豐田汽車 (TM) 2008 Q3 法說會逐字稿

Hello, everyone.

My name is Tricia, and I would like to welcome you to the Toyota Motor Corporation's FY 2008 third quarter financial results conference call, with the chairperson Mr.

Takahiko Ijichi.

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 Mr.

[Morita] from Toyota, who will introduce the conference.

Hello, everyone.

Thank you for joining us today.

My name is [Toro Morita] and I am a member of the [Accounting] Division of Toyota Motor Corporation.

I'd like to welcome you to today's discussion of the earnings results for the three months ended December 31, 2007.

I'm joined by Mr.

Takahiko Ijichi, Managing Officer of Toyota, and the narrator Mr.

[Mark Cower].

This conference call consists of two parts.

First, Mr.

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

Mark Cower will explain further details of Toyota's earnings results for the three months ended December 31, 2007.

At the conclusion of Mr.

Ijichi's presentation, we will ask you 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 of today's presentation material which, again, can be downloaded from our Internet homepage.

Now, I'd like to turn the call over to Mr.

Ijichi.

Hello, everyone.

Thank you for joining us.

It is my pleasure to present to you our Company's financial results for the third quarter of fiscal year 2008.

Consolidated vehicle sales increased by 126,000 units to 2.281m units.

Our sales increased significantly in Asia and Other regions, including the Middle and Near East and Central and South America.

Please go to page six.

Despite the severe conditions of the business environment, including the appreciation of the Japanese yen against the U.S.

dollar, we achieved a record high in third quarter results in every item, from net revenues to net income.

Please go to the next page.

Record results were also achieved in all items for the cumulative nine months from April through December 2007.

As we move on to discuss the details of the financial results, let me hand it over to our English narrator, Mr.

Cower.

I'll be available to answer your questions at the end of the presentation.

Thank you.

Thank you, Mr.

Ijichi.

Now, I would like to discuss our operating income.

Please see page nine.

This graph shows Toyota's growth in quarterly consolidated operating income over the past five fiscal years.

As you can see, steady growth has been maintained every fiscal year.

In each of the first three quarters of this fiscal year, operating income reached a level of, or near JPY600b.

We are reaching new highs in earnings.

Now, let me discuss the factors that contributed to the growth in consolidated operating income.

The contribution from marketing efforts was JPY100b, as a result of unit growth in both production and sales in almost every region, particularly Asia.

In addition, Group-wide cost reduction efforts to absorb the spike in raw material prices resulted in a positive JPY40b contribution.

As a result, third quarter operating income increased by JPY26.8b compared to the previous fiscal year.

Next, I would like to review our performance by region.

In Japan, operating income increased by JPY5.9b to JPY389.4b.

Domestic sales were brisk, thanks mainly to new models launched last year.

Toyota's share in the market, excluding mini-vehicles, reached a new quarter record of 47.7%.

In addition, increase in export volume contributed to profit growth, offsetting the effect of the Japanese yen's appreciation against the U.S.

dollar.

Next, in North America operating income fell by JPY35.5b to JPY63.6b.

This was primarily attributable to the valuation loss on interest rate swaps.

Please note that this is a valuation loss of very technical accounting nature, resulting from the declining interest rates in the U.S., and has no significant real impact on our financial business.

Therefore, it is not directly linked with the sub-prime lending issue.

In the Automobile operation, sales of our new Tundra and fuel-efficient models, such as Prius, have been strong.

In calendar year 2007, Toyota achieved the twelfth consecutive year of record sales in the U.S., with 2.62m vehicles sold and 16.2% of market share, despite the year-on-year decline of the market.

We aim to maintain growth of our North American business as our profit base.

Next, Europe.

Although our sales in some markets, such as Germany, declined, sales of Camry, Auris and other models have been strong in Russia and Eastern Europe.

As a result, operating income was JPY34b, maintaining the same level as the previous fiscal year.

In Russia, the production of Camry began in December 2007.

We expect to improve earnings in Russia through further penetration in the growing premium market.

In Asia, operating income more than doubled to JPY64.3b compared to the previous fiscal year.

Contributing factors include strong sales of IMV and Yaris, especially in Indonesia and Thailand, and the production capacity expansion in Thailand to meet the recovering market demand.

Furthermore, our Chinese subsidiaries have been contributing greatly to earnings as well.

