Bridgestone Corporation (BRDCY) Q2 2023 Earnings Call Transcript

Bridgestone Corporation (OTCPK:BRDCY) Q2 2023 Results Conference Call August 9, 2023 2:00 AM ET

Company Participants

Shuichi Ishibashi - CEO

Naoki Hishinuma - CFO

Conference Call Participants

Kazunori Maki - SMBC Nikko Securities

Shinji Kakiuchi - Morgan Stanley

Shiro Sakamaki - Daiwa Securities

Tairiku Sakaguchi - Mizuho Securities

Shuichi Ishibashi

Hello, everyone. I am Shu Ishibashi, Global CEO. I will explain the Financial Results for the First Half as well as the Fiscal 2023 Guidance. First, regarding the overall summary, the financial results for the first half and the fiscal 2023 guidance include deterioration of the business environment, which is worse than in initial assumptions. In particular, replacement tire demand in North America and Europe was more severe than initially assumed. Our projection and the severity was of domestic and there was a gap between our assumptions and the actual market situation.

Under this difficult business environment, we managed to increase in premium tire sales volume and improvement in price and sales mix with flexibility and agility to secure our financial results for the first half partly thanks to the tailwind from the currency exchange. We will continue management with the same stance into the second half. I will explain the business environment by product type.

Demand recovery versus prior year of regional equipment tires for both passenger cars and truck and bus is continuing reflecting the recovery in new car production with the alleviation of the semiconductor shortage. Particularly, for high-rim diameter passenger car tires, demand is growing compared to prior year, both from demand recovery and from the shift to larger vehicles and EVs for new cars.

Concerning replacement tires for passenger cars. As mentioned in the beginning, the environment is deteriorating more than an initial assumptions, mainly in North America and Europe. In both North America and Europe, sell-out declined in the first half, reflecting the economic slowdown. Distribution inventory adjustments continued and selling tire demand declined more than initially assumed.

In North America, we consider that distribution inventory have normalized by the end of the first half, and we do expect demand recovery in the second half. However, demand will be lower than prior year for the year. Europe, Selling demand dropped in the first half to as low as 87% compared to last year. Distribution inventory levels remain high and considering that sellout recovery in the second half is expected to be weaker than initially assumed. Selling demand for the year is also expected to be lower than initial assumptions.

On the other hand, Demand for high rim diameter tires remain relatively resilient. We expect growth versus prior year in the U.S. as in initial assumptions. And even in Europe, where tire demand has significantly dropped, we're expecting demand to be around the same level as last year. Regarding demand for truck and bus tires, Distribution inventory adjustments in North America and Europe are having a gradual impact than assumed.

First, in North America, sell-out declined in the first half with the economic slowdown. And while we expect recovery in the second half, it will be slower than the initial assumptions. Impacted by this, distribution inventory which we expected would optimize by the end of the first half remains at a high level. We anticipate inventory adjustments to be completed by the third quarter. As a result, Selling demand declined more than initially assumed at approximately 80% compared to last year for the first half. And even if recovery in the second half is considered, we expect demand to be at approximately 90% versus prior year for the year.

Environment and deterioration is even more prominent in Europe. Sell-out declined more than assumptions, and selling is also in a very tough situation. Selling demand for the first half was significantly lower than assumed at approximately 70% in prior year.

We think distribution inventory is gradually optimizing. But as sell out is slow, the selling demand will be lower than assumptions not reaching 90% when compared to prior year for the year. So faced with this environment and deterioration, we will transform into a "Strong Bridgestone" capable of adapting to change. Here, I will talk about our actions to secure results for the year.

First, regarding passenger car tires. We will continue to expand sales and increase market share of higher rim diameter tires, which are relatively resilient. We expect to increase the volume of higher-rim diameter tires sold, regional equipment tires and replacement tires combined by 10% compared to last year for the year. For investment tires, we plan to increase market share in both North America and Europe. Furthermore, we will steadily improve sales mix of premium tires, which includes not only high rim diameter tires, but also premium tire brands and premium tires in each region compared to the previous year.

For the year, approximately 55% of global replacement tires sales will be premium tires. For truck and bus tires as well, we have taken into account the large environmental deterioration, in an environment where the global sales volume of new tires are expected to be approximately 90% of prior year for the year. We will thoroughly ensure focus on premium.

In Japan, under the idea "From volume to value", we will narrow down low-profit categories. And in North America, we will steadily increase market share of our major brands, Bridgestone and Firestone. We will also grow the retread business in North America and Japan, in which we are investing to reinforce production.

This will not only contribute to the performance of the entire trucking business but also establish foundations of solutions for the '24 midterm business plans. We plan to increase market share of rethread compared to prior year in both North America and Japan and also grow the portion of retread among total sales volume of truck and bus tires for replacement. In Japan, we will create demand for rethread as market leader and also contribute to sustainability to establish a circular business model.

Rethread in North America is contributing to the 2023 financial results as a business with high profitability. Regarding of the road tires from mining vehicles, which is one of the pillars of premium tires, especially for sales of auto large and large tires, we expect global sales volume to steadily exceed the prior year. For small and medium-sized tires impacted mainly by distribution inventory adjustments of tires for construction vehicles in North America. Sales in the first half is slightly below last year. However, we expect recovery in the second half and plan the same level of sales as the last year for the full year. Regional equipment tires and replacement tires combined.

I will now explain financial results, reflecting our initiatives to become a "Strong Bridgestone" and focus on the premium. In the first half, we achieved increase in both revenue and adjusted operating profit versus prior year, partly thanks to the tailwind from the currency exchange.

Along with sales expansion of premium passenger car tires and tires for mining vehicles, we covered increases in raw material price, energy cost and labor cost from inflation, et cetera, through improvement in price and sales mix. We also drove initiatives such as thorough expense management and on-site productivity improvement in production and manufacturing. We will continue to constantly aim to optimize balance for increase in premium tire sales volume and improvement in price and sales mix.

Lastly, concerning the fiscal 2023 guidance, there are no changes from figures announced back in February 2023. We compared to plans in February, the sales mix within replacement and regional equipment is deteriorating with the decline in sales of replacement tires and increase in sales of original equipment tires will negatively impact profit. To counter this, we will thoroughly ensure strategic price management and pursue optimal balance between sales volume and price for replacement tires.

