豐田汽車 (TM) 2007 Q4 法說會逐字稿

Good day, everyone.

My name is [Mark Pena] and I would like to welcome you to Toyota Motor Corporations' financial results for the 12-month period ended March 31, 2007 conference call with the Chairperson, Mr.

Takeshi Suzuki.

Your line will remain muted until the question and answer session begins.

[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 Ms.

Kuno Fuji from Toyota, who will introduce the conference.

Hello, everyone.

Thank you for joining us today.

My name is Kuno Fuji and I am a member of Accounting Division of Toyota Motor Corporation.

I would like to welcome you to today's discussion of the earnings results for the 12-month period ended March 31, 2007.

I am joined by Mr.

Takeshi Suzuki, Senior Managing Director of Toyota, and narrator, Mr.

[Gareth Monteith].

Today's conference call consists of two parts.

First, Mr.

Suzuki will discuss a summary of Toyota's earnings results and Mr.

Monteith will explain further details.

At the conclusion of our 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 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 three of today's presentation material.

In addition, a complete cautionary statement with respect to insider trading is included on page four.

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

Suzuki.

Thank you, Fuji san, and thank you for joining us today.

I'd like to begin by giving you a very brief overview of our sales and financial results before turning the presentation over to today's narrator, Mr.

Monteith.

For fiscal year 2007, consolidated vehicle sales increased by 550,000 units to 8.52m units, despite decreased demand in Japan and Asia.

We achieved significant sales growth in North America and Europe in particular.

The posted record consolidated leads are across the board.

We believe our continuous efforts to support global growth have steadily contributed our record net revenues, operating income and net income.

I will now turn the rest of today's presentation over to Mr.

Monteith.

Thank you, Mr.

Suzuki.

Today we will cover two main areas - major activities in fiscal year 2007 and 2008, followed by details of Toyota's financial results for fiscal year 2007 and prospects for fiscal year 2008.

To begin, I will discuss Toyota's definition of growth and how the Company plans to achieve it.

When we look at our business environment, we see challenges in every activity area, from development through production and sales.

Our goal is to turn such challenges into opportunities.

Toyota's growth philosophy is to continue to improve technology, production and marketing, which are the Company's growth drivers.

To support this, we must also enhance product quality, costs and human resources.

This way, we plan to build a solid foundation to ensure further growth of our business in the future.

Based on this philosophy, the following major actions were initiated last fiscal year and will continue this year.

First, North America.

In February, Toyota entered the full sized pick-up truck segment with the new Tundra, establishing our full product line up.

We will continue to launch new models to further strengthen our product appeal.

Our new plant in San Antonio, Texas started production of the new Tundra last November.

In April, we began building the Camry at Subaru's plant in Lafayette, Indiana.

Instead of receiving assistance from Japan, both of these projects were supported by other North American plants assigned as mother plants.

Texas received support from Indiana and FIA had help from Kentucky.

These examples show progress in improving the self-reliance of our overseas operations.

Continuing our policy to build vehicles where we sell them, in 2008 we will continue preparation for our second plant in Canada and new plant in Mississippi.

By further improving the self-reliance of overseas operations, we expect to raise profitability of vehicles built there.

As a result of the rapid development of our local operations, Toyota vehicle sales in China are now second only to the U.S.

among our sales outside Japan.

Last year, local production of the Camry started in Guangzhou.

This global model launch was successful, in part because we were able to incorporate Chinese customers' tastes.

Additionally, we adopted a common design which took into account the capabilities of local suppliers to our overseas operations.

This year, we plan to start production of the new Corolla following this successful model.

Additionally, Toyota's sales network is rapidly expanding.

To accomplish this, we are pursuing higher-quality marketing by increasing the number of sales outlets, particularly in urban areas, and training dealers.

We plan to realize strong growth in this market, which has great potential.

Regarding products, global core models are being introduced worldwide.

Last year, we began rolling out full model changes of Camry and Corolla around the world.

