Edited Transcript of 5108.T earnings conference call or presentation 17-Feb-20 10:59am GMT

Our business environment surrounding Bridgestone Group. Currency exchange, this is the business environment. Currency exchange for such in the Japanese yen strengthened against the U.S. dollar and the euro. Raw material prices, natural rubber higher than in the previous year; crude oil, on the prices lower than in the previous year; tire demand, weaker demand globally, mainly in the OE segment of the business.

Over here, fiscal 2019 tire sales unit and growth on year-on-year basis. Global sales of PSR and TBR were both 96% of the previous year. North American PSR and European TBR demand in the OE segment of the business decreased. And also, net sales in Asia-Pacific region was less than the previous year. Ultra-Large and large-sized ORR, 102% and 98%. The OEM, the production quite affected here in the large-sized business performance as well. The high rim diameters above 18 inches, 106% of the previous year and the replacement business alone, 110%, and this should continue to show high growth globally.

Consolidated results for fiscal 2019. Net sales of JPY 3,525.6 billion. Operating profit, JPY 326 billion was lower than in the previous year. Versus the November announcement of 2019 projections, net sales was modestly higher. Operating profit was more or less in line to have no reason on February announcement.

Challenging Global OE tire demand was countered by the important improvements in selling prices and product mix, focusing more on high rim tires, among others, resulting in the operating profit of JPY 325.8 billion, with the OP margin, 11.0%.

At the same time, looking at the diversified products business, Japanese diversified business, there was still in the process of business restructuring. And also, the sales to new automobiles decreased, and this overall result was lower than in the previous year.

Profit attributable to owners of parent in gains on sales of PP&D and marketable securities secured a level more or less comparable to the previous year, which also was higher than the November announcement.

At the end of the fiscal year, JPY 80 dividend payout, meaning the full year dividend payout of JPY 160 per share to be proposed in the — to the Annual General Shareholders’ Meeting.

Consolidated operating profit variance analysis for fiscal 2019. As you can see in the price, raw materials were the positive factors on one hand. On the other hand, given the stagnated global demand, they saw some volume decrease and also the heavier, the depreciation burden reflecting investments for the future, pushing down the operating profit by JPY 76.6 billion year-on-year.

Next, results by geographical segment. Demand conditions were severe globally, centering on OE tires, resulting in lower sales and profit in all regions. Compared to the full year forecast announced in November, sales were in line with or better than the forecast in all regions. Operating income increased in Japan and Asia, partly owing to controlled SG&A expenses and others, but Europe and the Americas posted lower than forecast profit due to deterioration in TBR tires.

Next, balance sheet and cash flow highlights. Total assets increased by JPY 106.2 billion from the end of the previous year at JPY 3,946.5 billion. We issued JPY 200 billion worth of corporate bonds during this fiscal year, while repurchasing treasury stock up to JPY 200 billion. Accordingly, equity ratio decreased by 3.9 points compared to the end of the previous fiscal year to 58%. Net interest-bearing debt totaled JPY 162.1 billion, an increase over the end of the previous year.

Free cash flow ended at a high level of approximately JPY 200 billion despite the acquisition of Webfleet Solutions, formerly TomTom, and others, owing to improvement in operating cash flow and improved asset efficiency. ROA and ROE, which are positioned as important management indicators, both achieved the medium-term targets.

Next is on application of IFRS and changes in reporting segments. With a view to improving the quality of business administration of the group, we have decided to voluntarily adopt IFRS starting this fiscal 2020. In addition, we’ve also decided to change the reporting segments to facilitate appropriate disclosure of the business performance based on the SBU system.

Following pages show 2020 consolidated business results based on IFRS and new reporting segments. Please turn to the next page.

First, the operating environment for 2020. As for foreign exchange rates, we expect the yen to strengthen against both the U.S. dollar and euro compared to the previous year. As for the raw material prices, natural rubber price is expected to be higher year-on-year, while the crude oil price is expected to remain at the same level as in the previous year. As for the tire demand, replacement tire is expected to be firm year-on-year, while demand for OE tires is expected to remain weak, centering on North America.

