Bridgestone Corp
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Bridgestone Corp
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[Interpreted] Hello, everyone. My name is Yoshimatsu, serving as the Global CFO at Bridgestone Corporation. Thank you very much for attending our announcement of financial results for the third quarter of fiscal 2021. So I am going to start by giving you the highlights of the consolidated financial results for the third quarter of fiscal 2021. And this is my agenda today.
At first, I am going to give you the key points in our business and financial performance for the third quarter fiscal 2021, overview of the performance for the third quarter on a 9-month basis. In this third quarter 3-months period, PSR/LTR sales slowed down due to the shortage of semiconductors. However, in the replacement segment, sales in the premium segment were very strong, resulting in a significant increase in 9 months sales, up 20% and profit up almost 2.7x was compared to the previous year. Truck and bus sales continued to be strong and mining tire sales, which lagged somewhat in the recovery from the COVID-19, is now on a strong track for recovery.
Profitability. The impact of raw material inflation was offset continuously by improvements in selling price and mix. Also, the adjusted OP margin in the third quarter was 12.2%, improved further from the second quarter, supported by the effect of expense and cost structure reformation. Thus, the company recognizes that there has been steady progress of "rebuilding of the earnings power." Overview of the performance by product or product group is as described on this page.
Now moving on to the business environment surrounding Bridgestone Group for the 9 months period. Currency exchange. Both U.S. dollar and euro appreciated against the Japanese yen compared with the previous year. Raw material prices natural rubber inflation since last year subsided slightly, but prices remain high. Crude oil prices rose sharply in the third quarter, continuing from the first and the second quarters. Tire demand in the OE segment. Demand recovery slowed down significantly in the third quarter, which is due to the worsening of the semiconductor shortages. Replacement segment demand in North America and Europe has been very strong. On the other hand, demand recovery in Japan, as you can see here, is relatively weak.
Moving on to tire sales growth. All the data is for the 9-month period ended September 30, 2021, compared against the previous year and also against 2019, which was before the COVID-19 pandemic. On the year-on-year basis, Global sales of PSR/LTR tires rose 112%, that of TBR was 118%, significant increase. On the other hand, this also yet to recover to the 2019 levels. For the TBR -- before moving on to TBR, sorry. For your information, PSR high rim diameter tires above 18 inches and TBR in North American web market were particularly strong in sales performance, exceeding significantly the 2019 levels as well.
For the ORR, the sales for auto large sizes was 108%, large sizes 134% and small to medium sizes 127%, all recovering strongly. And for large and small and medium sizes, OE market tire sales exceeded the 2019 levels. Consolidated financial results. Consolidated revenue for the 9-month period generated 20% or about JPY 400 billion increase year-on-year at JPY 2.400 trillion. Adjusted OP margin with the further progress of "rebuilding of the earnings power" in Q3 resulted with the Q3 or the 3 months OP margin of 12.2%, and 11.6% for the 9 months period.
Now the analysis of adjusted operating profit for 9 months ended September 30, 2021. With 20% or about JPY 400 billion increase in revenue year-on-year, the 2 factors that you see towards the right-hand side of this graph, volume recovery and conversion cost improvement accompanying the recovery [ of the ] capacity utilization plans progressed significantly, resulting in JPY 174.2 billion increase in adjusted operating profit year-on-year. For other factors, negative impacts from raw materials and ocean freight rate increases have been more or less offset by price/mix and operational improvements such as in Gemba operation net production sites.
For your information, the previous year numbers have been reclassified as you can see in the asterisk footnote at the bottom of this page. Now moving on to the consolidated financial results by segment. All regions experienced large increase in revenue and operating profit. And in Americas, and Europe, Russia, Middle East, India and Africa as a region, profitability improved, particularly stood out. In the Americas, adjusted operating profit margin went up from previous year's 8% to 14%. And for Europe, Russia, Middle East, India and Africa, losses in the previous year made a prominent progress towards a positive margin exceeding 6%. Consolidated financial results by product in the tire business operations.
For PS/LT tire, the margin was 14.1%, and that for truck and bus tire was 12.0%, both having improved in profitability from 1 year earlier, particularly, therefore, truck and bus tire operations. Favorable operations in North American market propelled the sales. So the margin climbed even further from the first half. Specialties segment comprising our aircraft, agriculture and motorcycle tires maintained a very high profitability with a margin of 18.9%. While mainstay mining tire sales recovered steadily due to the effect of raw material index sliding down the selling prices, the margin recovery seems to be more modest than for other product categories. However, we do expect a full-fledged recovery to come about beyond next fiscal year.
