豐田汽車 (TM) 2009 Q2 法說會逐字稿

(Audio starts in progress).

Thank you for joining us today.

My name is Toro Morita and I'm member of the Accounting Division of Toyota Motor Corporation.

I'd like to welcome you to the FY 2009 Q2 financial results conference call.

I'm joined by Mr.

Takahiko Ijichi, Senior Managing Director of Toyota and the narrator, Mr.

Gus Montieth.

Today's conference call consists, first, Mr.

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

Gus Montieth 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 plus.

Also please note that the following presentation contains forward-looking statements that affect our plans and expectations, and our absolute results may be materially different from those expressed by these forward-looking statements.

A complete cautionary statement with respect to the 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 home page.

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

Ijichi.

Hello, everyone.

I am Takahiko Ijichi, Senior Managing Director of Toyota Motor Corporation.

Thank you for joining us today.

I would like to discuss Toyota's financial results for the six months ended September 30, 2008.

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

Montieth.

Our consolidated sales for the first half fell by 51,000 vehicles from the same period of last year, 4.25m.

Sales declined in North America and Western Europe due to the market slowdown in these regions.

On the other hand, sales in resource-rich countries and emerging countries, in regions such as Asia, Central and South America and the Middle East, increased, supported by solid demand.

Our financial results for the first half are shown on slide seven.

As you can see, both net revenue and income decline compared to the same period of last year.

Later on in this presentation we will discuss our action plan for the future growth on a short and a mid to long-term basis, as well as our amendments to our forecast for fiscal year 2009.

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

Monteith.

Thank you, Mr.

Ijichi.

Please turn to slide eight.

I will discuss the major factors which impacted this net income.

Net income decreased by JPY449b compared to the first half of last year, to JPY493.4b.

The left side of slide eight shows the major factors which impacted operating income.

Operating income declined by JPY690.1b.

The negative impact came from the appreciation of the Japanese against the US dollar and the decline in vehicle sales under difficult market conditions in the US and Europe.

From slide nine I will explain our operating income by region.

In Japan, operating income declined by JPY451.6b over the same period last year, to JPY321.7b.

This was mainly due to the appreciation of the yen against the US dollar.

In the domestic market, as a result of favorable sales of new models, such as the Alphard and the Vellfire, our market share including mini vehicles reached a record high of 42.5%.

Exports to Russia and the Middle East also increased.

Next, I will talk about North America.

Operating income, excluding valuation gain from interest rate swaps, decreased by JPY297.6b, to a loss of JPY34.6b compared to the same period last year.

The main reason for the decrease in profits are a decrease in vehicle sales, primarily resulting from the rapid decline in the US market, the shift of the market towards compact vehicles and the reduction in the number of vehicles produced.

Our US market share, however, marked a record high of 17% for the first half due to favorable sales of the Corolla and the Yaris.

Going forward, we plan to implement various measures to improve profits, such as launching market-creating models, including the Venza, and stimulating market demand.

Next, Europe.

Operating income declined by JPY59.6b to JPY8.7b, compared to the same period last year.

In Western Europe the market conditions have become more difficult.

In Eastern Europe, such as Russia, sales of models, including the Land Cruiser and the Corolla, have been strong, despite some slowdown in the growth of the market.

In order to increase vehicle sales and improve profits we plan to launch models that will contribute to the reduction of carbon dioxide emissions from this October until the end of next year.

These will include the iQ, which boasts an innovative compact package and high fuel efficiency.

Next, Asia.

Operating income increased by JPY20.5b, to JPY137.2b from the same period last year.

Vehicle sales of the fully remodeled Corolla from the beginning of this year have been brisk.

Sale volumes of the Avanza and the Innova, primarily in the strong Indonesian market, also increased.

In addition, increased export volumes of models such as the Hilux largely contributed to increased profits.

In Central and South America, Oceania and Africa, operating income increased by JPY7.4b, to JPY79.1b from the same period last year.

In Brazil, sales of the Corolla, following its full model change in March this year, were brisk and contributed much to income.

With regard to results in the Financial segment operating income, excluding valuation gains from interest rate swaps, was JPY44.9b; a decrease of JPY41.3b from the same period last year.

Despite the contribution from the increase in outstanding loan balances and expansion of lending margins, profit declined, mainly due to increased allocations of reserves for bad debt and residual value loss reserves, mainly in the US.

In addition to maintaining our prudent approach to lending, we strive to further reinforce credit control and strengthen loan selection.

