豐田汽車 (TM) 2012 Q3 法說會逐字稿

Hello, everyone.

Welcome to the financial results conference call of the fiscal year 2012 third quarter.

I am [Ashikaio Kimura], with the Public Affairs Division of TMC.

Today, we have Mr.

Takahiko Ijichi, Senior Managing Officer in charge of the Accounting Group of TMC, and Ms.

[Keiko] Morita, Interpreter, with us.

First, Mr.

Ijichi will briefly speak about the highlights of Toyota's earnings results.

Second, Ms.

Morita will take over and explain the presentation material.

This will take about 10 minutes.

After the presentation, you are welcome to ask questions.

We expect the entire call to take about 60 minutes.

Please note, the presentation contains forward-looking statements, to reflect our plans and expectations, and our actual results may be different for (inaudible) statements.

A complete cautionary statement concerning forward-looking statements is included on page 2 of the material, and a complete cautionary statement concerning insider trading is included on page 3.

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

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

Ijichi.

(interpreted) Good morning, good afternoon.

Ijichi speaking.

Thank you very much for participating in this conference call, despite your occupied schedules.

I would like to thank North American participants in particular for joining us so early in the morning.

During the third quarter in question, while we did have impacts of floods in Thailand or yen's appreciation, the operating income increased by JPY50.6 billion, compared with the same period previous year, thanks to the Company-wide profit improvement activities.

Furthermore, the forecast of the full year operating income was revised upward by JPY70 billion, thanks to the increase in sales volume, cost improvement, and curtailment of fixed expenses.

And these details will be explained in the presentation to follow.

I would like to discuss Toyota's financial results for the third quarter of the fiscal year, which will end in March 2012.

Please look at slide 5.

Our consolidated vehicle sales for the third quarter increased by 167,000 units, to 1,969,000 units, compared to the same period last year.

This was a result of increased vehicle sales, particularly in Japan and North America, where vehicle supply improved as production continued to recover from the earthquake disruptions in Japan.

In Asia, including Thailand, on the other hand, we suffered a significant decline in vehicle sales, due to the serious impact from the Thai floods.

Our consolidated vehicle sales for the nine months to December 2011 decreased by 522,000 units, to 4,995,000 units, compared to the same period last year.

As summarized in slide 6, our consolidated financial performance for the third quarter resulted in net revenues of JPY4.8652 trillion, operating income of JPY149.6 billion, pretax income of JPY198.6 billion, and net income of JPY80.9 billion.

Next, using slide 7, I would like to explain the major factors impacting net income for the third quarter.

Net income decreased by JPY12.7 billion, to JPY80.9 billion, compared to the same period last year.

The left side of slide 7 shows the major factors that impacted operating income.

Despite the Thai floods and yen appreciation, operating income increased year on year as a result of our Company wide profit improvement activities, such as marketing efforts and both variable and fixed cost reductions.

Net income declined year on year as tax expense increased, following the recent tax reform in Japan.

Slide 8 summarizes our financial performance for the nine months to December 2011.

Net revenues stood at JPY12.8811 trillion, operating income JPY117.1 billion, pretax income JPY197.2 billion, and net income, JPY162.5 billion.

Next, with slide 9, I would like to explain the factors impacting net income for the nine months.

Net income decreased by JPY220.2 billion, to JPY162.5 billion, compared to the same period last year.

This was due to the decline in vehicle sales following the Great East Japan earthquake, the Thai floods, and further yen appreciation.

These negative factors exceeded our profit improvement efforts, through a Company-wide VA activities and fixed cost reduction.

Next, with slide 10, I would like to explain our consolidated operating income for the third quarter by region.

In Japan, operating loss decreased, compared to the same period last year, despite yen appreciation.

This was due to a weakness of our domestic sales in the previous third quarter, which was caused by the expiration of eco-car subsidies, and of increased vehicle production in the earthquake recovery process.

In North America, operating income decreased year on year, despite increased vehicle sales.

This was due to reduced contribution from financial services.

In Asia, operating income decreased as both vehicle production and sales decreased, mainly due to the Thai floods.

