Nissan Motor Ltd S/Adr

I would like to start the presentation of the financial results for the first half of the fiscal year 2022. Thank you for joining us. We appreciate your kind attendance. I would like to introduce our attendees, Mr. Makoto Uchida, the CEO, Mr. Ashwani Gupta, COO, and Mr. Sylvie Ma, who is CFO. First, we'd like to invite Mr. Uchida to say a few words at the opening. Mr. Uchida, the floor is yours.

Thank you for taking time out of your busy schedule to join us today. First, COO Gupta will present the results for the first half of this fiscal year followed by my presentation of the outlook of the full fiscal year. Before I begin, I would like to say a few words. As you may be aware, global challenges including semiconductor supply shortage, supply chain disruption, rising energy costs, and raw material prices triggered by COVID-19 pandemic are impacting our business more significantly than our initial expectation. Despite these challenges, Nissan's performance is recovering and we are delivering results that exceed our business plan. We believe this is an indication that Nissan Next initiatives are bearing fruit and improving Nissan's business. Although the severe business environment is still continuing, the entire company will continue to work together on Nissan Next to build a solid business foundation for future growth. CEO Gupta will now explain the results for the first half of the current fiscal year.

Thank you. Thank you. Hello, everyone. I would like to add my welcome to Nissan's first half and second quarter results for the period ending September 30, 2022. We are very grateful for the large number of orders we have received for our latest offerings, including the Nissan Ariya, Sakura Z, Qashqai and Xtrail. As Ujitha said, despite the volatile environment, Nissan continues to deliver on our plans and have shown strong commitment to our business culture, driving value to our stakeholders. Please allow me to take you through our latest results. I will explain the key metrics for the volume and unit sales during the latest quarter. Overall, Nissan has put our production on the road to recovery in most of our market globally. As a result, we expect Retail sales to recover soon globally, excluding China. Production volume rose by 13.6% in the second quarter to 563,000 units. And as we have managed supply chain and COVID disruptions, and output has started to normalize. This improvement was offset by the production challenges in China, where output fell 23.5% to 242,000 units due to continued semiconductor shortages and the impact of COVID lockdowns. As a result, overall production was flat year on year at 806,000. This resulted in a slight decline of 0.9% year on year to 1.618 million units for the first half of fiscal year 2022. Year-on-year retail sales fell 21.4% to 750,000 units for the second quarter of FY22. This is primarily due to the difference in inventory availability. In transit and seasonal inventory were important factors as well. Export model production during the period such as for the Xtrail to Europe and Aria for the United States will be reflected in the sales for subsequent quarters as shipments are completed. The sharpest decline was in China, where sales fell 30.2% to 247,000 units, mainly driven by COVID lockdown and supply shortages. In contrast, sales in our home market of Japan rose nine point eight percent amid encouraging demand for new model and higher production levels. In North America, however, retail sales were down twenty five point four percent to two hundred four thousand and down by twenty point nine percent in Europe to sixty four thousand as inventory shortages. Sales in other markets were down by 15.1% to 118,000 units. Taken together, global unit sales for the first half were 21.6%, lower at 1.569 million vehicles. The next two slides show our key financial indicators on both China JV proportionate basis and equity basis for the second quarter and first half period. On an equity basis which excludes contribution from China JV operations, our net revenue for the second quarter rose by 30% to 2.52 trillion yen from 1.94 trillion yen in the same period of 2021. On the same basis, operating profit for the period was 91.7 billion yen with an operating margin of 3.6%. For the second quarter, net income was 17.4 billion yen. This decline versus the previous year can be explained by the one-time loss from the exit from the Russian market this year and impact of COVID lockdowns. Due to these factors, our net income was slightly lower than prior year. Our automotive free cash flow significantly improved in the second quarter to a positive 206.6 billion yen. Net cash for the automotive business was 1.04 trillion yen on a proportionate basis which includes our china operations our net revenue for the second or second quarter rose 2.78 trillion yen from 2.28 trillion yen last year on pro um Last year, operating profit under this major reached 113.7 billion yen for the quarter, representing an operating margin of 4.1%. In the second quarter, automotive free cash flow improved 284.8 billion yen versus a negative 169.9 billion yen in the prior year. Net cash for the automotive business reached 1.56 trillion yen on this basis. Nissan also continues to maintain strong levels of liquidity. The key highlight of this quarter is that for the first time in last three years, Nissan automotive profit, including intersegment eliminations, became positive. The challenge is to continue in following quarters to strengthen the sustainability of our core business. This next slide highlights our