豐田汽車 (TM) 2006 Q3 法說會逐字稿

Good day, everyone. My name is Janelle, and I would like to welcome you to the Toyota Motor Corporation's financial results for the 3 months ended December 31, 2005 conference call with your chairperson, Mr. Takashi Hata. (Operator Instructions). I would like to remind all participants that this conference is being recorded at the request of the hosting Company.

I would now like to turn the call over to Mr. [Shuei Hori] from Toyota Motor Corporation, who will introduce the conference.

Hello, everyone. Thank you for joining us today. I am Shuei Hori of accounting division of Toyota Motor Corporation. I would like to welcome you to today's discussion regarding results for the 3-month period ended December 31, 2005. 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 review Toyota's earnings results for the 3 months ended December 31, 2005. As a reminder, the slides from this presentation are available on the Financial Results section of the Toyota Motor Corporation Website. At the conclusion of Mr. Hata's presentation, we'll 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 homepage.

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

Hello, everyone. I'm Takashi Hata. Thank you very much for joining us for today's discussion of Toyota's financial results for the 3-months period ending December 31, 2005.

With respect to the consolidated result for the third quarter -- net revenues were 5.3 trillion yen; operating income was 482.2 billion yen; income before taxes was 639.9 billion yen; and the net income was 397.5 billion yen. Both revenues and earnings increased significantly year over year. Other income included a 143.3 billion yen evaluation gain, resulting from the merger of the Mitsubishi Tokyo Financial Group and UFJ Holdings.

This slide shows the quarterly changes in operating income. Compared with the first and second quarters, operating income upturned strongly in the third quarter, exceeding the result of the same period last year. This is the first time in 4 quarters that our quarterly revenues and earnings achieved a year-over-year increase.

Next, I would like to discuss 9-month cumulative results; operating income increased by 2.5 billion yen over the preceding year.

Next, I would like to provide details regarding third-quarter operating income. Major factors contributing to the increase were cost-reduction effort of 30 billion yen, marketing effort of 60 billion yen and the effect of changes in foreign exchange rate of 130 billion yen. On the other hand, factors contributing to the decrease were decrease in Daiko Henjo of 28.5 billion yen and the increase in expenses of 132.2 billion yen. This increase in expenses includes 44.5 billion yen affected by accounting special factors. The details of the special factors are valuation losses from interest rate swaps and the prior-year adjustment of our financial subsidiary of 21 billion yen and the impact of changes in our accounting of depreciation of 23.5 billion yen.

Other factors included in the increase in expenses are R&D expenses of 26.2 billion yen, depreciation and the CapEx-related cost of 23.5 billion yen and the labor cost relating to production launch support and business expansion of 38 billion yen.

Highlighting the factors relating to our core business, the 87.7 billion increase in expenses was offset by a 60 billion yen increase due to marketing effort and the 30 billion yen in cost-reduction effort. So, from a business performance standpoint, our operating income has been steadily improving overall.

Next, please take a look at consolidated vehicle sales. Consolidated vehicle sales increased by 141,000 to 1.98 million vehicles. Growth was especially strong in overseas market, where strong demand has been supporting steadily growth in service volumes.

I would like to discuss performance by geographical segment. In Japan, operating income rose year on year by 43.8 billion yen to 281.1 billion yen in contrast to the first and second-quarter levels. With the exception of mini-vehicles, demand has turned weaker in the market. Yet, Toyota sales volume was almost unchanged compared to last year. Our market share has remained high, and we'll do our best to boost sales with new models launched in last December through January this year.

In manufacturing, domestic vehicle production has risen by 300 units to meet the continuing strength of overseas demand. Our production capacity of 3.8 million vehicles has been established and has gotten into a good state of operation. Vehicle production in the third quarter increased year over year from 1.115 million to 1.177 million vehicles. This has led to growth in operating income.

In North America, service increased by 67,000 to 643,000 vehicles. Operating income was roughly stable at 127.8 billion yen over the preceding year. Despite our market that remained at the level of the same period last year due to factors, such as higher oil prices, Toyota's new models and compact models including Avalon, Tacoma, Prius and Scion had strong sales. This year, we plan on launching the Camry, FJ Cruisers and LS and hope to continue our sales momentum.

Despite short-term fluctuations, our North American operations generate higher level of profit, second only to Japan. Please note that the North American operating income includes a loss of 21 billion yen due to special factors, such as valuation losses from interest rate swaps. Otherwise, the operating income increased again over last year.