Slide 11 summarizes our consolidated operating income for the nine months to December 2011 by region.

In Japan, operating loss increased substantially compared to the same period last year, due to the earthquake in Japan, the Thai floods, and yen appreciation.

In North America, operating income also decreased due to disrupted vehicle supply following the earthquake in Japan.

In the emerging markets such as Asia, Central and South America and Africa, operating income decreased by the earthquake in Japan and the Thai floods, but was remained at a high level.

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

Please look at slide 12.

Operating income, excluding swap valuation gains and losses for the third quarter, decreased by JPY28.9 billion, to JPY63 billion, compared to the same period last year.

This was due to the substantial reversal of provisions in the same period last year, and reduced lending margin due to declining lending rates, mainly in the United States.

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

Let me now move on to slide 13.

Equity in earnings of affiliated companies for the third quarter increased by JPY8.7 billion, to JPY55.6 billion, compared to the same period last year.

Earnings of our affiliates in China have been improving as recovery from the Japan earthquake progressed.

Next, I would like to discuss our outlook for the full fiscal year ending March 2012.

Please look at slide 15.

With regard to our consolidated vehicle sales for the current fiscal year, we now revise our expectation from 7.38 million units that we announced in December, to 7.41 million units, having taken into consideration of our latest sales in North America and Europe, in particular.

In Japan, we will strive to improve our sales by utilizing our lineup of attractive, environmentally friendly vehicles, particularly hybrid cars such as Prius Alpha, which has been extremely popular since its launch in last May, and Aqua, which was launched in December, with the world's number one fuel efficiency.

Although there are significant uncertainties outside Japan, and particularly over European sovereign debt crisis, we will make every marketing effort, including new model launches, to improve sales in North America, Asia and emerging markets.

Please look at slide 16.

Based on the assumption of the foreign exchange rates of JPY77 to the dollar, and JPY100 to the euro for the fourth quarter, hence, JPY78 to the dollar and JPY108 to the euro for the full year, we now revise our forecasts of consolidated financial performance as follows.

Net revenues, JPY18.3 trillion.

Operating income, JPY270 billion.

Pretax income, JPY270 billion, and net income, JPY200 billion.

Please look at slide 17 now for the analysis of the difference between our latest consolidated operating income forecast and the previous forecasts.

Having factored in the improved outlook of vehicle sales, cost reduction efforts, and fixed cost reduction, we now expect operating income to increase by JPY70 billion, to JPY270 billion.

With regard to CapEx, depreciation expenses, and R&D expenses, we maintain our previous plans as footnoted in the slide.

Finally, please look at slide 18 for the analysis of our latest consolidated operating income forecasts, by comparison to our results of last fiscal year.

The negative impact from further yen appreciation is expected to amount to over JPY300 billion, including translational impact.

Despite this headwind, we plan to continue to accelerate production to recover from the Japan earthquake, as well as the Thai floods, and will pursue further improvement of earnings by raising prices and reducing sales expenses, besides further reducing costs.

As we discussed in Toyota Global Vision of March 2011, Toyota has been pursuing to establish a cycle of developing better cars, which would increase sales and causing consequently generate profits to reinvest in developing even better cars.

We are beginning to deliver better cars in the form of actual production, geel confident that our business foundation is now stronger.

We'll continue to aim toward a sustainable growth by managing this positive cycle.

This concludes the presentation.

Thank you very much for your attention.

Thank you.

Today's question and answer session will be conducted electronically.

(Operator instructions)

Now we are ready to take your question, but only up to two questions per person.

And you do not have to name yourselves.

Our conference call --

Our first question.

Hi, it's James Irwin from Moon Capital.

Can you hear me?

Yes, we can.

Thank you very much.

Great.

Thank you for doing the call.

I guess two questions.

First, with respect to your cost reduction efforts, and really, the pace of improvement, if we think about your fourth quarter forecast, walk me through the big elements that you're really attacking in terms of improving your cost structure.