Also, through thorough expense management and cost improvement, we will minimize the impact from deterioration of the business environment. Given the yen depreciation tendency in the currency exchange premise for the year compared to initial plans, we are expecting to secure results for the full year. For shareholder returns, there are also no changes from plans announced back in February. The business environment is expected to be more severe than the initial assumptions but we will focus on improving business quality as the final year of the midterm business plan, carefully watching demand trends. We will thoroughly ensure flexible and agile supply and inventory management. We will also ensure focus on premium and maintained our stance constantly aiming to optimize the balance for increase in premium tire sales volume, improving price and sales mix throughout the year. We will continue management focusing on execution resource to secure results.

Now details of financial results will be covered by our CFO, Hishinuma, after my presentation. Thank you very much for your attention.

Unidentified Company Representative

That was the presentation by Global CEO Ishibashi. Now moving on to the presentation by Global CFO, Mr. Hishinuma on the subject of financial results for the first half fiscal 2023.

Naoki Hishinuma

Global CFO, Hishinuma, is my name. To present the topic of financial results for first half fiscal '23 as well as full year 2023 guidance. This is my agenda today basically to supplement some financials and also the breakdowns for some of the key figures.

Starting with the business and financial performance for the first half fiscal 2023. Consolidated results for the first half in 2023. Here, focusing on profit attributable to owners of parent. In reference to adjustment items or adjusted items, whereas there was JPY 32.6 billion losses due to impairment losses for the Russian tire business result assets and rico expenses at the Bridgestone cycle. For the first half in fiscal 2023, there was JPY 12.3 billion gains on the sales of land and substantial decrease in losses from discontinued operation among others, resulting in 97% increase in the quarterly profit attributable to parent versus prior year at JPY 182.6 billion.

Next, overview of the performance for the first half fiscal 2023. Here in reference to the overview of the performance by product. Passenger car and light truck tires for the OE segment, although there were differences by region, tire demand increased as the vehicle production level at OEMs has improved.

In the Replacement segment, while higher demand declined due to the economic slowdown, sales for premium tires continue to be resilient. In Japan, for your information, Advanced demand due to increase in price of winter tires in the second half of the fiscal year was there. For truck and bus tires and refreshment segment, sales declined versus prior year in the Western Europe, particularly so in Europe due to the economic slowdown. The mining tires Demand for Minerals continues to be ready and exceeding sales versus prior year globally.

On to the business environment for the first year. Currency exchange Japanese yen depreciated against both U.S. dollar and Europe euro compared with the prior year. Raw materials, the purchase cost of raw materials increased due to spike of energy, labor and other costs of raw material suppliers, though the feed stock prices of raw materials continues to fall versus prior year. For the conversion costs, conversion costs increased versus prior year, which was due to continued inflation in energy, labor and other costs at plans.

Tire demand, OE segment. Although there were differences by region, tire demand recovered as a semiconductor shortage at the OEMs improved. Replacement segment. Tire demand for both passenger car and truck and bus tires has declined due to economic slowdown, mainly in the U.S. and Europe. Demand for passenger car hybrid diameter of 18-inch tires continue to be relatively resilient.

On two, the tire sales units, the growth for the first half. Passenger car, light truck and the truck and bus tires, backed by economic slowdown, global sales volume declined versus prior year. For the OE segment, there were regional differences. Tires sales showed a trend recovery as vehicle production lower at OEMs recovered on the improvement of semiconductor shortages.

In the replacement economic slowdown, central income on the U.S. and Europe decreased sales versus prior year. [Indiscernible] lie at 105%, large size at 109%, both above the prior year level. So the sales increased significant we continued with the focus on the premium zones. So in the passenger car, HRD above 18 inches, Globally, sales was 18% of the prior year.

Analysis of adjusted operating income profit for the first half. JPY 31.7 billion increase year-on-year. Negative factors such as raw material input cost increase and inflation of energy and labor costs recovered by selling prices and sales mix. Declining demand impacted sales volumes negatively, but with the backing of yen depreciation, adjusted operating profit increased on to consolidated financial results by segment.

In Japan and Americas regions, up-end revenue and adjusted operating profit on one hand. In other regions, revenue increased with adjusted operating profits decreasing. In Japan, there was increase in strong mining tire sales increase. Profitability of expert in business for general tires improved, and also with the increase in sales accompanying last minute in demand to buy winter tires in the second half pushed profitability versus prior year.

Consolidated financial results by product for the first half. Passenger car and light truck tires, revenue and profit increased year-on-year, but lower sales volume pushing down profitability. Lower profitability as a consequence of changes in business composition between the OE and Replacement segment, among others, squeezed margin by 0.4 percentage points versus prior year. Truck and bus tires in Americas and Japan, retail sales increased with better profitability year-on-year increase in revenue and profit and margin improvement as well.

Specialties. Highly profitable mining tire sales was quite favorable with the backing [Indiscernible] in FX, revenue and adjusted operating increased with some margin improvement. Diversified product business continued with revenue increase and the adjusted operating profit, whose details to follow up on the next page.

Flipping to the next page, the breakdown for the diversified product business and the continuing operations. Positive profits continued from the prior year. Chemical and industrial profit business. On top of the increase in revenue and operating profit, profitability improved also to continue on steady improvements. Sports & cycle business in the cycle business, there was a booking of cost of safety inspection in the prior year.

In reference to wage, though revenue declined this year. Adjusted operating profit did increase in first '23 and diversified products business in Americas. Selling price improved, enabling the trend of improvement from margin in the final quarter prior year. Balance sheet and cash flow highlights. Total assets increased by JPY 429.1 billion from December in 2022 at JPY 5,391.3 trillion, the backing of the EM depreciation was manufactured at play. Equity ratio increased by 1.8 percentage points at 61.6%.

Financial health continues to improve. Free cash flow, JPY 107.9 billion positive increase in Siemens profits, improved working capital conditions and others brought about the improvement of free cash flow versus prior year.