In Europe, despite the tough market environment, we maintained stable sales over the preceding year. Operating income in the third quarter stood at 26.6 billion yen, marking a steady recovery of profit levels compared to the first half of 2005.

With the new LS and the Lexus IS introduced late last year and the new RAV4 in pipeline for the fourth quarter, we hope to see an increase in sales. With greater efficiency in marketing expenditure and as costs for capacity increase in the UK and the model change of Reiz in France passing its peak, we hope to achieve stronger revenue growth in the future.

Turning to Asia, vehicle sales rose by 22,000 to 217,000 vehicles. Operating income rose year on year by 13.5 billion yen to 38.6 billion yen. Under the IMV project, vehicle export from Asia to Europe and other others began in the beginning to contribute to revenue growth. The IMV project is proceding very well from a production and marketing standpoint. As a result, we achieved higher profit through increased sales and cost reduction.

Next, let us move to Africa, Latin America and other regions. Vehicle sales in this regional segment rose by 57,000 to 303,000 vehicles. Operating income for this market increased by 6.3 billion yen over the preceding year to 14.7 billion yen.

As for the financial services business, operating income fell by 11.9 billion yen to 46.8 billion yen. This included a 21 billion yen negative impact from valuation losses from interest rate swaps as well as prior-year adjustment at the TMCC. Otherwise, there would have been a 9.1 billion yen increase in profit with a steady increase in the branch of capital finance in line with the growing sales of vehicles. Profit in this business segment is increasing steadily.

Equity in earning of our affiliated companies grew by 6.5 billion yen to 45.8 million yen. This is due chiefly to the thriving business of our affiliated companies in Japan and Chinese joint venture that launched the Reiz and the Crown.

Next, I would like to discuss unconsolidated financial result -- net sales was 2.66 trillion yen; operating income was 233.2 billion yen; pretax net income was 352.3 billion yen; and the net income was 245 billion yen -- resulting in significant growth in revenues and earnings. This is the first time in 7 quarters that we are reporting an increase in quarterly revenues and earnings on an unconsolidated basis.

Next, let me analyze the factors behind the increase in operating income. The positive factors were cost-reduction effort of 20 billion yen, marketing effort of 20 billion yen, and the effect of changes in falling exchange rate of 110 billion yen. On the other hand, increases in R&D expenses and others totaled 62 billion yen. This include R&D expenses of 26.1 billion yen, depreciation and the CapEx-related costs of 7.0 billion yen, and the labor costs relating to production launch support and the business expansion of 5.4 billion yen. There is also special factors of 23.5 billion yen, resulting from the impact of changes in the accounting of depreciation. Going forward, we will continue to control costs by utilizing these expenses more effectively.

With respect to our consolidated vehicle sales outlook, we are revising downward our consolidated vehicle sales forecast for this fiscal year by 80,000 vehicles from our forecast in November to 7.95 million vehicles. Compared with previous time, we expect a significant increase by 542,000 units.

With respect to forecast of depreciation for this fiscal year due to changes in accounting regarding depreciation costs that I mentioned earlier, there has been an increase of 40 billion yen from our forecast in November. Please note that our projection of unconsolidated sales for the fiscal year has not changed since the interim report. With net sales of 10.1 trillion yen and operating income of 750 billion yen, we project our growth in revenues and earnings over the last fiscal year. We aim to exceed both revenues and earnings of the last fiscal year on a consolidated basis as well.

Thank you, Mr. Hata. During the question-and-answer session, we will have consecutive interpretation for questions and answers in both Japanese and English. We ask that you please follow the instructions of our conference operator, Janelle. Please go ahead, Janelle.

(Operator Instructions). Mike Bruynesteyn, Prudential Equity Group.

Can you clarify one thing quickly first. The guidance saying you're not changing it, is that you're saying you're just not updating it, or you have reviewed it and there's no change?

(Japanese language spoken)

(Japanese language spoken)

So at the moment, we have not changed our forecast for the unconsolidated business result. Currently, there is a slight further depreciation of the yen. In other words, the yen is getting cheaper slightly. And this is of course a positive factor for our profit. However, on the other hand, there are slight reduction in the sales volume in markets, such as Japan and part of the Asian countries. Therefore, overall, we are not changing our current forecasts for the unconsolidated results.

Then big picture, can you just talk a little bit about how you're balancing off the costs for new capacity and business expansion? And how that might affect the earnings growth over the next couple of years?

(Japanese language spoken)

(Japanese language spoken)

Now, first of all, as I have mentioned during my presentation for the third quarter, if we just look at our core business, which excludes the effect of the change in the foreign exchange rate and also the impact from the special accounting factors, we believe that we have offset more than enough the increase in our cost.

