Toyota Motor Corp

TSE:7203

Earnings Call Transcript 2019-Q2

[Masayoshi Shirayanagi, executive]

Thank you very much. I am Shirayanagi. Thank you for joining us today for this presentation financial results. And first of all, we'd like to take this opportunity to take our customers who chose us as well as our stakeholders who support us. Thank you, indeed. Now it is my pleasure to discuss the financial results for the first half of the financial year ending March 2019. Compared with the first half of the previous fiscal year, consolidated vehicle sales increased by 30,000 units to 4,419,000 units. This was a result of solid sales in North America, Europe and Asia. The consolidated financial results for the first half of this fiscal year were net revenue of JPY 14,674,000,000,000, operating income of JPY 1,261.8 billion, pretax income of JPY 1,548.8 billion, and net income of JPY 1,242.3 billion. I would like to now explain the factors which impacted the operating income year-on-year. Firstly, the effect of foreign exchange rates decreased operating income by JPY 20 billion due to the negative translation impact of foreign exchange rates resulting from 1-yen appreciation against the dollar as well as depreciating of local currencies in emerging countries. Secondly, the cost-reduction efforts increased operating income by JPY 30 billion as the impact of cost-reduction efforts exceeded the increase of raw material costs. Thirdly, marketing efforts increased operating income by JPY 150 billion due to improved vehicle sales and product mix in North America, Europe and Asia as well as improved profitability in financial services and so on. Finally, expenses including the impact of reduction efforts decreased by JPY 40 billion due to a decrease in quality assurance costs and so on. As a result, excluding the overall impact of foreign exchange rates, swap valuation gains and losses and other factors, operating income improved by JPY 220 billion year-on-year. Next, I would like to elaborate on operating income for each region, going from the left-hand side to the right-hand side. In Japan, vehicle sales decreased by 56,000 units to 1,031,000 units due to the diminishing effects of new models. Operating income was up JPY 109.9 billion year-on-year to JPY 751.6 billion due to cost reduction efforts, marketing efforts and a reduction in expenses. In North America, vehicle sales were up 15,000 units year-on-year to 1,411,000 units, driven by trucks and SUV models such as the Tacoma and Highlander. Despite the progress on cost reduction efforts, operating income was JPY 137.2 billion, down JPY 3.9 billion compared with the first half of the previous fiscal year. This largely results from the negative impact of foreign exchange rates, rising raw material costs and increased sales incentives. As for sales incentives, we are now controlling them more adequately by efficiently allocating them to key models. In Europe, vehicle sales grew by 24,000 units year-on-year to 493,000 units driven by hybrid vehicles such as the C-HR HV. Operating income was up JPY 22.8 billion year-on-year to JPY 61.8 billion. This mainly results from marketing efforts including increased vehicle sales and a reduction in expenses. In Asia, vehicle sales were up 67,000 units year-on-year to 811,000 units on the back of solid sales in Thailand, India and China. Operating income was up JPY 63.2 billion year-on-year to JPY 276.2 billion, mainly as a result of marketing efforts including an increase in vehicle sales. In other regions, overall vehicle sales were down 20,000 units year-on-year to 673,000 units, mainly due to the decreased vehicle sales in the near and Middle East. Operating income decreased by JPY 7.9 billion year-on-year to JPY 63.8 billion. This was due to depreciation of local currencies and an increase in raw material costs. Next, the operating income of financial services. The operating income, excluding swap valuation gains and losses, for the first half of this fiscal year was up JPY 30 billion year-on-year to JPY 174.1 billion. This was mainly due to an increase in the lending balance and a decrease in costs related to loan losses and residual value losses. Next, shareholders return. With regard to the interim dividend of shares of common stock, we plan to make it JPY 100 per share, the same amount as the last fiscal year. Regarding full year dividend, we will continue to pay it stably and sustainably using the consolidated payout ratio of 30% as the benchmark. So this one summarizes our interim dividends and share buyback for this term. The total amount of dividends on both shares of common stock and model AA class shares for the first of this fiscal year will be JPY 1291.8 billion (sic) [ JPY 291.8 billion. ] We also plan to buy back up to JPY 250 billion or 42 million shares of common stock as the interim shareholder return. As a result, together with the interim dividend, the total shareholder return for the first half of this fiscal year will be up to JPY 541.8 billion, and the total payout ratio will be a maximum of 43.6%. Now I'd like to move on to the -- first, the outlook for the full fiscal year ending March 2019. First, with regards to our consolidated vehicle sales, we have maintained our forecast at 8.9 million units as we announced at the time of the Q1 results. As described at the bottom of the slide, we have also maintained our forecast of retail vehicle sales at 10.5 million units. We have adopted ForEx rate assumptions for October onwards of JPY 110 per dollar and JPY 130 per euro as well as full year assumptions of