Next, the full year tire sales forecast for 2020. As for general tires, we expect a slight increase for both PSR and TBR. While OE tires in North America expect tough business to continue, steady growth in replacement tire sales is expected. Ultra-Large ORR and Large ORR tires also expect a slight increase. As for Large ORR, in the previous year, there were some supply restrictions at some of the plants. So we are including the recovery effects. As for 18-inch or higher area, we are expecting growth, as you can see on the slide.

The consolidated forecast for 2020 on IFRS basis. As for the foreign exchange, we expect the yen to appreciate against the U.S. dollar and euro by JPY 1 compared to the previous year. We expect the sales to increase by 1%, and adjusted profit, operating profit to increase by 5%. As for the net profit attributable to owners of the parent, we expect a 4% decline year-on-year as a rebound from the sale of property, plant and equipment in the previous year.

Annual dividend is forecast to be JPY 160 per share, comprising of JPY 80 each as interim and year-end dividends.

Next, various analysis of adjusted operating profit. As explained, operating profit for 2019 based on Japan GAAP was JPY 326 billion, whereas adjusted operating profit based on IFRS was JPY 344 billion due to the effect mainly of goodwill amortization and treatment of retirement benefit-related expenses. Please be advised that these figures are estimates and may vary depending on accounting audit results.

For 2020, we expect increase in profit of about JPY 16 billion year-on-year from an increase in winter tires in Japan and ORR tires as well as effects of higher selling prices.

Next, financial projections by new segment. Sales are expected to decline slightly in the Americas due to the effect of foreign exchange and others. Adjusted operating profit is expected to decline year-on-year in Japan due to foreign exchange and shift to local production overseas. But in all other regions, increased profit is expected.

This is the summary of 2019 results and forecast for 2020. We will continue to pursue continuous growth in 18-inch and higher high rim diameter tires as well as work on maintaining appropriate price position, product mix improvement and steady implementation of cost reduction measures so as to achieve the medium-term management plan.

That concludes my presentation. Thank you for your kind attention.

================================================================================

Questions and Answers

——————————————————————————–

Unidentified Company Representative, [1]

——————————————————————————–

Now we are ready for questions and answers. Please raise your hands.

——————————————————————————–

Shiro Sakamaki, Daiwa Securities Co. Ltd., Research Division – Research Analyst [2]

——————————————————————————–

My name is Sakamaki with Daiwa Securities. Two questions to you. My first question goes to Mr. Ishibashi as the new Group CEO. I recognize that management — that the structure would change, and I wonder whether you already know that certain policies or the strategy is up for change? Looking at 2020 plans, whereas the Bridgestone has been very much in the focusing on ROE at 12%. If you go now with the current plan, it will probably not reach that level. And CapEx, I’m thinking or a 10-year trend and that Mr. Tsuya spoke about and in reference to which in this year’s plan for JPY 380 billion CapEx, that is notably high. And so I wonder whether you’re not necessary had the bound by ROE percentage over short-term rather to prioritize mid- to long-term depressions.

——————————————————————————–

Shuichi Ishibashi, Bridgestone Corporation – Vice Chair, Representative Executive Officer & Global Chief Solution Officer [3]

——————————————————————————–

Well, thank you. Ever since the announcement about the global CEO change that was made, we have been discussing mid- to long-term plans and business strategy. We are still in the process of discussions, but basics didn’t — do remain the same. And that it’s our tire business and being at the core, so end-to-end flow of the tire business operations and just more that we can do to become even better. So looking at this year’s investment plans, in the category of strategic products, be it ORR tires, aircraft tires, other passenger high rim diameter tires, those are going to be the center of this year’s investments. And those are the investments where we expect return to come about relatively quickly. But at the same time, based on that same tire business, the solution in the periphery of the tire business such as on the retread business as well as mobility solutions, such as from the Webfleet Solutions will be very important, so that we can generate higher value-add. That means that we have to change our business model. Meaning that, once again, we will be quite mindful of the share return on investments for the nearer future. At the same time, the mid- to long-term investments, such as with Webfleet Solutions, upfront investments will be made where we know that it will take time that your harvest returns. And that’s what we are discussing all of those in particular. And as our thoughts are cast and concrete, we will be able to announce those to you. So to repeat, once again, to retread, to center the tire solutions. We are already enjoying the profits. So these are the solutions in the business and the mechanisms. And we are already starting to harvest the good fruits.

