豐田汽車 (TM) 2009 Q3 法說會逐字稿

Good day, everyone.

I'm your Global Service operator.

(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 conference over to Mr.

Toro Morita from Toyota who'll introduce the conference.

Hello, everyone.

Thank you for joining us today.

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

I'd like to welcome you to the FY2009 third quarter results conference call.

I am joined by Mr.

Takahiko Ijichi, Senior Managing Director of Toyota, and the narrator, [Miss Morita].

Today's conference call consists of two parts.

First, Mr.

Ijichi will discuss highlights of Toyota's earnings results and [Miss Morita] 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 the 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 two of today's presentation material.

In addition, a complete cautionary statement with respect to insider trading is included on page three 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'm 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 third quarter of FY2009 that ended on December 31, 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, [Miss Morita].

Our consolidated vehicle sales for the three months from October to December 2008 fell by 443,000 vehicles from the same period last year to 1.838 million vehicles.

Sales declined in all regions, mainly in North America, due to a slide in demand in these regions.

The bar graph on the right in slide five shows our consolidated vehicle sales on a cumulative basis for the nine months ended December 2008, which also posted a decline of 494,000 vehicles to 6.089 million vehicles in total, despite growth in Asia and other regions.

Slide six shows the summary of the consolidated financial results for the third quarter.

Unfortunately, we resulted in a net loss of JPY164.7 billion.

And now I hand the rest of today's presentation over to [Miss Morita].

Thank you, Mr.

Ijichi.

Slide seven explains the decrease in net income from JPY623.3 billion.

The left side of slide seven shows the major factors that impacted operating income for the third quarter.

Operating income declined by JPY962.1 billion to a loss of JPY360.6 billion.

The negative impact was a result of the significant deterioration in vehicle sales, primarily in the United States and Europe, and the rapid appreciation of the Japanese yen against the US dollar and the euro.

Slide eight shows our consolidated financial results for the nine months ended December 2008.

Slide nine shows the major factors that impacted the net income for the nine months ended December 2008.

Next, I would like to explain the consolidated operating income by region.

For the third quarter, we posted a decline in operating income in all regions, largely due to our decreased vehicle sales under the rapidly deteriorating market environment.

In particular, we resulted in an operating loss in Japan where the profitability of our exports was affected by the stronger yen, and in North America and Europe due to a sharp fall in our vehicle sales.

On a cumulative basis, for the nine months ended December 2008, we posted a significant decrease in operating income in Japan, North America and Europe.

However in Asia and other regions, including Central and South America, Oceania and Africa, we managed to maintain earnings at approximately the same level as last year.

Next, I'd like to discuss our operating income for the Financial Services.

For the third quarter operating income, excluding interest rate swap evaluation losses, declined by JPY50.1 billion to a loss of JPY12.7 billion compared with the same period of the previous year.

The increase in our outstanding loan balance, and the improvement in our lending margins, contributed to our earnings.

However, our earnings decreased overall due to an increase in allowance for credit and residual value losses, mainly in our US operations.

By applying adequate risk control we plan to improve earnings from Financial Services in the future.

Equity in earnings of affiliated companies was JPY2.3 billion, a decline of JPY76.8 billion from the same period last year.

This was due to decreased earnings of Japanese affiliated companies in the severe business environment following the global recession.

Slide 14 shows our unconsolidated financial results for the three months ended December 2008.

Slide 15 summarizes the main factors that impacted our unconsolidated net income for the third quarter.

The net loss of JPY6.4 billion was the result of the significant appreciation of the Japanese yen against the US dollar, and the decreased vehicle exports reflecting the fall in demand, mainly in North America.

Slide 16 shows our cumulative unconsolidated financial results for the nine months ended December 2008.

Slide 17 shows the main factors that impacted our unconsolidated net income for the nine months ended December 2008.

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

As for our forecast of consolidated vehicle sales, we've revised downwards our outlook, which was announced last December at the year-end press conference, by a further 220,000 vehicles to 7.32 million vehicles.

With regard to our forecast of the consolidated results, we've made further downward revisions as follows.

