豐田汽車 (TM) 2011 Q1 法說會逐字稿

Good day, everyone. I am the Premiere 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. [Tairo Takata] from Toyota, who will introduce the conference.

Hello, everyone. Welcome to the First Quarter Financial Results Conference Call for the Fiscal Year 2011. I am Tairo Takata from Public Affairs for Toyota Motor Corporation.

Today we have Mr. Takuo Sasaki, Managing Officer of Toyota Motor Corporation, and Ms. [Keiko Morita], an interpreter, with us.

The agenda for today's conference call is the following. First, Mr. Sasaki will briefly discuss the highlights of Toyota's earnings results and then Ms. Morita will take over the rest of the presentation. This will take 15 to 20 minutes.

After the presentation, you are welcome to ask questions. We expect the entire call to take about 60 minutes.

Please note that this 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 and insider trading are included on pages two and three of today's presentation materials. Both of the statements 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, a Managing Officer of Toyota Motor Corporation. Thank you for joining us today. I would like to discuss Toyota's financial results for the three months ended June 2010.

Our consolidated vehicle sales reached 1.882 million vehicles, up 419,000 compared to the same period last year. In Japan vehicle sales improved from last year, thanks to strong sales of hybrids and the extension of the government's eco-car subsidies. In North America, due to a stronger market starting last year, vehicle sales have increased. In Asia, mainly in Thailand and Indonesia, there has been a large improvement in vehicle sales over last year. And in other regions, particularly in the Middle East, vehicle sales also increased significantly.

Our consolidated financial results for the first quarter are shown in slide six. Net revenues were JPY4,871.8 billion. Operating income was JPY211.6 billion. Pretax income was JPY263.0 billion and net income was JPY190.4 billion. As you can see this is an increase in sales and profit compared to last year.

Now I'd like to hand the rest of this presentation over to Ms. Morita.

I would like to explain the major factors impacting our net income. Compared to last year, our net income increased by JPY268.2 billion to JPY190.4 billion. The left side of slide seven shows the major factors that impacted our operating income. As you can see, due to an increase in vehicle sales and the large decrease in the costs related to loan losses and residual losses in Financial Services, operating income improved substantially on last year.

As slide eight indicates, our quarterly operating income has been generally recovering after bottoming out in fourth quarter of fiscal year 2009, despite the continuing trend of a stronger yen.

Next, please let me explain our operating income by region. In Japan, the negative impact of a stronger yen on export profits was more than offset by the increased volume of exports and cost reduction activities. In North America, operating income significantly increased, due to increased vehicle sales and contributions from Financial Services.

In Asia, where we had stronger sales in Thailand and other countries, we recorded our largest quarterly operating income to date. Also, in Central and South America, Oceania and Africa regions, we maintained a high level of earnings.

Next, let me discuss our operating income from the Financial Services business. Operating income, excluding interest rate valuation gains or losses, increased by JPY74.9 billion to JPY109.5 billion. This was, in part, due to higher-than-expected prices of second-hand vehicles and a large reduction in costs related to loan losses and residual losses as provisions were reversed in the United States. Our strengthened vehicle marketing program also increased the lending balance. We aim to continue to improve earnings while applying adequate risk controls in the Financial Services business.

Equity in earnings of affiliated companies increased by JPY66.4 billion to JPY70.0 billion. This is due to the large improvement in earnings of affiliated companies in Japan and the continuing good performance of affiliated companies in China.

As summarized on slide 12, our unconsolidated financial results for the first quarter were net revenues of JPY2,136.4 billion, operating loss of JPY63.8 billion, ordinary income of JPY163.1 billion and net income of JPY180.3 billion.

For your reference, major factors affecting our unconsolidated net income are as shown on the next slide.

Next, I'd like to discuss our outlook for the full fiscal year, ending March 2011. In May, we announced a consolidated vehicle sales forecast of 7.29 million vehicles. We are now revising this forecast upward by 90,000 vehicles, to 7.38 million vehicles. This reflects the improvement in our sales in all regions but Europe.

In Japan, we expect weaker demand due to the expiration of eco-car subsidies in autumn of this year. However, we expect an increase of 50,000 vehicles for the full fiscal year in consideration of our recently received orders.

