Fiscal Year 2005 Results and NISSAN Value-Up

April 25, 2006

Carlos Ghosn, President & CEO, Nissan Motor Co., Ltd.

Good afternoon everyone. Thank you for joining us today.

Fiscal 2005 was a year of transition for Nissan. As we successfully completed our revival by fully delivering on the three commitments of Nissan 180, the next phase of sustainable and profitable growth through Nissan Value-Up was already well under way.

It was also a year of headwinds and turbulence as the costs of energy, raw materials, regulations and interest rates increased significantly. Because of the fiercely competitive environment, we had to absorb most of these additional costs. This has negatively impacted the increase in our profitability and slowed our growth in a low year of our product cycle – the year when we have the lowest number of new product launches during Nissan Value-Up.

Despite this... Nissan has lived up to those challenges. And I am pleased to report today record earnings and an operating profit margin that continues to lead the global automakers.

I will begin with a review of our business performance during fiscal 2005, which is final disclosure. Then I will review progress towards Nissan Value-Up. Finally, I will give you our forecast for this year.

FY 2005 sales performance
First, an update on our sales. Global sales reached a record level of 3,569,000 units, an increase of 5.3%. In various markets around the world, we released seven-all new models.

In Japan, sales came to 842,000 units, down by 0.7%. Our performance in the mini-car segment has been encouraging. Thanks to the new Moco and Otti, our mini-car sales increased 39.6%. However, overall, our market share dropped by 0.2 percentage points to 14.4%.

In the United States, sales increased by 6.1%, to 1,075,000 units, marking another year of record sales – despite zero new models. The Nissan Division grew by 6.8%. Altima and Sentra have both sold well, despite being at the end of their lifecycles, and products like Murano and Titan continue to attract new customers to the Nissan brand.

Infiniti achieved sales of 134,000 units, up 1.3% from the previous record year. The success of the new M sedan drove this increase with sales of 28,000 units.

Our U.S. market share for the full year came to a record level of 6.3%, up from 6%.

In Europe, where reporting is on a calendar-year basis, sales were basically flat – at 541,000 units. We continue our strategy of maximizing profitability by focusing on high-margin segments with products such as the Murano and Navara Pick-up, rather than pushing for volume. Sales were particularly strong in Russia, but weak in Germany and Italy where restructurings are making good progress.

In the General Overseas Markets, including Mexico and Canada, sales were up 13% to 1,111,000 units. By country, sales in China are up 53.4% at 297,000 units. Leading the way after a successful launch was the Tiida – China’s 2006 Car of the Year – following the Teana, which was China’s 2005 Car of the Year. Strong sales in the GCC markets and in Latin America helped offset declines in Taiwan, Thailand and Australia.

FY05 financial performance
Next, I will review our consolidated financial performance in fiscal 2005.

Consolidated net revenues amounted to 9 trillion 428 billion yen, up 9.9% from last year. Movements in foreign exchange rates produced a positive impact of 301.0 billion yen. Changes in the scope of consolidation – such as the inclusion of Calsonic Kansei – had a positive impact of 117.8 billion yen on revenues.

Consolidated operating profit improved by 1.2% to a record 871.8 billion yen. As a percentage of net revenue, our operating profit margin came to 9.2%.

In analyzing the variance of operating profit between last year and this year, there are several factors to consider:

  • The effect of foreign exchange rates produced a 117.8 billion yen positive impact for the full year.
  • Change in the scope of consolidation had a positive impact of 21.0 billion yen.
  • Price, volume and mix had a combined positive impact of 20.4 billion yen.
  • Selling expenses increased by 52.9 billion yen, mainly due to higher levels of incentives, particularly in the U.S. market.
  • Purchasing continued to turn in a good performance as lower purchasing costs generated a positive contribution of 160 billion yen. However, we had to absorb 100 billion yen in additional costs coming from increases in the price of raw materials and oil.
  • Product enrichment and the cost of new regulations had a negative impact of 69.0 billion yen.
  • We spent an additional 22.6 billion yen in R&D, continuing to reinforce product and technology development.
  • Manufacturing and logistics expenses increased by 16.9 billion yen reflecting continued capacity and product-specific investments needed to support 70 production launches during the Nissan Value-Up period.
  • Warranty expenses had a negative impact of 37.0 billion yen as a result of growing sales and more proactive and swift customer service actions.
  • General, administrative and other expenses increased by 10.2 billion yen.

Regional profits were modified by a global change of inter-company payments that favors Japan, which bears most of our engineering and global development costs.

By region, operating profits in Japan amounted to 390.4 billion yen compared to 341.1 billion yen in fiscal 2004.

Profitability in the U.S. and Canada reached 345.4 billion yen compared to 379.7 billion yen last year.

In Europe, operating profit was 67.2 billion yen, up from 56.0 billion yen.

In General Overseas Markets, we achieved operating profits of 101.2 billion yen, compared to 84.8 billion yen the year before.

Finally, inter-regional eliminations resulted in a negative 32.4 billion yen, mainly due to unrealized profit on inventory.

