豐田汽車 (TM) 2010 Q4 法說會逐字稿

Good day, everyone.

I am the Premier Global Services 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 call over to Mr.

[Hideko Ukawa] from Toyota, who will introduce the conference.

Thank you.

Hello, everyone.

Welcome to the Financial Results Conference Call for the Fiscal Year 2010.

I am Hideko Ukawa, from the Public Affairs Division of Toyota Motor Corporation.

Today we have Mr.

Takahiko Ijichi, who is Senior Managing Director of Toyota Motor Corporation, and Ms.

[Keiko Morita], an interpreter, with us.

The agenda of today's conference call is the following.

First, Mr.

Ijichi will briefly discuss the highlights of Toyota's earnings results and then Ms.

Morita will take over the rest of the presentation.

This will probably take 10 to 15 minutes.

After the presentation, you are welcome to ask questions.

We expect the entire call to take about 60 minutes.

Please note that the presentation contains forward-looking statements that reflect our plans and expectations and our actual results may be materially different from these statements.

A complete cautionary statement concerning forward-looking statements is included on page two of today's presentation materials and a complete cautionary statement concerning insider trading is included on page three.

Both of the statements can be downloaded from our Internet home page.

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

Ijichi.

Hello, everyone.

My name is Takahiko Ijichi, Senior Managing Director of Toyota Motor Corporation.

Thank you for joining us today.

A (inaudible) press conference held today at 3 p.m., Japan time, our President, Mr.

Toyoda, shared our intentions for Toyota's fresh start in his opening speech.

The transcript of Mr.

Toyoda's speech is available on our website.

Now I would like to discuss Toyota's financial results for FY 2010.

Our consolidated vehicle sales reached 7.237 million vehicles, down 330,000 vehicles from last year.

In the first half of the year, our vehicle sales declined due to adverse market conditions triggered by the global financial crisis.

In the second half, however, our vehicle sales posted a year-on-year increase, despite the impact of our recalls, thanks to the demand stimulation measures by various governments and our marketing efforts.

Our consolidated financial results for the full year are shown in slide six.

Operating income was JPY147.5 billion and net income was JPY209.4 billion.

Now I would like to hand the rest of this presentation over to Ms.

Morita.

Let me explain the major factors impacting our net income.

Compared to last year, our net income increased by JPY646.4 billion to JPY209.4 billion.

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

As you can see, our operating income increased by JPY608.5 billion as a result of reduction of variable and fixed costs, among other factors.

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

At our third quarter results announcement in February, we announced that JPY1.590 trillion of profit improvement had been identified for the full year.

As a result of our concerted efforts across the Company, we managed to add a further JPY100 billion to achieve a total of JPY1.690 trillion of profit improvement.

In this and coming fiscal years, we aim to continue to strengthen the earnings structure of our Company.

As slide nine indicates, in spite of negative foreign exchange environment, with the strengthening yen, our operating income has been recovering quarter by quarter since the fourth quarter of last fiscal year.

With regards to our operating income by region, we achieved year-on-year improvement in all regions.

In Japan, the negative impact of the stronger yen and decreased numbers of exported vehicles were more than offset by increased sales of vehicles, particularly Prius, in the domestic market.

In North America, we improved operating income, despite the impact of our recalls, thanks to the recovering trend of the market and improved earnings from the financial services business.

In Asia, where we have stronger sales, for example in Taiwan and Thailand, our operating income increased.

In Central and South America, Oceania and African region, we maintained a high level of earnings.

Next let me discuss our operating income from the financial services business.

Operating income, excluding interest rate swap evaluation gains or losses, increased by JPY254.4 billion to JPY215.9 billion.

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

We aim to continue to improve earnings, while applying adequate risk controls.

Equity in earnings of affiliated companies resulted in JPY45.4 billion, despite impairment of certain stocks in our holdings.

This is mainly thanks to improved earnings of our affiliated companies in Japan.

Summarizing slide 13, our unconsolidated financial results for the fiscal year were net revenues of JPY8.5978 trillion, operating loss of JPY328 billion, ordinary loss of JPY77.1 billion and net income of JPY26.1 billion.

For your reference, major factors affecting our unconsolidated net income were as shown on slide 14.

Based on our results discussed so far, we plan to propose an end of year dividend of JPY25 per share at the annual general shareholders meeting next month.