And if you could tie that into the increasing headwinds that you're facing from the currency side of the equation, maybe walk me through some of the bigger sourcing issues that you're looking at.

And the second question is really, looking into next year -- I know you don't have an official forecast.

But if we think of the opportunity and the magnitude of the cost reduction effort and the structural change in your cost structure with respect to the yen, should we be looking at that fourth quarter as a relatively conservative forecast as we look into next year, or can you significantly improve your cost structure going into next year with respect to the ForEx?

Thank you.

(interpreted) You're asking about the status of cost reduction in relation to the fourth quarter.

And first of all, on the full year basis, we are planning the net cost reduction of JPY140 billion.

In terms of the cost reduction over the cumulative nine month period, we announced this time that it amounts to approximately JPY80 billion.

So this means that the cost reduction in the fourth quarter is planned to be around JPY60 billion.

On the other hand, referring to the impact of FX fluctuations, excluding translational impact on the full year basis, the effects of fluctuations had the negative impact of JPY310 billion overall, whereas on the cumulative nine month impact was JPY200 billion, which indicates that the negative impact stemming from FX fluctuations in the fourth quarter is expected to be JPY110 billion.

So, if one specifically talks about the fourth quarter, about one half of the negative impact of FX fluctuation is to be made up for or by covered by cost savings.

There is no new measures that will be specifically implemented in the fourth quarter to produce a substantial result in terms of cost savings.

We will simply continue to make efforts very steadfastly from the third quarter, including the implementation of a normal regular [vehicle] activities, cost reduction efforts to be continued in the plant, as well as positive impacts stemming from the launch of new products, among others.

And therefore, we are expecting to generate a cost improvement through those steadfast (inaudible) efforts as we have been doing over the years.

You also asked about the likely magnitude and the pace of cost improvements, a cost reduction in the next fiscal year and beyond.

We announced the retail sales volume, and if the cost reduction continues, if the volume increases, the cost reduction benefits will increase commensurately.

And so from that perspective, assuming that there is no totally unexpected instance taking place in the next fiscal year, probably you can say that the cost improvement benefits will be bigger in the next fiscal year compared with the current fiscal year.

You questioned about the impression you received that the fourth quarter may appear quite conservative, compared with the third quarter.

I suppose you are referring to the fact that despite substantial volume increase from third quarter to fourth quarter, the operating income forecast for the fourth quarter is expected to be around the same level, and therefore, I suppose you refer to that as being too conservative for the fourth quarter.

True, currently we are expecting volume increase, but somewhat slightly less than 500,000 units, while expecting positive impact of somewhat less than JPY200 billion.

But the expenses in various factors are expected to increase by the same magnitude, and therefore, in a sense, the marketing efforts are going to be more or less offset by increase in variable expenses.

And therefore, at the operating income level, the level seems to remain at the same level in the fourth quarter as it was in the third quarter.

And just on -- can you still hear me?

Yes.

Just as a follow up on that last answer, about the expenses moving up in the fourth quarter, I'm trying to figure out if those higher expenses coming through in the fourth quarter are a fourth quarter anomaly, or if that's something that continues into full next year forecasts.

It's the run rate that's concerning me a little bit, in terms of the higher volume that we're looking for next fiscal year.

Are we going to see those similar kind of incremental expenses coming through on a full year basis next year that limits some of that contribution margin from the higher volume?

Or is it really just kind of a fourth quarter, end of year expenses that kick in?

And it's kind of a fourth quarter anomaly?

(interpreted) What you have mentioned toward the latter part of your previous question is correct.

That is to say, for the fourth quarter, we have some unique factors relating to the fact that fourth quarter represents the end of the fiscal year, and therefore, compared with the third quarter, we expect somewhat bigger expenses to be incurred during the fourth quarter, and I would like to share with you some details of that, more specifically.

If I just compared expenses for the third quarter and fourth quarter, first of all, in the third quarter, the quality related expenses were lower than other quarters, whereas in the fourth quarter, the quality related expenses are expected to be higher.

And therefore, if you just compare the fourth quarter and third quarter, there will be JPY70 billion increase in quality related expenses in the fourth quarter compared with the third quarter.