Net non-operating expenses totaled 25.9 billion yen, up 20.4 billion from last year mainly due to foreign exchange losses.

Financial costs decreased by 5.8 billion yen to 4.6 billion yen.

As a result, ordinary profit was 845.9 billion yen, compared to 855.7 billion yen in fiscal 2004.

Net extraordinary items totaled a negative 36.9 billion yen, improving 25.5 billion yen from last year. The losses are mainly due to one-time charges on a change in Japanese accounting standards relating to the impairment of fixed assets. The sale of Nissan Diesel shares to Volvo produced a positive impact covering other extraordinary losses.

Income before taxes came to 809 billion yen. Taxes came to 254.4 billion yen, for an effective consolidated tax rate of 31.4%.

Minority interests – which are profits from fully consolidated companies that we do not own 100%, such as Calsonic Kansei, Aichi Kikai and Nissan Shatai – amounted to 36.5 billion yen.

Net income reached 518.1 billion yen, an increase of 5.8 billion yen.

We have a net cash position of 372.9 billion yen at the close of fiscal 2005, an improvement of 167.1 billion yen compared to the beginning of the fiscal year.

ROIC reached 19.4% at the end of fiscal 2005 – in line with our ROIC commitment to an average 20% over the three-year period of Nissan Value-Up.

At the annual general meeting of shareholders on June 27, as previously announced, we will propose a 15-yen-per-share year-end dividend, giving a full-year dividend of 29 yen per share for fiscal 2005 in line with our three-year commitment.

Nissan Value-Up Update
Fiscal 2006 is the second year of Nissan Value-Up, our third mid-term business plan, which is focused on "sustainable performance and profitable growth." As with our previous business plans, it incorporates three key commitments:

  1. To maintain the top level of operating profit margin among global automakers for each of the three years of the plan.
  2. To achieve global sales of 4.2 million units in fiscal 2008.
  3. 20% return on invested capital on average over the course of the plan.

Under Nissan Value-Up, we are pursuing four major breakthroughs. These new frontiers for Nissan are:

  • Building Infiniti into a globally recognized luxury brand.
  • Building a new and significant global presence in Light Commercial Vehicles.
  • Developing new supply sources in what we call "Leading Competitive Countries" for parts, machinery & equipment, vendor tooling and services.
  • Expanding our geographic presence... in markets such as China, India, Thailand, Russia, Eastern Europe, the Gulf Countries and Egypt.

Let me review the progress with you:

1. Infiniti is moving in the right direction, following a successful market entry last year in Korea. In 2005, global Infiniti sales reached 148,000 units – up from 142,000 units in 2004, thanks to the success of products like the new M and G35.

Starting with our new facilities in Korea, we are creating retail environments that express the vibrant energy of the Infiniti brand. This initiative, now being implemented around the world, will give a consistent look and feel to our showrooms, enhance the customer experience and strengthen the brand.

This year we will launch Infiniti in the Russian market... and in China during 2007. Today, we are also pleased to announce that Infiniti will be launched across Europe from 2008 through a brand-new network of dedicated dealers. Europe is the most competitive luxury market in the world, but we are confident the new generation of Infiniti products will provide a refreshing change for European buyers in the premium segment.

2. The Light Commercial Vehicle business is ahead of schedule to meet its Nissan Value-Up commitment ... and solidify its role as a pillar of our global business. The goal is to achieve 8% operating profit margin on 434,000 units sold in 2007. Compared to 2004, that represents a doubling of operating profit and a 40% rise in volume.

In fiscal 2005, we achieved 7.7% operating profit as LCV volume grew 28.2% to reach 400,000 units. Sales were notably strong in China and the General Overseas Markets.

In fiscal '06 and '07 we will launch four new LCV products. We are introducing specialized LCV dealerships – first in Japan, and later in Europe – to enhance service to our commercial customers. In North America we have also established a dedicated team to implement our strategy for this region.

3. The Leading Competitive Countries initiative – LCCs as we call them – is well under way. Purchasing and Engineering are committed to increasing global parts sourcing from LCCs, with similar efforts in progress for vendor tooling.

China and Thailand are the current focus of LCC activity. Efforts in these two countries – plus our prospects in India – will serve as a global benchmark and help us to reinforce overall cost competitiveness.

We are also pursuing opportunities to outsource and off-shore back-office functions and a variety of work in engineering-related R&D, Information Services and manufacturing. This will reduce costs and allow us to focus employee efforts on core value-added tasks. In fiscal 2005 we achieved an initial gross savings of 14 billion yen.

4. Geographic expansion is proceeding as planned. New production facilities and distribution channels are also taking shape in several countries:

  • In China, to further support our expansion and localization, we have set up a new technical center for passenger vehicles, investing a total of 4.6 billion yen. We will invest an additional 8.6 billion yen in the Huadu plant to increase capacity 80% by the end of this year to 270,000 units.
  • In Ukraine a new sales company for both Nissan and Infiniti was established last April.
  • In Egypt, production of Sunny began in December.
  • In India, we started a new subsidiary last June and we are now studying options for further expansion.
  • Russia has been a very successful market for Nissan and will play a more significant role in the future. We are announcing today the decision to go ahead with a new manufacturing plant in Russia... and that we have selected the city of St. Petersburg for our new facility. Pending final approval of a specific government agreement, production will start in 2009. The new plant, which will build a variety of vehicles, represents an investment of $200 million.

