May 14, 2019

Fiscal year 2018 full-year financial results Ė remarks from CEO
Hiroto Saikawa

Thank you for joining us for the announcement of the Nissanís fiscal year 2018 financial results. Today, I will outline our global sales performance, the full-year financial results, and the fiscal year 2019 outlook. I will then give an overview of the New Nissan Transformation, a program we have started to reform the operational structure of the company.

Iíll start with the financial results for the fiscal year 2018. Consolidated revenue was 11.57 trillion yen, operating profit totaled 318.2 billion yen, and net income was 319.1 billion yen. Free cash flow for the automotive business was a positive 191.1 billion yen. We ended the period with an automotive net cash position of 1.6 trillion yen. As our CFO Mr. Karube reported last time, the figures remain unchanged.

Now Iíll move on to sales performance. In fiscal year 2018, total global industry volume dropped, while our global retail volume slightly decreased by 4.4%, reaching 5.516 million units. In China, Japan, Latin America, Thailand and Philippines, our sales increased, while they decreased in the U.S. and Europe. Our global market share was 6%.

Moving onto the key markets, in Japan and China, our sales grew steadily. As you may know, in Japan, e-POWER has been well received on the Nissan Note, and in fiscal year 2018, the Note reached the top-selling position among registered cars and the Serena became the best-selling minivan. In China, despite a difficult market that declined, Nissanís sales increased by 2.9%, resulting in our market share increasing by 0.3 percentage points to 5.9%. In contrast, in North America and Europe, things remained difficult. Sales declined in North America as we worked to normalize sales. In Europe, as we described last time, due to efforts around environmental regulations and some supply issues, 2018 and 2019 will remain difficult in Europe.

For fiscal year 2018, our operating margin was 2.7% and net income was 319.1 billion yen.

Next, we move on to the operating profit variance analysis. There was the negative impact from foreign exchange fluctuations, costs related to regulatory compliance mainly in Europe, and commodity prices and tariffs. The climate surrounding the auto industry was tough, and we faced over 210 billion yen of headwinds. In pure performance of the company, the negative impact from the decline in sales exceeded the positive contribution of our monozukuri activities.

In the U.S., we extended the CVT warranty campaign, which impacted earnings. On a management pro forma basis, which includes the proportionate consolidation of our Chinese joint venture, net revenue was 12.97 trillion yen. Operating profit was 493.2 billion yen, which equates to an operating margin of 3.8%. Automotive free cash flow was 281.9 billion yen and we ended the period with an automotive net cash of 1.92 trillion yen.

Now, Iíll move onto the outlook for fiscal year 2019. Sales volumes are planned to go to 5.54 million units from 5.516 units, which is in line with the TIV trend. While in Japan and China we expect sales to grow, in North America, the US, and Europe, we continue to see a sales decline. We expect to reach the bottom in 2018 and 2019 and reverse the trend in the following years. For our financial forecast, net revenue is expected to decrease by 2.4% to 11.3 trillion yen. Operating profit is expected to reach 230 billion yen, down 27.7%, and net income is expected to reach 170 billion yen. The decrease in net income is largely due to costs associated to the structural reform of the business. Despite the challenging environment, we will keep on investing to recover our competitiveness, increasing spending for new product launches and investment in advanced technologies, such as CASE, and other spending.

Looking at the operating profit variance analysis, as we saw in fiscal year 2018, we expect significant impact from foreign exchange and product enrichment costs, including regulatory compliance and rising commodity prices, as well as tariffs. These items will have a negative impact of 200 billion yen. However, we are counting on the companyís performance to produce a positive impact of 112 billion yen. Volume and mix and manufacturing costs to prepare for new vehicles will have a negative impact, but this will be offset by such efforts as reducing purchasing costs and incentives. We expect these to efforts to produce a positive impact of 112 billion yen. Operating margin, excluding our joint venture in China, will be 2%, with an operating profit of 230 billion yen.

The board is proposing a year-end dividend of 28.5 yen per share. Together with the interim dividend of 28.5 yen per share that was paid last November, we are maintaining a full-year dividend of 57 yen per share, as we previously stated. For fiscal year 2019, considering the unfavorable external environment, the latest business status, investments required to recover competitiveness, and cash on hand, we would like to adjust the dividend to 40 yen per share. In order to restore our business as soon as possible, and deliver appropriate and attractive shareholder returns as we recover our performance, we intend to continue making efforts and carry out the New Nissan Transformation program, which I would like to present now.

Today, we are working on the New Nissan Transformation. I would like to talk about three subjects. The first is governance transformation, the second is organizational transformation, and the third is what I described earlier regarding recovery from where we are today.

