Fiscal Year 2006 First Half Results

October 26, 2006

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



Good afternoon everyone. Thank you for joining us today.

At the beginning of this fiscal year, we said clearly what we could foresee in the immediate future: high raw material prices, high energy prices and higher interest rates.

Along with this, we predicted little or no growth in the mature markets. Combined with high levels of incentive spending, we foresaw that the auto industry would have no ability to pass on higher costs to the end consumer.

And we were completely transparent in telling you that we faced this environment at a low point in our product cycle. Of the 10 new models we will launch this fiscal year, just one – the all-new Cabstar LCV – was launched in the first half.

In this unfavorable environment, for the first half of fiscal 2006... our revenue increased by 1.0%.

Compared to the same quarters in fiscal 2005... our consolidated operating profit dropped by 25.7% in the first quarter... and by 4.9% in the second quarter. This resulted in a 15.3% decrease over the first half of fiscal 2006.

These results are in line with our forecasts for operating profits.

Despite this drop in consolidated operating profits, net income in the first half rose by 18.8% to 274.2 billion yen... mainly on favorable exceptional items.

I will start with a review of our global sales performance and then provide an analysis of our financial results. Before concluding I will share our outlook for the full fiscal year. And then I look forward to taking your questions.

First-half global sales performance

First, an update on our sales: For the first six months of fiscal 2006, Nissan’s sales – across all regions – totaled 1,709,000 units, down 6.9% from 2005.

In terms of sales performance by region...

In Japan, total industry volume dropped by 3.4% – with minicars up 4.9% and registered vehicles down by 7.5%. As we have no elasticity in the minicar segment, this industry evolution did not favor Nissan – especially in a market where the main actors remained focused on higher incentives and volume rather than profitability.

In this half-year... we must also take into consideration that we are comparing results reached at a low point in our product cycle... to the period of the final sprint of Nissan 180.

In Japan, we sold 350,000 units in the first half, down 16.9% from last year – with minicars up 1.9% and registered vehicles down 19.9%. Our market share stands at 12.9%, 2.1 percentage points lower than last year.

We are implementing specific actions to improve effectiveness, particularly in sales, marketing and distribution. For example, we have taken measures to enhance our network of dealer subsidiaries by consolidating unprofitable outlets, streamlining back-office operations and integrating subsidiary dealers. We are also revising the way we compensate our dealer management. Even though the external environment is challenging, there are solutions... and it is our responsibility to implement them and deliver better results.

In the United States, prior to the launch of the Versa Hatchback in July, we had not launched an all-new model in 16 months.

As a consequence, we anticipated a decline in sales. At 513,000 units, our first-half U.S. sales were down 10.2% – in the context of total industry volume that declined by 5.6%. Our U.S. market share for the first half was 5.8%, down three-tenths of a percentage point.

In the Nissan Division, U.S. sales were down 9.8% in the first half. But our one significant product action in this period – the launch of our Versa hatchback – was well-matched to market trends and overall very successful.

Infiniti sales in the U.S. – unsupported by new products for 19 months – declined 17.5% from fiscal 2005.

In Europe, where results are compiled on a calendar-year basis, the story was similar: Nissan sold 275,000 units from January to June, down 4.4% from a year earlier.

During this period we were running out Primera, Almera and Tino in most markets, with only one new model launch: the Note, in March.

On the other hand, in the General Overseas Markets, including Mexico and Canada, our performance has been encouraging. In the first half, sales were up 2.9%, to 571,000 units. Let me highlight a few significant developments...

  • In China, with Tiida leading the way... we sold 180,000 units, up by 28% over 2005. As we do not expect to sustain this rapid growth over the whole year... we anticipate growth for the full year at 15%.
  • In the Middle East, sales reached 73,000 units, up 18% over 2005, driven by sales of Tiida and pickup trucks. This momentum is expected to continue throughout the year.
  • In Taiwan, we sold 23,000 units, down by 39% in an overall market that declined by 26%.
  • In Thailand, our sales fell 24% to 17,000 units... in a market that fell 3%. Our product range, particularly in the key pickup-truck segment, is near the end of its lifecycle. We also face operational issues in Thailand that are being addressed through changes in management and organizational restructuring.


First-half 2006 financial results

Let me now turn to our first-half financial results.

