. Beyond next year, please understand that we are right now in the process of compiling next year's business plans. So I cannot really quantify any numeric impact on the next year. But our expectation is, certainly, is that into next year, the basic [ tone ] will recover.
See, the reason why I keep on sticking to this, the point is because you keep on saying one-off costs, you have a temporary cost. So I'm very interested in knowing how much you're spending in that area.
Please excuse me for having to refrain from the particular amount.
Okay. And then the second question, if you would, please, by region.
All right. Japan, in comparison with the August 7 announced projection, we decided to lower that figure by JPY 7 billion. The key factors we decided to review the lost income before the allocation of costs in the group. So the intersegment elimination, it's that sort of a situation. So that's Japan. And by the way, that isn't the biggest factor for the Japanese downward adjustment. Americas segment, from the August 7 projection, we decided to lower the debt amount by JPY 13 billion. I, once again, identified Latin American currency weakening and also the worsening of the PSR mix in North America and higher freight charges and the raw material on the cost payable. So JPY 13 billion lower for Americas. For the expanded or extended EMEA versus the August 7 projection had downward adjustment by JPY 8 billion. Actually, on the year-on-year basis, the volume grew. However, in reference to the August 7 number, the volume was not -- has not been as much as we had anticipated, and so we lowered the projection number. Finally, Asia, Oceania, the geographical -- the regional region, minus JPY 10 billion is the number. We are meant for country markets such as in Thailand and China, where the replacement market tire sales has been a little bit slower, and which worsened under the conversion cost and position, and not to mention the Asian currency weakening, so minus JPY 10 billion for Asia, Oceania geographic region. Okay. So to move on, the next person, Mr. Kakiuchi from Morgan Stanley Securities.
My question #1 has to do with the JPY 20 billion downward adjustment in the full year 2018 operating income projection. So if you dare to identify third quarter versus fourth quarter, which of the 2 quarters is it weighing more heavily? And my question #2, so I understand that the priority supply has been going to the OE segment of the market, which created a shortage of supply to the replacement segment of the market. So I understand that mechanism, but by the way, I understand that's the same for the TBR operation as well. So is it a situation where this is applied now to the OE segment figure, it tapers down, the replacement segment supply just could not be increased or could not be sold more? Or is it a situation that for whatever reason, the total output has not been going up. So saying differently, is it because of the priority heavier supply going to the OE that the replacement sales just cannot pick up any further? Or even if the OE supply stays the same, then replacement market may have some opportunities to sell more?
Okay. To start with your first question, the projection against the changes from the August projection, third quarter or fourth quarter. It is more speaking -- oriented towards the third quarter. And the second question about OE prioritize the supply. If you look more closely, it is the high rim diameter tires where the OE demand has been very robust, and the priority supply has been going to those accounts. So that created the situation whereby the supply available to the replacement segment, it just has been declining or has been constrained. In the meantime, we have been working to enhance the production capacity, and we really have been doing that. But one of the factors that I would dare to mention is that capacity enhancement in actuality has been lagging behind the plans that we had to do so. So on top of the mix into the different segments, the supply have been lagging behind because we have been slower in executing the capacity enhancement. But we are confident in that we will be able to recover from that position by the end of the year.
Why? Why have you been slower in your plans?
Eto, would like to answer the point.
So based on the PSR replacement market, but the higher rim diameter tires, we just have not been able to supply as needed or as opportunities were actually there. If we were able to stay with our plan to increase the volume, we would have been able to give the supply to the replacement market. That incremental volume going to replacement segment would have seen no problems. And by the way, investments themselves have been made, be it in Wilson plant or the Joliette, Poznan or the Burgos. So we made investments, but that's not the end of it. What's truly challenging is to make investments and to make sure that added capacity can be utilized. So installing the capacity and the manufacturing, the process technology has to be ready to the increased -- the output. So it is in that last stretch of the adjustments, which has been lagging behind. And by the way, I personally do not think that, that is any negative that we have to worry about. If I dare to make the following statement, it's Bridgestone, even Bridgestone in this tire segment has not been able to do it more swiftly. Even Bridgestone has had to take this much time, implying that any second or the third tier players, if I may dare to say this, would find it not so easy at all to enter into the market. Of course, I accept that in the third quarter, we were not able to increase the volume of supply to the replacement market as planned for. However, we are confident that we will able to increase that volume of supply to replacement market and into the final quarter and into next year, but I also dare to add that it's not going to be easy for any competitor to come into the same very challenging zone. And orienting kind of more in the third quarter or the final quarter, we have the actual number for Q3 already, and therefore, Q4, we also do recognize that there are some elements that will stay, so it's not as though we have too optimistic view towards the final quarter.
We're going to move on to the next person, who is Mr. Sakamaki from Daiwa Securities.
