Toyota Motor Corp

TSE:7203

Earnings Call Transcript 2019-Q1

[Masayoshi Shirayanagi, executive]

Good afternoon, ladies and gentlemen. My name is Masayoshi Shirayanagi. Thank you very much for joining us today for financial results briefing today. First of all, we would like to take this opportunity to thank our customers, who chose us as well as all our stakeholders, who support us. Thank you, indeed, very much. It's my pleasure to discuss through this financial results for the first quarter of the financial year ending in March 2019. Compared with the first quarter of the previous fiscal year, consolidated vehicle sales of the first quarter of fiscal 2019 increased by 21,000 units to 2,236,000 units. This was a result of solid sales in North America, Europe and Asia.

The consolidated financial results for the first quarter were net revenue of JPY 7,362,007,000,000, operating income of JPY 682.6 billion, pretax income of JPY 813.8 billion and net income of JPY 657.3 billion.

Here, I would like to explain the factors, which impacted operating income year-on-year. First, the net effect of foreign exchange rates was 0, mainly due to negative translational impact of foreign exchange rates resulting from a JPY 2 appreciation against the dollar and other positive factors. Secondly, cost-reduction efforts increased the operating income by JPY 15 billion as the impact of cost-reduction efforts exceeded the increase in raw materials costs. Thirdly, marketing activities increased operating income by JPY 45 billion due to improved vehicle sales and product mix in North America, Europe and Asia. Finally, including the impact of cost-reduction efforts, expenses decreased by JPY 60 billion due to a decrease in quality assurance costs, which represented a significant portion of our expectation for the full fiscal year. As a result, excluding the overall impact of foreign exchange rates, swap valuation gains and losses and other factors, operating income improved by JPY 120 billion year-on-year.

Next, I would like to elaborate on operating income for each region going from the left-hand to right-hand side of the slide. In Japan, vehicle sales decreased by 34,000 units year-on-year to 510,000 units due to the diminished effects of new models. Operating income was up JPY 76.2 billion year-on-year to JPY 396.1 billion, mainly due to cost-reduction efforts and an increase in export vehicle sales as well as a reduction of expenses.

In North America, vehicle sales were up 23,000 units year-on-year to 746,000 units, driven by truck and SUV models, such as the Tacoma and Highlander. The operating income was JPY 78.3 billion, down JPY 10.4 billion compared with the first quarter of the previous fiscal year. This was largely a result of increased sales incentives. However, we are now able to control incentives more adequately by efficiently allocating them to key models.

We'll continue our efforts in this regard. In Europe, vehicle sales grew by 13,000 units year-on-year to 253,000 units, driven by such models, as the C-HR hybrid vehicle. Operating income was up JPY 2.6 billion to JPY 23.1 billion. This was mainly a result of a reduction in expenses.

In Asia, vehicle sales were up 31,000 units year-on-year to 394,000 units on the back of solid sales in Thailand, India and China.

Operating income was up JPY 39.3 billion year-on-year to JPY 142.2 billion as a result of cost-reduction efforts in addition to marketing efforts.

In other regions, overall vehicle sales were down 12,000 units year-on-year to 333,000 units due to decreased sales in the Middle East.

Operating income increased by JPY 1.5 billion year-on-year to JPY 41 billion. This was primarily due to marketing efforts, including price improvements and the reduction in expenses.

Next, allow me to explain the operating income of financial services. Operating income, excluding swap valuation gains and losses for the first quarter was up JPY 7.1 billion year-on-year to JPY 82.2 billion. This was mainly due to an increase in the lending imbalance and the decrease in costs related to loan losses and residual value losses. Now I'd like to move on to discuss the outlook for the full fiscal year ending March 2019.

First, with regard to our consolidated vehicle sales, we have reduced our initial forecast by 50,000 units to 8.9 million units. By region, vehicle sales are expected to increase in Europe and Asia but are likely to decrease in North America and other regions. As described at the bottom of this slide, we're maintaining our forecast of retail vehicle sales at 10.5 million units. The difference between the consolidated and retail vehicle sales is mainly due to an increase in anticipated retail sales in China. We have adopted ForEx rate assumptions for July onwards of JPY 105 per dollar, JPY 125 per euro, which makes our full year assumptions JPY 106 per dollar and JPY 126 per euro. Our forecast for full year consolidated financial performance remained unchanged. Net revenue of JPY 29 trillion, operating income of JPY 2,300,000,000,000, pretax income of JPY 2,440,000,000,000 and net income of JPY 2,120,000,000,000.

