Fiscal Year 2006 Results and Nissan Value-Up

April 26, 2007

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

Good afternoon everyone. Thank you for joining us today.

At the start of fiscal 2006 we told you it would be a challenging year for Nissan. Unfortunately, that prediction proved accurate.

All the anticipated headwinds materialized... and they were severe. There was almost no growth in mature markets. And with high levels of incentive spending, the industry had no ability to pass on higher raw-material costs to the consumer.

The result was a tough business climate for the auto industry at the lowest point in Nissan's product cycle... and at a time when Nissan is investing heavily for its future.

We knew the first half would be rough. As our product offensive began in the second half, we forecast a recovery in both sales and profit.

However, the full-year results were below our expectations and our actions did not match the challenge. So, for the first time in eight years we have missed the performance objectives we had set for ourselves.

In fiscal '06 we delivered:

  • consolidated net revenues of 10 trillion 468.6 billion yen
  • operating profits of 776.9 billion yen
  • an operating-profit margin of 7.4%
  • and net income of 460.8 billion yen

I will start my remarks with a review of our global sales performance then provide an analysis of the financial results and update you on the progress of Nissan Value-Up. Before concluding I will share our outlook for fiscal 2007 and the longer-term prospects for the company. Then I look forward to taking your questions.

FY 2006 sales performance
Our fiscal 2006 global sales came to 3,483,000 units, 2.4% below the previous year. Around the world, we introduced 10 all-new models - all but one in the second half - including several important pillars of our line-up:

  • an all-new version of Altima, our volume leader in the U.S.
  • the new generation of Infiniti's volume leader, the G35; and...
  • Livina Geniss, the first model in a new family of global cars launched first in China.

However, as these successful launches came late in the fiscal year they did not lead to overall annual volume growth.

In Japan, total industry volume dropped by 4.1% - with mini-cars up 4.2 % and registered vehicles down 8.3%. At 740,000 units, our domestic sales were down 12.1%... and our market share dropped 1.2 points to 13.2%.

In the U.S., as total industry volume fell by 3.4%... overall Nissan sales decreased 4.0% to 1,035,000 units. And U.S. market share for the full year was practically flat at 6.3%.

In Europe, where total industry volume was flat, on a calendar-year basis, Nissan sales were also flat at 540,000 units.

In the General Overseas Markets, including Mexico and Canada, sales were up 5.1% to 1,168,000 units. China led the way with sales up 22.2% to 363,000 units.

Fiscal 2006 financial performance
Let me now review our consolidated financial performance in fiscal 2006.

First, an important note on a change in consolidation methods which is in line with auto industry standards: As previously announced, in order to increase transparency and consistency, we are harmonizing calendar-year results for overseas subsidiaries such as Europe and Mexico with fiscal-year results for Nissan Motor Co., Ltd.

In an ongoing process, we have harmonized results for all overseas subsidiaries except China and Taiwan, where this is precluded by regulations. So this year we will align calendar with fiscal by including five quarters of results for subsidiaries previously consolidated on a calendar-year basis. This will have a 21.4 billion yen one-time positive impact on our operating profit.

As a result, we will officially report consolidated net revenues at 10 trillion 468.6 billion yen, with the inclusion of 767.6 billion yen of fifth-quarter results from calendar-year subsidiaries.

  • Operating profit was 776.9 billion yen (including 5th-quarter) compared to 871.8 billion yen in fiscal 2005. The major drivers were lower price, lower volume, and lower mix on the revenue side... and on the cost side, higher raw-material costs.
  • Our operating-profit margin was 7.4%.
  • Ordinary profit was 761.1 billion yen, compared to 845.9 billion yen in fiscal '05.
  • Net income reached 460.8 billion yen, versus 518.1 billion in fiscal '05.
  • We had a net cash position of 254.7 billion yen at the close of fiscal 2006.

At our annual shareholders meeting we will propose a 17-yen-per-share year-end dividend, giving a full-year dividend of 34 yen per share for fiscal '06.

And we will maintain 40 yen for fiscal '07, in line with our commitment to shareholders.