We expect to see further earnings contributions from the production and sales of the new Corolla, which will be produced in Thailand and Taiwan.

Next, we move to Other region, including Central and South America, Oceania and Africa.

Operating income grew approximately 1.6 times to JPY49.9b, attaining a significantly higher level of earnings.

Sales volume has grown throughout the region, exemplified by Corolla in Brazil, despite the scheduled remodelings, as well as IMV in Argentina and Camry in Australia.

Going forward, we plan to accelerate growth through the full remodeling of the Corolla in Brazil.

Page 16 shows the breakdown of overseas operating income by region.

As you can see, operating income has become more equally balanced among the regions, with significantly higher contributions from growing markets, specifically emerging and resource-rich countries.

We believe our record high financial results can be attributed to Toyota's growth strategy of utilizing every opportunity across the full product line-up and all regions.

Let's move on to the Financial Services segment.

Operating income fell by JPY20.4b compared to the previous fiscal year.

This includes valuation losses in accounting on interest rate swaps of JPY12.6b.

There was a positive contribution from an increase in outstanding loan balance of captive finance and lending margins.

While our loan loss ratio has increased slightly under the influence of the credit crunch in the U.S., our financial operations have maintained conservative credit assessment policy.

We will further strengthen our credit control and debt collection practices.

Our funding cost has been kept relatively low due to the highest credit rating of Toyota.

We believe that our competitive advantage has been, indeed, increasing in this regard.

Please go to the next page.

Equity in earnings from affiliated companies grew by JPY13b to JPY79.1b, thanks to the strong performance of Joint Ventures in China and companies of the Toyota Group in Japan.

As you can see in page 19, net income has grown rapidly in recent years.

This rapid growth has been driven by an increase of equity in earnings, combined with an operating income increase resulting from the global business expansion.

Next, I would like to summarize our unconsolidated financial results.

We achieved a record high in third quarter results for net revenue, ordinary income and net income.

Operating income also remained at a high level, only next to the previous fiscal year, despite the appreciation of Japanese yen against the U.S.

dollar.

Please go to the next page.

As for unconsolidated operating income, our efforts in marketing and cost reduction were offset by the increase in R&D and other expenses for our future growth, and the effect of the foreign exchange rate.

Now, I would like to discuss our prospects for the full fiscal year.

Our consolidated vehicle sales forecast remains unchanged since November 2007, which is 8.93m units; increased by 400,000 units.

Our prospect for the consolidated total vehicle sales will continue to be 8.93m units; an increase of 400,000 units compared to the last fiscal year.

Please see page 23.

Our earnings prospects also remain unchanged.

ForEx rate for FY 2008 reflect actual rates up to the third quarter and assumption for the fourth quarter.

Fourth quarter assumptions are JPY105 against U.S.

dollar and JPY155 against the euro.

Please go to the next page.

We have not made any changes to our unconsolidated earning prospect either.

Next page, please.

Our consolidated projections for capital expenditure, depreciation expenses and R&D expenses are shown.

These remain unchanged as well.

Next page, please.

Our operations prospects are as shown.

Finally, I would like to draw your attention to the shareholders' return measures, which were resolved at the Board of Directors' Meeting held today, as noted in the Press Release.

We plan to further promote our active shareholder return policy and will endeavor to further enhance shareholder value.

First, we will purchase the maximum number of shares authorized at the ordinary General Shareholders' Meeting held in June 2007 by further acquiring the remaining 10m authorized shares.

In addition, we intend to purchase an additional 12m shares by the end of this month.

All together, the purchase of such 22m shares up to JPY120b has been authorized by the Board of Directors earlier today.

Please go to the next page.

Further, the Board of Directors has resolved to cancel 162m shares of Treasury stock during the current fiscal year to define improvement of capital efficiency.

The remaining, approximately 300m shares will be kept as Treasury stock to secure management flexibility.

Through continuing profit growth and enhancing shareholders' value, Toyota aims to respond to its shareholders' expectations.

This concludes my presentation.

Thank you very much for your kind attention.

Thank you, Mr.

Ijichi.

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 line.

(OPERATOR INSTRUCTIONS).

And we'll go first to Kurt Sanger, Deutsche Securities.

Good evening, Ijichi-san.

Thank you for your late night here in Tokyo.