key financial indicators for the first half. On an equity basis, which excludes contribution from our China JV operations, our net revenues for the first half rose to 4.66 trillion yen from 3.95 trillion yen in the same period of 2021. On the same basis, operating profit for the period was 156.6 billion yen with an operating margin of 3.4%. for the half net income was 64.5 billion yen as i previously mentioned for the second quarter the decline versus the previous year can be explained by the one-time loss from the exit from the russian market this year in addition last year there was the one-time gain from the sale of timeless shares excluding the one-time gain and loss our net income was almost flat for the from the prior year free cash flow for the automotive business was a negative 98 billion yen for the first half as previously noted our free cash flow significantly improved in the second quarter to a positive 206.6 billion yen however it was not enough to recover the negative free cash flow in the first quarter which was due to low production We expect our free cash flow to continue to recover in the second half of this fiscal year. On a proportionate basis, which includes our China operations, our net revenue for the first half rose to 5.26 trillion yen from 4.6 trillion yen last year. Operating profit under this measure reached 212.6 billion yen for the first half, representing an operating margin of 4.0%. Automotive free cash flow was a negative 115.7 billion yen for the first half. Net cash for the automotive business reached 1.56 trillion yen on this basis. Now let us look at H1 financial performance. This is the income statement for the six months ending September 30, 2022 on an equity basis which excludes contribution from our China JV operations. net revenue increased by 715.3 billion yen from the previous year to 4.66 trillion yen net revenue increase year on year despite the decrease in sales volume which was primarily driven by the improvement in the net revenue per unit as well as the weakening of the yen operate operating profit increased by 17.5 billion yen from the prior year 256.6 billion yen representing an operating margin of 3.4 percent i will explain about the variance on the next slide Net income for the first half was 64.5 billion yen. This decrease from the previous year was primarily due to one time factors such as said of Amla shares and exit from Russian market. Turning now to the operating profit variance analysis for the first half, this slide shows the variance factors from first half of last year to this year. Foreign exchange had a positive impact of 93.9 billion yen, primarily due to strong US dollar as tailwind, but also headwind in other currencies like Mexican peso and Chinese yuan. The increase in raw metal prices had a negative impact of 122.8 billion yen, primarily driven by price hikes in materials such as steel, aluminum, plastics. Sales performance had a positive impact of 190.6 billion yen. The continued improvement in quality of sales was the biggest contributing factor, with a decrease in incentives as well as improvement in the pricing with value content like pro-pilot, e-force and connected services. Monozukuri performance had a negative impact of 24.7 billion yen primarily driven by cost inflation in manufacturing and logistics. Other items deteriorated by 119.5 billion yen from the previous year. Part of this was due to one-time gains of 35 billion yen last year from the lease of credit loss provisions and increased. used car prices we were also impacted by factors such as increase in cost for regulatory and product enrichment profit decline in the sales finance business due to decrease in assets increased gna and other items turning to the operational highlights of the current year despite facing volatile uncertainties such as inflation forex raw material costs nissan is taking action to build sustainable momentum across our business We are closely monitoring our operations and external factors to remain agile. As lockdowns have continued in China, our total production has been unstable and remains uncertain looking ahead. While uncertain conditions may persist, we have taken effective steps to counteract the impact of semiconductor shortages and recover production during this fiscal year. Nissan has made encouraging progress with our dual supplier sourcing strategy between alternative and standard IC chips. As an example, for one of the major components that caused continuous shortages in fiscal year 2021, we have more than doubled the supply through usage of alternative chips. Thanks to these efforts, we expect to increase our production further during the second half of fiscal year 2022, and we aim to grow our business sustainably amid unprecedented headwinds. Nissan Next is on the right trajectory, driven by three pillars, rationalization, prioritization and focus, and sowing seeds for the future, with the demonstrable progress of our electrification strategy. With both zero emission and e-power equipped as the key drivers, our total global sales for the electrified vehicles has reached 13% for the quarter. our home market of japan is the leading example globally of accelerating says across our compelling zero emission and e-power model range with 52 percent of our sales consisting of electrified vehicles during the quarter this is a result of our customer accepting the value of products from our wide offering starting from k-segment cars to luxury crossovers and with that i will hand over to cheetah sun to discuss our outlook for the remainder of the fiscal year so that