For this launch, we implemented a common design plan which accommodates each region's specific requirements, common production facilities, and centralized trial production and technical training in Japan.

As a result, we should be able to standardize product quality, substantially improve the cost base, and speed up the global launch.

Next, I will discuss VI, Value Innovation Activities, our cost-reduction activities.

The business environment of the auto industry is becoming more and more challenging.

There are increasing pressures that squeeze revenue, such as rising material prices, more stringent regulations for safety and the environment, as well as others.

To absorb these pressures through cost reduction and further increase revenue, it is vital that our VI Activities are successful.

An example of these activities is shown in slide 13.

Prior to our VI Activities, our vehicles were supported by many electronic control units, or ECUs.

By integrating many of these units, we were able to reduce cost and improve the ECU performance.

Additionally, ECUs no longer need to be connected by wire harnesses and the amount of raw material needed for wires has also decreased.

We are working on over 300 similar activities today.

The effects of these cost-reduction activities will be realized beginning in models launched early next year.

While we have implemented VI Activities on products through 2010, we will continue to work on further cost reduction for overseas models and compact cars.

As a manufacturing company, technology is the most critical driver of growth for Toyota.

We continue to work on hiring 8,000 new technical personnel by 2010.

We are also introducing a new process using IT technology, which enables high-quality R&D.

In addition, we continue to invest heavily in R&D.

While proactively investing resources, we are enhancing human resources development through organizational changes and personnel rotations between Japan and overseas R&D operations.

This should enable us to not only develop attractive new models but also to identify new areas for future growth and further advance our technology, including alternative energy sources, hybrid and safety technologies.

Next, I will discuss details of our financial results for fiscal year 2007.

Major factors contributing to the JPY360.3b increase in operating income were marketing efforts, particularly an increase in sales volume, and cost reduction, which offset the raw material cost increase.

Now I will review the results by region.

The bar chart shows operating income by quarter, while the figure in each square represents operating income by fiscal year.

The line graph represents units of vehicle production and sales.

First, Japan.

Operating income increased significantly, to JPY1.45 trillion.

Increased domestic production in response to strong overseas demand contributed to the increase in earnings through exports.

We launched the new Corolla, Auris, Blade and other new models in Japan, and our market share, excluding mini-vehicles, reached 45.8% despite severe market conditions.

Meanwhile, product mix continued to improve, supported by sales of the Lexus LS and other models.

In North America sales were strong, thanks to brisk demand for new models such as RAV4, FJ Cruiser, Yaris and Camry launched at the beginning of last year.

On the other hand, costs related to the start-up of our Texas plant and preparation for Camry production at Subaru of Indiana Automotive, among others, had a negative impact.

The operating income, however, was strong at JP449.6b.

We aim to improve profit through more efficient local operations.

In Europe sales performance has been strong, thanks to core models such as Yaris, Aygo and RAV4, resulting in a high level of operating income every quarter in fiscal year 2007.

We plan to improve this level through increased production and sales, particularly of the Auris, which came off the line in January.

In Asia, IMV exports to regions outside Asia continued to grow steadily and contribute to earnings.

On the other hand, due to declining demand in Indonesia and Taiwan, both vehicle sales and operating income decreased year on year.

Indonesia and Taiwan are expected to recover beginning late this year and we plan to take full advantage of this momentum.

In other regions operating income increased, thanks to the continuing popularity of IMV in Central and South America and Camry in Oceania.

As for financial services, despite shrinking lending margins as a result of rising interest rates and increased valuation loss on interest for transactions, the balance of captive finance has been increasing steadily, enabling us to improve profit.

Equity earnings of affiliated companies grew substantially, reflecting the strong performance of Toyota Group companies in Japan and joint ventures in China.

The latter, in particular, has benefited from stronger local operations.

Slide 24 shows consolidated CapEx, depreciation costs and R&D expenses and their regional breakdown for fiscal year 2007.

CapEx decreased slightly from last year.

As for unconsolidated financial results, we also posted record results across the board.

