豐田汽車 (TM) 2004 Q2 法說會逐字稿

Okay, everyone my name is Melinda and I would like to welcome you to the Toyota Motor Corporation financial results for the 6 months ended September 30, 2004 conference call, with your chairperson Mr. Takashi Hata.

[OPERATOR INSTRUCTIONS]

I would now like to turn the call over to Mr. Ken Sue from Toyota Motor Corporation, who will introduce the conference.

Hello everyone. Thank you for joining us today. I am Ken Sue of Accounting Division of Toyota Motor Corporation and I would like to welcome you to today's discussion of earnings results for the 6 months period ended September 30, 2004.

I'm joined by Mr. Takashi Hata, Managing Officer of Toyota Motor Corporation. Today's conference call consists of 2 parts. First, Mr. Hata will review Toyota's earning results for the 6 months ended September 30, 2004. As a reminder, the slides from this presentation are available on the financial results section of the Toyota Motor Corporation website at www.toyota.co.jp/en/ir/index.html.

At the conclusion of Mr. Hata's presentation we will open for any questions. We expect that the entire call will last approximately 1 hour.

Also, please note that the following presentation contains forward-looking statement that reflect the plans and expectations and our actual results may be materially different from those expressed by this forward-looking statement. A complete cautionary statement with respect forward-looking statement is included on page 2 of today's presentation material.

In addition, our complete cautionary statement with respect to insider trading is included on page 3 of today's presentation material, which again can be downloaded from our internet home page www.toyota.co.jp/en/ir/index.html.

Now I would like to turn the call over to Mr. Hata.

Thank you Ken. Hello everyone. This is Takashi Hata. Thank you for joining us for today's conference call on Toyota's financial result for the 6 months period ended September 30, 2004.

Please look at the consolidated financial summary. Earnings grew substantially to new record levels. Net sales and the operating income increased for the fifth consecutive year. This is a result of our effort in launching the right product in each market and optimizing our global production.

Slide 7 shows the growth in operating income and include efficiency. I would now like to discuss the details of the consolidated financial result.

Consolidated vehicle production increased significantly in all regions to 3.469m units, up 450,000 units year on year.

Moving on to the next slide, both consolidated and retail sales produce a year on year increase in all regions. Consolidated vehicle sales grew to 3.567m unit, up nearly 400,000 units.

Slide 10 [next slide] the operating income growth of 98.5b yen, strong production, sales and cost reduction effort offset our negative affording exchange impact, and increase our R&D and other expenses.

Let's look at the -- look at the situation in the major geographical segments. In Japan the Crown led the growth in the large segment. In the compact segment new models including the Porte was successful. Overall, consolidated sales increased 25,000 units from the previous year to 1.1m units. Accordingly, our market share excluding mini vehicles increase from 42.5% last year to 44.6%.

For both these by continuing overseas demand, domestic production rose 155,000 unit to 2.177m unit year on year. Despite a negative impact from the stronger yen of about 100b yen operating income reached the 490.6b yen.

Slide 12 shows the quarterly changes in operating income regardless of the ForEx environment. A good level of profit has been maintained.

Next in North America consolidated sales grew [indiscernible]% to 1.126m unit driven by the locally produced Sienna, Hilux [330] and the newly launched [car] Scion tC.

[Here is] market share reached a new record of over third of a point 1% on a semi-annual basis.

To meet the strong demand for the police in North America, we plan to increase the production in Japan from 120,000 to 180,000 units a year. An increase in both production and sales resulted in gross operating income by nearly 50% year on year to 244.7b yen.

The quarterly trend indicates that Toyota has established a solid profit basis supported by the balanced contribution from manufacturing, sales and the financing. We continue to make effort to expand the sales by launching new models in a variety of segment, including Tacoma, the Lexus GS and Hybrid SUV.

Let us move on to Europe. Due to continuously favorable sales of the locally produced core models namely the Avensis, the Corolla and the LS. Consolidated vehicle sales increased 8% from the previous year to 476,000 units. Beside the traditional market, new market typically Russia are experiencing rapid growth in sales. As a result, despite the expensive product line launch of the Corolla Verso in Turkey, and the implementation of the further shifting in price, earnings were from both manufacturing and sales, operations improved.

Operating income jumped nearly 3 times to 66.3b yen. As you can see in slide 16 with the development of a stronger profit basis in local manufacturing and sales, profit levels have been improving. Looking ahead we plan to strengthen our bigger engine in the [indiscernible] to support further sales -- sales growth in Europe.