Moving on now to the diversified products business. 9 months revenue was JPY 263.5 billion with the adjusted operating profit of JPY 5.4 billion negative. On one hand, diversified products business in the Americas and sports and cycle business [ were ] profitable. On the other, chemical and industrial products business in Japan continued with the business portfolio issues and increased the adjusted operating profit of negative JPY 11.1 billion.
Balance sheet and cash flow highlights for the third quarter. Total assets increased by JPY 263.3 billion from the previous fiscal year-end at JPY 4.452.7 trillion. Sales recovery increased working capital, and also cash in from the divestment in the auto business in the first quarter of the Firestone Building Products was the main factor. Equity ratio went up by 7 percentage points to 58.3%, maintaining healthy standing. Free cash flow. With a large increase in cash flow from investing activities on business divestments was JPY 357.7 billion.
Now to go through adjusted items and profit from discontinued operations for the 9 months period. Adjusted items included expenses relating to the closure and restructuring plans at JPY 7.8 billion, the core expenses of Bridgestone Cycle Corporation at JPY 2.6 billion, impairment losses of JPY 1.7 billion, and that is totaling JPY 12.2 billion. The company classified the Firestone Building Products as a discontinued business. In line with that, profit from discontinued operations of JPY 229.9 billion is booked here as a quarterly profit.
Before I end here, forecast the business environment on the for fiscal 2021. Please take note that there is no change in consolidated projections for fiscal '21 from that announced back in August 2021. But I would like to explain and share with you our assumptions and underlying thinking. Currency exchange, both U.S. dollar and euro are expected to appreciate slightly against Japanese yen compared with the previous forecast in August. Raw material prices are expected to remain at a high level throughout the year.
Tire demand. In the OE segment, we expect that the tire demand will be significantly lower than the previous forecast in August, which is due to the continued impact of the semiconductor shortages. In the replacement segment, our expectation is that the demand will decline in Asia due to the impact of COVID-19. Speaking of the business environment and the final quarter, we expect to be strongly affected by the rising cost of not only raw materials, but also ocean freight and energy costs. And in the U.S., profitability is expected to be squeezed by rising labor costs. And therefore, we will continue to focus on selling price, mix improvement and expense cost structure of information to further promote the rebuilding of earnings power. We will, therefore, minimize the unfavorable impact and aim to achieve the full year guidance that we gave you back in August.
All in all, once again, there is no change in consolidated projections for fiscal '21 from that announced in August 2021. May I say, however, that if there be any significant changes to the projections based on the future business environment and our business performance, we will disclose it promptly at that time.
And with that, I conclude my presentation to you. Thank you very much.
[Interpreted] That was CFO Yoshimatsu on Q3 results. Next, Global CEO, Shu Ishibashi, will make a progress update on the midterm business plan.
[Interpreted] Hello, everyone. I am Shu Ishibashi, Global CEO. Following the financial results, I will explain execution and results in the third quarter of this year as a progress update on the midterm business plan.
This year, we have been focusing on execution and results to realize our theme Looking Ahead to 2030 towards a sustainable solutions company, support the mobility and movement of people and objects, create social and customer value and gain competitive advantage. We are speeding up our efforts toward realization. We are accelerating our actions with an aggressive approach and challenging spirit. As our business environment remains unstable, we will continue crisis management. At the same time, we will also execute rebuilding of earning power and strategic growth investments in order to evolve into a strong Bridgestone.
I will highlight the key points for each business regarding the rebuilding of earning power. We are continuously examining business portfolio and manufacturing footprint restructuring, which is in its execution phase from this year. In the core business, we are thoroughly improving the quality of business through expensing cost structure reformation and our premium business strategy. In addition to improving sales mix and reinforcing price management, we are promoting a global procurement improvement project to respond to inflation in raw material and ocean freight costs. We are selecting second brand raw materials, switching to more reasonable raw material while maintaining quality and optimizing logistics routes that win procurement sites and our plants, all initiatives that are certain to lead to results.
Also, in order to respond to the changing business environment, we are reinforcing flexible agile management, as well as planning in advance the building of a new production footprint sourcing structure from a global optimization perspective. In addition, we will continue our Dan-Totsu product strategy, including the reinforcement of ENLITEN technology, an innovative tire technology responding to the accelerating shift towards EVs. In the growth business, we are continuing execution of strategic growth investments. In the U.S., we completed acquisition of digital fleet solutions provider Azuga Holdings and are reinforcing its synergy with Bridgestone. We also made a strategic investment in mobile vehicle services and technology company Wrench. We are also reinforcing our approach with sustainability at the core. In the U.S., we have partnered with electric and autonomous freight leader Einride, while in Europe, we agreed on a long-term partnership with the EVBox Group to expand EV charging infrastructure based on our retail and service network.