This will make our annual dividend JPY45 per share, including the interim dividend of JPY20 per share.

We believe that paying dividends is the most important way to return value to our shareholders.

In order to reward a long-term and trusted relationship with our shareholders, we intend to continue adequate dividend payments, while ensuring long-term financial stability and considering our financial prospects, investment plans and level of liquidity.

Next, I would like to discuss our outlook for the current fiscal year, ending March 2011.

Our consolidated vehicle sales are expected to be 7.29 million vehicles, up 53,000 vehicles from last fiscal year.

This reflects our expectation for stronger sales overseas, led by Asia and other regions, which offset our expectation for weaker sales in Japan due to the coming expiration of the government's demand-stimulating programs.

We anticipate a strong contribution to consolidated vehicle sales from overseas markets, especially from resource-rich and emerging countries where demand is growing.

Consequently, our consolidated revenue and earnings forecasts are as follows.

Net revenues of JPY19.200 trillion, operating income JPY280 billion, product income JPY330 billion and net income JPY310 billion.

Slide 19 summarizes the major factors behind our operating income forecasts.

Throughout the current fiscal year, we will continue to strengthen our marketing efforts and promote profit improvement through cost reduction and other activities.

Lastly, I would like to say a few words on our forecast for CapEx and research and development expenses.

While promoting overall efficiency, we plan to invest proactively and strategically into the areas that we prioritize such as next-generation environmental technology and emerging countries.

This concludes Toyota's presentation of the financial results for the fiscal year ending March 2010.

Thank you very much for your attention.

Thank you.

Now we will gladly take your questions, but only two questions per person, please.

Further questions may be possible later, if time allows.

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

Thank you, Mr.

Ukawa.

(Operator Instructions).

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

Good evening.

Thank you very much for this call and congratulations on an excellent set of results for the past very challenging year.

I've got just two questions.

First of all, in President Toyoda's comments, he mentioned that, as part of your plan going forward, you're interested in stopping and consolidating excess productions facilities and I would just like you to comment further on that and any specific plans in that regard and what exactly he was referring to with those comments?

And, if possible, could you include in that answer the costs of the shutdown of NUMMI.

My second question is with regarding to marketable securities and marketable securities held in current assets rose quite sharply in the past year.

If you could please comment on your strategy there and, as part of that answer, could you please provide a breakdown of marketable securities held in fixed assets, as well, between fixed income and equities?

Thank you very much.

(interpreted) First of all, I would like to briefly explain to you the comments made by Mr.

Toyoda in today's press conference with respect to line consolidation and equipment shutdown.

More concretely speaking, this line consolidation and equipment shutdown relates to the explanation of our plan of enhancing the efficiency of the production capacity here in Japan through the effort that we refer to as line consolidation and equipment shutdown.

More concretely speaking, currently the unit production, vehicle production here in Japan is approximately 3.2 million units whereas we have around 3.9 million units in production capacity here in Japan and we are planning to implement, over four to five years, mainly by spending less time, to align our domestic production capacity to the current production volume level of around 3.2 million units and that is through the process of line consolidation and equipment shutdown.

For example, what we are considering and with the direction [we have] determined relates to Tahara Plant, where we currently have three production lines, production line number one through number three.

Production line number one has the capacity of producing 220,000 units, line two 220,000 units and production line three has the capacity of production 160,000 units.

Of that, we are going to consolidate production line number one and number two into a very flexible mixed-production line.

That is to say, for example, a production line that is capable of producing both monocoque-based vehicles and frame-based vehicles on the same line.

With respect to the cost of shutting down NUMMI, we recorded about JPY40 billion to JPY50 billion for the fiscal year ended in March 2010 and this is more-or-less an even split between the third quarter and the fourth quarter of the fiscal year.

Regarding your question on the increase in marketable securities, there was an increase by JPY1.3 trillion in marketable securities.

At the end of March last year, considering the confusion and turmoil in financial markets, we did have rather a substantial amount of liquidity on hand in the form of holding cash and cash equivalents, focusing on the higher liquidity.

However in March 2010, this year, we emphasized more the efficiency of holding those liquidity or (inaudible) and we purchased government bonds, especially short-term government bonds, which resulted in increased holdings of marketable securities.

