Bridgestone Corp
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Bridgestone Corp
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Ladies and gentlemen, thank you very much for listening to the financial results presentation by Bridgestone Corporation. Please be aware that for the sake of the infection control, we are going to ask everyone to connect on the online basis. We are operating this conference with minimal staff. Please be aware that we purposely take off our masks to make sure that our voices are heard clearly.
Presenters today are Mr. Ishibashi Shu -- Shu Ishibashi, Global CEO and Representative Executive Officer; also, we have Mr. Naoki Hishinuma, Corporate Officer, Global CFO, 2 executives to give you the presentations. First, starting with Global CFO presentation to be given by Mr. Hishinuma.
Thank you very much. This is Hishinuma, Global CFO. Thank you very much for gathering on the occasion of the announcement of financial results for the third quarter fiscal 2020. If you go to Bridgestone's homepage, there are presentation materials uploaded, and this we'll please make reference to that. And this is my agenda today. First and foremost, to start with business and financial performance for third quarter fiscal 2020. First, impacts from COVID-19 in the third quarter fiscal 2020. The global tire market for both new vehicles and replacement recovered in the third quarter, particularly for replacement tires in U.S. and Europe as well as in China. For mining tires, while mine operating conditions varied among minerals overall slowed -- showed the signs of weakness. PSR high rim diameters above 18 inches, the relative strength in demand continued to stand out and sales recovered to a higher level than in the previous year in the third quarter.
Supply chain conditions. All plants which were temporarily suspended in the second quarter have already resumed their operations. The impact of the shortened operation hours and some store closures has been largely resolved, but we continue to operate while minimizing the risk of COVID-19 infection. Under such circumstances, the company in the third quarter implemented thorough expense and cost control under crisis management based on cash-oriented operations. Also, the company promoted to reform expense and cost restructure -- cost structure to "rebuild earning power." Port Elizabeth plant in South Africa, the operation started in August, which led to the closure agreement in November, as was recently announced. And for Bethune plant in France, a project of plant closure initiated in September. The company has been developing our own HRX plan, looking to the establishment of execution system for mid-long term business strategy, and the details of this will be explained by our Global CEO, Mr. Ishibashi.
Turning to the performance results in Q3. Business environment. Currency exchange. Japanese yen was stronger against the U.S. dollar and weaker against euro versus the previous year. Raw material prices, both natural rubber and crude oil, rose sharply from the second quarter when the market fell. Tire demand, both replacement and OE segments recovered significantly and particularly so in the replacement segment of the market.
Tire sales growth for the third quarter of fiscal 2020 versus the previous year. 9 months unit sales globally was 78% for PSR/LTR and TBR 81% year-on-year. Both PSR and TBR unit sales in the 3 months of the third quarter recovered to roughly 90% year-on-year. Replacement tire sales recovery was relatively strong. And for above 18-inch PSR, HRD, high rim diameter tires, recovery in Europe and U.S. enabled recovery to the level exceeding in the prior year. ORR tires, through the second quarter, the strength was preserved into the third quarter. Stagnant economy adversely impacted mining operations and no further recovery was seen from the second quarter level.
Now to explain the consolidated results for third quarter of fiscal 2020. Revenue for 9 months was for JPY 2,148.9 billion, down slightly less than 20% year-on-year. Adjusted operating profit, JPY 118.4 billion, was down year-on-year. In the third quarter, sales recovered significantly from the second quarter, which dipped largely. So that both revenue and adjusted operating profit returned to the level above the first quarter and the adjusted operating profit ratio improved to 8.8%. On the other hand, profit attributable to owners of parent, due to nonrecurring losses, such as impairment losses, for the 9-month period, the figure was JPY 24.1 billion negative. In subsequent pages, by the way, I will explain about nonrecurring losses and others for this fiscal year.
Analysis of adjusted operating profit for the third quarter of fiscal 2020. Under severe business conditions, fundamental cost review and containment were executed. While with the preservation of selling prices, spread between the selling price and raw material costs contributed to increased profits. On the other hand, large drop in sales volume and the worsening of conversion costs, which is part of the so-called others company, reduced the profits. As a result, consolidated adjusted operating profit decreased by JPY 138.8 billion.
Financial results for the third quarter of fiscal 2020 by segment. In the third quarter, in Americas, Europe and China, market conditions recovered, but not to the prior year levels. So all segments decreased revenue and adjusted operating profit for the third quarter 3 months as well over the 9 months period. In Europe, Russia, Middle East, India and Africa, 3 months in the third quarter returned to be profitable, but not enough to overtake losses from the first half and 9 months results were in the red.
Financial results for the third quarter of fiscal 2020 by product in the core tire business. Passenger car and light truck tires revenue for the 9-month period was JPY 1,018 billion with the adjusted OP ratio of 5.3%. Truck and bus tires revenue, JPY 472.2 billion with the adjusted OP ratio of 7.0%. Although in the 3 months of the third quarter, sales recovery in U.S., Europe and the sales of high rim diameter above 18 inches in the passenger car and light truck category increased, among others was recurring double-digit the adjusted OP ratio. In the meantime, hospitality tires, including the ORR, aircraft, agriculture and motorcycle tires, the 3 months total although was bearish for the sales of mining tires and 9 months adjusted OP ratio, however, stood strong after all.
Next, Diversified Products Business. 9 months Diversified Products Business revenue was JPY 378.6 billion with the adjusted operating profit of negative JPY 2.5 billion. Backed by strong Diversified Products Business in Americas centered around roofing materials, the 3 months adjusted profit for the Diversified Products Business was just shy of JPY 7 billion. However, chemical and industrial products business in Japan, while the business portfolio issues have been persisting, not to mention the impact of COVID-19 this year, suffered from the reduced demand from OE and/or mining accounts and severe conditions continued.
Balance sheet and cash flow highlights for the third quarter fiscal 2020. Total assets, JPY 4,111.6 billion. Funding to secure liquidity increased cash at hand by more than JPY 200 billion. On the other hand, decrease in accounts receivable, inventory, not to mention tangible assets and the investment securities caused total assets to decrease by JPY 165.5 billion from December end of 2019. Equity ratio came down by 3.1 percentage points at 51.8%, still maintaining the healthy status.