Turning now to our outlook for the fiscal year 2022. During the first half of the fiscal year, the auto industry continued to face a challenging business environment due to the semiconductor supply shortage and the impact of China lockdown and our production and sales were lower than expected. The supply chain situation is proving and we expect our global sales volume in the second half to increase significantly by 35.8% from the first half. However, the pace of recovery continues to be slower than our initial expectations. As a result, we are lowering our global sales volume forecast. from 4 million units to 3.7 million units. We will continue to work on improving the quality of sales and optimize our operation by closely monitoring the situation. This is the revised full year forecast for fiscal year 2022 on the equity method. Despite the decrease in sales volume for the fiscal year, we have revised upward the forecast for the revenue to 10.9 trillion yen operating profit to 360 billion yen which represents an operating profit margin of 3.3%. The exchange rate assumptions for the current fiscal year have been revised from 120 yen to 135 yen to US dollar and from 130 yen to 137 yen for the euro. The upward revision for revenue and operating profit is not only due to the depreciation in the yen but also due to the increase in net revenue per unit resulting from our initiatives to improve quality of sales including lower sales incentives and pricing revisions. Through these efforts, this is expected to offset the negative impacts from the decrease in the sales volume decrease and increase in raw material prices. Our forecast for net income is 155 billion yen. We are only making a small revision as we incorporate an expected extraordinary loss of approximately 100 billion yen due to the exit from the Russian market. Without the one-time impact of Daimler's share sale in the previous year and Russia exit in this year, our net income would have increased significantly from the previous year. This slide provides the operating profit variance from the previous outlook. Due to the depreciation of the yen, foreign exchange is expected to have an additional positive impact of 125 billion yen. As for raw materials and logistics, although prices for some materials have fallen in recent months, overall they have remained high, and certain items such as battery materials continue to rise sharply, resulting in an expected additional negative impact of 70 billion yen. Performance is expected to increase by an additional 30 billion yen due to the positive effects of the approximately 145 billion yen from our sales initiatives such as mix improvement, incentives reduction and price revisions, which is expected to more than offset the negative impacts of 115 billion yen from the decline in volume. the investment for new vehicles is expected to contribute a positive impact of 25 billion yen due primarily to the optimization of the advertising expenses despite the challenging environment in fiscal year 2022 we are making steady progress to reach the objectives set forth under the net nissan next and we will keep investing for the future now i would like to discuss our dividend policy back in may we said that we the interim dividend for the current fiscal year was to be determined due to the volatile external environment our production and sales are currently on the recovery trend and our automotive free cash flow is also improving accordingly nissan's auto free cash flow which was a negative 304.6 billion yen in the first quarter turned positive in the second quarter to 206.6 billion yen however the total amount of automotive free cash flow for the first six months remains negative at 98 billion yen Moreover, uncertainty in the external environment remains for the second half with risks such as a slowdown in the recovery of semiconductor supply inflation and rising interest rates. Therefore, we decided to forego payment of an interim dividend. We are forecasting a year-end dividend of 5 yen per share, but we will consider increasing this amount depending on the earnings and automotive free cash flow for the second half of this fiscal year. Improving shareholder returns continues to be one of our priorities and we will work to increase the amount to an appropriate level in the future. We appreciate your kind understanding and support. Finally, to reiterate, Nissan Next is making steady progress despite the difficult environment and we are confident in our transformation. Regarding new products which are at the core of our business, all our models have been very well received by our customers and influential experts in Japan, for example. The Sakura won the Car of the Year award from the Japan Automotive Hall of Fame. In addition, it was announced last week that three Nissan models were selected as the ten best cars in the Japan Car of the Year and the RJC Car of the Year's six best. We believe that these high evaluations validate our efforts to continually enhance our products to deliver greater value to our customers are beginning to bear fruit. In this fiscal year, we are also moving forward with efforts to realize our long-term vision, Nissan Ambition 2030, while firmly committed to business transformation through Nissan Next. Under Nissan Ambition 2030, we aim to empower mobility and society by providing value that only Nissan can deliver with electrification and vehicle intelligence technologies, which are our strength. The alliance is one of the powerful truths that others do not have in realizing Nissan Ambition 2030. Nissan is currently engaged in discussions around several initiatives as part of the continued efforts to reinforce cooperation and the future of the alliance. Why are we talking to Renault now? Let me share with you the background. The first factor is the external environment. A company is expected to assume greater responsibilities for addressing global challenges including the COVID-19 pandemic, climate change, and societal issues. In terms of operations, we must deal with semiconductor supply shortages, rising raw material prices, the sharp yen depreciation that is occurring for the first time in 32 years, divided world resulting from the developed political risk including the situation in Ukraine, and the changing customer mindset. We see growing awareness of SDGs and disaster prevention, a shift from ownership to sharing, and acceleration of digitalization. there is a growing need for more sophisticated technologies such as autonomous driving connectivity ev battery and software defined vehicle sdv as we adapt to these changes in this context we need to have clear priorities and address multiple challenges at the same time while leveraging the alliance and other partnerships our alliance has been building a strong track record and trust over many years based on this foundation we are engaged in open and constructive discussions on how to design the alliance in a way that will bring greater benefits to each partner regarding the new ev entity which renault group presented yesterday at its capital market day we are deepening the reflection on how the entity would be beneficial for nissan and how we could participate We will consider to invest in the entity following the ongoing discussions. The most important thing for us is to elevate the alliance to the next stage in order to increase Nissan's competitive edge, enable us to realize Nissan Ambition 2030, and ensure sustainable growth for the company. You may have a lot of questions about the ongoing talks. We kindly ask for your patience until we reach our conclusion and we are ready to communicate in due course. Thank you for your attention.