In the exploratory business, we added [ gua yew ] business as a new area of exploration. We are looking to commercialize [ gua yew ] and ensure sustainable procurement of raw material. Regarding enablers for execution, we established an external global CFO function since September and are reinforcing portfolio management. Furthermore, regarding our core competencies, we are reinforcing the development and recruitment of digital talent to drive DX and accelerate innovation.
I would also like to introduce Bridgestone Design, which we have been valuing since our founding. I will explain details of these key initiatives. First, regarding the Rebuilding of Earning Power. For manufacturing footprint and business portfolio restructuring, we will continue consideration over a mid, long term across all of our business, including tires, material manufacturing and diversified products. In 2021, as we have been explaining in past announcements, we executed manufacturing footprint and business portfolio restructuring, mainly around our diversified products business. We are continuing careful considerations based on the idea to sharply focus on areas where core competencies can be leveraged. This included the divestment of the Building Products Business in the U.S. announced in January, as well as the divestment of the conveyor belt business announced on November 1.
In our core tire business, we are continuing to work on our premium business strategy. In the third quarter, impact of reduced car production resulting from semiconductor shortages became remarkable. We conducted further flexible agile management of our passenger car, high rim diameter or HRD tires, which has a high ratio of original equipment OE tires in our sales. We are minimizing impacts by switching supply to replacement tires and reinforcing sales. As a result, replacement tires, which made up approximately 40% of total sales in the first quarter, grew to about 50% in the third quarter.
In the fourth quarter and into next year, we are anticipating changes in the manufacturing business environment to become more prominent, such as inflation in raw material, ocean freight and energy costs and the rise in labor costs in North America and we suspect a current rip (sic) [ rip current ], especially around the U.S., where the strong tailwind will change to a headwind. To respond to such changes, we will minimize impact to our revenue and profit through a global procurement improvement project and through sales mix improvement. While keeping local production for local sales as our basic principle, we will increase headcount in Japanese and Asian plants to support aggressive sales in Europe and the U.S. in the short term. Furthermore, we will accelerate the planning for building a new manufacturing footprint sourcing structure based on global optimization. This will be one of the foundations for a strong Bridgestone.
Regarding reinforcement of the Dan-Totsu product strategy, we are working to expand the innovative next-generation tire technology ENLITEN to succeed the first-generation eco-friendly product ECOPIA. ENLITEN achieves both innovative lightweight and driving performance, including lower rolling resistance, contributing to prolonging the driving distance of EVs. It also increases resource productivity and is expected to contribute to sustainability on a whole new level. We are also integrating commonality and modularity efforts to enable innovation in development and production processes. Expansion is starting from Europe. And for passenger car and light truck tires, ENLITEN fitment will largely expand between 2030, 2023 and 2024. By 2030, approximately 90% of replacement tires is planned to be equipped with ENLITEN technology. We are also planning expansion for truck and bus tires and driving development to achieve approximately 70% equipment in 2030.
In Europe, which will be our hub for ENLITEN technology expansion, we are expanding OE fitment on EVs. In Europe, of the top 10 most sold EVs in the region this year, approximately half was fitted with Bridgestone tires. We are investing over 30% of Bridgestone Europe NVSA's tire development resources in tires for EVs. For replacement tires also, approximately 70% of tires in 2024 and over 90% in 2030 are planned to be equipped with ENLITEN technology. We will continue supporting the adoption of EVs and the realization of carbon-neutral mobility from the ground up.
Next, regarding the growth business. We have introduced various solutions business in the past. This table shows the major solutions we provide to our customers. In our solutions business, we will put efforts in enhancing services based on our retail network. We have also started a new mobility solutions program where we provide digital data to customers. Today, I will talk about the mobile van service and enhancement of retail services in our retail and service business, as well as the digital data service just mentioned. As part of enhancing our retail and service business, we made a strategic growth investment in Wrench, a mobile vehicle service and technology company in the United States. We will reinforce the value we provide during the use of tires and user experience that delivers safety and peace of mind to our customers.
Based on the retail network of 2,200 locations in the United States, we will also link mobile van services and subscription packages, proposing a better way to use tires customers to each customer. Along with vehicle maintenance, we will expand such concierge-style solutions, encouraging a better way to use tires not only in the United States but on global scale. In Europe, we made a long-term partnership agreement with Europe's leading provider of EV charging stations, EVBox. Leveraging the Bridgestone Group's retail and service network we will expand EV charging infrastructure. We plan to install approximately 3,500 charging ports across our European retail locations over 5 years. Furthermore, customers will be able to easily access both these ports in the more than 130,000 charging ports provided by EVBox Group using a common dedicated card or mobile application contributing to the adoption of EVs. We hope to share such initiatives from Europe, the leading region for our sustainability strategy, and expand it globally in order to contribute to the realization of carbon-neutral mobility.