Free cash flow. With expense and cost review, scrutiny over the selection of CapEx, inventory control and others, though the environment was quite severe, we landed at JPY 173.4 billion cash in. Nonrecurring items. In the third quarter, the new China TBR business impairment losses was incurred and also provisions relating to the commencement of discussions for the closure of overseas tire plants. So for the 9 months total, on the IFRS basis, the total amount of adjusted items was JPY 75 billion.
Next, I would like to share with you the consolidated projections for fiscal 2020. Business environment for year. Currency exchange assumptions, as you see here. Raw material prices in the final quarter, natural rubber price to rise sharply with the crude oil to remain at the same level as in the third quarter. Tire demand. Demand slowed down in the final quarter, mainly in U.S. and Europe due to the emerging impact of the second wave of COVID-19. Moderate recovery expected in Japan for both replacement and OE segments. In Asia, China and Thailand on recovery, but Indonesia still hit significantly by COVID-19.
Tire sales growth projections for fiscal 2020. Both for passenger car and light truck and the truck and bus tires, global sales is projected to decrease by a little less than 20%. We assume that due to the second wave of the COVID-19, mainly in U.S. and Europe, there will be demand slowing for the final quarter. Sales of the HRD tires above 18 inches in the final quarter will be lower than in the third quarter, even though the replacement segment sales of HRD will be only slightly lower than in the previous year. ORR tires, final quarter, though, we continue to be bearish than prior year, mainly as a result -- as relates to coal mines, so full year sales of ultra-large, large, small and medium ORR tires are projected to be a little less than 20% lower in sales.
Consolidated projections for fiscal 2020. Revenue, JPY 2,890 billion, which is a little less than 20% lower. Adjusted operating profit is projected at JPY 150 billion. By the way, the variance analysis of the adjusted operating profit will be on the following page. Profit attributable to owners of parent, which remained to be determined as of August on the basis of the company's stance to book impairment losses from less profitable businesses or recognizing expenses for business restructuring now not foregoing the actions, resulted in the JPY 60 billion negative for year.
Analysis of adjusted operating profit for fiscal 2020. Improved spread between price and raw materials and benefits, which have come through the thorough review of expenses will contribute positively, while full year decrease in volume and the worsening of conversion costs in others category will noticeably drag the profitability. Thus, the company projects the consolidated adjusted operating profit to decrease by JPY 185.7 billion.
Last but not least, I will discuss the revision of the forecast for the year-end dividend. Our company positions the interest of our shareholders as an important issue in our business management. And it is our basic policy to work to improve our financial performance while reinforcing the foundation of the management to be prepared for the future development of the business. In regard to distributing profits to shareholders, we conduct shareholder returns while maintaining an appropriate financial position and securing the internal revenues necessary for future growth investments.
In determining dividend payments, we comprehensively evaluate factors, including business results, financial conditions for the relevant fiscal period, medium-term earnings forecast, investment plans and cash flows. Based on these considerations, we strive to live up to expectations of shareholders by issuing stable dividend payments, targeting at consolidated payout ratio of 20% to 40%.
Considering the difficult financial status we find ourselves in with a negative net income forecast for 2020, as explained, series of discussions were held internally, while being mindful of the need to secure fund for future growth, the likelihood of future increase in demand for financing relating to business manufacturing base reorganization, the need to continue to maintain a robust cash position and the policy of stable shareholder returns in the mid-long term. As a result, the year-end dividend forecast was determined as JPY 55 per share and the total annual dividend JPY 105 per share. I'd like to ask for your kind understanding.
And that's all for me. Thank you for your kind attention.
That was the presentation on the financial results of the third quarter of fiscal 2020 by Hishinuma. Next, I'd like to invite Shu Ishibashi, Global CEO and Representative Executive Officer, to present mid-long term business strategy update.
Hello, everyone. I'm Shu Ishibashi, Global CEO and Representative Executive Officer of Bridgestone Corporation. Following the financial results, I will provide an update on the mid-long term business strategy. In July, August and September of this year, I provided a whole picture and update on our mid-long term business strategy. This is our global midterm business scenario. Our aim is to evolve to a strong Bridgestone by 2023 that is leaner and capable of quickly adapting to changes in the business environment. To do so, we need to transform while taking advantage of our strengths in order to realize our new growth strategy.
We are accelerating this transformation and clarifying our strategic focus through the execution of 3 stages: crisis management in order to address the impact of COVID-19 for the remainder of this year and into next year; rebuilding earnings power, we've already started focusing on this in our core business; strategic growth investment in order to support the expansion of the Solutions Business into growth business. In order to execute this transformation, we initiated the following structured process: development of global KPIs and PDCA process to track and measure our progress; development of a new management index, including measurement of ROIC as the foundation of our evolving financial strategy. Also, as enablers for execution, we are accelerating Bridgestone's human resource transformation or HRX. Our people are the most important component of execution.
First, rebuilding earnings power. Here is how we control expense or OpEx under the crisis management mode in 2020. We managed strict expense control throughout 2020 in this severe business environment and also started tackling expense structure reformation to contribute in mid-long term range. As a result of these actions, we have secured JPY 75 billion savings of fixed expense versus 2019. Within this total amount, JPY 50 billion was saved by strict expense control under crisis management, for example, furloughs in retail and manufacturing to adjust production volume decrease.
Another JPY 25 billion was saved through initiatives to expense structure reformation, which will also contribute in the mid-long term range, for example, in the area of resource allocation and organizational restructuring. As for variable expenses, we are tackling logistics optimization to reduce expenses. However, we believe this is not enough. We will continue to focus on business portfolio restructuring over the next several years to initiate robust structural reformation.
Regarding operating expense, OpEx, we have changed the structure of fixed expense to be leaner and are already seeing positive results. This leaner fixed expense structure will be the new base going forward. We have already initiated a strategic reallocation of resources and overall restructuring of the organization and modification of a part of our compensation strategy. These changes will be aligned with our HRX strategy. As for advertising and sales promotion, we will optimize resources based on our brand strategy and in alignment with the mid-long term business strategy.
