豐田汽車 (TM) 2010 Q2 法說會逐字稿

Hello, everyone.

Thank you for joining us today.

I am Taro Takado, a member of Public Affairs Investor Relations of Toyota Motor Corporation.

I would like to welcome you to the fiscal year 2010 second quarter financial results conference call.

I am joined by Mr.

Takuo Sasaki, Managing Officer of Toyota, and (inaudible) Miss Hayashi.

Today's conference call is consisted of two parts.

First, Mr.

Sasaki will discuss the highlights of Toyota's earning results, and Miss Hayashi 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 an hour.

Also, please note that the following presentation contains forward-looking statements that affect 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 in page three of today's presentation material.

In addition, a complete cautionary statement with respect to insider trading is included in page four of today's presentation material, which again, can be downloaded from our Internet home page.

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

Sasaki.

Hello, everyone.

My name is Takuo Sasaki, Managing Officer of Toyota Motor Corporation.

Thank you for joining us today.

I'd like to discuss Toyota's financial results for the first half of the fiscal year, ending March 2010.

Our consolidated vehicle sales for the first half decreased by 1.12 million vehicles, 26.4% from the same period last year, in reflection of the continuing weakness of the global economy.

Most recently, however, demand has been picking up in some regions, thanks to demand stimulating measures, such as scrap incentive initiatives by governments.

In Japan, in particular, our monthly vehicle sales have been improving year-over-year since August.

Our consolidated vehicle sales for the second quarter, as shown on the right side of this slide, decreased by 16.2% compared to the same period last year.

Our consolidated financial performance for the first half of the fiscal year resulted in net revenue of JPY8.3776 trillion, an operating loss of JPY136.9 billion, pre-tax loss of JPY63 billion, and net loss of JPY56 billion.

This reflects the continued challenging environment we have been facing.

Now I would like to hand the rest of today's presentation over to Miss Hayashi.

Next, using slide seven, I'd like to explain the major factors for the decline in our net income.

By comparison to last year, our net income declined by JPY549.4 billion, to a loss of JPY56 billion.

The left side of this slide shows the major factors that impacted operating income.

As you can see, operating income was depressed by JPY718.9 billion as a result of the negative impact from declined vehicle sales, and a stronger yen that overrode the positive impact from the reduction of variable and fixed costs.

Slide eight shows our consolidated financial results for the second quarter.

We resulted in net revenues of JPY4.5416 billion, operating income of JPY58 billion, pre-tax income of JPY75.5 billion, and net income of JPY21.8 billion.

Please see slide nine for the major factors influencing our second quarter net income.

Next, I would like to explain our progress with the Emergency Profit Improvement activities.

The fruit of our Emergency Profit activities has amounted to JPY710 billion, against a JPY900 billion full year target that we updated when announcing the first quarter financial results.

This has been exceeding our expectations.

With regard to our vehicle sales, we have been leveraging on our strength and environmentally friendly vehicles, particularly hybrid vehicles such as the new Prius and HS 250h, backed by the demand stimulating measures taken by governments.

As for cost reductions, we have been promoting the Emergency VA activities.

In close collaboration with our suppliers, we streamlined designs and improved the process of manufacturing, which in turn, helped us improve our own technical abilities.

More than 30,000 proposals have been made so far, and the range of activities has been also expanding.

Furthermore, our Company-wide efforts to reduce fixed costs have been steadily bearing fruit.

With the next slide, I would like to explain the consolidated operating income by region.

We posted a decline in operating income in all regions except for North America, due to weaker vehicle sales by comparison to the same period last year.

In Japan, where profitability of our exports was affected by the stronger yen, our operating income fell particularly sharply.

In North America, on the other hand, we increased operating income thanks to improved earnings from the Financial Services, although our operating environment remains severe.

The regional breakdown of our consolidated operating income for the second quarter is as shown on slide 12.

Next, let me discuss our operating income for the Financial Services.

Operating income, excluding interest rate swap valuation gains, increased by JPY72.7 billion to JPY107.5 billion.

This was thanks to an improved lending margin as a result of a declined funding cost, and decreased expenses related to loan losses and residual losses, mainly in North America.

Going forward, we plan to improve earnings from Financial Services while applying adequate risk controls.

Equity and earnings of affiliated companies was a loss of JPY55.5 billion, down JPY199.6 billion from the same period last year.

This was largely due to decreased earnings of affiliated companies in Japan and China, and the valuation losses on our shareholding of certain affiliated companies.

For your reference, slide 15 summarizes our unconsolidated financial results for the first half year.

We resulted in net revenues of JPY3.6566 trillion, operating loss of JPY265.7 billion, pre-tax loss of JPY46.3 billion, and net loss of JPY18.8 billion.

