Edited Transcript of 5108.T earnings conference call or presentation 11-May-20 10:59am GMT

Page #6. Some examples of COVID-19-related social contribution activities. As said, it is really the lives and safety of customers and employees and other stakeholders first, upon which various activities have been made. In Japan, Bridgestone used to produce the simple masks, therefore, our own business activities. So we decided to produce and distribute the total of about 300,000 masks in regions where Bridgestone Group production sites are operating, overseas and the other variety of activities in given local situations.

Page 7. Capital policies in response to the risk of prolongation of COVID-19 impact. Our strength always has been the strong financial positions and the cash flow emphasis. And given the deterioration of business environment, the review of cost investment plans so that from that cash-oriented perspective to enhance the cash flow status even further. No one knows how much longer this COVID-19 would affect us all so multiple scenarios have been defined. So even in the so-called worst-case scenario with the prolonged impact from the COVID-19, that the security of funds for business operations is there. And then for the purpose of the various measures that you see on this page has been put to execution already.

Page 8. Business and financial performance for the first quarter FY 2020.

Page 9 shows business environment surrounding Bridgestone Group in the first quarter for currency exchange, raw material prices and the tire demand.

Currency exchange. The Japanese yen strength against the U.S. dollar and euro versus the previous year. Raw material prices, both for natural rubber and crude oil, trend out to be substantially lower than the previous year. Tire demand since the beginning of the fiscal year, particularly in the OE segment of the business, some softening of the demand. However, then came the impact of COVID-19 in end of March. So globally, a noticeable decline in tire demand.

Page 10. Tire sales growth for the first quarter on the year-on-year basis. PSR, 85% [overall] this year. 87% for TBR. So in all regions, the demand decline was experienced, both for OE and replacement tires. Ultra-large size of our tire sales declined only in a limited scale. On the other hand, large size of our tires, the OEMs halted in their operations so they are — the sales decreased substantially. Above 18-inch HRD in diameter domain, whereas the PSR demand fell sharply in Europe and the States, relative strength has been preserved. So in total, 92% year-on-year. Replacement market per se, almost comparable to 1 year prior.

Page 11. Summary of the consolidated results for the first quarter. As you’re aware, we have adopted IFRS from this fiscal year. Revenue was JPY 752.2 billion. Adjusted operating profit was JPY 49.8 billion, and profit attributable to owners of parent was JPY 19.5 billion, representing a year-on-year decline in revenue and profits. The factors behind the change in adjusted operating profit are explained on the next page.

Page 12. Analysis of consolidated adjusted operating profit compared to the previous year. During this quarter, we worked to secure selling prices and control costs in a difficult business environment, while raw material costs improved year-on-year, a drastic decline in sales volume coming from a decline in demand and the deterioration of processing costs included in others due to sales volume decline significantly pushed down the profit. All in all, the consolidated operating profit decreased by JPY 32.2 billion year-on-year.

Page 13. First quarter results by segment. Each region posted lower revenue and profits due to a large decrease in sales volume and deterioration in processing costs associated with a decrease in volume.

Page 14. Balance sheet and cash flow highlights. Total assets decreased by JPY 272.4 billion from the end of the previous year to JPY 4,074.7 billion (sic) [JPY 4,004.7 billion], mainly due to the stronger yen. The equity ratio rose 0.4 points from the end of the previous year to 55.4%. Net interest-bearing debt increased to JPY 485.8 billion from the end of the previous year due to the payment of dividends in March. Free cash flow was positive despite a difficult business environment.

Page 15. Consolidated projection for fiscal 2020.

Page 16. First, Bridgestone’s operating business environment. Tire demand has decreased significantly through the first quarter, and this trend is expected to continue in the second quarter and beyond. PSR faces difficult situation for both OE and replacement, despite relatively strong demand for 18 inches or larger HRD. TBR is also in a difficult situation due to the lower rates of operation of trucks and buses. But with the emergence of new demand related to e-commerce and delivery purpose light trucks, decrease in demand for replacement is relatively moderate.

Regarding ORR, while the operating status varies from mine to mine, contraction or halt of operations at certain mines is expected to lower the demand year-on-year. AC, aircraft tires are facing reductions in demand following massive curtailments of flights from global travel restrictions. We anticipate gradual recovery in the tire demand going forward with the resumption of economic activities in each region, but the timing or speed of recovery is hard to predict at this point in time. In light of this situation, we will revise the full year forecast for 2020 announced in February. But as it is difficult to produce rational performance forecast figures at this point in time, we will disclose revised forecast figures later as soon as calculation becomes possible.