For Mobility Solutions, we started a digital data service in our European web fleet solutions. Collaborating with leading location data and technology platform provider here, we will provide digital vehicle data collected by Bridgestone through a digital marketplace, all the time ensuring protection of privacy. By providing data such as vehicle type, driving route and fuel consumption status, et cetera, to the society and customers, we hope to contribute to safe and seamless traffic in smart cities, safe and more efficient fleet logistics and vehicle operations, and reduction of CO2 emissions.
Furthermore, we believe creating touchpoints with a larger number of customers and partners through the marketplace will enable the creation of new solution business opportunities based on digital, as well as the acceleration of innovation. As for the exploratory business, we added [ gua yew ] business in addition to the recycled and Soft Robotics business. In the recycled business, we are exploring technology to renew tires to oil and chemical products. In soft robotics, leveraging our technologies for robot arms and hands, we are exploring possible business models. In a [ Gua yew ] business that we have newly added involves the harvesting of [ gua yew ] a plan to produce rubber in arid zones, allowing the diversification of natural rubber sources. I will explain further in the next phase.
[ Gua yew ] is an evergreen shrub originating in the arid zone between the Southwestern part of the United States to Northern Mexico that contains rubber constituents. We officially started research activities in the U.S. and Japanese technical centers in 2012. We are studying the extraction of rubber content to enable the diversification and stable supply of natural rubber sources. We also think that this business will make a large contribution from the sustainability perspective, including biodiversity, sustainable raw material supply and contribution to increased CO2 absorption by expanding new green land. We own a research farm and research center in Arizona, United States, where we are working to accelerate the establishment of technologies for industrial use and commercialization.
We believe open innovation and co-creation are essential in advancing the exploratory business. For [ gua yew ] we have been co-creating with various partners in biotechnology. We will continue to explore the business through co-creation. Regarding our core competencies, we are working on driving digital transformation based on co-creation. In order to reinforce the development of high-level digital talent, we established Bridgestone Tohoku University Co-creation Lab at Tohoku University. Young researchers and those possessing special technology and expertise will participate and Bridgestone will dispatch its engineers, [ set seams ], and provide data.
During the project duration of up to 2024, we plan to develop a total of 40 talents. Also, as a result of the completion of the acquisition of Azuga Holdings, approximately 300 digital talent has newly joined our team. Our group's high-level digital talent now number 1,200 and is expected to reach 1,600 by 2023. We will continue developing digital talent through interaction with various parties and also enhance coordination with new teammates to promote Bridgestone's DX and accelerate innovation.
Lastly, I will introduce to you Bridgestone's design. The image on this slide is one of Bridgestone's Lunar Rover tire, taken to accentuate the aesthetics of its circular shape. We intend to value the image of circle and the concept of circulation not only in our business model and business portfolio, but also in design. Design has played an important role in the foundation and second foundation of Bridgestone. In particular, the introduction of a new corporate identity, including the Bridgestone logo and the B Mark in 1984 was done in view of globalization with Always Moving Towards the New Bridgestone as a credo. The initiative was positioned not only as a regeneration of visual design, but also that of the corporate culture. I believe it indeed supported the further globalization of the group marked by acquisition of Firestone.
Circle aesthetics is the first keyword in our current third foundation of Bridgestone 3.0. We are valuing the image of circle and the concept of circulation, which reflects our evolution towards a sustainable solutions company. A special exhibition, including Bridgestone Design Circle Aesthetics, is being held at Bridgestone Cross Point at Kyobashi Tokyo until the middle of December. The functional beauty of tires is presented through VRS graphics. Please come visit if you have time. We are also promoting innovation based on the 3 pillars: technology, business model and design. We will value design not only to pursue functional beauty based on circles, but also to drive innovation through the circulation of the 3 pillars: technology, business model and design. These key elements represent the circle aesthetics at Bridgestone, where we pursue the beauty of a tire circle and tread patterns.
We will continue placing circle aesthetics at the core of our design and accelerate our evolution through a sustainable solution company. This is all regarding our progress in the third quarter. This year, we celebrated the 90th anniversary of Bridgestone's founding. Also as the second year of the third foundation Bridgestone 3.0, we have been focusing on execution and delivering results with an ambitious approach and challenging spirit. Looking towards next year, we will continue on our ambitious outline in the midterm business plan and enforce management laying importance on results. The overall picture is planned to be presented in February. We continue to ask for your support and understanding. Thank you for your attention.