Thank you very much. And I'd like to go on to the Q&A session. If you have any questions, please use the raise hand button on your Zoom. When the moderator calls out your name and your affiliation, please unmute your microphone and then go on to speak. If you're participating through the Japanese Zoom link, please speak in Japanese. If you're joining us through the English Zoom link, please speak in English. We ask you to limit yourself to two questions at a time so that we'll be able to take as many questions as possible. Also, as was mentioned by Mr. Uchida, with regard to discussions related to alliance, this is an ongoing process, so therefore we will not be able to respond to your questions about the details in relation to the substance of the discussion. We will appreciate your kind understanding. So let us go on to the first question. Nihon Yanagi-san, onegai itashimasu.

Nihon Yanagi-san of BOFA. Yes, thank you for the presentation. I am Nihon Yanagi. Thank you for this opportunity. I have two questions. First, which is about China sales assumption has been revised downward. What's the background? Could you give us the details why you have revised it downward? Semiconductor supply shortage is primarily strong in China. Is that the reason? But as you said, rogue sales is slow or is it about the market trend which is triggering you to make a downward revision? Why did you have to make a downward revision of the sales in China? And if possible, could you give us a projection of China's sales in the next fiscal year? You see the uncertainties in macro environments. So these are the two parts of the questions. And the second one, Renault talks with Renault. I see internal combustion engine. In the collaborations you have been involved in the past for ICE vehicles, you used to collaborate with Renault in many ways and now Renault decided to establish horse joint venture right so Nissan will not be participating in horse so does it mean in the non-EV areas like ICE The ICE R&D or operations, how will this impact your ICE operation, including R&D with the establishment or horse, and you are not participating yet? These are the two questions. Nihon Yanagi-san, thank you for your question. First, I would like to answer the second question. And for the first question, I would like to ask Ashwani-san who is heading the operation to provide further details. ice and renault's scheme about the ice for this one going forward looking at europe renault's direction makes sense and in this context what will happen in the alliance i think that was your question Our market portfolio, Nissan's, ice demand is pretty high, and we need to continue selling ice. So, for example, Renault's horse entity, which is a new legal entity, in our case, we have Jatco. It would be like Jatco of Nissan. so the possibility of collaboration potential collaboration is what we are going to explore of course and in the media conference there was a question about ip intellectual property what i want to be clear is that ip is there any differences in opinions of ip that was raised by the media but ip is a key for each company and people all know about it irrespective where you belong to and the question is which of Will these IP contribute to the future development of the company or not? This is based on the common sense, business common sense. So these are what we need to discuss and think of the best way to benefit Nissan and enable us to develop further. And that's what we are discussing now with Renault. and R&D operation impact for ICE. Even today, in many ways, within Nissan, we are doing some internalization and R&D of Nissan. And going forward, we are collaborating with suppliers other than Renault. So looking at this big picture, we will come up with the idea which is beneficial for Nissan in R&D area. which we have done in the past and which we will do in the future. We haven't get the details, especially the future picture of Porsche yet from the Renault. We only have the limited information today. So going forward, we will explore different scenarios of collaboration. That's where we are today. Okay, first question, Ashwani-san, please.

Thank you, Chita-san. If I may compliment to that, as Nissan, we are reducing our ICE engines from 49 to 19 only by 2030. And these 19 are mainly driven by United States and in China and in Japan. So that's why the Renault new horse company has got a very minimum exposure when it comes to Nissan's future ICE strategy. And that's how we are making sure that our business continuity remains, even if after the spinoff of the ICE of Renault. Regarding the China, though it is very difficult today to have the business continuity in China, just for your information that there is a COVID outbreak in many of the prefectures. There are lockdowns in many of the prefecture and twenty nine percent of our dealers are closed in the month of October and in November, the situation is is continuing. So that's why. learning from the past pandemic, we believe that this is going to continue. And that's why we adjusted our production volume in China related to the pandemic. On the other side, this is also a fact that the sales of Xtrail is struggling as compared to what we planned. But on the other side, we are compensating that shortfall in the sales. Number one, if you would have seen the increase in Altima, increase in Silphi, increase in Kix, increase in Qashqai and the other models. So that's all which is a situation first because of pandemic and second because of performance. Regarding next year, it's too difficult, uncertain to predict what China will be next year, especially driven by the pandemic situation. Of course, we want to come back to our original retail sales, which is between 1.2 to 1.4 million.