In other regions we achieved the strong sales, especially in Asia, Africa and the Central and South America. Consolidated sales increased 34% year on year to 859,000 unit. The IMV [indiscernible] was launched in Thailand and Indonesia during the second quarter to make favorable result. Consequently, operating income increase 33% to 70.9b yen.

Please move on to slide 18. Increased sales in Taiwan, Thailand, Indonesia and other Asian countries have been driving profit growth. The IMV production is expected to further contribute to this trend.

In summary, Toyota has been generating a profit in not only Japan and North America but also Europe, Asia and other regions.

With regard to Financial Services, operating income significantly increased by 41b yen. This largely was a result of growth in the branch of captive finance in accordance with increased global sales.

Let me move on to slide 20. Equity in earnings offset our unit count increase, mainly due to a strong result of Toyota Group's [players]. Our joint ventures in China are keeping favorable results.

In September monthly sales of locally produced vehicles exceeded 10,000 units for the first time. Overall, the market temporarily faced a certain adjustment. It still allows itself to have significant potential for medium term growth.

We announced in September on the launch of [indiscernible] production in [Wanjo]. We intended to establish our full line lab local production in Sichuan, Tianjin and [Wanjo].

The table in slide 21 shows the capital expenditure, depreciation and R&D expenses. Next please move on to unconsolidated financial result.

The unconsolidated results are as shown in slide 23. Please turn to the next slide.

With regard to interim dividend we plan to distribute our new record over 25 yen per share, a 5 yen increase per share from the previous year. This is meant to reflect the record of consolidated results, as well as our policy of stable dividend pay out.

Slide 25 shows stable growth on Toyota's dividend over the last few years especially the increase has been more pronounced. We would like to emphasize more on dividends concerning value to be returned to our shareholders.

Regarding share re-purchase, Toyota has already exercised approximately 50% of the authorized annual plan of 250b yen. While the [legal just] per shares are being held in Treasury stocks we have no specific plans for a public offering.

Next I would like to discuss our prospect for the coming year 2005. For consolidated vehicle unit sales our current prospect is 7.22m units, up 501,000 units on last year.

The prospect of capital expenditure, depreciation and R&D expenses are as shown, although we do not disclose our consolidated profit outlook, our intention is to make continuous effort to retain the profit level achieved in the previous fiscal year.

For your relevance the prospective figures for Toyota's operation excluding Daihatsu and Hino are shown in slide 30. Please note, that as for all automotive production we amend the figures announced this year of 3.2m unit in August to 3.08m unit. We apologize for any confusion this may have caused.

Our current outlook remains the same 3.08m unit.

Lastly the prospect for the unconsolidated financial result are summarized in slide 31.

This conclude my presentation. Thank you for your attention. I would now be happy to answer your question.

Thank you.

Thank you Mr. Hata. During the Q&A session we will have consecutive interpretation for questions and answers in Japanese and English. We ask that you please follow the instructions of the conference operator. Please go ahead.

Thank you. Today's Q&A session will be conducted electronically. [OPERATOR INSTRUCTIONS].

Our first question today comes from Michael Brunstein of Prudential.

Hello Hata San. Thank you very much for hosting the call today. First, can I just put in a request for future calls that perhaps we focus a little more on the quarter than the half. That I think would be a little more helpful to us.

Now specifically looking at the quarter and Japan, could you talk about the operating, I guess the key elements are the cost increases that countered the operating and cost reduction performance. We had R&D and other were up and I'd like to understand that a little better please.

Thank you for your question Mike. I understand your question has to be related to the quarterly comparison between the second quarter this year against the second quarter last year. And let me summarize the outcome of the comparison as follows.

Overall, there has been a reduction in operating income by 9.4b yen, and if I may refer to some of the negative and positive factors. First of all, the sales and marketing efforts improved -- produced the improvement by 90b yen and cost reduction efforts contributed 30b yen. So, the total of positive factors amounted to 120m yen.

The negative factor included exchange rate fluctuations subtracting from the operating profits 30b yen and R&D expenditure is subtracting from the operating income 79.4b yen. So, overall the aggregate net factors totaled 129.4b yen and the net result was a diminutive 9.4b yen in operating profit. That means reduction in operating income by 9.4b yen.

Especially R&D expenditure increased for the future expansion and operation expansion. So, R&D as well as other expense items increased relating to stand-alone further bases as well as subsidiaries. Similar situations are observed in terms of higher R&D expenses and other expenses. And these are increases for the future growth and development [earning].

So, I may summarize that -- all that have I just mentioned relates to the second quarter of this year relative to the second quarter last year.

Thank you and then just 1 follow up. We have conflicting third party reports of incentive activity in the quarter, some are saying up, some are saying down. What impact did you see and could you quantify that for us? I'm talking about North America specifically.