We've revised our sales outlook in North America in reflection of our recent sales performance, and in Asia and other regions following steady recovery of the market. On the other hand, we expect sales to decrease in Europe by 90,000 vehicles due to a prolonged weakness of the market under the spreading credit concerns triggered by the sovereign debt crisis in Greece.

In regard to our consolidated revenue and earnings forecast, we adopt the assumptions of JPY90 to the $1 and JPY112 to the EUR1, on average, for the full year. Based on these assumptions, we revise our consolidated revenue and earnings forecast as follows. Net revenues of JPY19,500 billion, operating income of JPY330 billion, pretax income of JPY380 billion and net income of JPY340 billion.

Slide 17 shows the major factors impacting our consolidated operating income forecast. We now expect operating income to increase from initial forecasts by JPY50.0 billion to JPY330.0 billion. We expect an increase in vehicle sales, improved model mix, and increased earnings from Financial Services to more than offset the negative impact from revised foreign exchange rate assumptions, particularly concerning the yen against the euro.

We note a lack of visibility concerning currency movements and the possible backlash in demand after the end of the demand stimulus programs in Japan, which requires our close monitoring.

Nevertheless, we will do our utmost to reach as many customers with as many vehicles as possible. We will continue our activities for fixed and variable cost reduction as previously promoted under the emergency profit improvement activities.

Through the activities and the further improvement of our earnings structures, we will maximize our efforts to exceed our forecasts.

This concludes Toyota's presentation of the financial results for three months ended June 2010. Thank you very much for your attention.

Thank you, Ms. Morita. Now we will gladly take your questions. We'd like to limit the number of your questions to two per caller. Our conference call operator will explain how to connect your line.

Thank you, Mr. Takata. (Operator Instructions). Our first question today comes from Steve Usher from Japaninvest.

Thank you very much for the call. Two questions for you. First of all, in Q1 your SG&A to sales expenses were about 10.6%, which is down from 12.5% in Q1 last year and I was wondering if you expect to maintain that fairly low level of SG&A to sales ratio and, if not, where do you expect to see the increases and what can we consider or what should we consider as an appropriate ratio for the full year?

My second question relates to your new forecast and on slide 19 you are projecting your first half consolidated performance and you're looking, apparently, for a 73% decline, 72.5% decline in operating income quarter on quarter and I was wondering what you see as the key issues which reduce your operating profits in Q2 versus Q1? Thank you very much.

(interpreted) My response to your first question. The question was related to the SG&A to sales ratio and, compared with the previous year, during the first quarter SG&A to sales ratio was very low. And compared with the levels that we anticipate in the full year basis during the first quarter, the expenses turned out to be very low.

And we expect this ratio to be a bit higher than 10.6%, especially in the second quarter and beyond, relating to sales expenses, because, partly due to the expiration of eco-car subsidies in Japan, I think we need to use a little more marketing spending going forward. And, therefore, we expect SG&A to sales ratio to increase somewhat. But we would like to keep a very low level going forward, as well.

Now your second question was related to the difference in figures for the first quarter compared with the second quarter, the second quarter being lower than or it's slower than the first quarter. And in terms of our analysis of that, during the first quarter there were some temporary factors, positive factors, stemming from Financial Services' business, totaling around JPY60 billion.

And this temporary factor relates to the loan-loss provision and reversal from that loan-loss provision. In the fourth quarter of the previous fiscal year, that is to say between January and March, when we prepared the forecast for the current fiscal year, we assumed very low prices for used cars, which is used for the assumption for loan-loss provisioning.

However, as the first quarter has ended, the used car price did not decrease, but rather we were able to maintain a rather high level of used car prices, and, as a result of that, the loan-losses and also the residual losses turned out to be much lower. And, therefore, we reversed from the provision for loan losses and residual losses. And that part relates to the temporary positive factor that I mentioned earlier.

In addition to that, with respect to expenses in general, especially relating to fixed expenses, during the first quarter they remained very low. However, we expect expenses to increase or to turn out to be a bit higher in the second quarter and beyond because partly -- this is partly related to depreciation expenses.

During the first quarter new investments have been kept very low, but in the second quarter and beyond, if investments are conducted -- CapEx are conducted according to the schedule, that should result in some increase in expenses in this area. And, therefore, we expect the depreciation expenses to be a few tens of billions of yen higher in the second quarter and beyond.

