豐田汽車 (TM) 2008 Q2 法說會逐字稿

Good day everyone. My name is Jim Killion and I will be your conference operator. (OPERATOR INSTRUCTIONS). I would like to remind all participants, this conference is being recorded at the request of the hosting company. I would now like to turn the call over to Ms. [Ikuno Fuji] from Toyota who will introduce the conference.

Hello everyone. Thank you for joining us today. My name is Ikuno Fuji and I am a member of Accounting Division of Toyota Motor Corporation. I would like to welcome you to this fiscal year 2008 semi-annual financial results conference call. I am joined by Mr. Takeshi Suzuki, Senior Managing Director of Toyota, and our narrator, Mr. [Andrew Homer]. Today's conference call consists of two parts. First, Mr. Suzuki will discuss highlights of Toyota's earning results and Mr. Homer will take over the rest of the presentation. At the conclusion of the presentation we will open for your questions. We expect that the entire call will last approximately one 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 three of today's presentation material which can be downloaded from our Internet home page. In addition, a complete cautionary statement with respect to insider trading is included on page four of today's presentation material.

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

Thank you, Fuji-San. And hello everyone. Thank you for joining us. It is my pleasure to present our Company's financial result for the first half of the fiscal year 2008.

Consolidated vehicle sales increased in all regions outside Japan by 156,000 units to 4.301m units. In Asia in particular our sales trend has turned upwards, supported by the recovery of the market. In addition, sales in the Middle East and Central and South America have been robust. Total retail sales indicated in the bottom of the bar chart grew year over year by 241,000 units to 4.701m units, due to an increased production volume in China.

The consolidated financial summary shows recorded semi-annual result in every line from the net revenues to net income. We believe that this is the result of the implementation of our growth strategy across the products and the regions, and our efforts to establish a profit structure that is well balanced globally. The 21.3% increase in net income is attributable to an impressive rise in equity earnings from affiliate companies.

Toyota's consolidated net income has been growing rapidly in recent years. This is due to a significant increase in equity earnings in affiliate companies plus an increase in operating income. Net income in the first half year has grown by nearly 70% over the last two years. We will effect this net income growth into our shareholder return policy.

We propose JPY65 per share for the interim dividend, up JPY15 per share. This implies a 1.3% improvement in the consolidated payout ratio compared to the first half of fiscal year 2007. We continue to aim at 30% consolidated dividend payout ratio on a full-year basis and plan to achieve it within about three years.

And for share buybacks, at the ordinary general shareholders' meeting held in June 2007, the annual program was approved up to 30m shares, JPY250b equivalent. Thus far we have bought back 5m shares, JPY36.4b equivalent under the annual program. At the meeting held today, the Board of Directors resolved to acquire our shares of up to 1.5m shares or JPY110b equivalent. We will continue to return the value to shareholders proactively through both dividend payments and share buyback.

As we move on to discuss the details of the financial result, let me hand it over to our English narrator, Mr. Homer. I will be available to answer your questions at the end of the presentation. Thank you.

Thank you, Suzuki-San. Please look at slide 11. The bar chart shows the trend over the past five years of quarterly operating income. As you can see, Toyota's overall operating income has been consistently growing. For the first half year ending September 2007, our operating income has increased by JPY178.7b year over year. Summarized on slide 12, marketing efforts, particularly increased vehicle sales, as well as cost reduction efforts, exceeded the increase in R&D and other expenses.

Next, I will review the operating income by region. In Japan, the operating income rose JPY88.9b to a total of JPY773.3b. This was supported by an improved product mix, driven by increased sales of the Lexus LS both in Japan and overseas. In Japan, sales have been trending upwards since August, thanks to new model launches which began in May. Toyota's October vehicle sales rose by 7% year on year. Going forward, we will continue to stimulate additional demand.

Next, North America. Vehicle sales exceeded the results of the same period last year, thanks particularly to the new Tundra and Prius. Consequently, the operating income remained high, at JPY254.1b. In the second half of this fiscal year, we plan full model changes of the Sequoia, a full-sized SUV, and the Corolla, a global core model. We expect both to contribute to North American operating profits through local manufacturing and sales operations.

Next, Europe. Vehicle sales increased significantly with the Auris which has been manufactured locally since the beginning of calendar year 2007, and the fully remodeled Corolla. Russia contributed substantially to the increase in European operating income as sales of the Lexus brand models, Camry and Corolla, have been growing rapidly. We hope to maintain this momentum in the second half of this fiscal year.

