豐田汽車 (TM) 2004 Q3 法說會逐字稿

Please stand by. Good day everyone. My name and April and I would like to welcome you to the Toyota Motor Corporation financial results for the 3 months ended December 31, 2004 conference call with your chairperson, Mr Takashi Hata.

[OPERATOR INSTRUCTIONS]

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

Hello everyone. Thank you for joining us today. I'm Ken Sue of the Accounting Division of the Toyota Motor Corporation. I would now like to welcome you to today's discussion of earnings results of the 3-month period ending December 31st 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 earnings results for the 3 months ending December 31, 2004. As a reminder, the slides from this presentation are available on the financial results section of the Toyota Motor Corporation's website at www.toyota.co.jp/en/ir/financial_results/index.html.

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

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

In addition, a 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/financial_results/index.html.

Now, I'd like to turn the call over to Mr Hata.

Hello everyone. Thank you for joining us for today's discussion on Toyota's financial release for the 3 months period ending December 31, 2004.

Consolidated results for the third quarter are shown in Slide 5. All profits increased year on year.

Next, I would like to show you details of our consolidated vehicle sales. Our sales grew in all regions, achieving 1.839m units in total. With an increase of 139,000 units, or 8.2% year on year.

Slide 7 breaks down the operating income results of 21.3b yen. Operational and cost reduction effort offset the negative impact of the currency exchange rate fluctuation and the increase in other expenses.

Next, I would like to discuss the situation in major geographical segments. In Japan, consolidated vehicle sales increased by 19,000 units, or 3.5%, to 573,000 units, driven by favorable sales of new models such as Isis(ph) and Mark X.

With regard to retail sales. The Toyota brand sold 1.76m units and achieved 44.4% share in the new car market excluding mini(ph) vehicles. Retail sales including the Daihat(ph) and Hino brand reached 2.39m units and the market share was 40.8%. Both market share levels were new records.

Page 9 shows our operating and income performance in Japan. Despite the appreciation of the yen against the U.S. dollar, and the increased other expenses, operating income improved by 11.2b yen to 237.3b yen, due to marketing and cost of reduction effort.

Moving on to North America. The Toyota, Lexus and Scion continued to sell well. Consolidated vehicle sales grew by 2.6% to 576,000 units. In the calendar year 2004 the Camry was the top-selling passenger model in the U.S. market for the third consecutive year. Our RX 300 sold over 100,000 units for the first time as a Lexus brand. With the annual sales of Scion reaching 100,000 for the first time, we have been successfully acquiring new, younger customers. In total, U.S. retail sales for the calendar year 2004 reached 2.06m units exceeding our target of 2m units and market share marked our new record of 0.2%.

Other results of such a marketing effort, despite intensifying competition, we maintained a high level of profit comparable to the previous third quarter.

Now let us move on to Europe. Thanks to an increase in sales, such as in Russia, consolidated vehicle sales increased 14.3% to 249,000 units. In addition, the Prius was well received in Europe and was awarded the European car of the year. [3,000] retails sales in the calendar year 2004 reached 916,000 units [indiscernible] consecutive year, achieving record high sales in the region.

In an increasingly competitive European market, our sales continue to grow, led by the Yaris and Corolla Verso. Our local manufacturing volume expanded and we simultaneously improved cost reduction. Consequently, European operations and operating income increased by 1.8b yen to 26.5b yen.

In other regions, consolidated vehicle sales grew by 20.2% to 441,000 units. The IMV(ph) project launched in Thailand and Indonesia last year has been progressing successfully and we have received more orders than we had expected. We will drive to continue our effort to maintain strong order levels when we move to the IMV(ph) next stage of global expansion.

Please move on to the next slide.

The IMV(ph) project has already contributed to the operating income of other regions which increased 9.2bn yen to 33.5b yen.

Financial Services' profit increased to 6.4b yen compared to the previous third quarter. This was largely due to growth in a branch of captive finance in line with the increased global status.

Let me move on to Slide 17.

In summary, while we globally continued our efforts of development, production and the service to provide product does meet customer demand. We have attained calendar year sales target in all measured(ph) regions. We have also secured a high level of operating income compared to the previous third quarter.

Please turn to Slide 18.

We aim to continue to pursue the successful implementation of all our projects for future growth and the sustained expansion of both our [indiscernible] operations and the financial results. As a results, we have set our mid-term sales target at around 8.5m units by the end of calendar year 2006.