Also, we will evaluate our sales channels and organizations to allow for our Solutions Business expansion, and this will contribute to reduction of sales expenses. As for variable expense, our main focus is currently on reforming our logistics operations. Combined with restructuring activities within our sales channel, our distribution system will be refined, and we'll be able to optimize our distribution centers and achieve more efficient deliveries, among other benefits. In addition, we aim to improve group internal logistics costs in connection with the movement of products, in particular, resulting in the optimization of routes between sites and lower cost per delivery.
We anticipate these results will be achieved through our activities to reduce fixed costs in 2 years from 2020 to 2021, mainly in HR and organization areas. Approximately JPY 3 billion will be reduced in 2 years through the adaptation of compensation strategy initiated in Japan and our overseas SBUs. We have initiated resource reallocation in every region. Voluntary separation programs in overseas SBUs and utilizing outsourcing and shared services in administrative jobs will contribute approximately JPY 9 billion to fixed expenses reduction in 2 years. As for integration of office facilities, we have initiated activities globally based on new ways of working as well as in Japan. From these initiatives, the reduction of fixed expense in total will be approximately JPY 13 billion. We will move forward to achieve further improvements as we transform to a leaner structure, and we expect the benefits of these activities will continue to contribute to our earning power in 2022 onward.
Here is some information about the integration of our office facilities in Japan. Triggered by COVID-19, changes to how we work have been accelerated. We have been discussing ways to adjust our systems to new ways of working to ensure our teammates' peace of mind and safety. We have decided to integrate office sites and expand support of our remote work environment in order to realize our new ways of working, which will be a combination of remote work and working in the offices. Starting in January 2021, we will begin to reduce our office sites in the Tokyo Metropolitan Area and in large regional cities such as Osaka, Nagoya and Sapporo by 30% versus our current office footprint. This will support the expansion of remote work and optimization of office space usage, which means better utilization of owned estate and reduction of rental space.
Expected total benefit from this integration will be JPY 800 million of expense reduction in 2021. These new integrated offices will provide social distance options and ensure our teammates' peace of mind of safety. As for remote work, we are encouraging TQM, total quality management, activities to increase productivity and maximize value creation, and we tend to share best practices of value creation and innovation globally. Also, as remote work became a regular work option, this past October, we began providing an allowance to support the remote work environment, and we'll modify our commuting expense plan to better reflect this new style of working.
Next, I will explain about initiatives to improve production cost. We are focused on every element of production cost at every site globally. About raw materials costs, a global procurement project is ongoing. The initiatives will expand global sourcing and central purchasing and also review and evaluate current raw materials and switch them to better and more cost-effective ones. Through these measures, we will be able to cope with expected raw material cost increase, driven by anticipated economic recovery in 2021. About our Dan-Totsu product strategy, we have expected plans to achieve both improvements in cost, while at the same time, implementing activities to increase product power such as commonality and modularity.
Regarding initiatives to improve conversion cost, we're also exploring further cost improvements in our manufacturing operations. We're reviewing all issues in every plant and setting improvement KPIs. Based on these KPIs, we'll take measures to improve productivity through the PDCA cycle. Also, we are approaching this by considering both tangible factors and intangible factors. The tangible factors include maximizing the use of existing equipment to reduce unnecessary additional investment in our plants. The intangible factors are based on our fundamental policy of manufacturing.
To manage manufacturing is to develop people there, and we will strengthen it through activities that will include the deployment of talent from the headquarters and the Kodaira technical center to SBUs to support plants globally. As our European group company, Bridgestone EMEA, has already communicated publicly, they have initiated 2 planned closure projects. The project of Bethune plant is pending works council consultation. Regarding the closure of Port Elizabeth plant, we reached an agreement and is planning to close the plant on November 15. Optimization of our manufacturing footprint based on strategy will be continuously considered and evaluated.
Now I'll explain about building the foundation of our financial strategy in HRX as enablers for execution. We've enhanced the foundation of our financial strategy, which is very important for rebuilding earnings power and expanding our Solutions Business. Through portfolio management, we've structured our base for evaluation strategies by business portfolio and have added ROIC as a new management index to support strategic decisions, which may include the possibility of existing business. In addition, we've enhanced the function of finance as a global control function to better manage investment in plants and M&A globally, and we have adjusted structural resources, rules and policies accordingly. This enhancement of the financial foundation enables us to follow-up with the PDCA cycle and evaluate our execution progress. Our business portfolio management will be also enhanced.
Next, I would like to discuss Bridgestone's HRX. In the core tire and rubber business, we know that we face challenges, are in the process of addressing a fundamental cultural transformation to leverage our strength. As for the growth business, we are creating a new culture with our new teammates from Webfleet Solutions and iTrack, something that will help us be successful in the development and sustainability of Solutions Business. Through the transformation of our core business, we will generate the resources necessary to flexibly invest and reallocate to our growth business. We will also adapt the new culture of our growth business to our core business to make it stronger, thereby amplifying the value of each business, the value spiral up work here as well.
I would like to first explain the existing challenges and HRX direction of the core business culture transformation. The challenges we are facing globally are mainly four. First, there has been insufficient linkage of business strategy in HR and organization strategy. Next, in our SBU system, where each SBU executive business executes business in its region automatically, the balance of responsibility has become ambiguous. And as a result, performance management, including investment control, in particular, has not been strong enough. In addition, we recognize that lack of future management talent in many areas and increased fixed cost on global level are also our challenges.
Towards these challenges, anchored in and starting from a business strategy, we built an aligned HR and organizational strategy to secure group level optimization. We have qualified global and local strategies and global KPI and achieve stronger grip through the Global EXCO, which will evolve global management, glocal management. We have also qualified the global and local responsibilities of our global management team and linked performance to pay and incentives. And also, we have accelerated and expanded our focus on the development of future management talent. For example, we have selected BRIDGESTONE NEXT100.