We also plan to continue to set suitable residual values in a timely manner, while paying attention to used car markets.

By controlling our risks we will continue our business in Financial Services.

Equity and earnings of affiliated companies was JPY144.1b, approximately at the level of the same period last year.

Unconsolidated financial results are shown in slide 16.

Please look now at slide 17.

On an unconsolidated basis, net income decreased by JPY129.7b, to JPY472.2b compared to the same period last year.

Despite increased profit from expansion in export volumes, profits declined due to the significant negative impact of the appreciation of the yen.

We will pay an interim dividend of JPY65 per share; the same level as last year.

Next, I would like to explain our forecast for the full fiscal 2009.

As for the forecast in consolidated vehicle sales we have revised our plan, which was disclosed at the announcement of our first quarter result, to 8.24m vehicles; a decrease of 673,000 vehicles from the previous fiscal year.

With regard to our forecast for the consolidated results we have made downward revisions as follows; net revenues to JPY23 trillion, operating income to JPY600b and net income to JPY550b.

Slide 22 summarizes the main factors for the revised forecast of operating income.

The main factors negatively impacting income, as compared to the previous fiscal year, are the stronger yen assumption reflecting the current market risk and our decreased projections for sales volumes, reflecting the difficult conditions of the global market.

Although Toyota maintains a gross cost reduction ability of more than JPY300b per year, this amount is expected to be exceeded by the increased costs of raw materials.

Our forecast for consolidated CapEx, depreciation expenses and R&D expenses remain unchanged from the beginning of the fiscal year.

During the fiscal year, however, Toyota has been evaluating projects, making them more efficient and, at the same time, shifting our resources to areas indispensable to our growth, such as the development and production of hybrid vehicles.

We will continue to focus on efficient investments in necessary projects.

Unconsolidated forecasts are shown in slide 24.

Forecasts for Toyota and Lexus brand vehicle sales are shown in slide 25.

Currently, the financial crisis is negatively impacting the real economy worldwide, and automotive markets are contracting rapidly, especially in developed countries.

This is an unprecedented situation, but Toyota has already started to take measures.

First, in order to secure profits for fiscal year 2009 and fiscal year 2010 we have established a new emergency profit improvement committee, with President Watanabe as Chairman.

This committee is already working to reduce total costs and maximize revenue.

In our efforts to reduce total costs we are working to reduce costs across the board, including general and administrative, sales and marketing and manufacturing expenses.

Second, we are aiming to increase our vehicle sales and profits by launching attractive products, such as iQ and new hybrid vehicles, stimulating market demand with special models and revising pricing strategy by region and model.

Furthermore, we will work to adjust production capabilities by thoroughly reviewing all projects in our pipeline, to re-examine the timing and scale of each project.

At the same time, we will review our capital expenditure.

While taking these measures, we remain committed to implementing our strategic action plan for mid to long-term growth.

We continue to accelerate our hybrid vehicle strategy in the area of environmental technology, as we believe it will be critical for our competitiveness in the future.

Next year we are planning to launch four new hybrid models, including the Prius, into the Japanese market.

Besides, we will further promote cost reduction of our compact models which are increasingly in demand, in order to enhance our future profitability.

We will implement these projects while maximizing the benefits of our solid balance sheet.

In the past we have successfully dealt with various crises, including the oil shock and radical appreciation of the yen.

Although we consider the current crisis to be unprecedented, we intend to overcome it and aim to realize further growth through all of our integrated efforts.

This concludes our financial results presentation for the second quarter of fiscal year 2008.

Thank you very much.

Thank you, Mr.

Ijichi, and Mr.

Gus Montieth.

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.

Thank you, Mr.

Morita.

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

(Operator Instructions).

Your first You'll first hear from Steve Usher, Japan Investments.

Good evening and thank you very much for this conference call.

I've got three -- four questions at this point, if I might.

First of all, with regard to the US market, you mentioned that you would be engaging in stimulating market demand.

I assume that this means higher incentives, but if you could please give us a bit more color on that, I'd appreciate it.

Secondly, you spoke about Brazil making a strong contribution to operating profit in the others region.

Could you give us some more color in terms of how much profit you earned in Brazil, or what portion of operating profit in the Others region came from Brazil?

I assume that virtually all of the Others comes from Brazil.

Thirdly, in terms of the finance operation in North America, could you please -- were there any further residual loss or loan loss provisionings, or actual losses taken in Q2?