In Asia, the operating income increased 1.9 times over the previous year to a total of JPY116.7b. Asia therefore now represents a growing new pillar that will support Toyota's global earnings. We have been actively responding to the overall recovery of the Asian markets, including Indonesia which drove the profit increase. Also Asian operating income includes a significant contribution from a Chinese subsidiary that distributes the Lexus in China.

In Central and South America, Africa, Oceania and other regions, operating income roughly doubled to JPY71.7b, representing a remarkably high increase. Vehicle sales have been robust, driven by IMVs now manufactured in Argentina and South Africa and the new Camry.

Let me move on to Financial Services. Operating income from Financial Services maintained a trend of growth, reflecting the steady increase in the outstanding loan balance. The sub-prime lending issue has been insignificant to our financial business. Our loan loss ratio has remained below 1% and the funding for our financial business has not been impacted thanks to Toyota's high credit rating.

Please look at slide 19. Equity earnings from affiliated companies increased by JPY55.7b year over year, to JPY145.1b. This was thanks to a particularly strong performance by joint ventures in China and Toyota Group companies in Japan. Our efforts to steadily build on our operational foundation has contributed to the increased income of our joint ventures in China.

As for unconsolidated financial results, please refer to slide 20. Toyota marked record semi-annual results in every line, from net revenues to net income. In unconsolidated operating income, improvement in the model mix for both domestic sales and exports combined with cost reduction efforts as well as the effect of favorable foreign exchange rates contributed to operating income.

From slide 22, we would like to highlight Toyota's major activities in growing markets, including resource-rich and emerging countries. The bar chart on the left shows operating income from Asia and other regions. And the bar chart on the right shows the equity earnings of affiliated companies in China. We see rapid profit growth in these regions. These markets have been growing to represent a new pillar of support for our global earnings.

I would like to now give you an overview of each of these markets. Let me start with South East Asia. The IMV project has been a profit driver since 2004. Excellent profitability has been achieved through optimized network and allocation and vehicle production and parts procurement through Asia, Thailand and Indonesia as the largest centers. Also through exports outside Asia, including the Middle East and Oceania, the IMV project enjoys profit structure which is resistant to fluctuations in individual markets. Asian demands as a whole have been clearly recovering from the low level of the last year. We plan to enhance the trend of earnings growth in South East Asia by flexibly responding to recovering demands within the region, in addition to export to other regions.

Next, Central and South America. This market has already grown to the scale of 4m vehicle sales a year under the expansion of the [FTA]. In order to respond strategically to this change in environment since the 1990s, Toyota has consolidated the vehicle manufacturing plants in 10 different countries in the region, into Brazil, Argentina and Venezuela. At the same time, we commonized vehicle specs across the region to enable local procurement in a substantial scale and reduce cost dramatically. Toyota's strong competitiveness in products has been supported by our customers' confidence and the quality of the Toyota brand. Going forward, we will continue to pursue profit expansion with the Corolla in Brazil and the IMV in Argentina.

Lastly, China. We have been rapidly building production and sales foundations in China, utilizing three sales channels, FAW, Guangzhou and Lexus. In sales, we have established a high brand status for Toyota and Lexus through the launch of high-quality, high-performance models. In production we will achieve a high level of profitability through the introduction of state-of-the-art manufacturing facilities and enhanced local procurement.

Going forward, we intend to pursue improvements in our product lineup and further reinforcement of our business foundation to achieve annual sales of 1m vehicles in the early 2010s and the dramatic expansion of profit.

Finally, we would like to discuss the full-year prospects for this fiscal year. We have made an upward revision to our consolidated vehicle sales target by 40,000 units to a total of 8.93m units, up 406,000 units from last year. We have also made an upward revision to the consolidated earnings. Operating income up to JPY2.3 trillion and net income up to JPY1.7 trillion. The foreign exchange rate assumptions for the second half of the year are JPY110 to the U.S. dollar, and JPY155 to the euro. We intend to achieve an improved level of full-year financial results through increased vehicle sales and further cost reduction. Prospects with respect to CapEx, depreciation costs and R&D expense remain unchanged.

Unconsolidated prospects are as summarized on slide 29.

This concludes the financial results presentation for the first half of fiscal year 2008. Thank you very much for your kind attention.

