豐田汽車 (TM) 2012 Q1 法說會逐字稿

Hello, everyone.

This is the Premiere Global Services operator.

Please be aware that your line will be muted until the question-and-answer session begins.

(Operator Instructions) Please note that this call will be recorded at the request of the hosting company.

I would now like to hand the conference over to Ms.

Tomita from Toyota, who will moderate today's conference.

Please go ahead.

Hello, everyone.

Welcome to the first-quarter financial results conference call for the fiscal year 2012.

My name is Amiko Tomita from the Public Affairs division of Toyota Motor Corporation.

Mr.

Takahiko Ijichi, Senior Managing Officer in charge of our Accounting Group will present and then answer questions.

The presentation material can be downloaded from our home page.

(interpreted) Hello, everyone.

My name is Ijichi, and I would like to thank you for joining us despite your busy schedules today.

In particular, for those of you participating, joining us from North America, I know that it is very early, so I would like to express my appreciation for your participation.

The operating income for the first quarter was impacted by the earthquake and the continuing appreciation of the yen, resulting in an operating loss of JPY108 billion.

However, the operating income forecast for the full fiscal year is JPY450 billion, an upward revision of JPY150 billion compared to the previous announcement, due to the increase of vehicle sales accompanying the restoration and recovery of production.

For details I will give a presentation following this.

Now our interpreter, Ms.

[Sakai], will read out the presentation on behalf of Mr.

Ijichi.

After the presentation we will proceed in a Q&A format with consecutive interpretation.

You are welcome to ask questions.

We expect the entire conference call to last about 60 minutes.

Please note that the presentation and discussion contain forward-looking statements that reflect our plans and expectations, based on current information and circumstances.

The actual results, therefore, may be materially different.

Our Company's cautionary statement concerning forward-looking statements and insider trading are included on page 2 and page 3 of today's presentation material.

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

Sakai.

(interpreted) Thank you for joining us today.

I would like to discuss Toyota's financial results for the three months to June 2011.

Please look at slide 5.

Since our vehicle production was significantly impacted by the Great East Japan Earthquake, in April and May in particular, our consolidated vehicle sales decreased by 599,000 units to 1,221,000 units compared to the same period last fiscal year.

In Japan and North America, where vehicle sales were significantly impacted by the earthquake, first-quarter vehicle sales declined substantially compared to the same period last fiscal year.

As for countries in the Asia region, in particular Indonesia, despite the impact of the earthquake we were able to maintain a similar level of vehicle sales as the same period in the previous fiscal year.

Please look at slide 6.

Our consolidated financial performance for the first quarter resulted in net revenues of JPY3.441 trillion; operating loss of JPY108 billion; pretax loss of JPY80.5 billion; and net income of JPY1.1 billion.

Next, using slide 7 I would like to explain the major factors affecting net income.

By comparison to the first quarter of the last fiscal year, net income for this quarter decreased by JPY189.3 billion to JPY1.1 billion.

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

On the positive side, we achieved further cost reduction through companywide V-A and other activities, our efforts to reduce marketing expenses, and further reduction of fixed costs.

On the negative side, however, we experienced a decline in vehicle sales following the earthquake as well as yen appreciation, both of which resulted in a significant decline in operating income.

With slide 8 I would like to explain our consolidated operating income for the quarter by region.

Due to the impact of the earthquake on production, all regions posted a decline in operating income, in particular Japan and North America.

In Japan, where the impact of the earthquake and yen appreciation were especially significant, operating income declined substantially.

In North America we made efforts to decrease marketing expenses.

However, due to the decline in vehicle sales and the particularly high level of Financial Services performance in the same period last fiscal year, operating income declined further.

However, in Asia, especially Thailand and Indonesia, despite being impacted by the earthquake we were able to achieve operating income of JPY60.1 billion.

Next slide, please; and let me discuss our operating income for the Financial Services.

Operating income excluding swap valuation gains and losses decreased by JPY12.6 billion to JPY96.9 billion.

For the same period last fiscal year, the income level was particularly high primarily as a result of a reversal of provisions made in the United States.