Net revenues to JPY21 trillion; operating income to a loss of JPY450 billion; income before income taxes, minority interest and equity in earnings of affiliated companies to a loss of JPY500 billion; and net income to a loss of JPY350 billion.

Slide 21 summarizes the main factors impacting the revision of our forecast of operating income from our December forecast.

The most critical factor is our decreased projection for consolidated vehicle sales, reflecting the severe market environment in the latest month, and incorporating additional inventory adjustments.

Slide 22 summarizes the major factors impacting the year-on-year decline from last year's operating income of JPY2,270.3 billion to a loss of JPY450 billion.

Our forecast of consolidated CapEx, depreciation expenses and R&D expenses remain unchanged.

We've also revised our unconsolidated forecast for the full fiscal year as shown in slide 24.

Slide 25 shows our revised forecast of Toyota and Lexus brand vehicles.

Lastly, I wish to discuss further the plans to improve future earnings.

As you know, Toyota put up the emergency profit improvement committee last November and has been pursuing a variety of activities since.

We plan to accelerate these activities further with the aim of reforming our earnings structure as swiftly as possible.

With regards to maximizing our revenues, we will continue to listen to our customers in every market and will develop a new product lineup which responds to changes in customer preference.

In the short term, we plan to stimulate our vehicle sales by responding more thoroughly to customers' requirements through our product offering, particularly in those countries and regions where our services were not thorough enough in the period of our rapid expansion.

In the medium term we plan to enhance the development of hybrid and compact vehicles, which we believe are the key to our future growth.

As previously announced, we are scheduled to launch our new generation Prius with improved fuel efficiency in mid-May 2009 and the HS250H, the first exclusive hybrid model for the Lexus brand, around summer 2009.

We plan to develop more hybrid models going forward.

At the same time, we intend to strengthen our product lineup in resource rich and emerging markets that are expected to grow.

With regards to reducing costs across the board, we plan to reexamine all tasks and assignments and aim to promote efficiency in the areas of development, production and sales operations.

To be more specific, in order to reduce costs we plan to expand the scope of our emergency VA Activities from the current 15 models to all of our models, and establish a dedicated team for VA Activities.

This way, we can expand and accelerate our cost reduction activities in cooperation with our suppliers.

We will also promote additional cost reduction measures in projects that are still in the pipeline in order to absorb the negative impact of the ongoing appreciation of the Japanese yen.

In order to reduce our fixed costs, we will review all cost categories with the aim of achieving a 10% reduction from the current level.

For example, with regard to CapEx we announced our intention to reduce our CapEx to less than JPY1 trillion at the end of December 2008.

Under the severe market conditions, we plan to further increase efficiency and reduce CapEx costs even more by cancelling or postponing our plans to build new plants and expand production capacity while maximizing the use of our existing production capacity.

With regard to R&D and marketing expenses, we will promote strategic and prioritize allocation of resources into the environmental sector.

With respect to labor costs we will implement projects to reduce costs wherever appropriate while adhering to our principle of making best efforts to secure employment.

In Japan, in view of our Company's earnings results and outlook, we intend to review various conditions, including the bonus structure thorough discussion with the labor unions.

Outside Japan, we intend to implement adequate measures that are considerate to employees, in accordance with employment regulations and market practices in each country, such as reviewing bonus structure and considering work sharing.

In conclusion, we wish to stress that by taking all these measures Toyota will overcome this difficult situation and evolve into a company with a higher level of efficiency and resilience.

This concludes our financial results presentation for the third quarter of fiscal year 2009.

Thank you very much for your kind attention.

Thank you, Mr.

Ijichi and [Miss Morita].

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.

(Operator Instructions) We'll hear from Steve Usher, Japan Investments.

Good morning.

Thank you very much for this conference call.

I've got five questions if I might?

First of all, looking at your cash flow statement you had negative free cash flow in the aggregate nine month period of JPY355 billion.

Could you please give us an indication of how that breaks out between the Finance operations and the non-Finance operations.