Page 17. Lastly, but not the least, our future outlook. Leveraging experience accumulated while overcoming challenges seeing so far, we have developed flexible management structures accounting for various risks and are focusing our efforts on response measures to minimize immediate damage to business. As mentioned earlier, based on various scenarios for short-term trends, including a worst-case scenario, we are ramping up cash-oriented business management approach while reviewing cost and investment plans from a multitude of perspectives.

And at the base of measures against such crisis is the Bridgestone’s medium- to long-term strategies currently under development. We view the current crisis as opportunity for drastic reforms to Bridgestone’s management from medium- to long-term perspective, and we are working to secure fundamental competitiveness and strategic edge in preparation for the demand recovery phase and beyond, rather than simply focusing on weathering through crisis from short-term perspective.

We are currently engaged in global scale discussions in formulating the medium- to long-term business strategies aiming for a solution company with our strength of tire and rubber business.

We will announce the full year forecast for 2020 as soon as revised forecast become available, together with the explanation of framework of the medium- to long-term business strategies that underpin this forecast.

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

So now we are ready to take questions from here.

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

Questions and Answers

——————————————————————————–

Naoki Hishinuma, Bridgestone Corporation – CFO, Director of Finance Division & Treasurer [1]

——————————————————————————–

First, may I ask Mr. Sakamaki from Daiwa Securities?

——————————————————————————–

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

——————————————————————————–

I have 2 questions to you. Question number one, about the Q1 book settlement and the numbers. The variance analysis of adjusted operating profit for Q1 and for others and also, therefore, the operating expenses, I would like to ask.

For others, Mr. Hishinuma, thank you very much for explaining that the worsening of the conversion cost, there was a big factor. Would you like to discuss a little bit further? For instance, what about the — whatever effect from the mix? Because listening to Michelin and Continental, they’ve been saying that the mix was a positive factor during this period. So how was it at Bridgestone?

And for operating expenses, you had the original budget and have the plan for the year. And the operating expense, it seems that, if anything, it is turning out to be a positive factor, boosting operating profit by JPY 5 billion. So what sort of measures were taken? I also like to hear the specifics. And also going forward, the second quarter and beyond, is it such that the cost reduction, the benefits, may accrue to the tune of something like JPY 10 billion per quarter? So I would like to know a little bit more about operating expense as a factor. So that’s my first question.

——————————————————————————–

Naoki Hishinuma, Bridgestone Corporation – CFO, Director of Finance Division & Treasurer [3]

——————————————————————————–

So to answer that question, so the breakdown of the so-called others, breakdown of JPY 19.2 billion numbers. So what I did say was the effect of the worsening of the conversion costs, about JPY 12 billion. On the other hand, mix, you pointed it out. Mix also turned out to be a positive factor for us, particularly so for the high rim diameter tires, to the tune of positive several billion yen. On net, some others, including the weakening of Latin American currencies. So that’s that.

As the operating expense, I keep saying how it’s the cash-oriented business management at Bridgestone Corporation. Basically, we have been focusing on the free cash flow, which meant that as we had the original budget and the new free cash flow level and to preserve that level, that has been our aim. And with that in mind, the thorough review of the CapEx and OpEx and the benefits of that, as we expect, we will become more and more preeminent in the second half of the fiscal year.

——————————————————————————–

Shiro Sakamaki, Daiwa Securities Co. Ltd., Research Division – Research Analyst [4]

——————————————————————————–

Okay. So that means the positive JPY 5 billion coming from operating expense, is that something that resulted because of the COVID impact in March? And if so, by quarter, for the rest of the fiscal year, something like JPY 10 billion each quarter?

——————————————————————————–

Naoki Hishinuma, Bridgestone Corporation – CFO, Director of Finance Division & Treasurer [5]

——————————————————————————–

The answer is yes.

——————————————————————————–

Shiro Sakamaki, Daiwa Securities Co. Ltd., Research Division – Research Analyst [6]

——————————————————————————–

Then my second question, you once again said cash-oriented business management. You also said from medium- to long-term perspective, here’s an opportunity for drastic reforms. I am quite eager to hear something more specific. I don’t know to what extent you can disclose your thinkings. But in different scenarios, what are you thinking? The reason why I would like to hear that further also has to do with the dividend, the plan. The dividend plan is sort of confirmed at the end of the first quarter. So I wonder what you think about the dividend and dividend plan and policy? By the way, the mission has been saying the demand decreased by 20%, 30%. That’s although explanation has been given. So any further discussions, I would very much appreciate.