Another factor relates to the impact of FX rates. Between first quarter and second quarter, the difference is related to that. That is to say, for the second quarter we used JPY88 to the dollar level as the assumption for the dollar and JPY100 to the euro exchange rate. And the negative impact stemming from that different assumption used for FX rate amounts to JPY50 billion.

And in addition to that, we expect to use more marketing expenses and incentives in the second quarter and that factor is also incorporated in the forecast announced earlier, totaling JPY20 billion.

And, therefore, while compared with the first quarter we expect the volume to increase by 50,000 units in the second quarter, that will boost the profits by JPY25 billion, but because of the negative factors that will depress the overall operating profit, as I mentioned earlier, we expect the operating profit in the second quarter to be a bit less than JPY50 billion.

Of course, we do not consider that to be acceptable. As I mentioned earlier during the first quarter fixed expenses remained very low. We'll make every effort to keep fixed expenses at low levels in the second quarter and beyond, as well, and we will try to make as efficient use as possible for marketing expenses and incentives so that they can be reduced as much as possible. Those efforts will be continued is the second quarter.

Thank you very much. Just a quick follow up on the loan losses. Could you give us the loan-loss ratio for Q1?

(interpreted) The overall loan-loss ratio for Toyota Financial Services Group as a whole stood at 0.41%.

Do you also have the TMCC figure?

(interpreted) I was anticipating that question, as well. The loan-loss ratio at TMCC was 0.53%, 0.53%.

Great. Well, thank you very much. I really appreciate the detailed answer.

Our next question comes from Stuart Hosansky from Vanguard. Please go ahead.

Good day and thank you very much. My question is, on the non-consolidated entity where you produce the financial statements, do you have the information for the quarter-ending cash and investments and also the debt?

Are you asking about the non-consolidated financial statements and your question related to cash on hand and debt?

Yes. You have your consolidated financial statement in your release. You have the information on the cash and short-term investments and also the debt level. I'm curious -- I'm interested to know for the non-consolidated entity, where you do publish financial statements later on, do you have those same figures.

(interpreted) Let me confirm your question first. On the consolidated financial statement, there is a figure JPY2,396.4 billion and that's one of the figures for which you would like to find the non-consolidated figure, right? It includes both time deposits and securities, marketable securities.

That is correct.

(interpreted) Please give us a moment.

That's no problem. Thank you very much.

(interpreted) Let me answer your question in the following manner, because I understood that you're interested in the availability of funds and, excluding Financial Services' business on the consolidated basis, we have cash, cash equivalents and marketable securities, primarily government bonds, and aggregated sum of that is described as funds available.

On the consolidated basis, the total funds available is around JPY5 trillion on the gross basis and on the non-consolidated basis, the equivalent figure is around JPY3.4 trillion.

Great. Thank you.

(interpreted) Did I answer your question? I gave the figure of JPY5 trillion as the consolidated total funds available, which includes cash, cash equivalents and marketable securities, primarily government bonds, and the non-consolidated figure is JPY3.4 trillion.

Okay, next question please.

Our next question comes from James Irwin from Moon Capital. Please go ahead.

Hello. Can you hear me okay?

Yes, we can.

Hi. Thank you for doing the call. Yes, first -- two questions. First, on the equity income line, JPY70 billion, very strong number, not only the year-to-year comp, JPY3.6 billion, but JPY42 billion in the fourth quarter.

So just some clarification on that China component. How much was China? Are you consolidating China on a three-month lag basis? I just wanted to clarify that.

And then finally, there was quite a bit of talk in July about a lower MSRP on the Corolla EX and some discounting. So I'm trying to get your latest thoughts on the outlook for your China business, given what appears to be a more difficult pricing environment. That's my first question.

(interpreted) First, on the JPY70 billion in equity income, the portion relating to China is JPY28 billion and your point is quite correct. That is to say, China is consolidated with a three-month lag and, therefore, the figure included as the China portion is that that actually occurred between January and March.

Your next question, Corolla EX, but before I give you the specific answer relating to Corolla, let me describe the conditions relating to the sales volume in China. Last year, we sold 700,000 units in China and this year we are planning to sell 800,000 units, so even more. And the current actual sales volume is on track with that plan.