Thank you, Mr. Suzuki and Mr. Homer. During the Q&A session we will have consecutive interpretation for questions and answers in both Japanese and English. Now our conference call operator will explain how to connect your lines.

Thank you, Ms. Fuji. (OPERATOR INSTRUCTIONS). We'll go first to Steve Usher at [Japan Investments].

Thank you very much. I've got three questions, if I might. First of all, could you please comment on the model mix in North America? With profits essentially flat there, can you discuss what impact mix had and what the outlook is?

Secondly, congratulations on the excellent equity method performance due to the China operations. Can you give us an idea of your full-year expectations of the China contribution within the equity earnings? You've increased your prospects on the equity side. If you could just give us an idea what the China contribution is on that.

And thirdly, could you comment and give us a bit more detail in terms of the profitability in Latin America, particularly your Brazilian operation? What kind of margins can we expect there? And can you give us a bit more number detail in terms of the profit contribution? Thank you very much.

Hello?

Hello. Sorry.

(Interpreted). First let me respond to your question regarding the model mix in North America. Comparing the first half of this year against the first half last year, there has been very little impact of model mix on profitability. If anything, some slight improved impact of the model mix on the profitability.

The improvement in model mix is primarily due to the launch of LS which has been a very profitable model. On the other hand, our hybrid vehicle, the Prius, has somewhat slower profit margin than the average margin. And offsetting that, the overall model mix impact on the profitability was womewhat on the improving side, a bit more favorable side.

Next let me explain to you the earnings situation of the Chinese affiliates accounted for under equity methods. The contribution made by the Chinese affiliates accounted for under equity methods made to Toyota's overall profit was JPY30b in the first half of this year.

Our Chinese business has been doing extremely well, with volume increasing, and therefore in the second half of this year we are expecting to receive at least the same level of earnings or somewhat higher than the first half from these Chinese affiliates. And because we are expecting substantial growth of our Chinese business, on the full-year basis, probably we can expect JPY70b to JPY80b coming from the Chinese affiliated companies accounted for under equity method per year.

Let me move on to the situation of Brazil. Toyota's subsidiary in Brazil, just one company there generated JPY22.5b in profit between April and September in the first half of this year. And as a percent of sales, this operating income represented 14.5%. And with the volume going up, we are conducting excellent business which shows increasing operating income performance as well.

That's all. Thank you.

Thank you very much.

You're welcome.

Next we'll take a question from Kurt Sanger at [Deutsche Securities].

Good evening, Suzuki-San. Two questions please. First on the finance business. If I look at the second quarter only, the operating margin fell considerably year on year and quarter on quarter. You said that there was no problem with sub-prime or any of those issues. Could you help me understand why the profitability then has declined so dramatically? Is it higher lease rate, high provisioning? How can I understand that number?

(Interpreted). Regarding our Financial Services business, translated into the Japanese yen during the second quarter of this year, this Financial Services business generated a profit of JPY40.8b. Because the profit level in the first quarter was JPY45.4b, relative to that figure in the first quarter, the profit margin decreased by -- profit decreased by 10%. And in the second quarter last year, on the year-on-year basis, since it stood at JPY40.8b, the profit level did not change.

However, the figures I have just introduced are those figures excluding devaluation losses stemming from interest rate swap transactions. So from that perspective, in substance, the operating income decreased from the first quarter to the second quarter. And regarding the major reason behind that, primarily the provision established against the residual loss increased. And regarding this provision against residual loss, especially in the leasing business, if Lexus grows very rapidly, that results in an increase in that level.

One figure that I'd like to share with you relates to the sub-prime loan related issues. In terms of the loan/loss currently, it is standing at around 0.6% to 0.7%. Now, at the level of 0.6% to 0.7%, generally speaking, this is probably 0.1 percentage point higher than the loan/loss ratio of the cruising speed, so to speak, at the PMCC. And therefore I think it is fair for me to say that sub-prime loan related problem has had hardly any impact on Toyota's Financial Services.

Okay. Thank you. Yes, I'm sorry?

(Interpreted). Having said that, we also intend to remain very vigilant regarding the trends of our Financial Services loan/loss ratio.

Okay. Thank you. Suzuki-San, my next question is on the Corolla as you launch it into the North American market and even roll it out further in China. When the Camry was launched, there was a lot of talk about the cost that was being taken out of product. What kind of net cost savings do you expect to achieve from the Corolla relative to the old model as you get the full global volume impact from the second half of this year?