JPY 110 per dollar and JPY 130 and per euro. Based on this, our forecasts for full year consolidated financial performance are net revenue of JPY 29,500,000,000,000, operating income of JPY 2,400,000,000,000, pretax income of JPY 2,720,000,000,000 and net income of JPY 2,300,000,000,000. Moving on to an analysis of our latest operating income forecast in comparison to our previous forecast at the Q1 results. First, the positive effect of ForEx rates will be JPY 125 billion. This is mainly due to the adjustment of ForEx rate assumptions to the weaker yen against the dollar and euro. Secondly, we anticipate there will be a JPY 30 billion negative impact relating to cost-reduction efforts. This is mainly due to a higher increase in raw material costs than initially expected despite the steady progress of ongoing cost-reduction activities. Thirdly, we estimate that the effects of marketing efforts have a positive impact on operating income of JPY 75 billion due to price improvement efforts as a response to market fluctuations and ongoing inflation as well as a disciplined use of sales incentives in North America. Finally, expenses including the impact of reduction efforts are expected to have increased by JPY 40 billion largely as a result of an increase in expenses in response to ongoing inflation in South America. As for the cost reduction and fixed cost-reduction activities, we are steadily making progress towards achieving our challenge level target. In order to achieve this at the end of this fiscal -- financial year, and to continue strengthening our earnings power, we will accelerate our activities throughout the second half of the financial year across the group, companies and regions. As a consequence operating income is expected to be up JPY 100 billion year-on-year to JPY 2,400,000,000,000. Next, let me compare the latest operating income forecast for this fiscal year with the results of the previous fiscal year. Compared year-on-year, operating income is expected to increase by JPY 200 million due to the upward revision of JPY 100 billion from the forecast at the time of Q1 results as mentioned earlier. Excluding the overall impact of ForEx rate and swap valuation gains and losses, operating income is expected to be up JPY 135 billion year-on-year. Now as Executive Vice President Kobayashi said, Executive Vice President Didier Leroy will expand our sales and activities for enhancement of competitiveness and sustainable growth and Senior Managing Officer James Lentz will explain our profit improvement activities in North America.

[Didier Leroy, executive]

Thank you for making the time to come here today. I'm very pleased to have the opportunity to meet you. Today, I will talk about enhancing competitiveness in sales to pursue sustainable growth for the company. To pursue our vision, we are pushing in 3 directions. Strengthening our foundation, encouraging creativity in creating new value and pushing sustainable growth. All 3 are essential. And my job as the Chief Competitive Officer is to challenge the whole Toyota Organization to be the most competitive it can be in all areas of our business. To pursue sustainable growth, we must rely on our historical strengths. But we also need to innovate and think differently, make decisions faster and act like an entrepreneur. Customer changes and new technology are transforming our industry and markets all around the world at a speed we never faced before. With this entrepreneurial spirit, as Executive Vice President and Chief Competitive Officer, I am leading the enhancement of our sales capability worldwide. Facing a one in a century transformation, it is critical to secure strengths and presence in all markets and to popularize our new technologies. To do so, there is no more important mission than to increase the numbers of customers who choose Toyota. For that, we are engaged in 4 key sales activities: first, swift decision making and quick action based on genba information; second, train sales staff using exclusive departments; third, reinforce our brands; and finally, create lifelong customers. Genchi genbutsu is what we consider the most important policy at Toyota. In addition, making swift decisions and taking quick action for the improvements is some things I personally insist on. It is also one of what I call my leadership principles that executives have to roll up their sleeves and lead the PDCA by themself. To accelerate the cycle, top executives, including myself, have personally visited many points of sales and service directly and have tried to learn a lot from them. When top management is involved personally, the PDCA cycle is achieved much faster. Next, is the importance of training our staff. We sell vehicles globally. However, there is no universal market and each market has unique customer needs. The sales functions have to deeply understand these market characteristics and feed back the customer voice within our organization. At the same time, Toyota's core target of being the best in town should be embraced everywhere. To support this, we have an exclusive department to train our staff and we also share the know-how from the most experienced country or region. The training has two main objectives. First, to help staff have a better sense of the market. Second, to raise the level of sales operations. We developed this best in town strategy all around the world with the same passion, lead by local staff for local customers. The third point is the need to reinforce our brands. Last year, Toyota, we launched our first ever global marketing