豐田汽車 (TM) 2010 Q3 法說會逐字稿

Hello, everyone.

Thank you for joining us today.

I am Taro Takada, member of the Public Affairs/Investor Relations of Toyota Motor Corporation.

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

I am joined by Mr.

Takuo Sasaki, Managing Officer of Toyota, and narrator Ms.

[Keiko Murata].

Today's conference call is consisting of two parts.

First, Mr.

Sasaki will discuss the highlights of Toyota's earning results and Ms.

Murata 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 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 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 responsible for Finance and Accounting.

Thank you for joining us today.

I would like to discuss Toyota's financial results for the third quarter of the fiscal year ending March 2010.

Our consolidated vehicle sales for the third quarter reached 2.065m vehicles, up 227,000 vehicles from the same period last year as a result of customer demand for our wide range of environmentally friendly, particularly hybrid, vehicles, including Prius and Lexus HS250H.

The right side of this slide shows our consolidated vehicle sales for the nine months ended December 2009.

The results were down 894,000 vehicles from the same period last year due to the adverse market conditions triggered by the global financial crisis, mainly during the first half of the fiscal year.

The foreign exchange rate used for the third quarter is JPY90 against the US dollar, an appreciation of JPY6 compared to the same period last year, and JPY133 against the euro, a depreciation of JPY6 compared to the same period last year.

Our consolidated financial performance for the third quarter resulted in net revenues of JPY5,292.9b, operating income of JPY189.1b, pre-tax income of JPY224.9b and net income of JPY153.2b.

Now, I'd like to hand the rest of today's presentation over to Ms.

Murata.

Next, I would like to explain the major factors impacting our net income.

Compared to last year, our net income increased by JPY317.9b, to JPY153.2b.

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

As you can see, operating income increased by JPY549.7b as a result of the improved sales volume, and mix by JPY210b, and reduction of the variable costs by JPY150b and of the fixed costs by JPY80b.

Slide seven summarizes our consolidated financial results for the nine months to December 2009.

Net revenues of JPY13,670.5b, operating income of JPY52.2b, pre-tax income of JPY161.9b and net income of JPY97.2b.

Please see slide eight for the major factors influencing our net income for the nine months.

Next, I would like to discuss the progress of our emergency profit improvement activities.

At our second quarter results announcement in November last year, we communicated that we had identified JPY1,250b equivalent of improvement for the full year.

Having continued our serious Company-wide efforts since, we managed to achieve JPY1,210b in improvement in the nine months to December 2009.

Our progress has been thus exceeding our plan and it is our intention to accelerate our efforts further.

Our Company-wide serious efforts have resulted in a total of JPY1,210b improvement in the nine months to December 2009.

Our progress has been thus exceeding our plan and it is our intention to accelerate our efforts further.

With regard to our operating income by region, we achieved year-on-year improvement in all regions for the third quarter.

In Japan, improvement of our parent company's operating performance made positive contribution.

In North America we increased operating income, thanks to the recovering trend of the market and our improved earnings from the Financial Services.

In Asia and other regions where with strong -- we had stronger sales, in Thailand, Taiwan and India, we maintained a high level of earnings.

For the nine months to December 2009, our operating income by region was as summarized in slide 11.

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

Operating income excluding interest rate swap valuation gains or losses increased by JPY73.5b to JPY69.2b.

This was due to improved lending margins as a result of decreased expenses related to loan losses and residual losses and declining funding cost, mainly in the United States.

We plan to improve earnings from Financial Services while applying adequate risk controls.

Equity in earnings of affiliated companies for the third quarter was JPY58.4b, up JPY56.1b from the same period last year.

This was due to improved earnings of affiliated companies in Japan and China.

For the nine months ending December 2009, equity in earnings in affiliated companies declined year on year due to the valuation losses on our shareholding of certain affiliated companies which had been posted in the second quarter.

For your reference, slide 14 summarizes our unconsolidated financial results for the third quarter.

We resulted in net revenues of JPY2,439.9b, operating loss of JPY20.2b, ordinary income of JPY23.1b and net income of JPY24.7b.

Our unconsolidated net income increased by JPY31.1b to JPY24.7b, mainly due to the reduction of variable and fixed costs.

Please refer to slide 16 for our unconsolidated financial results for the nine months to December 2009.

Major factors affecting the nine-month unconsolidated net income are as shown in slide 17.

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

We revised our consolidated vehicle sales target by 150,000 vehicles, from 7.03m to 7.18m vehicles.