Before closing my presentation, I would like to explain our consolidated prospects for vehicle unit sales. We would like to upwardly [inaudible] the prospects announced in November by 17,000 units to 7.229m units. This represents a considerable year on year increase of 571,000 vehicles over the last fiscal year.

Slide 20 shows the prospective figures for [indiscernible]. As for consolidated earnings, while we cannot provide specific figures, we will make an effort to retain profit levels achieved in the last fiscal year.

This concludes my presentation. Thank you for your kind attention. Now I would be happy to answer your questions. Thank you.

[OPERATOR INSTRUCTIONS]

We'll first hear from Michael Brunstein of Prudential Equity.

Hello Hata San. Thank you very much for hosting us today. Could you please give some more detail on the impact of the operating efforts -- on the operating profits for the quarter -- perhaps outlining some of the key drivers by region -- specifically looking for pricing, mix -- other cost issues?

Thank you for your question -- I'd like to try to answer your question Mr Brunstein. First of all, our operating income on a consolidated basis for the third quarter had risen by 21.3b yen, but since you have asked me to elaborate on the operation efforts, I would like to elaborate on that specific stature(ph) that impacted the operating income. First of all, in terms of non-consolidated Toyota operating effort, this has resulted in the reduction of income by 10b yen and this is due to the deterioration of the mix in the Japanese market. But if we include the operating effort of the subsidiaries, this is a positive factor resulting in the increase of 40b yen, mainly in Asia and European markets.

Okay. Could I also ask -- in terms of the Daeko-Hanjo(ph) pension -- how often are we going to see this boosting the Japan operating results and is there any impact expected into the next fiscal year?

Let me answer your question with regards to the impact on the income of the Daeko-Hanjo(ph) pension system. For this quarter there was a positive increase of the income by about 28.5b yen as a result of Daeko-Hanjo(ph) and we forecast the boosting factor for the fourth quarter to be around 10b yen. But this is still our estimate and so this is not a very really accurate prospect, but we perceive such boosting effect in the fourth quarter. Having said so, starting in next fiscal year, although I cannot guarantee you what may happen in a very accurate manner. We don't see any major impact on our income.

Thank you very much.

Next we'll hear from Rick Herman of International Advisers.

Good evening Hata San. Again, thank you for the call. Can you go into a little bit more detail on North America and operating profit being slightly negative, if flat(ph). An identify the specific periods that were negative and positive? Thank you.

Thank you for your question. As you can recognize, our profits for the North American markets in the third quarter is almost on par(ph) with the level of the previous third quarter of 2004. And to give you a further breakdown, in the automotive segment, the marketing activity is -- I should say -- plus minus zero in North America. And for the Financial Services, we had a positive increase of 10b yen and there are factors that have resulted in reducing our operating income that is mainly the model change -- the model change of Tacoma and others(ph). The expenses incurred are as a result of starting up our factory in Mexico. These negative factors on the operating income, as a result of increased expenses, has pushed down the income by about 10b yen.

That was a total of 10b yen for both of those model change at Tacoma and the increased expenses for the Mexico start-up?

Well basically the answer would be yes. But to give you a greater breakdown of this 10b yen -- included in this 10b yen is also impact from the fluctuating exchange rate. So this is 3b yen which is part of the 10b yen that I have already referred to, other than that this also includes the model change of Tacoma and others.

Okay. For the fourth quarter of the fiscal year do you expect the operating profit in North America to continue to be flat or -- what is your outlook?

I thank you for waiting. I'd like to now answer your question. With regards to our forecast for after(ph) fourth quarter, as far as vehicle sales is concerned, we would like to see an increase by about 12,000 units over the same quarter -- that is the fourth quarter of the previous year -- and that is with regards to vehicle sales. However, when it comes to earnings, we do not have a similar forecast.

Just to understand that -- exactly that last comment -- does that mean you don't expect earnings to improve at all? You expect them to be flat?

You know that -- please take my statement as meaning specifically that we do not have a broken down regional process with regards to earnings at this moment.

Okay. Well then, 2 last questions. Do you expect start up costs from any of your plans in North America to continue to reduce [indiscernible] for the next quarter. And secondly, do you expect the trend in your marketing costs to improve or decline?

Thank you. First of all, to answer your question about the start-up cost, yes, it is true that for this third quarter we had the cost incurred with the companies and a start-up of factories in North America. But I recognize this as a positive expenditure. In other words, this would be conducive to the increase of future earnings.