Finally, the fiscal '23 guidance. As said before, there is no change in the consolidated financial forecast for fiscal '23 and dividend from February guidance but here, I would like to offer explanations on the assumptions. For the second half, the currency exchange, [JPY 133 per dollar and JPY 143 per euro]. Raw material costs. At the moment, price is softening versus February guidance. However, the price for natural rubber and crude oil is expected to slowly increase versus prior year as the economy recovers in the second half. Tire demand. OE demand is basically constant from the February guidance.

For the replacement segment, for the overall demand, it is expected to recover throughout the second half, though we expect it to fall short of February guidance. At the same time, Passenger car hybrid diameter tires and mining tires expectation is that the demand will remain relatively resilient. Under such business environment though with the negative sales from the February guidance with the expense and cost management and positive FX impact of Japanese yen depreciation, our expectation is that we will secure the full year financial forecast.

The business environment is getting tougher. However, with the focus on improving business quality to continue management focusing on execution and results, we shall secure the full year financial performance. And that concludes my presentation to you. Thank you.

Unidentified Company Representative

Thank you. That was the presentation by our Global CFO, Hishinuma, on financial results for first half fiscal 2023.

With that, we complete the presentation of financial results for the first half 2023. Now we would like to continue with the midterm business plan for 2024 to '26, the planning process update too. Now we would like to start the midterm business plan, 2024 to 2026 planning process update to of Bridgestone.

I would like to again introduce to you Mr. Shu Ishibashi, Member of the Board, Global CEO and Representative Executive Officer. And also, Mr. Naoki Hishinuma, the CFO. Now I would like to invite Shu Ishibashi to present the midterm business plan, 2024 to '26 planning process update two.

Shuichi Ishibashi

Hello again. This is Shu Ishibashi, the Global CEO. In this session, I will talk about the midterm business plan for the three years from 2024 to 2026, the '24 [MBP] Bridgestone is accelerating transformation in alignment with the road map presented in 2030 long-term strategic aspiration.

In the 2024 to '26 MBP, which is the halfway point towards aspiration, we will focus on the premium business and the solution business to create new premium. To build this plan, we determined management issues one by one and clarified what to do and what not to do by June of this year 2023. We went through a persistent discussion of 130 issues, including 85 management issues covering the entire value chain and clarified roles and responsibilities of 45 new tire plants with global executive members.

First of all, regarding what to do in the premium tire business, which produces and sells tires we are determining strategic direction by region and product type. Dan-Totsu R&D and manufacturing power and Dan-Totsu product power will be the starting point for the entire strategies. To create new premium, we will execute investment through reinforced production of enlighten and Master core. Moreover, we will promote value creation through fusion of enlighten and BCMA.

For BCMA, we will start visualization of quantitative benefits aiming start of contribution to profit in '24 MBP. Also, we will work on shifting to green and smart factories based on the clarified roles and responsibilities of 45 factories.

In addition, we will refine a global supply chain management power to support Dan-Totsu product power and global R&D and manufacturing power. Through proving the value of Dan-Totsu products, we will strengthen our approach to premium and prestige OEs.

Regarding what not to do, we determined business by region, product type and channel and decided further reduction in business with low profitability. For the Solutions business, which amplifies value of Dan-Totsu product during customers tire use, we determined what to do and what not to do, considering synergy with the premium tire business, growth potential and profitability by each solution and region. I will explain the details later on.

Regarding what to do, we will establish and execute global and regional strategy in five categories. First, I will explain one to three, which are about the premium tire business. We are building global and regional strategy of the premium tire business based on Bridgestone's position in each region determined the sole discretion based on market share, brand awareness and our strength in price leading power, product power, sales network and business foundation.

We will consolidate our Dan-Totsu #1 position where possible in the premium tire business for passenger car and truck and bus in Japan, Thailand and Indonesia. Next, we will establish #1 position in the Middle East, North Africa, in Australia and New Zealand, where we have historically had strong presence and in Vietnam, which is a growing market. For India, we will focus on #1 position in the premium tires for the passenger cars. We will aim for #1 position from now on in North America, where most important market in Latin America.

In North America, we will drive reinforcement of business structure, aiming for solid #1 position in premium. Regarding Europe and China, we will establish a unique position. For the Europe business, which is important for us from the perspective of EV strategy, sustainability, et cetera, the weak business foundation has been a challenge.

In '24 MBP, we will aim to be a strong follower position through rebuilding and reinforcing the business foundation. For the China business, we will focus on passenger premium tires and promote the premium niche strategy, as mentioned earlier.

Finally, for off-the-road aircraft and premium motorcycle tires, we will strengthen our global #1 position. What supports this global regional strategy is a premium tire business which are global R&D and manufacturing power and supply chain management power. To refine the thoroughly, we clarified roles and responsibilities of 45 new tire plants one by one. 16 Plants were specified as top priority investment plans to reinforce production of premium products. We will execute investment to reinforce production of a new premium enlighten and MasterCore and shift to green and smart factories.

Based on the clarified roles and responsibilities, we will build a sourcing plan for each plant linked with BCMA. We will build new global optimum supply chain based on flexible and agile management that we developed while overcoming changes in the turbulent business environment in the '21 MBP.

As one of the initiatives, we will reinforce Japan's manufacturing leadership. For Japan and Asia, we will enhance premium production power as our core of manufacturing and increased global contribution.

In order to realize new value creation in '24 MBP, it is necessary to establish the base technology to produce Dan-Totsu products, which is the starting point of everything in the premium tire business. It will be Enlighten and BCMA that we are placing as Bridgestone's base technology for product.

Through a fusion of Enlighten, the base technology for product design and BCMA, the base technology for R&D and manufacturing, we will take on the challenge to create value and gain competitive advantage. We will reinforce our earning power and create corporate value to move to the next day through the fusion of Enlighten and BCMA.

Regarding Enlighten, while expanding the performance spider chart, we will enable customization using desired complex performance for future mobilities. In addition to needs and wants of the market and customers, it provides new value that customers may not have been imagined and significantly improve inspiring performances with certain edges. It is the base technology to realize ultimate customization.

