豐田汽車 (TM) 2004 Q4 法說會逐字稿

Good day everyone. My name is Evelyn Jacobs and I would like to welcome you to the Toyota Motor Corporation financial results for 12 months ended March 31, 2005 conference call, with your Chairperson Mr. Takashi Hata . Your line will remain muted until the question and answer session begins. If anyone requires any assistance during the conference, please press star, zero on your touch-tone telephone keypad and an operator will be happy to assist you. I would like to reminds all participants that this conference is being recorded at the request of the host company. I would now like to turn the call over to Ms. Ikuno Fujii from Toyota Motor Corporation, who will introduce the conference. Please go ahead.

Hello, everyone. Thank you for joining us today. My name is Ikuno Fujii, member of accounting division of Toyota Motor Corporation. I would like to welcome you to today's discussion of earnings results for fiscal year 2005. At the outset, we would like to offer our sincere apologies for any confusion we have caused in the U.S. regarding the start time for today's call. Today I am joined by Mr. Takashi Hata, Managing Officer of Toyota Motor Corporation. Today's conference call consists of two parts. First, Mr. Hata will discuss direction of Toyota's business and review of financial results for fiscal year 2005. As a reminder, the slides following this presentation are available on the financial results section of the Toyota Motor Corporation website at http://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 one hour plus. Also please note that the following presentation contains forward-looking statements that reflect our planned 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 three of today's presentation material. In addition, a complete cautionary statement with respect to insider trading is included on page four of today's presentation material, which again can be downloaded from our Internet home page, www.toyota.co.jp/en/irpresentations/index.html. Now I would like to turn the call over to Mr. Hata.

Thank you. Hello everyone. Thank you for joining us today. I am Takashi Hata, Managing Officer of Toyota Motor Corporation. I would like start with the highlights. Possible posted record of overall vehicle sales of 7.408 million unit, up 689,000 unit year on year. Overseas vehicle sales reached record revenues in all measured regions. In Japan, Toyota achieved a 44.5% market share excluding many vehicles. As you can see in the slide seven, the company achieved a record high results despite a difficult business environment and unfavorable foreign exchange rates, consolidated operating income increased over the previous fiscal year and consolidated net income exceeded [inaudible] for the second consecutive year. We are especially proud that the company achieved increases in both revenue and income during this fiscal year, while continuing to make significant investment for long-term growth.

Another notable point is that we plan to distribute profit to our shareholders based on consolidated income. We also seek to raise the consolidated dividend payout ratio to progressively higher levels. Now I would like to discuss the current status of Toyota's business and the future development that we aim to achieve. As shown in the slide nine, Toyota has been achieving long-term growth, operating income has increased at an especially high rate in recent years. Such a rapid growth was a result of our effort to modify global business strategies to cope with the drastic changes in the business environment in the late 1990s, such as a significant rise of the yen. In response to the appreciation of the yen, we accelerated our effort to expand overseas production to minimize exchange risks. Also in order to address the environmental issues, prompted by the adaption of the cure de protocol, we developed new environmental technologies which resulted in the Prius.

In the last decade, the number of Toyota's overseas production bases has expanded from 25 bases in 18 countries to 51 bases in 26 countries. This is represent one of our strategies to achieve stable profitable growth on a global scale, while introducing external [Inaudible] such as [inaudible]fluctuation in exchange rate and the original economies. Please move on to slide 13. In order to expand globally we have continuously made large scale capital investment. While making these significant capital investments, we have also earned high levels of profit. As you can see in the slide 14, the cash flow in each fiscal year has exceeded the amount of capital investment, insuring continued investment in the following years. As shown in the slide 15, we are planning to apply cash flows to new capital investment. Toyota has also been making significant investment in research and development. Through these significant R&D effort, we have been launching new products that aim to capture market needs ahead of time.

For example, the Lexus RX , [Inaudible], the Prius, a hybrid car and the LS, a global compact cars, have been marketed as the pioneers in each product categories and are grown to become important models in Toyota's production lineup, in particular hybrid technologies are one of Toyota's solution to environmental challenges. Since the introduction of the Prius, the cumulative service of hybrid vehicles exceed 360,000 units globally. This continuous effort to improve our business strategies have driven our long-term growth. Now, looking ahead I would like to talk about Toyota's future direction and how we plan to achieve it. In order to achieve further growth in the 21st century, it is necessary for us to meet certain qualitative changes. We believe that the key is use new technologies in the creative markets. New technologies for people and energy would help the automobile achieve substantial mobility and to create new demand.