And then finally, in terms of the equity method contribution, can you please give us some detail as to the contribution coming out of China?

Thank you very much, I really appreciate it.

(Interpreted).

Thank you very much for your question.

Now I would like to give you in greater detail our measures, to be taken especially in the North American market.

Now, first of all, to answer your first question about our North American operation, you assume that perhaps this requires increase of incentives, but this is not necessarily true.

It is not just to raise the incentives to implement our sales measures in North America.

The basics in our strategy is to offer high quality products in a timely manner.

So, for example, models like Yaris or Prius should be offered to match the market demand.

So, indeed, it is true that according to auto data, incentives per unit of Toyota Automobile had increased compared to the level of the same period of the previous year.

And that is because in the second quarter there has been increase in the incentives of Tundra and other full-size pickup trucks, which have seen decline in sales due to reasons including the increase of gas prices.

So, indeed, temporarily the level of incentives for models such as Tundra and Sequoia has increased.

However, as a result of that, the inventory level of these models has come down.

Therefore, from now on the incentives for the full-size pickup trucks and large-size vehicles are expected to come down and, instead, that can be used for other models.

And, overall, our incentive level will be lower than the average of the automotive industry.

Now, turning to your question about Brazil, indeed, the business in the Latin American market has been very brisk.

And so out of this Others region sales, which totaled JPY79.1b, about 50% has come from Brazil.

Answering your third question about reserves for bad debts and residual value loss reserves, the figures that I am going to give you would be TMCC's bad debt cost and also residual value loss costs.

First of all, concerning the bad debt loss plus the reserve for bad debt for the past six months had totaled up to about JPY50b loss.

As for the residual value loss that had actually been incurred, totaled with the reserve for the residual value loss, the past six months has totaled a loss of approximately slightly more than JPY25b.

Turning to your fourth question concerning the equity in earnings of affiliated companies, this totaled JPY144.1b.

Unfortunately, this is a decline from the same period last year by JPY1b.

And the major reason for the decline was the decline in revenue of our Group companies, such as [Denzo] and [Ichine].

On the other hand, the business of our Chinese joint venture operation has been growing, and the revenue had been increasing quite steadily.

So, out of this total of JPY144b approximately of equity and earnings of affiliated companies, 30% comes from China.

Great.

Thank you very much.

Next question, please.

That will come from Kurt Sanger, Deutsche Bank.

Good evening, thank you (inaudible).

Mr.

Sanger, we can barely hear you.

Could you speak up?

Hello.

Thank you, go ahead.

Hello.

Mr.

Sanger?

Hello.

Okay, sorry about that.

Yes, I have two questions, please.

One is the non-operating income assumption; it is only about JPY40b for the year.

That was revised down from about JPY100b, and a much more significant contribution from last year.

Is there some kind of impact to your interest income assumption in this number?

Could you help us explain the significant year-on-year change there?

The second question is on the tax rate.

You incurred over 40% tax rate in the first half.

All of your competitors are seeing their tax rates substantially below the 40%, 41% statutory rate, (inaudible) that stays at that level.

Can you please explain to us why that is?

And, given the profit outlook, do we see a change to that in the second half?

Why is it that Toyota is so diligent in paying all its taxes?

And my third question is on the shareholder return.

You discussed the dividend in the meeting today, and that sounds firm.

You have a JPY200b share buyback program authorized.

Do you think that will not be executed over the next year?

Thank you very much.

(Interpreted).

Now, I'd like to first of all explain the situation concerning the relatively small non-operating profit.

Now, there are two reasons for this difference, and one is during the first half Mitsubishi USJ Financial Group had acquired Mitsubishi USJ Securities, and we had possessed the equities of Mitsubishi USJ Securities.

And upon the acquisition of Mitsubishi USJ Securities by [MUSJ], Mitsubishi USJ Financial Group, we had exchanged our shares of Mitsubishi USJ Securities with Mitsubishi USJ Financial Group, which generated this equity swap gain which totaled about JPY20b.

And this is included as non-operating profit in the first half, which was relatively inflated as a result of this event.

And another reason for that is, compared to the last fiscal year, this fiscal year, as all of you are fully aware of, has been this major downturn in the equity market.

Therefore, we have priced in the valuation loss of the equity holdings of our Company.

And so this resulted in the non-operating loss for this fiscal year.

And, of course, by the end of March next year, if the prices rally and if the prices would come back to close to normal, we do not necessarily need to price in a major valuation loss.