campaign, start your impossible, using the energy of our worldwide Olympic and Paralympic partnership. With this campaign, we are showing our ambition to become a mobility company and to provide mobility for all. Second pillar of our brands, environmental vehicles. Green cars are not just something to meet CO2 compliance. This is part of our DNA, and they have also become a key differentiator for Toyota. The third pillar, motor sports and GAZOO brands. We continue to make efforts to always make ever better cars and increase fans through motor sports. The last activity to increase the numbers of customers choosing Toyota is to create lifelong customers. Toyota's approach is to reduce the lifetime cost to the customer by retaining residual values through lower incentives, product improvement and brand enhancements. And we want to improve our after sales service to be more convenient and affordable. And the gap between the costs and the value received including omotenashi become satisfaction, increase this satisfaction level to an even higher level and you can create a lifelong customer. We are confident that with all of this action we can increase the number of customers choosing Toyota. Now let me touch on our activity here in Japan. To cope with future market changes in Japan, we prepared the J-ReBORN plan in 2016, and we are actively carrying out this plan's activities. J-ReBORN plan have 2 major pillars. First, shift to regional-based approach. We changed from a national-wide and channel-based to a regional-based approach organization this January to better address the regional needs. Second, transform from an automotive manufacturing company to a mobility company that can provide a diverse variety of mobility-related services. Toyota dealers are starting to offer appropriate services to local communities and aiming to become best in town sales outlets. These are also coordinating with local government and nonautomotive businesses to provide new mobility services for regional societies. New mobility services will start from Tokyo. Why? Why Tokyo? Very fast to adopt new trends. The Tokyo region have a big urban area and also countryside area, where we can try different types of new mobility services. A new company, what we call Toyota Mobility Tokyo, will be established in April 2019 by integrating our full directly-owned Toyota sales company in Tokyo and all dealers will become One Toyota. This new company will be the front-runner to begin 3 new activities. First, to allow dealers to better respond to their customer needs, all stores will begin to sell all Toyota vehicle models ahead of the other regions in Japan. Second, it will start new mobility services with, for example, the car-sharing service TRI-AD in Nagano and a monthly set price subscription service for private customers called Kinto. And lastly, through the margin, it well set up a TPS Kaizen promotion division to enhance the productivity and quality of sales operations and cultivate human resources capable of innovation. Next, let me mention China. As shown on the slide, our volume sales has been increasing in China. It's come from our steady effort to improve sales capability and, of course, market expansion itself. First, we increased our presence at local motor shows. Recently, we are participating in such motor shows to the tune of around 150 to 200 times yearly. Secondly, we are doing hybrid brand events. Gradually, we have been able to convey the benefit of our hybrids to Chinese customers. We have been holding around 20 such events per year. Lastly, we provided TNGA test drive. We started this activity when the new Camry based on TNGA platform was launched at the end of 2017. There, a customer can feel the benefits on design and drivability of the TNGA vehicle. Lately, distributors have also been organized these events with C-HR and Izoa, the newest TNGA SUVs. Based on such activity, at the genba, we have been increasing sales volume. We also welcomed Mr. Li, Prime Minister of China, to Toyota Hokkaido in May. We felt Chinese expectations to our Toyota and we will continue our effort for sustainable growth in China. We cannot cover all the region in today's limited time. And Jim will come back in a few minutes on the North America activities. But another example of regional change and improvement of our sales announcement activity is what we decided, for example, for Africa. Based on our home and away strategy, we decided to transfer the activity to Toyota Tsusho Corporation to boost our performance in this region. In conclusion, as you have you heard and seen, the [ fealty ] of best in town and genchi genbutsu are what constitute the Toyota way when it comes to sales. For us, best in town means listen, learn, and take quick action locally with the understanding that there is no universal market and try to be the best brand in each market and in each city. Genchi genbutsu is to grasp real information at genba or frontline. The right decision, the right strategy, the right action should be taken only after receiving the right information, which can be obtained only at the genba or frontline. It cannot be obtained just by waiting in the office or reading a report. By sharing the Toyota way of sales globally, we are making our sales activity better, better and better again. We believe that following this way will lead Toyota to become the number one but the number one in the heart of the customer. I really hope you can follow our progress in the following months and years to come. Thank you very much and I will hand over now to Jim Lentz. Thank you.