Please see the slide 19. Our vision to develop new technologies for sustainable mobility is a concept named Zero-nize and the Maxi-mize. Zero-nize means to reduce the negative impact of automobiles in society. Maxi-mize means to Maxi-mize the worth of a spirit of our customers by offering products that provide a great pleasure in the car port. Now I would like to explain in further details about our vision taking our hybrid technologies as an example. We launched the RX hybrid and the Highland hybrid earlier this year. They provided not only high environmental performance, but also excellent driving performance. These motors to really put the Zero-nize and Maxi-mize concept into practice. Our vision of Zero-nize Maxi-mize also applied to safety technologies as well. We have been developing technologies for both passive and active safety in the hope of eliminating traffic casualty.

For further progress, Toyota is taking comprehensible measure to coordinate the three major element for traffic safety, automobile, people and the traffic environment, and we believe that we would create for the market. Please move on to the next slide. Another key to achieving product growth in the 21st century is to strengthen our global competitiveness. As I mentioned, we are striving to develop new technologies that can realize people's dreams, at the same time we are focusing on our global manufacturing capability so we can offer innovative products to more customers around the world at reasonable prices. In order to strengthen our global competitiveness we are working for further cost reduction effort through our new VI activities. It focuses on value engineering activities for each functional system as a whole such as a brake or steering, compared to more component basic activities in the past. We believe that the VI gives us a great opportunity to reduce total cost. Another key strategy to strengthen global competitiveness is a self reliance of overseas operations. How do we expand our operations globally?

Each operation need to be fully responsible for product engineering and the product development. For example, in the IMV project, we developed all new pickup trucks and the multipurpose vehicles for over 140 countries. Through IMV we aim to establish substantial structure of production in the supply chain by making the most of our overseas production sites. We have already started our production of IMV product in seven countries. While our production site in Thailand works as a global base and the support that starts up of others. We have the same challenges in North America. Our Kentucky brand supports our Mexico plant start up as mother plant. Also the Indiana brand supports the Texas brand of start ups. They support new branch as a mother branch utilizing their 20 years experience in North America. We believe it is a result of our effort to localize our operations. We believe our human resources development effort, headed by our overseas operations, becomes self reliant. This effort were to become increasingly important in the years ahead.

Please move on to the slide 26. In order to promote steadful reliance of overseas operation, we needed to establish a global R&D structure to develop motors which suit the local market. But this moment, we have seven R&D facilities in the world. In the near future, we are planning to expand our facilities in the U.S. from 700 to 1100 employees. This global R&D structure will enable us to promote steadful reliance by strengthening our development of local employers. Through our quantitative challenges and the strengthening of our global competitiveness, we aim to establish a profit structure which is rare but [Inaudible] among the four regions. We believe this allows for the long-term growth of Toyota's consolidated profit.

We are planning to reflect this long-term growth to shareholder return. According to discipline, we would drive to change our return policies significantly, especially in three major areas. First, we aim for consolidated investor return. For the past several years we have returned most of our unconsolidated cash flow to our shareholders through a dividend and the share buybacks. From now on, as we expand our operations globally, we will drive to preserve consolidated investor shareholders return. Second, we aim to put the more emphasis on the consolidated dividend payout ratio, rather than the dividend amount itself. Thirdly, we seek to increase our dividend to progressively higher levels. Based on this policy, we plan to propose a dividend of 65 yen for fiscal year 2005 at the general shareholders meeting. This fear[ph] is a 28 increase from fiscal year 2004. Overall, our consolidated payout ratio will be 18.3% up a 5.3%. While our unconsolidated payout ratio, will rise from 26% to 40.5%. Next, I would like to discuss the details of our financial results for fiscal year 2005.