——————————————————————————–

Naoki Hishinuma, Bridgestone Corporation – CFO, Director of Finance Division & Treasurer [7]

——————————————————————————–

So to answer, you say scenario planning. Yes, we have multiple scenarios, the movement of the top line by what magnitude, some different scenario patterns, 10%, 20% or a 30% decline in the top line. How that would affect our free cash flow or the financial positions, that’s sort of from the scenario — the simulations that we’ve been running continuously since the latter part of February.

Now on the free cash flow emphasis or the cash-oriented business management, free cash flow always, as we quote internally. So as we say that there are multiple scenarios, our aim has been having to preserve the same level, same sort of our free cash flow that we began the financial year with the sort of control and review of CapEx and OpEx in the flight.

Dividend, you also asked, JPY 160. In other words, we confirmed what we said here at the beginning of the fiscal year. Well, currently, as I explained to you, the full year forecasts are not certain yet. The sort of situation is such that free cash flow — we have to think about the cash flow, CapEx, financial positions and stable and continuous payout dividends. All of those factors would have to be looked into over medium- to long-term perspectives. As we closed the books at the end of the first quarter, there was nothing per se, which necessitated us to review and possibly adjust the dividend plan. So that’s what happened. Meaning that as we move forward, the full year outlook and forecast become certain ready to be disclosed to you and estimated, that we’ll be able to discuss the dividend. So once again, it is not simplistic, the top line fluctuation, which would move us in a certain direction for different payout.

——————————————————————————–

Shiro Sakamaki, Daiwa Securities Co. Ltd., Research Division – Research Analyst [8]

——————————————————————————–

Okay. So what you’re saying, Mr. Hishinuma, is that you’re still working on the full year on the forecast. So this is not the time for you to say anything about the dividend?

——————————————————————————–

Naoki Hishinuma, Bridgestone Corporation – CFO, Director of Finance Division & Treasurer [9]

——————————————————————————–

Correct.

Now moving on to the next person. I would like to ask Mr. Yamaoka from Nomura Securities.

——————————————————————————–

Hisahiro Yamaoka, Nomura Securities Co. Ltd., Research Division – Research Analyst [10]

——————————————————————————–

This is Yamaoka speaking. I also have 2 questions. Question number one. Raw material, the prices have been getting lower and also the selling prices, the balance between the 2. So what is your thinking regarding the balance between the raw material costs and selling prices? Current situations such that, obviously, the COVID-19 has been negatively impacting business confidence at large, pushing down raw material costs. So what is the overall effect of that on selling prices? So the current status as well as your expectation going forward between the 2 factors.

——————————————————————————–

Naoki Hishinuma, Bridgestone Corporation – CFO, Director of Finance Division & Treasurer [11]

——————————————————————————–

Thank you for the question. As you say, at present, raw material prices are continuously getting lower and lower. We tend to think that during the second quarter, this trend will persist. But what about for the rest of the year? Not possible for us to foresee, inclusive of the further development of the macroeconomic conditions. It’s too opaque at the moment. That said, though, our basic thinking and outlook that we have for the financial year, which becomes more and more opaque. But still, the lower — the raw material prices will start to support and boost our profits in the second half of the fiscal year. Nevertheless, the so-called spread will remain. That is what we think.

But remembering our overall history. The OE pricing would slide along the raw material, the prices. And even in the replacement market, it’s not as though that spread can be preserved. Yes, I see what you’re saying. But so I am not saying that, definitely, 100% of the raw material will form — the benefits are going to accrue upon this. But as much as possible, we expect that we will be able to rest on that.

——————————————————————————–

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

——————————————————————————–

So you’re saying that you will stand to keep or to preserve the current — the same prices as much as possible?

——————————————————————————–

Naoki Hishinuma, Bridgestone Corporation – CFO, Director of Finance Division & Treasurer [13]

——————————————————————————–

Yes.

——————————————————————————–

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

——————————————————————————–

Then moving on to my second question, which may be somewhat more of a stretch, but I would like to ask your view on the tire demand after the COVID-19. After this impact of — from the COVID-19 is over, what do you tend to think? Do you assume that the tire demand will go back to how it was before the COVID-19? Or is it going a bit lower? Or is it going to be even higher? For instance, you talked about some opportunities on the newly emerging for the TBR business. So after the COVID-19, what sort of ideas — what do you talk right now among yourselves?