——————————————————————————–

Naoki Hishinuma, Bridgestone Corporation – CFO, Director of Finance Division & Treasurer [4]

——————————————————————————–

Just one point, if I may. JPY 380 billion of annual CapEx and then migrating onto the IFRS, the JPY 60 billion, whereas lease transaction is going to be added. So it’s not going to be the net increase by JPY 100 billion, but rather JPY 60 billion, having to do with the inclusion of lease transactions and JPY 40 billion net increase.

——————————————————————————–

Shiro Sakamaki, Daiwa Securities Co. Ltd., Research Division – Research Analyst [5]

——————————————————————————–

What about ROE, 12%?

——————————————————————————–

Shuichi Ishibashi, Bridgestone Corporation – Vice Chair, Representative Executive Officer & Global Chief Solution Officer [6]

——————————————————————————–

Okay. I would answer by saying that ROE and ROA will continue to be upheld as very important targets by the management, but it is not as strong that we have to necessarily accomplish in the target percentages that ORR use. So depending upon how — whether the business circumstances may be, that we may deviate from the target percentages, but the basic tone remains the same that ROE and ROA are the important targets.

——————————————————————————–

Shiro Sakamaki, Daiwa Securities Co. Ltd., Research Division – Research Analyst [7]

——————————————————————————–

So the next question having to do with 2020 and the plans, if I may. Coronavirus, Olympic games and the expected improvements there from the profitability of diversified business. If there are any thoughts that I would love to hear from you. The reason why I asked this question is because looking at your — the 2020 plans. And then typically, the Bridgestone upheld rather aggressive on the sales targets. And in the meantime, our corporate side, that maybe had a functions as the cost buffer. But looking at this year’s plan, it seems that the raw materials, of course, in this medium or rubber, that’s a particular name that you particularly — perhaps mindful of. But what about other operating expenses? You’ve been the same or are you purposely establishing the more aspirational profit targets? Well, what about the 3 factors that I mentioned? So in short, I would like to draw my conclusion and understanding as to your net plan for this year. (foreign language)

——————————————————————————–

Naoki Hishinuma, Bridgestone Corporation – CFO, Director of Finance Division & Treasurer [8]

——————————————————————————–

Thank you for the question. As to the coronavirus, conclusion is that the plan that we shared with you today does not reflect on that. It’s quite obvious that it’s still under premature and uncertain to quantify any sort of impact which may come from that corona and the virus outbreaks. Diversified business, some sub-elements, Japanese diversified business. Broadly speaking, now 2019 and 2020 will be comparable to one another in terms of the profitability. Diversified business as a whole. In 2019, that diversified business in the U.S., particularly in the first quarter and through the first half suffered very much. And this recovery from hardened at those conditions in this year.

——————————————————————————–

Shiro Sakamaki, Daiwa Securities Co. Ltd., Research Division – Research Analyst [9]

——————————————————————————–

If I may supplement, this is about diversified business with a particular emphasis on chemical or industrial goods.

——————————————————————————–

Naoki Hishinuma, Bridgestone Corporation – CFO, Director of Finance Division & Treasurer [10]

——————————————————————————–

Well, as we have been explaining to you, we have been establishing on the certain solutions to stand as pillars to support the overall net chemical industry business in the future. This sort of base that would be set need to be very solid, so that we can generate the good value into society and customers. We are still in the process of establishing the reliable foundation in that regard, and that is in the background, against which we say that this year’s profitability in the diversified business is more or less comparable to 2019’s.

As to the Olympic games. Well, being responsible, therefore, the Japanese tire business operation, I can see the following: of course, it is not only this year but last year as well as 2 years ago, that necessary communication platform hasn’t been fostered. So those activities will continue this year. So in that respect, of course, we will deploy necessary resources in this year’s plan as well. But it is not only for the purpose of Olympic games, it is in combination to with other material initiatives that we would consider having it this year’s and the platform activities and the promotional activities.

——————————————————————————–

Shuichi Ishibashi, Bridgestone Corporation – Vice Chair, Representative Executive Officer & Global Chief Solution Officer [11]

——————————————————————————–

Okay. Olympics and the Paralympic, I would like to say the following. It’s not only the Olympic games, Paralympic and the games are very important. Well, frequently, I say that there are 5 purposes that we uphold: number one is brand. Olympic, after all, isn’t the most appealing opportunity that we have to push the brand value.