This slide -- see this slide for an analysis of our latest operating income forecast in comparison to our previous forecast. Firstly -- first, the positive effect of ForEx rates will be JPY 5 billion. This is due to the revision of ForEx rate assumptions and effect of the fiscal year and balance of provisions in foreign currencies. Secondly, we anticipate there will be a JPY 70 billion negative impact relating to cost-reduction efforts. This is due to a significant increase in raw material costs and inflation in Argentina despite the ongoing cost-reduction activities. Thirdly, we estimate that the effects of marketing activities will be JPY 110 billion due to price improvement efforts in response to increasing raw material costs and ongoing inflation as well as a disciplined use of sales incentives in North America.

Finally, expenses are expected to have increased by JPY 40 billion, largely as a result of the reclassification of factor from expenses due to the effects of ForEx, following verification of our accounting treatment. As for the fixed cost-reduction activities, we are steadily making progress towards achieving our challenge that will target, which we are determined to achieve at the end of the fiscal year through further efforts across regions. As a consequence, we're maintaining our initial operating income forecast at JPY 2,300,000,000,000. In order to achieve this, we will further reinforce profit improvement activities across the company.

Compared year-on-year, we anticipate JPY 99.8 billion decrease in operating income, excluding the overall impact of ForEx rate and swap valuation gains and losses, operating income is expected to be up JPY 130 billion year-on-year, which remains the same from the initial forecast.

Next, we would like to explain activities for enhancing our competitiveness. The first area involves cost reduction efforts into Toyota Production System. We are pursuing the reduction of Toyota costs and operational efficiency improvement in administrative and technical divisions. The second area is concerning making of ever-better cars. The Executive Vice President, Moritaka Yoshida, will explain our activities in this area later. The third area concerns investment in future technologies in order to enhance our competitiveness. In a future society of mobility, we are accelerating collaborations with other companies with and without committing capital investment, while allocating more resources to electrification, autonomous driving and connectivity. The fourth area is about strengthening the overall competitiveness of the Toyota Group by promoting collaboration within the group further and maximizing the utilization of each group company's strength.

Furthermore, as a worldwide partner of Olympic and Paralympic Games at the Tokyo Olympic and Paralympic Games in 2020, we envisaged to showcase mobility for all, in which every person can move freely by providing mobility solutions, which will go beyond the supplying vehicles in the conventional way.

We plan to provide the e-Palette, a battery electric vehicle designed for MaaS, the Mirai fuel cell vehicle, and the Sora fuel cell bus. And to demonstrate a level 4 equivalent automated driving technology in designated area. Thus, we would like to boost the enthusiasm in everyone for the Olympic and Paralympic Games. This concludes my presentation. Thank you very much.

[Moritaka Yoshida, executive]

Hi, everyone. I will talk about Toyota's efforts to create ever-better cars for the continuous creation of aisha or beloved cars that present Toyota often mentions. Currently, Toyota is working on creating ever-better cars based on TNGA and the in-house company system. TNGA increases the potential of cars through intelligent sharing of resources. The in-house company system allows each car type receive individual care to create aisha. Please allow me to explain the situation of some of our recent efforts.

First, let us look at TNGA. TNGA replaces the parts that make up the base of the vehicle. More specifically, TNGA provides a way for us to significantly increase the basic functions and appeal of our products, with core designs to win the hearts and minds of customers at first sight, where once they ride in the vehicle where they want to continuously driving. And in addition, offering additional functions, such as improved safety performance and fuel consumption. By sharing TNGA components in a way that considers complete optimization, we are able to increase efficiency as well as achieve cost reduction.

Functional components that determine the basic performance of cars, such as the platform and powertrain as illustrated in the diagram, are TNGA components. These components represent approximately 60% to 70% of the cost of our vehicle.

