豐田汽車 (TM) 2007 Q1 法說會逐字稿

Good day, everyone. My name is Evelyn Jacobs, and I’d like to welcome you to the Toyota Motor Corporation financial results for the three months ended June 30, 2006 conference call, with your chairperson, Mr. Takahiko Ijichi. [OPERATOR INSTRUCTIONS]. I would now like to turn the call over to Miss [Ikuno Fuji] from Toyota Motor Corporation, who will introduce the conference. Please go ahead ma’am.

Hello, everyone. Thank you for joining us today. I am Ikuno Fuji of Accounting Division of Toyota Motor Corporation. I would like to welcome you to today’s discussion of earnings results for the three-month period ended June 30, 2006. I am joined by Mr. Takahiko Ijichi, Managing Officer of Toyota Motor Corporation.

Today’s conference call consists of two parts. First, Mr. Ijichi will review Toyota’s earnings results. As a reminder, the slides from this presentation are available on the Financial Results section of our website. At the conclusion of Mr. Ijichi’s presentation, we will open for your questions. We expect that the entire call will last about one hour.

Also please note the following presentation contains forward-looking statements. A complete cautionary statement with respect to forward-looking statements is included on page two of today’s presentation material. In addition, a complete cautionary statement with respect to insider trading is included on page three.

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

Hello, everyone. Thank you for joining us for today’s discussion of Toyota’s financial results for the three-month period ended June 30, 2006.

First, sales volume. Our consolidated vehicle sales for the first quarter amounted to 2.091m vehicles, a substantial increase of 143,000 vehicles from the same quarter last year. The sales growth was attributed to strong demand in markets such as North America and Europe, despite a decline in Japan and Asia due to unfavorable market conditions.

Next, I would like to talk about consolidated financial results for the first quarter. As you can see in this slide, Toyota posted substantial increases in both revenues and profits, achieving record levels. We believe this is the result of company-wide efforts to implement the plans that we set at the beginning of this fiscal year.

Next, I will discuss major factors contributing to the growth of consolidated operating income. Consolidated operating income grew substantially this quarter due to progressive marketing efforts, as well as the yen depreciation against other major currencies, which offset increases in various costs such as R&D expenses for future growth. Cost reduction was JPY20b, despite soaring prices of materials such as aluminum and precious metals.

Now, I would like to discuss performance by geographical segments. In Japan, our operating income reached JPY293b, which marked a sharp increase of JPY104.6b from the same quarter last year. The increase just means production volume, which responds to strong overseas demand, contributed to our income growth in Japan.

Despite a shrinking market, excluding mini-vehicles, we have been able to meanwhile decrease unit sales for the first quarter. Our market share, excluding mini-vehicles, increased 1.5% to 46.5%.

In North America, sales volumes totaled 747,000 vehicles in the first quarter, a sharp increase of 106,000 vehicles over last year. Increased operating income was achieved by strong sales of new, relaunched models and compact cars including RAV4, Yaris, FJ Cruiser and Camry, which offset start-up costs of the Texas plant.

We would like to continuously achieve increased profits by maintaining strong sales, and with a successful remodeling of the Lexus LS and Tundra. In Europe, despite the weak market conditions, Toyota sold 308,000 vehicles in the quarter, a substantial increase of 52,000 vehicles from the first quarter last year.

As a result, our first quarter operating income increased significantly by 2.2 times as compared with the same quarter last year, to JPY36.5b. As a result of strong sales, mainly with new models such as the Yaris, RAV4 and Lexus IS, profits in Europe have been improving steadily. As shown in quarterly earning trends, both vehicle sales and profits from European operations have been improving.

In Asia, the sales volume for the quarter amounted to 193,000 vehicles, declining by 36,000 vehicles from the year before. This was largely due to sales decreases in Indonesia and Taiwan. On the other hand, exports of IMV out of Asia, which began last year, have been progressing well and contributed to securing a higher level of operating income of JPY30b.

Sales volumes in other regions, including Oceania, Africa and Latin America, increased by 28,000 vehicles from the year before to 300,000 vehicles in the first quarter. This was aided by strong demand for Toyota vehicles, particularly IMV. Operating income in these regions totaled JPY15.9b.

Operating income from financial services grew by JPY8b over last year, to JPY47.7b in the first quarter. Operating income increased due to steady growth of the balance of captive finance from increased vehicle sales.

Equity in earnings of affiliated companies increased by JPY20.6b to JPY56.2b in the first quarter. The increase mainly reflected strong earnings of domestic Toyota Group companies, as well as joint ventures with Chinese companies.

As for unconsolidated financial results, we achieved a significant growth in revenues and earnings.