Although income has declined in this first quarter compared to the same period last fiscal year, we have continued to secure a high level of income.

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

Going to slide 10, equity and earnings of affiliated companies decreased by JPY29.8 billion to JPY40.2 billion over the same period last fiscal year due to the effects of the earthquake, which especially had a significant impact on the earnings of affiliates in Japan.

Going to the next slide I would like to discuss our full-year forecasts.

Please look at slide 12.

First of all, I would like to explain the expected production and sales of Toyota and Lexus brand vehicles.

Our vehicle production outlook reflects our progressive restoration and recovery of production, primarily made possible by the support of our suppliers.

We now expect to reach 7.72 million vehicles with respect to production, an increase of 330,000 vehicles from our previous forecast published in June.

Our vehicle sales, on the other hand, are expected to ramp up more slowly due to the time lag between production and sales.

We are now expecting a steady recovery to 7.45 million vehicle sales, an increase of 150,000 vehicles from our previous forecast in June.

Going to slide 13.

Our consolidated vehicle sales, which include Hino and Daihatsu brands and exclude those vehicles that are sold through unconsolidated distributors -- such as our Chinese joint venture sales and marketing companies -- are expected to reach 7.6 million vehicles.

We expect to make improvements on consolidated vehicle sales especially in the overseas markets and achieve a substantial improvement of 360,000 units compared to the previous forecast in June.

Please turn to slide 14.

On our revised assumption of JPY80 to the dollar, reflecting the latest yen appreciation applied from July onward, our consolidated financial performance for the fiscal year ending March 2012 is expected as follows.

Net revenues of JPY19 trillion; operating income of JPY450 billion; pretax income of JPY500 billion; and net income of JPY390 billion.

Going to slide 15, I would like to discuss the major factors behind the changes in our operating income forecasts from our previous forecasts published in June.

We now upwardly revise our operating income forecast by JPY150 billion to JPY450 billion despite the negative currency impact, because we have experienced increased vehicle sales as a result of our progressive restoration and recovery of production.

With regard to capital expenditures, depreciation, and R&D expenses, we maintain our previous forecasts.

Major factors influencing the year-on-year change in operating income are shown on slide 16.

We expect marketing efforts, such as vehicle sales and pricing, on top of cost reductions will be factors that lead to an increase in profits.

On the other hand, we expect yen appreciation by JPY6 to the dollar; lack of the favorable one-off factors in Financial Services we had last year; and increased fixed costs for expanding production capacity.

These will be the factors that lead to a decrease in profits.

Recently, the yen has been further appreciating against major currencies.

However, Toyota remains committed to pursuing an improvement of its earnings as compared to the previous fiscal year, mainly through cost-reduction measures, in which it has a strong track record; pushing for improvement of its global earnings structure; and examining every opportunity to increase production and sales outlook.

Through these efforts, Toyota intends to achieve the solid profitability, our profit target, under its global business as soon as possible.

This concludes my presentation.

Thank you very much for your attention.

Thank you.

To answer as many questions as possible, we would like to ask that each participant ask up to two questions only.

You do not have to provide a name.

Further questions might be possible later if time allows.

Now, our conference call operator will explain how to get connected.

(Operator Instructions)

Yes, hello.

Sara Gardiner-Hill from Deutsche Asset Management.

Thank you very much for taking my questions.

I have got two questions.

My first one relates to the currency.

The yen is currently stronger against the dollar than the Company has forecasted.

I wonder, to what degree have you hedged into the currently forecasted level?

Also related to this, at what speed can you adjust to what is more local procurement of parts to reduce this currency impact?

And then I have got a follow-up question.

(interpreted) Let me answer the question about the foreign exchange hedging first.

Basically we have forward contracts three months into the future.

When the trend is towards a strong yen we hedge higher than the 50% central band; and the reverse is done when there is a weak yen trend.

So that would be maybe 40%.

This past year, we have had extreme appreciation of the yen.

Quite recently it is even faster.

Therefore for this one year we had taken a bigger hedge for the three months.

However, because the yen appreciation is so dramatic of recent time, we are trying to suppress this somewhat so that it is a little bit higher than the central value.