In that environment, currently we are planning to introduce new models of Prado, the [el Prado], so that we can strengthen our model -- brand appeal, product appeal. With respect to Corolla and other smaller vehicles, too, we are in a very competitive situation, especially in terms of pricing. Therefore, it may become necessary for us to lower prices in view of the competition in those -- involving those models.

But to address that, we will continue with serious efforts of reducing cost to address the required price reduction for smaller vehicles. But at the same time, as I mentioned at the outset, those very strong models, the new models like Prado, [el Fuego], Camry and Highlander that are selling very well, we will make very strong efforts to sell more of those vehicles so that we can earn good profits in our China system.

That's very helpful, thank you. And then if I could, just on the second question or second issue, I was looking back at your original forecast for this year on operating profit, the JPY280 billion prior number. And I was just trying to understand in a little more detail the increase in expenses that you now cite as a negative factor, JPY40 billion, as one negative offset to your much higher marketing effort number.

Could you elaborate a little bit more on the cost reduction efforts this year and maybe where you're now seeing a little bit of headwinds in expenses? I'm just trying to get a little bit of clarification on that. And that is it for me. Thank you.

(interpreted) First, with respect to the cost reduction efforts, we did not revise the benefits or effect coming from cost reduction efforts from the initial forecast, when the total figure was JPY280 billion. It's only three months into the new fiscal year and, therefore, that's the major reason why we did not revise the effects of cost reduction efforts.

But, going forward, we would like to make sure that cost reduction is one of the major factors contributing to better earnings and, therefore, to make sure that it produces even more positive effects as the various activities are currently pursued.

And we also increased -- increases in expenses from the initial forecast by JPY40 billion and this is mainly due to our assumption that there may be increases in quality-related expenses. And considering that, we raised the -- increased expenses by JPY40 billion. That doesn't mean that expenses will increase without any question, going forward. This is just the assumption that we used in coming up with the forecast, the revised forecast.

And compared with the previous year's level, we are anticipating several hundred -- several tens of billions of yen reduction in the forecast and we are trying to make efforts to minimize that reduction market.

With respect to expenses in general, in the first quarter expenses remained very low and in order to make sure that in the second quarter and beyond expenses, again, also remain low to offset those (inaudible) factors, every efforts are being made through various activities.

That's great. Thank you very much.

Next, please.

Your next question comes from Kurt Sanger from Deutsche Bank. Please go ahead.

Sasaki-san, good evening. Thank you for the call. Two questions for me.

The first one is on the North America segment number, JPY109 billion. I want to understand the breakdown of that. Is that mostly or near 100% finance profit? Earlier in the Japan call, you mentioned in the OP variance, minus JPY56.4 billion others. Most of that was warranty. I'm assuming that most of that was taken in the North America segment. So on those two points, can you confirm that Finance was nearly all of the North American profit and that the warranty was booked in the North America segment? Thank you.

(interpreted) In response to your first question, out of JPY109 billion, JPY16 billion is from Automotive business and JPY93 billion is from Financial Services business.

About your second question, and this relates to operating income of a different geographical region, there is an item called other and I earlier mentioned that that relates to quality-related expenses and that is included in Japan segment, actually.

Okay, great. Thank you. My second question is a continuation of China, a discussion of your Chinese business. Can you give us an update on Lexus in China? Last year sales were roughly flat. This year, your German competitors seem to be having a fantastic time and making lots and lots of money. Lexus doesn't seem to be enjoying the same success now, but maybe I'm wrong. Can you give us an update, please?

(interpreted) About Lexus, between January and June, the sales volume increased by two fold, or, to be more exact, 1.9 fold compared with the level last year.

Okay, great. So that's maybe 22,000 units or so, I'm going to guess?

(interpreted) Maybe a bit larger, but that's about right.

Okay. Are you enjoying the success you think you should be with Lexus in China or do you feel you need to do something to change the strategy?

(interpreted) Well, reviewing strategy about China with Lexus, well, thus far, we have been steadfastly increasing the sales volume in China according to the plan and we are planning to increase the volume gradually bit by bit and we do not intend to drastically grow the Lexus volume in China. That is not in our plan at the moment.