This reflects our stronger than expected sales results in the third quarter.

We revised our consolidated financial forecasts for the full year as follows, adopting a foreign exchange rate assumption of JPY90 (sic - see presentation) against US dollar and JPY125 against euro for the final quarter.

Net revenues of JPY18,500b, operating loss of JPY20b, pre-tax income of JPY90b and net income of JPY80b.

Please see slide 21, analyzing the main factors behind our revised consolidated operating income forecasts.

Our emergency profit improvement activities have been progressing faster than our earlier plan as a result of the upwardly revised outlook of our vehicle sales and the concerted efforts of our suppliers and employees for variable and fixed costs reduction.

We now expect to achieve a total of JPY1,590b, up JPY340b from the target that was announced earlier.

We will continue to be committed in promoting these activities, to further improve our earnings prospects.

Please note that our revised forecasts include the potential impact of our recent recall of accelerator pedals on earnings and vehicle sales, as far as we could estimate at this point in time.

For your information, please also see slide 22 for comparison between our revised forecasts and previous year's results.

The JPY440b improvement in operating income was supported by a reduction of variable and fixed costs through our emergency profit improvement activities, which exceeded the negative impact of unfavorable foreign exchange rates and the decline in sales volume and mix.

Lastly, we also revised our full-year forecasts for capital expenditures and R&D expenses.

We have been pursuing CapEx efficiently by maximizing the use of unemployed and idle facilities and excess goods in stock.

Further efficiency in use of R&D expenses has been also achieved.

This concludes Toyota's presentation on the third quarter results and the full year prospects.

Thank you very much for your attention.

Thank you, Mr.

Sasaki and Ms.

Murata.

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

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

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

(Interpreted).

Before receiving your questions and giving responses to those questions, I would like to make one statement in advance that relates to the expected estimate of the negative impact on earnings stemming from the expenses relating to accelerator pedal.

I earlier mentioned that expenses related to the measures to be implemented addressing accelerator pedal issue is already factored into the full year projections.

So I would like to explain to you how that is incorporated because we have received various questions, and therefore let me respond to that in advance.

As assumptions for the performance forecast, we estimated likely impact that we could -- to the extent that we could make such estimations at this point in time, of the measures addressing the issues relating to floor mats and accelerator pedals, whose implementation has been already determined for various regions.

To be more specific, we incorporated approximately JPY100b as quality-related expenses, which is evenly allocated to the third and fourth quarters, and therefore one half approximately of that is allocated to the third quarter and the remaining half to the fourth quarter.

Furthermore, we incorporated about JPY70b to JPY80b into the fourth quarter forecast as the likely impact on sales and others.

The impact on sales and others stems from the fact that we assumed that the unit sales may be negatively impacted to the tune of approximately 100,000 units globally.

And at the same time, in addition to that, we added some additional expenses which may be expected to be taken in response to customers' enquiries or in addressing customers' requests.

If I may just repeat, those numbers that I have just cited are the assumptions used in preparing full year forecast, and therefore the actual impact may be different from the assumptions that we are using this time.

At any rate, we will be making maximum all-out efforts in restoring the confidence and trust of customers early, and that in turn I believe would help minimize the reduction in the sales units.

At this juncture, I would like to start receiving the questions.

Thank you.

(Operator Instructions).

We'll take our first question from Steve Usher with Japaninvest.

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

I just have the two questions.

First of all, could you please comment on the costs associated with the closure of NUMMI?

And are those -- I don't imagine those are included in the recall costs, so if you could please give us a bit more detail on that.

My second question is could you please talk about the profitability in China?

And included in that question, could you comment on the recall costs in China?

You had a number of recalls thus far this year and if you could give us a bit more detail on those costs, I'd appreciate it.

Thank you very much.

(Interpreted).

With respect to NUMMI, as the production moves toward the completion and final closure, there may be the possibility that the operation may lack some stability going forward.

And in order to assure stable delivery of Corollas and Tundras, for which demands are very high, without causing any troubles or concerns on the part of customers, we will incur certain costs.

And those costs and expenses are, in the reasonable extent, incorporated and booked in the third and fourth quarters.

However, when it comes to specific amount involved, please accept my statement that I would like to refrain from mentioning those numbers.

With respect to China, we actually recalled 75,000 units of RAV4, and therefore there are certain recall-related expenses or costs.

It is not a very significant amount.