Please proceed to slide 31. To summarize this fiscal year, consolidated vehicle production leads to 7.231 million units, while consolidated vehicle sales recorded 7.408 million units. Accordingly, net revenue operating income and the net income all achieved record highs. We believe we are successful because we attain a high level of profit while still investing aggressively for our future growth. Slide 32 breaks down the operating income growth of 5.3 billion yen, results the impact of a currency exchange rate and rate of fluctuations and the decrease in Daiko Henjo profit, operating income growth would have been over 200 billion yen. Which you'd have predicted the increase over sales volume. The improvement is a result of our effort to change the development process to introduce suitable product at the right time. Overall, this effort led to our globally well balanced of profit of structure. Let me move on to the situation in major geographical segment. In Japan, consolidated vehicle service increased by 78,000 units to 2.381 million units.

In addition to strong sales of compact cars, such as Porte and Vitz, sedan including the Crown and the Mark X, were well received among customers. Operating income was 987.2 billion yen, despite the 420 billion yen impact due to the currency fluctuations. In North America, both production and service continue to grow and consolidated vehicle sales increased by 168,000 units to 2.271 million units. Productional costs exclusively for the North America market, including the Avalon and Tacoma, were fully the new movers, started smoothly, as planned. Full year sales reached 69,000 units for this fiscal year, 2.7 times the amount sold in the previous year. For the previous and a reason to introduce a new hybrid SUVs. We expect to continue the strong sales. Operating income increased by 56.5 billion yen to 447.5 billion yen. Financial services in North America also increases. Its branch over capital finance contributed to this close.

In Europe, local production movers such as Avensis, Corolla and the Yaris continue to sell well, despite the other vast market environment. Consolidated vehicle sales increased to 979,000 units, up 81,000 units year on year. Expansion of Deiter[ph] motors also greatly contributed to the increase in sales volume. Other result, operating income grew to 108.5 billion yen, a significant growth of more than 50% over the previous year, and exceeded 100 billion yen for first time. Please move onto the slide 36. Vehicle service in other regions, mainly in Asia, grew significantly with strong sales of the IMV. Consolidated vehicle service increased to 1.777 million units, up 26% year on year. Since the IMV project has already started contributing to profit, operating income over our operations in Asia and other regions increased to 141.2 billion yen, a significant increase of 46% over the previous year. We expect that the other regions will continue to grow to be one of the major profit associates for global territory.

Before closing my presentation, I would like to expand our consolidated prospect for fiscal year 2006. Our consolidated prospect for vehicles in its sales it is 7.85 million units, up 442,000 units year on year. The prospect for capital expenditure, depreciation and R&D expenses, are shown on the slide 38. As I have already discussed, we have been continuing large-scale capital investment, aiming for globally well-balanced profit structure. And we assume that it will peak in the fiscal year 2006. Also, we estimate that R&D expenses would increase as we invest in our future growth. Next, the prospective TS for Toyota's operations, excluding Daihatsu and Hino, as shown.

Finally, the prospect for our unconsolidated financial results are shown as well in the slide of 40. Although we do not disclose prospect for our consolidated financial results, we will try to maintain a smooth level of profit as fiscal year 2005, excluding full incremental impact , through marketing and of course the reduction effort. This concludes my presentation. Thank you for your kind attention. I would be happy to take your questions. Thank you very much.

Thank you. Today's question and answer session will be conducted electronically. If you would like to ask a question, please press the star key, followed by the digit 1 on your touch-tone telephone keypad. Again, press star, 1 if you would like to ask a question. If you find that your question has already been answered and you would like to remove yourself from the queue, you may do so my pressing the pound or hash key. We'll now pause for a moment to assemble the roster. We'll first go to Michael Bruynesteyn from Prudential.

Hello, Hata San. Thank you very much. First, with regard to the fourth quarter, can you talk about the major drivers in the drop in North American margin, which I guess is about almost 200 basis points?

[Question in Foreign Language]

[Answer In Foreign Language]

Thank you for your question and let me respond to that. With respect to the operating income for North America in the fourth quarter, relative to the previous year, there has been a reduction by 24.2 billion yen, and the major reasons behind that relate to the advertisement expenses, because in the fourth quarter, Avalon and GS were launched for the first time, and we spent some advertisement expenses for that purpose. On top of that, expenses relating to motor show in North America in January, as well as some increase in incentives, are also included in that figure.