Major factors affecting our unconsolidated net income from the first half of last year are shown in the next slide.

Net income dropped by JPY491 billion to a loss of JPY18.8 billion, due to declined exports, mainly to North America, and the yen's appreciation against the US dollar, which exceeded the impact of variable and fixed cost reductions.

Please look at slide 17 for our unconsolidated financial results for the second quarter.

Major factors affecting the second quarter unconsolidated net income are as shown in slide 18.

In consideration of our very serious financial situation, which resulted in a net loss for the first half year, we will pay an interim dividend of JPY20 per share.

We will continue to make our best effort to return to profit swiftly through enhancement of our product appeal, and reduction of variable and fixed costs, in order to meet our shareholders' expectations.

Next, I would like to discuss our outlook for the full fiscal year ending March 2010.

We have revised our consolidated vehicle sales target that we announced in August from 6.6 million, to 7.03 million vehicles, up 430,000 vehicles.

This reflects the development of demand in excess of our initial assumption, thanks to various governments' demand stimulating measures initiated by various governments, and the favorable sales of our environmentally friendly, particularly hybrid, vehicles.

However, in view of expiration of the demand stimulating measures in many countries within this calendar year, the outlook for demand appears still uncertain, and we therefore need to carefully analyze as to how it develops going forward.

We have revised our consolidated financial forecasts for the fiscal year to March 2010 to the following.

Net revenues of JPY18 trillion, operating loss of JPY350 billion, pre-tax loss of JPY300 billion, and net loss of JPY200 billion.

Please see slide 23, summarizing the main factors behind our revised consolidated operating income forecast.

We have revised our target for Emergency Profit Improvement activities from JPY900 billion to JPY1.250 trillion, reflecting the upward revised outlook of our vehicle sales, and the progress of variable and fixed costs in excess of our earlier plans.

We will continue to promote profit improvement activities across the Company in order to further improve our earnings prospects.

For your information, please also see slide 24 for a comparison between our revised forecast and previous year's results.

Finally, please note that we also revised our full year forecast for capital expenditures and R&D expenses as shown, as a result of additional efficiency improvements.

This concludes my presentation.

Thank you very much for your kind attention.

Thank you, Mr.

Sasaki and Miss Hayashi.

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

I would to like to limit the number of your questions to two questions each.

Now, our conference call operator will explain how to connect your line.

Thank you, Mr.

Takado.

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

(Operator instructions).

Our first question today comes from Paul Heaton with Pyrford International.

(technical difficulty) inquire about the Cash for Clunkers deal that was offered by the US government, or stimulus package, as you describe it.

This enabled you to do fairly well in the United States, and as you've shown.

But what I'd like to know is, of the sales of vehicles in the United States, what proportion were of that nature?

Cars being brought in to be replaced, and thus, selling a new car because of that?

And the second question I have is, that cost reduction efforts, when we look at the unconsolidated and consolidated numbers, [110] in the consolidated, only [20 billion] in the consolidated element.

Which means that possibly, there's a lot more that can be done overseas, or in the consolidated parts of the companies.

Would you like to comment on that as well, please?

(interpreted) I believe your first question has to do with the -- what we call the scrap incentives in the United States.

But as a result of this Cash for Clunkers program in the United States, it is very difficult to specify the number of new vehicles that were sold as a result of this program.

It is forecasted that overall, there is an increase of about 500,000 new car sales as a result of this program.

However, it is very difficult to identify the exact number of new car sales that came from this program.

Having said so, we can say, at least, that in the month of August, the annualized car sales in the United States have gone up to 14 million units, which used to be 10 million units annualized car sales outlook before the month of August.

So it surely has a positive impact, it being the program, has a positive impact on the US market new vehicle sales.

And in the month of September, this program had come to an end, and the annualized vehicle sales in September dropped to 9.2 million units.

So we thought at that time that there was this backlash of our new vehicle sales.

However, in the following month, in the month of October, our car sales had recovered, growing up to an annualized vehicle sales volume of 10.5 million units.

Therefore, we believe that we need to carefully observe the US car market trend going forward.

Your second question had to do with the gap between the unconsolidated and consolidated effect as a result of our cost reduction efforts.

I think you pointed out that the fruit of cost reduction is seen more on the non-consolidated side, and I think you are implying that this consolidated result of JPY20 billion as a result of cost reduction would have further room for improvement.

And I believe that the effect is, as of now, felt greater on the non-consolidated side, due to, mainly, two factors.

One is, we are implementing a series of the so-called Emergency VA activities that are showing results in the unconsolidated side to a greater extent.

Therefore, we look forward to seeing a greater fruit of our cost reduction efforts in our subsidiaries and affiliates in the near future.

