Bridgestone Corporation

Hello, my name is Hishinuma. I am the CFO of Bridgestone.

Thank you very much for participating in today’s teleconference. I am going to report on the Financial Results for the First Quarter Fiscal 2019.

I would like to explain to you that there are presentation materials available on our website. And so if you have an access, please take a look.

And after the presentations, we will be accepting your questions. Page 2, business and financial performance for the first quarter as well as the consolidated projections for the first half fiscal 2019.

First quarter results for fiscal 2019 first, page number 4, business environment surrounding Bridgestone Group, the stronger USD versus the Japanese yen, euro, made stronger Japanese yen versus the previous year. Raw material prices, natural rubber and crude oil like lower than in the previous year, tire demand.

Although there were some signs of weakness such as PSR, OE segment in Europe and North America, global tire demand remains almost flat. Tire sales growth for the first quarter of fiscal 2019, PSR, North America OE demand hovered low.

So on the year-on-year basis, OE and REP in total for PSR was 97%. On the other TBR, the OE North America, the sales was quite robust, 116%, so the global trend was quite favorable.

ORR be it for ultra-large or large sized and the ORR tires, the double-digit growth, they're quite positive. The PSR high rim diameters of 18-inches, 105% on the global total, replacement segment in particular 115%.

Consolidated results for the first quarter of fiscal 2019. Net sales was ¥848.2 billion minus 1% year-on-year.

Operating income because of the raw material price hikes as exemplified by petrochem raw material charges ¥77.1 billion as a result, down by 23% here. But I would like to emphasize that it was more or less speaking in line with the February announcement.

Ordinary income was ¥83.8 billion. We did have some non-operating income numbers having affected this.

Profit attributable to owners of parent was ¥60.3 billion, down by 5% year-on-year. Let me take you through the various analysis of consolidated operating income.

For the first quarter of fiscal year 2019 vis-à-vis the first quarter of fiscal year 2018, operating income declined year-on-year due to factors such as the rising prices of petrochemical and other raw materials. As for price mix volume, and et cetera, price and the mix had a positive impact on operating income while due to a deterioration of emerging country currencies.

Negative impact of diversified products business was incurred. Net effect was negative ¥2.7 billion.

Page 8 please, net consolidated results of geographical segment. Net sales remained almost flat year-on-year in all areas except for China and Asia Pacific.

Operating income declined in Japan, the Americas, and China and Asia Pacific, where the operating income increased in EMEA, which expanded sales of high rim diameter tires or HRD. Page 9 please.

Next is consolidated projections for the first half of fiscal year 2019. Page 10 please.

I will first explain the business environment for the first half. As for currency exchange, the Japanese yen is expected to depreciate against the U.S.

dollar and appreciate against the Euro. As for raw material prices, natural rubber prices is expected to stay around the same level as last year while the crude oil prices are expected to slightly lower than the rest of the year.

With regards to tier demands, like in the case of last year, despite some weakness in PSR OE tires in the U.S. and Europe, the global tire demand is expected to remain unchanged year-on-year.

Page 11 please. Lastly, let me summarize the financial results for the past quarter and the projections for the first half.

For the first quarter, the trends of ORR tires and other tire sales were strong, but due to the impact of rising prices for petrochemical and other raw materials and the restructuring costs of the diversified product business, operating income declined year-on-year. The guidance announced on February the 15 is kept unchanged for Q1 and the first half.

There are some highlights: PSR-HRD, and ultra-large and large ORR tires expected to maintain strong sales trends. For pricing in response to higher petrochemical and other raw material prices, we are raising prices in some areas and are continuing to maintain fair prices.

We will stay focused on the restructuring of the diversified product business. That's all.

Thank you very much.

Now we are ready to take questions from you. First we are going to start with questions from Mr.

Matsumoto of SMBC Nikko Securities.

Thank you and hello to everyone. I have two questions.

I'm going to just asking both of the questions, and so if you’d respond to – at your convenience. Question number one, variance analysis of operating profit, price mix and volume.

Thank you very much for giving us a qualitative explanation, but if any numbers can be shared with us. How much from the diesoline price increase?

Or how about the volume as far as emerging country currency depreciation, diversified products or although you did mentioned from what happened into the corporate elimination? My second question, so your presentation was that vis-à-vis the plan, it was more or less in line about one half of the planned ordinary income 40 percentile at its middle on FOD operating income.

So, I’ would like to know a little bit further and a reason for that question is that having listened to the variance analysis. I would like to know little bit further and for instance the ForEx and other factors.