Although I cannot cite any specific number in relation to that, please do understand that recall cost related to China is incorporated in the aggregate number I cited earlier, the number such as JPY100b, for example.

At any rate, please do understand that the expenses related to China is not a significant amount.

With respect to the market in China, we expect that market is likely to grow very substantially in the fiscal year 2010 as well.

For example, the market in 2009 in China was slightly less than 14m units, that is to say, in the higher part of 13m units.

And this year the growth of the market is likely to exceed even that.

And on the part of Toyota, we've sold approximately 710,000 units in China and this year we are planning to sell at the level of around 800,000 units.

We believe Chinese market is, of course, the market with a very strong and high potential over medium and long term.

Thank you very much.

Could you comment on the profitability in China and the profit contribution to equity earnings in Q3 and thus far this fiscal year?

(Interpreted).

During the three months of the third quarter, in the equity method profit the profit related to our Chinese business is included to the tune of between JPY20b to JPY30b.

And in addition to that, we do have a profit from Chinese subsidiaries as well as profits earned by delivering parts and vehicles from Japan to China.

And therefore, during the three months of the third quarter, we booked approximately JPY70b in profit to the Chinese business.

Allow me to correct my earlier statement.

I earlier mentioned that the profit from Chinese business is included to the profit accounted for by equity method to the tune of between JPY25b to JPY30b.

Actually, that amount included in the equity method profit was slightly less than JPY25b.

But the total profit relating to Chinese business is about JPY70b, as I mentioned earlier.

Great.

Thank you very much.

I appreciate that.

Next question, please.

Margaret Moore with DuPont Capital Management.

Please go ahead.

Yes.

Thank you for the call.

The first question is I was wondering if the recall costs include the most recent announcement of problems with the Prius brakes.

And if not, do you have any estimate at this time for what the amelioration costs for that would be?

My second question is regarding the Financial Services.

In your assumptions for the Financial Services business, are you now revisiting resale value assumptions in your guidance?

Thank you.

(Interpreted).

First of all, with respect to the issue of Prius, it has not been clearly identified what sort of improvement or amelioration measures specifically are going to be implemented, and therefore any cost relating to the Prius is not incorporated in the forecast I mentioned earlier.

Regarding the resale price of used vehicles, it's very difficult to forecast what those prices are likely to be.

However, I earlier cited the likely impact on sales of about JPY70b to JPY80b, and a part of that includes the risk of a possibly reduced value of used cars.

Thank you.

Next, please.

And we'll take our next question from Kurt Sanger with Deutsche Bank.

This is excellent.

Thank you for the call.

Two questions.

One, on the North America profit for the third quarter, excluding valuation gains, you have JPY69.7b.

Can you give us a rough idea of how much was the Finance business and how much was the Auto business of that?

Please give us a moment.

Okay, great.

Thank you.

(Interpreted).

During the third quarter, excluding interest rate swap related earnings, the profit of North America was JPY69.7b.

And of that, about JPY50b relates to the Financial Services gains, that is, gains from TMCC.

Great.

Thank you.

Second question, Sasaki-san, is on the domestic market.

The sales in Japan have been extremely strong, helped by the government incentives.

That certainly helped your parent company and domestic production levels over the last quarter.

Just looking into next year, after the incentive program ends in September, what is your view of the domestic market?

I'm more concerned about domestic production levels going forward.

Thank you.

(Interpreted).

As you have just mentioned, in September the domestic subsidy regarding environmental friendliness will expire.

However, that's only one aspect of those incentives.

The ecological or environmentally friendly tax breaks will last a little longer, up until 2012.

And as I mentioned, just a part of that, that is ecological subsidy, expires in September.

And therefore we are also concerned about the potential decline in demand in and after October this year.

However, at the same time, the markets in other regions of the world are recovering and will start recovering further.

And therefore we are hoping that those stronger market recovery in the regions of the world outside of Japan would be able to cover and make up for a potential decrease in demand here in Japan.

Okay.

Thank you.

The impact has been to help shrink the parent losses to only JPY20b in the third quarter, I believe.

Would you be hopeful that the parent company could actually break even next year?

(Interpreted).

Well, the business plan, the plan for the next fiscal year is something that we are working on right now, and therefore it's very difficult for me to answer either way, either yes or no.

And especially when you talk about parent company, there is another factor, that is to say the exchange rate may fluctuate quite significantly from what we see today.

And therefore all I can say at this point is that we will make a very serious effort so that we can break even next year.

And this year, on the standalone basis or at the parent company basis, earnest efforts are being made to reduce fixed costs, for example.