Also, another way to respond to the yen appreciation is to be explained.

For example, when we think about the local procurement percentage of North American production, it is maybe around 80% or 90%, which is slightly lower than the other manufacturers.

Therefore to alleviate the impact of the foreign exchange, we could raise this percentage further.

As for the production of automobiles in Japan, almost all the parts are procured in Japan, and the percentage of imported parts is very low.

Therefore we could get the cooperation of our suppliers to consider the overseas procurement.

For example, there are good manufacturers in China that can be studied.

Also, Japanese suppliers may have some production bases in China, and so that can also be studied.

This is a way that we can mitigate the shock of the yen appreciation somewhat.

And we need to take these measures with speed.

However, let me make clear that I mentioned China just now, but this is just an example.

We are not saying that we are going to immediately procure parts from China.

So just to make sure there is no misunderstanding, I'd like to emphasize that point.

Thank you very much.

My second question relates to your new Camry model.

I wondered, to what degree have you managed to cut costs here through engineering efforts?

And how will profitability per vehicle of the new model compare to the old Camry model?

(interpreted) I cannot give you an answer with regards to the cost improve -- profitability per vehicle.

However, the Sonata of Hyundai would be the competitive vehicle in this case, so let me give you an explanation from that perspective.

You have to remember that the number-one passenger vehicle in North America is the Camry.

We have that track record of its reliability, and its quality, and its top fuel economy for that class of car, and that fact that the ride performance, drivability performance, is enhanced.

There has been a major improvement in cost, yes; but we are very confident that the product appeal of the vehicle has gone up by quite a degree.

We will be considering -- we will be holding an event on August 23.

So I hope that you will come to this event to see this wonderful model.

So, now let me speak a little bit about the new models in North America.

Yes, the Camry will be the central model.

However, we will also be launching a Prius-type wagon which is called the Prius V.

There is also the launch of the iQ, and this is probably going to be one of the cutest vehicles in the world.

There is also going to be the new model of Yaris.

So with the introduction of these vehicles in North America, we expect that we will be holding campaigns to recover the share that has been lost.

Good.

Thank you very much.

Next, please.

Our next question.

Hi, it's James Irwin of Moon Capital.

Can you hear me?

Yes, we can.

Hi, thank you for doing the call.

One follow-up question actually on the same issue of foreign exchange.

Could you give us an update on your manufacturing footprint?

Specifically, how much of your production capacity is in Japan this calendar year, this timeline?

How does that compare with prior peak levels of a couple of years ago?

Then officially, what is your commitment to sustaining that capacity in Japan three years from now?

(interpreted) Well, we believe that the conscientious manufacturing in Japan needs to be maintained.

In order to compete in the world, we need to maintain development technology and production technology in Japan.

That means that it would be necessary to produce minimum of 3 million vehicles.

So, last year, the production capacity was 3.64 million; and in 2011 the previous plan was to reduce this to 3.4 million vehicles.

However, right before this time it was decided that the closing of one plant would be delayed; and we have decided to maintain the similar production capacity as last year, which is 3.64 million.

This plant that was supposed to have been closed that I mentioned is the Tahara plant.

However, because of the impact of the earthquake we need to make a big recovery of lost production.

Therefore it has been decided to postpone the closing of this plant by about one year.

So, at the moment we are expecting that this Tahara plant will be closed around after the Golden Week.

That is a time in Japan in early May when there is a long series of holidays anyway.

So we expect that it will be after that period of time in 2012.

And then the production capacity will be 3.4 million.

Last year we had made an announcement about the production system in Japan and had said that in 2014/2015 it would be about a 3.2 million level.

So that means that with regards to about 200,000 vehicles, we have not made a decision yet.

It will be considered from here onwards.

I am often asked about the production capacity in Japan.

I think the intent of the question perhaps is to ask about whether there is any wasteful facilities because of the plants.

Of course, it should not just be that you keep the facilities idled.

It should be concentrated so that it can be utilized in an efficient manner.

Also when we think about the accounting aspect of the plants and facilities at Toyota Motor, the average accumulated depreciation is about 90% or higher.