Good evening.

I'll ask one question at a time, if that's easiest, trying to understand the North American profitability.

First, on the Finance business, can you give us an idea of what percentage of revenues and operating profit for the quarter is from North America?

(Interpreted).

Only in terms of the third quarter result, the operating income of our North American business, as explained earlier, totaled JPY63.6b.

And of that, I would like to refer to the profitability of earnings of the Financial business.

But to avoid any misunderstanding, let me clearly state that the valuation gains and losses relating to the interest rate swap represented substantial loss.

And, therefore, specifically only for this third quarter, the financial results for this North American Financial business showed the deficit in total.

Having said that, allow me to add that regarding the valuation gains on swap transactions, as you already know, this loss is purely due to accounting technical matters.

And therefore, if that loss is excluded, in reality, we have realized earnings of some JPY20b.

And therefore, excluding this valuation losses, which, as I said, is purely for accounting reasons, in effect, we do have the real operating income for the Financial business accounting for approximately one-third.

Okay, great.

So -- and then, two follow-on questions.

Ijichi-san, last year, in the third quarter, you made, I don't know, maybe JPY35b, JPY30b to JPY35b, in Finance business in North America.

So is there a reason for the further -- is the deterioration all from the swap, or is there some deterioration in the core profitability for higher reserves for, perhaps, used car residual values, or for higher loan losses?

(Interpreted).

I would like to state an example of TMCC in North America in responding to your question.

As you said, in terms of the gains and losses relating to swap transactions, we did register a loss of JPY30b approximately.

However, as was explained earlier, in addition to that, in reality, we recorded some loan losses, to a certain extent.

Let me go into a little more detail in responding to your question.

Regarding the earnings last year, compared with that, we had the earning boosting factors contributing a positive JPY20b, consisting of increase in loans outstanding as well as increase in interest margin we earned on those loans.

On the other hand, we did have some factors subtracting from the earnings, which totaled somewhere around JPY20b, consisting of a few major factors.

One, as I said, relates to loan losses, which increased somewhat.

And in response to that we also took a very conservative approach in providing for those loan loss reserves' greater amount.

And adding to that is another additional expenses and, therefore, all in all, JPY25b or so was the factors subtracting from the earnings.

Regarding this loan loss, TMCC in the United States is not extending -- is hardly extending any loans to so-called sub-prime sector of customers.

All in all, so-called credit squeeze is undergoing in the United States, which may have spread to some prime segment of the customers as well.

However, just for the sake of clarity, I think it is quite unlikely for the current trend of a loan loss to continue increasing going forward.

Okay, thank you.

And final question, then, Ijichi-san, excluding the finance, if we just look at the North American Auto business, was the -- that core profitability, was that roughly flat year on year, or am I missing something?

(Interpreted).

Regarding Auto business in North America alone, you could say that it virtually leveled off.

In terms of the impact of our Automobile business operations, while the volume did decrease somewhat, there have been improvements in the model mix, contributing positively.

And therefore, combining these two factors, it produced a somewhat positive net contribution to the earnings.

On the other hand, there has been some increase in the fixed costs of the North American affiliates.

And therefore, if that is used in offsetting those positive contributions, we did have some negative net impact stemming from those factors to the tune of several billion.

And so, excluding Financial business, then, only in terms of Automobile business, you could say that the earnings leveled off, more or less.

And therefore, we are not concerned about the North American business at all.

Very helpful.

Thank you very much.

Thank you.

We'll go next to Steve Usher, [Japan Invest].

Good evening.

Thank you very much for this call.

A few questions, first of all, with regard to the U.S.

again, Could you give a bit more color to your comment on the improvement in the product mix, what your expectations are for Q4 in terms of product mix and going forward?

You commented that in the second quarter there had been a deterioration in mix, at that conference call.

I'm just wondering how it improved in the third quarter.

(Interpreted).

My apologies; allow me to rephrase, or restate my earlier comment regarding the model mix.

Earlier, I mentioned that model mix has improved, but it more or less remains unchanged.

Okay.

In that context when you look at the marketing efforts, the contribution to operating profits was a plus JPY100b.

Can you break that down by region, please?

(Interpreted).

All right, let me give you the breakdown of this JPY100b.

TMC's contribution on a standalone basis was JPY30b, and its subsidiaries, JPY70b.