So again, I focus on that price, volume and mix box. So I'm trying to imagine how it will be in the final quarter for you if the price will be negative JPY 20 billion, the volume will be in the positive JPY 20 billion. I wonder whether my estimation is at all accurate. If so, you seem to be very conservative, therefore, the final quarter price effect. But someone like Goodyear that also increased their respective product prices. And in the case of Goodyear, they have very aggressive expectations, positive expectation to come in the final quarter. Why is Bridgestone so conservative? Is it just because you're conservative? Or is there any particular reason behind that? And the second quarter having to do with the diversified business, I recognize that Q3 or the Q4, it is more or less in reference to what happened in Q3 that you decided to give the downward guidance. So what happened in Q3, particularly in the diversified business, that input on the cost went up all of a sudden, which the cost, the commercial roofing material business in North America happen to be much more challenging than they ever anticipated? Any one-off factors, either in the third quarter and or the final quarter? If there are, is there any chance that by eliminating those one-off factors, you'll be able to increase your profits next year?
Okay. The first question first. Final quarter, the price effect in the final quarter is not negative, more or less speaking, there's some slight positive in the full price.
Okay. If you say so. As I said, sorry to cut in, but Goodyear seems to be very aggressive in counting on the positive effect coming from price. And if your case is more or less the same, you should be able to count on something like JPY 10 billion positive effect. Are you being ever so conservative?
Well, basically, if you say we are conservative, maybe so. But on the price increase announcement have been made already, and our view is that those announced price increases, in due course, we'll stick to the market. That's it. But the difference in our position versus Goodyear's, I'm not in a position of knowing more clearly on what assumption Goodyear is taking. So that is towards my answer. And your second question about diversified products, you are correct. The petrochemical feedstock prices increased to the level higher than our assumption. The product freight cost also increased, more so than we had originally anticipated. These are the major reasons. For 2019 onward, already, we have announced the price hikes incorporating these higher costs. And towards next year, we expect these higher prices, the price hikes to take hold to improve the spread and we can expect recovery.
This is Eto speaking, if I may. In relation to the selling prices, for the diversified products, the materials, feedstock prices went up, freight went up, and we are trying to raise the selling price to incorporate that, but we don't expect the effect to be felt during the third or the fourth quarter. We feel that we'll have to wait until the first quarter or the first half of next year to see the effect. For the freight costs, commodity costs as well as the trade-related disturbance resulting in what's called the import cost. In light of these factors, both in terms of material and freight, there is a risk that cost level will further increase. We'll have to be prepared for that. Currently, we are thinking to what extent we are to incorporate that in our budget next year, but we are putting together the plans for the price hikes, not only for the U.S. where the price hikes are easier, I can't give you the details but we are putting together the plans so that we can surely raise the price hikes, even for the areas where the price hikes proved to be difficult in the past based on the freight increase in others. And that approach is currently being discussed within the group.
Next, Yamaoka from Nomura.
My first question is on Asia, in particular Thailand and China. You said that the reasons for the downward revision was decline in the sales of replacement tires. So what is happening in Thailand and China resulting in the weaker-than-assumed performance? That's my first question. My second question is on price hikes. Can you give us the rate of price hikes in each region as well as what the rates are going to be for different types of tires?
First, about China. Broadly, there are 2 factors. One is 1 related to the trade conflict between U.S. and China, the macroeconomic factor that is resulting in weaker sentiment. And the other factor is more internal to Bridgestone. As I said in August, in China, we are expecting the sales to expand in the premium zone. We are trying to improve the quality of sales more so than in the past. And with that in mind, we are deliberately controlling or containing the sales volume. So in China, in addition to this macroeconomic weaker sentiment issue, there is the production or the sales control on the part of us as well, resulting in lower sales. As for Thailand, there was the incentive program for new cars in the past, which resulted in the replacement cycle to peak last year. And we are feeling the repercussion of that this year. As you know, in Thailand, there is a very strong demand for new cars. And so we do see a shift from replacement to new car or new car tire demand. However, the economy itself is strong in that country and, therefore, we expect the demand to recover eventually. Your second question pertained to selling price by region. First, North America. On September 25, we announced the TBR Dayton brand TBR price hike of 10%. And PSR, the light truck, starting October 1, up to 3.5% price hike has been announced. Agricultural tires, 4% increase starting October 1. For TBR, starting November 9, price hikes, although we are not disclosing by how much. And for products other than tires, the diversified products business in North America, we have started announcing the price hikes in April. In Europe, starting September 1, TBR price hike of 5%, this is the Dayton brand tires. And starting October 1, Bridgestone -- Firestone brand TBR price hike of 3%. So that's the situation regarding the selling price.
Clarification, the last one, did you say December 1 or October 1?
October 1.
I see. I have a clarification question about first question. You said that you're deliberately controlling the sales volume in China. Should we assume that this trend will continue into next year?
No. The sales strategy for China, the impact should be only for this year.