(Interpreted). Let me put it this way, the new Corolla has lower costs than the previous Corolla and it is more profitable than the previous generation or previous model of Corolla. That's certain and without any doubt. And the overall amount of the cost savings we achieved in the first half of this year was JPY50b. And we expect to generate somewhere around JPY80b in terms of cost reductions. Although I do not have any concrete figure that I can share with you at this juncture, but this JPY80b in cost reduction includes substantial cost savings actually achieved through the Corolla.

Is it sufficient to understand that with the VI cost savings that are supposed to accelerate from next fiscal year and over the next two, three years that the Corolla is really the beginning of those efforts.

(Interpreted). Corolla is not the beginning of that trend because the Corolla is still showing the cost reduction effect or benefit coming from CCC21 activities. And the actual benefits of VI activities cost reduction will be incorporated in the Crown that will be launched here in the Japanese market next year. And so we have a lot of expectations looking forward to that a great deal.

Great. Thank you very much.

You're welcome.

(OPERATOR INSTRUCTIONS). We'll take our next question from Jairam Nathan at Banc of America Securities.

Hi. Thank you. I just had, Suzuki-San, if you could talk to us about what you are thinking on the U.S. sales outlook for '08?

And also I'd noticed -- my other question on North America was your operating margins on the North America region seems to have -- seems to be coming at under 4% and it seems to be low at least over the last two or three years. I'm just wondering what is the reason behind it and what could change that?

You asked about U.S. sales outlook for 2008, right, next year?

Yes.

(Interpreted). On the calendar-year basis, we expect the U.S. market this year to be higher than 16m units. But the market overall is likely to be somewhat smaller than that last year.

Do you have an estimate for the kind of preliminary estimate for '08, calendar '08?

(Interpreted). And frankly speaking, it's a bit difficult to capture the market outlook for calendar 2008. So I hope I can have a little more time before I can share that information with you. But regarding specifically about our product lineup, our Toyota sales plan next year is expected to be higher than the sales this year, and more concretely, for the calendar next year, we are planning to sell 3m units in North America.

And regarding the operating margin in North America, it was -- it declined during two quarters, so you are right by pointing out that it was below 4%. One factor that relates -- compares the second quarter against the first quarter this year is that in the second quarter, the operating margin decreased because of the fact that in the first quarter, LS increased substantially. The volume of LS was redundant, whereas in the second quarter, it was the Prius that accounted for the large volume there. And therefore there was that model mix impact.

And the reason behind operating margin decrease over a six month period relates to first of all incentives that we are offering for Tundra. However, from the very beginning, we were aware that making inroads into the market segment which has been the exclusive preserve of the big three, where the big three remains very strong, represents a very tough proposition for us, and therefore, we've been using incentives in a very strategic manner.

And another reason relates to an increase in invoice prices of raw materials used in our North American plant. Raw materials are rising in their prices. From the viewpoint of the structure of earnings, basically speaking, we are going to make a further initiative in bringing down costs further of our U.S. produced and overseas produced vehicles overseas. We created task forces specifically for that purpose, and so we're going to take concrete efforts, initiatives, in further reducing costs of those vehicles locally produced outside of Japan. And with those in mind, we are going to increase the operating margin of our U.S. cars so that level that we have seen previously, and I'm confident that we can achieve that.

Okay, thanks. Just one more question on commodity prices. What is your outlook for commodity prices next year, and can you -- would cost reductions of having JPY130b that you assume for this -- all of this year, would it get better next year? Is the outlook better?

(Interpreted). Actually, commodity prices defies anybody's prediction, I must say, but we have the impression that they are showing some signs of settlement or slowing down. However, with the WGI prices reaching $100 per barrel, frankly speaking, we really can't tell what's likely to happen there. However, regarding the amount of our cost reduction achieved at Toyota, as I mentioned earlier, the true benefits and effects of our VI activities will start emerging next fiscal year, and at the same time, expecting the commodity prices will start showing some subsiding signs, we expect the cost reduction amount to be higher than JPY130b next year.

Alright, thank you.

Mr. Nathan, did you have anything further, sir?

No, no, that's all I had, thanks.

Thank you. (OPERATOR INSTRUCTIONS). We'll go to Steve Usher with Japan Investments.

