Bridgestone Corp
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Bridgestone Corp
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[Interpreted]
Hello, my name is Hishinuma, CFO. Thank you very much for participating in this conference call, during which I am going to cover the business's financial performance for the third quarter of fiscal 2019 as well as consolidated projections for fiscal 2019.
I'm going to be referring to the prepared presentations, which you can access through our web page. And so if you're able to take a look, and then please do so.
So what I am going to cover are the third quarter business and financial performance as well as the full year projections. Starting with the third quarter business and financial performance overview. Page 4.
Business environment. Currency exchange, raw material prices as well as tire demand. And for currency exchanges in both USD and euro, the Japanese yen strengthened compared to the previous year.
Raw material prices. Natural rubber prices were higher than the previous year, while the crude oil prices were lower. Tire demand in Japan. Ramp up in demand before the price increase and consumption tax rate increase.
On the other hand, our TBR in the REP market in North America and OE market in global, became weaker. Tire sales for the third quarter FY 2019. Third quarter PSR globally, 100% year-on-year, TBR 98%. Both for PSR and TBR in Japan, REP and OE sales, before the price increase and consumption tax rate increase, in particular, replacement market sales grew very much, while our Asian region sales were weaker. ORR. The Ultra-Large size ORR, 100%, compared to previous year. Large sized ORR, 115%, in prior to adding owing and cutting into the stock rate income available for recognition in sales.
PSR high rim diameters above 18%, particularly in North America and U.S, the replacement market sales was 110% to the previous year. Next page, consolidated results for the third quarter. Net sales JPY 890.7 billion. Operating income, JPY 91.9 billion, dropping to the top line an increase in operating income in appreciation with the trend.
On a constant currency basis, it increased in the both, for the top line and operating income. And for the tires and diversified products on the constant currency basis, the increase is a trend. During this quarter, we booked gains on sales of marketable securities and land and other assets held for efficiency purposes.
This was affected, and the net profit attributable to owners of parent increasing 2%.
The 9 months results. Net sales, JPY 2,635.3 billion, operating income, JPY 250.3 billion. The net sales increased on a constant currency basis, operating income and analysis will follow on a different page.
Analysis of consolidated operating income for the third quarter of fiscal 2019.
Raw material prices increased. Emerging currency -- countries' currencies weakened to our costs and freight transportation cost increased. In various regions, we executed price increases, however, not enough to offset the negatives. And so consolidated in total, a yearly decrease of JPY 40.5 billion.
Page 8. Financial results for the third quarter by geographic segment. Japan, a ramp-up in demand ahead of a price increase and consumption tax rate increase and behind the increase in sales and operating income. All else, the drop in net sales and operating income.
Page 9, please. Next, I will discuss consolidated projections for fiscal 2019. Let me explain about the forecast of the business environment for the full fiscal year on Page 10. In terms of foreign exchange, both U.S. dollar and EUR are assumed to become stronger versus yen than the previous fiscal year. The price of natural rubber stayed lower than the year before in the third quarter, but it is expected to be higher for the full year.
With regard to the tire demand, even severe business environment is assumed due to weaker OE demand, slowdown in the Asian economy and impacts from the U.S.-China trade war.
Please turn to Page 11. Let me now move on to the sales growth projections of tires for full fiscal year. We expect a slight decline in PSR tires and flat year-on-year in TBR tires. In particular, the OE demand in North America, and sales in Asia are expected to remain challenging in the fourth quarter. On the other hand, Ultra-Large ORR tires are forecast to show a solid performance at 105%, while Large ORR tires are expected to remain flat year-on-year due to a decline in the OE demand despite the strength in the replacement demand.
As for PSR/HRD tires, sales are expected to reach 105% of the previous year. And if you look at the replacement business alone, it is expected to achieve 110%.
Page 12, based on those forecasts, here is the consolidated projections for fiscal 2019 due to a decline in the OE demand in North America and in demand in Asia, net sales are expected to be the JPY 3.490 trillion. Operating income, JPY 330 billion, down year-on-year, respectively.
Profit attributable to owners of the parent is forecast to decline 6% year-on-year to JPY 275 billion. Page 13. Let me now explain about analysis of consolidated operating income for fiscal 2019. In this fiscal year, more than expected decline in OE demand in North America and overall demand in Asia, higher conversion cost, weakness in emerging countries' currencies and increase in labor and freight cost cannot be offset fully by the growth in sales prices. This is expected to result in a drop in the operating income of JPY 72.7 billion year-on-year.
Page 14. Here, you can see a summary of what I explained about the third quarter results and projections for the future. On the demand front, we expect to continue to see a challenging environment. But in addition to the expected continued growth for HRD tires by maintaining optimum pricing and improving the product mix, while steadily being engaged in the cost reduction effort, we will seek to achieve the business plans.