Now, I would like to discuss factors contributing to the growth of unconsolidated operating income. Similar to consolidated operating income, unconsolidated operating income for the quarter grew substantially due to progressive marketing efforts, as well as the yen’s depreciation against other major currencies, which offset increases of various costs such as R&D expenses.

Finally, I would like to discuss the outlook for the fiscal year. Consolidated sales for the fiscal year is unchanged from our initial projections set out at the beginning of this year. We will try to maintain the positive momentum of the first quarter, so that we may aim to exceed these projections.

Consolidated earning projections for the fiscal year also remain unchanged. We are currently on track overall for the annual plan so far, with the exception of ForEx rate assumptions. Despite fluctuations in raw material prices, we aim for the outcome of each activity as we planned at the beginning of this fiscal year.

We are also maintaining the initial projections of these items. We are planning JPY1,550b in CapEx, JPY930b in depreciation expenses and JPY920b in R&D expenses. And consolidated earnings prospects for the mid-term and the fiscal year also remain unchanged.

Lastly, I would like to report that Toyota has selected Pricewaterhouse Coopers [inaudible] as its temporary accounting auditors.

This concludes my presentation. Thank you very much for your attention. Now, I would like to be happy to answer your questions.

Thank you, Mr. Ijichi. During the Q&A session, we will have consecutive interpretations for questions and answers in both Japanese and English. We ask you that you please follow the instructions of our conference operator, Miss Evelyn Jacobs. Please go ahead, Evelyn.

[OPERATOR INSTRUCTIONS]. Our first question today comes from Ronald Tadross, Banc of America. Please go ahead.

Thank you, good evening. Just a couple of questions, first regarding slide number seven. Your marketing efforts were a positive JPY60b and I’m wondering if you can give us a breakdown of volume and price in that number? Then I have a few more questions.

[Translated]. Thank you for your question. With respect to the JPY60b contribution from marketing efforts, we do not have a breakdown between the volume effect and price effect, but I would like to respond to your question from a different angle. That is to say, out of the JPY60b, JPY40b came from TMC on a standalone basis, and the remaining JPY20b was contributed by subsidiaries. Of this JPY40b contribution by TMC on the standalone basis, the domestic market contribution was –JPY10b, and overseas marketing contributed a positive JPY50b.

The JPY20b contributed by subsidiaries can be further broken down as follows. The contribution coming from domestic subsidiaries, a positive JPY15b, the overseas subsidiaries, positive JPY10b. And this positive JPY10b contribution by overseas subsidiaries can be further broken down as follows. North America, plus or minus zero, Europe, positive JPY10b contribution, Asia, plus or minus zero, and Financial Services and Others, negative JPY5b, resulting in net contribution by subsidiaries of JPY20b.

Okay, thank you. Another question. Regarding the cost reduction of JPY20b, could you just share with us your outlook for cost reductions, given the changing commodity cost picture?

[Translated]. With respect to cost reduction, I believe that our ability to improve costs remains unchanged compared with two or three years ago. However, at the moment prices, especially of raw materials or commodities whose prices are predominantly determined by market conditions, are soaring. And JPY20b recited in the presentation today subtracts that negative impact stemming from soaring raw material prices, and therefore JPY20b represents the net figure of our cost improvement. On the gross basis, cost reduction benefits remains unchanged compared with the past figures.

On that basis, I would like to refer to the outlook of our cost reduction. In the first half of this year, on the net basis, as I mentioned earlier, we are expecting to generate JPY50b in cost reduction benefits. And therefore, that also means that we are expecting to see JPY30b in the second quarter in terms of cost reduction benefits. And in the second half of the year, our expectation is for JPY80b coming from cost reduction. And therefore, on the full-year basis, we are likely to see, or planning on, realizing cost reduction benefits of JPY130b.

Despite those soaring commodity prices, because of the competitive nature of the automotive industry we simply cannot pass on those higher prices to the vehicle prices. That indicates how tough the competition in the automotive industry is. However, by realizing a further cost reduction, we would like to offset the soaring prices of commodities through cost reduction.

Okay, thank you. I’ll get back in the queue for my other question.

Thank you. Our next question comes from Margaret Moore, American Century.

Yes, thank you. I was wondering if you could comment on the costs of the Texas plant in terms of the progression of costs through the year versus the prior year? And I was wondering if you could also comment on your expectations for Lexus in the domestic Japanese market? Thank you.

[Translated]. During the current first quarter compared with the first quarter of the last year, the Texas plant represented JPY5b in the negative, that is to say the cost burden on our part. Although I cannot share with you the full-year figure in that regard, but we are likely to see the continuation of that level of cost effect up until the third quarter.