Number two, I certainly do hope that we can make this showcase of innovation and solutions. For instance, Air Free, which is the new on the product concept in the Athletes’ Village where we will supply those Air Free tires and other, the very innovative and exciting product concepts and products as well.

And number three, obviously, to support our global business activities, for the time being, we are planning to invite quite a few guests from all over the world. We certainly hope that they will become the new fans of Bridgestone.

Number four, that globally, 45,000 employees, in Japan, 28,000, unity and diversity, and that’s what we would like to expect with this year’s Olympics and Paralympic games.

And finally, point number five, being inclusive, the quite — the focusing on Paralympics, focusing on what one is able to do. That aspiration is very important. I understand that be it within the organization or outside of the Bridgestone, this will go at millennial generations, younger people are very much interested in that. And by showing that Bridgestone, as a corporation, is engaged in these activities and hopefully, that we all heighten our corporate values so that we can aim higher.

——————————————————————————–

Hisahiro Yamaoka, Nomura Securities Co. Ltd., Research Division – Research Analyst [12]

——————————————————————————–

My name is Yamaoka from Nomura Securities. My first question, I dare to go back the 5-year history at Bridgestone. If I may, the level of profitability has been gradually — has been slipping down. So once again, now we are very eager to hear from you, why you think that happened? Or in order to turn it around, what do you think is necessary? Is this a reflection of the past as well as your on the future expectations?

——————————————————————————–

Shuichi Ishibashi, Bridgestone Corporation – Vice Chair, Representative Executive Officer & Global Chief Solution Officer [13]

——————————————————————————–

As I said before, right now, we are in the midst of the heated debate in our mid- to long-term business strategy. In order to do that, we obviously had to start with the confirmation of historical facts. It is an objective fact, after all, and that the operating profit hit the peak in 2015 and ever since then, it’s been coming down. Of course, we’ve been analyzing why that happened? What had to be done in order to sort out legacy from the past, make investments the future and so on? But at the same time, we also have been looking at the overall trend of the tire industry. Industry at large, since 2015, has started to see the decline in profitability. This is the entire industry. But by plotting out all industries in these sectors, I still believe that tire industry is in the so-called better position. Within that tire industry then that there are on the Tier 1, 2 and 3. It is obvious to say these — the lessers, they started to fall before the others. As today, so-called first group, where we are positioned in, although the severity is still a play with proper actions that we can do more. So the tire business, the end-to-end business, make to sell. Now in the U.S., now we had few various issues. Be it mix improvement, that high-performance, the high rim diameters, both in the making the production or the sales and distribution, U.S. had things to do. Europe, the sales and distribution, having gotten better, but the production front, and there’s more which has to be attended to. So taking care of all of these necessities need to uplift the bottom line performance. Then the cash generated will be used to solidify the solution, the business, tire solution, mainly, we trade in operations as well as mobility solution so that we can evolve and set the business model for the future. Again, the management team is very much involved in discussions.

——————————————————————————–

Hisahiro Yamaoka, Nomura Securities Co. Ltd., Research Division – Research Analyst [14]

——————————————————————————–

Okay. So as long as — can we look forward to the announcements about those plans?

——————————————————————————–

Shuichi Ishibashi, Bridgestone Corporation – Vice Chair, Representative Executive Officer & Global Chief Solution Officer [15]

——————————————————————————–

Yes, of course, at opportune timings, I would like to do exactly that.

——————————————————————————–

Hisahiro Yamaoka, Nomura Securities Co. Ltd., Research Division – Research Analyst [16]

——————————————————————————–

My second question has to do with Ultra-Large-sized and Large-sized ORR tires. Well, I’ve been listening to your competitor, (inaudible), who have been saying that this year may not be the year for the dramatic growth. But you talked about inventory and others. So the modest growth may be in this — in the category of business. But for what are Ultra-Large-sized and the Large-sized, separately over a mid- to long term? What do you think is what I’d like to hear afterwards, these are one of the profit centers in the overall business and the portfolio?