Moving on to Page 15. Last but not least, let me explain about the adoption of international Financial Reporting Standards or IFRS and change in the reporting segments. We will adopt IFRS in the fiscal 2020 to improve the quality of managerial accounting at the Bridgestone Group. Moreover, we will change reporting segments to facilitate more accurate disclosure based on SBUs. For more details, please refer to the press release issued today. Thank you for your attention. So now let us have questions and answers session.Mr. Sakamaki of Daiwa Securities, would you like to start?
I have some questions, but let me start with the following: Third quarter, actual performance, how does the company assess the level of performance? Because looking at the set of figures, there wasn't debt lower and yet into the final quarter, had a volume downward adjustment. This seems to be unexpectedly large. So particularly focusing on North America and Asia, inclusive of inventory-related projections, the company seems to have made significant noteworthy downwards adjustment. So how this changed? What is your view at the company?
The other company (sic) [question] has to do with the confirmation of some numbers. So for sales volume and mix, in that category in comparison with the previous, the focus and projections. They have been adjusted down by some JPY 75 billion in your fiscal year that focused on projections. Price, JPY 4 billion increase, and volume, JPY 39 billion decrease. So for others -- simply put, would you explained a little bit further? With a focus on this downward adjustment and why.
Thank you. The first question about the actual performance in the third quarter in comparison with the August projections.
Our review at the company is that be it the third quarter or the final quarter, lower than the earlier projections. In saying this, however, we would point out that the final quarter, the deviation from the previous projection seems to be larger than in the third quarter. Third quarter, on a year-on-year basis, the profit did increase. And we know that, first of all, in Japan, the ramp up in tire sales before the hike in price and consumption tax rate. But into the final quarter had that one-off effect and probably, it would dissipate. The other effect at play for the third quarter is that we know how it was performed in North America, but into the final quarter, particularly centering on the OE sales, it is more likely to decelerate.
So there is the reason why 3 -- the third quarter versus the final quarter, the final quarter the projection seems to be more severe. Is that okay?
Well, Yes. But if I can have a follow-up question. The -- I thought that your previous sales plans and the beat in Asia or North America, they were more robust. And this in sales and also on the production plans, again, centering on Asia and North America. How is the situation after regarding inventory? The reason why I ask is that particularly for the replacement market-related inventory has to be entire accumulation of the inventory. And do you think that perhaps you would need longer period of time before the cleanup of that inventory, they perhaps now reflected in the downward adjustments to the production plan among others.
Well, okay. So I understand the intent behind your question. Why we changed our projections on this occasion, 3 big reasons: number one, we now recognize and think there is going to take longer. Therefore the recovery of demand in Asia. Back in August, we implemented the round of the projection change. But then on this occasion, we decided that we'll be warranted of us to make a further downward adjustment. The second reason has to do with North America. As I said, particularly centering on the OE segment auto market, demand seems to be on the dropping beneath our anticipation. So that's reason number two. Reason number three has to do with the ORR sales. Particularly ORR Large sized net tires into OE construction machinery companies and so on, the demand seems to, maybe, trending more bearish than we had thought before. So these are the 3 major reasons why we decided to make this round of downward adjustments.
To your second question which refers to price mix and volume and others. So in particular, I take that you're interested into what's going on in the others. Yes, and I am going to go into further details as regards volume. But before doing so, the prices basically had flatted from August. However, the volume in comparison with August projection significant downward adjustments, net to the tune of JPY 40 billion downward adjustments. Being the push up of conversion cost and the rising by some JPY 20 billion. And also emerging countries' currencies and about JPY 5 billion, the depreciation further of the worsening of the conditions. As to the unrealized profits of inventory, JPY 5 billion negative. Therefore the UPI on various profits and inventory.
And for the others, it's the accumulation of all other miscellaneous items.
Next, Mr. Yamaoka from Nomura Securities. Would you like to proceed with your questions?
My first question refers to the downward adjustments by region. Looking at operating profit by geographical segment, North America, Asia, downward adjustments, yes, but also for Japan, it seems that your projection for the operating profit in Japan is the geographic regions. This seems to show some downward adjustments. And so by region, would you please explain a little bit further. So that's my question number one. Question number 2 has to do with rather severe view that you have for the volume in the final quarter. So what is your baseline thinking? So the current -- the conditions of the market and mindful of that, and this may be right around adjustments that you should make in the downward direction or did you add something a little bit even further to make it even severer.
So the first question, the situation by region. Japan, yes. Vis-à-vis the August projection, additional JPY 15 billion is the tone of the decline. Volume is a big factor at play.
ORR, OE sales, so these are our 2 construction machinery companies, so that's reflected here. For North America, vis-à-vis, the August projection that further had a decline by JPY 12 billion, we explained how the consumer OE or the commercial TBR and net volume would decline more than what we projected back in August, worsening the conversion costs as a result.
For Asia, recovery of demand/the future sales, this seems to be taking more time than initially had been projected on the worsening below conversion cost as well.