Nissan Value-Up Update
Next, I will update you on the progress of our midterm business plan.

Fiscal 2006 did not boost our results towards achieving the objectives of Nissan Value-Up. But we believe the commitments are still within the potential of the company and we remain focused on delivering them completely.

Accordingly, we will extend the delivery period for all Nissan Value-Up commitments by one year.

At the same time, we continue to prepare our next business plan, and we will announce it one year from now.

Nevertheless, during 2006 we made tangible progress towards the four key breakthroughs that are central to Nissan Value-Up.

Our first breakthrough aims to establish Infiniti as a globally recognized luxury brand.

In fiscal '05, Infiniti was introduced in Korea. And in fiscal '06, the brand was successfully launched in the rapidly growing Russian market.

In 2007, geographic expansion will accelerate as Infiniti enters the Chinese and Ukrainian markets... and during 2008 extends across Western Europe.

To serve these new markets, new products are coming. The G35 sedan will be followed this year by the G37 coupe and the EX compact luxury crossover.

Infiniti is poised for rapid global growth.

The second breakthrough aims to build a global presence in Light Commercial Vehicles - or "LCVs."

Global sales have grown 57% since the start of Nissan Value-Up to 490,000 units in fiscal '06. More importantly, the LCV business unit over-achieved its 8% operating-margin milestone. With LCVs now firmly established as a pillar of our global business we are building on this momentum.

The third breakthrough involves developing new sources for parts, machinery & equipment, vendor tooling and services in what we call "Leading Competitive Countries."

Sourcing bases are now established in China and ASEAN for Japan; in Mexico for North America; and in Eastern Europe for Europe. To accelerate progress, the next step will be to develop a new sourcing base in India.

In fiscal '06, for Japan, North America and Europe, 15% of our purchasing, by value, was sourced from LCCs, versus 12% the previous year.

In 2007, we will accelerate this trend to source 24% of our purchasing from LCCs.

To reduce costs and focus employees on core tasks, we are outsourcing back-office functions and a variety of work in engineering, information services and manufacturing. In fiscal 2006, this effort yielded gross savings of 43 billion yen in costs reduced or avoided.

The fourth breakthrough expands our geographic presence in emerging markets - the so-called BRICs... and beyond.

In Brazil, we're investing $150m in our operations to reach sales of 40,000 units by 2009.

In Russia, we are investing $200m in a plant in St. Petersburg that will have a capacity of 50,000 units when it opens in 2009.

In India, we are joining Renault in a partnership with Mahindra. Together, we're building a plant in Chennai that will open in 2009... with a planned capacity of 400,000 units.

In China, since 2003, we have invested $1.6 billion in our partnership with Dongfeng - with recent investments including a new engine plant and a new R&D center.

FY'07 outlook
2007 will be a better year for Nissan. Last February, we acknowledged our performance was not satisfactory, and we pledged to take immediate action.

We have a new leadership team, with an Executive Committee expanded from seven to nine members to better cover our business priorities.

We have taken a number of business initiatives to improve profitability:

  • In Japan, we are restructuring our dealer network - to focus more and better-trained resources directly on the customer
  • In the first quarter, our Oppama and Tochigi plants will go down to single-shift operations in line with actual demand in Japan
  • Nissan Shatai will close its #1 plant and shift production to the #2 plant, and to the Kyushu plant, which is being expanded
  • We have initiated voluntary-retirement programs across all operations in Japan
  • In the U.S., we have implemented voluntary-transition programs.
  • In Europe, we're transforming national sales companies into leaner regional business units.
  • In South Africa, we have announced headcount reductions to boost productivity and competitiveness.

These are some of the measures already being implemented.

Today, we are fine-tuning our operations in order to boost our performance. As we address short-term issues we remain focused on our long-term goals, keeping a close eye on the motivation and engagement of our people.