And another point has to do with the positive impact from the reduction of material costs and other expenditure, which is felt to a greater extent on the unconsolidated side in Japan.

Thank you very much.

I'm happy with that second answer, and not so happy with the first answer, because I'd like to know how many vehicles might have been brought in for scrapping.

(interpreted) I'm sorry to have to make you unhappy with regards to my answer to your first question.

The problem is that I don't have the specific number of cars in my hand right now.

But I may be able to give you a very rough ballpark number, and maybe this would enable you to envisage what was the impact.

Out of this 500,000 vehicle sales, maybe 19%, roughly speaking, would be the cars brought in for scrapping.

So that would be roughly 100,000 units or so.

That may be the rough image of what was happening.

That is very kind of you.

That is very helpful.

Thank you.

(interpreted) You're welcome.

Next question, please.

Thank you.

Next question comes from Steve Usher with Japaninvest.

(technical difficulty) -- you have restored profitability in Q2 with JPY58 billion in operating profits, yet you're looking for an operating loss in the second half, JPY213 billion operating loss.

Could you comment on why you expect your financial situation to deteriorate in the second half, particularly after the success of Q2 and the success in the first half?

My second question refers to slide 14, when you're talking about your losses in equity method income.

Could you please comment on the profitability of your China operations, and if possible, could you give us a breakdown of the equity losses between the domestic operations, China, and the valuation losses on your affiliates?

Thank you very much.

(interpreted) First of all, to answer your first question, indeed, as you have pointed out, our second quarter figures have returned to profitability.

However, there are two factors for this profitability.

One is the increase of sales volume.

And this is, in part, due to the demand stimulating measures implemented by governments of various countries.

And so, compared to the first quarter, the second quarter vehicle sales had increased 330,000 units.

And another major factor comes from our Financial Services business, which had minimum bad debt costs and also residual loss related costs.

And in the United States, especially, the price of secondhand cars, used vehicle prices, that is, have been coming up.

Therefore, there was a major contribution coming from the Financial Services business for the second quarter results.

Now then, as you have questioned, why do we foresee a loss for the second quarter and our financial situation deteriorating?

And we are estimating a loss for the second quarter for about JPY200 billion.

And indeed, the units -- the vehicle sales volume are to increase, according to our outlook, from the first half to the second half by about 770,000 units.

And so, as a result of the vehicle sales volume, there may be an increase of roughly JPY300 billion.

However, we have to think about the exchange rate of the Japanese yen to the US dollar, which used to be JPY96 to the US dollar in our assumptions for the first half, which is going to be JPY90 to the US dollar in the second half.

And as a result of the yen appreciation, there would be a negative impact by about JPY100 billion.

Of course, if these are the only factors that we need to take into account in our outlook, we still would remain profitable.

However, I have to point out that the fixed cost expenditure would be skewed toward the second half of the year.

For example, capital expenditure is forecasted to total, on an annualized basis, JPY760 billion.

However, the actual CapEx incurred in the first half was JPY250 billion, which means that the CapEx that would be incurred in the second half would be about double the amount of the capital expenditure in the first half.

And as a result of this greater amount of capital expenditure, naturally, depreciation costs would go up.

And also, since we estimate the vehicle sales are to increase, there would be an increase of related sales costs, which is going to be greater in the second half.

And so, all in all, the expenses would be greater and skewed towards the second half of the fiscal year.

Furthermore, we have conservative estimates for our Financial Services business as well, and also, we have taken into account in our outlook the expenditures that would be incurred for the withdrawal of the F1 Racer that was announced yesterday, and also, expenses related to the liquidation of NUMMI, and the factors that we -- it was possible for us to take into account in our outlook are taken.

Therefore, the second half seems to look like it is deteriorating.

And if I say so, I think, being proactive, I think you would come up with this follow-up question that then, how much would this one time off temporary expense be?

But at this moment, I am sorry, I cannot give you a specific number for that.

So allow me to go on to your next -- second question, which has to do with equity and earnings of affiliated companies and valuation loss.

Now, to give you the breakdown of the earnings or loss in the companies, affiliated companies that would be included in our equity methods, the Japanese affiliated companies, where we have equity in the earnings, had a positive -- excuse the interpreter, a negative JPY10 billion.

That is for the Japanese affiliates.

And for the Chinese affiliates, the first half was a plus JPY20 billion.

Now, compared to the previous year's first half, this was -- the Japanese affiliated company had a positive JPY70 billion in the previous year during the same period, which means that there is this deterioration of JPY80 billion for the Japanese affiliate.

And on a year on year comparison, the Chinese affiliates had plus JPY40 billion last year, which means that there is this reduction by JPY20 billion.