In addition to that, in terms of general expenses, and there will be increase in general expenses of JPY40 billion, and another JPY40 billion increase in fixed expenses as well as labor costs.

So most of those expenses in the fourth quarter were due to the specific conditions which is unique to fiscal year end.

Some is due to the actual expenses slipping from the third quarter and being made in the fourth quarter.

But I would like to make one other point, to avoid any misunderstanding.

I earlier mentioned that in the fourth quarter, the quality related expenses is expected to increase by JPY70 billion, compared with the third quarter.

Now, on the full year basis, the quality related expenses decreased by JPY120 billion, from JPY590 billion to JPY470 billion, from March last year to March this year.

And therefore, overall, we believe that the quality related expenses has already reached the peak, and moving down thereafter.

But in that general conditions, if -- as comparing third quarter against fourth quarter, I made the earlier comments that there will be JPY70 billion increase in the fourth quarter.

Of JPY120 billion decrease in quality related expenses, yen appreciation caused that expense to decrease by JPY50 billion.

That's very helpful.

Thank you.

Next, please.

Our next question.

Yes.

I have a question about your volume forecast.

I know Toyota recently came out with calendar 2012 forecasts by region.

I wonder if you could walk us through those, and give us a little bit of comment on the retail increases you expect, as well as the inventory buildout.

I noticed that Toyota's inventories have been rising in the US, and I'm not really sure how much of your volume projections are coming from inventory increase, versus retail gain.

And I wonder if you could just kind of walk through the different regions and give us a comment along those lines, for 2012.

(interpreted) I would like to elaborate on the retail volume for the next calendar year.

Overall, on the global basis, we are expecting retail market, total market this year to be somewhat bigger than last year.

In that global picture, as you already know, because of the credit concerns in Europe, the market there will remain tough.

But in the regions other than Europe, we expect the overall market to be larger than last year.

First of all, with respect to Japan, the extension of incentives for environmentally friendly vehicles has been made, and therefore, that is likely to revitalize the automotive market.

We are expecting the overall market, including mini-vehicles, to be around 5 million units -- excluding mini-vehicles, 3.2 to 3.3 million units.

That's overall market in Japan, and in that total market, we at Toyota is planning to sell 1.63 million units this year.

Moving on to the United States, we expect the US government to continue implementing some measures to stimulate the economy, and based upon that, we are expecting some increase of the market, albeit at the modest pace.

Our expectation of the overall market in the United States this year is around JPY13.6 million, compared with JPY12.7 million this year.

And in that, Toyota's retail sales in the United States is expected to be around 1.9 million units.

China's market rates 18.5 million units last year, and this year, while the increase may not be that big, but we are expecting the Chinese market to increase somewhat from the last year's level.

In that market, we would like to sell at least 1 million units of vehicles in China on the retail basis.

Asia in general, we expect the market to increase, and we would like to sell more than last year, especially in Thailand and Indonesia.

In terms of the inventory level as of the end of December 2011, the inventory was not yet at the level which we considered to be appropriate, especially in the United States.

We did have a shortage of inventory there.

However, with the production increasing in January, February, through March, we intend to fill the pipelines, so that by the end of March this year, in various markets of the world, the inventory level will be restored to an appropriate level.

And therefore, in the next fiscal year with an inventory fully replenished, we would like to be in a position to be able to compete adequately.

Yes.

Just -- what was your total volume forecast for 2012?

You gave us Japan, US and China.

But I know Toyota issued a forecast a few days ago.

I just don't remember what it was.

And at the same time, could you give us the result for 2011?

(interpreted) What we announced a few days ago relates to the global retail sales for 2012.

And on that basis, the global Toyota's retail sales for 2012 is expected to be 8.58 million units.

That's Toyota alone.

And including Daihatsu and Hino, we announced a figure of 9.58 million units.

Those are retail sales based figures.

The corresponding figures for 2011 are, Toyota's retail sales globally, standing at 7.1 million units, and including Daihatsu and Hino, the figure stands at 7.95 million units.