And therefore, compared with the situation in the past, we have acquired stronger fundamental capabilities which allows us to make earnings even at the current exchange rate levels.

And therefore we need to make, of course, even further efforts going forward for next year as well.

Great.

Thank you very much.

Okay.

Next question, please.

And Ben Moyer with BlackRock, please go ahead.

Yes, hi.

Thanks for the call.

I had a question about your volume assumption for the fourth quarter and the impact of the recall.

You said that you anticipated a 100,000 unit impact.

I'm assuming that's at the retail level.

Are you assuming that the wholesale volume will be impacted the same amount, or by a lesser or larger amount?

That's the first question.

(Interpreted).

Basically speaking, I think you will be able to understand that the impact on the wholesale is in line with, or about the same level, as that on the retail level.

In formulating the consolidated full year forecast, the volume assumption was made on that basis.

Okay.

Okay.

And this is kind of a follow-up to that.

I'm curious how you came up with this 100,000 unit estimate.

It looks like, if we look only at North America and we look at the run rate in North America through the end of the third quarter, a 100,000 unit drop in the fourth quarter would imply about a 20% drop from the run rate through the end of the third quarter, and that's only at North America.

So it just seems to me that it's possible your assumption of a 100,000 unit impact may be a little bit too conservative.

In other words, the impact could be larger than 100,000 units.

That's just my impression.

I wonder if you could comment on that.

(Interpreted).

I earlier mentioned that the impact globally could be 100,000 units.

And for North America we estimated the impact to be around 80,000 units and in the remaining areas, specifically Europe and others, 20,000 units.

So 80,000 North America, 20,000 Europe and other regions, totaling 100,000 units.

But this is the estimates we made for the purpose of formulating the full year projections, to be used as assumptions for that.

And as I mentioned earlier, the actual impact may be potentially different from those assumptions I have just mentioned.

So, rather than being able to describe how we have arrived at those numbers, let me just say that estimation was made by soliciting opinions and views of those people at the forefront of sales.

Needless to say, those people at the forefront of sales will be making every possible effort in order to keep those impacts on volume to be at the minimum possible level.

And they are working hard in order to regain trust and confidence of the customers and therefore, when the actual result arrives, it may be different from those assumptions I have just mentioned.

Okay.

And then my other question is more about the recall and the problems that have been mentioned in the press continuously for the last two weeks, or less than two weeks.

I'm not sure, but it seems a lot of focus is now being put on the electronics in the vehicles, and some people believe that there could be an electronic problem.

Toyota has so far said that there is no electronic problem and I believe they seem to be saying that with a lot of confidence.

And I'm just wondering if you could tell us something about why you're so confident that the problem is not electronic.

(Interpreted).

Not being an engineer myself, all I can do in response to your question is to convey what I have heard from engineers, or engineers' opinion.

Now, Toyota's engineers said that the electronic throttle control system has many layers of redundant failsafe mechanisms and systems incorporated, and therefore there has not been any fact that has been confirmed that sudden unintended acceleration was caused by electronic throttle control system.

That's what I heard and I simply cannot mention any more specifics than what I have just mentioned.

Okay.

Well, thank you.

Okay.

Next question, please.

And James Irwin with Moon Capital, please go ahead.

Hi.

Thank you for doing the call.

Can you hear me okay?

Yes, thank you.

Thank you.

Yes, the last question was focused on what I had the same issue on, your methodology on the 100,000 hit from the -- on the sales side.

I did have one follow-up on that, though, and that's simply if we looked at your sales results in United States in January and we looked at the sales level in the first 20 days versus the underlying sales level in the last 10 days of the month, what was the actual hit in terms of that sales running rate?

Like the prior caller, I thought that the 100,000 unit was a potentially low number in terms of the real impact here, just based on the market share trends.

Maybe I'm missing something, though.

Can you share with me what happened in the last 10 days of January, in terms of your US sales rate?

Thank you.

(Interpreted).

I'm sorry, I can't give you any specific answer because I don't have those specific numbers with me at this moment.

But one thing I can say is that this very last week of January includes the weekend, that is, a Saturday and Sunday, and on January 26 the announcement was made to stop the sales.

And so the impact on sales was clearly observed in the last week because of that.

And rather than trend of the last week continuing on into the future, since the announcement of countermeasures and implementation therein was made on February 1, dealers have been making all-out efforts fixing the vehicles currently used by the customers, and then moving on to modifying the vehicles in the inventory subsequent to that.