But of course, having said so, there are differences among projects. So, for example, the truck factory in Texas would still require some time until the actual production would get started, which means that in this specific project, a cost would continue to incur.

But on the other hand, there are projects like the one in Tacoma, where the model change had been completed. So with the production going down, the cars would start to be sold. And so the cost that had been incurred would turn to earnings in the very near future. So it’s not that all these factory start-ups are recognized as cost centers.

Now, turning to the marketing assets, we have improved our product mix. And we have RV hybrids selling very well. [RX400-8] highland hybrid and full size trucks being introduced to the product mix. And we are trying to optimize this so as to maximize our profit as much as possible.

And to finally add just 1 more point, in the fourth quarter Avalon’s production would start up. So we would like to, upon launch of Avalon, make this model successful and so that this can make a contribution in the increase of our earning.

Okay. Thank you very much for your answer.

[OPERATOR INSTRUCTIONS]. We will now hear from Ronald Tadrose (ph) of Bank of America.

Thank you. My question is regarding North American pricing. It seems like the conditions are very ripe for a price increase for Toyota. Your resale values are very strong. The dollar is very weak. And your domestic competition is suffering in trying to take price.

I’m wondering whether you would consider raising prices and, if not, what would change your mind?

Let me answer your question, with the rapid appreciation of the yen, we have to think about solid and robust measures to be implemented to mitigate the negative effect of the rising yen on our operating income as much as possible.

Over the short term we have hedging activities, such as trading futures (ph) of foreign exchange, so as to mitigate the risk of the fluctuating exchange rate and the risk of yen’s appreciation on our operating income. So there may be a time when we have to reflect this in our retail pricing.

However, when it comes to the timing of the adjustment of our retail price or the margin of increase, we have not made any decisions.

Thank you. Maybe, could you just give us an idea of what your hedge -- what percent of your hedges are in place this year and next year 2005 -- calendar 2005 and ’06?

Our ratio is, on average, about 70 to 80%. And so we have the futures (ph) contract 6 months in advance of the timings -- specific timings for the payment. So I think this is above the average.

Okay. Thank you.

Thank you.

Our next question comes from John Buckland of Daiwa.

Good afternoon. It’s John Buckland in London. I notice on your changes of sales forecast that Europe was the 1 which got a cut in volume. I just wondered if you could comment on why that was.

And also the European markets are very strong in November and December. There’s also talk about big increases in incentives and price competition being tough. So I wonder if you could comment on those aspects of the European market as well?

Thank you. You have correctly pointed out that we had made a modification downwards by about 10,000 units compared to our forecast in the medium term. And this is mainly due to our consideration of the new vehicle sales in Poland being replaced by used car sales. And also the reduction of tariffs in Turkey.

Excuse me, I have misstated the direction of the tariff change in Turkey. It is the increase of the tariff in Turkey which we took into account in modifying downwards the sales process.

Okay. Can you comment on the European -- the Western European market then? It was strong in November, December then?

So as far as the Western European market is concerned, we still maintain a view that the market is quite robust. And the sales is going to progress quite smoothly. So our forecast for the vehicles sales, which was reduced, is mainly due to the situation in Central Europe, which we think would push down our vehicle sales.

Okay. You don’t have a comment on pricing or anything like that in the Europe market?

So with regard to issues related to pricing, I have to mention that [the year] as a model is coming towards the end of its life for that specific model. So this means that there was a slight increase in the marketing costs. However, in terms of the vehicle sales, it has grown. And as a result of our cost reduction efforts, there is not going to be any major impact on our revenue or earnings level.

Okay. Thank you very much.

[OPERATOR INSTRUCTIONS]. We will now hear from Adam Hurritch (ph) of KLC (Ph) Management.

Good morning. You’ve been -- Toyota’s been licensing its technology, as an example of Ford’s use of Toyota’s hybrid technology. Is there a way that you could recommend we think about the profitability of those arrangements?

So I think your question has to do with the possible profitability level of our licensing activities. First of all, I should say that licensing our technology is not giving a major impact on our income level. That is how we see the possible profitability of licensing. So what we are trying to do is, while keeping the core hybrid technology within Toyota, we are licensing the periphery or related technology.

But having said so -- although I said that there is no major impact on our income level, taking into account the accrued necessary expenses, we have some profit generated from this licensing activity.