Another significant expansion is happening in R&D. As attractive and competitive products are vital to our growth through Value-Up and beyond, we are spending 90 billion yen to renovate our R&D facilities in Japan. A new engineering facility will open this month and the Design Center will be entirely renovated by this fall.

The Renault-Nissan Alliance continues to generate value for all our stakeholders. Together we now rank among the top-four global automakers – with total sales of 6.1 million units in 2005. The market capitalization of both companies has increased dramatically since the Alliance was formed. Nissan is healthy and growing; Renault is healthy and will grow faster.

We are two separate companies united for performance. We work together where there are demonstrable benefits for both sides. We share technologies, competencies, best practices and support infrastructure. And we provide benchmarks for each other with a degree of transparency others cannot match.

There is no blueprint to follow – because we are pioneering this model of industrial partnership. This is a unique and long-lasting opportunity. It requires a delicate balance and strong resolve, but I’m confident we can continue to manage it convincingly well over the long term.

FY06 outlook
Fiscal 2006 will be a year of two distinct halves.

Growth will be hard to achieve in the first half. Volumes will be down and our operating profit will be lower.

In the second half, however, volume growth will increase by more than 10% and we expect our operating profit to accelerate as we begin to launch nine all-new vehicles around the world – one in the first half and eight in the second.

The most important of these introductions will be in the U.S.... the market that continues to provide 60% of our profit. We will launch all-new versions of Altima, Sentra and the Infiniti G35 sedan, key models that will spearhead a product blitz that continues beyond Nissan Value-Up.

In Japan, we will launch three new products including a new mini vehicle and an LCV – plus in fall we will introduce an all-new Skyline. In Europe we will launch a new LCV and a new compact crossover. In the General Overseas Markets we will launch a new car dedicated for the region.

During fiscal 2006, we will have 23 regional product-launch events around the world.

Assuming global industry volume of 63.9 million units, we forecast global sales volume at 3,730,000 units, 4,5% higher than 2005. In Japan, the U.S. and Europe, we expect TIV to be flat at best. Across the General Overseas Markets we expect growth in specific key markets such as China and the Middle East.

Looking at our sales objectives by region: in Japan we forecast TIV of 5.9 million units. Our sales objective for the year is 846,000 units, flat versus last year.

In the U.S., we forecast a market of 16.9 million units. Our sales objective is 1,100,000 units, up 2.3%.
In Europe, we forecast sales of 561,000 units, up 3.7% from fiscal '05. This is based on a total industry volume assumption of 20.4 million units.

For the General Overseas Markets, including Mexico and Canada, our sales objective is 1,223,000 units, a 10.1% increase.

Throughout this fiscal year, though, we face a challenging environment to meet our Nissan Value-Up commitments. Foreign exchange rates continue to be volatile. Raw material and energy prices continue to be high. Interest rates continue to rise. And with incentives remaining at a high level, competition is relentless.

The only way to overcome all these obstacles is to deliver Nissan Value-Up effectively and completely.

In light of all these factors, we have filed the following forecast with the Tokyo Stock Exchange, using a foreign exchange rate assumption for the year of 110 yen per dollar and 135 yen per euro.

  • Net revenue is forecast at 10 trillion 75 billion yen, up 6.9%.
  • Operating profit is expected to be 880 billion yen, up 0.9% from fiscal 2005.
  • Ordinary profit is expected to reach 870 billion yen.
  • Net income is forecast at 523 billion yen.
  • Capital expenditures are expected to reach 550 billion yen – 5.5% of net sales.
  • R&D expenses are forecast to reach 490 billion yen – 4.9% of net sales.
  • ROIC is expected to be at 20%.

We are pleased to report another record year in terms of operating profit and net income after-tax. For this I would like to acknowledge the tremendous efforts of Nissan employees around the world, our dealers and our suppliers. And gratefully thank our customers and investors for their support.

It was a record year, but a tough year none-the-less. Going into the lowest phase of our product cycle, we faced headwinds in every direction. Raw material and energy prices continued to rise. Interest rates rose. We faced new additional regulatory costs. And none of these costs could be passed on through higher pricing.

In continuing to wage incentive wars, the automotive industry remains more focused on capturing volume than creating value. This race to the lowest common denominator – selling deep discounts not desirable cars – is ultimately destructive at a time when society expects innovation from our industry as never before – especially on the environmental front.

It is evidence of our fighting spirit that Nissan could achieve better results in a very challenging year. We are confident in our ability to compete, having overcome significant obstacles over the past seven years. But we know we cannot be complacent. We can take nothing for granted as we work to meet our Nissan Value-Up commitments. Once again, we will have to stretch to succeed. And that, you can be sure, we will do.

Thank you. Now I would like to take your questions.