R&D plus CapEx, 7% to 8%. As you notice, probably in Q4, if you did the calculation, R&D plus CapEx as a percentage of net revenue is like 12%. It’s very high. This is exactly what we just mentioned earlier. Given that we finalized the Arc, we decided to pull ahead some of the R&D and CapEx into this year. We are able to — luckily, with the good free cash flow, we’re able to fund it and we have now accelerated some of the investment for future. So I think those are your three questions, Yuzawa-san. That’s the answer.
Kota Yuzawa: Thank you. Yes. Another one. Within 180 days, you said, as a result, inventories will be reduced and you are confident of a free cash flow. So is there a possibility that you can buy more than 2.5%? And the second one, R&D expenses for 2024, how much is it?
Stephen Ma: R&D expense for 2024, we usually don’t disclose that kind of detail. I think you have to wait for Q1 announcement. You can see actual — maybe see some of the actuals. But we usually don’t give the full amount. It’s increased year-over-year, for sure. Similar to what we do for CapEx. That’s what I can tell you. Regarding the share buyback for the remaining shares for right now, we’re still discussing with them. We haven’t made up our decision or made up our mind. But I think we got a lot of feedback from some of our shareholders that they are also looking to have increased dividends. So we’re trying to balance the two, which is why for the year-end dividend, you saw we increased our final year-end dividend to JPY15, so full year is JPY20 and also increasing dividend for next year. So we will see the reaction to that and then we will judge as we go through the year.
Kota Yuzawa: Thank you so much.
Operator: Thank you very much. Next, Citigroup Securities, Yoshida-san. Please go ahead.
Arifumi Yoshida: Thank you very much. I would like to deepen my understanding on outlook. Q4 operating margin, if we exclude the reversal of provision, it’s probably around 1.5%. On the other hand, for this fiscal year, for the full year, your outlook is 4.4%. In Q4, there was a one-time off seasonality dip. So if that’s transitional and one-time off, how much was the one-time off amount and in the current fiscal year, you’re expecting a significant improvement, like a convection. Can you elaborate? Second question, North America, relatively speaking, in comparison to your peers, brand capability and product lineup strength, how has those indicators changed in the past few years? What’s your take? Incentive, according to external data, according to database, you’re regaining your high profile and against other Japanese OEMs, you are recovering your status.
North America, we can’t, however, be confident that you are improving in North America. That’s probably the reason why convection isn’t improving from the external perspective. New models will be introduced, but are they equipped with brand strength? Are they strong products? Those are my two questions. Thank you.
Makoto Uchida: On your first question, I will ask our CFO to respond. Regarding the second question on the United States. First of all, in terms of the number of units, it’s come back to historical levels. Rather than focusing on those dimensions, as I talked about to the media people, in comparison to pre-pandemic days, if we look at the recovery of other OEMs, unfortunately, in the case of Nissan, we have not gone back to the previous level, FY 2018. Against the number of units, how did we do in 2023? If we do a one-on-one comparison, we have not regained to the pre-pandemic level. Yes, there was a shrinkage of the market, but even in comparison to our peers, our recovery hasn’t been so strong. So if we look at the United States for full year 2023, although the number of units on year-on-year basis has improved, is this the underlying strength?
There are areas where we haven’t recovered. What happened in 2023? Yes, the supply-side challenges were more tough for us than our peers. So gaining strength in those areas would lead to balanced inventory, as we spoke, and in the affordable segment, Kicks, Versa, Sentra, these models, in that market segment, we need to regain presence. But quality of sales, we won’t sacrifice quality of sales. We want to maintain quality of sales and regain presence and achieve volume as well. So that’s the backdrop to our outlook for 2026. You also spoke about the incentives for PHEV, FEV, in the United States. Because we don’t have models, if we compare the incentive, there are zones where we don’t need incentive in the FEV sector, but in ICE sector, the incentive for ICE cars is cheaper than other competitors.
So we are competitive and we’ve been able to sell our products by maintaining quality of sales. And how do we strengthen the brand power of our product lineup portfolio? The high net worth versus affordable, those are the two segments where there is high needs in the United States market. And in New York. QX80 is popular with its functionality and where you have confidence, and as you can see, Kicks as well. At the New York Motor Show, this gained popularity. So by our customers, potential customers, understanding the values, 3.7 million units, 14% year-on-year growth in North America. So we will increase presence through these models, and by maintaining quality of sales, we will achieve underlying number of units as we offer our products to our customers.
