豐田汽車 (TM) 2011 Q2 法說會逐字稿

Hello, everyone.

Welcome to the second quarter financial results conference call for the fiscal year 2011.

I'm Amiko Tomita from the Public Affairs Division of Toyota Motor Corporation.

Today we have Mr.

Takuo Sasaki, Managing Officer of Toyota Motor Corporation, and Ms.

Morita, an interpreter, with us.

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

First, Mr.

Sasaki will briefly discuss the highlights of Toyota's earnings results and 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 conference call to last 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.

Complete cautionary statements concerning forward-looking statements and insider trading are included on pages two and three of today's presentation material.

Both of the statements can be downloaded from 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 for Toyota Motor Corporation.

Thank you for joining us today.

I would like to discuss Toyota's financial results for the first half of the fiscal year ending March 2011.

Our consolidated vehicle sales for the first half increased by 585,000 vehicles to 3,715,000 vehicles year on year.

In Japan, our vehicle sales grew strongly from last year, driven by our hybrid models, with the support of the government's eco-car subsidies.

In North America, in addition to the Camry, the Sienna and 4Runner, which were remodeled in 2009, have been leading the increase of vehicle sales.

In Asia, vehicle sales continued to be strong in Thailand and Indonesia, in particular, and we recorded the highest vehicle sales to date.

In other regions, vehicle sales grew substantially, mainly in the Middle East.

In the second quarter, Japan, Asia and the other region drove the year-on-year increase in our vehicle sales.

Among all, Prius has been successful and its cumulative sales exceeded 2 million units as of the end of September.

Our consolidated financial performance for the first half of the year resulted in a net revenue of JPY9,678.4 billion, operating income of JPY323.1 billion, pretax income of JPY392 billion and net income of JPY289.1billion.

This represents an increase in both sales and profit compared to the same period last year.

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

Morita, our interpreter.

Next, using slide seven, I would like to explain the major factors for the increase in our net income.

Compared with last year, our net income increased by JPY345.1 billion to JPY289.1 billion.

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

As you can see, operating income improved significantly, despite the substantial negative impact from the strong yen.

This was due, first, to our marketing efforts, such as improved sales by 585,000 vehicles and decreased loan-loss and residual-loss-related expenses in our financial services, and secondly, to our cost-reduction efforts, such as our VA activities in close collaborations with our suppliers.

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

We resulted in net revenue of JPY4,806.7 billion, operating income of JPY111.5 billion, pretax income of JPY129.1 billion and net income of JPY98.7 billion.

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

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

As you can see, operating income improved across all regions.

In Japan, despite declining export profit as a result of the yen's radical appreciation, operating loss improved thanks to strong domestic sales and cost-reduction effects.

In North America, operating income improved significantly, thanks to the contribution from strong performance of financial services.

In Asia, where we had strong sales of IMV, especially in Thailand, we recorded our largest half-year operating income in history.

In other regions, namely Central and Latin America, Oceania and Africa, we continued to post a high level of operating income in countries such as Brazil and South Africa.

The regional breakdown of our consolidated operating income for the second quarter is as shown on slide 11.

Next, let me discuss our operating income for the financial services.

Operating income, excluding interest rate swap valuation gains and losses, increased by JPY76.6 billion to JPY184.1 billion.

This was thanks to our better-than-expected used car pricing that resulted in a decrease in our loan-loss and residual-loss-related expenses, partially through reversal of the relevant provisions, as well as an increase in our lending balance, following reinforcement of our financing programs.

Going forward, we plan to upgrade earnings from financial services while applying adequate risk controls.

Equity in earnings of affiliated companies was JPY133.8 billion, up JPY189.3 billion from the same period last year.

This was due to increased earnings of affiliated companies in Japan and continued contribution from China.

Please note that our results for the second quarter of last fiscal year included the valuation losses on our shareholding of certain affiliated companies.