Thank you very much for listening to the midterm business plan progress update given by our Global CEO, Ishibashi. Now we would like to start the Q&A. Questions and answers session to start.
May I ask Mr. Sakamaki from Daiwa Securities to lead off.
[Interpreted] This is Sakamaki speaking. Thank you very much for your presentations. So I have 2 questions to ask. The first question goes to Mr. Yoshimatsu, the financial results of the presentation. So I would like to have a sense as to what is the company's, the reaction to the actual performance through the third quarter, vis-a-vis the company's management plan or the internal plan? Particularly, I understand that there's really no change before the Q4, the forecast from the previous one announced back in August. But then you touched upon that the increases in raw material costs, not to mention ocean freight rate increases. Of course, you have a positive such as in the price increases in North America. But I would like to know on net, what is your observation. I understand that ocean freight, the rate increases, have been weighing rather heavily in some other companies. I understand that Bridgestone has, relatively speaking, high proportion of local production to fill the local needs. But still, the strategic the increase in export from Vietnam to U.S., for instance. So what is your view?
[Interpreted] Thank you very much for your questions. Let me start by responding to the Q3 profitability and our sense. If, for instance, you calculate the progress rate to accomplish the annual target adjusted operating profit through the third quarter, you would note that the progress rate is above the 75%, which will be the 3 quarters out of the 4 quarters. They show the excess is the performance over and above our expectation. And that is exactly the analysis that we would make. And all in all, we concluded that there really have no other factors at play which should cause us to change our guidance to the end of the fiscal year. That is the reason why we confirmed the forecast at the end of the previous -- the presentation.
Our expectation, therefore, is that we will be able to continue with the same pace of the overachievement to the end of the fiscal year to offset the negative factors. And so that's rebuilding the earnings [ progress ]. Also, if you go to Page 7 of the presentation titled Analysis of the Adjusted Operating Profit, there are various views. But for instance, under the asterisk #4, which points to JPY 11 billion were from ocean freight rate increase and the impact. Going forward, there may be various views. But we tend to think that the worst case scenario would be that in Q4, 3 months alone, another JPY 11 billion of the cost escalation may come about, which would mean that on a full year basis, double that JPY 11 billion.
[Interpreted] So let me confirm, this is Mr. Sakamaki saying, you are saying that in the worst case, the annual -- the impact of those impacts, that would be double that JPY 11 billion. Is that what you said?
[Interpreted] Yes, that is exactly what I meant to say, and that is how I have been reporting to CEO.
[Interpreted] Let me add from the CEO perspective. Well, we have the 9 months results. And our assumption by now is that in the final quarter, the October, December, it isn't going to be [ have deferred ] as severe, more severe conditions at play, meaning that our worst case assumption is that it may be double that JPY 11 billion by the time we end the fiscal year. But we also have the positive expectation for the final quarter, namely that is not tire business. So given the progress to date of the adjusted operating profit through the third quarter. And the snow business -- the snow tire business opportunities in Europe and Japan, for instance. We have the overwhelmingly strong so-called Dan-Totsu new product, which has been launched into the Japanese market ahead of the original plan. So those positives should be able to offset the negatives which should come about more severely for raw materials and ocean freight rates. So the price increases can be acted on as well.
[Interpreted] I understand very clearly. So now the continuing question -- second question to Mr. Ishibashi. You do talk about continuation of business portfolio restructuring and manufacturing footprint and restructuring. As I calculate backwardly, in the final quarter, you would still have remaining JPY 130 billion deficit, which is the negative impact of the discontinued business. I know and I could imagine how you are actively engaged in the various negotiations and they all have been confirmed in your result. I suppose that you would refer to relatively older or less efficient plans subject to those restructuring. But may I hear a little bit more?
[Interpreted] Well, thank you for asking that. As you say, yes, it is the business portfolio restructuring and manufacturing footprint restructuring. What I committed to in the beginning of the fiscal year, which is [ a mitu ] phase issues from the past straightforwardly that this is no change. But having said that, there are counterparties involved in various talks that I or our team are engaged in. My expectation is that we will continue at full force so that the expectation by and large is that by the time the fiscal year is closed by December, we will have certain resolution and agreement from those continuing discussions, the annual focus. And therefore, they have been established on that assumption. May I also say that we say business portfolio restructuring, sometimes benefits would accrue such as from the sales of the Firestone Building Products, roofing materials under the business. But at the same time, towards the end of the fiscal year end, the more the cash out would have to be prepared for. In any case, all of the areas of business operations, tire, material manufacturing sites, chemical and industrial products, the overall diversified product business, all remained on the scrutiny table. And in the remaining 2 months, as we are ready to announce, we will give you the updates.