if there is a normal condition in the china to operate our business hope it answers your question thank you did that suffice yes thank you for all the elaboration i appreciate it i'm looking for the update thank you Thank you, Nihonyanagi-san. Moving on to UBS Securities, Takahashi-san, please. Yes, this is UBS Securities, Takahashi. Can I speak in Japanese or English is better? Japanese, please. Japanese. Sure. Okay. In the financials, in the second quarter, the automotive operation is profitable. I appreciate this. And with regards to Renault, I have two questions about Renault. The first one, this new EV company, by investing in new EV company and alliance, the alliance sharing, common EV alliance platform or technology commonization, is there a link? No matter whether you invest in Ampere or not, this alliance collaboration on the EV front doesn't change or not. This is my first question. And the second question. It's not limited to Renault, but... Volkswagen and GM for these car makers are leveraging on the capital market to increase the transparency of the corporate value and as a result, enhance the corporate value. So they are using ingenuity like capital market day of Renault. That was intention, right? And for Nissan, is there looking at what Renault is doing? Is there any good practice that you want to adopt or share? Is there any good tools that you would like to adopt? Is there any good ideas that you are learning and find it interesting and you are thinking of doing the same kind of arrangement? If there's any. Thank you. Thank you for the questions. Starting with the first question. Well, with regards to the investment in Ampere, nothing is decided as of today and that's the assumption. Keeping this in mind, will this change what we have done in the Alliance? No, there will be no big change on this front. Renault's mid- and long-term plan, Renolution, as an extension of Renolution, as you said, Takahashi-san, as electrification in Europe accelerates and regulations will grow stringent. Against this backdrop, Renault is... By increasing transparency assets and what to do, they are trying to enhance their corporate value. And that's part of the intention of the revolution. Ampere is one of the demonstrations. On this point, as I said, for Nissan, we will see how does it benefit Nissan. We are investing 15% in Renault. So, the possibility of European operation is what we are considering carefully in this framework of collaboration. That's what we are focusing on in the ongoing talks. So, what can we learn from our partners? What we face today? In this contest, this is my personal insight by the way, the world is divided. And there are geopolitical risks which are largely impacting and Forex is so unstable. So, Nissan Ambition 2030, this is the vision that we need to translate to specific plan. In doing so, can we just continue what we have been doing to grow the company? That's the big discussion which is underway internally. What I want to say that doing a business as usual will hit the limitation depending on some regions or segments. And in these areas, we need to think of the possibility of collaboration with the partners. Many discussions are underway. Unless we talk about these, we are unable to make a true transformation depending on the regions. What Renault is trying to do, this big transformation is what Renault intends to do. And for the dynamism of the transformation of Renault, business portfolio, Renault differs from Nissan, so timing will be different. So we, Nissan, as a partner, can learn a lot from what Renault is doing, I believe. Did that answer your question? Yes, thank you. I got the directionality. Ampere. For ampere, whether you invest in ampere irrespective of whether you invest in ampere. So basically, semi investment, like it depends irrespective of the subject investment. when you do you investing in av company in europe whether it's owned by renault or not is this beneficial for nissan and whether the valuation appropriate or not these are the viewpoints that will determine or decide your dis determine the decision or investment so in the media reports they are saying that For Renault to sell down Nissan's stake, Nissan is asked to invest in Ampere. That's what media reports. But listening to Renault and Uchida-san, it seems like the value of investment in Ampere is what you are evaluating in respect of who the owner is of this entity. Am I right to say this? Yes. If we invest in Ampere, we are looking at return on investment. That should be clear. So you are right on that point. But in order to escalate alliance to the next stage, how should we design alliance? That's what we are discussing at the same time. So on this aspect, partially, does it mean that as a condition to be an equal footing that's what some media reports but that's not the case in the discussion we are only we are looking at whether this is a benefits for nissan or will this result in additional business up opportunities so you're right on that point stevenson

Thank you for the questions There are a lot of media speculations out there and as you can imagine we cannot at this point in time comment on specifics we are working in a trustful and sincere way with our partners and looking at all what they're doing as shown by Luca and Thierry in the Capital Markets Day. I mean, Renault is transforming the company into five businesses and it makes sense for them and we fully support them in all that transformation. But in terms of collaboration with Nissan and Mitsubishi, I mean, all the current collaboration we have is still going on very strong. We have common platform and as we showed previously to you guys, many of the CMFB or EEB or other platform are common. So that doesn't go away. So, and I want to be very specific on some of the news or speculations or how much to invest or up to how much to invest or what the valuation, this is too early to talk about those things. When we are ready and we have an agreement, we will disclose and announce in due course. for the learnings from reno and capital markets they have other oems i think what you're referring to is more deeper understanding of the strategy or the business operations of the companies besides why you just get a normal announcement or This is what we tried to do last Friday with you guys. We didn't call a capital market state, but we had a dedicated roundtable with you guys to explain more holistically. It's not something done by a Japanese company here in Japan, but it's something we're looking at. How can we increase? Thank you. Thank you very much.