Regarding the challenges to reduce fixed cost, as I introduced earlier, we have started fundamental strategic restructuring and personnel optimization activities. As for Japan, we recognize that it is a big challenge to break away from the traditional organizational structure and culture. We have a unique system in Japan, where evaluation and promotion is made based on mainly seniority and with focus on performance.
And perhaps uniquely to Bridgestone, we have a bloated and inefficient organization, slow decision-making and silos across our organization. We also realized that we must effectively develop global management capabilities and enhance our focus on attracting, retaining and developing and promoting diverse talent. In order to fundamentally improve these challenges in Japan, we have introduced a new HR system to: one, make organization simple and lean; and also to adopt a job-focused employment concept and enhance talent development.
Let me explain the new system on the following side. First of all, we revised our organizational design to enable a firm, lean, quick and simple organization and decision-making. The organizational layer is revised from 5 to basically 3, composed of senior officer, executive and management layers. We've eliminated the existing executive officer system and reduced the number of leader positions, mainly in the core business, by about 20%. The senior officer layer is composed of only vice president and senior officers, and we have reduced the number of officers from the current 60 to about 20. We issued a letter to those who have been appointed as a vice president and senior officer to qualify their role and responsibility. It is 1-year term and is updated annually.
In order for individuals with advanced knowledge, skills in a specific area to contribute in the right position, we created a new specialist position in addition to the leader position. The specialist contributes to the business with their knowledge and experience without responsibility for management. The transfers between the 2 positions, specialists and leader, are intended to be flexible to realize agile utilization based on ability and performance. In this way, we are able to optimize personnel as well as achieve a simple and lean organization. We are also able to generate resources through reducing positions in our core business and flexibly reallocate roles to improve and expand our global business.
Next, I would like to address the concept of matching of people with position based on the business strategy. Until now, our HR system was based on a membership-based employment concept. Now we are seeking a more hybrid employment system by partially adopting a job-focused employment concept in our growth business. This is represented by a concept of matching of people with position. We firstly clarify required functions and organizational abilities to execute the business strategy, and based on them, clarify position requirements and HR requirements and then identify the right person to take the appropriate position.
We also will enhance talent development and recruitment activities to identify the best candidate to meet position requirements. Also, we've revised the unique Japanese evaluation reward system, which is based mainly on seniority, to a more fair one, aligned to role and responsibilities and performance. For officers and managers, we've introduced position-based evaluation promotion, 360-degree assessment, et cetera. And for staff personnel, we eliminated the regular annual salary increase system and introduced a new system which evaluates outcome and progress in a fair manner. With this organizational reform, we expect these new system to foster motivation and growth of our teammates.
And finally, regarding one of the most important elements, talent development, we have initiated new approaches based on the new organization and people matching concept. In the past, our main focus was to minimize variability to maximize organizational ability based on the membership-based employment concept. But for the future, as we adopt the job-focused employment concept, we aim to maximize individual capacity or capability, so that each teammate can work to his or her fullest ability in the right position through learning and development activities that are customized to each individual's unique strengths and needs. Regarding development programs, basics are to align with the clear HR requirements. The programs are designed to focus on improving practical ability and performance and creating opportunities. Top management and division heads are responsible for providing these opportunities.
As an initiative to develop future management talent, this year, we introduced the BRIDGESTONE NEXT100 system to select and develop future management talent, about 100 globally in total with about 30 from Japan. We are also continuing our focus on promoting diversity and inclusion. Diversity and diverse viewpoints are indispensable if we are to successfully expand our growth business. We have been enhancing recruitment and development of diverse talent. And as one of our challenges that require immediate attention in Japan, we will focus on promoting female managers and improving their support system through initiatives such as mentoring system.
So those were the new culture regarding the core system, but from here, I will explain about the Solutions Business organizations. As I mentioned earlier, we need to create a new culture to accelerate our Solutions Business expansion. First, we've structured our Solutions Business organization globally. The Global Solutions Committee directly reporting to G-EXCO consists of members from all SBUs to monitor and align the business expansion. They also propose strategy and actions through G-EXCO, as appropriate. We structured Bridgestone T&DPaaS organization in the global HQ and the Kodaira technical center to manage the whole picture of Bridgestone Solutions Business and will take initiative for global alignment.
And under the centers of excellence model, which is a unique system where a region which has a strong position in particular aspect of our Solution Business leads the business globally, each Solution Business organization has been structured to reinforce its role and capability. In Europe, we have the Bridgestone Mobility Solutions business unit with integration of Webfleet Solutions organization and tire-centric solutions team. In America, we have developed focused retread and mobility solutions organization to accelerate Solutions Business. In Japan, Bridgestone Tire Solution Japan is focused on identifying ways to accelerate the Solutions Business. And for mining and aircraft solutions, we have an independent business unit to lead global business expansion. Step-by-step, Solutions Business will be strengthened and expanded.
We also have strategic partnership and M&A organization in Europe and the United States to maximize new value creation and value co-creation for the growth business. In addition, we launched a global strategic partnership M&A project, which reports directly to the Global CEO for scouting and execution based on business strategy. In this project, we are exploring new business opportunities to enhance our solutions, digital transformation and sustainability initiatives, investment in start-ups and venture capitals to further strengthen the scouting function. Building a global M&A funding system, we will allocate necessary resources in our midterm business plan. With this global organization base, we will further accelerate and expand our Solutions Business.
This is what we wanted to discuss today. As I started -- stated at the start of this presentation, we have started the execution phase based on this midterm business scenario towards 2023. And as we look towards 2030, we have firmly placed sustainability at the core of our business and management and will accelerate business development to contribute to the circular economy. An important component of this approach is based on 3 Rs: reduce, reuse and recycle. Through our core business, which produces and sells tire and rubber products, we will strive to continuously reduce raw materials use.
And through our growth business, we will provide value solutions to customers who use our products and services. We reuse tires as well, for example, retread tire services. In addition, we will increase focus on recycling or further integrate recycling into a business model, so that we will be able to amplify the value of tires fully throughout the value chain, and we will have unique circular economy business model, which we aim to establish. And the final target is to realize our 2050 vision, whereby Bridgestone continues to provide social value and customer value as a sustainable solution company.