[Interpreted] As the moderator, I would like to next call upon Mr. Yoshida, who is from Citigroup Global Markets in Japan, Inc.
[Interpreted] This is Yoshida from Citigroup Global Markets Japan. My first question refers to the operations in Europe, Russia, Middle East, India and Africa, where Q3 3 months alone, the resulting OP margin was 9.1%. The significant improvement from the past. Could you give me a little bit more about the background? And also listening to your presentation about ENLITEN, I am positively surprised at acknowledging that the portion to be occupied by ENLITEN isn't going to be bigger than what I had once thought. So what is the company's expectation in terms of the positive impact on the margin contribution? And speaking of the ENLITEN technology, I heard that the EVs -- the 50% of EVs had a fitment tube ENLITEN tires. So that's Bridgestone's share. So what have been the deciding factors from the customer perspective? Is that fuel efficiency? Is that the quietness? Is it something else?
[Interpreted] Thank you. So I, as the CEO, would like to ask CFO to answer the first part of your question about OP margin.
[Interpreted] To answer as the newly appointed CFO, because I am newly appointed, my understanding expectation is that each and every business should exceed the OP margin of 8%, which is to go above the work -- the weighted average cost of capital or to, simply put, to go above the 10% OP margin. Now historical the operation in EMEA, the European regions, which is not so strong in terms of the profitability, is to be purposely ignored. For me, the newly appointed CFO, to say to the European SBU heads that my expectation would be that there is going to be the OP margin exceeding 10%. So that's the basic stance that I take. Now since last year, there have been various progress made. The restructuring of Bethune plant in France, improvement of the fixed cost position or the improvement of the product mix. So my overall observation is that, including other areas of operations as well, productivity improvement has been confirmed, and also large-scale dramatic reform of the logistics flow, so that's SCM, is ongoing.
So all in all, when we say profitability improvement from various angles, it's been tackled and proceeding. And with this -- within this European region, India and Russia are part of this region where, in both of the countries, the profitability conditions have been getting better. So that is my observation to date. And I would like to hand over to the CEO, therefore, the rest of the observation.
[Interpreted] EMEA, as you are aware, consists of Europe, Africa, Russia, Middle East and India. Last year, Europe recorded loss, Russia recorded loss and South Africa recorded loss. This year, they all expect profitability this year. And India business is improving, and thus the numbers that you see there. Europe is improving, first because of the manufacturing footprint restructuring, the closure of Bethune, resulting in cost improvement. And also, in the European area, we are discontinuing the low-end tire sales. So in terms of product mix, we are focusing on premium and increasing the premium products. And at the same time, we are discontinuing the low-end products, and those do have an important contribution.
And also this is not only in Europe, but on a global scale, we are making steady efforts to improve the productivity, which is becoming the strength of Bridgestone. And also the logistics consolidation, including the consolidation of warehouses. And through these efforts, we are improving the performance. Secondly, about the ENLITEN technology. The German 3 OEMs, I had intense interaction with them 3, 4 years ago. For German 3s, the top priority is lowering the rolling resistance. And of course, without sacrificing other performance requirements. Achieving lower rolling resistance is a must. That's the strongest priority for them. And when we proposed ENLITEN, as you can see, it has various characteristics. Using the Volkswagen GTI, Golf GTI, as an example, conventional tire weighs about 10 kilograms, whereas ENLITEN is 8 kilograms, 2 kilograms lower, 20% reduction, which means less material. And the lower, lighter weight contributes to the fuel efficiency. And also in terms of structure and rubber, better rolling resistance being achieved, and that is the strongest appeal to the OEMs.
Now I have to be very careful here because this is a sensitive matter. Including the REM market, replacement market, we want to secure premium price of 5% to 10% for ENLITEN. In the case of ECOPIA, initially, we had 5%, 10% premium price, started in 2010 and the premium diminished. So for ENLITEN, again, we would like to look for 5%, 10% premium with less materials, lower cost. And through modularity and commonalities, efficiency would be improved to lower the cost. And also on the selling price side, by appealing the features, we want to maintain high price. Currently, we are focusing on OEMs, but we would be expanding the replacement market going forward. So we have a great expectation going forward. So that's ENLITEN. The impact to the profit margin, the expectations for the future and the reaction of OEMs at the current moment. I hope that helps.
[Interpreted] I have a follow-up question. In the case of ECOPIA, your peers' competition quickly caught up with their fuel-efficient tires and quickly turned into commodity. Now in the case of ENLITEN, I think the battery performance improvement will not be achieved in 10 years or so, meaning that maybe the competitive advantage of ENLITEN could be sustained. Would that be a right way to look at it?