And actually in an accounting sense, it is not all that positive to retire the excess facilities.

Rather, in this situation it is actually useful for recovering lost production.

That's very helpful.

Just one clarification and then a second question.

The capacity figures that you were providing, are you including Daihatsu production in those numbers?

Or was that a separate category?

Then my second question is with respect to your expansion plans in China, could you give us an update on what your current production capacity is with FAW and Guangzhou Auto, and what your capacity ramp will be over the next two years in China with those two JV partners?

Thank you.

(interpreted) So, let me clarify with regards to the capacity in Japan that I mentioned earlier.

It is just the Toyota Lexus brand.

And although Daihatsu and Hino are consolidated companies, it was not included in the figures I mentioned.

Okay.

(interpreted) As for the capacity expansion in China, both partners are FAW.

There are two locations, Changchun and Tianjin.

In Changchun, 100,000 vehicles; in Tianjin, 150,000 vehicles are planned.

With regards to the 150,000 in Tianjin, the timing is still undecided.

But the total for the two locations would be 250,000.

Thank you.

With Guangzhou, any update on the Toyota expansion there?

(interpreted) With regards to Guangzhou, we don't have any plans that we can announce here right now.

Okay.

Thank you very much.

Appreciate the call.

And we'll go to our next caller.

Next, please.

Good evening.

This is John Murphy from Bank of America Merrill Lynch.

Thank you for taking my questions.

First question.

On slide 16, you highlighted marketing efforts as a positive for operating income relative to your previous forecasts.

I was just wondering what that meant.

Does that mean lower incentives or lower ad spending?

And if it meant lower incentives, is that because you have tight inventory and you can see a lot of consumer orders in the pipeline?

I'm sorry.

This is the interpreter.

I couldn't hear the first half of your question.

Can you repeat it?

Sure.

On slide 16 you highlighted 80 billion dollars (sic - see slide 16) positive swing in your marketing efforts relative to your previous forecast.

I was just trying to understand if that is from lower advertising spending or lower incentives.

And if it is lower incentives, is that because you have tight inventory right now and can foresee a lot of consumer orders and your backlog?

In your pipeline.

I'm sorry.

Can you wait a bit?

We are looking for the page right now.

It was slide 16.

(interpreted) So you are talking about the comparison with the previous year?

That slide?

It was slide 16 where you talked about the positive change in your operating income; yes, on a year-over-year basis.

(interpreted) If I may explain this slide, this looks at March 2011 to March 2012 and in what items there was ups or downs in the operating income.

With regards to this plus 80, that is JPY80 billion, this includes all the marketing efforts, and let me explain what they are.

So the breakdown here is previous year the sales were 7.3 million; and this time the forecast is 7.6 million.

So that is plus 300,000, and JPY150 billion.

For Financial Services compared to the previous year, this is a large negative of minus JPY50 billion.

Then with regards to the marketing of vehicles, it is minus JPY20 billion.

And with regards to the other marketing, minus JPY20 billion, we can break that down to price increase of JPY120 billion -- that is positive.

Then there was the worsening of the model mix and decrease in after-sales service.

Then there was also the temporary income in the previous year.

So offsetting all of this, we get minus JPY20 billion.

Maybe if I could follow up on that with a simpler question.

It appears that you may lower -- it sounds like you may lower incentives and improve pricing going forward.

That is something that a lot of folks in the market would view as a positive for Toyota and the industry.

Is that a correct interpretation?

(interpreted) So, with regards to the marketing expenses, including incentives, for the first quarter there was the shortage of supply and therefore incentives were reduced.

However, on the road to recovery there will be some money spent, and we are going to take an operation whereby we will be expanding the so-called footprint of our income.

When we look at the full year, however, it will be on a lower level than usual year.

So in that sense you can say that what you said is true.

Okay.

Then a second question on slide 12.

The increase versus your previous forecast on vehicle production.

Sorry, excuse me.

Sorry, Mr.

Murphy.

Mr.

Ijichi has something else to say before you go on with your question.

Oh, I'm sorry.

I'm sorry.