——————————————————————————–

Shuichi Ishibashi, Bridgestone Corporation – Vice Chair, Representative Executive Officer & Global Chief Solution Officer [17]

——————————————————————————–

Thank you. Ultra-Large on the size net tire business, and that’s — the transacting with mining customers, very volatile. Volatility, yes, but over a long-term, this is the market which basically continues to grow. It is true, however, that since last year, severity has become more and more noticeable. So that — for now, we expect this year to be the year of the flat performance for the Ultra-Large-sized ORR tires. However, we also have exciting plans. Although not officially announced yet, we have rather innovative new product which will be deployed into the market. From here to there, we’ve been supplying these — the new product to the market because by nature, being that is commercial on this category or the product, and we have to make the test and supply to the customers trying and verifying and to define and tune. And it seems that the initial results are quite encouraging. So this is going to be the year for the deployment of this innovative new product. This — and the new product isn’t going to be offered then to the very mature, large-scale mining company, the customers of ours were so-called overwhelming than total product. The further productivity gains at customers, necessary expansion.

Large-sized ORR, very severe. But looking at ORR tire business as a whole, the OE segment accounts only for the 20%. 80% is in the replacement segment. So OE segment, there, we have U.S.-based Caterpillar, European Volvo or the Japanese Komatsu, all of those, the important customers, they do face and they’re sufferings. And the ROE business, which is still Large-sized ORR and we are acting in accordance of the 2 having their conditions.

Replacement segment. Last year, actually, we had certain production constraints. So to be more exact the mode issues which created product shortage, and we have been working on it to overcome having made those determent since last year is all fixed. So this year, we will be able to supply the goods — the wanted by market. Some to be — to auto Ultra-Large-sized ORR on the Western new product with — or the Large-sized ORR having overcome the restrictions and supply from last year, we should be able to somehow sell more this year. Although the overall demand in the market, it seems flat.

——————————————————————————–

Unidentified Company Representative, [18]

——————————————————————————–

So let’s move on to the next person.

——————————————————————————–

Arifumi Yoshida, Citigroup Inc, Research Division – Director and Analyst [19]

——————————————————————————–

My name is Yoshida with Citigroup Global Markets Japan. OE tire (inaudible) and the PSR-OE, what is your business thinking or the midterm plans?

The other day, I was listening to your competitors speaking. They reflected the 10-year history, saying that on one hand, the OE customers have been very, very demanding in terms of environmental-related performance, so that made it more and more profitable. However, in the more recent 2-, 3-year period, that slope seems to have peaked out. OE business and the automotive from the operations itself, they are facing the deal on challenge in electric vehicles and so on. So the profitability is not at the best most recent — most recently. Now your case isn’t different, and from your competitors different, the declining portfolio and so on. But is the overall dynamism — do you think that the margin that you can get, therefore, on the PSR-OE may go back to the lower level, which was in the beginning of the millennium? So that’s question number one.

Question number 2 has to do with your 2020 plan. I see the adjusted operating profit and the profit attributable to your owners in the parent, the gap between the 2, and this seems to be much more noticeable than in the past. So I know that this is the voluntary adoption of IFRS. So if I may, I would like you to explain this bigger and the difference between the adjusted OP and profit attributable to owners of parent further.

——————————————————————————–

Akihiro Eto, Bridgestone Corporation – President, COO, Representative Executive Officer & Director [20]

——————————————————————————–

Okay. So starting with the OE business, the OE markets are different from one another. In Japan, for instance, in the beginning of the millennium or maybe in the first, the 5, 6 years into the new millennium. The situations were much tougher because the selling prices were, average ratio is realized, raw material, because they were — and a very volatile. But then we introduced the concept of RMI. We continue to talk with our customers. Customers accepted the application of RMI. And by now that’s the norm for transactions with those customers. Plus, we have the premium, the appeals that we can make. And there is our Bridgestone-branded tires. So that’s the base conditions that we have. In other words, our base conditions are superior, if I may, to our competitors. So of course, raw material of the fluctuation is there. But that is no longer, and that is also disturbance of under the ordinary flow of business transactions, meaning that how we can continue to appeal on the premium nature of our products to our customers. No sharp decline in this business, so no evaporation of profit opportunities. Or for that matter, 2019 results were rather reasonable, in my opinion.