Revenues reached 4.534 trillion yen in the first half, up 1.0% from the same period in fiscal ’05. This was primarily due to favorable exchange rates, with a positive impact of 201.2 billion yen.

Operating profits, at 348.6 billion yen, were down 15.3% compared to the first half of fiscal 2005.

Our operating margin was 7.7%, which is in line with our forecasts.

What factors were behind this result?

1) Favorable foreign exchange rates contributed 54.8 billion yen to first-half operating profits, mainly due to the U.S. dollar and Euro.
2) Changes in the scope of consolidation, contributed an additional 4.6 billion yen to first-half operating profits.
3) Raw material costs increased to 65.8 billion yen. In an industry that has no pricing power, you cannot pass additional costs on to consumers. So we had to absorb most of these costs.
4) Price, volume and mix had a negative impact of 104.3 billion yen. This was due to lower volumes at the end of product cycles and shifts in mix... to smaller cars in the U.S. and to minicars in Japan.
5) Selling expenses had a positive impact of 3.8 billion yen. This is not particularly good news considering that sales volume decreased. Expenses should have been lower... but per car sold... incentives and other marketing costs have been higher.
6) Purchasing continued to turn in a good performance as lower purchasing costs generated a positive contribution of 75.5 billion yen. However, this was offset by having to absorb additional costs related to increased prices for raw materials and energy.
7) Product enrichment and regulatory costs had a negative impact of 19.1 billion yen.
8) Higher R&D expenses generated a negative impact of 7.0 billion yen as we continue to boost investment in technology and product development.
9) Manufacturing and logistics expenses decreased by 4.3 billion yen.
10) Warranty expenses increased by 3.9 billion yen. This relates to charges taken in the first quarter on the QR engine. This amount was little changed from the one-time warranty charge we took in the second quarter of 2005.
11) General, administrative and other expenses produced a negative impact of 5.8 billion yen.

By region, operating profits in Japan amounted to 133.7 billion yen, compared to last year's 199.4 billion yen.

Operating profit in the U.S. and Canada was 121.1 billion yen, versus 152.1 billion yen last year.

Europe’s operating profit was 26.8 billion yen compared to 18.2 billion yen in 2005.

Finally, the General Overseas Markets, including Mexico, contributed to 58.8 billion yen to our operating profit, up from 46.2 billion yen in 2005.

Despite the first-half drop in operating profits, net income rose 18.8% to 274.2 billion yen. The main drivers of this improvement were the sale of Nissan Diesel shares in September, favorable changes in the pension scheme of our Chinese operations... and tax benefits resulting from losses incurred through our domestic dealer restructuring.

Exceptional charges were taken in the same period of 2005 relating to impairment losses on fixed assets... and to the introduction of Nissan’s defined-contribution pension plan.

Turning to our balance sheet, at the end of September 2006, our net cash position stood at 94.9 billion yen. Our position improved significantly by 221.2 billion yen from September 2005 when our net automotive debt stood at 126.3 billion yen. However, this is down from our net cash position of 372.9 billion yen in March 2006... as a result of normal seasonality.

Outlook for fiscal 2006

Having reviewed the results, let me move on to the full-year outlook.

As we consider the risks and opportunities to the forecast, the most significant risks continue to be, first and foremost, related to continued high incentive levels worldwide... mix and grade deterioration and, finally, high commodity prices, high energy prices and higher interest rates.

Major opportunities come from the flawless implementation of the Nissan Value-Up plan and more-favorable-than-foreseen foreign exchange rates, especially the yen-dollar relationship. Taking into account these risks and opportunities, we continue to believe favorable foreign exchange rates will offset the identified risks, and we do not see any compelling reason to change our initial forecasts for the full fiscal year.

What will be different in the second half?

Above all, this industry is about product: fresh product; attractive product; product closely attuned to market trends.

In the second half, and into the next fiscal year, you are going to see a return to the intense product launch activity that fuelled the Nissan turnaround. Not only are we replacing several core models in our line-up... we are continuing to enter new segments.

Right now, three all-new products are rolling off the production lines. And they are critical to our business in the U.S.

The all-new Sentra, launched this month, comes to market as consumers are taking a fresh look at more-compact, fuel-efficient cars. Alongside Versa, launched in July, Sentra will compete in the fast growing sub-compact segment.