Thank you.

And then, I just had one follow up question, and that was on the domestic market.

I know the government has made -- I think it's JPY300 billion available for the purchase of new vehicles, with different amounts depending on whether the vehicle is a registered vehicle or mini-vehicle.

I'm just wondering, how long these funds will be available, or when you estimate they might expire?

(interpreted) Basically speaking, when the budget is fully depleted, that will be the time at which the incentive will expire.

I guess the specific amount was JPY100,000 for registered vehicles, and either JPY60,000 or JPY70,000 for mini-vehicles.

But once those figures are depleted, the total budget is depleted, the incentive program will expire.

But at this juncture, I simply cannot mention how long or when the expiration will take place.

As I said, I cannot make any definitive comment.

I am just looking at the information available at hand.

The system of this incentive itself is to last for one year, but as I said, once the budget is depleted, that's the time when the program comes to an end.

And as I said, I simply cannot say when it will come to an end.

Thank you.

Next, please.

We'll take our next question.

We have -- I have two questions.

Can you hear me?

Yes, we can.

Thank you.

Thank you.

The first is with regards to comments you've made on your quality costs.

You did -- indicated that the quality costs had increased sequentially in the fourth quarter, but you showed a decrease in fiscal year '12 versus fiscal year '11.

And I'm wondering if we should expect to see a continuous trend of reduction in those quality costs into the following fiscal year, or does the sequential increase represent a change in that overall trend?

(interpreted) With respect to the quality related expenses, this is not something that can be clearly allocated to each quarter.

So in that sense, the quality related expenses are something that you need to look at on the full year basis or semiannual basis.

Now, in terms of the general trend, as I mentioned last year, the -- we believe that the quality related expenses has already reached a peak, and has been petering out since March 2011, gradually.

Since we encountered the qualities used two years ago, we established significant organizations and other units on a global basis to address quality related issues.

And the benefits of those efforts that we made since two years ago is now emerging gradually, and becoming manifest.

Okay, thank you.

The second question regards a comment from Toyoda-san at the end of last year, whereby he indicated that manufacturing and exporting en masse from Japan at the current yen rate was exceptionally difficult.

And the implication of the comment is that something had to change.

And I'm wondering, as we sort of think about Toyota's plans to address a very strong yen, how we should think about the communication of that.

Is -- are we to expect that we should hear news of meaningful change?

Or is this something we'll likely see as new product programs evolve, changes in strategy on individual product programs?

(interpreted) In essence, how -- what we wanted to convey is that we feel strongly about maintaining manufacturing in Japan, because we need to compete with outstandingly strong engineering capabilities.

And in that context, the human resources as well as supply chain that we have in Japan are truly outstanding.

And we need to leverage those outstanding resources we have in Japan in competing in the world -- global context.

So that is what we have been trying to say, by saying that we continue to insist on and feel strongly about maintain a manufacturing base in Japan.

When we discuss that people say that all we need in Japan is the research and development capabilities, and actual production can be done outside of Japan, that sort of debate takes place, but that is not the right way of thinking at the situation.

Because only when research and development capabilities, production engineering ability, as well as true capability of a production floor combine together, that allows us to fully display our engineering clout.

Now, in that general context, what is the appropriate level of production in terms of the size or magnitude of the production?

There are a certain number of models that are to be produced in Japan, because that is -- makes more economic sense.

For example, vehicles that are sold in the Japanese domestic market, or globally strategic vehicles that are produced in Japan in smaller volume, such as Land Cruisers, or those vehicles that are destined for export into those countries where the manufacturing base is still underdeveloped, or vehicles with very high value added, such as Lexus, among others, or vehicles installed with next generation technology, such as environmental technology.

And in the case of those models I mentioned specifically, producing them in Japan is more advantageous to the Company itself.

And if you add up all those models in terms of the volume, you arrive at the current level of production, more or less, of 3 million units.

Now, if that is the case, we still have the exposure through this 3 million units produced in Japan, and you may be worried that that would cause us to become less competitive.

And that worry is really well placed.