And also Page number 5 for the tire sales is it really as expected or the sense of the strengths or the less strength. And all in all was it really in line with your expected tire sales?

And the replacement market sales [indiscernible] and the profitability, so by recent North America for instance, 94% for the TBR and 100% flat for PSR. So it seems that Q1 was not the strongest quarter for you.

I can see that it was more or less common throughout the industry but I’m very interested in your particular case. Thank you.

So the first question. So the price mix and volume.

Let me try to share some numbers with you on the prices. Plus ¥7 billion, roughly speaking, volumes were plus ¥3 billion about one half of the price effect positive in any case.

And other than that, weak emerging market currencies, unrealized gains and losses or the negative, which was reported from diversified product areas, it was all negative. So all in all on the net basis minus ¥2.7 billion that was the number that we reported.

Okay. So, I heard you to say unrealized gains and losses was minus negative factor?

Yes.

Okay. So all combined is ¥10 billion and you had done FX and diversified and then realized the factor and the rest?

Yes. The weaker emerging market currencies are some two digit numbers.

The effect of the unrealized item not as much as from our currency element, but anyway it was yet another factor. As to your second question about tire sales, all in all, as I said, the volume of sales was as expected or in line and that was in the business plan that we shared with you back in February.

But some signs of the weakness here and there such as and that was TBR, the business in North America, in February we saw the introduction of anti-dumping duty or accounting varying tax and prior to that [indiscernible] last minute in demand and therefore the net imports from China. So – and then we have to remember that we came out of that particular timing.

Other than that, I guess, I can talk about Asia, on one hand. The businesses in Thailand and Indonesia were quite strong.

In some other countries such as in India maybe it was a little bit slower than expected, but we know the reason behind that we think. For instance, there was a general election scheduled and the people were holding back from their more robust purchases, but beyond the Q2 that we’re certain that it’s going to come back.

The PSR, the interim market in North America that was in line with your expectation?

Well let me repeat, to be more detail on the major brand sales growth, at the same time associated brands and they’ll feel shorter from the previous year results all you know 100, 100 have in the investor report and that we reported therefore in line with plan. Now the profits ¥77.1 billion operating income was ¥83.8 billion ordinary income.

From the perspective or from the profits would you also say that it’s in line with your expectation? Thank you.

To respond for profits, the simplistic statement that I can make is that it's in line with our full year projection. Of course, I am to repeat once again the effect of the petrochem raw material cost high or the emerging country currency depreciation, and we try to recoup those – the effect with higher selling prices was not 100% sold in Q1, but it's going to get better.

It’s sort of spread in Q2 and beyond, but better than Q1.

Okay. And no change necessary for the first half projection?

Correct.

Thank you. I am Sakamaki.

I'm going to follow-up on the last question. However your statement is that it's in line within the plans?

PSR in North America, 100, 100 mean that it's flat from the previous year. But remembering the Q1 period last year there was an establishment that I have for inventory adjustments are necessary, which puts down the previous and the first quarter you have net profit results.

And so, if anything you would have – and I would have expected a stronger performance and yet it was 100% exactly flat year-on-year. So what happened?

And at the same time SG&A expenses, it seems that vis-à-vis your first half on the forecast of planned, it seems to have exceeded a little bit on those. So it’s still in line.

And my second question dividend the diversified product business, the first quarter had the plan of course for ¥2 billion plus. The first quarter this year, [indiscernible] ¥2.4 billion negative meaning that say in the Q2 period you have to earn ¥4.4 billion worse.

Is it feasible and what's going on?

The first question I would like to answer first. North American PSR, the replacement market business in line with our initial plans.

As I said a little earlier in particular Bridgestone brand or the so called major brand sales grew further whereas the other third brands or the associated brands fell a little bit, but in total 100%. SG&A expenses you asked about ¥7 billion versus the negative impact.

But quickly let me say that there was the specific factor at play and this has affected the overseas and group company and they were in lined with the accounting method changes, the SG&A expenses had tend to be shown explicitly. These are grossing up and what's necessary in contrast with the net results only which are lower under the previous method.

Okay. So what you are saying is that for SG&A expenses, you knew that this was going to make change.

I mean the accounting method change in the first quarter, but going beyond the Q2 period is this going to get normalized? This accounting change was not any part of our initial plans.

So it had to be portrayed there to be quite explicit and noticeable. Okay.

The tires last year, the establishment with higher half and the one of the challenges was there. So how is it that coming out from that one-off in the circumstances, the sales did not grow any further?