Those marketable securities do not include equities.

Okay.

If I could just follow up, in terms of the marketable securities held in fixed assets, is there-- could you give us the breakdown of equities and fixed income?

Thank you very much.

(interpreted) Could you give us a moment so that I can look into the information in hand?

Great.

Thank you very much.

(interpreted) A more detailed breakdown between fixed income assets and equities is going to be incorporated in the 20-F that we are going to submit towards the end of June and would you be able-- would you be kind enough to wait until that-- then?

Fine, thanks.

Thank you very much.

The next question, please?

Our next question is from Sara Gardiner-Hill with Deutsche Asset Management.

Yes, hello.

Thank you very much for taking the time to talk to us today.

My questions related to your unit sales assumptions.

And firstly, on Japan, I wonder why is the Company factoring in such a steep fall in the Japanese unit sales?

And also, what are their underlying assumptions for the Japanese auto market overall?

(interpreted) First of all, I would like to explain-- start explaining by referring to our estimate of the Japanese automobile market for the current calendar year.

For the current fiscal year-- excuse me, for the current year, we estimate the market to be around 3.18 million units, which is 109% of the level that the market reached last year.

Because there had been the incentives for environmentally friendly cars given by the Japanese government, but the government subsidy measure is expected to expire in September of this year and, therefore, we expect the market to be more-or-less limited to 3.18 million units.

And, therefore, in terms of our own sales up until September, while the government subsidy measures still continue, we expect a rather high level of sales volume.

However, after the expiration of the subsidy policy of the Japanese government, we expect the volume to decrease substantially.

This may be a rather conservative way of looking at the sales prospects, and, therefore, for the calendar year 2010 currently we plan the sales volume level of around 1.5 million units.

Last year, the sales volume stood at 1.37 million units, which means the 1.5 million units is 109% of last year's level.

You are right, we are estimating the conditions to be rather harsh in the second half of this year and this may represent our conservativeness in estimation.

Just for your reference, if I may just give you the figure for the fiscal year, on the fiscal year basis, we are estimating the volume to be around 1.58 million units.

Okay.

Thank you very much for that.

(interpreted) Excuse me.

For the fiscal year ended in March 2010, it stood at 1.85 million units.

We expect the volume to be 1.35 million units in March 2011.

Okay, thank you.

I wonder, can I ask a similar question for your North American forecast, with respect to the North American auto market overall and your assumption with regard to that and also for Toyota, your unit sales assumption relative to the market?

And how much of Toyota's forecasted unit sales growth and performance relative to the market is due to safety-recall-related factors and how much to where they are in the product launch or upgrade cycle?

(interpreted) Allow me to answer by referring to the US market instead of North American market.

In terms of North American market in 2009 on the annualized basis, the market was around 10.4 million units and for calendar 2010 we are expecting the market to go back to around 11.5 million units, which is 110% of 2009's level.

And in that entire market environment we-- let me refer to Toyota's sales forecast.

In 2009 our sales volume reached 1.77 million units and for 2010 we will have to work hard, aiming at achieving over 5% growth from the level that we reached in 2009.

And could you elaborate a little bit about the second aspect of your question?

Were you asking about the potential impact of safety or quality issues on the sales volume?

Yes.

I was wondering how much you have factored in from that, within your forecast.

(interpreted) And on that point, this is not specifically about the North American market, but on the consolidated basis, the current forecast, we incorporated that there still will remain some limited impact on sales volumes, which stands at around the tune of several tens of thousands of units.

And secondly, although is not specifically classified or difficult to be classified as quality-related expenses, but we also incorporated approximately JPY80 billion as sales expenses and incentives.

Furthermore, at the moment, especially since March, we have been using incentives quite significantly in order to promote sales and, therefore, at the current level incentives are somewhat higher than the historical levels of incentives in the past.

But we do not plan to keep the level of incentives at this level and continue using such high level of incentives.

At the latest, sometime in fall or towards the end of this year, we are planning to adjust those incentive levels back to the historical level.

Thank you very much.

(interpreted) Since I have just referred to quality-related issues, since we recorded some special items or expenses relating to special items in March 2010, in order to avoid any misunderstandings, I would like to elaborate a little further on that.

The special item expenses or special items that we recorded for the fiscal year ended in March 2010 are as follows.