This result is [how while] incentive that our competitors increase year on year. Further decrease [so much].

More specifically for the second quarter the incentive per unit of vehicle was $902, $902 per unit per vehicle.

And the year ago period?

The second quarter last year was $1,178 per vehicle.

Thank you very much.

Thank you.

Thank you sir. [OPERATOR INSTRUCTIONS]. Next we'll hear from Rick Harman from Philadelphia International Advisers.

Hi, I just want to follow up on the last question. The 2 positives that you mentioned, the sales and marketing positive 90b yen and the cost improvement positive 30b yen add up to 120b yen. And then the negatives add up to 109.4b yen would mean a positive 10.6b yen. And you were saying that there's a negative 9.4b yen. Can you explain the difference?

There has been -- there may have been some mis-communication, so let me give you the accurate numbers once again. First of all the positive factors included cost improvement efforts adding to the operating income 30b yen, sales and marketing contributing 90b yen, a total of 120b yen was contributed by those positive factors.

Moving on to the negative sectors exchange rate movements subtracting 50b yen from the operating income, R&D and other expenses subtracting from the operating income 79.4b yen. So, the aggregate amount of negative factors totaled 129.4b yen. So, the net result was the negative 9.4b yen.

Okay thank you.

Thank you.

And if you could also, another question can you explain in the Japanese operations what percentage of the vehicles were, if you had some type of a dollar or value figure that you can tell us, were exports versus vehicles produced for your domestic market, for the Japanese market?

Is your question specifically related to the second quarter?

Yes.

Could you give me a little more time please?

Sure.

For the second quarter let me give you the numbers in terms of the volume, domestic market volume 425,000 units, for export 487,000.

Okay do you have a value amount?

A little more time is necessary.

Thank you.

Okay, we respond with respect to first of all the domestic sales which totaled 712b yen and exports 923b yen for second quarter.

Okay great, thank you very much.

Thank you.

Thank you Mr Harman and [OPERATOR INSTRUCTIONS]. Margaret Warr of American Century has our next question.

Thank you, I have a couple of questions. First there's been a great deal of commentary on the slowdown in China, and the relative importance of high-end cars versus lower cost cars. I was wondering if you could comment on your expectation for the remainder of the year and going into next year for the different models that you'll be selling.

Secondly, could you comment on steel price increases and other raw material price increases that you anticipate in the second half of this year, and initial expectations for next year as well.

First of all let me share with you our view of the Chinese market. As of today the Chinese market seems to be in a temporary adjustment phase.

However from a medium and long term prospective China, and especially Toyota market is the market with a huge growth potential. And some of the reasons behind this temporary stagnation of the growth first of all relates to the price reduction -- reduction in selling prices by their car makers which cost consumers, which are waiting the sidelines in anticipation of a further price reduction announced by the car makers.

And secondly, some regulations of the conditions for car loans, automobile loans have been tightened. And as a result of that 20% of the purchases of vehicles who depend upon automobile loans for the purchase, have been restraining their purchase activities. But with those temporary adjustments continuing and occurring occasionally, I guess the Chinese market will continue to grow in the future.

Of course, it is very difficult to anticipate how -- what the market itself holds for us in China, but in each segment we in Toyota intend to achieve [set path] growth by augmenting our overall vehicle line up.

Moving on to the impact of higher prices of raw materials, let me start with the price hike of steel sheet. To date whatever increases have occurred have been kept within the range that we had anticipated or factored in at the beginning of the fiscal year. However prices are matters of individual specific transactions, and therefore I would like to refrain from divulging any specifics of any specific transactions.

With respect to other raw materials including platinum, rhodium, aluminum and the precious metals, these are the materials whose prices are determined by the market conditions. There has been some increase in prices in those materials, and therefore we intend to remain very vigilant monitoring whatever development in the market.

Does that answer your question?

Yes thank you very much.

One correction relating to my answer to the previous question, which I think was by Mr Jones, a question related to the amount of sales for the Japanese domestic market against the amount of the export. And I cited 712b yen as domestic sales and 923b yen as exports. But it [isn't] 923b, the correct number is 954b is the accurate figure for the amount of vehicles exported from Japan.

[Hello?]

There's more please standby they are researching your question.

Oh Okay.

Moving on to John Greenhill of Lazard.

Hi thanks very much for the call. Just on the China side, could you tell us if you've currently seen an inventory build in your own models in China and what you're doing on pricing? And in the longer term, can you tell us do you expect China to become -- it looks very competitive, do you expect it to become a low margin market like Japan or remain a high margin market like the US?