Regarding BCMA, the base technology for manufacturing and R&D, which supports ultimate customization, we will improve efficiency of development and production through sharing modules between different products. It will enable business cost reduction and improve agility.

In '24 MBP, we will take on the challenge to achieve both price increase in accordance with the customers' delight and reduction of business costs, environmental impact by the fusion of Enlighten and BCMA.

For the value creation through fusion of ENLITEN and BCMA, it is essential to evolve products, planning power, which can provide each customer with the best quality based on developing tires, thinner, rounder and lighter.

We launched new product of TURANZA premium tire brand in Europe and North America through product planning, which maximizes enlighten technology. TURANZA EV, which was launched in May in North America is the EV specialized tire representing new premium in EV era. It was developed through customer interviews, mainly in California, where the shift to EV is advancing and in cooperation with the EV OEMs and retail channels. It contributes to sustainability by using renewable materials for approximately 50% of the materials used in tires as well as the significant improvement in rare resistance which has been a challenge for EV tires. We will provide new value for our customers.

In Europe, we have launched TURANZA 6 which has significant improvement in rare resistance and wet performance in response to European market needs. Based on this Dan-Totsu product power, we will expand or equipment of ENLITEN products. It has been fitted to 57 car models so far. We will continue to focus on premium and prestige car models and reinforce our approaches to OEMs in Japan, Europe, U.S. and China, carefully watching EV market trends. We will also expand the replacement tires, aiming 50 products in cumulative total and 70% of equipment rate of enlightened in 2026.

BCMA, which supports ultimate customization by ENLITEN will start contribution to profit in '24 MBP. BCMA will enable, for example, to consolidate into about 5 modules by tire category, such as winter tire and sports tire instead of individual development and production by each product.

We can realize efficient production and development through sharing modules between different products. we will take on the challenge on the business cost reduction.

Regarding production, each production process will be simplified through reducing number of changeover, which was required by each size and product. This will improve production efficiency and reduce production costs.

Regarding development, the development efficiency will be improved by the impact of sharing module between products not only the efficiency of development cost, but also the development agility will be improved. We will increase our speed from product planning and development, responding to customers' needs and wants to launch if new product.

Linking with the clarified roles and responsibility of 45 plants, we will begin our initiatives to visualize value creation of BCMA in accordance with the manufacturing capability of each plant. Bridgestone West, which consists of Europe and the Americas, is the region with many challenges in manufacturing capability.

First of all, it is essential to reinforce flexibility, which is the foundation of manufacturing to produce necessary products flexibly. We will work on this in '24 MBP as a priority initiative.

For the plants in Bridgestone East, which have high manufacturing capability and flexibility, we will drive our initiatives to reduce workload at plants and reduce the business cost through improved efficiency by BCMA. Next, I will provide process updates on green and smart factories that we are developing linked with BCMA. Based on the contribution to sustainability, which is at the core of our management of business, we set increase of productivity for smart power and reduction of energy gante or energy consumption per unit for green power as KPIs.

To begin with, we determine green and smart power and manufacturing power, such as productivity and flexibility of each of the 45 plants by June 2023. Bridgestone West is advanced in responding to sustainability and has high green and smart power with the background that it is difficult to secure talent in manufacturing. Bridgestone East tends to have high manufacturing capability based on the strong operational excellence. We will determine necessary investments and KPIs in '24 MBP according to each tendency of West and East. These are the key points of what to do in the premium tire business.

Next, regarding what to do and what not to do in the solutions business. We will expand the tire-centric solutions business, mainly in mature countries. What to do in the solutions business for passenger cars is to reinforce our retail and service solutions network, primarily in the U.S., Japan and Australia and New Zealand.

We will further reinforce and expand 2,200 sites of equity stores in the U.S. and also roll out new store format in 10 sites, combining real and digital from this year. In Japan, we will reinforce our channel network. We will promote enhancement of store network [B Select], which have been launched from this year and e-commerce.

Regarding Australia and New Zealand, we will reinforce equity and family channels and enhance services together with the mobile van service. Meanwhile, for Thailand, we will rebuild the equity store structure.

For the retail business in Europe, where we have challenges in profitability, we will fundamentally refine it. Regarding the tire-centric solutions for truck and bus, we will reinforce retail, which is at its core, mainly in North America, Japan and Latin America.

In North America and Japan, we are already executing investment to reinforce retail production. In North America, where we have Dan-Totsu #1 position, we will enhance re-trade as the access for Fleet Care, the solutions package for truck and bus. In Japan, where we have done to #1 position as North America, we will create demand as a market leader. We will reinforce re-trade linked with TTP, our solution service.

Meanwhile, in Australia and New Zealand, we will rebuild it. And in Europe, as we have many challenges in profitability, we will rebuild it with limited customers and areas.

In addition, we will reinforce our solutions network for truck and bus primarily in North America as well as Japan and Australia and New Zealand. In North America, where we have 1,200 sites of service network, we will reinforce our solutions network as the key enabler of fleet care, all enhancing capabilities for EVs we will support the shift to EVs from the ground up. We will reinforce our network linked with re-trade in Japan and Australia and New Zealand as well.

Meanwhile, as for Thailand, we will reinforce after rebuilding its business structure. For Europe, we will rebuild our network linked with web fleet solutions in limited areas.

Regarding what not to do in the solutions business, we determined it based on profitability, considering growth potential and synergy with premium tire. We will stop the expansion of B2C subscription model and mobile van service in Europe and North America.

In North America, we will consolidate to B2B subscription and utilize it as our mobility ecosystem. Regarding other B2B subscription model in Europe, we will integrate them into Fleet Care. We will rebuild retail and re-trade business with limited areas and customers.

In the same manner, we will limit areas and customers for re-trade in Asia and Pacific. We will rebuild, re-trade in Australia, New Zealand and Thailand and withdrawal in some regions.

Finally, regarding the mobility to tech business in North America, which is our foundation for the future growth. Through reinforcement of coordination between web fleet solutions in Europe and Azuga in North America, we will enhance and expand fleet care, which offers premium tire, re-trade and vehicle real-time monitoring and others as one package in North America.