(Japanese language spoken)

So, from the first quarter to the second quarter to the third quarter, the situation is improving. And we shall continue making use of our expenses as efficiently as possible. And, we shall maintain the marketing effort and also cost-reduction effort so that these positive factors would be maintained, leading to future increased earnings.

Finally, could you just divide up the FX impact by region please?

(Japanese language spoken)

(Japanese language spoken)

Your question was the regional breakdown. But, I think by that, you mean by currency. So, I would like to give you the breakdown of the impact by the change in the foreign exchange rate by currency. First of all, from U.S. dollars, there was an impact of $110 billion. The European currency -- that is Euro -- $5 billion and other currencies, including Australian dollars and Canadian dollars $15 billion dollars. In total, there was an impact of $130 billion from the change of the foreign exchange rate.

But, I did want to know how much of that shows up for example in the North American regional report.

(Japanese language spoken)

(Japanese language spoken)

Due to the basic characteristic of our business style, the majority of the impact from the changing foreign exchange rate would be reflected in the unconsolidated earnings. Therefore, out of the $130 billion, about $110 billion would be reflected in the non-consolidated result. And so, the remaining $20 billion would be visualized in the result of the foreign-affiliated companies. And out of that 20 billion, approximately $13 billion would be reflected in the result of our American subsidiaries.

(Japanese language spoken)

Excuse the interpreter, not dollars -- billion yen. It's yen, yen.

(Japanese language spoken)

And one more point to add as far as the result -- the business results of our foreign-affiliated companies are concerned, in closing their account and publishing the figures that are settled, the figures are converted into Japanese yen. So upon conversion into the Japanese yen, that would be an impact of the foreign exchange rate.

Rick Herman, Philadelphia International Advisors.

I would like to know if you could breakout the Japanese sales and operating income for local production or local sales and operating profits versus your exports.

(Japanese language spoken)

(Japanese language spoken)

May I clarify your question? You said how much of that is for local production and sales in Japan? Local production, by that you mean, production in Japan?

No. I just want -- really what I'm trying to find out is how much of your operating income and sales for the Japanese group goes overseas?

(Japanese language spoken)

(Japanese language spoken)

We disclose the sales and income by geographical segment. However we do not disclose the figures of sales by market in Japan. Therefore, I shall refrain from disclosing specific numbers. I'm sorry.

The other question I had was on the -- you lowered your revenue forecast 80 billion. Can you explain why that was a decrease from November?

(Japanese language spoken)

(Japanese language spoken)

Let me clarify. We have not made a downward revision of our revenue forecast. What we had modified downwards is our forecast for the sales volume. So, from the numbers that we had forecasted in November, there has been a reduction by 80,000 units.

Thanks for that clarification. Can you explain why?

(Japanese language spoken)

(Japanese language spoken)

Since we had announced our forecast in November, mainly due to the soaring oil prices, the overall automobile market in Japan as well as in some Asian markets have somewhat shrunk. Therefore, the pace of the sales of automobiles currently are somewhat sluggish, and that was a main reason why we had reduced to be specific 70,000 units in our forecast for sales in Japan and 40,000 units in Indonesia.

However, there are some markets that we had made an upward revision for the sales. So, all-in-all, we have ended up in reducing 80,000 units in terms of our sales volume forecast.

Okay and lastly, in Japan, can you discuss how your Lexus sales are doing?

(Japanese language spoken)

(Japanese language spoken)

As you are fully aware of, we had launched the Lexus brand in Japan in August last year. And since the launch, we have concentrated our effort in trying to first of all firmly establish the Lexus brand in the Japanese market, increase the brand awareness and have the consumers in Japan fully appreciate this Lexus brand in the Japanese market. As a result of conducting some surveys, we have found out that as far as brand awareness, customer satisfaction and other related factors are concerned, the level is more than we have originally expected. Therefore, I should say that the first 6 months since the launch of Lexus brand is going on very smoothly and the results are more than we have expected.

Can you share your forecast and results with us at all?

About the Lexus brand?

Yes.

(Japanese language spoken)

(Japanese language spoken)

Since the launch in August last year until the year end '05, the sales of Lexus was about 10,300 units in Japan. And since we plan to launch Lexus LS this summer, we forecast the sales of Lexus to be about 40,000 units on an annual basis.

So the 10,300 units was your forecast for the fall? What was the actual results?

From August to the year-end December, the actual sales.

The 10,300, those were actual. So what was it (multiple speakers)--?

