Toyota Motor Corp

TSE:7203

Earnings Call Transcript 2020-Q3

[Masayoshi Shirayanagi, executive]

[Interpreted] Hello, everyone. Thank you very much for joining us today. I am Masayoshi Shirayanagi.

And first of all, I would like to take this opportunity to thank our customers who chose us as well as our stakeholders who support us. It is my pleasure to discuss Toyota's financial results for the third quarter of the fiscal year ending March 2020.

Let me discuss our financial results for the first 9 months from April to December 2019. Compared to the first 9 months of the previous fiscal year, consolidated vehicle sales increased by 129,000 units to 6,830,000 units. This was a result of solid sales, mainly in Japan and North America and Europe, driven by new models such as the RAV4 and Corolla.

Consolidated financial results for the first 9 months of this fiscal year were net revenue of JPY 22,830.1 billion, operating income of JPY 2,058.7 billion, pretax income of JPY 2,515.7 billion and net income of JPY 2,013 billion.

I would like to explain the factors, which impacted operating income year-on-year. Firstly, the effects of foreign exchange rate decreased operating income by JPY 250 billion. Secondly, cost reduction efforts increased operating income by JPY 110 billion. Thirdly, marketing efforts, which resulted in improved profitability in financial services as well as streamlined sales expenses, increased operating income by JPY 160 billion. Finally, expenses decreased operating income by JPY 50 billion due to a proactive allocation of R&D costs in advanced and cutting-edge technologies fields, while promoting efficiency through TPS and refining costs at all levels. As a result, excluding the overall impact of foreign exchange rates, soft valuation gains and losses and other factors, operating income improved by JPY 220 billion year-on-year.

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 6. In Japan, operating income was down JPY 11.6 billion year-on-year to JPY 1,232.5 billion, mainly due to the effects of foreign exchange rates.

In North America, operating income was JPY 328.5 billion, up JPY 164.8 billion compared to the first 9 months of the previous fiscal year, mainly due to marketing efforts, including increased operating income from financial services as well as a reduction in expenses. In addition, we are promoting activities on all fronts, such as carefully and strategically examining the allocation of incentives, strengthening model-based cost-reduction activities, making efforts to improve the supply of SUV light trucks, improving the productivity of each of our manufacturing plants and reducing fixed costs on a company-wide basis.

In Europe, operating income was up JPY 22.7 billion year-on-year to JPY 109.7 billion. This was mainly due to marketing efforts.

In Asia, operating income, including that of consolidated subsidiaries in China, was down JPY 65.9 billion year-on-year to JPY 329.1 billion. Excluding the effects of foreign exchange rates caused by depreciation of the Chinese yuan and appreciation of the Thai Baht, operating income increased by JPY 10.9 billion year-on-year.

In other regions, operating income decreased by JPY 11 billion year-on-year to JPY 73.3 billion. This is largely due to effects of foreign exchange rates.

Next, let me explain our consolidated subsidiaries and equity method affiliates in China as well as our financial services business. As for China business, operating income of consolidated subsidiaries decreased by JPY 15.2 billion year-on-year to JPY 116.7 billion. Excluding the effects of ForEx rates caused by the depreciation of the Chinese yuan, operating income increased by JPY 24.4 billion year-on-year. Equity in earnings of equity method affiliates was up JPY 9.5 billion year-on-year to JPY 94.2 billion, largely due to marketing efforts.

Regarding financial services. Operating income, excluding swap valuation gains and losses for the fiscal year, was up JPY 44.1 billion year-on-year to JPY 307.9 billion. This was mainly due to an increase in the lending balance and a decrease in costs related to residual value losses.

Next, I'd like to move on to discuss the outlook for the full fiscal year ending March 2020. With regard to our consolidated vehicle sales, we have maintained our forecast that was announced in our Q2 results anticipating vehicle sales in North America to increase by 20,000 units and vehicle sales in Asia to decrease by 20,000 units.

We have adopted ForEx rate assumptions for January onwards of JPY 105 per dollar and JPY 120 per euro, which makes a full year assumptions JPY 108 per dollar and JPY 121 per euro. Based on this, our forecast for full year consolidated financial performance are net revenue of JPY 29.500 trillion; operating income of JPY 2.500 trillion, pretax income of JPY 2.910 trillion and net income of JPY 2.350 trillion.

Now I'd like to explain the factors, which will impact operating income year-on-year. Operating income is now expected to be JPY 2.500 trillion. That is up JPY 100 billion from the previous forecast that was announced in our Q2 results. And please see Slide 10 for on analysis of the latest operating income forecast in comparison to our previous forecast announced in Q2 results.

Compared year-on-year, the latest operating income forecast for this fiscal year represents an improvement of JPY 32.5 billion. We remain committed to and will continue to undertake our profit improvement activities across the company with utmost effort.

Next, Executive Vice President, Leroy, will explain our efforts on enhancement of sales competitiveness. This concludes my presentation. Thank you very much for your attention.

[Didier Leroy, executive]

Good afternoon, ladies and gentlemen. My name is Didier Leroy. I would like to express my deep appreciation to all our customers around the world as well as all our dealers and suppliers who have made tremendous efforts to deliver smile to each and every one of our customers. I would like to express my sincere gratitude to all of our shareholders, business partners and also stakeholders for their daily support of Toyota.