Slide 14 summarizes our unconsolidated financial results for the first half of the year.

We resulted in net revenue of JPY4,356.4 billion, operating loss of JPY149.4 billion, ordinary income of JPY190.8 billion and net income of JPY201.0 billion.

Please look at slide 15 on shareholder return.

With regard to our interim dividend, we will pay JPY20 per share.

We continue to anticipate a very challenging business environment with yen's appreciation and precarious markets.

However, we believe that dividend payment is the most important means to return value to shareholders.

We will strive to pay dividend continuously and treasure long-term and trusted relationship with our shareholders.

We intend to maintain adequate dividend payment while ensuring our long-term financial stability and considering our financial prospects in investment plans.

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

We raised our consolidated vehicle sales plan to 7.41 million vehicles, up 30,000 vehicles from 7.38 million vehicles, which we announced in August.

This basically reflects improved sales in Asia.

In terms of regional breakdown, in Japan, our expectation has increased by 20,000 vehicles.

Following the expiration of eco-car subsidies, we will make efforts to stimulate demand further through utilization of the eco-car tax break, which remains in place, and through sales promotion as we launched special edition models.

In North America, we have reduced our outlook by 80,000 vehicles in view of slowdown of the market recovery.

In Asia, we expect a further improvement of sales by 80,000 vehicles, reflecting the continuing popularity of IMV.

With regard to our consolidated revenue and earning forecasts, we adopt the assumption of JPY85 to $1 and JPY112 to the EUR1, on average, for the full year, given JPY82 to $1 exchange rate assumption for the second half of the year, reflecting the prevailing market rate.

Based on those assumptions, we revise our forecast, as follows.

Net revenue, JPY19 trillion; operating income, JPY380 billion; pretax income, JPY410 billion and net income JPY350 billion.

Please see slide 19, summarizing the main factors behind our revision of consolidated operating income forecast.

The negative impact anticipated from the recent radical yen appreciation amounts to JPY120 billion.

On the other hand, as an outcome of our accelerated marketing efforts and further cost reduction efforts, combined with decreased depreciation following CapEx reduction, we plan to achieve profit improvement of JPY170 billion in total, this offsetting the strong yen's negative impact, our operating income forecast is now JPY380 billion, up JPY50 billion from our previous forecast.

For your information, please refer to slide 20 for the comparison between our revised operating income forecast and the previous year's result.

Slide 21 summarizes our full-year forecasts for CapEx, depreciation, and research and development expenses.

With regard to CapEx, while continuing to invest proactively in our prioritized areas, such as emerging markets, we will accelerate our efficiency improvement activities, including revision of the timing of our investment projects.

As a result, we revise our forecast as shown.

We also revise our forecast for depreciation expenses accordingly.

As for R&D expenses, our plan remains unchanged.

We will maintain our investments in environmental technologies, as well as advanced technologies, including safety technologies.

In conclusion, we currently find ourselves in a very tough business environment, characterized by the precipitous appreciation of the yen, the risk of slowdown in demand recovery in the United States and Europe, and falling demand, post-eco-car subsidies, in Japan.

Nevertheless, we will do our utmost in order to deliver as many vehicles as possible to our customers, while continuing to reinforce our profit structure through further pursuit of fixed-cost and variable-cost-reduction activities.

This concludes my presentation.

Thank you very much for your kind attention.

Thank you.

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

Further questions might be possible later, if time allows.

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

Thank you, Ms.

Tomita.

(Operator Instructions).

And our first question comes from Sara Gardiner-Hill with Deutsche Asset Management.

Yes, and I thank you very much for taking this call.

My question relates to the fall, the forecasted fall, in income, operating income, between the first half and the second half and I wonder, apart from currency, what are the main factors behind the forecasted fall?

(interpreted) You asked about the reduction from first half to second half, right?

Not the first quarter and second quarter?

No, no.