——————————————————————————–

Masaaki Tsuya, Bridgestone Corporation – Chairman of the Board, CEO & Representative Executive Officer [21]

——————————————————————————–

May I interject? Looking at the OE tire business in Japan, you talked about competitors. True, the small cars were very popular in Japan. So if you focus on that particular phase, yes, the size was reduced. But that was temporary. I often say that the vehicles are improving all the time, and the tire performance requirements are becoming more difficult. Size is increasing, and the profitability is improving. More challenging tires are required, larger tires, especially in relation to SUV. So profitability is improving. That’s a fact. So what you said does apply to the small car business in Japan. But looking at global situation, I have a different impression, as Tsuya-san just said. For PSR tires, regardless of OE or replacement, we are seeing bifurcation, 2 different areas: the high rim diameter Run Flat and 17-, 18-inch or higher premium tires. The profitability there and what’s called the commodity tire segment, 14-inch, 13-inch, they are entirely different. Although they both belong to PSR, we’re talking about entirely different businesses. I don’t know about the other companies, but I think the product mix varies from company to company. And for companies with higher proportion of commodity segment tires, I think they are facing a more difficult situation. In our case, as Mr. Eto said, we are focusing on premium segment. We have been working together with various automotive OEM. For example, Run Flat with BMW, Bridgestone was the first to work on that, and we want to win that position. And in addition, OE will be — there is a rate of recursion from OE to replacement. The more expensive the tires, the recursion rate is higher. Generally, it’s 40%. But for a premium products, it’s 70%, and certain cases, it’s 80%. So if you look at OE and replacement together, it’s really a good business, and that’s what we are going after.

——————————————————————————–

Arifumi Yoshida, Citigroup Inc, Research Division – Director and Analyst [22]

——————————————————————————–

My second question. Regarding the IFRS, the adjusted operating profit and how that relates to the profit before tax.

——————————————————————————–

Naoki Hishinuma, Bridgestone Corporation – CFO, Director of Finance Division & Treasurer [23]

——————————————————————————–

Well, there are no major items for adjustment. On a year-on-year basis, the impacts from the special extraordinary income recorded in the previous year had a major impact, which amounted to approximately JPY 30 billion. This came as a gain on sale of land.

——————————————————————————–

Unidentified Company Representative, [24]

——————————————————————————–

Next person?

——————————————————————————–

Shinji Kakiuchi, Morgan Stanley, Research Division – Equity Analyst [25]

——————————————————————————–

Kakiuchi of Morgan Stanley. My first question is on the tire sales forecast for this fiscal year. You used to use the phrase such as slight increase, whereas this time, you are mentioning up to 5%. We tend to focus on 5%, but am I correct to understand that you’re talking about 0% to 5%? In terms of tonnage, the increase is 2%. So if we are to use the conventional verbiage, are you talking about the slight increase?

And specially in North America, your unit sales tend to be lower than market, whereas for this fiscal year, as always, you are projecting better growth than market. So does that represent the bullishness on your part? That’s my first question.

——————————————————————————–

Naoki Hishinuma, Bridgestone Corporation – CFO, Director of Finance Division & Treasurer [26]

——————————————————————————–

You are correct. We used to say slight increase, and that meant 0% to 5% increase. In the English materials, that’s the expression that we have been using. So for the sake of consistency, we started using this phrase, so we mean the same thing. For North America, for 2019 compared to demand, sales, our sales may have appeared to be weaker, slightly. This is in relation to the associate brands, which weighed in on our unit sales, made us appear weak. For 2019, as mentioned earlier, for Bridgestone and Firestone brands, was over 100%, and we did better than the demand figures from U.S. G&A.

For 2020, for this, our major brand sales, we have been changing the portfolio. So we believe that the growth in major brands will continue into 2020. And maybe that is giving the impression of being bullish.

——————————————————————————–

Masaaki Tsuya, Bridgestone Corporation – Chairman of the Board, CEO & Representative Executive Officer [27]

——————————————————————————–

For North America, for 2019, I believe we could have done better. But due to the strikes at GM and high rim diameter production disruption and others and for flat tires, we had some mismatch in our efforts and not enough capacity initially. And I was talking to the media representative earlier, and our CEO in North American operations, Gordon Knapp, you may have met him before, but he was not feeling well. He went under major surgery. And so we had to change CEOs earlier than we had expected. And therefore, there were many things that we could not have done as we had planned. That is for 2019. For 2020, there are many things that we can do. I think we can actually be exercise and fulfill our own capability.