This TMC business can be divided into negative JPY10b from domestic business and a positive JPY40b contributed by export.

And the JPY70b contributed by subsidiaries can be divided -- broken down into the following categories; the domestic subsidiaries contributing a positive JPY25b, North American subsidiaries a positive JPY5b, European subsidiaries a positive JPY5b, Asian subsidiaries a positive JPY30b, and subsidiaries in other regions contributing a positive JPY15b, and Finance and Other businesses contributing a negative JPY10b.

Okay great, thank you.

And next -- looking at your forecast for the full year, you are assuming a 28% decline in fourth quarter operating profits, and I assume that that is largely due to the currency.

But could you give us a bit of color going into the next fiscal year?

Will you have a sharp drop in the fourth quarter and then a further decline in profitability next year?

Or what are your -- how do you see your prospects for the following fiscal year?

(Interpreted).

Subtracting the third quarter results from the full-year forecast, as you implied in your question, the fourth quarter is expected to represent a substantial decrease in profits.

First of all, the exchange rate assumptions we have for this quarter is JPY105 to the dollar, representing yen depreciation by JPY14, and that's the major reason.

However, allow me to add further that when we made the financial announcement for the past year of this period, we mentioned that the exchange rate assumptions for the second half of the year is JPY110 to a dollar.

And for the fourth quarter, as I mentioned now, our assumption has been changed to JPY105 to a dollar.

And despite that, we retained the earnings forecast at the same JPY2.3b without any change or revision, which means that in effect we are making an upward revision to our forecast, overcoming this negative impact that is likely to stem from this exchange rate movement.

In that regard compared, with the time when we announced this earnings forecast earlier, we believed that there were possibilities moving in a more stable direction.

However, I cannot deny the existence of some uncertainties, especially relating to devaluation gains and losses of our Finance business subsidiary.

Of course, it does not have any real impact upon actual profitability of our business.

However, interest rate movement, either upward or downward, does represent valuation, either, gains or losses.

And therefore, that does represent an uncertainty lying ahead.

And at the same time, if the current exchange rate environment continues on and prevails during the next fiscal year as well, you may believe, as you imply in your question, that the profitability environment may be quite demanding as well.

In terms of a very simple calculation, moving from JPY115 to JPY105 in terms of dollar/yen rate means appreciation of the yen by JPY10.

And therefore, it could subtract JPY400b from the profits.

Of course, faced with a very strong yen staying at around JPY105, we wouldn't stay quiet, or doing nothing regarding that; that will never happen because we have had actual experience of the phases of appreciating yen in the past as well.

And therefore, internally we have already embarked upon various activities to address that.

Needless to say, cost reduction efforts were one of them.

Starting this year we could (inaudible) the cost savings generated by (inaudible) activities will become [a mindset].

To further accelerate and promote that, is one of our activities.

On top of that, as we mentioned in relation to the announcement of annual plan last year, we are expecting to increase the sales volume by approximately 400,000 to 0.5m.

And by achieving that probably we can make up for this JPY400b negative contribution to the operating profit, about half of that.

Furthermore, fortunately, [utility] vehicles enjoy very strong demand and needs, which we believe would mean that there is enough room for us to make upward modification to the pricing as well.

So here is cost reduction effort, increase in sales volume and some price increase.

Added with our thorough activities to save and reduce expenses in general would allow us to address this exchange rate related, negative impact.

If the exchange rate remains at JPY105 to a dollar level, I think that would represent a level that we can really aim at the increase in profit as well for the next fiscal year through those measures, maybe earlier implemented.

One modification -- one correction, sorry.

Earlier, of course, you asked relating to the model mix in North America.

Let me re-correct my earlier statement once again.

In North America our product mix has improved, which is shown by adding up the various line figures on the individual vehicle series basis.

For example, the high value-added type of the models, including IS and DS, showed some increase.

On the other hand, Corolla and Sion decreased somewhat.

And therefore, on the consolidated basis, the North American model mix has improved.

So once again, correction to that effect, please.

Okay, great.

Well, thank you very much, and just one last little question, if I might?

On page 10 of the presentation materials, the presentation slides, within an increase in expenses there is Others of JPY35.2b.

Could you just give us a breakdown of that number?

(Interpreted).