And that will result in the resumption of sales going forward.

And therefore, I'm not quite sure it is appropriate to simply extrapolate the figure of the sales of the last week of January into the future.

Yes.

Thank you.

I would agree with that but, directionally, we have in the US Congress a couple of hearings coming up in February relating to the NHTSA and the recall issues.

And from a communication standpoint, as Ben Moyer mentioned, there's a lot of confusion and negative press out there in the marketplace and, again, two big congressional hearings coming up in February.

As of today, now that Toyota has identified the fix and is implementing it, has Toyota planned to embark on a significant public relations or advertising campaign to address a lot of the negative commentary that's being put out there regarding the brand?

Or is that still to be determined?

(Interpreted).

As I mentioned earlier, now that we have identified the problem, we are making all-out efforts in addressing and fixing this problem.

And the first primary focus is to restore confidence and trust of those customers, Toyota fans, who have been using Toyota vehicles thus far.

And that will be the first measure that is to be implemented and that will be implemented.

Now, about the various media coverages and press reports, what sort of public relations efforts needs to be made was included in the question.

And of course that is something that we need to consider, implementing some countermeasures at the corporate level, but for me it's a bit difficult to give you some direct answer to that.

In the overall context, taking into account the various factors, that public relations campaign will be one of the options that we need to consider.

Thank you very much.

Okay.

Next question.

This is the final question, please.

We'll take our final question from John Buckland with MF Global.

Good afternoon.

Thank you for including me on the questions.

I just wondered if you can offer some insight into the markets as you see them post incentives, particularly in Europe but also the underlying picture for North America, because it's not clear to me exactly why you increased your forecast.

Clearly, you've done better up until now in terms of the sales, but is that a real underlying improvement?

Is it the fact you've benefited more than you expected to from incentives?

In Europe particularly, there seems to be quite a contrast in terms of forecasts.

For example, Ford give a forecast down 8% to down 15%.

Fiat says it could be down 12% or 16%.

Yesterday, Volkswagen said German market wasn't so bad; maybe even the European market is flat.

So I wondered if you could tell us what you think the calendar year forecast would be, what your assumption for 2010 is.

And in North America, excluding the impact of the recall, do you see the actual recovery rate improving such that you -- that's what is underlying your higher forecast there?

(Interpreted).

Let me just confirm your question regarding the market conditions in Europe and the United States.

Have you raised the question regarding calendar year 2010, rather than fiscal year ending in March 2010?

Yes, it's the calendar year, if -- I know that's --

Calendar year 2010, right?

Well, yes, because clearly you're right at the end of the current fiscal year.

The last quarter of your fiscal year is the first quarter of calendar year 2010, where in Europe, for example, there still is the impact of incentives being felt.

In particular, some markets still have their incentives in place.

Others are running out but there still is the impact there.

So really what I'm trying to judge is your assumptions about what happens in Europe post the incentives.

So we really need to look at the whole of 2010 calendar year.

And then in the US, obviously, it's just the rate of -- the pace of sales recovery, which perhaps applies also to the whole of 2010.

(Interpreted).

With respect to Europe, you are quite right.

Last year, governments of various countries in Europe introduced scrappage incentives and other measures, but the countries in which those incentives will continue in the subsequent year are France and Italy.

And in other countries those incentives are to expire or have expired, so it's quite -- the situation is quite disparate from country to country.

In terms of our sales assumptions for calendar year 2010, at the retail basis our assumption stands at 840,000 units for calendar 2010.

And this contrasts to calendar year 2009, the decrease of 50,000 units, so this is down 50,000 units from the actual level reached in calendar 2009.

As for the United States, the market for the entire period of this year is assumed to be around 11.5m units, partly due to expected increase in production stemming from inventory adjustments made by corporate United States.

And also, albeit at a very slow clip, there are some signs of improvement in economic activities in general.

And furthermore, the first half of last year was really the worst period and therefore, compared with that, we are assuming that there will be some rise in the market to around 11.5m units.

And with respect to the assumptions for North American sales for the calendar year this year, we have already announced that we forecast about 2.19m units of sales volume for North America.

This is the assumption made prior to incorporating the impact of recall which I mentioned earlier.

And therefore, we will very carefully monitor the actual developments in the market and its impact going forward.

The assumptions for the United States US market -- US sales is 1.97m units.

Okay.

Thank you.

Thank you too.

Okay.

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 Investor Relations 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.

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.