Stephen Ma: Regarding the first question about the Q4 profit percentage. You’re right, there’s multiple factors at play here for the Q4. One, as you already highlighted, we have normal seasonality, where Q4 typically is a lower margin quarter for us as it’s towards the year-end, a lot of costs and expenses are happening. So typically our Q4 profit margin is like 1 percentage point to 2 percentage points lower than four-year average. That’s perfectly normal. Secondly, we had two unusual items in this Q4. One is the cost relief provision and the other one is the reversal of the litigation provision. The reversal of the litigation provision is very simple. It’s just JPY38.8 billion that we reversed above OP and below OP in non-operating, we also reversed some of the potential FX losses that we had to book given that yen was depreciating in the last couple of years.
So we had also booked another JPY15.5 billion for FX loss potentially. So we also able to reverse that below OP. So this is why for the litigation provision, there’s above OP of JPY38.8 billion and below OP of JPY15.5 billion, so a total of about JPY54 billion from the income base. So that’s for that one. Unfortunately, as I mentioned earlier, I cannot give you the exact number for the one-time for the supplier cost, how much that is, but I think you can sort of guesstimate from the step chart roughly for your own estimation. You can see that inflation is JPY49.1 billion, and others in the monocyclic cost is JPY62 billion negative, a large portion of that is for those kind of costs. I cannot give you the exact number, but those are the kind of costs that we have in those two categories.
That’s where you will see it. Not all of it is, but some of the majority of that is. So your final question is, what would be — if I adjust out these abnormal items, what will be the profit margin in Q4, because you want to use as an indicator for next year, I fully understand. Based on my own internal estimation, Q4 without this litigation provision and supplier kind of cost relief should be somewhere between 3% to 4% OP margin, which is fairly healthy. So I think it’s upper end of that probably, but it’s a pretty healthy Q4 in my opinion. So I think it’s a good stepping stone for the future quarters. Yoshida-san, I have given you enough indication?
Arifumi Yoshida: Yes. Thank you very much.
Operator: Thank you. Moving on to UBS Securities, Takahashi-san, it’s yours.
Kohei Takahashi: Yes. This is Takahashi from UBS. Starting with the first one, in fiscal year 2024, retail sales plan in North America is 170,000 units increase year-on-year. In your elaboration, you talk about Kicks, Versa, and Sentra, affordable segment will increase largely. If possible, U.S., Mexico, Canada, if you — could you divide all these countries and give us a breakdown of the volume or these three models, affordable segment, how much are you going to boost the volume in affordable segment? That’s the first part of the question. Why am I asking this question? Because U.S., affordable — besides affordable segment, things are challenging in U.S. So Nissan, can you keep the quality of sales? I think this will be the testing period.
So if you are bullish about the volume, you may pursue volume than value, but I would like to make sure that’s not the case. And the second point, the Arc, fiscal year 2024, what is the positioning of the initial year of the Arc? How significant it is? It can be qualitative. So could you explain? Operating margin, in order to recover operating margin, in fiscal year 2024, fixed costs may rise, but volume increase, how are you going to improve the operating margin? You are still in the preparation in fiscal year 2024. New models will be introduced, but not in large numbers this year, right? So financially, when will the operating margin improve visibly? At the earliest, it will be in the latter half of fiscal year 2026. I think the operating margin will improve significantly in the final year of the Arc, if you look at the plan for fiscal year 2024 and the new product plan.
Am I right? This fiscal year, I hope you are on track. I want to see, is there any exceptional factors to be considered in 2024? What’s the positioning of 2024 in the three-year plan? Thank you.
Makoto Uchida: When I talk about the Arc, I talk about the upcoming new models. Out of the 30 new models in Nissan brand, we have 15 and we gave you a rough breakdown by year. So as you indicated, in 2025 and 2026, the profitability, highly profitable models, I’m not sure whether this is the right way to express it, by high profitable models will come out in 2025 or 2026. So in 2024, we would like to boost the basic volume first with the lineup. That’s the positioning of fiscal year 2024. As I said earlier, in North America, in affordable segment, are we supplying enough in affordable segment? No, there were a lot of supply chain challenges in 2023, including logistics and we have been solving them, taking action, and in the fourth quarter, we supplied a lot.