First of all, relating to the first question, the expenses related to the shutdown of NUMMI, which is around JPY40 billion to JPY50 billion.

And the second item relates to the expenses of us withdrawing from Formula One world's championship and the expense that related to this is around JPY20 billion, plus a few billion.

And thirdly, the quality-related expenses related to accelerator pedal, floor mats and Prius, among others, totaling around JPY100 billion.

And the fourth item relates to the fact that we changed the method of estimating cost of future field actions and expenses relating to that totaled around JPY100 billion.

So, all in all, the aggregate amount of special items stands at JPY250 billion in the fiscal year ending in March 2010.

Of that, excluding about JPY100 billion relating to accelerator pedal, floor mat and other quality-related expenses, the remaining JPY150 billion will not be recorded as special expenses in fiscal year ending in March 2011 and, therefore, if you compare the results forecast for March 2011 against the results for March 2010, this part will be the profit-boosting factor or positive factor, overall.

Furthermore, the expenses related to NUMMI shutdown is included as sales impact in the factors affecting operating income for March 2011 and also the expenses related to Formula One withdrawal and change in the methodology of estimating future field action expenses are included in the decrease in expenses in the 2011 forecast.

And furthermore, with respect to our quality-related expenses for the fiscal year 2011 forecast, we assumed about the same level of quality-related expenses as the actual level that was recorded for the fiscal year ended in March 2010 and that actual level for fiscal year 2010 included accelerator pedal, floor mat, Prius and other quality-related expenses.

And, therefore, this factor is not a profit-boosting or operating income boosting factor.

And just to emphasize that these are very special items that need to be kept in mind when you make comparisons between results for March 2010 and March 2011 expectations, I just wanted to make that additional comment at this juncture.

Thank you very much.

Next, please?

And our next question comes from [Adam Kinrich] with ING Investment Management.

Hello.

Thanks for the call.

Another question, a very precise question.

If you look at slide 19, you said there was going to be a sales volume mix, a negative factor of JPY50 billion.

I'd like you to split that out between volume and mix, because I noticed that in your forecast you've got sales volume rising.

So dare I concur that your mix effect is going to be negative and higher than JPY50 billion?

And if you could maybe put a figure on each of these factors, split it out between the volume and mix, please?

(interpreted) Concerning this JPY50 billion impact, I cannot explain to you by giving you the split between volume and mix and, therefore, allow me to explain that from a different angle, a different way.

First of all, the sales volume and mix will have the impact of positive JPY30 billion and sales expenses and incentives negative JPY80 billion and financial services business a negative JPY30 billion to JPY40 billion and others positive JPY30 billion.

And I hope you would accept that way of explaining this.

Yes, that sounds reasonable, certainly from the volume perspective.

One thing that I fail to understand is the operational-- if you look back on page seven, slide seven, last year you had a 4.3% decline in volumes and there the sales-- the volume and mix is minus JPY370 billion.

This time, we're getting a positive volume factor, it just seems a little bit strange that the volume mix is totaling minus JPY50 billion, but then you said a lot of it is due to incentives and the fin corp.

and so an underlying mix of plus JPY30 billion seems a little bit weak, I would say.

So it seems you're suffering on the downside, but when sales recover slightly you're not really picking up much in terms of profitability.

(interpreted) Please give us a moment.

You are quite right.

There is some (inaudible) gap, shall I say, between the volume on the hand and expected impact and this is especially due to the deteriorating mix in the fiscal year ended in March 2010, which produced a substantial negative impact.

In Japan we have the model called Crown, which is the luxury vehicle, and that relative proportion of the Crown decreased substantially.

And, at the same time, the weight of compact vehicles overall in the mix increased.

And, because of that, despite increasing sales volume in Japan, we did not see a parallel high contribution made to profitability.

In terms of a number, the total impact spending from the volume and also mix is shown at JPY370 billion and most of that stems from activities outside of Japan, that is to say, decrease in volume overseas.

There have been over 500,000 units decrease in the volume, which is the primary factor for this decrease.

And for the year ending in March 2010, we have 60,000 units producing JPY30 billion and you can obtain the figure per unit by doing this arithmetic.

And that, I think, represents a more normal level of these figures.

Yes, good.

Thanks.

Next, please?

And our next question comes from James Irwin with Moon Capital.