The increase in unconsolidated operating income was largely driven by marketing efforts, through export growth and improved model mix in Japan, as well as the impacts of foreign exchange rates.

Moving on, I will discuss Toyota's prospects for fiscal year 2008.

Consolidated vehicle sales are expected to reach 8.89m units, up 366,000 units year on year.

We expect balanced growth across all regions.

As for earnings prospects, we are targeting net sales of JPY25 trillion, operating income of JPY2.25 trillion and net income of JPY1.65 trillion.

We aim to exceed last year's earnings by increasing sales volume and reducing cost, while investing for future growth.

This is based on the following assumptions.

CapEx will remain high, at JPY1.5 trillion, depreciation expenses will be JPY1.2 trillion [sic - see documentation] and R&D expenses will be JPY940b, up JPY50b from last year, in order to develop areas of future growth.

Our unconsolidated prospects are shown on slide 30.

To wrap things up, I will discuss our shareholder return policy.

At the Annual General Shareholders' Meeting in June we would like to propose a JPY120 per share dividend, which is a significant increase from last year.

As a result, we will raise our consolidated dividend payout ratio to 23.4%, while increasing profit significantly.

We aim to achieve our 30% target in the near future, at the same time as continuously increasing profits.

Regarding share buyback, today Toyota's Board of Directors resolved to acquire its own shares under the resolution made at the Annual General Shareholders' Meeting last year.

The aggregate purchase price of shares is up to JPY62.99b and the aggregate number of shares to be acquired is up to 11m shares.

This completes our share buyback plan resolved last year to acquire JPY200b of shares.

Our proposal of a share buyback program to be presented to this year's meeting is 30m shares or JPY250b.

As a result of our secondary offering and share buybacks in November, very little overhang risk from government entities exists now but we intend to exercise the share buyback program continuously.

Together with our dividend program, then, we would like to strengthen our shareholder return.

This concludes the presentation.

Thank you for your attention.

Now we will open for your questions.

During the Q&A session we will have consecutive interpretation for questions and answers in both Japanese and English.

Now our conference call Operator, Mr.

Mark Pena, will explain how to connect your line.

Please, Mr.

Pena.

Thank you.

Today's question and answer session will be conducted electronically.

[OPERATOR INSTRUCTIONS].

Our first question today comes from Ron Tadross with Banc of America.

Thank you.

Just a couple of questions regarding the 2008 guidance.

Your unconsolidated cost-reduction goal is about JPY100b.

Maybe you could just give us an idea of what that might be on a consolidated basis.

JPY100b seems very, very high already for Japan, which is good.

And then, on the mix side, you did about JPY320b in 2007.

Could 2008 be as good, given the headwinds in Japan that you're forecasting?

[Interpreted].

First of all, let me respond to the planned cost-reduction benefits for the period ending in March 2008.

On the standalone basis we are planning to achieve JPY100b in cost reduction.

And on the consolidated basis it is expected to be JPY130b.

We continue to believe that the materials cost will -- is expected to rise going forward but, that notwithstanding, we are planning to realize JPY130b in consolidated cost savings.

With respect to the positive impact increasing profit for the period ending in March 2008 coming from operating -- coming from marketing and other efforts, including sales volume increase and improvement in model mix, the expected positive impact is likely to be somewhat lower than what we realized in the past fiscal year.

But, still, we intend to maintain the level higher than JPY200b.

Okay.

And then just one follow up on the labor side.

Well, your labor and business expenses were -- labor was about JPY100b in '07 and business expenses were about JPY130b.

Will they be lower or higher in 2008?

That's my last question.

[OPERATOR INSTRUCTIONS].

[Interpreted].

First of all, with respect to the level of increase in labor expenses, we're expecting that to be more or less on par with the period ending in March 2007 because our business scale is still expanding and therefore the labor expense is likely to increase in line with that.

However, with respect to other expenses, our current prospect is that those other expenses are likely to come down somewhat.

So they'll be down year over year or the rate of increase will be lower?