Thank you very much. Next from Goldman Sachs. Yuzawa-san, the floor is yours. Yuzawa-san from Goldman Sachs. Thank you. Yuzawa from Goldman Sachs. Can you hear me? Yes, we hear you clearly. Thank you. I know that. Thank you for responding to questions about Renault. I have two questions about your financial performance. First relates to the following. Slide 12. I'm looking at slide number 12. I see improvements as well as fall compared to the previous session. With regard to the forks, it's inevitable. In terms of OP variance analysis, can you talk about areas that were improved and areas that did not improve? Can you give us a breakdown? With regard to Nissan Next, you have a set of margin. You have a target margin. Are you on track in terms of achieving the operating margin in Nissan Next? So that's my first question. My second question. Free cash flow has been very strong in the second quarter. Your free cash flow has been very strong in the second quarter. Can you sustain this over the next few quarters? And also, after the post-ruinal discussion is over, The automotive net cash, what level can you reach in terms of automotive net cash going forward? When we consider credit rating, what is the level of net automotive net cash that you can achieve going forward? Thank you for your question. I will give you a general response. And as for the specifics and the numbers, I will ask Mr. Masaya to respond to the questions. So with regard to Nissan Next and the update on the Nissan Next, I think that was what you answered, you asked. In terms of first half and second half, operating margin. We're aiming for 5% in Nissan Next, inclusive of China. And the first half, actual numbers, is already 4% operating margin. So against the backdrop, we want to improve this quality of sales, and also we're aiming for net revenue, and also per unit net revenue, we are also on track. Having said that, on the other hand, as we explained earlier, we're in a certain economic environment. With regard to the basic volume, we have to work harder. So we will monitor the current situation, and I think it's a way that we work, but we will prioritize the value and make sure that we also try to achieve volume. We hope that we'll be able to provide products that will be acceptable to the customers. We want to present value. So if we present value, the volume will improve, and we're very confident about the improvement of volume going forward. So the current situation, we're continuing on with the efforts we believe that we'll be able to achieve for the targets in Nissan Next. we are confident that we'll be able to achieve that eventually. Now, having said that, with regard to the free cash flow, this situation was good second quarter, but then on a full year basis, we're still in negative territory. So therefore, in the third quarter, in the fourth quarter, it's important that we try to maintain the good momentum we had in the second quarter, and hopefully they will be able to achieve free cash flow despite the difficulties in the volume, in particular automotive. We want to improve profitability of our automotive business. In the second quarter, if we take a look at second quarter alone, we are now in the positive territory just for the second quarter alone. So it's important that we continue this momentum in the following quarters. That is what we are aiming for. And once we are able to do that, we believe that we'll be able to achieve the target contained in the next. And it will pave the way for the next stage. Nissan Ambition 2030 will be able to achieve the plan. I think we'll be able to reach that stage eventually.

I think you saw something. Thank you for the question. You're asking more about the outlook on page 12 and trying to understand a little bit more of the drivers in each of the steps. Is that the question? Yeah, I think so. So first of all, let me point you to, this is a revision of what we had before, and very obviously raw material price, raw material cost has gone up for everybody, not just us. And you can see very clearly, is 70 billion is increasing, and half of it is raw material and half of it is logistics. So if you look at that combined with what we had before, when we had the regional four-year guidance, this additional ceremony brings the four-year total raw material costs year-over-year increase of 327 billion at the bottom. You can see that. What we are saying here with this improved guidance, you can see that, yes, we have FX good news, but the performance with the increase of 30 here, you can see the year-over-year increase is 330 billion. So what we're saying is that performance can cover all the raw material cost increase based on current visibility. Now, you might ask how we do it and what is the detail behind it. Of course, in that $330 billion number, a lot of it is mixed improvement, pricing, and incentive. And we have, we don't advertise this, we don't want to show it specifically because as Ashwani has said many times in our previous session, we want customers to pay the price based on the value they recognize in our vehicles. So we don't want to show just pricing and show the costs, imply that we just pass on the cost in terms of pricing to customers. But in here, the numbers you can see. I think we said volume minus 115 and performance 145. Within that 145 number, a good portion of that, if not all of it, is pricing and BME, so what we call net pricing that we have improved year over year versus the last forecast. So, what I'm trying to say to you is, yes raw material is coming and first half and second half is about the same impact for us, year over year impact. Logistics, a lot of it is coming more in the second half because the sea freight cost given the new contract is hitting everybody. But then the overriding good thing that we are doing right now is quality of sales in terms of pricing incentive and also being very disciplined in the cost that's able to offset the raw material and the slight inefficiency in manufacturing because of lower volume. So I'm trying to say as simply as possible, is there a specific number you're looking for or figure that you want to understand better, Yusuf Hassan?

No, that was sufficient. 145 billion yen of revision is due to net transaction price improvement, which is a majority. That's what I understood from your explanation. How about net cash? What is the right level of net cash? It will be post-Renault negotiation, if possible. What's the right level of cash?

Oh, as we mentioned, on Agribase, we have more than one trillion net cash, auto net cash. This is driven because we have auto profit finally, seven billion, and positive auto free cash flow. One trillion, if you remember, I'm sure you have the file, is last time we were above one trillion equity base was back in FY19. So we're back to very good levels in terms of net cash. In terms of what the net cash will look like after Renault, I cannot comment because we cannot, we haven't, reached any deal agreement or what we're going to do with Renault as Richard mentioned we might invest up to 15% and we might do other things and there might be IP discussion other considerations so at this point in time I cannot comment on what the net cash should be the level but for sure for Nissan point of view one of the key strengths we have is a strong balance sheet and we have good net cash position for sure i want to protect the net cash position as a cfo so that as a company we are determined to do yes thank you thank you okay moving on to diver securities please

Yes, good evening. Do you hear me? Yes, Hakomori-san, go ahead. Thank you for the opportunity. Production volume on the supply shortage of semiconductors is lasting, it seems like. Three months ago, Gupta-san, I remember you saying that there are some commodities which have improved the supplies, but you are unable to increase the production volume because of these several commodities. As of today, What happened to the semiconductor supply shortages? Same kind of components are short or things are improving. There are new problems in front of you. What are the evolutions of the semiconductor supply shortage? This is my first question. And the second one. In the business transformation in the past, you said that you are going to optimize the capacity to 5.4 million units. if covet 19 has settled down and semiconductor supply issue is solved earlier and you had to aim 5.4 million units and this should have been done faster if things normalize but uncertainties remain in the world 5.4 million units of capacity how should i say it Are you going to maintain this capacity or temporarily, are you going to reduce the fixed cost and can you take actions to reduce the fixed cost? This capacity you have and this actual production volume, there's a gap. So how should you interpret this? These are the two questions. Thank you. Yes, there are two questions. I would like to hand it over to Ashwani-san who is heading the operation. Ashwani-san.