Could I sum up with 2 quick questions. The first 1 is how aggressive do you think the opportunity for a hybrid diesel is? And secondly, to expand from that, do you see using the hybrid technology on medium-sized trucks and possible heavy trucks?

In response to your question, please do understand that when it comes to questions related to our future product development plans, at this moment we cannot disclose you anything specific.

However, technically speaking, hybrid technology can be applied to diesel as well as trucks. Not only passenger cars but trucks. Therefore the only thing that I can say is that we shall continue studying the possibility of this hybrid technology applied in other areas.

Thank you very much.

[OPERATOR INSTRUCTIONS]. We’ll take a follow-up from Rick Herman of Philadelphia International Advisors.

Thank you. Regarding your cost-cutting efforts, did you have a target for the quarter and did you meet that? And what is your target for the last quarter of the year?

So let me give you the numerical target that we had established for the third quarter. On a consolidated basis, our target for the cost reduction effort was JPY40b. On a non-consolidated basis it was JPY20b. And for the third quarter we have achieved this target.

Now our forecast and the target, I should say, for the fourth quarter is for consolidated JPY60b. Non-consolidated JPY30b. And for the full year, we expect the cost reduction effort to achieve a JPY170b level on a consolidated basis and JPY90b on a non-consolidated basis.

Thank you very much for those specific numbers. And getting back to North America, I appreciate that the mix is expected to improve in the fourth quarter. I’m wondering if you could also just talk about on the marketing trend, do you see incentives stabilizing or do you see them changing, deteriorating or improving in any way?

So let me explain to you the status of Toyota’s incentive. And we have, compared to other competitors, have established lower incentive levels. And we have been continuing this relatively lower incentive level compared to other competitors and also in comparison to the industry average.

When it comes to the future, we shall see and observe the situation of incentives of other companies so that we can make acceptable moves so as to address the change, if any, of incentives of competitors. But we recognize the consumer’s sensibility, or should I say response to Toyota’s incentives to be linked directly to ourselves. Therefore, Toyota’s incentive would be conducive to the increase of our sales volumes. So we shall continuously make efficient and effective use of the incentive policy.

However, whether we are going to change the level of our incentive is not something that we have specifically determined at this point in time.

Okay. Thank you for that detailed answer. I guess I’m just trying to get a feel for how you see things at this point in the quarter coming off the fourth quarter -- I’m sorry, the third quarter. Have things tended to trend at the same level? Or do you have any older models that are going to need some incentivizing? Can you give a little color there?

Well, it’s impossible to give you a generalized comment about the incentive level and how we feel the trend to change. And so there may be a possibility when it comes to the older models, such as Colora (ph) and KaMuRi, to have a relatively higher incentive established. But on the other hand we believe that the newer models that have started up and launched in the market very recently would require substantially no incentive.

Okay. Thank you very much for those details.

[OPERATOR INSTRUCTIONS]. And we will first hear from Kurt Sanger of McCrary.

Hi. Good evening. Thank you very much. I just wanted to clarify the DAIKO-HENJO impact in the fourth quarter. You earlier said you’d see about, I think, JPY10b this year. Is that a positive impact year on year? I remember you had quite a substantial gain in the fourth quarter last year. So net, what is the impact going to be to profitability? Thank you.

Thank you. Let me answer your question. As you have mentioned and recognized in the last fiscal year, as a result of Toyota’s head office returning our -- in other words resorting to DAIKO-HENJO, there was a profit generated totaling JPY107b.

And this year I said there would be a positive effect of JPY10b. And this is not JPY10b on top of the JPY107b. It’s from base line, having nothing profit generated from DAIKO-HENJO. So this year the positive increase would be JPY10b.

Well understood. Thank you very much.

Our final question for today will be a follow-up from Michael Brunstein of Prudential Equities.

Hi. Could you just give a geographic breakdown of the JPY40b cost cutting? Where did that -- where did the elements of that hit?

So thank you. Yes, to repeat, I said that the cost reduction effort would amount to JPY40b on a consolidated basis, and JPY20b on a non-consolidated basis.

When it comes to geographical breakdown, I just should say there is even distribution in terms of our cost reduction achievement among our subsidiaries.

Thank you.

Thank you.

Mr. Sue, it appears there are no further questions at this time. I will turn the call back over to you for any additional or closing comments.

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 New York. Their contact details were given and the end of the invitation to this conference call. Thank you again for joining us today. Goodbye.

That does conclude today’s teleconference. Thank you for your participation. You may now disconnect.