[Interpreted].

The rate of increase will be lower.

Okay.

Thank you very much, Suzuki-san.

You're welcome.

Our next question will come from Rick Herman.

Good evening, Suzuki-san.

Thank you for the call.

My question is in regard to your forecast for North America sales.

It's much more conservative than what you achieved last year.

Could you explain your assumptions in making that forecast?

[Interpreted].

As you've pointed out, compared with the actual growth rates that we achieved in the past, we have come up with somewhat a more conservative forecast for the next year.

And, honestly speaking, I somewhat feel that we may have been too conservative in coming up with these forecasts.

However, for one thing, as the conditions relating to oil prices still remain quite uncertain, and while we are quite confident that we can prevail in the competition in the market, but market conditions and developments themselves remain quite uncertain.

And therefore, we came up with a relatively conservative sales volume forecast for the next fiscal year.

However, when it comes to actual deployment of business, we'll make every effort, so that we'll surpass the forecasted level of 2.99m units for the sales volume for North America next year.

Rather, we would like to even exceed and achieve a level higher than 3m [units].

Okay.

In your assumptions, do you have an assumption for the total number of sales -- unit sales in North America?

Not for Toyota, but for the market.

[Interpreted].

On the calendar-year basis the total market, and when I say total market that's more or less U.S.

market rather than North American market, but the total market stood at 16.55m units last year and we expect the market this year to be not very much different from that level.

However, as far as Toyota sales is concerned, we tended to be somewhat conservative in coming up with the own sales forecast, which I mentioned earlier.

In reality, between January and April the Toyota sales increased year on year by 7%, reaching 107% of the previous year's level.

And therefore, I think we'll be able to achieve the plan I mentioned earlier.

In the same period, between January and March, the total U.S.

market was 97% of the previous year's level.

And therefore, we have continued to retain the recently observed trend of Toyota's sales enjoying a 10% advantage over the entire market.

Okay.

Thank you very much for that explanation.

Just one last question - does the FX rate have any impact on this assumption?

[Interpreted].

Our projections for profit and loss have been made assuming the U.S.

dollar to be JPY115 and EUR1 to be JPY151.50.

So, compared with the currently prevailing rates for both dollar and euro, we used the assumption of yen somewhat stronger than what they are in the market at the moment.

Actually, the actual rate prevailed in the previous fiscal year was JPY117 and therefore we are anticipating yen to be JPY2 higher than the previous year, whereas in the case of the euro the market rate was more or less around JPY150 and therefore we're assuming the same level of euro exchange rate.

Okay.

Thank you very much.

Our next question will come from [Yiu Liu] with TPG.

Hi, guys.

I have two questions, one is on the other costs in the fourth quarter.

I think there has been JPY200b -- excess of JPY200b of increase in the fourth quarter and you mentioned during the conference during the day that there has been some pull-forward expense.

And if I look at your R&D and labor costs and the other costs has shown significant increase in the fourth quarter.

Can you just elaborate how much of that can be attributed to the one-time increase or the pull-forward of expense, as you called it?

And then the second question is on the North American capacity.

I think you mentioned that the Sienna and the Sequoia has some problems, is not selling very well at this point.

And if you think about the new Tundra capacity, 150,000, and then the SIA capacity for the Camry, 100,000 is coming in next year.

So can you reconcile that -- help me reconciling how much of sales -- how much you can grow your sales with the new capacity that's coming in, not from a capacity point of view, rather than the sales growth projection.

[Interpreted].

First, let me respond to the specifics of other expenses for the fourth quarter.

The labor expense increase due to the personnel increase stemming from the business size expansion totaled around JPY50b.

And increase in research and development expenditure was around JPY54b.

And both of them were primarily due to increase in outsourcing expenses relating to research and development, or a special increase during fourth quarter of actually expending or spending research and development, for which the budget had been formulated within Toyota earlier.

And, on top of that, there has been substantial increase in expenses relating to plant expansion as well as maintenance expenses.