When we look at the Company's forecast, implied forecast, for the second half that implies quite a bit reduction in operating income or-- and I wonder if the Company can split that down by the different factors.

Currency would clearly be one very important factor, but there would also be other negatives, I guess.

(interpreted) True.

The actual operating income for the first half was JPY323.1 billion and our forecast for the full year was JPY380 billion, so subtracting one number from the other, you arrive at JPY56.9 billion.

And in terms of the breakdown of different factors, the exchange rate -- that is to say, appreciation of the yen -- subtracts, according to our forecast, JPY130 billion from the operating profit.

Another factor relates to financial services business.

In the first half, some temporary factors were-- or gains were included, especially in the first quarter.

That is to say, the reversal from the loan-loss provision, among other factors.

And, therefore, compared with the first half we are assuming that for financial services the operating income is likely to decrease by around JPY70 billion in the second half.

There is another factor that relates to the automobile business operations.

Compared with the first half, we are forecasting a sales volume reduction of around 10,000 units.

In the first half, we did have eco-car subsidies in Japan still impact, but with that having expired, we expect some sales expenses to be used in the second half and, therefore, we are expecting the operating income to decrease by JPY70 billion-- between JPY70 billion and JPY80 billion, due to those sales-related factors.

So, due to these two factors, exchange-- due to these three factors, exchange rate, financial services and sales-related factors, compared with the first half, the operating income in the second half is likely to appear depressed somewhat-- significantly.

Thank you very much.

Next, please.

(Operator Instructions).

Our next question comes from Steve Usher, with JI Asia.

Good evening and thank you very much for this call.

It's been helpful.

Two quick questions, if I might.

First of all, I'd like to follow up on the first question.

Your volume-- or your marketing contribution to operating profits in the first half was a positive JPY570 billion.

In the second half you're projecting a minus-JPY290 billion.

And I was wondering if you could break that down between volume mix, incentives, that sort of thing, because just a simple calculation of the changes in volume, as opposed to the marketing impact, gives somewhat confusing numbers?

So I'm looking to a more detailed breakdown of that factor.

My second is more strategic.

In the second quarter, you achieved an operating profit margin of 4.3%.

Historically, the peak, I believe, was about 9.6% in March 2004 and I'm just wondering what kind of trajectory we can expect coming out of the very difficult past two years?

What kind of operating profit margin do you think you can return to over the next two to three years?

What would be a reasonable expectation?

What would be a reasonable target?

Thank you very much.

(interpreted) Allow me to answer your second question first.

As you already know, our operations has been extremely hit by the very strong yen, which hovers at JPY80 to $1 level currently and we are suffering from that, significantly.

If we assume that the dollar or yen remains at around JPY80 to $1 level into the future, the environment remains extremely tough.

Now, what do I mean by environment being tough?

How long and to what extent can we continue manufacturing and production and making things here in Japan is the very difficult aspect that we consider, assuming the continuation of the JPY80 to $1 level.

Having said that, what we are saying is not that we would shift production bases-- the bases of our operation outside of Japan if the dollar remains at around JPY80 level into the future.

So currently, we are striving very hard to make sure that we can be comfortable, even with the exchange rate of JPY80.

So internally, we are making serious efforts in that level.

And if that continues over medium and long term at that level, we have to come up with the vehicles that will allow us to be profitable by exporting those vehicles, even at the dollar being JPY80, but still, at that level, if the continuation of the production in Japan remains extremely difficult, then we will simply be compelled to consider other alternatives, as well.

But the assumptions themselves are extremely difficult and, therefore, what the likely scenario for operating profit margin in two, three years time, depends a great deal on assumptions we set and also the continuation of those stories.

However, one thing that I can share with you is that naturally we are making very serious efforts pursuing thorough cost reduction or trying to improve productivity in plant operations, among others, and, therefore, certainly the situation will be better than it is today.

But what is the degree of that improvement is something that I find it very difficult to describe in terms of a quantitative expression.

