Toyota Motor Corp

TSE:7203

Earnings Call Transcript 2019-Q3

[Masayoshi Shirayanagi, executive]

Now I would like to discuss our financial results for the first 9 months through December 2018. Compared with the first 9 months of the previous fiscal year, consolidated vehicle sales increased by 23,000 units to 6,701,000 units. This was a result of solid sales mainly in Asia.

Consolidated financial results for the first 9 months of this fiscal year were net revenues of JPY 22,475.5 billion, operating income of JPY 1,937.9 billion, pretax income of JPY 1,725.7 billion and net income of JPY 1,423.3 billion. While both net revenues and operating income increased, net income decreased by JPY 589.8 billion year-on-year. This is largely due to the fact, as shown on the bottom of this slide under item 3, that net income in the same period of the previous fiscal year includes a positive impact of JPY 291.9 billion due to the U.S. tax reform and that net income of the first 9 months of this fiscal year includes a negative impact of JPY 310 billion of unrealized gains and losses on securities due to the market deterioration during this fiscal year.

Furthermore, if I may add some comments on the unrealized gains and losses on equity securities, Toyota uses U.S. GAAP as of today. Starting in the current fiscal year in line with the revised U.S. GAAP, we've recorded in profit and loss statement the mark-to-market values of equities we hold other than those of subsidiaries and affiliated companies. This represents a valuation losses based on the equity market value as of the end of December 2018.

If I may just explain the factors which impacted operating income year-on-year, firstly, the effect of foreign exchange rate increased operating income by JPY 10 billion. Secondly, cost reduction efforts increased operating income by JPY 10 billion as the impact of cost reduction efforts exceeded the increase in raw material costs. Thirdly, marketing efforts increased operating income by JPY 210 billion due to improved product mix in North America, Asia and Europe as well as improved profitability in financial services. Finally, expenses decreased operating income by JPY 10 billion due to an increase of labor costs mainly in Japan and Central and South America. As a result, excluding the overall impact of foreign exchange rates, swap valuation gains and losses and other factors, operating income improved by JPY 210 billion year-on-year.

Next, I would like to elaborate on the operating income for each region going from the left-hand side to the right-hand side on this slide. In Japan, vehicle sales decreased by 44,000 units to 1,595,000 units due to the diminished effects of new models. Operating income was up JPY 131.3 billion year-on-year to JPY 1,244.2 billion due to cost reduction efforts and marketing efforts.

In North America, vehicle sales were down 41,000 units year-on-year to 2,091,000 units as a result of the temporary impact of the preparation for RAV4 and Corolla switch-overs. Operating income was JPY 163.7 billion down JPY 4.4 billion compared with the first 9 months of the previous fiscal year. As for sales incentives, we are controlling them more adequately by efficiently allocating them to key models.

In Europe, vehicle sales grew by 19,000 units year-on-year to 725,000 units driven by hybrid vehicles such as the C-HR HV. Operating income was up JPY 24.5 billion year-on-year to JPY 87 billion. This mainly results from marketing efforts and the reduction in expenses.

In Asia, vehicle sales were up 127,000 units year-on-year to 1,275,000 units on the back of solid sales in Thailand, China and India. Operating income was up JPY 59.9 billion year-on-year to JPY 395 billion, mostly as a result of marketing efforts, including an increase in vehicle sales.

In other regions, overall vehicle sales were down 38,000 units year-on-year to 1,015,000 units mainly due to a decrease in vehicle sales in the near and Middle East. Operating income decreased by JPY 21.6 billion year-on-year to JPY 84.3 billion. This is largely due to depreciation of local currencies and an increase in raw material costs.

Next, I would like to talk about the operating income of financial services. Operating income excluding swap valuation gains and losses for the first 9 months of this fiscal year was up JPY 43.1 billion year-on-year to JPY 263.8 billion. This is mainly due to an increase in the lending balance and the decrease in costs related to residual value losses.

Now I would 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 increased our forecast at the time of Q2 results by 50,000 units to 8.95 million units. As described at the bottom of the slide, we will also increase our forecast of retail vehicle sales at the time of Q2 results by 50,000 units to 10.55 million units.