As you may be aware, last December, we established the Special Committee for Improving Governance, consisting mainly of independent experts. Based on recommendations from the committee, we are taking action. Nissanís board decided the following. After June, we are intending to transition to a three statutory committee structure, and the chair of the board shall be an independent outside director. Based on the recommendations from the committee, there are 38 in total, and there are 32 relating to board meetings. So, we aim to establish corporate governance guidelines, and incorporate these recommendations from the committee. Part of this will be reflected in the board regulations, committee regulations and articles of incorporation.

We also dissolved the CEO reserve and the Office of the CEO. The Provisional Nomination and Compensation Advisory Council is going to recommend a list of director candidates. Nissanís board will deliberate on the recommendation, and on the approval of shareholders at the annual general meeting of shareholdersí scheduled for June, Nissan will begin operating under the new governance structure.

We are working to an extremely tight schedule. Usually, in other companies, they spend about one year to transition to a committee system, but in Nissanís case, after we received the recommendations from the committee, in a little more than three months we are working to transition to the new system. This is the first year of the new governance structure for Nissan, so that is why we are working to make it happen. As of May 16, the following changes will take place. A new Chief Operating Office and Vice COO will be appointed to ensure operations are more effective. Moreover, the corporate officers who are leading the major regions in the global operations, Japan, North America and China, are joining the highest decision-making body of Nissan, the Executive Committee.

The auto industry is facing significant changes. In order to expedite our business transformation, which is one of our top priorities, a dedicated corporate officer, Mr. Seki, has been appointed to oversee this. Also, Mr. Kawaguchi will be in charge of governance. Under this new leadership, one Nissan team will execute operations.

Before talking about the next steps, let me describe what we are facing. As I described earlier, the company faces poor results. The portfolio of the midterm plan is as follows. The major markets are the US, Japan and China. In these key regions, we were intending to maintain a 10% operating margin in the midterm plan. In the Europe, we were trying to shoot for 5% profitability. By doing so, we were trying to maintain 8% global operating profit margin.

Starting from fiscal year 2016 results, if we had gradually improved profitability in North America, we would have been close to the goal that I described earlier. In fiscal year 2018, our global operating margin stood at 3.8% compared to 6.9% in fiscal year 2016. This is on a pro forma basis. In the U.S., we saw a big deterioration in profitability.

In Japan and China, we continue to maintain a healthy profitability. In the US, in the latter half of the previous midterm plan, we tried to expand the business and relied on incentives to push sales. After the TIV peaked out and as other carmakers increased incentive spending, the competitiveness intensified. So, even if we spent a lot on incentives, we were struggling to boost volume. In order to compensate for this, we increased the ratio of fleet sales. We were in this cycle and damaged the brand and product competitiveness, and this affected the dealers as well.

It will take time to restore and recuperate, and we are ready to take that time. We said that we would do it in 2017 and 2018, and we would like to spend enough time to restore our situation. Also, European profitability is declining. In the expansion strategy of Nissan Power 88, we made a tremendous amount of investment, especially in compact cars. We made a lot of investment in emerging countries. We have been unable to get the return that we expected, and this is becoming a big burden. We have excess capacity and unprofitable operations. These two issues are what we need to address.

For the second half of the current midterm plan, we need to look at what is beyond 2022. We face imminent challenges from technological innovation, such as CASE. We need to assume leadership and be ready for the business evolution that is beyond 2022. This is a must-have strategy, and we have to do it in advance. We should not slowdown in this area. However, we have the burden of investments made in the past. Therefore, we aim to put more focus or concentrate on business evolution. As for the burden, while improving profitability, we aim to pick what is promising and what is not. We will carry this out by selection and concentration, and make drastic reforms. That is the direction that we pursuing, up to fiscal year 2022 in particular. That is the companyís decision and we are already working on it.

Largely, the challenges we face are as follows. Firstly, we need to strengthen our U.S. operations, which used to be a big source of profit. The second is the enhancement of operational investment efficiency. We need to clean up what we have done in the past, optimize it, and narrow down what we need to invest for the future. Based on this policy, in the past we overstretched ourselves to grow our business, so going forward, we need to ensure steady growth through new products, new technologies, and Nissan Intelligent Mobility. Concisely, our core structure and unprofitable operations need to be cleaned up, including production capacity. This needs to be done quickly, while sales expansion, particularly the recovery in the U.S. operations, should not be done in haste. Based on our Nissan Intelligent Mobility strategy, we will enhance brand attractiveness to ensure steady growth.

People tend to compare Nissan today with Nissan of the 90s, before the Nissan Revival Plan. But, what are the differences between the Nissan Revival Plan and today? Today we have solid business pillars such as China and Japan. We use China and Japan as a benchmark to make improvements in the rest of the regions. Our financial strength is also healthy. Therefore, now is the time to take bold action and be ready for the future.