We will provide a wide range of customer-focused solutions to solve customers' pain points with a combination of real and digital. In addition, we will strengthen our initiatives to respond to the shift to EVs.

Regarding the mobility tech business, we will start building it in North America, where we have strong business foundations in '24 MBP. That is all regarding current updates for the '24 MBP planning process. Today, I explained the result of identifying what to do and what not to do and details of what to do.

We will update this planning process on the '24 MBP in November. We appreciate your continued support. Thank you for your attention.

Unidentified Company Representative

Thank you, that was our Global CEO, Mr. Ishibashi on the subject of midterm business plan, 2024 through 2026 planning process update two. Now we are ready to open the floor for questions and answers.

Let us now start with Mr. Maki, who is with SMBC Nikko Securities.

Question-and-Answer Session

Q - Kazunori Maki

This is Maki from SMBC Nikko Securities speaking. So I would like to ask two questions today. The first question refers to the FY '23 performance, particularly with respect to the second quarter. And the other question has to do with the midterm business plan.

The second quarter, what is your take as to the actual versus the plan. I'm sure that you have some thoughts, so I would like to hear more. And as regards the full year guidance, my impression is that your view has become somewhat a little weaker. So I would like to hear more because looking at second quarter performance by product, for instance, in the [TBR area, it's not as the performance was noticeably weaker.

And the same in your European operation and reference to other competitors operating in the same region, not so -- weak. So I would like to hear your thoughts further. Do you think that you can attain the forecast and the goal that you established by the end of the fiscal year? But do you think that there are some possible scenarios, which you point to the deterioration of the business environment. So how high is the hurdle ahead of you?

Shuichi Ishibashi

So I, Ishibashi would like to respond to that question. The second quarter performance, the actual versus the plan. My observation is that -- by the way, I would like to hand it over to Mr. Hishinuma. So thank you.

Naoki Hishinuma

I, Hishinuma would like to answer that. Actual versus the plan. vis-a-vis the internal plan with the sole exception of the currency, more or less speaking, all other factors were more or less in line on the west plans.

By factor, the price that was the bigger positive than what we had anticipated. Raw materials in actuality, the net increase in cost as much as we had anticipated. And I can say that these two factors were relatively speaking, positives. But at the same time, volume, which is a negative.

However, [indiscernible], we were able to execute, particularly in Europe and the North American market, the regress control and management. So these are all the collective positive. So the negative would be really the volume and the currency, under the currency was surplus because that pushed us forward in numbers.

Shuichi Ishibashi

I, Ishibashi, would like to supplement a little bit because you said what will be our expectation with respect to the FY full year guidance, which we did not change on this occasion.

In the beginning of this fiscal year, as I said in my summary and presentation, as I look back, my own view for the fiscal year, particularly for Europe and North America was a little bit too optimistic. So that started to affect our operations.

For instance, the production plans are there, making various preparations and arrangements. This -- that was affected. So it's not just a matter of inventory, for instance, the distribution inventory. Our own inventory would be affected, which we need to optimize in the second half from the perspective of return on invested capital or SPL that's very necessary.

So our read is that into the second half of the fiscal year, demand will become more robust. So we're counting on that. But this -- the issue of distribution inventory is quite deep-rooted. So we expect the demand will go up. But we have to make sure that we can get rid of under the remaining goods and materials on inventory, which means that we need to have the finished goods sold in the market in order to have the resolution of the remaining inventory issue.

If under the speed of the recovery turns out to be slower than what we once anticipated. And then we have to accelerate the speed of the downward adjustments in production, which, in turn, would affect the conversion cost, which would need to go up. So everything is all tied together.

Now [indiscernible] of our competitors, I'm sure that competitors are each thinking of their own respective costs. Some -- they would be more aggressive to sell and others and would take a different strategic position. So we need to be able to respond successfully to that. So there's always a set of positives and negatives in this sort of business, as always, and what our situations are into the rest of the second half of the fiscal year is mid to [indiscernible] the fiscal year-end targets, and so we will do all the peak in due be plus or minus.

Kazunori Maki

Well, thank you very much for saying that Mr. Ishibashi and Mr. Hishinuma, let me check something. So for the second half of this fiscal year, Europe and North America, my impression is that you seem to have concern for the trucking bus business in both of these regions. But it seems that in North America for the high-rim diameter tire business, relative strength seems to be there. And so the trend may be different between Europe and the North America.

Shuichi Ishibashi

I understand your question. This is Ishibashi speaking. The -- your read is correct. If you do compare the conditions at play in Europe on one hand in North America on the other, Europe is more severe. Be it the trucking tire business or the passenger tire business. So that's for sure. So we're also very, very competitive and rigorous that you compete in but with a particular focus on high-rim diameter tires, North America is more the resilient for us than in Europe, where we will make sure to keep emotionally consistent level of operation.

Kazunori Maki

Thank you. I understand. So the second question has to do with midterm business plans, but it's not very midterm because I'm referring to the next fiscal year. What do you think there would be the sources of growth of the good performance because macro economy and the FX market, there was outside of under control of anyone setting those externalities aside for your tire business, for instance, do you think that ENLITEN, can they penetrate further into replacement market, which may positively trend in the mood of the market into your favor? What about BCMA? Do you think the good effects will come about?

Shuichi Ishibashi

Well, thank you. Tire business is our core, whereas solution business is a growing business that is a [continuing] view. And in this year's forecast, rather than banking on the gross order premium tire business, it's in the re-trade operation and also the retail business and a more robust growth is anticipated.

In terms of the variable growth tire-centric solutions, the key point there is the re-trade operation in retail and, of course, solution network. So that is where we are to make investments as I presented. So we will enhance our enabling capabilities to make sure that collectively all of those will support to be the big pillar of growth for us.

Now on top of that mobility take, that's still at the preliminary phase of saving seeds -- sowing seeds for the future. This is going to be basically in North America, but not actual contributions in the period of the '24 midterm business plan. It's for the '27 round of mid-term business plans. I'm looking forward to that.

So the key point for the 2024 midterm business plan, what I said is that the growth opportunities with re-trade and retail operations or the establishment fostering solution network as well, of course. But our core is a set of premium tire models and brands. So how to surely and reliably making so to what extent we can do that is the point that we should focus on. which means a very meticulous review of operations and opportunities by area, one by one is necessary.