On Lexus, I would like to refer to the Lexus here in the Japanese domestic market. We established Lexus as a new brand here in Japan last year. And in terms of the brand recognition under the current circumstances, it has been more successful than we had originally thought. However, as you already know, in terms of the volume of our Lexus sales, it remained rather tough last year and it is a fact that the volume rather substantially undershot our plan.

However, since the beginning of this year, there has been very stable and good sales of both GS and IS series in Lexus, and that represents the current situation of Lexus now.

And furthermore, in September of this year we are going to launch LS within the Lexus series. And the pre-market order has begun already in July, and to date the order intake has been very strong, and we already obtained orders for 7,000 units up till this moment. And therefore, in the second half of this year, primarily through the strong sales of this flagship model of Lexus LS, we think we will be able to further increase sales of Lexus.

And sales plans for 2006, including Lexus LS to be launched in the second half, is currently 30,000 units. And the LS model within the Lexus series is a very profitable model and we are expecting that the LS series will make a substantial contribution for the domestic profitability here in Japan.

Thank you very much.

[OPERATOR INSTRUCTIONS]. Our next question comes from Kurt Sanger, Macquarie.

I have a couple of questions, one on revenue growth of 13%. Can you give us what percentage -- how much of that was from ForEx and what was core business?

[Translated]. The consolidated net revenue grew by JPY656b. Of that, ForEx contributed JPY230b.

230? Okay, great.

[Translated]. 35.

35, okay, thanks. In the non-operating income, the others went from a decline of JPY3.5b last year to almost JPY20b positive this year. Can you give us the key details of that change?

[Translated]. I’m just referring to the slide as well, and first of all, there has been some increase in interest income received as well as the foreign exchange gains we earned. But much greater impact came from the merger between Toyota Tsusho, one of our affiliated companies, and Tomen Trading Firm. When these two companies were merged, the equity portion -- the equity stake we had in Tomen was marked to market, evaluated at the market value. And that is recorded in the non-operating profit as JPY13b. So, that was the one single most important [aspect there].

Great, thank you. And final question, your equity measured earnings grew very impressively, JPY20b year on year. Can you give us an idea of the growth? How much came from your parts company affiliates and how much came from consolidated entities, like your Chinese partners, for instance?

[Translated]. Actually the equity method earnings was JPY52.2b, representing an increase by JPY20b year on year. Although I cannot share very detailed figures, but let me just refer to the relative contribution made to this positive JPY20b variance.

First of all, the increase in the equity income that we received from Denso or Toyota Tsusho and other affiliated companies here in Japan amounted to somewhere around JPY7b to JPY8b, and North America or European affiliated companies maybe half. And you also referred to China, and China’s increase in earnings from equity that we have in Chinese partners contributed maybe one-third to close to one half of the variance, excluding Japanese affiliated companies.

Sorry, just to confirm if Denso and Tsusho were about JPY7b or JPY8b and North America/Europe were, I believe I heard JPY10b.

No, he said half.

Okay.

[Inaudible - not English].

[Nokudinor], okay. Thank you very much.

No, but that’s for Chinese partners.

Yes, yes, yes. I understand.

Thank you. [OPERATOR INSTRUCTIONS]. We will now take our next question from James Irwin, Moon Capital.

Hi, good evening. Kurt touched on my question, but I’ll just do a quick follow up on the question on the Texas plant. What -- can you remind me what the ramp-up schedule is in terms of when does job one production start? And what’s the ramp-up schedule in terms of the output for the Texas facility?

[Translated]. The production is scheduled to start towards the end of this year and Texas plant has the capacity to produce 200,000 units. However, the Tundra, which is to be produced in Texas plant, of course is a very important product for us. And usually the ramp-up takes place rather sharply in other models but this time we would like to ramp-up more gradually step by step. Of course, we will constantly monitor the market trends in ramping-up the production there.

And a follow-up question, if I could. The full-size pick-up segment fell 16% this year for the industry, high fuel prices, etc. [Inaudible] operating leverage in that facility? And is there any difference in that facility in terms of fixed cost element once it’s at full ramp-up mode? Is there any different cost structure element to that facility versus your other North American facilities?

Your voice is somehow cracking up and could you repeat the last part? You said cost structure different compared with other North American plants?

Hi, can you hear me better on this line?

Yes.

Okay, great. No, I just want to add a question for you on the cost structure of the Texas facility. I’m just getting a sense of what’s the breakeven volume levels on that facility, and is it higher or lower than your other North American plants?

Okay, thank you.

[Translated]. We do not say by comparing one [further] plant to another that this plant has a higher cost structure or higher fixed costs for content among others, because with every plant we make a maximum effort, so that we can come up with the best, most efficient mode and way of conducting production activities in any plant we construct and operate. And Texas plant is no different in that regard.