And to add, the financial -- the fiscal period for the Chinese affiliates runs from January to December.

Therefore, this positive JPY20 billion for the Chinese affiliates are the numbers from the month of January to June.

And so, this includes the very difficult period from January to March.

With regards to the valuation loss, there are two major companies involved.

One is our joint venture in California in the United States, NUMMI.

And next year, as of the end of March next year, NUMMI will terminate its production of automobiles, and we have already included the impairment of the securities that we have invested in NUMMI for -- which totals about JPY10 billion, slightly less than JPY10 billion.

So this is the negative JPY10 billion valuation loss.

And the other company is the AIOI [Profit] and Casualty Insurance Company that up to now has been included in our equity method.

And next year in April, they are going to exchange equities with Sumitomo Mitsui Insurance Company, and since the exchange ratio has been determined, we have evaluated their stocks at market price, because we believe that it is already decided that they would no longer be part of our affiliated companies under the equity method starting April next year.

And since we have been applying the US GAAP for valuation, we have, so far, for the equity holding of AIOI Property and Casualty Insurance Company, have increased the book value of the stock prices for AIOI.

However, the current equity price was slightly below that, so we had incurred a valuation loss as a result of that.

Therefore, the equity and earnings of affiliated companies had resulted in a loss, and that was mainly due to the factors that I have described.

Thank you very much.

If I could just have two quick follow-ups?

First of all, what is the AIOI valuation loss?

What -- how much is that?

And secondly, you're absolutely right, your answer for the first question did stimulate a follow-up.

Could you give us the loan loss ratio, the current loan loss ratio for your US finance operations, TMCC?

Thank you very much.

(interpreted) Thank you for your follow-up question.

Concerning the valuation loss for AIOI, that would be approximately around JPY60 billion.

So I think that would give you the correct image.

And for the loan loss ratio of our TMCC operation in the United States, the first half had a loss ratio of around 1%.

Thank you very much.

Your answers have been very helpful.

I appreciate it.

Okay, next question, please.

Our next question will come from Ben Moyer with BlackRock.

Yes, thank you.

I had a question about -- the first question is about NUMMI.

I know you can't tell us the amount of allowance you've included in your current year forecast, but do you think you've adequately allowed for losses on NUMMI in your current year forecast?

In other words, can we expect that there will be no NUMMI-related losses next fiscal year?

Or if there are, that they'll be extremely small?

That's the first question.

The second question relates to the domestic market.

There have been stimulative measures in place in Japan for several months now -- or actually, since, I guess, April.

I'm just wondering when you expect the stimulative measures in Japan to end, and what is your outlook for the Japanese domestic market, say, over the next four to six quarters?

Thank you.

(interpreted) Thank you.

Concerning your question about NUMMI, as of now, we have already taken into account the allowances that would be needed for NUMMI in our estimates, and this is, to the extent that we can reasonably estimate, as the expenditures that would be incurred as a result of this termination of NUMMI operation.

And so, to a certain extent, this is already discounted for in our outlook.

And so, we believe that there is sufficient consideration of the NUMMI circumstances in this year's outlook.

However, when it comes to the next fiscal year, unless there is unexpected development concerning the NUMMI process, and if things go on as we currently anticipate, there would be very limited expenses that would be incurred as a result.

And I believe, although we cannot guarantee you that there would be no further allowance required for the next fiscal year, we expect that even if there are going to be some expenses, that would be very limited.

Now, going on to the demand stimulating measures -- in other words, the scrap incentive program in Japan, there are two specific programs, one being the so-called eco-car tax break, and the other being the eco-car government subsidy.

Now, concerning the eco-car tax reduction or tax break, this is planned to continue on until March 2012, so this is going to be a three year program in total.

However, the eco-car government subsidy would come to an end in March next year.

And concerning the eco-car government subsidy system, although the current plan is to put this program to an end in March next year, it's not very clear at the moment.

This may continue on even beyond April next year, but there are debates going on at the moment, and we cannot clearly foresee what would happen to this program.

But depending on whether or not this program would continue, the Japanese domestic market would be affected.

Therefore, it's extremely difficult to clearly foresee the domestic market trend for four quarters or six quarters ahead, because this very much depends on whether the government subsidy would continue or not.

Okay, thank you very much.

Okay, next, please.

Our next question will come from Clive Wiggins with Macquarie Securities.

And Mr.

Wiggins has disconnected.

That does conclude our question and answer session.

I will now turn the conference over to Mr.

Takado.

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

If you require further information regarding today's conference or on Toyota, please feel free to contact our Investor Relation 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.

And that does conclude our conference call.

Thank you for your participation.

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.