For fiscal 2007, our forecasts are as follows:

  • Global sales at 3.7 million units, a 6.2% increase.
  • We are cautious in Japan, forecasting 700,000 units in expectation of further decline in total industry volume and a very competitive market.
  • U.S. sales at 1.1 million units.
  • And European sales at 600,000 units.
  • For General Overseas Markets, including Mexico and Canada, we forecast 1.3m units.

Throughout fiscal '07, we will again face a challenging environment: rising raw-material costs, rising energy prices, rising interest rates, volatile foreign-exchange rates, high incentive levels and a growing number of distressed suppliers and competitors.

The only way to overcome all these obstacles is to remain focused on delivering Nissan Value-Up effectively and completely.

Taking all of the above into account, we filed the following forecast with the Tokyo Stock Exchange, using a foreign-exchange-rate assumption for the year of 117 yen per dollar and 148 yen per euro - which were the average rates during fiscal '06:

  • Net revenue is forecast at 10 trillion 300 billion yen
  • Operating profit at 800 billion yen
  • Ordinary profit is expected to reach 773 billion yen.
  • Net income is forecast at 480 billion yen.
  • Capital expenditures are expected to reach 515 billion yen.

Above all, this year Nissan will get back on track in terms of profitable growth.

The Future
Having told you about last year and the year ahead... now I want to give you a look over the horizon. Because even as we work intensively on near-term issues this year, we remain very much focused on the long term.

Today, we are investing massively in the future - especially in R&D.

In the 1990s, Nissan's finances were so fragile the company could not afford to maintain its reputation for technological innovation - the traditional core of its brand identity.

Since 1999, annual R&D expenditures have doubled to nearly 500 billion yen in fiscal 2007. But bigger budgets are only one measure of the change. Our research and advanced technology functions are now more than five times more efficient than in 1999.

Instead of unfocused and sporadic technical achievements, we now have a culture of consistent cross-functional innovation. And through the alliance we have significant collaboration with Renault's R&D. Together we are advancing on all fronts.

Following the world's first 4-wheel active steering system introduced recently in the new Skyline, in fiscal '07 eight new original technologies will be featured in our products. More "world-firsts," including safety features such as the Distance-Control Assist System, Lane Departure Prevention and Around View Monitor are also coming. And starting in 2009, we will deploy more than 15 new technologies in our products each year.

Our most urgent R&D challenge today is to meet society's environmental expectations. That's why 40% of our budget for advanced engineering is devoted to Nissan Green Program 2010, our five-year environmental blueprint.

For our industry, environmental sustainability represents the biggest engineering challenge. And no matter what you may hear, there is no silver bullet, no quick fix. In this race, the finish line is still nowhere in sight.

So along with Renault we will pursue every possible avenue of environmental progress - from hybrids to fuel-cells to electric cars and clean diesels.

Last week, I announced Nissan will be the first Japanese automaker to introduce a confirmed clean-diesel passenger car for all 50 states in the U.S. in 2010. We will launch a Nissan Maxima powered by a clean-diesel engine co-developed by Nissan and Renault.

Focused technology will once again be a pillar of Nissan's competitive strength... and the core of our brand identity.

Building our brands
Brand identity is, in fact, the other great challenge in our industry. Anyone who continues to sell cars as a discount commodity will not last long. In the future, it is brand power that will distinguish the winners - and the survivors.

Today, as the weakest automotive brands struggle to escape negative perceptions, prestige earns significant premiums for the strongest. At this point, although Nissan and Infiniti have made substantial progress, both brands are somewhere in the middle. Our successes still come much more from the strengths of individual models than overall brand appeal.

So building our brand power is critically important. Patiently and consistently, we are focusing on every facet of our relationship with the customer. In parallel, we are working on two fronts:

Attractiveness - which is the emotional side of our relationship... internal and external design, driving pleasure, customer service and brand image; and on the other hand...

Competitiveness - which is the rational side... quality, reliability, price and availability.

So far, compared to our benchmarks, we're doing better on attractiveness than competitiveness. We have work yet to do, but already we are recognized for the attractiveness of our designs and for driving pleasure. We will do even better as we regain our reputation for innovative technology.