We have adopted ForEx rate assumptions for January onwards of JPY 112 per dollar and JPY 125 per euro as well as full year assumptions of JPY 110 per dollar and JPY 128 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 2,200,000,000,000 and net income of JPY 1,870,000,000,000. Please note that for the impact of unrealized gains and losses on the equity securities, we have used the same amount as the actual losses in the first 9 months of the fiscal year.

Please see the next slide. First, we anticipate there will be a JPY 10 billion positive effect relating to ForEx rates and a JPY 20 billion negative impact relating to cost reduction efforts. Secondly, we estimate that the effects of marketing efforts will have a positive impact on operating income of JPY 85 billion mainly due to increased vehicle sales in Japan and Europe as well as improved profitability in financial services. Final expenses are expected to have increased by JPY 65 billion, largely as a result of increased labor costs and expenses. As a consequence, we maintain our operating income forecast at JPY 2,400,000,000,000, which is what we have forecast at the time of Q2 results.

Now this one compares the latest operating income forecast for this fiscal year with the result of the previous fiscal year. Compared year-on-year, operating income is expected to increase by JPY 200 million, maintaining our operating income forecast at the time of Q2 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 due to cost reduction efforts, marketing efforts. As for the cost reduction and fixed cost reduction activities, we are steadily making progress towards achieving our challenging level of target. In order to achieve this, we will follow through with our activities.

Now I'd like turn to turn to the Executive Vice President, Shigeki Tomoyama, who will explain our strategy on Connected and MaaS, which we engage in as activities enhancing competitiveness and sustainable development.

[Shigeki Tomoyama, executive]

Good afternoon, ladies and gentleman. I am Shigeki Tomoyama of Toyota Motor Corporation. I'll introduce Toyota's Connected and MaaS Strategy. I am in charge of Connected Strategy, the new business as well as motorsport. Two years ago at the end of 2016, Toyota announced its Connected Strategy comprised of 3 arrows, namely build a mobility services platform, MSPF and secondly, use of a big data using that as a foundation and also creating new mobility services.

MSPF can be called a contact point between cars and external sources. With MSPF, Toyota takes responsibility to safely and securely manage the collection and management of data transmissions and big data between vehicles and external services. Service companies such as ride sharing, car sharing and insurance companies are also able to offer services to Toyota and Lexus vehicles via MSPF. The -- Toyota's Connected Strategy has 3 phases namely defense, kaizen and offense. In defense, we will establish a long-term relationship of trust with customers and secure and expand the existing value chain. Through kaizen, we aim for rapid improvement in productivity, quality and lead time by changing existing work habits. Via offense, we have an eye toward creating new value for cars and a new mobility business.

Key defense measures in our Connected Strategy includes e-Care services and a health check services. Dealers and call center both enabled by vehicle data allow provision of timely after-sales services, delivering a secure life with cars to customers. We hope to increase the number of service visits to dealers and improve the replacement rate of Toyota and Lexus vehicles moving forward.

The main kaizen measure in our Connected Strategy is early detection and early resolution or EDER based on vehicle data. By constantly collecting vehicle data, we can detect market defects at an early stage and identify target vehicles. As a result, market actions can be taken faster and more efficiently reducing costs.

Onboard a software update by OTA, which stands for over the air, are currently limited to updates of navigation-related software. From 2020, OTA software updates will become possible for certain ECU control software. With OTA, automobile software can be kept constantly up to date, reducing costs significantly compared to part replacement by visiting dealers.

Offense measures in our Connected Strategy focus on the creation of new value for vehicles and the creation of a new mobility business. The Agent system represents new value creation. This cloud AI virtual assistant enables the cars to talk to and communicate with users. Currently, Agent 1.0 is in commercial use, allowing users to control the navigation system and air conditioning system by talking to Agent. We plan to launch a more advanced Agent 2.0 in or after 2020. Creating a new mobility business represented to [ AT ] by Mobility as a Service or MaaS is a new growth field for us in our transformation from a car company into a mobility company.

There are 3 approaches into this MaaS strategy. The first involves collaborating with the leading regional MaaS players such as Uber, Grab and Didi. In the second, Toyota plays the main role in the MaaS business. In the third, Toyota dealers are the main business entity in the MaaS business. The approach to BUs is tailored to each region.