Was there anything further Mr Greenhill?

Have they gone home? No that was it thanks.

First, let me respond to your question in relation to the inventory. The inventories have not increased in China.

And unfortunately, I do not have any accurate pricing figure with me at the moment, but in the light of the kind of market conditions I mentioned earlier, I suppose that our prices have come down somewhat, but let me get back to you later with more accurate information on that.

With respect to the future of the Chinese market with respect to the profitability, as I mentioned earlier, the Chinese auto market itself, I believe it still at the stage where changes are taking place very rapidly. And we do not have any accurate prediction as to how that market conditions are to settle down going forward. So, we do not have any explicit and clear projections of the respective likely profit levels in the future.

Having said that, let me also add that Chinese market does have a very important and very high potential for the future. And therefore overall, we believe that the market is likely to be one where we can secure a lucrative amount of profit. Bearing that in mind then, on that assumption we are beefing up our production capacity as well as augmenting sales network, consolidating sales network there.

Thank you.

[OPERATOR INSTRUCTIONS]. Next we'll hear from Benjamin Moyer of Merrill Lynch.

Hi Mr Hata. I have 2 questions, the first 1 is on your -- your breakdown of factors affecting profit. You mentioned 4 for the second quarter - lower costs, marketing effort, foreign exchange and R&D. I wonder if you could give us any further detail on these items. In particular cost decreases contributed only a positive 30b yen to your profit. Usually Toyota seems to on an annual basis achieve about 200b yen or more in benefits from cost reductions. This seems small to me, I'm wondering if this is net of increased costs from higher raw material prices, etc and that's why the number is so small.

If you could just break these down a little more finely it would be a more instructive to us. That's the first question.

And the second question is on your dividend policy, does Toyota have a target pay out ratio? And do you think that this policy of having a target pay out ratio and increased emphasis on dividends is going to filter down to your affiliated suppliers in which you own equities. Is there -- do you think there will be an effort on the part of Toyota to influence the pay out policies of its largely owned affiliated suppliers?

Thank you for your question. First of all, I'd like to respond to your question relating to the cost improvement efforts and your point is correct and very well taken. I earlier talked about market condition fluctuations especially relating to precious metals and impacts stemming from that has influenced our cost reduction contributions.

And as a result , we have-- we write downwards the target cost reductions. And as a result for the current interim period this 30b yen coming from the cost reduction or cost improvement efforts represents probably 10b yen lower figure than the original anticipations.

For the full year outlook, considering the impact of the higher materials costs among others against the initial cost reduction target of 200b yen, we lowered that to 170b yen reducing it by 30b yen. So, that is my response to your first part of the question cost improvement.

Next I would like to respond to your question relating to the dividend policy. For the interim period we have planned to distribute 25 yen per share as interim dividend representing a pay out ratio of 31.1%. Emphasizing the returns and benefits of our shareholders is a very important point of our management policy and we would like to proper-- properly respond to the expectations that shareholders may have.

And as I said, that's a very important aspect of our management policy. So, while making every effort to improve our earnings capability we would like to continue paying dividend on the consistent and stable manner over a long period of time. However, we have not set for ourselves any specific numerical target payout ratio.

Yes but do you have any comment on the part about influencing the pay out philosophy of your affiliated suppliers?

It just seems like a good philosophy to me and I would think that increasing dividends would -- Toyota might be trying to influence the policy of its suppliers.

In terms of the rough direction probably one can think in line with what you have just mentioned. However, each company would have its own investment requirement, for example funds. And therefore any pay out would be determined primarily by capital expenditure planned for the company who is planning the business strategy plan of the company concerned.

Thank you, Mr. Moyer. Next, we'll hear from Kurt Sanger of McCrary

Hello and thank you. I just want to ask you about your hedging policy for the rest of the year. Your forex-- US dollar forex rate would have been 105 yen to the dollar for the second half. Thinking that you are mostly hedged for the third quarter, would that be implying a less than 105 yen to the dollar assumption for the fourth quarter?

Based upon certain assumptions in philosophy we are carrying out hedging operations in a very stable manner. It's not that we have any specific number in mind in terms of the likely exchange rate levels for the first quarter.

Okay. Thank you. And a second question is your Dyco Hangzhao impact for the first half of fiscal year period '05 at the operating and the equity method level? And can you confirm what those impacts will be also for fiscal year period '04 first half?

We had the [indiscernible] impact during the current interim period of 9.1 billion yen on our operating income and 3.8 billion yen coming from gains in investment accounted for under equity method.

For comparison purposes, can you give us last year's number?