We cannot say that Texas plant relative to other plants in North America has higher costs or lower costs. However, I can say that Texas plant is going to be a very efficient plant with state-of-the-art facilities introduced with a most efficient way and modality of a production conducted there.

And how about an absolute level on is 60% of utilization breakeven, 70%, any guidance on that front?

[Translated]. Very difficult question, but you would accept my not responding to that specific question. But, as I said, this is going to be the most efficient plant in the world and I think you can somehow surmise what would be the likely breakeven operating level would be.

Great, thank you. And one last question. What’s the timeline or schedule for getting production out of the Subaru Indiana facility? I believe you’re going to be sourcing Camry product from there.

[Translated]. We are currently scheduling to start the production of the Camry at this IA somewhere around spring 2007. That’s the timeframe we have in mind.

Okay, thank you very much.

[OPERATOR INSTRUCTIONS]. Our final question -- excuse me, our next question will be from Ronald Tadross, Bank of America.

Thank you. Regarding the North American revenue per unit down 1.5%, do you expect it to stay in this range or could it get worse or better?

[Translated]. As you pointed out, the revenue of price per unit has come down. But generally speaking in the U.S. market there has been some shift in the vehicle mix, moving toward the compact vehicles. And so the market itself has been showing a softness in the model mix overall and we have not -- we have been no exception to that trend.

However, as I mentioned earlier, going forward, LS of the Lexus series is going to be launched. And toward the end of this year Tundra is scheduled for launch. And, therefore, with the current level of revenue per unit at the very bottom, we are hoping and expecting to see upward movement in this figure.

Okay. And then just another question on slide number seven. Could you just -- to help us understand what the JPY17.3b decline in other expenses is? And then also, where is the JPY6.6b valuation gain in this walk?

[Translated]. The figure you have just cited can be elaborated as follows. First of all, there has been increase in expenses -- other expenses due to the expansion of the business size among others, subtracting JPY23.9b. That is nearer to JPY23.9b. However, we had a valuation gain from spot transactions conducted by Financial Services subsidiary amounting to JPY6.6b. And those two are offsetting each other and resulting in the figure you cited.

Okay. And then did you increase your rate of warranty reserve, given the recent recall activity?

[Translated]. Which timeframe are you referring to when you said increase from -- compared with which timeframe?

Well, I guess the -- in the latest quarter did you increase the rate at which you accrue for warranties?

[Translated]. We did not increase the transfer to the allowance for warranty.

Okay. Alright, thank you very much.

Our next question comes from Margaret Moore, American Century.

Thank you. I have three quick questions. First, can you comment on your outlook for the rest of the year for Taiwan and Indonesia?

Second, the Japanese market overall has seen a tremendous mix deterioration in a headwind for you. When do you expect the mix deterioration to bottom out?

And third, can you comment on residual values for your cars? One of your competitors mentioned that they are -- that the high fuel efficiency models that they produce have actually seen residual values improving recently. Thank you.

[Translated]. First, I would like to comment on the conditions in Indonesia and Taiwan. Well, first of all, in Indonesia, due to foreign gasoline prices or higher interest rates and other impacts, since September 2005 up until June of this year there has been the shrinkage of the market for 10 consecutive months. That is to say market was below the previous year’s level for 10 consecutive months.

In Taiwan, because they tightened credit standing standards for loan extension, for six consecutive months starting in January 2006 the market remained below the previous year’s level.

In either case, at this moment it’s extremely difficult to foresee the future development to the market. And precarious conditions continue to prevail in both of these countries. However, we are anticipating that market starts recovering next year, starting in 2007.

Here in Japan in the domestic sector actually the model mix remained extremely unfavorable. However, between January and March this year, that is to say the fourth quarter of the previous fiscal year and the first quarter of the current fiscal year, there has been positive shift in model mix in the Japanese market.

Going forward, given the fact that LS is going to be launched here in the Japanese market, we are expecting further improvements in model mix in the domestic sector.

Relating to your third question, which is on residual value, I don’t have the specific information on that so I cannot give you a direct answer. But I would like to respond to your question from a different perspective. And if the second hand vehicle the price comes down or trading value decreases, that results in residual loss in the case of lease vehicles. However, in the case of our U.S. subsidiary TMCC, its residual loss is plus or minus zero related to the previous year.

Thank you very much.

Thank you. [OPERATOR INSTRUCTIONS]. Miss Fuji, 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.

[Translated]. Toyota Motor Corporation is going to launch LS model in Lexus series in the second half of this year. And, therefore, for the second half into 2007 we would like to further enhance our profit capability or earnings capability. So, I hope you would also have good expectations of that going forward.

Thank you very much for your attention.

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. This -- their 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 concludes today’s conference. Thank you for your participation and you may now disconnect.