However, we have taken a prudent approach and, based on the current situation of the equity market, had incorporated this equity valuation loss.

To answer your third question about the difference of the tax rate, I believe this mainly comes from the fact that when we are to recover, in form of dividends, the earnings of the subsidiaries located in countries with relatively low tax rates, by taking into account the taxation here in Japan this becomes relatively expensive.

Now, about your last question concerning the share buyback, for this term we have not conducted the share buyback by looking at the situation of the financial markets.

We have placed emphasis on the liquidity of the shares in the market.

And, as you are aware of, we still have JPY130b of share buyback valued at -- approved by the General Shareholders' Meeting.

However, we have not determined how we are to implement the share buyback activities.

And we would very much like to respect the approval given by the General Shareholders' Meeting.

However, we shall take a very prudent approach and make judgment by cautiously looking at the global financial market condition which, at the moment, lacks transparency.

Therefore, we shall see the development of how the financial market stabilization measures will prove to be effective and how the capital market situation would develop.

Okay, great thank you.

Ijichi San, just to confirm your comments earlier tonight, you are quite certain that the full-year dividend from last year of JPY140 will not be lower this year?

(Interpreted).

To be very stringent and accurate, the dividend amount is to be approved ultimately by the General Shareholders' Meeting.

However, Toyota Motor Corporation values this trust-based relationship with our shareholders, being the top-most priority of our shareholder return strategy.

Therefore, I cannot guarantee you at the moment that it would not be decreased.

But Toyota have never in the past decreased the dividend amount, because we want to value this trust-based relationship with our shareholders.

Okay, thank you very much.

Next question, please.

There are no further questions.

(Operator Instructions).

We will take our first question again from Rick Herman Philadelphia International.

Hi, Ijichi San.

Thank you for this call.

I am trying to understand more detail of the major components of the downward revision.

And just looking at page 22, I see effects of marketing activities, and a previous caller had asked about your incentives in the US.

And it would seem that, under marketing activities, that that would be where incentives would be categorized.

So can you just go over again the major components of the downward revision, and how much impact those incentives are having?

Is that the big factor?

Before the interpreter interprets your question at the moment, there is a correction made.

Excuse the interpreter.

In the answer to the previous question concerning dividend policy, Toyota cannot guarantee that it would not decrease the dividends in the future.

But Toyota, up to now, have never decreased the dividend amount.

(Interpreted).

I would like to confirm your question.

Do you want to know the difference between the annual performance of last fiscal year and the forecast for this fiscal year on an annualized basis?

Well, no.

I'm actually more interested in understanding the difference between your previous forecast and your current forecast.

What has changed for the full year?

(Interpreted).

So in the conference call that was held in early August we had given you this forecast of JPY1.6 trillion, and this has been downward revised to JPY1 trillion.

And since this is a good opportunity, let me give you the specifics of this revision.

First of all, there is this negative impact that had made us change the forecast from the change, or fluctuation rather, of the foreign exchange rate, which resulted in a negative JPY280b.

And that is because earlier we had his foreign exchange rate assumption of JPY105 to the dollar and JPY160 to the euro, whereas, in this revision we have assumed the exchange rate to be at JPY100 to the dollar and JPY130 to the euro.

So to all currencies we have assumed appreciation of the yen.

And as part of the effect in the marketing activities there was a change that was necessitated as a result of the reduction of the forecast unit sales.

Earlier, the forecast for the sales volume was 8.74m units, but this was reduced down to 8.24m units; a reduction of 500,000 units.

And this resulted in the impact of about JPY300b.

And also our model mix had deteriorated.

Lexus, for example, which has high profitability, had reduced in our forecast of the sales volume.

And this had resulted in a difference of about JPY100b.

And also, aside from our Automobile business, in our Financial business we had the loan loss reserve and also the bad debt reserve, and also residual value loss of about JPY100b.

And, in total, there is a difference of about JPY500b.

And the incentive that you enquired about in this forecast is at the same level before the downward modification.

And also the rise of the raw material costs had exceeded our cost reductions, and this resulted in a difference of about JPY60b negative.

And also for other expenses we had made a revision by about JPY150b.

And therefore, all in all, we had downward modified our forecast about JPY1 trillion.

And for your information, in this increased forecast of other expenses totaling about JPY150b, more than the original forecast, there is about slightly more than JPY100b of quality related costs.

Okay.

So also included in the other expenses, does that include the changes you are making to your plants in North America?