For the making as well, are we going to do it, in particular area on that. If a answer is no, not to continue, then are we going to discontinue altogether it local production, are we going to make efforts to make it better. So what's good is to be made better and it was not as good this to be either made better to make it good or to re-trade or withdraw from those local operations for fracturing in particular.

So all of this is a matter of cost and ordinary course of business. But that is what it boils down to. So that what we've broken through as future opportunities will have their respective on the causes and durations and becoming much more visible and better and optimal use of resources as well.

So solid lead manufacturing so that Dan-Totsu products, including but limiting to ENLITEN will be there. So that's the grand rule of our business. how we can do that is the '24 MTBP under value creation.

ENLITEN, yes, we are starting to have declare our plans. BCMA, of course, we are working on that. However, to make it more visible on what will be the available value of BCMA and the value creation that has to start with a [indiscernible] so meaning that each and every under the plant is going through its own respective of the production plans, keeping those opportunities in mind. So that value creation can be maximized by plant.

So everyone is working so hard, and I'm counting on that. I'm sure that as we do that, we will be able to have the good success with BCMA. However, what we will be able to do in the three months period. It all depends on the sense of speed and agility is very important but '24 MTBP, we are working on that. And to what extent we can make progress is the one to look to.

ENLITEN, the pricing has been increased. For instance, TURANZA EV, 5%, the price increase and the sky the challenging from those opportunities, MasterCore, the mining tire of 5% on the price increase as well. Price increase, by the way, is not executed because raw material input costs increase is because we believe in the greater value of those products and that we will decide to increase the pricing. So willing to pay so on the hub that we can have bigger willingness to come from the market, it's not a home run hitter sort of play on the analysis baseball playing, so it's much more the gradual and one by one, nothing radios.

Unidentified Company Representative

Thank you. Mr. Maki. So that is it with SMBC Nikko Securities. Next, I would like to ask Mr. Sakamaki from Daiwa Securities.

Shiro Sakamaki

Thank you. This is Sakamaki. Can you hear me all right?

Unidentified Company Representative

Yes, I can hear you well.

Shiro Sakamaki

I would like to ask about the midterm business plan. I am sorry to ask you once more about the BCMA which is already explained by Mr. Ishibashi. But let me make sure that my understanding is correct. It is reflected to the material about Page 11.

If you're going to be sharing models, I was thinking that on the factory floor or at Gemba, it will be much easier to install, for example, [VMI] automatic molding machine and so on. And that those in Europe and Americas who are not as flexible while our costs are increasing, we'll be able to reduce costs by automating, but rather, you're saying that in Europe and U.S., you will enhance flexibility by doing so.

I was wondering what would happen at the real plant. And also for those process, you probably do have some experimental introduction to obtain results. And I wonder what you might have already seen as a cost reduction impact on a plant-by-plant basis.

Unidentified Company Representative

Well, First of all, plants in the West, those in Europe and Americas, they are basically smarter compared to Japan and Asia. In a way, the machines work hard and do a pretty good job of manufacturing. Therefore, they are good plans with high productivity making lots of large lots, easy to make products. However, in the future, we will focus more and more on the so-called premium products. This will lead to the emergence of more and more difficult products to produce, not products that are easy to make, but products that are more difficult to make.

In addition, a number of small diversified products will also increase. So this will be the starting point for us to deal with. So it would be great if plants are like ones in Japan and Asia with on-site capability where everyone worked really hard and made good preparations and arrangement to produce difficult products in small lots.

In Europe and in the United States, that is not possible. So if we proceed with more premiumization. Simply put, we sold any major taken productivity will drop and the production volume decreases. So we have to start with the basic premise studies a little different.

In Japan capability for changeover is high, and we have a high on-site capability for small lot production. If BCMA method is introduced in such a place things will be easier and smoother, including the changeover. The preparation and arrangements will also become easier to make because we can start with high capability, we believe this will directly lead to business cost reductions and production volume will not drop there, and improvements further can be made and expected. However, in the case of Europe and Americas, if you don't do anything, production volume will drop and the cost goes up and productivity declines.

First of all, since premiumization is also the aim in Europe and the Americas. The challenge is to increase flexibility. And now we are working on that, for example, at the burgers plant in Europe and at some plants in the United States and there is trials that are being carried out in these areas. We must first determine how we can improve the flexibility, including the ability for changeover. We have made preparatory arrangements as to how far we can proceed with various approaches, including sometimes referencing to the Japanese know-how. BCMA should be done in this kind of basis.

In essence, the introduction of BCMA may just be enough to offset the decline in the overall capability or capacity. In other words, it will only be to reduce the drop and will not really bring out added results. So in terms of how we can -- we are going to be able to get the real results, we are challenging each of the things I've just mentioned. And of course, we have to change all the production plans as well. We have to consolidate the products that are tailored to certain models in each plant. Therefore, the hurdles seems to be higher in Europe and Americas as we need to improve on-site capabilities while carrying out such detailed work.

This is not to say that the hurdles are lower in Japan and Asia, but they have on-site capability at Gemba, and they do production planning in precise and detailed manner. I was able to see how production plan is done recently. Everyone carefully goes over the production plan, and let's say it finds out that there are products A and B in certain plan. If it happens that A and B are not sharing the same model, B could be moved to another plant where modules can be shared.

This is a kind of natural thought process that is being followed, and they do this for each -- one by one in order to get the results. While we are now undertaking this, we have to think about how each plant will be able to perform and get results, how much investment you make? How far will we raise the on-site strength and how much the workload will be reduced for the people at each of the plant. We need to make forecast in various areas and visualize the benefits for it. How much of this can be included in the midterm business plan, I think that at the beginning, it would be reflected more orders on a conservative side. It will be an effort of improvement, and it will be carried out centering around the Gemba based on the continuous learning for further improvement.

Since this is a major change in the approaches to production, it cannot be done all at once but it will require a very steady and continuous Kaizen activities. because with the Japanese are versed in such an approach, I am hoping that we will be able to even change the corporate structure through this process.