The next subject is the U.S. business recovery. What happened in the past is that the products in our portfolio were getting older, from 3 years to 5 years on average, while our market share was much higher. Basically, it seems our customers bought our products for discounts, rather than for competitiveness or brand value. We were buying market share. The average age of our portfolio was growing, because globally, we saw similar tendencies. As I said, Nissan made tremendous amounts of investments in emerging countries, to increase scale. Around 2013 and 2014, we focused our investments in emerging markets while reducing investment in new cars. As a result, we postponed product launch timings, and we are suffering from the repercussions.

From fiscal year 2019 and onwards, as you can see in the graph, new products in the pipeline will arrive in the markets. Not only the products but also the overall portfolio will be rejuvenated. Also, the lineup under Nissan Intelligent Mobility strategy, ProPILOT Assist, safety shield, connectivity-equipped vehicles will be arriving in the market. At the same time, we will communicate advanced technologies in an effective manner, to gain the appreciation of customers and increase retail volume as a consequence. Steady is the overall growth tempo we are pursuing.

Nissan will not overstretch ourselves to increase our sales share. Steadily, we will recover sales, and 1.4 million units is the level we would like to return our sales volume to, as a first milestone. The fleet sales ratio will be largely reduced, so the majority of the sales recovery will be done as we reduce the fleet sales ratio. So, the pure retail volume will largely grow. The fleet ratio should be around 15%, but today we are planning to reach between 15% and 17%. Thanks to new products and new technologies, we will increase the attractiveness of products and increase revenue per unit and sales. Revenue is to be increased, and we aim to return to the level of revenue that we enjoyed in fiscal year 2016, or even slightly exceed this level.

Today, our profit margin is poor. It is around 1% or 2%. In fiscal years 2018 and 2019, we expect to reach the bottom, and then recover. There are two key factors: reducing fleet sales ratio and discounts and incentives, which should be largely reduced. We are aiming for 5 percentage points improvement. We will not go back to the level that we were stretching for in 2016, but I think this is an appropriate level. So, we will reduce the incentives to this level.

For fiscal year 2022, we will look for more healthy and sustainable profit improvement. People may question why we are not delivering results soon, but we need to be patient here. The U.S. team have understood this and are working hard. In the past, we used to suffer from a top-down push, and that is why we are in this situation. But now is the time to recover and recuperate our performance. In doing so, we would like to gain back the confidence of the dealers.

The second item is about improved efficiency of operational investments. We could not achieve the growth and profit that we intended, so we have excess capacity. This is as a result of the investments in the past. So, this is an inefficiency that will be addressed drastically. We will work on production efficiency, and this will generate 10% benefit. Part of the action is underway. So, we forecast a reduction of 4,800 people (due to actions taken in various markets), with a financial impact of 47 billion yen. But, the full-year benefit will be 30 billion yen. Today, I cannot give you further details, but actually we are taking action under a wider scope.

Regarding cleaning up the investments made in the past, for the future we need to ensure selection and concentration. Mainly around unprofitable product segments, we aim to enhance efficiency by around 10%. We have to make sure that we pick promising segments.

Based on the assumption of a win-win-win spirit, we would like to gain the support of Renault and Mitsubishi Motors, and using their assets, we would like to enhance the efficiency and allocation of resources so that we can concentrate on further strengthening Nissanís areas of strength. Promptly, we are taking action and making updates. Including the rationalization items that I described earlier, I believe that around July I can present a more specific plan. Until then, we aim to complete this specific action plan.

Slowly but surely, we aim to enhance revenue, and this is the core area to make this happen. During this time, all core models will be renewed, and there will be technological innovations in CASE. We will commercialize and market the application of technological innovations to adapt to CASE before other carmakers. This remains a top priority for the company. Under the strategy of Nissan Intelligent Mobility, we will put this into a package. Globally, we will introduce more than 20 models during this time, so it will be an intensive effort. One of the strengths is electrification, and in the area of electrification, we will not just simply electrify vehicles. Rather, we will use electrified vehicles, Nissan LEAF, Note e-POWER, Serena e-POWER, which have been well received in the market. The customers appreciate not only the environmental performance and fuel economy, but also the automotive value of the driving feel and single-pedal operation that electrified vehicles provide.

As you can see, the total sales ratio by volume of electrified vehicles, EV and e-Power, by 2022, in Japan and Europe, should be reaching more than 50%. The ratio of gasoline-powered vehicles will be less than 50%. Globally, the ratio for electrified vehicles will be around 30%.