Next, let me move on to the in-house company system. Thanks to TNGA, improving the potential of the base system and parts, each in-house company can focus on creating beloved cars for each car type. For example, Lexus focuses on the luxurious feel for its vehicle, while the midsize-company focuses on how to bring a smile to groups of customers or even just 1. The TC company can focus on contact vehicles and making them easier to purchase. And GR company can focus on comfortable and also smooth driving. Decisions can be made quickly by the presidents of the in-house companies in a top-down approach and the four functions of planning, design, production engineering and manufacturing are united as one team, where each person focuses on carefully producing ever-better cars, building in quality along the way.

As a result, we're also starting to see the efficacy of optimization of the process from development to the start of production.

The new TNGA cars that have come out over the past and current year are shown on the slide. We have the growing mid-size sedan, Camry; Lexus premium vehicles, LC and LS; as well as the Crown and Corolla Sport that were launched just last month among others. All of these vehicles have demonstrated improved design, better driving performance and handling high-quality ride comfort, cutting-edge safety features and connected technology systems. They have been well received by our customers and praised by magazines.

In addition, the Prius PHV, C-HR SUV and hatchback Corolla Sport all use the same TNGA platform as a base. To summarize, TNGA makes it easier to develop and produce vehicle types, including variations, such as sedans, SUVs, hatchbacks and wagons.

On the other hand, challenges have also been revealed. Customers have realized that while cars have improved, pricing has also increased. This means we are still not adequately thinking from the customer perspective even though we are able to produce more appealing cost with greatly improved performance and cutting-edge safety features. Also, in order for Toyota to remain as a company in the midst of the increasing regulations and the progress reformatization, intelligence and electrification, we need to increase our competitiveness and accelerate the speed of decision-making and development so that we can continue to offer aisha to customers, who will work to further evolve TNGA by strengthening product or TNGA planning our advanced technology development enacting sensors cost reduction and introducing the Toyota Production System, TPS, in development sites.

Also, we will proceed to cultivate and develop our human resources by the way we move forward the task and activities to reform the way we work. When a customer sees or gets in a car and automatically smiles or feels like it is a part of them, they understand, excuse me, while moving forward improvements like this, we will expand our introduction TNGA-based ever-better cars to the market as shown in the diagram. We plan to make half of all of the cars sold TNGA models by 2020, and we plan to produce them at approximately 30 factories globally.

Furthermore, through the advancement through intelligence and connected technologies, we will enhance our overall product appeal and strengthen our competitiveness. Please allow me to share an experience of my own. The picture on the top here is me with my friends on a trip to Hokkaido, when I was a student and had just purchased my second Celica. This Celica was an indispensable partner to me, and I packed in memories with my Celica, my aisha. I joined Toyota after that and I had been involved in development of cars for roughly 40 years. The all-new Crown that we just launched has continued to evolve with innovations and new features and is a great representation of a Japanese premium vehicle. The Corolla is the world's most popular vehicle that is enjoyed by customers all over the world. In the 2 photos at the bottom, I can be seen driving the first-generation Crown and Corolla. Driving those cars naturally made me smile.

Technology moved forward, but the respective DNA that has been consistently preserved in each car model has not changed at all. In my opinion, the reason that some of Toyota's lines such as Crown, Corolla, Land Cruiser, Hiace, Century and so on, have continued for 50 or 60 years. And the reason is because of that DNA.

So when a customer sees and gets in a car and automatically smiles or feels like it is a part of them, they understand aisha. This feeling doesn't change with time or technology. I believe they are universally [ changed ] looking at the future, informatization, intelligence, electrification will progress further making cars more convenient, safe and better for the environment. And while mobility in general will also probably change, I still believe that this aisha feeling will endure. And this is how we will continue to make cars. TNGA brings out the potential of aisha, and in -- the in-house company system determines what aisha to make. Finally, Toyota sees this once-in-a-century transformational period an incredible opportunity. In addition to continuing to focus on aisha and making ever-better cars, we see this as an incredible opportunity to expand the business strategically shifting towards informatization, intelligence and electrification by offering new values that customers have not yet even thought about.

In the near future, cars will evolve into partners able to more deeply understand customers. Also, some vehicles like the e-Palette will connect vehicles to cities and to drive with functions to enhance lives, such as serving as stores, medical offices or laboratories. This is exciting connected future that awaits us. Toyota aims to contribute to the realizations of this future mobility society with our world-class technological know-how and innovative ideas.

So please join us as we look forward to this future of exciting changes. Thank you very much for your attention.