Today, I will explain our activities to strengthen sales competitiveness in each region. Toyota vehicle sales in 2019 reached 9.71 million units. The global vehicle market shrank and the competitive environment were very severe. Nevertheless, we exceeded both sales in 2018 and sales target in 2019.

In 2019, sales in Asia declined, partly due to the trade friction between the U.S. and China. However, other regions, such as China, Europe and Japan make up for this decline. This underscores the fact that Toyota growth is supported by our strategy to develop a well-balanced business across the world. As the result of this strategy, our global sales has been growing steadily.

Let me touch now on our activity in some region to show how our strategy is customer-centric. In China, despite the market declined by 8% in 2019, Toyota sales volume increased by 9%. This is partly due to strong sales of our completely redesigned Corolla and Levin. Based on the Toyota new global architecture platform, the driving performance has significantly improved. Each and every salesperson showcase the appeal of our vehicle and focus on providing customers with opportunities to realize the attractiveness of our vehicles through test drive at dealers. As part of our customer-centric approach, we are also avoiding jumping to price cuts to ensure that our used car price do not decline. This has helped to increase awareness among customers that, in addition to quality, fuel efficiency and performance, another attraction of Toyota vehicles is resale value.

Two years ago, Chinese Premier, Li Keqiang, visited Japan and see them. The Chinese government has shown strong interest in our environmental technologies. We would like to contribute to the development in China by utilizing our technology while focusing on partnership.

In Europe, our long-term effort has borne fruit. Future tightening of environmental regulation was expected, and we decided to anticipate customer needs by taking advantage of our hybrid technology. However, it was an extremely demanding choice because in the European market, diesel technology was dominant and hybrid technology was quite unknown to customers.

First, we convinced the dealer of the benefits of our hybrid technology, such as fuel economy, quietness, durability, maintenance and ownership costs. Our salespeople are learning the new technology from scratch, so they could better communicate the appeal of hybrid vehicle to customers. Customers gradually become aware of its benefits.

Our customer also played a role in communicating the advantage of hybrid technology over other type of vehicles. In the past, hybrid technology was misunderstood by some people who believe that it's sometimes difficult to repair if it's breakdown or hybrid vehicle need to be charged. However, such misunderstanding have gradually decreased. We have sincerely responded to our customer, listen their voices and move ahead step by step. Consistent efforts directed toward a shift of hybrid finally pay off. Now hybrid vehicles are chosen by more than half of our customers who purchased Toyota vehicle, and this has boosted our overall sales volume and performance in Europe.

In North America also, our strategy was strongly focused on customers. In the region, the ratio of hybrid vehicle for the RAV4, for example, was previously about 13%. We conducted detailed surveys, listening to the opinion of the customers and dealers and found that the low ratio has been caused by the perception of hybrid vehicle are inferior in power. Then we decided to showcase their on-road performance and excellent fuel economy with greater emphasis when we're rolling out the completely redesigned RAV4. As a result, the number of customer who see the RAV4 hybrid as powerful increased from 27% to 38%. Sales also increased, and the hybrid ratio of the new RAV4 in 2019 increased to 25%. We really wish to popularize the use of hybrid vehicle regardless of region, and thereby, contributing to protecting our planet. We will continue to listen to the voice of our customer and deliver electrified vehicles that meet their needs.

We are also moving forward with the reform of our dealer network here in Japan. We are taking off this -- taking on this challenge for the future. And this cannot be properly addressed if we stick to conventional IDs only. If what customers expect of car changes, ideal sales method will naturally change, too.

In our effort at reform, we will implement an initiative to make all Toyota vehicle models available at all sales outlets throughout Japan. And our original plan was to implement this initiative in stages as far as 2025. However, to reinforce our best-in-town activity, it is necessary to provide various products and services at an early stage to address a wide range of local needs and issues. So we have decided to move forward by 2 years from the initial plan, all model and all channel, and we will start in May this year.

I met a dealer representative, and I asked them to tell me very, very frankly what they think about that and to share their honest opinion and concern with me. Many dealers expressed their concern of the possibility that the delay in supply of popular vehicle. So immediately, we have made adjustments in our production system, steadily making preparation that can be implemented now to anticipate the potential risk through sowing the seeds for future growth, which is not bound to plan our precedent. We are determined to change ourself to become a Toyota that continue to be chosen by customers.

In each country and region, Toyota employees were engaged in sales activity, focused on selling 1 vehicle more and reducing even by just JPY 1 in their own works' fair. And I think that is -- in all the regions struggling, for example, another region should make up for the global sales. The spirit of working for others is rooted in the Toyota Group across the world. I visited many region and meet many, many stakeholders there. I always keep a card in my braced pocket in which -- like this one, in which I myself wrote 10 elements of leadership. Among them, the elements I mentioned, especially when I meet people at genba is fighting spirit and be passionate. We are faced to the tidal wave of revolution, and we cannot survive unless we continue to implement every measure and make every effort to provide customers with the mobility and services they need. For our customer's file, we will continue to do our best and challenge forward with a fighting spirit and, again, with passion.

To conclude my presentation, as you know, during the customer electronics show held in the U.S. in January, President Toyoda announced the Connected City Project. This project is living laboratory. And of course, this is just starting point for the future. And in the near future, we will be able to give you much more information about this project.

Thank you. Thank you very much for your attention this afternoon. Thank you.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]