Thank you, I remember three months before I said semiconductor situation is improving, but I also remember, I said that it will continue even in 2023. So this is exactly what is happening because nobody has got the crystal ball, on the other side, all the investments which we did. in increasing the capacity but also in developing the second source has started ramping up and we will see that from quarter three and quarter four if the china lockdown which is shanghai lockdown would not have happened definitely we would have increased our production by more than 13 because excluding china we include we increase our production by 13 this is for sure so which means or it's getting better in the second half as we as we presented um in in the slide the second half is getting better what we we forecasted is 3.7 million In the first half, we did 1.56 million, which means the second half should be 2.2 million. So again, we are increasing roughly from 1.6 million to 2.2 million from first half to second half. Whether that is enough, I don't think so, because still we have a strong customer demand around the world. That's the answer to the first question. The answer to the second question is really very important, and thank you for asking this question. Of course, how we selected 5.4 million? We selected 5.4 million based on our capability to do 6% market share on a 90 million automotive TIV, which means 90 multiplied by 6, 5.4 million. This is how we define how much capacity we should have. Now, whether the global market is at 90 million, answer is no, because we are still running around 80 million. So if I say 80 million multiplied by 6%, so we are already at 4.8 million. And we do believe with all the demands which we have around the world, 4.8 million is doable as of today. Now, the last one, if you say we want to keep this capacity, answer is yes. because 5.4 million capacity is the minimum capacity which we should have to have a sustainable growth after the markets are coming back because of the market share we have in each market. For example, in U.S., We should have six to seven percent of market share in China for the Nissan brand. We should have between 10 to 12 percent of market share in Japan. We should have roughly 10 to 12 percent of market share. And in Europe, we should have two to three percent of market share, which means if we really want to have a strong market presence in US, China and Japan, We need to keep the capacities. And that's why we believe that 5.4 is the right capacity. Even if the things and TIVs are coming back, we want to grow further on 3.7 million and 4 million. Thank you.

That was very clear, sir. Thank you. Thank you. Moving on to JB Morgan. Kishimoto-san, please go ahead. Yes, JP Morgan. My name is Kishimoto. Thank you. I have two questions. The first one, it's a very simple question. In the Q2 sales finance operation, since the past, you have been saying that the profitability was too high in the past, and now you are normalizing the profitability. So the profitability of sales finance will decline going forward. That's what you said. In Q2, this level remains high. used car prices including residual value are falling and yet you are maintaining the high profit of sales finance why maybe yen depreciation may be a main factor behind this But US sales finance environment, could you elaborate on why you are keeping the high profitability margin for the sales finance? That's the first question. And the second question, as you explained, this may be a repetitive question. 300,000 units is the revision that you made on the sales volume. So production volume will be linked to the new forecast, right? If so, for the second half of the year, you are going to increase largely the production, right? In Q2, automotive free cash flow is positive, I understand. But basically, after third quarter, this automotive free cash flow will largely increase. improve and net cash will build up. Am I right to say this? Probably going forward, as the alliance discussion goes, I think you need to increase your cash. So could you give us a projection free cash flow for the second half of the year? Thank you. Thank you. Yes, sales finance head Kocha-san is here, so he will answer your question. Kocha-san.

Yes. Thank you, Mr. Kishum, for your question. So you're right. Sales finance profitability is coming down because, as you know, that last year we had a lot of one time items. We we released reserves, which is not expected to happen this year. Also, because the used car prices still continue to be good, the customers and dealers at the end of the lease are not returning those cars back to us because they see value in those cars. So our remarketing profits are also less. But if you exclude these two one-time items, the sales finance profitability, as you say, continues to be very good. Actually, our return on assets in first half was 3.8% because we continue to focus on good margins. We continue to focus on good customers. And also, our losses continue to be lower than in the past. So I think all those factors contribute to a healthy sales finance profitability, even though because of one-time items in the last year, it's lower year over year.

The second question, Kishma-san, as you can tell from the volume, of course, the second half production volume, as Ashwani mentioned, it's about 2.1 million. So it's higher than Q, first half. given that you can see the q1 free cash flow was negative because the volume went down and then q2 as we stabilized the working capital reversed and we have positive free cash flow combined with the auto op positive so for first half year just minus 90 some billion negative for first half. And then for the second half with the volume increasing, we expect further good news on the working capital area. So we do with this volume forecast, we probably have a good chance of making, I think second half positive free cash flow as well. And the second half auto profit, we also wanna try to keep as good as possible. And now this is all hinging on the supply and the volume. And as you guys know very well, I mean, fluctuates month to month. So, but given the current visibility, we think we have a pretty good chance. Yeah. It's okay.