And moving on to the final -- the second question about the volume in the final quarter. Basically, what we did was that we made reference to the current trend of sales, and we have factored in the due risk to come up with the information that we shared with you.
A follow-up question. From your perspective, are you under the impression that in terms of your company's volume and the market as a whole, things are deteriorating significantly from the third quarter to fourth quarter? Or as I understand, that you come forward with your sales plans by adding up numbers from SBUs, are we supposed to interpret that your previous forecast was too bullish. Could you share more of your thoughts on that?
With regard to Asia, we had expected to see a recovery in the second half from the first half, when they had general elections in India and Indonesia. But that assumption was slightly overoptimistic, and it turned out that the recovery failed to materialize as we had expected, which we believe was the main reason. In other regions, such as North America, are we supposed to understand that the market itself is deteriorating further currently? As for North America, the biggest factor is a drop in the production of vehicles in the OE business.
Next question is from Mr. Kakiuchi from Morgan Stanley Securities.
Kakiuchi from Morgan Stanley Securities. I have one question on ORR. You earlier referred to construction machinery OE business. Has your view on Ultra-Large ORR for mining vehicles remained unchanged? And sales for Ultra-Large ORR tires in the third quarter remained flat at 100%, but does this include tires for construction machinery? You also disclosed this time, the breakdown of ORR for OE and replacement, which we appreciate very much. But could you share with us the split between OE and replacement in ORR at present?
That is my first question. Secondly, as production volume weakens, I'm not sure if you are still in the process of reviewing your capital investment plan for the full year, but do you plan to revisit or postpone capital investment plans? Give me your take on capital investment plans for this fiscal year and next fiscal year.
First of all, for the first question on Ultra-Large ORR, our sales are all for replacement business. As for our forecast, back in August, we came up with the full year forecast of 110% for Ultra-Large ORR. But this time, 105%, down slightly. And this is because coal prices are hovering at low levels, which resulted in a decline in demand for mining vehicles, which was reflected in this forecast.
On the other hand, in iron ore and other mines than coal, we believe demand still remains strong.
With regard to the breakdown of OE and replacement for Large ORR, OE accounts for about 30% and replacement about 70%. Does that answer your question?
Yes. For Large ORR, is it correct to assume that most of the demand comes from construction machinery?
Yes, the OE business, which accounts for 30% of Large ORR business is mostly sales to construction machinery manufacturers.
To answer your second question on capital investments, as I said, we have not revised the numbers themselves, but we will review our production capacity increase plan in accordance with the demand. Some of the plans will probably end up being postponed in reality.
Next question is from Mr. Yoshida from Citi Global Markets.
Yoshida from Citi Group. You said demand in Asia is weak. But could you give us a geographical breakdown, such as China, India and ASEAN countries? And my second question is whether there are any one-time factors assumed in your forecast for the fourth quarter profit. For instance, in North America, there could be an impact from strikes at GM for OE business, which I'm not sure is a critical factor or not, but I'm wondering if there are any such onetime factors included? Looking at the numbers per se, it makes me worried about the next fiscal year as there will be a 30% decline in profit. Are you expecting, say, a major adjustment in the inventory levels?
For your question on Asia, especially in replacement business in PSR, we are struggling in sales in Thailand and India. On the other hand, China also is showing a decline in demand, mainly due to the trade frictions between China and U.S. and the poor performance in sales because of the price competition. Especially in Asia, because demand is falling, the market itself is becoming weaker, which has resulted in more intense price competition. In this context, as we basically seek to maintain our price levels, we tend to be affected in terms of the volume. On the other hand, in Indonesia, especially in PSR, our sales have been steady and more or less in line with the plan or ahead of the year before. With regard to the OE business, our performance has been strong in Thailand and Indonesia. But in India, we are seeing a large negative growth due to the decline in sales of new vehicles. In China, in PSR, thanks to the strong financial performance by OE players there, we are doing relatively well. As for your second question, with regard to the decline in sales in North America in the fourth quarter, the biggest factor is the OE business, as I said. And of that OE business, the largest reason is, as you said, the strikes in GM.
Are there any other factors that you incorporated in the fourth quarter than the volume? If the impact from the strikes at GM is excluded, is this the level of profit that you would see in the current demand environment?
Another major factor is TBR in North America. Due to anti-dumping duties imposed, this year, sales have been struggling with higher inventory levels. But we expect the level to be normalized in the fourth quarter and the inventory adjustments to be completed, which we believe is a positive factor.
You have been originally explaining that the TBR replacement inventory in North America will improve at the end of the third quarter. Has it been moved down slightly? Or was it in line with your anticipated time frame?
In the fourth quarter, the inventory level is back at the normal and we expect it to improve in the next fiscal year.
Are there any other questions? If not, we would like to conclude today's conference call. Thank you for your attendance.