Where we have to work much harder is on the side of competitiveness. And the key is quality and reliability - the foundation of our long-term relationship with customers.

In the U.S., many new-car buyers consult the influential Consumer Reports magazine before deciding what to buy.

So it is significant that a recent test by Consumer Reports showed our new Altima tied in the number-one ranking.

And in Consumer Reports' "Ten best cars in America," Infiniti's G35 and M were both recognized as the top picks for safety and reliability in their respective categories.

It will take time, but these are the kinds of achievements we need in order to build more brand power.

Investing in people
Brand is undoubtedly critical... but the true power behind any company is the talent and motivation of its people.

At Nissan, we know the future depends on the motivation of our people. And since our future is global - much more global than before - we need human-resource strength all over the world.

That is why we are dedicated to creating a corporate culture that embraces diversity. We want the most talented and motivated people in every country to recognize Nissan as an employer where merit - and merit alone - opens every door.

We are investing in people, and investing in working conditions that enable our people to work more efficiently and cross-functionally. For example:

  • In November 2006 we opened our new design center in Atsugi.
  • Next month we will open the new Nissan Advanced Technology Center, also in Atsugi.
  • In mid-2008 our new headquarters for the Americas will open in Nashville.
  • In October 2009 our new global headquarters in Yokohama will be ready.
  • And in our plants worldwide we are steadily improving working conditions.

Product offensive
Technology, brand power, people power - all of these will be long-term Nissan strengths.

But the ultimate test of any automaker is, of course, consistently delivering attractive and competitive products. And we are ready to meet the critical test over the long term.

In 2007, we will launch 11 all-new products globally.

1. In the General Overseas Markets, starting with China, we will introduce the Livina two-row minivan.

2. The all-new X-trail will launch this summer, first in Europe, then in Japan and around the world.

3. In the U.S. you will see an all-new version of Altima - a coupe.

4. To strengthen our domestic LCV business, new Single- and Double-Cab versions of our Atlas truck will be launched.

5. And in Mexico a new entry-level sedan derived from Renault's successful Logan.

6. For Infiniti in the U.S., our all-new G37 coupe - enhanced from its first generation - will be powered by a new 3.7-liter VQ VVEL (Variable Valve Event & Lift ) engine

7. That will be followed by an all-new compact crossover in the U.S. - the Rogue

8. The headline event in the second half will be the Tokyo Motor Show global premiere of the GT-R - the ultimate symbol of Nissan's automotive passion.

9. And not long after, the Infiniti EX, a compact luxury crossover.

10. Then we will introduce an all-new version of our very popular Murano

11. Finally, the new Frontier-Navara single-cab pickup truck, starting with Thailand.

Once we complete the 28 launches of Nissan Value-Up this year, we will begin to introduce more than 33 new products during the following three years - an average of nearly one new product each month.

At Nissan, we have clear vision and strategies for the future. We have been focused on doing the right things... and we will put more emphasis on doing them the right way.

We know where we're going. We know how we're going to get there. And we've got enough fuel to go the distance - the resources we need to fund our future:

  • Our balance sheet is clean, our cash flow from operations is strong at more than 1 trillion yen, and our operating-profit margin is at 7.4%.
  • We have established a strong technology and product pipeline.
  • We have significantly modernized our infrastructure.
  • And our future is bolstered by the Nissan-Renault Alliance, which ranks fourth in the global industry in terms of sales volume and second in terms of total profitability.

Our alliance model is unique and still not widely understood, but its effectiveness is clear.

We share platforms, technologies and best practices. We achieve ever-greater purchasing synergies each year. And there is much scope for cooperation yet to be realized, as evidenced by the latest diesel announcement.

This past year, though, we hit a bump in the road. It's not a near-death experience like 1999. We haven't gone in the ditch.

But we've had an early wake-up call. And it is not in our nature to hit the snooze button on the alarm and go back to sleep. So we respond with all the lucidity, the vigilance and the sense of urgency that drove our revival.

We will get past this bump, with its lessons fully learned and with a sharper competitive edge. You can continue to expect the best from Nissan.

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