It look as though you may have actually been generating cash in the non-Finance operations.

But if you could give us a bit more clarity on that I'd appreciate it?

Secondly, you posted a 9% decline in shareholders' equity.

That looks to be largely as a result of the foreign exchange adjustment within comprehensive income, but could you give us a bit more clarity on that factor as well?

Thirdly, what do you see as the minimum cash that you need to maintain on your balance sheet in order to meet operating expenses.

And the rule of thumb that I've often heard is that 70% of one month's sales is necessary on the balance sheet.

And could you please comment on that and let us know what you think is the minimum cash that you need on your balance sheet?

Fourthly, with regard to the dividend.

You have said that you are going to maintain your dividend this year.

I'd like to know what metric do you use to decide what your dividend is going to be?

Is it a percentage of cash on the balance -- what do you use to determine what's the appropriate dividend?

And fifthly, could you please give us a bit more clarity in terms of your finance operations?

What were the loan losses or the residual value losses taken in Q3?

And could you give us a breakdown of those changes?

And also, if possible, could you give us an indication of the current loan loss ratio in the finance operation?

Thank you very much.

(Interpreted) Thank you very much.

I was not able to fully understand your first question, so let me start by answering your second question.

Regarding 9% decline in shareholders' equity let me refer to the specifics of that.

The total decline was JPY1,060 billion and the valuation, gains and losses and securities represented the decreasing JPY360 billion.

And, in addition to that because of the appreciation of the Japanese yen, the foreign exchange adjustment account showed a decrease by JPY520 billion.

So between these two you see approximately JPY900 billion decrease in the shareholders' equity.

Regarding the requirement for cash of our operations, as you pointed out the 70% of the monthly sales is the level that is generally accepted to be necessary.

And in that regard, in our Company, we use as the basic concept the available funds rather than cash on hand, and we think we require approximately JPY1.5 trillion to JPY2 trillion in available funds.

However, whether we should keep that fund in the form of cash, or whether that should be in marketable securities that can be encashed any time, including securities invested, would depend upon the conditions that the Company finds itself in.

In our case we hold both cash and marketable securities and, as of the end of December, we had those available funds in excess of JPY3 trillion.

Regarding the dividend, that is the fourth question, there seems to be a little misunderstanding in that regard.

What I said on the previous occasion was not that we will maintain the dividend level, rather I mentioned that, since we attach the greatest value on the relationship based upon trust that we maintain with our shareholders and investors, we would like to maintain the dividend.

And just for your reference, on that occasion I also supplemented by saying that my wish to maintain the dividend is not really guaranteed.

Be that as it may, regarding the fiscal year and dividend, usually the discussion on that level starts about one month prior to the announcement of financial results that takes place in May of the year.

And therefore the discussion on the dividend level has not yet started in the Company.

Let me share with you some of the perspectives from which those internal discussions take place, and probably this may be the same in any company.

But we examine the performance of the fiscal year concerned, in question or the following fiscal year.

And in addition to that we discuss investment requirement, the cash flow conditions among others, and those are examined from many different angles.

Moving on to the Financial business, and if I may just describe the conditions regarding loan loss and residual value loss.

For the entire financial services during the third quarter the loan loss related cost increased by JPY45 billion, compared with the same period last year.

And just for your reference, the loan loss ratio at TMCC during the third quarter reached slightly above 1.5%.

Just for your reference, the loan loss cost figure I mentioned earlier includes both the actual amount of loan loss plus the additional provisioning that we made against those losses.

Moving on to the residual value loss related expenses for the entire Financial businesses during the third quarter.

The increase in that residual value loss was slightly over JPY15 billion, including both the actual residual value loss plus the provisioning for that.

Going back to the first question, which was related to cash flow.

On the quarterly basis we do not break out the overall cash flow into Financial and non-Financial sector cash flows, so there is no figure that I can share with you at this juncture for that.

I'm sorry.

Okay, well thank you very much.

This has been very, very helpful.

We'll now take a question from James Erwin, Moon Capital.

Hello, good evening; thank you for the call.