Is the effect of the decline in the sales of third brands or the associate brands?

Okay. So nothing to do with adverse changes, and the distribution channels and parties involved in the distribution on the product, your understanding is correct.

Okay. And to your second question having to do with the negative that we reported for the diversified product business, I would like to point out that there are two factors at play.

The first of which has to do with restructuring of diversified product business in Japan and also the diversified product or roofing materials business in the States. As to the former, in Japan the restructuring income that has been going on in line with the original schedules and that affects as expected our business performance in the first quarter.

The U.S. roofing material business, the raw material charges particularly on the petrochem raw material charges input cost rose.

So that had an adverse impact on the sales results. The operation tried to offset with higher selling prices, but it was not 100% offset.

And also the sales volume there was a little bit of issues remaining in the first quarter this year with respect to the production operations. And the percent down – available in the goods to sell, but had the overall situations once again to really improve in the second quarter and beyond.

So what you say is that, I mean for the diversified product business, it was a little bit at least a little bit behind your original plan in the United States.

Yes and if we isolate only the North American roofing material business – but all in all it was in line with our expectations and plans.

Thank you very much.

Thank you. I am Yamaoka, my two questions.

Question number one refers to PSR OE business both in North America and Europe where there was a little bit of the favourness witnessed. This business, particularly, having the North American PSR OE was quite robust through last year.

So what happened is that has affected by the auto assemblers, the production volume, in other words they assembled the core units and failed in the first quarter, which affected your business, or is that anything having to do within the model – the product model cycle of your products and this is important it must have had some impact on the overall OE profitability. The second question, you have been talking about the ramp up on the auto production activities in North America, both for PSR and TBR tires.

What is the current status in terms of the progress?

Question number one that I got from you on the PSR OE business in North America, which showed the negative for the Q1 period. Demand coming from car companies, particularly centering on sedan type vehicle models, the assembled volume was lower than in the previous quarter.

So that affected our business. So we traded along with the market demand and that gave us the exact result that you saw and we showed to you.

So that's for North America. But conversely in Europe, the market demand if anything was negative year-on-year, but our sales of tires in that market was positive year-on-year.

The ramp up of production activities in North America, your second question, in line with our expectation and plans.

When you say that North American OE business turned out to be slower due to the reasoning that you gave, so then would have had some effect on the global 105% for the HRD, high rim diameter, higher than 8-inches tire business.

Yes, for the first quarter in particular, that is so. But again, my point of emphasis is that for the same reason particularly about the vehicle models, which I expected to come on stream and so on, the second quarter and beyond the business will come back in.

And my follow-up question then is that as the volume of sales in the OE segment fell then that would have impacted in the first quarter this year your capacity utilization or the profits?

Yes, for the first quarter particularly speaking.

Okay. And the second question, your answer was that it's in line with your plans.

That's both for the PSR and TBR production lines?

Yes, that is exactly so.

But the PSR replacement segment business had 100% or even TBR, but particularly so for PSR, I would like to know a little bit further you used to say that there was shorter issue of supply, which in turn was attributable to some issues on the production front. So your interpretation of current status is that it's in the model to normal operation and on that basis the supply is coming off the line and the result of sales 100%.

My answer once again is that it's in total 100% of the previous first quarter last year. But therefore the North American replacement segment sales, particularly with the focus on the higher rim diameter tires, there was double digit growth and that was accomplished.

And at the same time with certain brand sales, the sales fell and in total 100%.

And then what about the yield, the available fund of production lines? And so, there is no longer – any concern about the available yield and expectable yield?

Your understanding is correct.

Okay. Thank you very much.

I'm satisfied for now.

I'm Kakiuchi from Morgan Stanley. Thank you very much.

My first question is concerning diversified products in Japan, where your financial results just announced were in line with the plan.

Well, the company is focusing on the restructuring of the business as it’s written in the presentation material. There was a news release made in the later half of April concerning the renewal of the diversified product technology center or the Oklahoma plant there.

What do you mean by focus on restructuring of the business in terms of the end state of the ongoing activities? The company has been talking about the restructuring for sometime now, but what kind of timeframe do you have?

When you said focus on restructuring, what does it mean? Could you elaborate on this along with financial performance?

That’s my first question. The second question is about SG&A, which was discussed earlier during the Q&A session or impact of changes to accounting standards on SG&A overseas, in your variance analysis, is there an independent impact from accounting standards on top of other factors or is the impact offset by other factors, which means no impact on a net basis, is that the case?

So that’s my question.