Next month, the all-new Altima will appear in showrooms across the US. The current version has been our consistent volume and profit leader. The new generation represents a significant evolution... building on the Altima’s strengths.

At Infiniti, a similar story: the all-new version of G35 – Infiniti’s volume and profit leader – appears in showrooms across the U.S. next month. With the global expansion of Infiniti, the new G35 now plays an even more significant role in the success of the Infiniti brand.

In Japan, in the second half we will launch four all-new models. The all-new Otti and another new minicar will extend our lineup in this growing segment. The successor to AD-van and another LCV will contribute to the growing light commercial vehicle business.

Next month, we will launch the all-new Skyline sedan. Celebrating the 50th anniversary of the legendary Skyline, we plan a series of events over the next year aimed at strengthening the Nissan brand.

In our General Overseas Markets, the first of an all-new family of global cars – the Livina Geniss – will be launched in China.

In Europe, we will begin selling Qashqai, the innovative compact crossover we introduced last month at the Paris Motor Show. Qashqai represents a shift in our approach to the traditional c-segment in Europe and positions Nissan as an early entrant in a booming market segment.

Looking further ahead, fiscal 2007 will bring even more new products – 11 to be exact. For example, in the U.S., we will launch a brand-new compact crossover called Rogue, delivering on our commitment to compete in all major segments of the U.S. market.

At the high-performance end of the scale, we will launch the long-awaited GT-R – an icon of the Nissan brand. In the past, it was sold mainly in Japan... but this time GT-R will be sold globally. In fact, this month we started testing the first pre-production prototypes at Germany’s famous Nürburgring track... which has become part of the GT-R legend.

Post-Value-Up we will launch more than 30 products – at least 15 of them in the U.S. Nowhere in the foreseeable future will we have another low point in our product cycle such as we have experienced over the past 12 months.

But the story for Nissan goes beyond refreshing and extending our product line. We are resolutely expanding our geographic presence in rapidly growing markets such as Russia, Egypt, India and Indonesia. This will make a significant contribution to our future growth.


Transparency is fundamental to our Nissan culture – and it is important to understand why.

We believe that transparency is inherently “good” for business. Transparency in good times and particularly in bad times builds higher trust and confidence among all our stakeholders.

But transparency is as important internally as externally. By publicly setting ambitious long-term commitments, we focus everyone in and around the company on the goal. We convince ourselves to stretch in pursuit of the goal. And by maintaining transparency at every step we ensure we will never lose our way.

That is why, together with Renault, we remain the only automakers that make public commitments up to four years in advance.

This is one of many strengths that Nissan draws from its unique alliance with Renault. The mechanics of this alliance are still not widely understood – but its effectiveness is clear.

This is evident in the evolution of our market capitalization. Between 1999 and today, the total market capitalization of the major global automakers increased by 27.1%.

That number includes a doubling in the market value of Japanese automakers... a flat performance among European automakers... and among U.S. automakers... a decline by more than half.

During the same period, Nissan’s market value grew five-fold and Renault tripled.

Collectively, the market capitalization of our Alliance quadrupled... which gives us the second-highest market capitalization in the global auto industry. And we are likewise #2 in profitability. 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.

And yet... we remain two separate companies; two distinct brands; two very different corporate cultures. That we maintain these differences is not something incidental.

Our respect for diverse identities is a fundamental difference from the M&A paradigm. It is the reason for the success of the alliance... and it is why we are confident that the alliance model can be extended to include another partner with a very different culture.

Some observers have looked at our current short-term results and taken our recent discussions with General Motors as a sign that we lack confidence in our ability to compete without a third partner.

Let me be clear. We are in no hurry. We have no need to find more partners. And we are not taking any initiative. But knowing how much value an alliance can create, we do feel a responsibility to our stakeholders... to stretch in pursuit of opportunities – particularly if they arise at a convenient time.

Right now, halfway through Nissan Value-Up, we are at a turning point: over the next 18 months you will see Nissan on the product offensive as never before. We expect to deliver our business plan commitments in full. We remain on course towards sustainable long-term growth. The fundamentals of our business remain strong.

You can continue to expect the best from Nissan.