Lastly, on February next year, we will announce our midterm business plan in direction looking towards 2030 based on midterm -- mid-long term business strategy, which I have explained. As updates throughout this year, I will explain the plan, along with the action, including financials and other data for 3 years at the time. Midterm business plan was redesigned to execute strategy in a steadier and more strategically consistent manner globally than previous midterm management plan. Including announcement of midterm business plan through very -- every communication opportunity, I will continue to provide visibility of our plans and results to deliver on our growth.
Thank you for your time today and for your understanding and continued support.
Thank you, Mr. Ishibashi. We have just given you the presentation from Mr. Ishibashi on mid-long term business strategy update.
Now we would like to proceed to the questions and answers. Please be aware that due to the capacity reasons, the company has asked certain members to ask questions. [Operator Instructions] To start with the members of the media, let me first ask Ms. [ Tanabe ] from Nikkei Newspaper to ask your question.
This is [ Tanabe ] from Nikkei Newspaper. So full year, your projection points to the bottom line losses. So I would like to get the observation by CEO, Mr. Ishibashi, and once again to please explain why the bottom line losses, despite the fact that adjusted operating profit is profitable? Also here and there, there has been the rumors saying that there's a possibility of the Firestone building product divestiture.
Well, thank you for the question. First of all, the very fact that our projection now points to the bottom line losses is regarded quite heavily by myself. In particular, adjusted items or nonrecurring items have become so noticeable. But in the beginning of the fiscal year, 3 points: to tackle issues from the past heads-on, not to forego action necessary; secondly, the crisis management, which mentioned the cash-oriented or the cash-based management; and number three, to lay the foundation for the future growth strategy for Bridgestone.
So of the 3, the first one, to clarify the issues from the past to tackle those issues heads-on meant that we obviously had to review each of the businesses and business viabilities, which led to the necessary judgment to take impairment accounting and resulting losses. Manufacturing footprint restructuring, this is also for our future. So nonrecurring items were accumulated, including impairment losses. By the way, please be aware that all of these actions are expected to lead to the future growth of the business. Meaning that starting in the next fiscal year, we expect the new start to begin.
About the U.S., I think, roofing material business, I am aware that various reportings have been made. But we always keep various options in mind. So some of them may be business restructuring or the manufacturing footprint restructuring and so on. So the optimal approach needs to be chosen at opportune timing has been the key. Therefore, nothing is decided for now. If and when, however, I -- certainly, we will choose the proper timing to disclose the information to you. Thank you. By the way, for the current fiscal year, adjusted items total and amount have been impairment losses or the business restructuring expenses, the total expected.
Mr. Hishinuma to answer.
So what I said is that through the third quarter, JPY 75 billion was the total adjusted items, and this includes impairment losses and the business and plant restructuring expenses. To give you further details, in the third quarter, these expenses amounted to some JPY 46 billion. And in the fourth quarter, I'd say some amount comparable to that, that would be booked possibly. So that is reflected in our projections. By the way, all of these calculations and projections refer to our future business plan and strategy and cash flow planning. So on that basis, we are needing to have some sense of the likelihood of these adjustment items. Right now, we are working on these plans and numbers. So something like JPY 120 billion in total for this fiscal year. So that's a rough sense that I can share with you as of today. Thank you.
Thank you, Ms. Tanabe. So let us now move on to Mr. [ Shinkai ] from Asahi Newspaper.
This is [ Shinkai ] from Asahi Newspaper. So I'm interested in your new HR system in Japan. First of all, this expected revision of the HR system, how has it been impacted by new coronavirus? And also before and after this revision, how would personnel costs change in Japan? That is to say, is it going to be bigger or smaller? Also, things like seniority system or the regular annual salary increase system, those to be abolished may be resisted by employees in Japan. So how would you care for that?
Thank you very much for that question. CEO, Ishibashi, responding. You want to know what the impact of coronavirus has been to the revision of the system. This trade forward -- the impact has not been there. So it's been decided separately. Of course, things like on the office, the premise consolidation or the teller working system with the new allowance to be offered, that has affected by the COVID-19 and the productivity improvement as well. But things like 5 layers down to 3 layers or the so-called firm, lean, quick and simple, these are not directly related to the new coronavirus. Rather it's based upon our mid-long term strategy.
And as to the before and after question about the HR system, let me ask the CFO to answer. By the way, the carrying partner for the segments of the employees with the union for nearly 1 year, and we have been continuing discussions. So some uniform treatment is going to be brushed away. So something which is truly fair to everyone is the approach that I advocate. The union accepts that, which led to our announcement. However, with the introduction of this new system, how we are going to go through the process of evaluation, that is quite tricky. And further improvements will be made to make sure that everyone accepts. Thank you.
And CFO, Hishinuma, I would like to respond to part of your question. You wanted to know how the total personnel cost will change before and after the revision. Basically, the total personnel costs is expected to come down. But by how much, may I refrain from quoting any particular number. Thank you.
Thank you very much. So let us now move on to Mr. [ Yamada ] from Toyo Keizai Inc.
[ Yamada ] speaking. Speaking of the next fiscal year, it's right around the corner sort of. So what's your read for the coming fiscal year, the numbers, environment and so on? And you took impairment losses and fixed cost reduction and so on. How would next fiscal year's profitability be? So that is what I would like to know, not 3 years from now, but just next year. What will be your expectation? Now you're talking about adjusted items and the other expenses. I take that it's tax. The tax expenses are going to weigh heavily. So that's my understanding, and I just would like to make sure that I'm reading it correctly.
So CFO responding. Next year's our budgeting plan is something that we are working on right now. So frankly speaking, there are no exact numerics that I can quote right now. But in terms of the top line expectations, under the coronavirus, there is severe impacts, but the trend will be that of recovery next year. But as you point out, in the current fiscal year, fixed cost reduction is something like the JPY 25 billion to JPY 28 billion structural reduction. So that would imply that in the next fiscal year the profitability should improve. Once again, however, let me refrain from quoting the specific numbers only because we are working on the expense right now. Thank you. About your inquiry about tax expense let me just make sure that I understand appropriately the question -- properly.