——————————————————————————–

Naoki Hishinuma, Bridgestone Corporation – CFO, Director of Finance Division & Treasurer [15]

——————————————————————————–

Okay. My answer is that, first of all, everyone says that it’s really not known how much longer this COVID-19 impact is upon us. Is it just for this year? Is it going to be for multiple years? For how much longer? But there’s an end-of-risk of the prolongation of that COVID impact. And also, as you say, the COVID-19 impact, from the perspective of the movement from the people and goods, it has been quite pronounced. So that, of course, would impact the demand situation and the trend in the future. So that higher demand as well, possibility of changes there. However, at the moment, as you say, also e-commerce or the home delivery sort of new demand on TV or net tires is there. That’s what we see for now.

——————————————————————————–

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

——————————————————————————–

Okay. So what you’re saying, Mr. Hishinuma, is that from medium to long perspective, for you to talk about the future formation of the industry is really too premature? Is that what you’re saying?

——————————————————————————–

Naoki Hishinuma, Bridgestone Corporation – CFO, Director of Finance Division & Treasurer [17]

——————————————————————————–

The answer is yes. Of course, there’s something that we need to debate on quite in the future, but not now.

The next questioner is Mr. Yoshida from Citigroup Global Markets Japan.

——————————————————————————–

Arifumi Yoshida, Citigroup Global Markets Japan Inc., Research Division – Director & Analyst [18]

——————————————————————————–

This is Yoshida. I hope you can hear me. My first question is on dividends. You are not disclosing the full year business performance forecast, and yet you are maintaining the dividend forecast. Do I take it that you’re trying to send a strong message that even if the business performance is to decline through cash flow management, you will not reduce dividend? At the same time, listening to your answers to earlier questions, you said that dividend proposal will be made based on comprehensive consideration, and that seems to be inconsistent. So could you elaborate on that?

My second question is what you call the worst-case scenario from Bridgestone’s perspective. So what kind of worst case do you have in mind? And even in that situation, you are to maintain the originally envisioned cash flow. Do you already have that kind of scenario in mind?

——————————————————————————–

Naoki Hishinuma, Bridgestone Corporation – CFO, Director of Finance Division & Treasurer [19]

——————————————————————————–

Thank you for your questions. First, on dividends. I have already described our basic thinking, and so the full year business performance forecasts are not yet announced. But in determining the dividend, there are many other factors that are involved. As was mentioned earlier, medium- to long-term investment, cash flow, our financial position as well as stability and continuity. All these different factors will have to be taken into consideration in determining the dividend. In making such consideration, currently, we don’t have sufficient information. The evidence, if I may, that warrants revisiting the dividend forecast is not yet available and, therefore, we are maintaining the original dividend forecast.

I hope that was clear enough.

——————————————————————————–

Arifumi Yoshida, Citigroup Global Markets Japan Inc., Research Division – Director & Analyst [20]

——————————————————————————–

Yes. I have a basic understanding. With regards to the V-shape recovery or when the corona impact is brought under control, those need to be identified first, correct?

——————————————————————————–

Naoki Hishinuma, Bridgestone Corporation – CFO, Director of Finance Division & Treasurer [21]

——————————————————————————–

Yes. Thank you. We appreciate your understanding.

Moving on to your second question. What is the worst-case scenario from Bridgestone’s perspective? Well, simply put, at the time of the Lehman crisis, the top line declined by 20%. So larger impact on top line over an extended period. That is the worst case that we have in mind for now.

——————————————————————————–

Arifumi Yoshida, Citigroup Global Markets Japan Inc., Research Division – Director & Analyst [22]

——————————————————————————–

I see. So that’s not on a quarterly basis, but more longer term, including next year or the year after that.

——————————————————————————–

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

——————————————————————————–

Well, at least, we are considering on a full year basis.

——————————————————————————–

Arifumi Yoshida, Citigroup Global Markets Japan Inc., Research Division – Director & Analyst [24]

——————————————————————————–

I see. And still the originally envisioned free cash flow level will be maintained. You have already established that kind of management structure, or you are building that structure. Correct?

——————————————————————————–

Naoki Hishinuma, Bridgestone Corporation – CFO, Director of Finance Division & Treasurer [25]

——————————————————————————–

Yes. Further resource control need — included, we are considering all those factors.