[Interpreted] Yes. That's what we are hoping for. And for ECOPIA, it differed from area to area. In some areas, premium price was sustained for a longer period of time than in other areas. So there was the difference from area to area. For ENLITEN, this is really innovative technology, and we will be refining this technology. So to what extent the premium could be secured and to what extent could that be sustained would be one of the key aspects of the premium strategy, to be added to the high rim diameter tire within the premium strategy.
[Interpreted] Next is Mr. Kakiuchi from Morgan Stanley MUFG Securities.
7
[Interpreted] Kakiuchi from Morgan Stanley. I have a question on tire price. The Japanese market is weak, relatively speaking, but there is inflation, many costs are going up. So I was wondering what your thoughts are on the possibility of raising prices in Japan? In North America, there have already been 4 rounds of price hikes, including your competitors. So compared to the beginning of the year, the price level is rather high already. So I'm wondering, to what extent the consumers would accept more price hikes? In other words, the tolerance on the part of consumers. I do know that you do have the product power, but I'm wondering what your thoughts are on the tolerance on the part of the consumers for price hikes?
[Interpreted] Thank you. Let me first look at North America. As you are aware, inflation taking place, all the prices are going up. So in that sense, in addition to the 4 price hikes that already took place, I think we can continue to see further price hikes, including next year. And of course, price hikes have to be supported, justified by brand power, distribution channel power and the product power. In the U.S., the U.S. -- the Bridgestone brand is strong, and we have a very strong network. The channel power is strong. And also, we have very strong product appeal based on recent product updates. And we've been promoting high rim diameter tires. The market share is increasing, including October. And so increase the market share while raising the price. This policy would be maintained in North America continuing on to the next year.
Now generally speaking, in terms of the tolerance to the price hikes, meaning how easy it is to raise price. North America is the best, followed by Europe, Asia and Japan, in that order. So looking at the situation in Japan, we know that price hikes are taking place in many different industries. But in light of the competitive landscape, I'm afraid I cannot comment on that today.
[Interpreted] Understood. I look forward to updates going forward.
And second question, I'm afraid we'll have to wait until February, but I would like to know what your thoughts are for next fiscal year. Back in August, you said that you expect to achieve JPY 360 billion in operating income this year, when you're ahead of schedule. And next year, JPY 450 billion, again, 1 year ahead of schedule. And although material costs are increasing and ocean freight costs are increasing, I think it is not unreasonable to expect that given the [ ora ] tires price hikes with a time lag as well as the restructuring efforts underway. I know it's not that easy, but in terms of the risks and opportunities, what do you think is the possibility for next year?
[Interpreted] Well, thank you very much for having such a great expectation. Frankly, back in August, we were not expecting the headwind blowing. We thought that the tailwind will continue to blow with some headwind. As far as this fiscal year is concerned, as I mentioned earlier, we expect to achieve the number that we mentioned in August. That's for this fiscal year. Now in the third quarter and fourth quarter, we are expecting even stronger headwind blowing. So how are we going to deal with that? As mentioned earlier, the basic strategy is the premium strategy, improve the product mix. And in terms of end-to-end, improve cost. Plus business portfolio and manufacturing footprint restructuring to control the cost and expense, positioning and price. This year, we'll be controlling for the expense and cost. So by addressing this basic needs, we are going to improve the situation. That remains unchanged.
Good news is, as mentioned earlier, the tires for mining industry. In the third quarter, the extremely large mining tires exceeded the 2019 level. So that's the new momentum that we see. And also for the OR medium, small size tires, that is for construction vehicles. Given the infrastructure investment in U.S., OEMs are really focusing in this area. So we have a great expectation in this segment. So this is a major positive shift from this year to next year, the positive contribution. At the same time, there is very strong wind. Everything is going up in terms of price. And in North America, there also is an issue of securing skilled workers. So we need to make up for that through support from Japan and Asia.
So where should we strike the balance, is the question that we are pursuing right now. So what I can say is that the results for fiscal 2022 should be better than the original target and go after the 2023 target. In summer, we were expecting to achieve the 2023 target. But given the headwind, the question is how close we can get to that.
[Interpreted] Next, I would like to invite Mr. Sakaguchi of Mizuho Securities to ask your question. In view of the time, I'm sorry to say, but please limit your question to just one.