Thank you for doing the call.

Most of my questions have been answered, but I've got two followups here.

There's a pretty significant slowdown in your cost reduction efforts from JPY520 billion achieved this past year to JPY130 billion this year.

Could you indicate what the raw material headwind is within that forecast?

I'm assuming that's a big part of why it's such a lower number.

That's my first question.

And my second question is, I appreciate the detail on the special items and the JPY250 billion that you tallied for us.

Could you tell me how hit in the fourth quarter, specifically?

And then also, on that issue, could you just explain to me why you're assuming the JPY100 billion related to special recall costs in this past fiscal year in North America, why doesn't that just go to zero?

I think you mentioned your incentive levels are going to be flat with the prior year, and the prior year includes the JPY100 billion.

So I'm a little bit confused on that rationale.

Thank you.

(interpreted) Let me start by explaining the cost reduction and you are quite right in making the earlier point in your question.

We have incorporated rather significant increases in raw material prices, although we indicated JPY130 billion stemming from cost reduction efforts.

But if you exclude the raw-- this excludes the raw material expense impact.

Excluding that one, the cost reduction impact is around JPY300 billion or even more, as we have achieved in the past and we do have ability of achieving that cost reduction impact currently and that is incorporated.

However, the description here is made on the net basis, excluding those impacts of the raw materials and, therefore, any difference between the figure stated here and the normal level represents the price increase that we incorporated for raw materials.

The special items that we booked for the fourth quarter totaled around JPY150 billion and I will give you the breakdown of that.

Earlier, I cited JPY40 billion to JPY50 billion as expenses related to NUMMI shutdown and about one-half was booked for the fourth quarter.

And out of JPY100 billion in quality-related expenses of the floor mat and accelerator pedal, slightly less than one-half of that was booked for the fourth quarter.

And in addition to that, JPY100 billion in expenses due to change in methodology of estimating cost of future field actions are included and, therefore, combining all that, the total amount recorded for the fourth quarter was JPY150 billion.

And with respect to JPY100 billion in accelerator pedal and floor mat, I think you said that it may not be appropriate to use the same level as an assumption for coming up with the forecast for the next fiscal year and you may be right in making that point, but let me remind you that this is just the assumption that we used for coming up with the estimate or forecast for the next fiscal year.

It's not that there are specific cases that have been incorporated, but we just wanted to take a very conservative approach in making assumptions for the forecast for the next fiscal year and I hope you would understand in that line.

Yes, that's perfect.

Thank you very much.

I really appreciate the clarity.

Thank you.

Okay, next, please?

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

Yes and good evening and thank you for a very long day.

Regarding the finance business, the core profits you had JPY216 billion for March 2010.

Can you give us an idea of how much of the contribution came from North America?

(interpreted) You asked about the North American contribution to the total, that is to say the earnings of TMCC, had specifically.

I earlier cited the figure in excess of JPY200 billion and, of that, about 70% is the contribution from TMCC.

Okay.

Continuing on the finance business, you cited increase of about JPY80 billion in incentives and sales expenses for March 2011.

Does this include the expense from the low-cost leases and low-interest loans that you're using for your sales expenses now?

(interpreted) That figure includes only the subvention loan offered by TMS, or subvention by TMS.

Okay, so subvention is included.

Okay.

Okay, great.

Finally, you discussed in the beginning of the call, potential restructuring of the domestic production footprint.

Maybe this is a very difficult question to discuss, but Toyota has many production subsidiaries in Japan that you own maybe 50% or less of the equity, Toyota Auto Body, Kanto Auto Works, and production relationships with Daihatsu, Hino and Toyota Industries.

When considering the production footprint in Japan, do you see any radical changes in the relationships of these companies?

Will you buy 100% of Kanto Auto Works, for example?

How can we imagine Toyota in Japan in four or five years time?

(interpreted) My apologies, with respect to the production structure of body manufacturers we have contracts with them under consideration, but there is nothing that has been excited at this juncture and I hope you would accept my answer in that form.

Thank you very much.

I hope you get to go home soon.

Thank you.

Thank you, Mr.

Sanger.

Well, I'm afraid we are just out of time.

So this concludes today's conference call.

If you require further information, please contact our IR representatives in New York or London.

Thank you very much for joining us today and goodbye.

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.