And going back to your first question, that is to say with respect to the negative JPY280 or JPY290 billion in the second half, you are comparing second half against last year's second half.

Is that right?

No, I'm comparing the second half against this year's first half.

(interpreted) When you refer to positive JPY480 billion contribution from marketing, you are referring to the first half of the previous fiscal year?

Earlier, in response to one of the questions, I referred to the volume and also sales activities comparing the first half against the second half and I referred to 10,000 units in terms of the volume reduction and also the sales and mix income-- mix of the vehicles.

And combining all those factors, I mentioned that the operating income will decrease by JPY70 billion or JPY80 billion.

And are you asking about the breakdown of that?

Well, yes.

What I'm saying is on page seven, the marketing effort contribution was JPY570 billion.

On page 20, for the full year, you're looking for JPY280 billion.

So JPY570 billion in the first half, in order to get to JPY280 billion for the full year, then that would mean a minus-JPY290 billion in the second half.

What I'm simply looking for is a breakdown of volume, mix, incentives for the first half number and for the full-year number.

(interpreted) In terms of the full year, I mentioned that there was an increase of JPY280 billion, but for the first half, the increase was JPY570 billion and, therefore, you said the second half must have been negative-JPY290 billion.

So you are comparing second half against second half in describing this minus-JPY290 billion and if I may just give you the breakdown of that impact comparing the second half against the previous year's second half, the volume decrease was 400,000 units, which means JPY200 billion reduction.

And salary expenses, including incentives, represents the profit reduction of JPY20 billion.

And the product mix and other factors subtracting JPY60 billion from the operating income.

And financial services subtracting from the operating income about JPY10 billion.

If I may just repeat myself, in the first half, we had increase of JPY570 billion.

This is an increase compared with the previous year's first half.

Now, in the second half, compared with the second half of the previous fiscal year, the operating income decreased by JPY290 billion.

So combining them, on the full-year basis, we'll see an increase in operating income by JPY280 billion.

Great.

Thank you very much.

Now could I also just have that same breakdown, volume, selling expenses, mix and finance operation for the first half?

Yes, for the first half, please?

(interpreted) Volume increased by 580,000, representing an operating income increase of JPY290 billion.

And sales expenses, including incentives, subtracting JPY80 billion from the operating income.

And model mix and other factors, added, contributed positively, to the operating income by JPY120 billion.

And pricing revisions and others contributed positively by JPY150 billion to operating income.

And financial services contributing positive JPY90 billion.

Great.

Thank you very much.

And I apologize for the confusion.

(interpreted) My pleasure.

Thank you very much for your question.

And our next question will come from Steve Usher, with JI Asia.

Okay.

Well, thank you for the second opportunity.

I was just wondering, could you give us a forecast for your equity method income for the full year?

And secondly, can you give us a breakdown-- on page 20, you have decreases in expenses for the full year, JPY160 billion, positive, and I was wondering if you could give us a breakdown there -- labor costs and that sort of thing.

Thank you.

(interpreted) Responding to your first question, that is to say the forecast on the full-year basis of equity method income, we are expecting JPY210 billion in equity method income.

And with respect to the positive JPY160 billion contribution through decreasing expenses, et cetera, the most important factor relates to the decrease in depreciation expenses stemming from our efforts to curtail CapEx, in general.

And this added JPY180 billion increase by that, to the operating income.

At the same time, research and development expenses increased by JPY30 billion, while general administrative expenses decreased, contributing JPY10 billion positively to the operating income and, therefore, netting them out, negative JPY20 billion.

Okay, great.

Thank you.

And if I could just follow up on the equity method, could you give a breakdown between your China operations and the domestic affiliates?

(interpreted) Starting with China for the first-half-year basis, we expect the equity method income to be around JPY46 billion and for the full year around JPY75 billion.

Did I answer your question?

Yes, and then the domestic affiliates?

(interpreted) Please allow me a minute to look into the figures.