Okay. And then in your presentation, you stated that Toyota seeks to deliver more technology at a more reasonable price. Does this suggest that Toyota will be aggressive on pricing going forward and that prices will come down?

[Question in Foreign Language]

Is there anything further, Mr. Bruynesteyn?

Answer first.

[Answer In Foreign Language]

Thank you for your question. Constantly, we make a continued efforts in cost reduction when we develop new vehicles or when you develop new technologies, and we would also like to continue doing so going forward. By doing so, new technology will be more broadly and widely accepted by customers. However, having said that, I must also hasten to add that this does not necessarily lead to the implication that prices on already marketed vehicles will come down in the future because that is a totally separate and different issue because pricing in this regard would be determined by the market and also from the comprehensive viewpoint, including the behavior and the rest of the part of our competitors.

Okay, and then finally, could you talk about cash flow, I guess for the half? Because you don't report it for the quarter. We saw a big working capital increase. What would be the key drivers there?

[Question in Foreign Language]

[Answer In Foreign Language]

Thank you for the question. At the moment, I do not have any detailed figures on that particular point. However, basically speaking, increase in cash flow is a result of increase in profit as well as depreciation.

Actually, cash flow was down, it wasn't increasing, but if you can get back to some that, I'd appreciate it. Thank you.

[Question in Foreign Language]

[Answer In Foreign Language]

Relating to the question just asked, although I do not have the semi-annual data with me, but we do have the number relating to the full year basis, so let me give you that instead. A major factor, as a matter of fact, the most of that is due to the decrease in the amount of a redemption of bonds that we had invested in.

Okay, thank you.

Our next question comes from John Casesa, Merrill Lynch.

Hata San, could you recap Toyota's expectations for a global hybrid vehicle sales, and can you tell us anything at all about the profitability of the business at the current level of volume?

[Question in Foreign Language]

[Answer In Foreign Language]

Thank you for the question. Already, as we have been explaining on various occasions, at the very initial stage, we have been of the view and desire that some time around 2005 we wanted to produce and sell 300,000 units of hybrid vehicles per year. At this juncture, that is indeed a very high target for which we will have been and we will strive, and so we will at least make continued efforts to that end. However, from a longer-term perspective, we also have in mind the figure of one million, both in terms of production and sale, and therefore, aspiring to reach that level, we will continue to make efforts to develop various types of vehicles with hybrid systems. So much for the volume aspect of your question.

[Answer In Foreign Language]

Next, let me respond to the profitability aspect of a hybrid, but I hope you would understand me when I saw that I would refrain from citing any concrete figures in that regard, but let me clearly say that hybrid vehicles are already profitable. Going forward, by reducing hybrid systems, both in terms of size, weight further, and by enhancing the product attractiveness and features while continuing to reduce costs, we would like to enhance the profitability of the type of vehicles.

Thank you very much.

Once again, if you would like to ask a question, please press star, 1 on your touch-tone telephone. Our next question comes from Kurt Sanger, MacQuarie Securities.

Hata San, good evening. Two questions, please. The first is on the Daiko Henjo impact in the fourth quarter. Can you explain in the regional profit breakdown where that appears? Is that part of the margin problem that we're seeing in the overseas subsidiaries? The second question would be on your financial operations. You had a very impressive profit improvement for the fiscal year. What is the outlook for that business as far as profit potential? And do you look to raise your penetration rates to help continue to grow that business? Thank you.

[Question in Foreign Language]

[Answer In Foreign Language]

Thank you for your question. Let me first of all respond to your question relating to the impact of Daiko Henjo. We expect that Daiko Henjo and its impact during the fourth quarter, it had negative 97.4 billion yen impact, that is to say subtracted 97.4 billion yen from the operating income. Where does it appear on the financial statement? It appears on the segment called operating income of domestic subsidiaries and that is where the impact of Daiko Henjo appears.

[Answer In Foreign Language]

Next, let me respond to your question relating to financial services business. As you have correctly pointed out, during the fiscal year in question, financial services generated operating income of 200.8 billion yen, up 54.8 billion yen and this substantial increase is primarily due to an increase in outstanding balance of loans and credit, among others. Going forward and our prospect in this division, we had the original target of obtaining operating income of 100 billion yen and we were able to steadfastly and quite smoothly increase our operating income along those lines. Going forward, when I look at the global situation, interest rates are on the rise and competition against banks are getting stiffer and stiffer, and therefore, for the time being, we would primarily aim at maintaining, at least, the current level of profitability of this financial services business.