And therefore, we are trying to reduce costs to enhance our competitive edge, and are also trying to increase prices to minimize the negative impact of yen's appreciation.

We will continue to take those measures and implement them.

And those are the measures to address earnings improvement, or earnings impact, and therefore, trying to improve profitability overall.

But at the same time, in order to reduce exposure overall, we are increasing our local procurement ratio.

We are trying to increase the percentage of domestic sales in the overall volume produced in Japan.

We are trying to increase local sourcing of major vehicle components, among others.

And through implementation of those measures, we will try to reduce exposure through exchange rate fluctuations.

Therefore, I am not saying that you'll see the sort of countermeasures that you'll be surprised to see all of a sudden.

That's not going to be the case.

If I could follow on to that question, thank you very much for that thoughtful answer.

I think, though, about the 3 million units of production right now, and I think about the previous peak in your production, which I believe was somewhere over 4 million.

It would imply that the capacity utilization ratio on -- was substantially below something that you would see as competitive long-term.

And I'm just -- I'm sort of wondering how we should think about the plan to improve that capacity utilization, or how we should even compare the utilization now versus then.

(interpreted) This is announced in May two years ago, but at the current standing capacity, the production capacity is around 3.6 million units, and we are planning to gradually reduce that capacity in Japan.

You seem to be implying that because there is surplus capacity in Japan, that means inefficiency.

And it might appear in that way.

However, the capacities and equipments that we have in Japan is to the extent of over 90% depreciated, and therefore, the existence of domestic production and capacity does not have major impact financially.

And at the same time, given the fact that models such as Aqua is selling extremely well, we need some upper flexibility.

And having this sort of buffer allows us to adjust those production without any financial implications.

So we are planning to reduce the production capacity gradually from the level of 3.6 million units.

Thank you very much.

The time is running out.

So, final question, please.

Our final question.

-- Murphy from Bank of America Merrill Lynch.

Thank you for taking my question.

I'll keep this as brief as possible.

Just wanted to ask a question.

When we look at the marketing efforts, or marketing spend that you've laid out in your year over year change for this year, it looks fairly, fairly low.

And there's been a lot of concern in the US market that you might ramp up incentives to regain market share.

So it appears so far your efforts are fairly tempered on marketing efforts directed at incentives.

I'm just curious, as we look forward into calendar year or full year 2012, if those efforts might ramp up, and if you can juxtapose that with what appears to be a fairly conservative forecast for market share.

It looks like your market share forecast, based on your volume, would only go up to 13.9%, which is about a 100 basis point move.

So it seems like you're being very conservative, both on your marketing spend and your market share forecast, despite the fact that there's a lot of concern in the market that you might get a lot more aggressive with incentives to pump up market share.

Just trying to understand if these numbers are just very conservative and they're just planning numbers, and you could possibly be much higher than them.

(interpreted) First of all, in terms of incentives, we do not intend to use a large amount of incentives just for the sake of increasing the sales volume.

We have not done that in the past, and I think we do have a full understanding of both benefits and negative impact of incentives.

If you look at the evolution of incentives between October/December period, as against July/September period last year, clearly, incentives decreased in that period in the United States.

We do not intend to increase volume at the expense of earnings, or at the expense of profit.

And therefore, you seem to have implied that our US market share forecast, although slightly less than 14%, is still low, and probably, I think the appropriate answer is, that is correct, and we have taken a rather conservative forecast for that.

Between November and December, our market share returned to 14.2%.

We subsequently decreased to 13.6% in January.

And the major reason behind this decrease is that the inventory level was very low at the end of December, and we suffered from a short supply, supply shortage.

So, this expected sales volume of 1.9 million in the United States can be said to be quite conservative.

This year in the US market, we are planning to launch 19 new models.

So, rather than using incentives, we intend to compete using those new models as our important weapons.

Great.

That's very helpful.

Thank you very much.

(inaudible), our time is up.

Please allow us to conclude today's conference call now.

Thank you very much for your participation.

If you have further questions, please contact our IR team in New York or London.

Thanks again 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.