Yes. What I meant to say is that before and after the application of adjustment items, I see that even after on the adjusted operating profit basis, it's profitable. And beneath that line, you basically have items such as financial charges and so on. So it's mainly tax, isn't it? So I would like to make sure that I'm reading it correctly. And by the way, you say the recovery trend next year, but not exactly back to the pre-COVID days?
Thank you very much. Tax, yes, net tax would weigh negatively to the bottom line. The impairment losses, please be aware that those refer to less yielding businesses. So things like tax effects and DTA is not expectable. So I'd say that not exactly back to the pre-coronavirus days next year. Our general view is that the negatives may persist until 2022. So not exactly 100% recovered as of the next fiscal year.
Let us now move on to Nikkan Kogyo Shimbun, Mr. [ Kamata ].
My name is [ Kamata ]. My question has to do with the overall electrification of automobiles. Starting with the U.S. with the President-elect, Mr. Joe Biden. In China, how they say that by 2035, no more gasoline-fueled vehicles or to be ecofriendly. Japan, Europe, acceleration to move towards under the EVs. So that move is getting more and more preeminent. So as we see that trend, how do you see the trend at Bridgestone? Or what is your view, specifically in the name of the CEO?
Okay. CEO responding. Electrification of vehicles, no time to waste or to wait. We have the various alternatives, there's EV, there's SEVs, there's also the OE car assemblies. Mindful of the original characteristics or the overall maturity of the auto industry, I'm sure that we are making the appropriate decisions and not to mention regulatory environment and how it is going to move forward. So the particular type of electric vehicle, there will be at the discretion of the car companies. In any case, for all purposes, it's our low rolling resistance tires with the brand name of ECOPIA [ Mindi ] is there.
In Europe, we have ENLITEN, which is the auto light-weighting tires. It's very light and yet the performance features are quite reliable, good motion performance, lower rank resistance and super fuel economy. So that's our -- those are our answers. With the further acceleration of electrification of cars, the capacity of batteries become even more important. So how to extend the durable life of batteries would be questioned. And in those connections, and tires can contribute with the value ad or with low rolling resistance and the features. Those will come in mainstream. So things like ENLITEN, which are light-weight, good-performance tires, they wouldn't be the choice of the market. Thank you.
Next, Mr. [ Akuwa ] from Chemical Daily.
[ Akuwa ] from Chemical Daily. Mr. Ishibashi mentioned in his presentation that you're going to continue with your structural reformation efforts after 2022. I'm under the impression that the current reformation is more focused on reduction of production costs and fixed expenses. Do you plan to continue your current efforts after 2022? Or do you have more drastic transformation of business structure in mind, such as consolidation of manufacturing locations? If you can share with us your basic direction of the information, that will be appreciated.
Our structural reformation is twofold: business portfolio restructuring and manufacturing footprint restructuring. In business portfolio restructuring, by identifying which business to pursue and which ones not to, we will make Bridgestone's future business portfolio clearer. In this context, we would like to focus our efforts in business portfolio restructuring in the next 2 years, 2021 and 2022. As for manufacturing footprint restructuring, we already made announcements on 2 projects. What is on the table for discussion includes manufacturing locations of not just tires, but diversified products as well. We're going to execute our restructuring plans or reorganization at the right timing. As we engage in such exercise, we expect to see what a new Bridgestone looks like as we move to 2023. Did that answer your question?
Well, you alluded to M&As toward the end, but would that be part of your business portfolio restructuring?
Yes. As you know, we acquired Webfleet Solutions in 2019 and Bandag retreading company in 2017. We're hoping to and going to carry out M&As necessary for us to execute our business strategies in areas such as solutions, digital transformation and circular economy or sustainability. That should help us move 1 or 2 steps forward or enable us to commercialize those businesses, which otherwise would have been found impossible to be commercialized.
Do you already have several potential deals in your pipeline? Or have you set aside a certain level of budget?
As I explained, when we announce our midterm business plan, I will mention how much monetary resources we plan to allocate for M&As each fiscal year. Therefore, our plan is to secure resources to carry them out globally. There are so many potential deals to tap into and there are -- they are always on the table for discussion. But you need to also take into account the timing and opportunities. Therefore, our plan is to make decisions at the appropriate timing.
I'll be looking forward to your earnings report in February.
Thank you very much, Mr. [ Akuwa ]. Now we will open the floor for questions from analysts. The first questioner is Mr. Sakamaki from Daiwa Securities.
Sakamaki from Daiwa Securities. I would very much like to ask similar questions to Mr. Ishibashi. Today, I will focus on one question on financial results. More specifically, in the financial results of the third quarter, adjusted operating profit was significantly affected by items under others, which makes me suspect that there may be onetime factors included. But what were the factors that eroded into profit? I understand conversion cost is one of them, but could you give me the breakdown of this category? Moreover, since you recognize the impairment losses this fiscal year, I would assume there must be positive factors to improve profit for next fiscal year, including a potential reduction of depreciation costs. Could you share with us how much of that you already foresee, if any?
Was your question about the breakdown of JPY 100 billion indicated as negative factors under others?
Yes. But if you look at the third quarter alone, it was JPY 42.9 billion.
To give you the breakdown, of the total of JPY 42.9 billion, the conversion cost accounts for slightly less than JPY 7 billion, while improvement in mix pushed up the profit by JPY 3 billion, and the remaining balance was about JPY 39 billion. The balance includes weaker currencies in Latin America, representing about JPY 6 billion; and the unrealized profit in inventory, another JPY 6 billion. As we operate retail businesses as well, reduced volume sales pushed down our retail gross margin by about JPY 5 billion. In order not to postpone posting various losses, we have done the review of the inventories and posted provision for and disposal of some of the slow-moving inventories, which resulted in another JPY 3 billion drop in the profit. Adding all these factors up will bring us to the total negative impact of JPY 39 billion. In that sense, once the retail sales volume starts to recover, the gross margin is also expected to improve. We also will make sure that slow-moving inventories should not be carried over, but be dealt with by the end of this fiscal year. And so this should become a positive factor next fiscal year.