Okay this JPY35.2b that actually subtracted from the operating income, that number also includes positive JPY5b which stems from the translation gains of the earnings of a big subsidiary.

That's [JPY30b] positive.

And having said that, you might say that that also means other factors contributing -- subtracting from the operating income must have been bigger than what is implied here, and that is quite correct.

Regarding the third quarter, we were able to use very efficiently the research and development expenditure, the CapEx-related expenditure as well.

However, at the same time, given the continued expansion of the scale of the business, the outsourcing expenses, computer systems-related expenses, remain at the very high levels, which subtracts from the operating income in a rather substantial manner.

And I would like to add by saying that this sort of expense items tend to vary from fiscal -- quarter to quarter.

That is to say, there seems to be the factor of a timing difference creeping in resulting in some variations from quarter to quarter in actual results.

And therefore, we will make sure that will give you a very adequate explanation on the full-year basis of those expenditure items.

But I hope you would also try to look at those numbers on the full-year basis.

Great, okay.

Well, thank you very much.

This has been very helpful.

Thank you.

Next, please.

We will next go to Rick Herman, Philadelphia International Advisors.

Well, thank you.

Could you just elaborate on your CapEx, particularly in North America, how far along you are?

And when you look on page 25, you can see that it's expected increase just about JPY81b this year.

What's your prospects are for your capacity utilization and, particularly, in regard to the Texas plant and the Tundra?

(Interpreted).

First of all, regarding the CapEx overall, last year we invested JPY320b.

And in the fiscal year ending in March 2008, we are going -- we will have invested JPY400b, as you correctly pointed out, representing an increase by JPY80b approximately.

However, in essence, because we believe the North American market is the market that we can hold high expectations of, and we are confident that we will be able to do a good and [proper] business in that market, we are going to make certain investments representing an increase by JPY80b.

And this JPY80b primarily stems from our investment in the second plant in Canada, as well as our eighth plant in North America, which is in Mississippi.

Regarding the rate of operation overall in North America, we have a production capacity of approximately 1.9m units; more precisely 1.87m units.

And lastly -- last year, using those capacities we produced 1.64m units in North America, representing an increase of 8% year on year.

And some plants were immediately after becoming onstream.

But producing that volume using that sort of production capacity represents that our plants in North America are operating at a very, very high level.

The rate of operation is very high.

And actually the 1.87m units in the capacity I mentioned earlier, includes 100,000 units that is the capacity of SIA, Fuji Heavy Industries' plant in the United States, where we just started producing the Camry.

So if I understand this right, you said that you are producing 1.64m units with a production capacity of 1.87m.

Is that correct?

(Interpreted).

Let me go into a greater detail.

This 1.87m unit in capacity increase includes some vehicles that are to be delivered to General Motors.

And furthermore, as I mentioned earlier, it also includes 100,000 units capacity of SIA, Fuji Heavy Industries' plant in North America.

But this production we'll carry in that plant has just started.

And therefore, when you discuss the volume vis a vis the production capacity, whether the production has just started or not should be given due consideration.

Okay, thank you for that.

But can you explain -- so how many units are you delivering to GM?

(Interpreted).

I do not have a precise figure of the vehicles to be delivered to General Motors with me, but I presume it is around 30,000 to 50,000 units.

But the essence that I would like to put across is that you made a concern about the status of our operation in North America.

You may think that there may be some excess capacity there, but that's not the case in our plants.

Our plants are operating at a very high level of capacity.

Okay, and can you just comment on the Tundra in the Texas operations and the capacity there?

(Interpreted).

Please, give me a minute.

We are just confirming the numbers.

Sure.

We can come back to that.

That concludes my questions.

Thank you.

(Interpreted).

Sorry, I cannot produce the figures relating to the operation of Texas plant per se.

But the point that I would like to make is that Tundra is produced both at Indiana and Texas, and we have been maintaining the operations by letting go of some part-time workers as well.

And combining these two plants, one in Indiana and the other in Texas, last year we sold 197,000 units of Tundras.

And this number implies that the production capacity is in these two plants are fully utilized.

Okay, thank you.

It is time to conclude today's conference call.

If you require further information regarding today's conference from Toyota, please feel free to contact our IR representatives in London and New York.

The contact details were given at the end of the invitation to this conference call.

Thank you, again, for joining us today.

Goodbye.

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.