(Interpreted).

You are correct.

That is included in other expenses.

About JPY20b is included.

Okay.

And, lastly, can you just elaborate on that JPY100b of quality expenses that you mentioned?

What exactly are those?

(Interpreted).

This is not to address the complaint raised by our customers.

Rather, this is the expenses for the service campaign that we had initiated in March this year.

And this service campaign is to cover pickup trucks.

And the expenses incurred for the service campaign had been incorporated in the expenses for the first half of this year.

And that is slightly (technical difficulty) than JPY100b.

And since this matter is related to our suppliers as well, I cannot give you greater detail.

I am sorry.

Okay.

Thank you very much.

We'll now hear from Ben Moyer, BlackRock.

(Technical difficulty) questions.

The first one is could you just confirm again your foreign exchange sensitivity against the yen/dollar and yen/euro?

That's the first question.

Second question is you mentioned earlier you are assuming valuation losses on securities for the full year.

I wonder if you could tell us what amount you are assuming.

The third question is on you volume change.

For the full year you are assuming that total sales volume drops by 673,000 units.

I am just wondering if you could tell us roughly how much of this drop is coming from a decline in retail volumes and how much is coming from a change in inventory.

And maybe you could, while you are answering that question, tell us a little bit about where you see inventories globally, and if there is any particular issue there.

And then finally, on credit losses and losses on residuals, I didn't understand in the last question, when you went through the causes of the increase in projected decline in profit, the amount attributed to higher loan losses and losses on residuals.

How much of the JPY1 trillion increase in profit decline was coming from loan losses and residuals?

Those are my questions.

(Interpreted).

So, first of all, let me give you our foreign exchange sensitivity.

In dollar, JPY1 resulting in a difference of JPY40b.

And, for euro, a JPY1 move resulting in JPY6b.

And this sensitivity level is -- remains unchanged from the level last year.

And let me skip a question and, first of all, try to answer your question about the residual value loss and the bad debts.

And this results in this -- a total of JPY100b negative.

And so to give you the specifics, as I have mentioned earlier, this mainly comprises the positioning of the reserve for the bad debt and also the cost incurred for the residual value of the lease vehicles of TMCC, our financial subsidiary in the United States.

And with regards to the reserve for the bad debt, as a result of the increasing unemployment rate in the United States starting in August and the month after this, the actual bad debt ratio had increased.

And so this resulted in the provisioning and increase of the reserve for bad debt.

And also, with regard to the cost for the residual value, as a result of the declining prices of the second-hand used cars we have reviewed our [cost] forecast for the residual value.

Excuse me, I cannot share with you the specific numbers with regards to how much goes for the bad debt reserves and how much for the residual value loss.

But these are the two major items that consisted JPY100b difference in our forecast which has declined.

And, in terms of proportion, I can just say that the proportion of the provisioning required for the reserve for the bad debt was greater than the proportion of this residual value loss reserve.

And to come back to your second question about the decline of volume, since I do not have the detailed numbers by region, I cannot be very precise.

However, roughly speaking, the decline in the sales volume mostly comes from the retail sales, because there is no specific location in the world where we anticipate a major fluctuation in the level of our inventories.

Anything further, Mr.

Moyer?

Yes.

I had also asked about the assumed securities valuation loss for the full year.

(Spoken in Japanese).

Okay, I understand.

Can I have just one follow up?

For the full year, then, what is your assumed loss from -- your credit loss and residual loss in your forecast?

And what was the actual number for last full year?

For the other English-speaking participants, the response from Mr.

Ijichi was with regard to the specific number for the valuation loss.

Excuse me, but I shall refrain from giving specific answers.

(Interpreted).

Are you limiting your question to the TMCC numbers, or are you talking about our entire Financial business?

The entire Financial business.

Or which -- if that's too difficult, then just TMCC is fine, just in North America.

(Interpreted).

Okay, thank you.

(Interpreted).

Just give me a minute, please.

Thank you for waiting, but I am sorry I cannot give you the absolute number of the credit loss or the residual value loss.

I have given you the differences of how much it had increased or decreased for the overall TFS Group, but the absolute figures cannot be shared.

Okay, thank you.

There are no further questions.

Mr.

Morita.

(Interpreted).

Should I just give you the differences, or would you like to have the numbers -- the difference?

There are no further questions.

Mr.

Morita, I'll turn it back to you.

Okay.

There are no further questions today, and 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 the conference call.

Thanking you 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.