In addition to current e-Power and EV models, we aim to widen the application. So, high-performance technologies are in the pipeline. On the front and rear, we will have a large-capacity battery, for 4WD. This is one of the areas of our offensive. Another core area is ProPILOT. Within the package of Nissan Intelligent Mobility, we are delivering ProPILOT technology, starting with Serena, Nissan Leaf, X-Trail, Rogue, Qashqai, and the new Nissan Dayz. Globally, cumulative sales of vehicles equipped with the ProPILOT technology reached 350,000 units. Nissan will keep on widening the application of ProPILOT technology. By fiscal year 2022, we aim to reach annual sales of 1 million units, and launch 20 models equipped with ProPILOT technology in 20 markets.

This ProPILOT technology keeps on evolving. Soon, we plan to adopt ProPILOT 2.0, which enables driver-assist on multiple highway lanes, on the new Skyline in Japan. This will be a world-first. The system is linked to the navigation system, and on multiple lanes, you can engage assisted driving. The system is actually between level 2 and level 3 of autonomous driving.

Electrified powertrains, Nissan Intelligent Mobility, and autonomous driving technologies will be put into a packageónot as a demonstration but in mass production cars. We will deliver them to customers in an affordable way. So, this is an updated version of Nissanís DNA in technological excellence in the era of CASE. We will work hard to make sure customers understand Nissan Intelligent Mobility and its value. With this, we want our customers to be attracted to our brand, rather than buying our products and services because of discounts.

Now I would like to turn to midterm outlook, the growth that we are planning for, and the initiatives. Nissan is aiming to improve its profit by approximately 500 billion yen by fiscal year 2022. Approximately 300 billion yen of that is expected from cost reductions or cost-structure reform, and enhancement of the efficiency of investments. 200 billion yen is from revenue growth, mainly based on Nissan Intelligent Mobility, including the normalization of sales.

When we started the current midterm plan, I said that we will need to make a revision of the plan in the middle. However, there was a big slowdown in the U.S. We originally assumed a revenue objective of 16.5 trillion yen, but this will be reduced to 14.5 trillion yen. Also, the operating margin of 8% will be revised to 6%. At the level of 6% operating margin, the electrification ratio will be 30% globally and the new portfolio age will be less than 3.5 years. For the future, we are ready to adapt to the changes in the market, in the era of CASE.

Under the former chairman, we pursued an expansion strategy. Now, we will change course to pursue more sustainable growth.

Today, I presented the essentials, or the skeleton of the initiatives up until fiscal year 2022. In terms of operational and investment efficiency enhancement, this should be done quickly. First, I would like to spend two years, and in fiscal year 2021, we aim to return to the level close to our goal for fiscal year 2022. We will take action boldly and swiftly, while ensuring steady growth, and we will not slow down our actions to develop new technologies for CASE and what is beyond. As I said earlier, I plan to present more specific actions and updates around July.

Honestly, last year, there were some unprecedented cases, including in our relationship with Renault, and for a time we were unable to fully concentrate on operations. The people at the frontlines of our operations, our employees, our customers and our business partners were anxious. I am sorry about this. Directly or indirectly, this was reflected in the companyís results. Most of the problems that I presented today are a negative legacy coming from the former leadership. Once the issues occurred, we were slow in taking necessary countermeasures. That is an internal problem. But in this era of transformation, we aim to get out of these problems, and recover as soon as possible.

I express my regret to customers, shareholders, and stakeholders for the inconvenience. I also express my regret about reducing the dividend. At the same time, we know what to do and our financial strength is healthy. In the next two years or three years, in the longest period of time, we aim to return to the original status of Nissan. To this end, we need to stabilize the relationship with Renault. These are essential.

Before moving into the Q&A session, let me speak briefly on a subject of interest. Recently, the media has reported on the relationship between Renault and Nissan. As members of the media, I am sure you are interested in it. Mr. Senard and I share confidence and trust, and we are openly discussing the relationship between the two entities. Naturally, capital participation is one of the subjects that has been raised, and Mr. Senardís opinion and my opinion are different. There is a difference, and we recognize this. In one sense, there are differences because we are different companies. We are openly discussing different options. However, what we agree about is that this is not the right time to discuss this subject. Nissan should first concentrate on stabilizing operations and performance, and that is what he wants us to do. This is fully supported by Mr. Senard.

If you look at Nissan alone, annually, we have sell more than 6 million units globally. Rather than being alone, having a partnership will be a big opportunity, and if we are successful in partnership then we will be successful. If not, this may be a weakness. So, going forward, together with Renault and Mitsubishi Motors, we aim to evolve or develop the Alliance in a stable manner, and we will continue collaborating with Mr. Senard to make it happen.

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