Just to follow-up on that. Is there scope to increase the penetration rate? I think it's roughly 40, 45% currently. Would you consider raising that to a higher level in order to continue to grow the business?

[Question in Foreign Language]

[Answer In Foreign Language]

In terms of a general orientation, we have been striving to increase penetration, which we will continue. However, the penetration rate that you have referred to in the question remains more or less unchanged between last year and the year before that.

Okay, thank you very much.

Again, please press star, 1 if you would like to ask a question. If you find that your question has already been answered and you would like to remove yourself from the queue, you may do so by pressing the pound or hash key. We will now take our next question from Margaret Moore, American Century.

Good evening, Hata San. I have two questions. The first is regarding further cost reductions. You've mentioned that it was primarily a function of new model introductions or full model changes. You achieved 160 in the year just ended and you referred to going from a component to a more systemized based cost reduction effort going forward, but can you quantify for us what your expectations for cost reductions this year are likely to be as well as what the impact of raw material price hikes are likely to be on your earnings this year? My second question regards your geographic breakdown for the coming year. I was wondering, you've provided vehicle sale forecast, but can you provide some color as to the direction of operational profit going forward? Thank you.

[Question in Foreign Language]

[Answer In Foreign Language]

Thank you for the question. My first response relates to the further cost reduction. As I mentioned in my presentation earlier, we are shifting our emphasis or focus from the component and part based cost reduction to a reduction of costs on the base of the entire system. And those activities are referred to as a value innovation or VI activities. And the emergence, the timing of the emergence of true effect of such cost reduction efforts will be quite similar to the previous cost reduction efforts, which was primarily focused on parts and components cost reduction. That is to say, whenever new models are introduced, the concrete impact of value innovation activities will start emerging. And so, I think it's fair for me to say that pattern of the emergence of true impact or effect of cost reduction in the case of the value innovation activities will be quite similar to more component-based cost reduction efforts. What is the likely benefit?

Likely magnitude of the benefit or impact of value innovation activities, that is exactly what we are currently working on and analyzing at the moment, and therefore, I do not have any concrete number with me that I can share with you at this moment. The prospect of a cost reduction this year, in the fiscal year just ended, we achieved 160 billion yen in cost reduction and for the current fiscal year we are anticipating somewhere around 140 billion yen in cost reduction. Moving onto the impact of the raw materials price increase on the profit of the company, here, again, I won't be able to cite any concrete numbers, but we are not able to achieve the amount of cost reduction that we had reasonably anticipated at the beginning of the fiscal year. And the major factors that prevented us from achieving that number was the soaring prices of raw materials.

[Answer In Foreign Language]

Lastly, on the breakdown of geographical profit, here I would like to share with you the rough outlook of prospects rather than referring concretely to how much profit is expected in which region. So let me start with North America. Our expectation of unit sales is 2.43 million units, up 159,000 units year on year. And while we achieve-- try to achieve this volume increase, manufacturing feel it, especially Texas plant which will become on stream, will incur some temporary expenses relating to startup of operations. However, by making continued cost reduction efforts, we would like to lock in, at least, the same level of profit as we have done in the fiscal year just ended. That is a picture for North America.

Moving on to Europe next. In the current fiscal year we have achieved substantial sales volume increase and-- excuse the interpreter-- in North America, the prospective unit sales figure is 2.43 million units instead of 2.34, so the correct figure is 2.43 million units-- excuse the interpreter-- and going back to Europe, we intend to achieve significant sales volume increase in the current fiscal year and the current target is 1.04 million units for the current fiscal year. In Europe, again, relating to model changes, manufacturing affiliates will be incurring some additional temporary expenses, but that notwithstanding, we intend to lock in the profit on par with the current fiscal year. Moving onto other regions, including Asia, among others, with the startup of operation and production of IMV in Asia, we have experienced both volume increase and cost reduction. And both of these impacts will have a very positive influence on overall profit. And IMV production will start in South Africa as well as in Argentina, and we are expecting a significant profit contribution from these regions as well.