Rather than focusing specifically on Lexus alone, what we are trying to do is to expand the production capacity locally in China so that we can produce and also sell SUV vehicles such as RAV4, among others, and those are the types of vehicles whose volume we would like to increase significantly.

Okay, thanks, Sasaki-san. I always appreciate your clarity.

Our next question comes from John Buckland from MF Global. Please go ahead.

Thank you for taking my question. The only -- in your forecast, the only region in which you've actually downgraded is Europe. Perhaps the previous estimate was too optimistic, but I wondered whether you could tell us what your new assumptions for calendar year 2010 and calendar year 2011. It appears as thought demand in the first half of this year has been better than expected. In fact, a number of European car makers have actually been upgrading their forecasts for Europe. Perhaps you could talk about that.

Also, are there any particular markets where demand is better or demand is worse than you previously assumed? Thank you.

(interpreted) With respect to Europe and especially in the western part of Europe, in Germany, the market itself has decreased significantly. But more than the impact stemming from that, other, especially European-based manufacturers, sometimes introduce new models or simply try to shore up their own sales volume in their own countries.

They offer substantial price reductions or discounts, resulting in significant increase in price competition in that part of Europe. And we are trying to counter that by introducing new products or strengthened products through minor model changes or introduction of special editions. And through these means, we are trying to recover the sales volume.

And in terms of calendar year 2010, well, already have six months have passed and thus far, the market has been more or less on par with that in the previous year. So on the full year basis, it seems that the business there will be more or less on par with the last year or we hope that it can be a little better than last year.

Now in terms of the areas where we can be hopeful, the area where some recovery in sales volume is observable is Russia. So Russia and Eastern European part of Europe are the areas where we can be a bit hopeful.

Okay. Do you have any sort of thoughts about 2011? Because your full year, obviously, spans both calendar year 2010 and 2011.

(interpreted) Sorry, I don't have any information on hand with respect to calendar 2011.

Just another question on, obviously, your -- you have both what you might call mass market cars and also luxury cars. And there is a big contrast between what the European car makers say about price pressure mix and demand for these two different segments. Is it true to say that you're also experiencing lower mix, lower pricing for mass market cars, but for Lexus potentially, the pricing is better, volume is stronger, mix is stronger? Is there signs that this polarization in the market is getting stronger?

(interpreted) You are quite right. Price competition is very fierce in smaller vehicles and that's a hard fact. Now in the case of Lexus or higher-end vehicles, there are conditions unique to Toyota which I must share with you. That is to say, we are not locally producing those high-end cars, but rather they're exported from Japan. And given the current levels of exchange rate of euro, that really means very tough profitability conditions. So long as there is any potential, we try to secure good pricing on those high-end vehicles so that we can be profitable in those [businesses].

Do you -- you surmise, therefore, that the -- some of the premium brands, the better pricing is a benefit of the weaker euro?

(interpreted) I mean, what I earlier said is that we would like to increase prices wherever that is possible, but I did not say that pricing position is getting better because of the weaker euro.

Okay, thank you.

Okay. Next is the final question. Final question, please.

And our final question comes from Justin Atkinson from Alliance Trust. Please go ahead.

Hi. Thank you very much for the detailed presentation and Q&A. Just one question and that is, assuming that Toyota achieves the forecast net income of JPY340 billion for this year, how much should shareholders expect the dividends to be?

(interpreted) Well, we have not yet decided the dividend for the current fiscal year. And as we always say, whenever I receive questions relating to dividends, we consider dividends to be a very important component of our returns -- returning value to shareholders.

And from the viewpoint of securing good relationship based upon trust over a long term between shareholders and Toyota, we have been trying to pay out dividends consistently and continuously and that's what we have done, thus far, in the past.

For the dividend for the current fiscal year, we will take into overall consideration such factors as performance of the fiscal year that will have ended by then, the capital investments required and also cash on hand. And on that basis, we will try very hard trying to live up to the expectations of shareholders in general.

Okay. Thank you very much.

Thank you.

Thank you, Mr. Sasaki. So this concludes today's conference call. If you require further information, please contact your IR representative in New York and London. Thank you very much for joining us today. Goodbye.

Thank you very much. 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.