For the first-half figure, the Japanese affiliates contributed around JPY70 billion.

China, as I mentioned earlier, JPY45 billion and the remainder relates to the equity method income from other regions.

And I would like to apologize that I do not have the breakdown figure with me right now excluding Japan or China and simply giving you the breakdown for other regions.

(multiple speakers)

Okay, great.

That's--

(interpreted) China, other regions.

Okay.

Well, thank you very much.

This has been very helpful.

I don't know if there's anybody else in the queue, but if I could just follow up with one more quick question, could you give me an idea of the loan-loss ratio for Q2 on the finance operations?

(interpreted) For the entire financial services companies defined, the default rate or loan-loss ratio is 0.44%.

Excellent.

Thank you very much.

I appreciate all of the help and guidance.

And our next question comes from Justin Atkinson with Alliance Trust.

Hi there.

Hello?

Hi.

Thanks very much for the presentation materials and the helpful presentation.

It's been very useful.

Just looking out a little bit further, beyond next year, if we can, what are the targets for market share in North America and China?

And if you could sort of give a little bit of color as to what those market share targets are going to be driven by, that would be very helpful.

(interpreted) The target for next year is something that we are currently discussing extensively internally and, therefore, I would like to apologize for the fact that I won't be able to respond to your question by sharing with you specific figures.

For North America, in the earlier part of next fiscal year, probably in the first half, we're expecting model changes of Camry and some other models.

Camry is now at the last part end of its model life.

So compared with that, we are expecting substantially stronger competitiveness displayed by Camry after model change.

And, as for China, for the current fiscal year, we are trying very hard to sell more than 800,000 units and for next year, of course, we will try to reach above that level.

Prado and other models that has gone remodeling this year are doing very well and our four door have been introduced to the Chinese market, as well.

Thank you very much.

I appreciate that.

It's not an easy one to answer, looking out that far, but that's very helpful color.

Thank you.

(Operator Instructions).

And our next question comes from Sara Gardiner-Hill with Deutsche Asset Management.

Hello.

Thank you very much for giving me another opportunity to ask questions.

I wonder, given the Company's earnings forecasts, what dividend level would you deem appropriate for the full year, given both the need to keep shareholders happy while maintaining your financial stability?

(interpreted) You ask a very difficult question.

For the current fiscal year, we have decided to pay JPY20 as the interim dividend.

That is, in a sense, the temporary payment, so to speak, and, honestly speaking, the only thing I can say at this juncture is we are having a very hard time deciding what sort of level we can propose when the fiscal year ends.

However, I can state one thing.

That is to say, before we reported losses, we stated that we would aim that we would aim at paying stable dividend, aiming at payout ratio of 30%.

Under the current situation, we are not thinking of not paying anything above the 30% in payout ratio, that is to say, using 30% as a ceiling for the current fiscal year and not paying anything above that, that is not in our thinking.

So please be reassured about that.

At any rate, we will try very hard to improve our earnings so that we can live up to your expectations and work hard to that end, going forward.

Okay, thank you very much.

That's very helpful.

May I follow up with two other quick questions?

In the first half, you said you took reversals on loan-loss provisions in the financial segment.

I wonder, how large were they?

And the other question, if you could give me your currency sensitivities, as they stand now, for the full year, both to the yen to the dollar and yen to the euro and also if there are any other ones that are important?

(interpreted) On the full-year basis, there has been about JPY50 billion in reversal from loan-loss reserve.

And moving on to the sensitivity, starting with the US dollar, a change by 1 yen means JPY30 billion up or down, but, very delicately, it's a bit shy from JPY30 billion, but, let's say, rounding that, the impact is JPY30 billion.

For euro, a change of 1 yen means a JPY4.5 billion or JPY5 billion yen change.

Thank you very much.

That's very helpful.

It seems there are no more questions, 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.

Thank you.

'Bye-bye.

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.