Regarding the production capacity in North America, the capacity in North America is expected to increase and reach 1.87m units during 2007, increasing from 1.75m in capacity reached in 2006.

Actually, we are planning to increase the prospect for volume in North America by 50,000 units.

Actually, the local production units will increase by 110,000 units, whereas the CBU exported from Japan will decrease by 70,000 units.

And this 110,000-unit increase expected for local production is primarily covered by the production capacity offered by SIA.

That means the Camrys exported from Japan will decrease the same percent.

Just a follow up on that.

I guess, if you look at the capacity at year end, it's 1.75m, as you mentioned.

But considering that the Texas plant just started at, like, year end, doesn't that contribute into your production going into next year?

I mean going into 2007?

[Interpreted].

Yes, that is correct.

You are quite right.

But, at the same time, when one considers in relation to the market, for example, the Texas capacity will increase by 140,000 units but NUMMI's production will decrease somewhat.

And we also expect the Kentucky production level -- production of Camrys to decrease somewhat and, in general, production will also decrease to a certain extent.

And, therefore, all in all we are expecting net production increase to be 110,000 units.

Our next question will come from Mark Warnsman with Prudential.

Yes, thank you for taking my call.

I believe that financial services' operating margin declined by 344 basis points.

Could Mr.

Suzuki provide some background on that decrease?

[Interpreted].

Where did you get the figure of 344 basis points as the decrease in gross profit margin of financial services business?

Yes, I'm calculating it based on a backup schedule numbered 17 that details the financial services income statement.

And it shows net revenue as having grown by JPY303b, whereas operating income grew by JPY2.7b.

Perhaps I could ask the question differently.

It appears that revenue is growing at a faster rate in financial services than is operating income.

Does that relate to a specific business condition or market that would cause that to occur?

[Interpreted].

Let me relate to you the status of the financial services business.

Centering around North America, the sales volume has increased substantially and therefore the loans outstanding have been increasing steadfastly.

That is to say the net revenue is increasing quite steadily.

However, at the same time, compared with this rather rapid increase in loans outstanding, the earnings is not increasing at the same rate for two major reasons.

For one thing, the market interest rate increased in the United States and under such circumstances the interest rate on loans cannot be increased at the same pace.

And, therefore, that means higher cost of doing business, putting a downward pressure on interest margin.

Interest margin tends to decrease under such circumstances.

Therefore, I guess we simply must ask Chairman Bernanke of FRB to start cutting rates as quickly as possible.

Indeed.

[Interpreted].

And the other reason is some slight increase in the amount of loan loss.

While I did say that loan loss increased somewhat, but it increased from 0.53% in the previous fiscal year to 0.63% in the fiscal year just ended, increasing by 0.1 percentage point.

However, all in all, as clearly shown on page 22 of the slides, we still maintain very high level of operating income.

Thank you.

If we could turn to slide 16, regarding the marketing effort improvement of JPY330b, my question is volume was cited in the narration as being the primary driver behind marketing effort.

Curious as to how the Company is thinking about increasing volume versus increasing margin through higher prices.

[Interpreted].

Basically speaking, this contribution -- marketing effort contribution for the most part is due to the increase in sales volume.

Other factors include improvement in model mix or how the model mix evolves and also the pricing, as you pointed out in your question, to what extent we can increase price.

But, as I said, the predominant portion of this marketing effort contribution is -- stems from the volume increase.

And a final question, if I may, concerning Japan.

I notice that the projection for 2008 shows an improvement in unit sales in Japan compared to a decline in fiscal year 2007.

Is that being driven by increased -- or new Toyota models in the market?

Or does the Company anticipate improved economic conditions driving demand?

[Interpreted].

Honestly speaking, we -- I don't think we'll be able to hope for a substantial increase in demand.

The Japanese economy is not expected to grow that substantially and market continues to be quite tough.

So, in that general environment, we at Toyota are planning to increase new model -- model changes or introduction of totally new models successfully starting in the second half of this year, especially much more so than last year.