Anything further?

No, thank you very much.

Thank you. Just a reminder, if you do have a question, please press star, 1 on your touch-tone telephone keypad. Once again, that is star, 1 if you have a question. Our final question will be from Michael Bruynesteyn, Prudential.

Hello, again. Could you comment on the tax rate for the fourth quarter, which seemed low at about 31%? And give us some guidance for what you expect the tax rate is for next year. And then also, could you talk about, with the rising dividend, do you have a target for the consolidated payout ratio? Thank you.

[Question in Foreign Language]

[Answer In Foreign Language]

Thank you for the question. Let me take your questions in the reverse order, starting with the dividend policy. As I mentioned earlier, there are three key features in our dividend policy currently. That is to say, it will be based upon consolidated performance and we will think in terms of dividend payout ratio and we would like to progressively improve that. However, we have not set for ourselves any concrete target of dividend payout ratio. But at the same time, we were led to believe that companies in Europe and the United States seem to have a payout ratio at around 30%. So such a factor will be kept in mind as we continue to consider our dividend payout ratio going forward.

[Answer In Foreign Language]

Let me refer to the tax rate. Unfortunately, we do not analyze a tax rate on quarterly basis, and therefore, I cannot answer your question relating to fourth quarter tax rate. However, on the full-year basis, the tax rate is -- was 37.5% and I think the tax rate for the current fiscal year -- with respect to the tax rate for the current fiscal year, at this point in time I cannot identify any factor that is likely to cause any substantial change from that level.

All right. Thank you very much.

Thank you.

And we do have a follow-up question from Margaret Moore from American Century. This will be our final question.

Thank you again, Hata San. First question is, could you comment on your expectations for profitability in China, both in terms of the recent trend towards excessive price discounting? And secondly, the impact of the anti-Japanese riots impact on your brand? Second question is, do you have any further plans for share buybacks? And over what period would you expect a dividend payout ratio to achieve a 30% ratio? Thank you.

[Question in Foreign Language]

[Answer In Foreign Language]

Let me first of all respond to the profitability of our Chinese business. As you pointed out, we think that the competition in the Chinese market has excessively, or has become extremely stiff and tough. However, we have been making continued cost reduction efforts and at this moment, our Chinese business is generating adequate profit. Going forward, we will further push ahead with stepped-up cost reduction efforts. And on top of that, we will have the prospective impact of the introduction of Crown, which was introduced in March, and Camry is scheduled for introduction by the end of 2006. And we are now trying to establish a Lexus channel in China as well. And therefore, by strengthening our sales and marketing setup in China, we want to upgrade our earnings capability in China further. With respect to the impact of anti-Japanese developments or movements in China, to date we have not had any direct impact on our business, but of course, we will remain very vigilant on that front. But as I said, we have not come under any material impact to date.

[Answer In Foreign Language]

Moving onto share repurchase program and dividend policy, we would like to make a proposal at the forthcoming annual general shareholders meeting on the share repurchase program up to 250 billion yen or 65 million shares.

[Answer In Foreign Language]

Moving onto the dividend payout ratio and 30% figure you have just mentioned, let me first of all refer to the fact that our discussion relating to dividend payout does not include any amount that may be used for share repurchase program. And furthermore, I would like to assure accuracy of my statement in that regard. That is to say, I earlier cited 30% as the yard stick or indicator that major corporations in Europe and the United States seem to keep in mind when they discuss their own dividend policy, according to our understanding, and therefore, 30% was not the figure that we set for ourselves as our concrete target of dividend payout ratio. And therefore, we do not have any timetable of bringing our payout ratio up to 30%.

Thank you very much.

Thank you.

Ms Fujii, there are no further questions today. So at this time, I'd like to turn the conference back over 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 in general, please feel free to contact our IR representatives in London and New York. Their contact details were given at the end of the invitation to this conference call. Once again, we would like to offer our sincere apologies for any confusion we may have caused in U.S. regarding the start time for today's call. Thank you very much for joining us today. Good-bye.

Thank you. That concludes today's conference. Thank you for your participation. You may now disconnect.