(Japanese language spoken)

(Japanese language spoken)

That is correct, from August to the end of December.

Those were the actual results?

Correct.

So what was the forecast?

(Japanese language spoken)

(Japanese language spoken)

So the forecast on an annual basis would be 40,000.

This year.

Ron Tadross, Banc of America Securities.

I have two questions. The first one is, is it fair to say that 2006 -- the fiscal 2006 is the peak year for the cost increases -- the labor, R&D, and depreciation cost increases? And then, I'll ask you my second question.

(Japanese language spoken)

(Japanese language spoken)

So the type of expenditures that you have pointed out, such as R&D or depreciation as a result of capital expenditures and labor costs, are needed as a result of business expansion. And to take up R&D expenditures first of all in order to address the increasing demand, we must make this investment so as to keep up the supply for increasing demand. Therefore, we shall continue making R&D investment into the future as well. And turning to the depreciation cost and labor cost, both that are incurred as a result of business expansion, that would be increased possibly as a result of the expansion of the business volume.

(Japanese language spoken)

We believe that what is most important is to realize cost efficiencies so that we can effectively and efficiently make use of the investments that we are to make. And through marketing efforts and also cost-reduction efforts, we shall continue trying to offset those expenditures with the increasing revenue within the specific fiscal term. And we believe that we have done so in the third quarter, and we should continue this trend.

Just to follow-up, maybe ask it a different way. Is the rate of increases in the costs of labor, R&D and depreciation going to slow in fiscal 2007? I understand they will still be up. The costs will still go up, but I'm wondering if the rate of increase will slow on a dollar basis.

(Japanese language spoken)

Yen basis also, dollar or yen.

(Japanese language spoken)

Yes, I believe that would be the correct assumption. And, that is because for the past year, we had a period of very rapid business expansion. Therefore, we had a high rate of increase of the cost. And the amount shall increase for a certain while. However, the rate of increase would slow down.

(Operator Instructions). Margaret Moore, American Century.

I was wondering if you could talk a bit more about the marketing efforts of 60 billion that assisted you in the third quarter. What specifically -- and can you comment on your expectations for these costs over the environment of marketing and promotional and incentive costs going forward? Thank you.

(Japanese language spoken)

(Japanese language spoken)

So, to give you the breakdown of the 60 billion yen, the unconsolidated TMC figure would be 20 billion yen, and the contribution from our subsidiaries would be the remaining 40 billion yen.

(Japanese language spoken)

And this 40 billion yen that is a contribution from the 40 foreign subsidiaries to further break this down by region -- North America about 10 billion yen, Asia 15 billion and Europe 5 billion.

(Japanese language spoken)

To put it more directly, this 20 billion yen from TMC on consolidated basis and 40 billion yen from our foreign subsidiaries are mainly due to the very smooth sales of our vehicles. The sales have been increasing smoothly.

(Japanese language spoken)

Now, I would like to give a brief explanation about the environment that surrounds the incentive cost, which is one of the major marketing cost.

(Japanese language spoken)

Now as far as the U.S. market is concerned, the -- except for some models, on average, the incentive is at the same level as we have experienced in the previous year. And since the U.S. market sensitivity to our incentive is very high, we are looking at the situation and the environment in which our specific models are placed and also the overall market situation. And by looking at the standards of the market and how well the models are selling, we are flexibly establishing the incentive cost level.

(Japanese language spoken)

Now turning to the situation in Europe, we had the Yaris model reaching the end of the model year. And also in some countries, the competition was very tough. However, this is about to come to an end. Therefore, the incentive level is coming down.

(Operator Instructions). Mike Bruynesteyn, Prudential Equity Group.

A quick follow-up on the Mideast and others, there's like a 50% volume increase. Is there some sort of consolidation that went on there, or is there really a 50% improvement in vehicle sales?

(Japanese language spoken)

(Japanese language spoken)

Which page are you looking at?

I'm looking at the supplementary material for financial results for the 3 months U.S. GAAP consolidated.

(Japanese language spoken)

(Japanese language spoken)

Thank you. I found what you are talking about and sorry to have kept you waiting. Please take it that there was a pure increase in the sales volume, and that was mainly because we have started selling the models that had been produced in mainly the Asian countries, the IMV in the Mideast. Therefore, this resulted in a net increase of sales.

Then finally, with regard to these special items we saw in the quarter, do you expect to see some more impact from those with regard to the accounting and from the other special items you talked about today? Do we see that going forward?