In all approaches, we recognize that it is important for Toyota to provide a value chain including in cars that themselves are a means of transportation as well as related maintenance insurance, leasing and more. So this is a collaboration scheme with MaaS players of provisioning of value chain, is also an essential element in tie-ups with MaaS players.

Toyota has developed the Total-care Service for ride-sharing vehicles. The Total-care Service allows Toyota dealers, insurance companies and regional ride-hailing companies to share vehicle data via MSPF. Vehicle management, insurance, maintenance are all covered through shared vehicle data via MSPF. As the first step, we rolled out this service to 1,500 vehicles owned by the Grab Singapore. So the -- we have implemented the improvement of the TPS, and then this collaboration entails Intensive Care Stalls, ICS, and exclusively for Grab vehicles have been installed with Toyota dealers. And they aim to improve the operating rates of vehicles and reduce maintenance cost. Toyota and Grab plan to expand this service to all Grab vehicles throughout Southeast Asia. At the same time, we aim to increase Toyota's share of Grab rental vehicles in Southeast Asia by 25% by 2020, representing a maximum 80% of the Grab rental vehicles.

In Japan, we have already deployed a leasing service aimed at fleet customers, whereby a lease is added to the Total-care Service that I mentioned earlier. A new car leasing business for private individuals called Kinto will be launched on this month.

The TOYOTA SHARE car-sharing service that allows cars to be locked and unlocked through smartphones made its debut last month. In the U.S., a similar car-sharing service in which Toyota dealers are the main business entity launched in Hawaii last year with deployment throughout North America as scheduled.

In MaaS, currently existing passengers vehicles are used through vehicle dispatch services. However, we believe MaaS dedicated vehicles will become necessary based upon their own characteristics. But now there will be MaaS dedicated vehicle lineups shown here, the e-Palette on the left of this table was unveiled at CES last year and is scheduled to be revealed to during the Tokyo 2020 Olympic Games. We also think more compact lineups are necessary. The vehicle in middle of the table is Sienna-based MaaS vehicle, while the vehicle on the right is a much smaller, a compact BEV-based vehicle. Our plan is to meet a wide variety of needs within these 3 lineups.

Linked to the future are automated driving mobility services. As the level for the autonomous driving vehicles, when it will become available or not, it depends upon the technology and cost, but the social or the consensus need to be built so that it's very difficult forecast that as well. So therefore, as the basis, the Level 2, Level 3, the mass-produced vehicles will be used and then the autonomous driving kit will be added. Then, it will become Level 4 MaaS, the dedicated vehicle. So that is a concept to commercialize this system of the vehicle.

So autonomous driving software are to be sold on -- in ADKs can be developed by third-party companies, but we aim to increase overall vehicle safety through dual monitoring of the surrounding environment by Toyota's Guardian system on the vehicle in concert with autonomous driving software, and. And we -- our development is promoted by standardizing the interface between ADK and the vehicles and generalizing to control unit, including Guardian system, to expand the use of the application.

To realize this MaaS strategy, Toyota has been promoting collaboration with the key MaaS players, including Grab that I mentioned earlier and a joint venture in which SoftBank is the largest shareholder. And together with Uber in North America, we have been working on the development of an autonomous driving MaaS fleet based on the Sienna platform and so on and so forth. But together with SoftBank, Toyota has established a joint venture, MONET Technologies, and MONET conducts service planning sales, vehicle leasing and third-party operation aiming to popularize MaaS vehicle in local public areas and local public agencies that support senior citizen mobility. And so that we are talking about this -- cars significant evolving due to the technical innovations such as the electrification, intelligence, informatization.

We anticipate the realization of an autonomous driving mobility society. However, just using AI and developing advanced software doesn't lead to the popularization of autonomous driving mobility. The car itself is a bundle of advanced hardware and software, and cars are industrial products that are on a learning curve. At the same time, cars are the means of transportation with which the lives of people are entrusted. To mass produce such cars at sufficient quality and appropriate cost, provide maintenance in a timely manner and popularize such cars as a safe transportation service, we understand that it is important for us to further hone our real-world strengths, including our long cultivated Toyota production system, TPS, our real-world expertise, technology and assets, including our service network.

Toyota's efforts to transform itself into a mobility company has just started with connected cars and a MaaS business. We would like to contribute to the realization of a mobility society in which everyone can move safely, smoothly and freely. Thank you for your attention.