(interpreted) Let me add an explanation about the incentive.

When looking at incentives, I think that the numbers from auto data are used to make the forecast or speculation.

There is in the past a gap between the numbers and audit data and the amount that was borne by Toyota Motor sales, Toyota in the US.

If you look at the first-quarter number, actually there is a big departure in the numbers, and more than the numbers in auto data.

The amount borne by Toyota in US is low in the first quarter.

Thank you.

Just a second question on slide 12.

Vehicle production relative to your previous outlook looks like it is 330,000 units higher because you are recovering faster, which is a great thing.

But it appears to be showing up in vehicle sales more slowly.

I was just curious as to when you think your inventory will actually be restocked, specifically in the US.

Because we are hearing from dealers that they are expecting to be relatively full on Toyota inventory in September, so that they would be able to sell out of that inventory, as opposed to the very tight inventory they are selling out of right now.

(interpreted) Let me explain the meaning of the numbers that you see here on the slide.

For 2012, we are assuming very strong numbers.

I would like you to consider that we are going to accumulate the stock with a strong will.

However you have heard, I don't know from where, about this inventory becoming relatively full in September.

However, unfortunately, September is still at the stage of recovery, so it will not be the case.

Thank you very much.

(interpreted) Let me make a correction on another matter, please.

Sorry; I need to make the correction about what I said about the plant closure.

This was with regard to the question about the production capacity in Japan.

I said that the closure of the plant will be postponed until about May 2012m after the holidays in May.

However, please consider it to be the following, not what I said before.

That is -- whether the plant will be closed or not will be determined from the end of the year to the beginning of next year.

That is when we will make the decision for Tahara plant.

And we will go to our final question.

Good evening.

Thank you very much for this call.

Just two questions from me.

First of all, on page 17 and 18 you have your unconsolidated results.

The operating losses at the parent increased quite sharply, but you revised down your operating loss forecast for the full year.

Could you give us an indication of the factors behind the losses there, and when you expect that you may be able to return to breakeven at the parent level?

My second question is with regard to your equity method income on page 10.

You mentioned that the key reason for the decline was domestic affiliates.

But I was wondering if you could comment on profitability in China and the outlook for full-year equity method income overall?

Thank you very much.

(interpreted) Okay.

The question was about when the unconsolidated, the parent, would be breaking even.

So let me explain in this way.

For example, on the operating income of the unconsolidated basis, it is north of JPY370 billion.

However, this last year it was a loss of JPY480 billion.

That means that in that sense there has been a reduction of the loss of JPY110 billion.

With regards to the foreign exchange rate last year, we assumed JPY86.

This year it is JPY80, so that means that it is stronger by JPY6.

So if you consider this stronger yen, the figures should be worse by JPY160 billion.

However, the loss is JPY370 billion, meaning that the improvement is JPY270 billion.

Last year the improvement was JPY240 billion.

So if we continue along these lines at this level we expect that at the end of March 2013 we should be able to break even.

And this breakeven point should be attainable at JPY80 to the dollar.

Around May next year, I think that is when we will be making the explanation of the financial results for the fiscal year.

So I think at that point in time, that is around May of next year, we should be able to give you our expectations for when we will break even.

Next, with regards to the profitability of the Chinese companies, first quarter the income was down, and that is because of the earthquake impact, which will probably also to an extent impact the income for the entire fiscal year.

Okay.

Thank you very much.

Could you give any forecast, your equity method forecast, for the full year?

(interpreted) With regards to the forecast for the full year, I think that it will be a bit higher than the announcement made previously.

But it will probably be a bit lower than the figure of the last fiscal year.

Okay, great.

Thank you very much.

And we have no further questions in the queue.

Can we have your patience a little while longer, and if you could stay with us for a little bit longer?

(interpreted) I am sorry to keep making corrections.

We talked about the closure of the Tahara plant.

However, so there is no misunderstanding, please note that we are talking not about the Tahara plant as a whole, but we are talking about making adjustments on one line in the plant.

As there are no further questions in the queue, we would like to conclude today's conference call now.

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

Thank you very much for joining us today.

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.