And, therefore, in the general market conditions we are planning to grow sales volume by Toyota further beefing up its own product line up in Japan.

To avoid any misunderstanding, let me add that I'm not saying that the Japanese economy will deteriorate or remain rather stagnant.

Rather, what we are trying to do is to capture what sales volume that we lost to the Mini vehicles in the Japanese market.

And at the same time the demand itself will not continue in the downward slope.

And, therefore, I also believe that the demand were one of the factors underpinning the market.

Thank you very much.

[OPERATOR INSTRUCTIONS].

Our next question will come from Steve Usher with Japan Investment Advisors.

Good evening, Suzuki-san.

Thank you very much for the call.

Two quick questions, if I might.

First of all, can you please comment on the pricing environment in China and the impact the expectation for reduced prices will have on the profitability of your operations there?

And secondly, in terms of sales volume, you enjoyed a very robust year in Europe this past year but your projections are for a dramatic slowdown in growth in European volume this year.

Do you see those forecasts as conservative as well?

And could you comment on the reasoning behind the slowing growth in Europe?

Thank you very much.

[Interpreted].

Let me start with China, and may I refer you to slide number 11 for that purpose.

Toyota actually grew very rapidly both the production volume and sales volume in China.

The pricing competition has been and continues to be extremely tough.

However, Toyota is very cost competitive and we are plan -- we have been able to grow the sales volume while maintaining a very high level of profitability.

So, the very positive cycle is in operation in China.

And, therefore, in China we will continue with the profitable growth of sales volume.

However, China defies any prediction as to what may happen in the future.

Two years ago, because of the tough pricing competition, there has been some erosion of prices.

And, therefore, in that sense we remain extremely vigilant but we are quite confident that we can come out prevailing in the competitive market in China.

Regarding Europe, in the fiscal year just ended both Yaris and Aygo grew very rapidly, very strongly.

And, therefore, we were able to enjoy very good benefits of the excellent product line up we had in Europe in the fiscal year just ended.

However, during the current fiscal year just the opposite may apply, because we may face the product gap because the Corolla is now undergoing substantial model change -- a full model change.

And because of this product line up relationship and because of the -- some models ending the end of the model life, we expect the growth to somewhat slow down in Europe.

However, let me just say that we are very conservative, although we are not very, very conservative.

Right.

Thank you very much.

Thank you.

Our final question will come from Samuel Lau with Deutsche Asset Management.

Good evening.

Sorry, thank you very much for taking my call.

I've just got a couple of quick questions.

Well, just a follow-on question regarding the European market.

What is your assumption for the market growth?

And secondly, do you have a dividend outlook for this year?

And do you think you're likely to use your entire maximum limit to buy back the share?

Thank you very much.

[Interpreted].

First of all, the European market; major markets there remain extremely stable.

And, therefore, on the calendar-year basis we expect the market this year to be more or less on par with last year, or probably higher than 17m units.

Actually, last year the market size was 17.27m units and this year the market may surpass that level.

At least it will be on par with the previous year.

As for the dividend, we are going to propose JPY120 per share for the full year for the current fiscal year.

And for the next year we would also like to grow our profit while increasing payout ratio as well.

And we simply hope that we'll continue to realize the extrapolation of the trend shown on the graph on page 31.

Last year we specifically mentioned that we will aim at attaining 30% in payout ratio and we would like to remain on that course going forward.

Regarding share buyback, in the current fiscal year we will execute the maximum amount of shares that has been authorized in the Annual General Shareholders' Meeting last year.

And for this year's AGM we are going to propose, as shown on page 32, the repurchase program up to JPY250b worth of shares or up to 30m shares.

And, once authorized, we would like to execute the full program.

Okay.

Thank you very much.

Ms.

Fuji, there are no further questions today.

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 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.

Portions of this transcript that are noted "interpreted" were interpreted on the conference call by an Interpreter present on the live call.

The interpreter was provided by the Company sponsoring this Event.