These will be the kind of challenges I would like to make. And for that, we are obviously experiencing and testing them in Asia and in other areas to see what various effects and impacts of BCMA may be. From my point of view, at this stage, results on only the size of peanuts. But even peanuts are better than nothing or zero. I am thankful that there are results. But of course, Peanuts alone is not sufficient, and we have to think of the ways to create more value out of this. That's the challenge. But we're thankful for the results so far, which is only peanuts, but we -- and we'll be building on the results one by one, which is true for the burgers and others.

We are making it more and more visible now. That is why I'm telling the people and you find us that they should not sit back at the head office in Cobasi, but needs to actually go out to the site to work together with the people there. Otherwise, we will not be able to understand what is going on.

In this respect, I believe that this is an opportunity to make a major change in the power of manufacturing on site. I believe those in Europe and Americas also do have things they can do. on site and make this an alternative. In that sense, including the change in awareness, this will be a major milestone for Bridgestone.

Shiro Sakamaki

Well, I sort of understand. What are the effects of this?

Unidentified Company Representative

Well, it is a little difficult to say, but I would like to say that this is going to be in very big band forward or a major advance. But for now, it's still small, peanut. So it's still a little early to say.

Shiro Sakamaki

I just wanted to confirm whether you have an image for now, such as the effect is something like the increase of profit margin by 1% or 2% or something like that I see on Page 10, maybe the company-wide positive impact of 1.2% improvement in the profit margin that is spreading rapidly?

Unidentified Company Representative

Well, obviously, I have my expectations for everyone. I say, this is what I want to say. I want to see, for example, x percent and then people said "what". Seem surprised, I say, I am looking for more than what we experience in peanut. As mentioned earlier, I say what we can raise in terms of the growth margin by this can come from the top line with ENLITEN. And then there is the raise of gross margin through the business cost reduction, the sum will adapt.

Shiro Sakamaki

The next stage of lending power is, although not written out, I do have the numbers in the table. When I develop them, it's right in there. I have not included them because I don't want to make an over commitment at this point by showing them to you. But in any case, the question is how we can raise or lower the numbers to reflect in the gross margin in this way.

This is a key to the success of 2024 midterm business plan, which will come in 6 months. Secondly, I think one of the updates is that you have decided a number of things in what not to do. In particular, it seems to me that there are many things in Europe that you have decided not to do. I wonder if these are actually things that you have decided not to do with are causing losses and dragging down profitability. And that would increase profitability simply by deciding not to do them and also by not doing things among the list of not to do items, how much profit would you be expecting to generate or how much immediate impact will you be seeing?

Unidentified Company Representative

Regarding the European business, we discussed it separately at the Global Executive Committee meeting in June. I believe that the weakness of the management foundation of the European business is a management challenge that we confront. And as I have said before, we will not give up on the European business, I believe Europe is a very important market, and we would like to somehow move on to the next stage.

From about 2015 to 2019, the operating profit of the European business was about 1% to 2%. But since about 2020 and onwards, with the restructuring of the tune and improvement of the product power and competitiveness, along with the price increase, it increased to the level of about 4% to 5%. But of course, it is not sufficient from the standpoint of mark. Therefore, we need to go one step further in the 2024 midterm business plan.

We are now discussing these issues together and we will, of course, work to increase gross margins in the terms of the top line, including ENLITEN and of course, including BCMA, which I mentioned earlier, including the production sites, but we will also keep a close eye on this loss-making business, including those in what not to do list. Now to move on to the next level. We are now discussing for a far we can go in terms of the specifics as a major point of the upcoming midterm business plan.

Shiro Sakamaki

Thank you very much.

Unidentified Company Representative

Yes, we are confronted with a long journey.

Shiro Sakamaki

Yes, I can see that. Thank you very much. I have lots of hopes in you.

Unidentified Company Representative

Thank you very much, Mr. Sakamaki.

Unidentified Company Representative

Next, Mr. Kakiuchi of Morgan Stanley Securities.

Shinji Kakiuchi

This is Kakiuchi from Morgan Stanley Securities. My first question, in your presentation of the Q2 results, which you kindly covered in detail, you said that regarding the current weakness in replacement tires, particularly for truck and bus, you ascribed it to the economic slowdown and you provided some details. And Mr. Ishibashi, you acknowledged that your initial assumption in retrospect was too optimistic.

Now do you see factors other than economic slowdown in play as well? For example, in this slide, the current post-COVID landscape, perhaps you feel that 2021 or 2022 was too strong that end customers bought too aggressively. And so you are now seeing a rebound or perhaps some changes in the way tires are used? Are there any such factors as well?

I suppose with the simple impact of economic slowdown, you can make prediction to a certain extent. So I'm wondering if you see changes in distribution inventory, or in the way, fleet customers, logistics customers hold their inventory? Are there such specific factors in play as well?

Unidentified Company Representative

First, regarding truck and bus tires, as you can see in the slide, during the COVID pandemic in 2020 from around the summer of 2020, in the U.S. through economic stimulus packages and others, there was quite a bit of movement in goods. I recall saying at that time that the movement of people stopped, but movement of goods was very active.

In that sense, the demand in the U.S. primarily for truck and bus tires rapidly recover and demand rose sharply in 2021 and 2022. Now in the face of such rapid increase, starting around the second half of 2022, the production capacity of first year tire manufacturers could not catch up. So TB tires from second-tier and third-tier players made their ways into dealers, resulting in inventory buildup.

In general, when demand rises rapidly like this, everyone says not enough supply, nothing available. So dealers would buy up a lot. There is a tendency to order more under the inflated sales projection and place orders believing they can sell. Thus, the dealers' inventory expands and there are many second- and third-tier products included in it. And then the actual demand drops rapidly.

Currently, in the U.S., as you are aware, the movement of goods has slowed down. While the movement of people is now starting to pick up. When there is a movement of people that will contribute to the passenger car tires. But when movement of goods slows down, then the dealers will start squeezing their inventory level.

