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Edited Transcript of 7203.T earnings conference call or presentation 2-Aug-19 10:59am GMT

Q1 2020 Toyota Motor Corp Earnings Press Conference

Aichi Aug 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Toyota Motor Corp earnings conference call or presentation Friday, August 2, 2019 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Kenta Kon

Toyota Motor Corporation - Concurrent GM of Accounting Div. and Executive VP of Advanced R&D and Engineering Company

* Moritaka Yoshida

Toyota Motor Corporation - Executive VP & Concurrent GM of MS Management Division

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Presentation

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Kenta Kon, Toyota Motor Corporation - Concurrent GM of Accounting Div. and Executive VP of Advanced R&D and Engineering Company [1]

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Hello, everyone. Thank you for joining us today. I'm Kenta Kon. First of all, we would like to take this opportunity to thank our customers who choose us as well as our stakeholders who support us. It is my pleasure to discuss Toyota's financial results for the first quarter of the fiscal year ending March 2020.

Let me start with Slide 5. Compared to the first quarter of the previous fiscal year, consolidated vehicle sales increased by 67,000 units to 2.303 million units. This was a result of solid sales of TNGA new models such as the RAV4 and Corolla, mainly in Japan, North America and Europe.

Please see Slide 6. Consolidated financial results for the first quarter were: net revenue of JPY 7.646 trillion; operating income of JPY 741.9 billion; pretax income of JPY 841.7 billion; and net income of JPY 682.9 billion.

Using Slide 7, I would like to explain the factors which impacted operating income year-on-year. Firstly, the effects of foreign exchange rates increased operating income by JPY 20 billion. Secondly, cost reduction efforts increased operating income by JPY 15 billion. Thirdly, marketing efforts, which resulted in increased sales of TNGA new models, such as the RAV4 and Corolla in Japan, North America and Europe, as mentioned earlier, as well as improved profitability in financial services, increased operating income by JPY 80 billion.

Finally, expenses increased JPY 75 billion due to an active R&D investment in advanced and cutting-edge technologies fuels, while improving efficiency through TPS and cost reduction activities. As a result, excluding the overall impact of foreign exchange rates, swap valuation gains and losses and other factors, operating income improved by JPY 20 billion Y-o-Y.

Now I'd like to elaborate on operating income for each region, going from the left-hand side to the right-hand side on Slide 8. In Japan, operating income was up JPY 40.2 billion Y-o-Y to JPY 436.4 billion as a result of marketing efforts. In North America, operating income was up JPY 37 billion Y-o-Y to JPY 115.4 billion as a result of marketing efforts and reduction in expenses. We believe that we are starting to see the results of structural reform of North America as one. More specifically, we are promoting all direction activities such as sensitivity, balanced and efficient allocation of sales incentives, enhanced cost reduction efforts by model access, efforts on improvement of SUV and light truck supply, improvement on productivity of each plant, reductions in fixed cost across the company.

In Europe, operating income was up JPY 11.6 billion Y-o-Y to JPY 34.7 billion as a result of marketing efforts. In Asia, operating income was down JPY 25.6 billion Y-o-Y to JPY 116.5 billion, mostly due to the effects of ForEx rates caused by depreciation of the Chinese yuan and appreciation with the Thai baht. In other regions, operating income was down JPY 19.2 billion Y-o-Y to JPY 21.7 billion, largely due to the impact of inflation in Argentina.

Next, let me explain our consolidated subsidiaries and equity method affiliates in China by using Slide 9. Please note that the fiscal year-end of our companies in China is in December. Therefore, earnings of these companies reflect the earnings from January to March, which numbers are reflected in Toyota's consolidated financial results for the first quarter of the fiscal year ending March 2020.

Retail sales in China increased by 23,000 units year-on-year to 348,000 units on the back of solid sales driven by C-HR, IZOA and Levin. Operating income of consolidated subsidiaries decreased by JPY 19.6 billion Y-o-Y to JPY 36.4 billion, mainly due to the effects of ForEx rates caused by the depreciation of the Chinese yuan. Equity in earnings of affiliated companies was up JPY 4.1 billion Y-o-Y to JPY 31.7 billion, thanks to marketing efforts.

Next, please see Slide 10 for the operating income of financial services. Operating income, excluding swap valuation gains and losses for the fiscal year, was up JPY 23.4 billion Y-o-Y to JPY 105.7 billion. This was mainly due to an increase in lending balance and the decrease in costs related to residual value losses.

Now I'd like to move on to discuss the outlook for the full fiscal year ending March 2020. Please look at Slide 12. With regards to our consolidated vehicle sales, we maintain our initial forecast, anticipating that vehicle sales in Japan will increase by 10,000 units, while vehicle sales in North America will decrease by 10,000 units.

Please see Slide 13. We have adopted ForEx rate assumptions from -- for July onwards of JPY 105 per dollar and JPY 120 per euro, which makes the full year assumptions JPY 106 per dollar and JPY 121 per euro. Based on this, our forecast for full year consolidated financial performances are: net revenue of JPY 29.500 trillion; operating income of JPY 2.400 trillion; pretax income of JPY 2.560 trillion; and net income of JPY 2.150 trillion.