More recently, the mileage is registering a negative growth. And even after the COVID-19 pandemic, under the new normal environment, the demand structure may change and the demand for tires may not return to the level of pre-COVID-19. Are you concerned at all that if this turns out to be the case, the absence of onetime factors may not be enough to offset a potential larger volume decline? Is there any discussion ongoing in your company about the possible necessity of further pursuing restructuring in preparation for that?
For example, in the U.S., the extent of negative growth in the mileage is proving to be smaller than we feared. The retail business is gradually improving. Moreover, trucking companies are rapidly recovering in the U.S. partly because of the strong e-commerce business and frequent movement of goods. Thus, we do not have the concern that the replacement demand will deteriorate rapidly. In fact, the replacement business has been consistently improving from the third to fourth quarter. Aside from the lockdown measures against COVID-19, our take is that there have been signs of recovery in the volume of traffic of both people and cargo.
Thank you very much, Mr. Sakamaki. Next, Mr. Yoshida from Citi Global Markets Japan.
I want to ask about raw materials. Their prices have been rising significantly recently. Previously, in the case of your company, it was possible to absorb the rise by raising your selling prices to customers. Can we expect that strategy to continue to work going forward? Could you share with us your take on that, including the supply/demand relationship? Secondly, you mentioned procurement project to reduce raw materials cost. Generally speaking, natural rubber is linked to the market prices and synthetic rubber is procured under price-linked contracts with chemical companies. Therefore, I suspect it will not be so easy to offset the rise in the raw materials cost. So could you share how much positive result do you expect to see even in qualitative returns from the procurement project realistically speaking?
The question was about the split between the raw materials cost and selling prices. Our forecast for the third quarter and the full year has been shown. Raw materials cost at its lower levels is expected to contribute a positive JPY 54 billion and the price JPY 6 billion for the full year, which shows that while the raw materials costs stayed at the lower levels we have been able to maintain the selling prices to some extent.
The cost of raw materials has been actually increasing more recently and could become a negative factor for the profit around January to March or April to June because of the time lag. Normally, you manage to cope by raising the selling prices to some extent, and I'm wondering if that thought process remains valid. And what is your expectation on the procurement project?
Our basic policy is to absorb the rise in raw materials caused by higher selling prices. Going forward, of course, things will depend on the market prices, but basically our approach will remain unchanged. I may sound repetitive, but the fact that we were able to maintain the selling prices to some extent in the third quarter suggests that we can do the same when raw materials costs rise as well.
With regard to the procurement project, we started it first from Europe. With regard to natural rubber and other major items, various activities are already underway globally and what you said is exactly correct. But there are still many items which we conventionally fail to procure together globally. Those include chemical-related materials. Therefore, we decided to identify those areas conventionally overlooked, look more closely and figure out what we can do more. That is why we launched this project. About the expected value, we plan to incorporate specific numbers in the budget next fiscal year. For major items such as natural rubber, RMI, or raw material linked prices, are applied to some customers where there's some time lag.
In other words, if the raw materials costs start to rise now, the selling prices will also start to rise at some later point in the future. If such schemes like RMI are not in place, we will raise the price. So through both of these measures, we are hoping to manage. Furthermore, we're looking at the positioning of each of the products in order to identify those products where we already see a gap between the capability of the products and their price positioning. For those products, we're beginning to make adjustments gradually, especially in Europe and U.S. While putting such efforts, on one hand, we're trying to cope with the issue through price hike and RMI. Did I answer your question?
Thank you very much, Mr. Yoshida. The next questioner is Mr. Kakiuchi from Morgan Stanley Securities.
Kakiuchi from Morgan Stanley Securities. You have made upward revision to the revenue forecast by JPY 190 billion and adjusted operating income by JPY 50 billion for the full year. Have you incorporated upside in both third and fourth quarters? Mr. Ishibashi said earlier that the mileage in North America has not shrunk as much as initially anticipated, but I'm wondering how you assumed possible impact of COVID-19 in the fourth quarter. So could you tell us whether the upward revision reflects only the upside in the fourth quarter or include upside in the third quarter as well?
In preparing for the forecast, we had various discussions together with each SBUs regarding sales forecast. Now the conclusion is that for the third quarter there is an upward adjustment. And for the fourth quarter compared to the August forecast, there is some increase. Well, one reason is that we had incorporated a certain level of demand decline due to the second wave of COVID-19 to hit in the fourth quarter, although maybe not as severe as in the second quarter when preparing the forecast for August. This time, too, we did take another look and expect some impact to be incorporated, mainly from the United States and Europe in the second wave of COVID-19. However, we do not expect that to be as large as that forecasted in August. When we look at the more recent trend in October, with the forecast in which we based our plan, it is somewhat higher if we take October alone, and we do see some level of increase.
You did explain to us about nonrecurring loss earlier. Have you included some items which you are expecting from -- specifically in the fourth quarter? Or are you considering something like a buffer to be included? In other words, my question is on these numbers. What constitute them, maybe plant closures, maybe 1 or 2 or more that you're already looking at more concretely?
What we are planning for 4Q is mostly impairment loss. Well, obviously, or maybe to some extent, we do see some level of risks. But we are in the midst of developing the next year in the midterm business plan for now. And based on the current situation and trend, we are now formulating the plan for the next year as well for the coming 3 years. Depending on the situation, due to the cash flow, et cetera, the number may possibly fluctuate up or down. But for the items where we feel that there are certain risks that must be accounted for, they are included. Or in other words, those with lower profitability, you may be able to guess what they may be reflected in these figures.
Earlier, Mr. Sakamaki asked about the impairment for the next year. Because there will be impairment taken this year, can you expect to see some level of decrease in fixed cost or depreciation?