So in many ways, when it goes up, the sales prospects go up. And when it goes down, there will be inventory cutbacks, no orders being placed. Although when changes are so rapid, it becomes really difficult to predict. Now dealers know that manufacturers have built up inventory and so when they need more, they will be delivered right away. When there's no stock, you need to order way in advance. That's a typical behavior of dealers. I think those things have a lot to do with what's happening today. So until this post-COVID anomaly really subsides, I'm afraid there will be rampant ups and downs like this.

Now the movement of goods is slowing down so the activities of national fleets, large fleets are also slowing down. And therefore, there is no doubt that the actual demand is dropping. So that added with the ups and downs of dealers' inventory the behavior during the declining demand as well as the fact that the second and third tier brands are now entering the dealers. And these players are benefiting from the ocean freight returning to the normal level.

We are now seeing the combined effects of all these factors. Therefore, we will stick to the fleet business that focuses on the premium tire combined with re-trade and provide solutions such as Fleet Care. We will not change the direction of this main thrust. We will do this in a steady and steadfast manner.

Still, it is true that we are affected by the rapid ups and downs in this post quoted era. So the question is how far we can stick to this? While maintaining a solid business structure, we must stay away from doing anything unreasonable. We will endeavor in our business so that customers acknowledge and truly appreciate our value.

Now that's for Bridgestone brand. The Firestone brand is a dealer brand. So we will respond a little more flexibly. The actual demand in the national fleet is already dropping. So we should do something that contributes to overall cost reduction, such as re-trading, that's the short way. We will execute these firmly and steadily.

Shinji Kakiuchi

I apologize for not being more precise and articulated.

Unidentified Company Representative

No, no problem.

Shinji Kakiuchi

Now you said that your company's inventory is high, true?

Unidentified Company Representative

Yes. It's manufactured stock.

Shinji Kakiuchi

I see. The manufacturer inventory.

Unidentified Company Representative

So the distribution inventory and dealer inventory, these are high. and our own manufacturers inventory is also high in the first half. And in the second half, we will reduce manufacturer inventory. So if the economy recovers and demand recovers, it will be very easy to do so. But if it slows down, the operating rate of the factor will naturally decrease. So it will be tough, but we will do it even if it gets tougher.

Shinji Kakiuchi

I see. My second question. In your presentation, you said that for TURANZA EV, the tire for EV, you will seek to improve price positions. In your conversation with the OEMs and retailers, the voices that you hear from them, I'm sure they reflect the general users. The end users voice, do you see a positive reaction from those end users as well?

Unidentified Company Representative

As you know, California is leading the U.S. in terms of the shift to EV and they have a keen interest in sustainability. And people drive a very long distance. So historically, people in California have keen interest, a very strong demand on the product life. In that sense, we have launched a product that has a significantly longer life while also considering sustainability, Costs are high, but prices are set high as well.

To be more specific, there are many customers of Tesla. And many customers are actually concerned about the life of Tesla's current tires. And although it's only been several months since we launched in May, we are already getting such feedback from our customers. Of course, I have no intention of criticizing the OEMs and since OE manufacturers are making tires for new vehicles that meet their respective requirements that is that. However, for the aftermarket or the replacement tires, this is not a B2B business, but B2C business. So providing products that meet the needs and wants of the end customers as well as products that inspire them and expand the business proactively.

That's the nature of the business. So in that sense, replacement products have aspects that are slightly different from OE products. In Europe, OE and replacement tires are generally the same, whereas in the case of Japan, OE products and replacement aftermarket products are generally different, and the U.S. is in the middle. So in the case of U.S., we are doing things like launching our own replacement tires, well, of course, for some, the same as OE tires but expand the size range. That's the kind of things that we are doing, taking into consideration the characteristics of each region.

Shinji Kakiuchi

I see. Thank you.

Unidentified Company Representative

From here due to the time constraint, we will only take one question per person. Next questioner is Mr. Sakaguchi from Mizuho Securities.

Tairiku Sakaguchi

This is Sakaguchi from Mizuho Securities. One question, a question on the selling price. According to Mr. Hishinuma commentary earlier, during the first half, the selling price was a positive factor compared to the plan. I believe that this is the result of our solid execution of the premium strategy in the midst of a severe market environment. So could you state your view on the selling price during the first half? And also what's the projection for the second half?

Now there are signs of slight improvement. The market environment remains severe, particularly in North America and Europe. Costs such as raw materials and ocean freight rates are declining. And I'm worried that low-end manufacturers might take a lead in embarking on price reduction campaign.

I'm fully aware that Bridgestone has no intention of changing the strategy or stance but can you talk about the risk of this positive aspect of selling price shrinking or turning into negative in the second half?

Unidentified Company Representative

I take it that you're asking about the spread between selling prices and raw materials. The spread we showed in the full year plan in February, we believe can be kept so clearly, we do not assume that there will be a narrowing of price spread at this point in time.

However, as I said earlier, regarding the selling price, it is a matter of how to balance the sales mix, selling price and volume, the quantity. In that sense, the selling price is our asset. So we don't want to give it up easily. So within that balance, what's the appropriate level in each region for the second half is something we need to judge based on many different factors.

During the first half of the year, we did various things such as keeping up the selling price level while reducing the volume within that balance of three factors that I mentioned. I want everything to improve, selling price, sales mix and volume. That position remains unchanged. So how do you do that in each region area that's the confidence of the top management of each SBU.

In our monthly meetings, we are discussing how to manage all these in the second half. And that's where the competence accounts, not on the strategic level, but on the operational level. Now the annual forecast seems keeping the sales price to ensure an extent because it's really an asset. And we are considering the volume, the balance.

Now as you say, ocean freight, the benefits of ocean freight normalizing are very large for low-end manufacturers. I am well aware that accordingly, the competitive terms and conditions will change. And we have an option of not moving along with them, stay away from that or anticipate that we might be dragged along to a certain extent. The Firestone brand might be dragged along to a certain extent. So make adjustments to a certain extent. I think we can write this through by mix and matching various options.

Tairiku Sakaguchi

I see. Thank you.

Unidentified Company Representative

Thank you, Mr. Sakaguchi. With this, we conclude the Q&A session. And with this, we end the midterm business plan 2024, 2026 planning process update two. Thank you for your participation.