——————————————————————————–

Shuichi Ishibashi, Bridgestone Corporation – Vice Chair, Representative Executive Officer & Global Chief Solution Officer [28]

——————————————————————————–

For passenger car tires, we have 2,200 direct sales outlets, and they are struggling and how can we sell more premium tires at these outlets is what we are refocusing on this year. And for the dealer business, as Mr. Tsuya said earlier, the relationship has become slightly severe. But under the new CEO, Paolo Ferrari, I actually visited U.S. together with Tsuya-san recently, and we are regaining the trust of the customers through very strong communication. So I have a great expectation, I’m very hopeful. And so I share Tsuya-san’s view that we can achieve what we are planning.

——————————————————————————–

Shinji Kakiuchi, Morgan Stanley, Research Division – Equity Analyst [29]

——————————————————————————–

My second question on PSR, production capacity. Earlier, you mentioned that the PSR is moving into 2 different directions, the premium tires and commodity. And maybe you can modify some of the 10-inch production lines, convert them to produce something more high premium? Are you closing some older ones as well? And so I’m wondering if there are going to be some capacity that is going to turn idle?

——————————————————————————–

Masaaki Tsuya, Bridgestone Corporation – Chairman of the Board, CEO & Representative Executive Officer [30]

——————————————————————————–

Over a long term, in one way or another, we have been implementing such a transition. Here in Japan, the Tokyo plant has been converted to the development and innovation center. We have been continuing with that effort, and we need to push further into high-end premium area. Otherwise, we would not be profitable. We have been making those efforts, and we will continue with those efforts.

——————————————————————————–

Shuichi Ishibashi, Bridgestone Corporation – Vice Chair, Representative Executive Officer & Global Chief Solution Officer [31]

——————————————————————————–

As Mr. Tsuya just said, this has been our history, including the reorganization of various manufacturing plants. And what we actually manufacture at each plant, we have the commodity part and the premium part. You are correct. The commodity product capacity is becoming more idle, so we have to make sure we address that issue, and we will be addressing that.

——————————————————————————–

Unidentified Company Representative, [32]

——————————————————————————–

Next person?

——————————————————————————–

Tairiku Sakaguchi, Mizuho Securities Co., Ltd., Research Division – Senior Analyst [33]

——————————————————————————–

Sakaguchi from Mizuho Securities. I have 2 questions. First is on your sales strategy in emerging markets. You have strength in premium zones and solutions business. I am aware of that. But there are places where the market conditions are more difficult, including the price aspect. Last year, you implemented measures to revamp the distribution channel in China. And what effect do you expect from those efforts in 2020 and onwards? In other words, what is your strategy for China and other emerging kits?

——————————————————————————–

Masaaki Tsuya, Bridgestone Corporation – Chairman of the Board, CEO & Representative Executive Officer [34]

——————————————————————————–

For China, in a sense, we do not pursue volume. Rather, we want to focus on high-end segments. At the same time, we need to establish very strong sales and service structure. Of course, it’s still not certain what the impact of the coronavirus outbreak is going to be. But as far as the promotion of electric vehicles is concerned, there is a political will. There is a national effort to promote this, and the infrastructure is being built, and that’s part of the national policy, to be at the forefront of the EV development. And we want to build a truly capable network. We are not going to pursue volume. We don’t believe pursuing volume would be a wise strategy.

As for other emerging markets, for 2019, the disappointing results were observed in India, Indonesia and Thailand as well to a certain extent. We expected the political stability to be there to stimulate the economic growth. That was our expectation for 2019, but that did not materialize. However, over a long-term, demand would increase in emerging markets through further motorization. So we have to be entering these markets, capturing this momentum on a timely basis and shift to premium segment. That’s been our approach. Historically speaking, that remains unchanged.

For 2020, because of the coronavirus outbreak, we don’t know what the impact on the global economy is going to be. But over a long-term, we believe some of the countries in the emerging markets will go into that direction, including Africa. And we believe that as long as the world economy develops in a stable manner, the motorization will be promoted, and we would be pursuing the premium segments in that.