The next questioner is Mr. Kakiuchi from Morgan Stanley MUFG Securities.

——————————————————————————–

Shinji Kakiuchi, Morgan Stanley, Research Division – Equity Analyst [26]

——————————————————————————–

This is Kakiuchi speaking. My first question, during the first quarter, the tire production volume tonnage on a year-on-year basis, on a rounded level, about 15% lower year-on-year. In Europe and the U.S., the operation has resumed, although you said the phased resumption. So I suppose the level of resumption is different from plant to plant. As far as the second quarter is concerned, and this will relate to the earlier question of risk scenario or the worst case, let’s say that the first quarter, the reduction in volume — production volume was 15%. I suppose that in the second quarter, it is going to be larger, maybe 20%, 30% since, I suppose, the actual data are already in for April. Can you give us an idea of the assumed reduction in production in the second quarter?

I also have a question regarding the JPY 200 — JPY 200 billion borrowings from Megabass. Am I correct to understand that this will be used in preparation for the worst case? Or is it that should the worst case linger for the borrowings would be necessary? That’s my first question.

My second question is regarding the first quarter results. In the Americas, the decline in profit seems rather limited. Is this thanks to nontire products such as roofing materials, the TBR rib tires as well as Bandag effect? So what are the reasons why the profit decline in the Americas was rather limited in the first quarter?

——————————————————————————–

Naoki Hishinuma, Bridgestone Corporation – CFO, Director of Finance Division & Treasurer [27]

——————————————————————————–

Thank you. Your first question, comparing the first quarter and the second quarter. As you are aware, during the first quarter, the COVID-19 impacts was felt in Europe, U.S. and Asia in March, whereas in the second quarter, the impact is being felt on a full term in the months of April and May. So although I cannot disclose specific figures, we are assuming that the drop would be larger in the second quarter than the first quarter.

Regarding the JPY 200 billion borrowing, as was mentioned earlier, this is to prepare for the worst case. The cash is not tight right now so as to secure a certain level of liquidity even under the worst case. For that purpose, we executed the JPY 200 billion bank borrowings.

Your second question regarding the limited profit decline in the Americas. As you are aware, especially in March, TBR benefited from the pre lockdown last-minute demand surge from the fleet operators. And although this is not being disclosed, the diversified product in the Americas were rather in a dire situation last year, whereas a significant improvement year-on-year was observed this year, and these contributed to limited decline in profit year-on-year.

——————————————————————————–

Shinji Kakiuchi, Morgan Stanley, Research Division – Equity Analyst [28]

——————————————————————————–

So you plan to secure the free cash flow level as envisioned originally, and that is to be realized, including the borrowing from the banks. Am I correct?

——————————————————————————–

Naoki Hishinuma, Bridgestone Corporation – CFO, Director of Finance Division & Treasurer [29]

——————————————————————————–

No. This bank borrowings are purely for the preparation purpose, just in case, in other words.

The next questioner is Mr. Maki from SMBC Nikko Securities.

——————————————————————————–

Kazunori Maki, SMBC Nikko Securities Inc., Research Division – Analyst [30]

——————————————————————————–

This is Maki speaking. I hope you can hear me. I have 2 questions. First, regarding the demand, especially the demand for replacements in April onward. The non-Japanese tire manufacturers are forecasting a decline close to 50% for the second quarter. You also said you expect larger decline for the second quarter. So can you talk about the demand for replacement in April? And how much recovery you are seeing in May, in other words, the overall outlook for the second quarter?

My second question is in relation to the inventory level. Following the COVID-19 outbreak, demand disappeared and the production was suspended. And then while halting the supply for OE, the replacement demand continues. So I’m wondering what the current level of inventory is. Has the inventory level being reduced? Or is the inventory levels still remain at the high level, including the dealer inventories?

——————————————————————————–

Naoki Hishinuma, Bridgestone Corporation – CFO, Director of Finance Division & Treasurer [31]

——————————————————————————–

Thank you for your questions. Your first question was with regards to demand. You said 50% decline in the second quarter. We, at Bridgestone, do not expect such a big decline in demand. But as was mentioned earlier, compared to the first quarter, we believe that the impact will be larger in the second quarter. That is for replacement.

And your second question, on inventories. Since March, sales volume has quickly plummeted, and therefore, inventory levels are higher than planned in some regions. And throughout the first half, we are to adjust the inventory level. That is our basic thinking.

Any other questions? Looks like none. So we are going to finish the conference call here. Thank you very much for your participation.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]