[Interpreted] This is Sakaguchi of Mizuho Securities. I'd like to ask you 1 question. Let me ask you to tell us about the U.S. market and the competitive environment. Looking at your company sales in the market, the growth of passenger tire replacement sales in North America was lagging that of the market during the first half of the year. But looking at the third quarter, your company seems to be catching up. I wonder if this is due to some external factors such as other manufacturers are having difficulties marketing their products or sending their products? Or is it due to continuous improvement of your product power, such as indicated in the increase of HRD? Could you let us know what is changing in the third quarter, including structural factors of the company and also whether it will be possible, you think, to further increase your market share from fourth quarter and on to next year?
[Interpreted] Basis of Bridgestone's business in the United States is the basic brand power and product power. And for SUVs, including pickups in the United States, we are very strong, especially in the OE market. The fact that we were able to really get the replacement market is at the foundation of our business in America. In addition, the power of the channel is very important. In case of Bridgestone, we have a very strong company-operated stores at the base. And although we were behind at the beginning of the year, we have since been expanding our channel through various projects. And in that sense, we have enhanced the certainty. In October, the preliminary numbers show that we actually increased our share of the North American passenger market.
So although we were significantly behind in the first quarter, since then, I have had a lot of discussion and the product [ in ] the channels had increased and expanded and tire sales at our company-operated stores are growing. These continued development combined improve the preliminary results of the third quarter, which was indicated in October. We are having intense discussion to make sure that this trend can be accelerated and to reflect them in the budget for next year. So as I mentioned earlier, while we were working on the basics, the role of channels are very large or very important.
[Interpreted] Thank you, Mr. Sakaguchi for your question. Next, we have a question from Mr. Maki of the SMBC Securities. And I would like to ask you to limit your questions to just one.
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[Interpreted] Thank you very much for this opportunity. I am Maki of SMBC Nikko Securities. And I would like to ask you a question. Well, I would like to ask about how you plan to use your cash in the future. Currently, third quarter looks to be relatively strong and fourth quarter too, and we can expect an upturn from the progress underway. If restructuring is included, you told us that you are ahead of the midterm business plan, and targeted numbers are expected to be reached. So I would like to find out about the way in which JPY 700 billion allocated for strategic resources will be used. So there is an acquisition of Azuga. As for the future, to what extent are the other future investment already decided, and also if you did not use all of the fund, I think you had [ policy ] of returning profit to the shareholders, including share buybacks. But now that you are moving ahead of the midterm business plan, Mr. Yoshimatsu-san, the newly appointed global CFO, would you be able to let us know how you plan to utilize this cash?
[Interpreted] Thank you very much for your question. As is clear from the previous questions, first of all, there is a current Q4 results, then the business plan for the next fiscal year, as explained by CEO. And furthermore, the achievement of the midterm business plan drawn up in 2021. We are, at the same time, reviewing our capital allocation. Our returns to the shareholders and share buybacks, as you mentioned in your question, are also a part of the options that we are looking at. In this context, we are studying the situations from various perspectives. Because our business performance has been showing signs of strength, and in view of that, while taking into consideration some potential factors to undermine our revenue, we hope to report on this new direction in February next year.
But as of today, we will have to repeat our previous explanation that the JPY 700 billion strategic investment and share buybacks are both one of the options that could be considered.
If I may add, I would also like to add that, as I explained, half of JPY 700 billion, JPY 350 billion is for investment on strategic expenses. And the remaining JPY 350 billion would include M&A. As for the first, strategic expenses and strategic investments, we have many, many items or projects that we can consider. Last year, I talked about implementing the plan in advance, and I promise that we will first utilize -- use up our current production capacity. We have been doing that. For example, growing market share, including for the high rim diameter products and accelerating our performances. And the investment which we considered for the next midterm business plan of using the existing facilities to modify them to produce the premium products, which we call replacement or substitution, is already under consideration. So those are considered.
So for one thing, we have a lot of potential strategic investment projects or items on the table. And of course, ENLITEN is another major item. We must create a big movement forward and carry it out in advance of the plan. In that sense, we are giving a big push for this development. Naturally, resources will be needed. The fact that we are moving up the pace of our aggressive initiatives mean that we are now making selections out of many potential projects. However, with regards to M&A, because for them, partners will be involved, in these cases, while we are considering various possibilities, we have yet to come up with definitive conclusion. As of now, as I have been saying repeatedly, there is strategic areas such as solutions and digital area as well as others, including the tires in the premium range, which are being looked at. I would think that the honest answer would be that if you ask us whether we had made any decision or conclusion, the answer is not yet.
[Interpreted] So you are saying that you will be investing for the future growth? And the order of the priority will be growth, financial and return to the shareholders, and that the general order of the choice will not change much? Thank you very much. I understand the response very well.
[Interpreted] Thank you very much, Mr. Maki.
[Portions of this transcript that are marked
[Interpreted] were spoken by an interpreter present on the live call.]