Please see Slide 14 for an analysis of our latest operating income forecast in comparison to our initial forecast. Operating income is now expected to be JPY 2.400 trillion, down JPY 150 billion from the initial forecast. There is a JPY 180 billion negative impact relating to the changes of ForEx rates assumptions. In order to offset such impact even slightly, we plan an additional JPY 25 billion positive effect of profit improvement activities through cost reduction and reductions in expenses.

Compared year-on-year, we anticipate a JPY 67.5 billion decrease in operating income. We remain committed to and will continue to undertake our profit improvement activities across the company with our utmost effort.

Currently, we are pursuing various activities to transform ourselves to a mobility company. And to support such effort, next, Executive Vice President Yoshida will explain our activities to continue to hone our competitiveness under ever better making car (sic) [making ever-better car], which supports our transformation.

This concludes my presentation on the financial results for the first quarter for the fiscal year ending March 2020.

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Moritaka Yoshida, Toyota Motor Corporation - Executive VP & Concurrent GM of MS Management Division [2]

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Good afternoon, everyone. I am Yoshida from Toyota Motor Corporation. Thank you so much for attending today's media conference to join us today.

Surviving a once-in-a-century period of profound transformation, we are undertaking various efforts toward a complete redesign into a mobility company. As President Toyoda stated at the financial results announcement in May of this year, in an age when the change is required, we must be mindful of what we must not change. We believe that enhancing competitiveness through the process of making ever-better cars in the real world is one thing that we should not change.

Today, I will introduce current developments and the future plans for competitiveness, enhanced through the making ever-better cars process. I will share characteristics of Toyota's car manufacturing. There are 2 key points. First, we are producing and selling a large volume, about 10 million cars, worldwide. Second, we have a full lineup, ranging from small, large and commercial cars to environmentally friendly cars and sports cars.

As part of activities utilizing these key points, we raised the potential of our cars to a great extent. And from there, adapting TNGA and the in-house company system, we made use of the large volume, 10 million units, to create ever-better cars. We continue to reinforce competitiveness of making ever-better cars with our customer-first policy and both TNGA and the product-based in-house company system.

I will explain our current situation since the introduction of TNGA 4 years ago and 3 years since the introduction of the product-based in-house company system. These are the cars developed under TNGA and the product-based in-house company system. We began these TNGA initiatives, alongside the development of the fourth generation Prius launched in 2015 and expanded the lineup to midsize, large-size and Lexus models.

At present, we have introduced 15 models, resulting in a switchover of roughly 3 million units to TGNA-based (sic) [TNGA-based] models. These cars received favorable reviews for design, performance and specs by customers, and the sales are doing well.

In April, we introduced the RAV4, which is the best-selling SUV in the world. We received positive feedback from customers, including comments on powerful styling, functional and generous trunk space, comfortable 4-wheel drive driving and affordable price. We are pleased that 45% of customers are under the age of 30, a demographic that is currently trending away from driving cars.

Next, I will explain specific results of TNGA. Development human resources decreased by about 25% compared with previous models, owning to grouping development and commonization of parts. Capital investment for manufacturing cars decreased by around 25% per line average because a wide range of cars were efficiently made using the same equipment, owning to standardization. Base costs decreased by about 10% through the use of common component parts, decreasing parts variation and by simplifying production process as thoroughly as possible.

However, as a result of additional environmental regulations and the safety features, pricing fell short, far short of customers' expectations. In order to provide cars at a more affordable price, we will place TPS through the production system and cost reduction at the forefront and accelerate these efforts.

In recent years, the environment around vehicle development has been changing at a rapid pace with ever-increasing magnitude and speed. For example, one global trend, especially in North America market, the segment shift from sedans to SUVs is accelerating faster than anticipated. As a result, some OEMs are adjusting their strategy by moving away from the sedan market.

In China, the largest growth market, Chinese manufacturers are increasing their share by providing multimedia with large displays and convenient features connected to smartphones. We should also closely follow and swiftly adjust to diversifying customer demands in each region.

Also, as we announced recently, we will accelerate the pace of electrified vehicle penetration while complying with tightening environmental regulations, and at the same time, implement further cost reductions as well as shift resources to CASE development.

Likewise, in spite of the increasing challenges we face in the automobile industry, we will focus on activities to enhance our competitiveness in making cars in order to become a mobility company based on our mid- to long-term vision. There is no silver-bullet solution that can magically enhance competitiveness towards ever-better cars. Under our customer-first principle, we will move forward in keeping with Toyota way, meaning an all Toyota approach toward participation and strong collaboration with suppliers and related companies.

We'd like to evolve the activities of the in-house company system and the TNGA as two pillars, while also pursuing a shift in resources and human resources development toward future CASE development. We established vehicle development center from this July, at the same time, we recognize the said factory to enable vehicle development functions, such as advanced technology, powertrain development in conventional vehicles to streamline and strengthen development process. This allows us to speed up development and train and develop vehicle engineers. And in doing so, we aim to further speed up the development of next-generation zero-emission vehicles.

Let me explain the future product launch plan for the future 2 years, from compact to commercial SUV. We are going to launch various types of new models, in total, 18 models, 6.5 million, roughly speaking. 60% of that will be switched to new models.

In this environment, in September, Toyota's core model, from the first generation, 1966, 12th generation Corolla sedan and wagon will be full-model changed and global model, and these new models will be commonized in the good way. As a specific model, we are going to reimprove the style and the spec greatly.

We are going to continue to keep launching ever-better cars. We hope you keep your high expectation towards us continuously. Thank you so much for your attention.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]