——————————————————————————–

Shuichi Ishibashi, Bridgestone Corporation – Vice Chair, Representative Executive Officer & Global Chief Solution Officer [35]

——————————————————————————–

By each country, of course, the maturity of motorization varies, the competitive conditions vary, our profit structure varies. For example, in certain emerging markets, we enjoy 40% market share, whereas in other markets, we have the top market share but less than 20%. And the approaches would be entirely different between the two. So whether we are dominant or whether the market is still competitive, the strategy to pursue is going to be different, as Mr. Tsuya just said. Looking at the level of maturity, we are always trying to make a step ahead. That has been our approach at Bridgestone. So while maintaining the basic approach of manufacturer to sell, we are also pursuing this approach, but this really varies from area to area, from country to country. And therefore, within the framework of local management, under the global management leadership, each SBU, each country management is to decide the best policy ahead looking at the local situation.

——————————————————————————–

Tairiku Sakaguchi, Mizuho Securities Co., Ltd., Research Division – Senior Analyst [36]

——————————————————————————–

My second question, Mr. Ishibashi said that tire industry is in a more favorable condition amongst all the industries. Can you give us the background to that? I think you are talking about solutions business as well as case as well. And also, within the auto industry, how is the tire business, tire industry being positioned?

——————————————————————————–

Shuichi Ishibashi, Bridgestone Corporation – Vice Chair, Representative Executive Officer & Global Chief Solution Officer [37]

——————————————————————————–

What I mentioned earlier is nothing complicated. Looking at the objective publicly available information and half the operating margin on the y-axis, we can’t see a curve like this. And the 30% operating margin enjoyed by GAFA, and then there will be some businesses with 10% operating margin and then auto OEM at lower margin. That is based on the publicly available objective data.

So for tire manufacturers, to be able to enjoy a 10% margin, well, as was mentioned earlier, there is Tier 1 and Tier 3 manufacturers. Tier 3 manufacturers’ operating margin is around 5%, whereas in our case, 10%. There are so many things that we can do in terms of high value-added products. But if we are complacent with where we are, there would be no growth going forward. So while solidifying the current foundation, there are many things that we still can do. At the same time, we are going to evolve the business more in the direction of periphery of the tire business and mobility, and we will be making investments for that for future growth. Otherwise, we are going to fall behind this curve that I showed you earlier. And so we have to have a sense of urgency and maintain good balance.

——————————————————————————–

Masaaki Tsuya, Bridgestone Corporation – Chairman of the Board, CEO & Representative Executive Officer [38]

——————————————————————————–

As was mentioned earlier, automotive industry is in a very difficult situation. I think that is a common understanding. There are still uncertainties about the future direction of case, and the capacity utilization rate is 10% or so, very inefficient. It’s a very typical inefficient product areas. And at the same time, the necessary R&D expenses tend to be high, so you have to have a sense of urgency. And for parts and components, with the evolution of case, I think there will be many components and parts that are going to prove unnecessary. Whereas, I often tell my colleagues, tires would never disappear, and there is a scale. But we have a history of 50 years in radial tires, and with the advancement of electric vehicles, I think we are talking about entirely different types of products. For example, Air Free tires and some of new models that I cannot mention. So we’re talking about a sea change in the industry landscape, so this is a very tough situation, but crisis can turn into opportunity, and this industry has gone through various reorganization. And the key is how you can be a winner in that.

——————————————————————————–

Shuichi Ishibashi, Bridgestone Corporation – Vice Chair, Representative Executive Officer & Global Chief Solution Officer [39]

——————————————————————————–

Let me focus more on tire. Tire touches the ground, and it is only the tires that can run, turn, stop and transmit. And in addition, there’s another function that is being required. The connectivity, connect tires and vehicles and connect tires and components. For example, NVH, the noise, vibration and harshness, and then connectivity between tires and the ground surface. And connectivity between tires, which is something yet to take place. So the features, properties of tires need to be leveraged so as to create a new business model. That is our basic thinking in our solutions business.

So conventional approach is manufacture and sell. That is attractive. But on top of that, we are going to leverage the features of vehicles so as to contribute to society, to provide value to customers. That’s our basic thinking on our solutions business.

——————————————————————————–

Unidentified Company Representative, [40]

——————————————————————————–

Thank you very much. With this, we conclude today’s briefing session.