[James Lentz, executive]

It's nice to see so many familiar faces that have joined us in Detroit. I'm going to start by giving you a very quick update on how the overall market is running for us in North America. In North America, we continue to see some tailwinds and we have some headwinds. On the positive economic side, unemployment is very low, consumer confidence is at near record levels, fuel prices remain low, the housing market and housing starts still remain strong and stock market performance is also very, very well. So overall, consumers feel very, very good about the market. But we do have several challenges. There are challenges of uncertainty of trade, uncertainty in emission regulation, rising interest rate environment. The overall market appears to have peaked in North America. Commodity prices in America are rising. Incentives are a large expectation of our consumers and used cars are still adjusting as we shift from a passenger car market to a much stronger light truck market. But overall, North America is on target to hit its sales plan of 2.4 million vehicles in a market that is approximately 17 million vehicle sales. Now, many of you have heard of the phrase One Toyota. And it was our consolidation of our sales, our manufacturing and our finance company under one roof in Plano, Texas. And there are many, many benefits. It allows us to strengthen the capabilities of our team members, to become much more efficient, to respond much more quickly to the market and to our customers. But most importantly, it allows us to work as 1 team and have 1 voice in how we attack the marketplace. And our transformational profit plan is just one of those advantages as working as 1 team. It is really designed for rapid improvement in North American profit. And as I said, we're going to do that as 1 team, sales, manufacturing, finance company, all working together. And it focuses on a number of different areas. First off, as revenue management and incentives. We will strengthen our product competitiveness and that includes our telematics offerings to the marketplace, continue to improve our QDR as well as safety, take advantage of the new platform, TNGA, and also, rebrand our hybrids as they become a larger and larger share of our business. We're also optimizing our incentive system. Every facet of our incentives, from planning to execution, has been evaluated to make sure that we can become the most efficient company in terms of using incentives. Today we're number two, but we are number one of any full-line manufacturer. Fixed cost. Prioritizing our return on high investment projects, fixed cost reductions in professional services, travel, real estate, as well as overall labor cost. And in labor cost, we're working very closely, we call it the synergy project, between the North American headquarters as well as TFS to eliminate duplication in administrative services. We're also taking a critical review of non-core activities to eliminate any waste that may be in the organization. In terms of our profit portfolio, we're taking a hard look at all of the segments that we compete in to make sure that we're competing in profitable segments and that products that we sell have strategic value to the brand. We're also improving in the connected car technologies, as well as taking a look at any of our new initiatives to make sure we're putting priorities and our dollars in the right place. And finally, it's under design and spec. Our R&D team in North America is really taking a hard look at how we execute the all-new TNGA platform. And I'll give you an example because we really need to become more flexible and more responsive to the marketplace. But today, as we develop this current generation Camry, we developed Camry, Avalon and ES all in sequence to take advantage of being able to reduce overall manpower as we move from the Camry to the Avalon to the ES, and it's been very successful for us. We'll do that same thing as we go into the future and replace our frame-based vehicles: Tundra, Tacoma and Sequoia. And this is all going to help us really help to recover profitability and make sure we sustain that profitability. So what are we doing to strengthen our sales activities? There are 4 topics I'd like to just touch on. Number one is product cadence. Over the next 3 years, from 2019 to 2021, we will introduce, in the U.S. alone, 31 either all-new, redesigned or refreshed models. That compares to 24 in this last 3-year cycle. We're going to grow the lineup including a new sports car, that's no big secret to anyone, new SUVs, all in an attempt to attract new, young buyers. And as all of you know, as product cadence improves, the need for incentives declines. Also there is the retail transformation. So we're changing the way we work in our dealerships to be able to attract these young buyers. As you may know, Toyota, in the U.S., is already the number one brand in terms of African-American buyers, Asian buyers and Hispanic buyers. But we need to create a new digital touch point for these consumers. And I'm going to touch on 4 or 5 different areas of this new process. Number one is dealer inventory management, to make sure that, through digital process, we have the right product at the right place at the right time to satisfy our customer needs. Number two is helping the dealers become much more efficient with what they have in stock. And that's