(Japanese language spoken)

(Japanese language spoken)

The impact would remain until the fourth quarter. To be specific, as far as the decrease in Daiko Henjo is concerned on the fourth quarter of the previous year, we had accounted for 9.6 billion yen of gain as a result of Daiko Henjo. But we had returned this Daiko Henjo portion, which results in this zero gain this year. And also, as far as the accounting procedure change for depreciation cost is concerned, we forecast about 20 billion yen of impact in the fourth quarter as well. There would be some remaining impact from the interest rate swap, but this depends on the interest rate. Therefore, we don't have specific numbers at the moment.

John Buckland, Daiwa.

Just going back to the -- what you call marketing efforts and I would want to ask specifically about the mix and volume. Obviously, you mentioned that the volume in Japan for example is being affected by high oil prices. But this is really mainly affecting sort of passenger cars with mini-car sales holding up better.

In the U.S. obviously, there's a debate about the impact of oil prices on light trucks. And when we look at Europe, a lot of your sales growth is now coming from the small car like Aygo and perhaps also the Yaris. So I wonder if you could talk about what the prospects are for volume and for mix. It appears as though maybe if volume -- where the market's volume is increasing, the mix is deteriorating. And impacts in Japan were getting both a volume decline and a mix deterioration together.

(Japanese language spoken)

(Japanese language spoken)

I'm very sorry, but the specific numbers for the mix and volume, the breakdown -- the detailed breakdown is something that I cannot disclose.

(Japanese language spoken)

Having said so, as you have correctly pointed out in the Japanese market for example, there is a steady shift towards mini-vehicles. And therefore, this is impacting -- negatively impacting the overall automobile market size in Japan, and this would impact the automobile sales. And for example, in the United States as a result of the rising oil prices, there is also an impact seen in the large SUVs as well. And this is going to result in the change of the mix in the U.S. market.

(Japanese language spoken)

However, what actually impacts Sarb's result is not only the overall market environment and the trend of the entire automobile market. Our own model cycle is very critical for the result of our sales. That is to be more specific, which models are to be launched in which market in the world at what timing? And for TMC, the model mix is known to keep improving.

Is that the end? He's finished?

(Japanese language spoken) Yes. Yes.

So you think Toyota Group mix will improve? This is therefore better than the underlying development in the market. Is it -- do you see that as the underlying development of the market having a deteriorating mix? Therefore, you know that if you like, you come with a strong model's life or strong model life cycle against a market, which is seeing a mix worsening. Is that right to think about that that way or not?

(Japanese language spoken)

(Japanese language spoken)

Let me specify my statement to the situation in the Japanese market. Depending on the timing of the launch of the new model irrespective of the overall market trend, the trend of the sales of the new model that is launched may show a different trajectory. And to be more specific as I have alluded to earlier, we plan to launch Lexus LS in summer in Japan. And also, we have introduced already the new model of Camry and also RAV4. These are models with relatively high profitability. By launching these new attractive models, we believe that this year is limiting to the Japanese market. The trajectory of sales of these new models would not necessarily coincide with the overall trend of the market.

In Europe, is the situation just the same or different?

(Japanese language spoken)

(Japanese language spoken)

Please take it that the development in the European market is basically the same as we see in Japan.

Rick Herman, Philadelphia International Advisors.

Just following up with that question on the mix and volume, going to the U.S., Scion's sales have been fairly strong, which is in a lower margin vehicle (multiple speakers). In the U.S. also, you mentioned SUV sales may be weak because of oil. So can you go over your expectations for the U.S. for mix and volume?

Excuse me. Before the interruption, did you say Scion sales?

Yes.

(Japanese language spoken)

(Japanese language spoken)

Looking at the U.S. market last year, part of the SUV market has weakened as I have alluded to earlier. However, on the other hand, pickup trucks for example are the type of vehicles that cannot be replaced by other types of vehicles. Therefore, this has not received much impact as a result of this high gas price.

(Japanese language spoken)

Now, that is the overall market situation in the United States. Now turning to our specific situation in the U.S. market, models like Avalon that is a car that belongs to the luxury car category and Gsis are selling quite well. And because of the overall market shift towards passenger cars and as a result of -- let the interpreter back up -- as a result of the entire market in the United States shifting towards the passenger car segment, the incentive level is coming down. And as a result of the increase of sales volume and the reducing marketing costs, we have a very positive impact in the United States.

Mr. Hori, there are no further questions today. So at this time, I would 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 on Toyota, please feel free to contact our IR representatives in London and New York. Their contact detail were given at the end of the invitation to this conference call. Thank you again for joining us today. Goodbye.

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