I've got three quick questions.

First could you give us an update on the raw material cost headwind and that negative impact in the third quarter, and also year-to-date.

And if you could remind me where that actually is hitting in your [Tier WAC] in your operating profit I'd appreciate it?

Second, if you could give us your expectations on when that might become a tailwind in terms of lower raw material cost.

Is that something that you expect to see coming through in your first half of next fiscal year?

The second, broader question is, if you could deep a little bit deeper into your cost reduction targets with respect to how many temporary workers do you still have within the system, either in Japan and the rest of the world, and have we already kind of seen that number come down?

And are you considering actually some, through normal attrition, reduction of your actual permanent workers?

And then final question is with respect to your purchasing from your external supply base.

How aggressive should we expect the savings to be on that front?

I don't know if, at this point, you can put some numbers around that in terms of an additional 5% savings coming from your supply base over the next 12 months, or if there's any quantification that you can provide in terms of those savings?

Thank you.

(Interpreted) The first question, first, regarding the negative impact from higher raw materials cost during the three months of the third quarter.

It ranged between JPY60 billion to JPY70 billion, impacting negatively.

On the accumulative basis for the nine months until the end of the third quarter the negative impact of the raw materials cost is slightly higher than tripling the figure for the third quarter.

That is to say, it ranged around JPY240 billion to JPY250 billion.

Now when is that going to turn into a tailwind?

Already albeit at the very modest level, but there has been decrease in precise metal prices.

And this certainly is having some positive impact upon overall performance.

And in general regarding raw materials and materials in general, in the early part of next fiscal year we are going to have the re-pricing or pricing realization for that.

The environment for pricing realization is going to just the opposite of what we saw last year, and certainly this is going to have a positive impact upon overall performance.

With respect to the number of temporary workers, actually we do not have any precise figure on the global level.

And, therefore, let me just share with you the TMC's standalone figure.

At the end of March 2008, that is last year, we had somewhere around 9,000 so-called fixed term employees.

And through attrition and through letting the contract expire at the end of March 2009, it is likely to go down to around 3,000.

In and after April this year, of course it depends upon the level of the production activities we will continue, but it is not likely for us to see this fixed term employees, which stand at around 3,000 in number at the moment, to come down to zero.

That is to say, to letting contract for all those fixed term employees expire.

We do not foresee production decrease of such a magnitude at all and, therefore, we expect a substantial number of those fixed term employees to stay in the Company in and after April.

You also asked about the permanent employees, that is to say regular, I think, employees.

Of course, any individual could leave the Company based upon their voluntary will, but we will never fire, forcibly, those employees against their will.

We have never done that in the past.

Moving on to the cost related question, we do not set any numerical target agreeing with suppliers, for example, to reduce prices or costs by 5%.

We do not have any such numerical target.

Those cost savings are achieved as a result of the accumulation of savings achieved in the cost savings activities that we conduct together with the suppliers.

And furthermore, for the next fiscal year, the raw materials prices are likely to be reversed from the current situation, which we expect to bring about positive impact upon TMC overall.

And, at the same time, we are going to extend the scope of value VA Activities covering the mass production vehicles at the moment from the current 15 models to all the models in the next fiscal year.

And therefore, we are expecting to see substantial results generated by those VA Activities.

So in terms of the cost savings, while we achieved net cost savings subtracting the impact of higher raw materials, of JPY10 billion during the current fiscal year, but we a foresee substantial increase in those cost savings achieved as a result of those VA and other activities.

Of course, because of the reduced volume, the level of the cost improvement will not be as high as the JPY300 billion that we used to achieve in the past.

But be that as it may, in addition to those special VA Activities, we will also have normally conducted VA Activities, plus the revision and modifications of prices for raw materials and other materials, which should bring about substantial savings in overall cost.

That's great, thank you very much.

(Operator Instructions).

All callers please remember to limit yourself to two questions only.

Again, that's two questions per caller.

(Operator Instructions)

We'll now hear from Kurt Sanger, Deutsche Bank.

Good evening, thank you.

I'll limit my questions to two.