However, in the final quarter of 2023, as I have referred to, Rogue model year, there was a switch over the model year of Rogue, and that was an issue and that is why incentives rose. So after April, we will boost the volume of affordable models. That’s the strategy that we have. And Japan, no, U.S., in Americas, North America, Mexico, Mexico, as you may know, in March, market share was 18.9%, was it? I don’t have the precise number, but we were at a high level. And in Mexico, we would like to use the sales power to boost the volume and increase the share in the market. So in Mexico, for example, in TIV, we don’t assume a big number for TIV. But if that TIV — according to our perception, TIV will increase by 4% year-on-year and double digit growth is what we’re expecting.
America says 13.3% growth. If you divide it in U.S. and Mexico, it will be kind of similar. Oh, by model, as you said, Sentra, Versa, Kicks, but Pathfinder and Frontier, these bigger models will — we would like to boost the share. We talk about the base volume. We would like to boost the base volume with these models as well. But as I said, we are not going to spend big amount of incentives. Rather, we would like the customers to appreciate the value and be ready to pay for it. That’s a strategy.
Stephen Ma: Can I add to that also, Takahashi-san? So as we said before as well, Nissan aims to build a balanced portfolio and then the electrification speed is determined, is based on the customer taste and what the customer trend is. And right now in the U.S. market, you can see sort of slowing down for EV, pure EV, but hybrids picking up. So we are obviously reconfiguring our plan in the Arc where we’re going to introduce e-POWER to the US. And also as mentioned by our partner Mitsubishi Motors, we’re going to do a plug-in hybrid together with them for North American market. So the first year, next year, FY 2024 is very critical part for us because we are launching four very, very good SUVs, as Uchida-san mentioned, the Kicks, the QX80, the Armada and the Murano.
These are all good, very profitable ICE vehicle, but also in high demand. Yes, they are mass market who’s moving towards more affordable, because interest rate and inflation still high, but eventually interest rate inflation will come down in the U.S. As they come down, then they will move back up maybe into the market a little bit more to more premium. While the rich customer, more higher household customers, they are still buying the higher end vehicle. So the launch of the QX80, as Uchida-san mentioned, we just launched it in New York and they will go on sale in summer and this will be probably the highest price Nissan company has ever offered, other than GTR, that’s targeting those premium customers. So we are having good expectation, high hopes for these four cars, contributing FY 2024 and FY 2025.
Kohei Takahashi: Thank you.
Operator: Okay. Moving on to JPMorgan Securities, Kishimoto-san, please.
Chie Kishimoto: Yes. JPMorgan, Kishimoto is speaking. Thank you for the opportunity. I have two questions. The first one, is China operation, what is the cash flow in China operation in the fiscal year 2023, and as well as 2022? If you look at China operation, it’s a cash burn I believe. In the fourth quarter in 2023, Chinese sales are picking up. However, with this situation, free cash flow, if you think about competitive landscape for the fiscal year 2024, there seems to be concern about the free cash flow. So for fiscal year 2024, the sales volume in China is stable year-on-year. But how about the cash? What is the cash projection in China? Could you elaborate on this? In the past, Chinese operation was benefiting from high cash flow with a cash cost [ph] business.
But going forward, in terms of cash, wouldn’t China be a risk in the future? I want elaboration here. This is the first part of the question. And the second one is a simple question. Earlier, there was a question. There is a huge gap between production and retail. So you need to adjust the inventories to a large extent, I believe. And operating profit variant analysis tells me the JPY10 billion of negative is due to mix and volume. So can you expect the volume will not increase? Is there any — what are the factors behind this? Could you elaborate on this? These are the two questions. Thank you.
Stephen Ma: So, let me address those, Kishimoto-san. First of all, our China joint venture, DFL, actually is cash cost — cash flow positive. It’s still net cash flow positive. So they are operating with — still is — as you pointed out, it’s not nearly as high as it used to be, but it’s still positive. That’s the first thing. If you’re looking at the difference between the equity-based free cash flow and the proportional base free cash flow, and therefore, deducting that it’s negative for China operation, there’s a slight accounting adjustment in here as well that you don’t see, which is in the past, we used to get dividends from China. This will help the free cash flow on the equity base. So we are getting less dividend, which is why we are seeing this kind of difference of this 2 basis free cash flow.