Yes, thank you. By the way, the sales finance projection for the second half of the Q2 profitability is too high, so it will come down. So is it normalized already? You can maintain this profitability of sales finance in the second half of the year. What's the projection of sales finance in the second half?

Kishimoto-san, sales finance is still slightly higher than the normal, simply because, as you know, our car sales have been lower because of semiconductor availability and pandemic in the past. So our assets are also lower. Actually, our assets are lower by about 500 billion yen, if you ignore the foreign exchange translation. So because the assets are going to be lower going into the next half, the profitability of sales finance, even though as a percentage would still be similar, but the absolute number would be lower.

That was very clear. Thank you. Thank you. We are about to conclude, so this will be the final question. Last one from Nomura Securities, Kunugimoto-san. Thank you. Do you hear me? Yes, we do, Kunugimoto-san. I have two questions. Because of supply shortage, it's very difficult to project the market trend. So looking at the key markets of Nissan, what is particularly strong? Because of the supply shortage, you can put a lot of incentives. What are the segments where you don't need incentives because of supply shortage or there is a declining TIV somewhere? I mean, what's the image? What's the market trend today? you elaborate what is happening in each key market that's my first question and the second question today there's a depreciation of yen against the us dollar so the exports from japan to elsewhere is higher in margin fair lady z may be one example and aria may be another one although you are introducing many new cars like tochigi the production is limited right that's my impression is it because of semiconductor supply issue i believe but on top of this from when can we expect the exports to come back export from japan how much will we it increase going forward and tochigi plant In US and UK, you are going to deploy the system that you adopt in Tochigi. While the Tochigi has a limited production volume for the efficiency enhancement, are you going to deploy the system for efficiency enhancement, which I'm concerned about? So what are the challenges you are facing on this front and what are you going to do going forward to improve the situation? These are the two questions.

Thank you. Ashwini here. To finish with, I think these are very good two questions. So market trend for key markets. Of course, as I remember, we talked about this before, that automotive market would be the last one this time in the recession to get hit because the pipe is very long and customers are waiting for long. so if i look at it u.s market even if the tiv is getting slowed down but our performance is better because of the strong acceptance of our product on the other side when we look at our incentives in fact we are very uh very very much on the industrial average after long time um in in in in united states um in case of in case of europe uh we have uh we have long long waiting time for kashkai kashkai e power and extra power and also for the jew so these irrespective of the market i think these all the four models are doing extremely good japan as you would have seen we have increased our share we have increased our presence and japan for us is also doing much better Only where we are facing today the challenge because of mainly external environment is China. And that's why we are very much careful about the continuity in China, mainly driven by the pandemic. So I would say that when we get into the second half and even when we get into the FY23, the market trends will continue and our product performance in those markets will continue. And that's the confidence I think we have based on quarter two and the visibility for quarter three and quarter four. For the Japan, I think this was the question today also, because Japan is a home market and we restarted investing heavily in our plants, in our R&D centers, definitely we need domestic volume, but we also need the export volume. We have started increasing our export volume. One, of course, because of exchange rate, but mainly because our customers are waiting. For example, the Rogue highest grade platinum grade, we make it in Kyushu and export to the United States. The X-Trail we make in Kyushu and we export to Europe and other parts. So exports from Japan are coming back and we really need to get back with the semiconductors. Regarding the Tochigi, of course, it started with the plant was modernized, especially during the pandemic with all the imported equipments outside the Japan, but also in Japan. Definitely with no service engineer entering into Japan, we had a lot of challenges in ramping up the Tochigi plant. Then the semiconductor crisis also helped to have more challenges in the Tochigi plant. Now we are ramping up. We are between 160 cars to 180 cars every day, which we are making in Tochigi. So we started selling in Japan, as you know. We started exporting to Europe. Already last month, we sold 1,500 in Europe. But first shipment for United States went on 1st of November. And before Christmas, the first shipment for United States will be sold in United States. So which means we have now started exports out of Japan for ARIA to United States and United Kingdom. And Europe. Now your question is whether this facility will be deployed around the world? Answer is yes. Starting from starting from Tochigi, the line which we are putting up in Cinderland is exactly similar. The line which we are putting in Canton, Mississippi is exactly the is exactly the similar. But what we have to be very sure that there is a good balance between Japan production and the overseas production, because if you put all the production in Japan, especially for electrified cars, we may not be able to qualify for IRA in the United States. So we will lose seven thousand five hundred in the United States. On the other side, to get seven thousand five hundred, if you put everything in the United States, then we will have difficulty in managing our our our capacity in japan for domestic as well as exports so that's where we are realigning our mid to long-term industrial strategy not only driven by exchange rate but also the local business practices and the regulations to maximize the benefit for the profitable growth hope it answers your question thank you

thank you tochigi production is 160 units to 180 units so it's ramping up and i'm relieved thank you thank you okay it's time so with this we would like to conclude the session thank you for joining us