Thank you for the second opportunity. Suzuki-San, just a question on the second half. You had a very solid performance in the first half, with operating profits up 16%. Even with your upper revision, however, you're anticipating a 10% decline in second half operating profit. Do you see that as a worst case scenario? Are you adopting intentionally conservative numbers there or there particular reasons why you're expecting such a sharp decline in the second half? Thank you very much.

(Interpreted). I believe that Toyota's business itself is continuing to grow in a very proper and solid manner. However, the reason behind a decrease in operating income year-on-year in the second half, the only reason shall I say, relates to the changed assumption for exchange rates. That is to say, we are going to use a very conservative assumption for the dollar of JPY110 to a dollar.

Actually, in the second half of the previous fiscal year, the actual average dollar rate was JPY119 to a dollar. And therefore, our assumption assumes, or incorporates [JPY9 in] appreciation of the yen, and that would have a major impact on the operating income trend. So if you exclude this impact stemming from exchange rate and its assumptions therein, the volume will increase steadily, and so does operating income. I am hoping that the U.S. dollar appreciates.

Okay, thank you very much, and if I might just ask one more, could you comment a bit more specifically on the profitability on your operations in Russia? You'll be opening up the St Petersburg plant in December. Can you give us an idea of how the margins are proceeding in Russia and the profit contribution there?

(Interpreted). Our plant is not in operation at the moment. Our Russian business has the profit generated by Toyota Motors Russia, which is a distributor there. And between April and September of this year, the Toyota Motors Russia sold 85,000 vehicles compared with 46,000 in the previous period, representing an increase of 39,000 units. And the 85,000 units of vehicles sold generated JPY13.3b in profits, so quite a high level of profit has been achieved.

Great, thank you very much.

You're welcome.

(OPERATOR INSTRUCTIONS). We'll take a question from [Tukaki Makinishi] at JP Morgan.

Hi, this is Tukaki speaking, JP Morgan. I have a couple of questions if I may. First of all, I am pretty impressed with the China profit, which is almost 10% of your automotive profit today. But maybe something we should focus on besides China should be the Middle East sales growth and profitability there. You have a fairly big upward revision in Middle East sales and could you elaborate about this upward revision, what is driving sales there? And can you comment on how much -- what kind of profitability you are generating Middle East? I assume it's going to be somewhere around 10% of your total profit, which is similar to the significance of China. Is that perception right or not?

And the second question is, as a result of those margins up, a stronger profitability coming from those emerging economies, how much percent do you now depend on U.S. or North America on profit? I suppose it's a pretty, getting close to 50 or maybe even better than 50%? Is that perception right or not?

(Interpreted). First of all regarding our Chinese business profit, our local Chinese business is conducted through a joint venture, and therefore it is not included as a part of the operating profit of the consolidated income statement. If you aggregate altogether the profit generated by vehicles we export from Japan to China, and the profit generated by our subsidiaries located in China, as well as the earnings generated by the Chinese affiliated companies accounted for under the equity method altogether, combined as you correctly pointed out, those aggregate operating income accounts for about 10% of the income of Automotive business.

Regarding our business in the Middle and Near East, about 5% of overall profit is generated by -- the profit of Automotive business is generated by our business in Middle and Near East. And we have a very strong and robust distribution network located in the Middle and Near East. And given such soaring oil prices, the purchasing power has increased substantially, resulting in substantial improvement in the markets in Middle and Near East as well. And in that general favorable context, Toyota is conducting the sales and the marketing efforts which are next to none.

Regarding our dependence on income generated in North America because the contribution from other regions increased so substantially on relative terms, our dependence on North American profit has decreased somewhat to a level which is slightly less than 50% of the total profit.

(Inaudible). Thank you very much.

Thank you. And we'll take our final question, a follow-up from Jairam Nathan of Banc of America Securities.

Thank you. I was just -- I was wondering if you could talk about the IMV project. Have you -- are there any capacity expansions or increase in the product -- number of products that you'll be sending under that project?

(Interpreted). I have been involved with this IMV project personally since a long time ago, and at the initial stage, in terms of the sales volume per year, the IMV project started with the level of 400,000 units per year. However, once this project was fully onstream, it remained extremely favorable and strong, and in fiscal '06 a total of 610,000 units were produced under IMV project. And therefore we expanded capacity in various plants within IMV, and at the moment the annual production has increased to 640,000 to 650,000 per year.

Okay, thank you.

You're welcome.

There are no further questions today, so 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 everyone, and good night.

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.