Next person please, Sanger from Deutsche Securities.
I have 2 questions. My first question is with regards to the fourth quarter, ultra large and large ORR. You are expecting strong business. Can you explain the reason why? And for next year, Michelin is projecting 4% to 5% growth. What about Bridgestone? That's my first question. My second question is on cash flow. As of the end of the third quarter, I understand that you have been increasing the working capital, especially the receivable side compared to last year. And what is your target free cash flow as of the end of the year? That's my second question.
Thank you. Your first question, ORR seems to be very strong fourth quarter is what you asked. Now during the third quarter, the timing of some of the shipments have been pushed back, there has been a time lag in recording the shipping in some of the products. And it is based on that, that we are making the projection for the fourth quarter, which makes the fourth quarter to be stronger but no change on a full year basis. Your second question on cash flow. If you look at that CapEx figures that's been disclosed, you will find that with the shift to the HRD and ORR, we are making larger investments, maybe about JPY 100 billion more than last year. And that is having the impact compared to the previous trends in terms of free cash flow, this is having the adverse impact. Any further questions, anyone?
Kakiuchi of Morgan Stanley. I have some additional question, 1 additional question regarding the diversified products. After the last earnings briefing, you sold your ceramic business and you reduced the size of the production of some of your products. In diversified product business, you have many different businesses, and it appears that you are revisiting different businesses in a very comprehensive manner, am I correct? Am I correct to assume that you are looking very closely at each business?
Well, it's not just diversified products business, this is true for tire business as well. Revisiting the approach for the future for each business has to be done all the time, that is the very basic. Within the diversified products business, there are many businesses that are very small in scale. And in terms of business block, we do sometimes make the decision whether to divest, sell or shrink the size, and we will keep you updated once a case has reached that state. Many of the businesses in the diversified products business are small by nature. And so the impact is not that significant compared to tire business. This revisiting has been done in the past, we're doing it this year and we'll continue to do it next year onward. And the resources that have been saved would be allocated to other businesses, that has been the basic approach in the diversified product business. That remains unchanged. Now as for the expenses for this fiscal year, there are many thin branches and there are areas where we want to expand and enhance in the light of putting together the business package to meet the customer needs and customer issues. And we are allocating resources to those areas, which is a situation that is unique to this year. And we are withdrawing from some businesses, selling some businesses from that respect, and that will continue into the future as well.
Matsumoto from SMBC Nikko Securities. I also have 2 additional questions. I'm looking at the supplement document, at the lower right-hand side, you're showing the productions. I have noticed that compared to August, the volume has been reduced from 1.91 million tons to 1.86 million tons. I'm wondering if this has to do with the number of tires that is being reduced. Or as Mr. Eto said, is this in relation to the yield issue -- which is more significant?
I would suppose that those that have been considered as defect in relation to yield is not included in this production volume.
I've noticed that the production volume is fluctuating more recently between the second and third quarter and on the full year basis as well. So what are we to make of this is my question? If the yield is not improving and if that is the reason, is that the reason why you cannot increase the production volume? That's my question to Mr. Eto. And I also have a question about the winter tires. Since last spring had lots of snow, I understand that the inventories have been reduced earlier this year. And so I suppose you can expect a recovery in the fourth quarter and I think the shipments have already begun. So can you give as an update on the winter tires?
Thank you. As per your request, I, Eto, will take your first question. I think, the 2 aspects that you mentioned are both applicable. For example, to improve the quality of business in China, more specifically, this means that we want to build a structure where we can follow all the route along the value chain to the sellout by segment, by size, so that we can sell more high-performance tires in the future. And so we are exercising discipline in controlling the sales volume before that structure is built, and that is resulting in lower sales for this fiscal year. And then, there also is a factor of not being able to produce sufficient amount. This is true for the retail market products in North America as was mentioned earlier. And then, in some areas, the case is we do have the facilities, we do have the demand, but we can't secure enough number of workers, or that the turnover is rising. And there are some regions with this temporary factors where we couldn't produce even when we wanted to. And all these factors are incorporated in this production volume that you see on that document. For the last factor, we are making efforts so as to return to the normal state, and therefore, there shouldn't be any lingering effect. About the winter tires, as of the end of March, the distributors' inventory was already at the low level. And so we have started the shipments in September already. And of course, for the snow-falling areas, we are making sure there's enough supply, and that has already begun. And in total, what would determine the total volume would be the demand in the non-snow areas or semi-snowing areas, and we are already preparing for the supplies. But wherever it is, I think what's most important is to build a solid distribution capacity. And this is true not just for tires, for any of the product. The transportation is becoming more difficult in Japan in securing the number of drivers and securing the number of vehicles. That is the situation in Japan. But we have our own distribution capability, so we're different from the competitors in securing the distribution capability, and we are focusing on that in the fourth quarter.
And that concludes today's earnings briefing. Thank you.