For the fourth quarter last year, 107 billion yen was booked as the gain from Dyco Hangzhao, but zero for the second quarter last year.

Okay, thank you.

And our final question will come from Rick Harman of Philadelphia International Advisors.

Hi [indiscernible]. Thank you for that explanation on the changes in the costs between the first quarter and the second quarter. Could you also elaborate on the change in the sales and marketing, which you said is a positive of 90 billion yen, because just checking on the first quarter of last year, I believe that the marketing efforts contributed a positive 170 billion yen.

So there is even more of a change between your marketing efforts in the first quarter and the second quarter. Can you explain what was happening there, please?

First of all, let me compare the second quarter this year against a bad year that was last year. On the unconsolidated basis at GMC alone there have been positive 30 billion yen in contributions, primarily due to an increase in how vehicles exported.

And at the [continuous] levels, this 2 billion yen was contributed by semi-funded [indiscernible] sales in both North America and Europe.

Compared to [indiscernible] placed stronger emphasis on the reduction in operating income, both in Japan and North America. Starting with the Japanese situation, partly due to the model mix and also a very aggressive [indiscernible] of investment for research and development. So the future growth, those subtracted 15.4 billion yen from the operating income.

And specifically about North American segment, due to summer vacation production and also shipment volumes decreased, and Takoma, because of the model change period, experienced some reduction in volume as well. Only now, combining these 2 factors, we have been 14.9 billion yen reduction from first quarter to second quarter.

Rick Harman. Okay. I'm still -- There's a big difference between the first quarter and the second quarter, I guess is about 80 billion yen, and what I'm saying-- And so that explains maybe 15 billion of it.

Are incentives a major factor that are included in that [indiscernible] marketing figure?

Let me make sure that I understand your question correctly. First, you compared the first quarter last year and first quarter this year, and you have said the difference is 170 billion yen. When comparing the second quarter year over year, you talked about 90 billion yen as difference, and you are asking about the difference between these two volumes?

Actually, I'm just comparing the change in the marketing effort between the first quarter of this year and the second-- I'm sorry, the first quarter of this year and then the third quarter of this year.

Okay, first quarter and the second quarter. So you've got the figures that you just released today for the second quarter, and I'm just really relating that back to the first quarter figures that you gave on August 3. So at that time, for the first quarter, you said that the improvements in the operating profit from marketing efforts were 170 billion yen, and then the-- this time you're saying that for the second quarter the improvement from Sales and Marketing was 90 billion yen.

So that would be an 80 billion dollar decrease in the improvement from the marketing efforts, and I'm just wondering why that's so much lower for this quarter than it was for the previous quarter?

The most important factor, I think, relates to the following. During the first quarter last year, especially in North America, we had model rotations -- model reduction rotations amongst the different plants in North America, and therefore that reduced or kept North American profits again in the first quarter last year to a significantly low level.

If you compare the first quarter this year against first quarter last year, because of that there seems to be a substantial increase in operating income this first quarter.

Okay, thank you for that explanation. If you were to take that amount out, I don't know what that figure would equal, but I guess on a comparison for the first quarter, what would it be without that rotation? Would that 170 billion yen drop down to a lower number? And then how would that compare to the second quarter figure?

I think they're taking a little more time than I had anticipated, but as I mentioned earlier, the impact of the model rotation accounted for 315 billion yen in [indiscernible] numbers, and on top of that, during the second quarter of this year the model mix because less favorable, which compromised the increase in operating income.

Okay. Thanks for that explanation, and just to follow up on what I asked before regarding the incentives, the incentives-- the costs actually decreased per vehicle during the quarter. I'm wondering if those incentive costs at all are reflected in this marketing area that you're mentioning -- the Sales and Marketing positive improvement?

Yes, that is included in the contribution made by Sales and Marketing efforts.

Okay. Thank you very much.

I apologize for correcting myself once again. Earlier there was a question relating to the value amount of the domestic sales and also exports, and we re-calculated the numbers, and what I am going to give you are the correct numbers.

The value for the domestic sales was 735 billion yen, and value of exports from Japan for overseas, 982 billion yen. So 735 billion yen against 982 billion yen, and these are the accurate numbers.

That does conclude today's question and answer session. Mr. Sue, I'll turn the conference back to you for any additional or closing remarks.

Thank you. This concludes today's conference call. Should you require further information regarding today's conference or on Toyota, please feel free to contact our IR representatives in London and in New York. The contact details were given at the end of the invitation to this conference call.

Thank you again for joining us today. Goodbye.

Thank you. That does conclude today's conference. Thank you for your participation, and you may now disconnect.