Well, I don't know if we can say we are expecting, but yes, some level of decrease in the expense will be seen. So there will be the depreciation difference, et cetera. So there will be some decrease in expenses that we are foreseeing.
Thank you, Mr. Kakiuchi. Next, we would like to invite Mr. Sakaguchi of Mizuho Securities.
I would like to ask you some questions about your tire sales, especially for North America and especially for over 18-inch high rim diameter tires. I think they experienced recovery of the market recently. What is the competitive environment like? And what are you doing to prevail in that market? For the in general HRD tires and for replacement, it is 113%, and the recovery in the third quarter is quite strong. With the backdrop, fourth quarter, on the other hand, the forecast is either at level with last year or this will decline. What is your prospect? Do you think that this recovery is not sustainable?
For the North American tire sales, which you had asked about, when you look up until the third quarter, demand is 105% over previous year and our sales is 100%. In the demand, I expect that there are some last-minute demand before the anti-dumping duties from the Asian countries went to effect. We do recognize that demand is growing, centering around the general purpose tires. For the tires, which are offered by the major brands, well, the demand in North America is either at or just above last year's level. In such a market, we are doing just about the overall market or just above maybe 100%.
I believe that the high rim diameter is strong now, and we expect them to not lose steam in the fourth quarter. It all depends on how negatively one looks at the impact of COVID-19. In general, for the HRD tires, we did take into account the risk of severe COVID-19 impacts into account. But if pandemic could be better managed, and we could present what could be called a more optimistic view where the economic recovery will continue, we will have a more optimistic situation. But if it takes more negative turn and possibly we do something like a lockdown, the situation or the options of choice will be very difficult. So in that sense, we can say that the fourth quarter is weak. If something like lockdown is avoided, we expect the recovery will basically continue.
Especially for those tires, HRDs over 18 inches, are you getting a larger share in the market? Or do you see such a trend?
I think that it is comparing with the previous year. But compared to the second quarter, there are some changes. Well, it is true that now in the third quarter, especially for the replacement, there is a big increase in the sales, reflecting the fact that where we are strong, we have further strengthened. We did not have a major shift or a change in the channel or as for products we did not necessarily introduce, at this point, new product strategy which led to the change. So there is no change point in that sense. Of course, we will introduce new products in the future. But what we can say is that under the existing situation, where we are strong, we are gaining even more strength, and it is not that we are necessarily taking any special action at this point.
Mr. Sakaguchi, thank you very much. Now we are getting closer to the end of the presentation session. I would like to ask Mr. Maki of SMBC NIKKO Securities.
I have one question. It is more or less related to the business scenario leading up to year 2023. On the presentation by Mr. Ishibashi, the CEO, on Page 2, you have risk management on this page. Compared to the information we received in August, I believe it has been brought forward by about 1 year. But on the other hand, restructuring or rebuilding of the earning power, it looks like it has maybe half a year to a year extended longer. I believe crisis management is implemented in advance of the early year plan due to recovery of the market condition.
As a result, I thought that transformed Bridgestone may be realized earlier. Could you give me the background in which that the scope of restructuring is expanding or growing? In addition, you are implementing restructuring in France and South African plant or projects. How much of envisioned tire business restructuring? Or how far until the goal would you say that these restructures will take you to? It may be difficult to get a very clear answer. There may be things you may not be able to discuss with me. But even if something like a mismatch, I would appreciate it. Can you tell me the kind of progress you are making in these efforts?
Business scenarios are being refined and brushed up every month through active discussion. Even on the issue of the impact of COVID-19, we are gradually seeing the recovery -- economic recovery from the impact. And as such, it's a little ahead of the schedule. As for business restructuring and manufacturing footprint restructuring, we haven't made any announcement for the business restructuring yet. But for the manufacturing footprint restructuring, there are 2 projects. We are planning to concentrated efforts for manufacturing plant restructuring in years '21 and '22. So there will be a significant impact felt. So the French project will have a big impact. And this will be continued in the kind of business impact we will concentrate our efforts in years '21 and '22 with significant impacts.
And those will require a significant amount of resources, not only just financial, but also manpower will be necessary. And they will require very detailed and careful planning. So even if concentrated and focus their efforts for the early implementation, we expect it will take 2 years. Well, of course, we will not be done with all of the business and manufacturing footprint restructuring in 2 years. There will be some that will come later. But we are putting a lot of things on the table for consideration. And we do hope that what we can do can be actually accomplished in years '21 and '22, so that we will become strong Bridgestone in year 2023. We are now at the final phase of formulating a scenario. In that sense, the restructuring, including the 2 projects for the manufacturing footprint, we can say, has just started. Thank you.
Then for the third quarter, until for the first 9 months, we did see adjustment item for business and manufacturing footprint restructuring expense of JPY 25.9 billion. And even just for the third quarter, it may be about JPY 20 billion or so. You also talk about the provisions related to discussions for the closure of 2 plants, and that may be what constitute these expenses. But if it is just for these 2 projects, the figure may be a little too high. Can you tell me what the breakdown is? You talked about continuing restructuring in years '21 and '22. Do you mean that you expect to have more of these expenses in the future as well?
Your question is on the expense for business and manufacturing footprint restructuring. Unfortunately, this is a very sensitive area, and I do hope that you would understand that I will not be able to give you specific details or breakdowns. But in general, there is -- when there is a plant closure, you experience impairment loss from the fixed cost or [ land soil ] improvement and expenses related to human resources as well. So there may be part of those items, but please understand that I will not be able to give you specific breakdowns. We are generally formulating our business plan for this coming year and the 3 years till 2023 for our midterm business plan, and we will announce it in February next year. In that process, we are undergoing very careful review about these expenses. So I hope that you'll be able to wait until the announcement in February for the specifics.
As mentioned earlier, we will be carrying out various business restructuring and there will be various costs entailed in that process. We will give you the details in February.
Mr. Maki, does that answer your question?
Now we would like to conclude the Q&A session. Thank you. Now we would like to conclude the fiscal 2020 third quarter business results presentation. Thank you very much for your attendance.
[Statements in English on this transcript were spoken by an interpreter present on the live call.]