First, on the Finance business, I'd like to get some more color on the North American component.

Can you give me an idea, in the third quarter, how much of the revenue was generated out of North America?

Is it still about 70%, 80% there or was it lower than that because of the volume?

And the core operating profit in North America for Finance was, I think, about JPY40 billion last year.

Would you say the core profitability was at least stable this year or down?

So that's my first question on the Finance business.

My second question would be in your full year forecast, your marketing efforts minus JPY1.39 trillion.

Can you give me what the volume component of that is?

I think there is sales expense and others in there, but I'm interested in the volume impact within that number.

Thank you.

(Interpreted) Excluding the interest rate swap valuation gains and losses, the North American Financial business during the third quarter, and more specifically the GMCC, generated negative JPY20 billion.

And you asked about the core operating profit, which I failed to fully understand.

So let me just skip that part of your question and move on to JPY1.39 trillion.

With respect to this JPY1.39 trillion, first of all the volume decreased by 1.59 million units over a one year period.

And in addition to this volume decrease, you have seen the deterioration or change to model mix in the more unfavorable direction.

So combining these two, the negative impact was JPY1.50 trillion or JPY1.60 trillion.

And on top of that, the marketing expenses increased by JPY150 billion.

And in addition to that, the Financial business saw deterioration by JPY180 billion.

So all in all, that adds up to JPY1.39 trillion.

Great.

On the first question, just to clarify, you did answer my core profit question in your answer.

The problem with the translation of my question I guess wasn't clear.

From a revenue standpoint, I'm just trying to understand how much of the revenue is generated out of North America.

I just want to get an idea of how stable that is on a running basis.

(spoken in Japanese)

Okay, thank you.

We'll now hear from Hannah Cunliffe, Union Investments.

Yes, I would like you to give me an idea of how you can cut production effectively, whether you can use opportunities to furlough workers, or cutting shifts, or closing factories and even on a temporary basis?

And what kind of inventory level would you actually like to see in your various markets, after you've cut production?

(Interpreted) With the sales volume having come down to this level, we are adjusting operations and production activities in various ways, including making adjustments to inventory.

On the global basis, we have 74 production lines in operation.

And of those 74 lines, currently 27 lines are operating on the single shift basis.

In addition, by having planned production suspension days, or having corporate holidays, we are carrying out various production adjustments and operation adjustments.

With regards to the inventory level, since the Lehman shock in September 15 last year, there has been sharp drop-off in sales volume.

And that resulted in substantial increase in inventory by the end of December last year.

And therefore, we are now carrying out activities at the reduced inventory level overall by reducing the production on a global basis between January and March period.

Those inventory levels vary from region to region, from market to market.

But fundamentally, we believe that the level of inventory, as of the end of March 2008, was at the appropriate level.

And therefore, in each of those regions that we operate in, we are now adjusting production to bring the level of inventory back to the level that prevailed at the end of last fiscal year, that is at the end of March 2008.

Going back to the earlier question regarding the Financial business, during the third quarter, the global revenue generated by Financial business stood at JPY340 billion approximately.

And North America, that is GMCC, had the revenue of around JPY240 billion.

And therefore, as we pointed out, it accounts for about 70% of the overall Financial business revenue, and that level has not changed.

May I take this opportunity to make some additional comments while we are waiting for the follow-up question?

Let me add further regarding the inventory situation.

As I mentioned earlier, we are now adjusting production substantially between January and March.

Just taking Toyota brand vehicles compared with the previous year, the production operation currently is, in some cases, approximately down 50% compared with the previous year.

And through those activities, we are going to reduce the inventory level down to 400,000 or 500,000 level by the early spring this year.

And therefore, this represents an abnormally low level of operations, which is quite unlikely to continue into the next fiscal year.

There are no further questions today, so this concludes today's conference call.

Should you require further information regarding today's conference around 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.

(interpreted) Thank you very much.

And that concludes today's conference.

We do appreciate your participation.

Everyone have a great day.

Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call.

The interpreter was provided by the Company sponsoring this Event.