Okay. Your question was about the focus on the restructuring of the diversified product business first.

In 2021, it will have been 50 years since the start of the diversified product business and its name and that’s the timeframe we have for the ongoing renewal of the Yokohama plant or the diversified product technology center that we have announced the other day. So that’s part of the anniversary, so the timeframe of the restructuring is year 2021.

In terms of financial performance, we expect an increase in restructuring cost again for the first half of this fiscal year compared with the previous year. But the cost is expected to decline slightly for the second half and a full fledged recovery is expected in and after 2020.

So that’s the current plan we have.

Thank you. Are you also transferring production of certain products to other plants within the diversified product segment?

Yes. Between the group companies and the parent company, we are also promoting transfer and consideration of production activities.

Restructuring cost was already incurred in the second half of the previous year. So on a year-on-year basis, are you expecting lower manufacturing cost for the – lower restructuring cost for the second half of this year?

Yes, that’s what we expect. Thank you.

Regarding the impact of accounting standards and SG&A, the nature of the change was that we now reflect SG&A in both SG&A and the sales. In the waterfall chart, for example, there is a positive impact in price mix volume, et cetera.

And it is offset, so there is no impact on the consolidated operating income.

Understood, thank you.

Thank you. My first question is about mining tires or off-the-road tires.

What was the trend like during Q1 this year? Could you give us some comments qualitatively?

I remember that there was some inventory remaining at the end of December, which was expected to be resolved during the January-March quarter. The performance seems to be higher than the original forecast at ¥11.5 billion against the forecast of ¥11 billion for the first half.

Can I understand that this is an upside or is it just inline with a plan? Could you give us some color on this?

The second question is if you calculate the Q2 profit, it would be ¥88 billion representing an increase of ¥10 billion quarter-on-quarter. But if you look at the trend over the last four or five years, Q-on-Q increase of ¥10 billion is something that has never achieved in the last four or five years.

What are the factors behind the Q-on-Q increase of profit by ¥10 billion? Could you elaborate on this?

So those are the questions.

First on ORR tire as you pointed out correctly, some shipment was – that we were expecting last year was carried over to Q1 and this explains part of the results of ¥11.5 billion against the plan and this is one of the factors behind the upside. Second, on the profit trend, as mentioned during the presentation, we are trying to raise prices to observe the impact of higher petrochemical and other raw material prices and the depreciation of emerging country currencies and therefore expect an improvement in the spread from Q1 to Q2 that’s one factor.

Also, earlier we talked about the sales trend in India being slightly weaker than expected and the recovery in demand and sales volume is expected to recover of the direction. That’s another factor.

When you talked about India, were you referring to OE tires or replacement tires?

We are referring to replacement tires.

Understood, thank you.

Good afternoon. I’m Sanger.

Thank you very much. I have two questions.

The first question is as follows, sorry for asking again. You have taken us through the financial results vis-à-vis the first half forecast, but I’m more interested in the recovery in the recovery – in the second half, recovery of a profitability from 12.6% over the next three years.

This is unprecedented. So can we really expect it to happen?

Given the global macro trends today, isn’t it difficult to do? How confident is the company in delivering on this?

That’s my first question. My second question is about ordinary income.

There was about ¥5 billion. What does settlement received mean, could you give us some more details on this?

That’s my second question.

The first question was about the recovery in profitability in the second half. Roughly speaking, there are two factors.

One is the price hike to observe the impact of rising raw material prices and weakening emerging country currencies. This is expected to drive profitability for the second quarter and the second half of the fiscal year.

The other is the sales volume. Since last year, we have been faced with supply constraint mainly with HRD tires, but the ongoing effort to improve supply capacity is expected to generate some positive outcome.

On top of that in some parts of Asia and China, we have been controlling sales volume in an effort to shift towards a better quality business. These reform efforts are expected to be completed within the first half and the profits should normalize from the second half.

Sales volume is also expected to help increasing profitability. Those are the factors behind expected improvement in profitability in the second half.

Thank you. I understand.

Regarding the second question about ordinary income of ¥5 billion, as you correctly pointed out, we received settlement from another company, that’s how approximately ¥5 billion was recognized. I’m afraid the specific nature of the payment cannot be disclosed due to the confidentiality obligation with the other party.

That’s my comment.

It seems that the company is reporting substantial ordinary income or extraordinary income this year is ¥5 billion in line with your forecast. Can you confirm this point please?

Yes, it is in line with our expectation.

Thank you.

If there is no more question, we would like to close the session. Thank you very much for your attendance out of your busy schedules today.