going to allow a customer to actually select a vehicle that is in stock, be transparent and understand what the clear pricing is, understand trade-in values, understand what monthly payments will be and actually be able to get approved credit online even before they go into the dealership. And that mobility sales tool will allow the customer, if they stop at a certain point in that transaction process, they will be able to pick up on just that same point when they go into the dealership. So they won't have to start over again. It also will help us in our ownership life cycle. Consumers will be able to make appointments online for service. They'll be able to pay for their service online. They'll be able to track their service histories online, as well as parts. Consumers will be able to orders parts from the dealerships. They can ship them to their homes to install themselves or they can order the parts and go to the dealership and have the installation done. So the key to all this and why it's important is it's all about speed and transparency, because what we know about young buyers is speed and transparency is important because it builds trust and that drives loyalty to our brands. Next is our product mix. We continue to balance our trucks and SUVs as the marketplace continues its shift from cars towards light trucks. That shift over the last 3 years has been quite, quite large, and it's really moved away from what our core strength has been. Our core strength in North America has always been Camry, Corolla and Prius. But as we've put more efforts into light trucks and capacity into light trucks, unlike many of our competitors, we are not going to abandon passenger cars. We still think there's strong opportunities for us to grow in those segments. And finally, it's about optimizing our manufacturing footprint. We've made a lot of investment in TNGA in our plants. We have our new Mexico plant in Guanajuato that will open in 2019 to build about 100,000 much-needed Tacoma pickup trucks, and in 2021, our joint venture in Alabama will open with Mazda. So we are still making those adjustments to the market needs. Finally, I'm going to touch on 3 issues about the future. Number one is Toyota Connected. You've heard a lot about it, but I want you to understand how it's being executed in the marketplace. So I'm going to highlight a program called HUI, H U I, and it's a station-to-station car-sharing service that's being tested by our distributor Servco in Hawaii. Today, they have 70 moving towards 100 vehicles in 25 different stations around Honolulu. They're using a platform, mobility services platform, developed by TC along with a smart key and a mobile application. And it's only been in operation for about 90 days, but thus far, it's off to a great start. They have had over 1600 reservations with about a 2.2 hour average reservation time. But this system that we're developing is going to not only allow us to monetize in car sharing but it also provides tremendous opportunities for our dealers to be able to track their inventory, to be able to measure how much gasoline is in their car, to understand if tire pressures are low, to be able to use those vehicles in car sharing as well as third parties. We'll be able to use that data on how customers are driving to create driving scores to be able to work with different insurance companies as well as rent-a-car companies like Avis, who are very happy to use this information to measure things like fuel levels so they can much more accurately estimate how much fuel is in a car and also be able to manage their inventory much better. The second project is a project that we call the portal project. And it's a fuel cell vehicle project. This is a zero emissions truck. We have 2 proof of concepts in operation in Long Beach, California right now. These are class 8 80,000-pound capable trucks that basically move freight from the port of Long Beach to the rail head. It's about a 4-mile trip. And this is going to allow for a much more environmental way to move this inventory than today there are about 16,000 diesel-powered trucks that go in and out of that port operation. So we believe that this is going to make a huge difference in air quality not only in the U.S., but around the world. Finally, there is the electrification plan. We continue to invest in alternative fuel options. We believe in an alternative fuel portfolio in the U.S. that has its backbone in hybrids, in plug-in hybrids and we're n moving into fuel cells. Eventually EVs will be part of that mix as well. We are a big advocate for fuel cells in America. We have 36 stations available right now that have hydrogen. It's a little bit behind our plan but, as that expands, we will be able to sell more hydrogen fuel cell vehicles. Volume so far today are about 4000, all sold in the state of California. And it's important to us because, as we continue to meet these tougher and tougher emission standards, today the market is a little more than 3.5% hybridized weakness. We are about 9% so we are the lion's share of the business. By 2020, that will grow to 15%. So it's important that we continue to push our hybrid options and with the great stable of vehicles that TMC is developing for global markets, when the EV business is ready in America, we're very confident that we'll have vehicles for that market as well. So I thank you very much for your time.