Toyota Tsusho Corp

TSE:8015

Earnings Call Transcript 2019-Q2

[Hideyuki Iwamoto, executive]

Good morning, everyone. I am Iwamoto, CFO of Toyota Tsusho Corporation. I will briefly explain the consolidated results of Toyota Tsusho. This is the outline of consolidated results for second quarter of fiscal year 2018. Revenue is not shown on this page, but on the other A3-sized sheet. It is indicated that the sales increased by JPY 230 billion from the previous year. This time, there was almost no impact of foreign exchange rate. As for the U.S. dollar, there was JPY 1 appreciation and it changed from JPY 111 to JPY 110. Euro has changed from JPY 126 to JPY 130, making the yen depreciate by JPY 4, and there was almost no impact on the revenue.

There was application of equity method to some of the consolidated subsidiaries. Including that, revenue increased by around JPY 260 billion in real terms. Based on our analysis, the reason for that is the increase of automotive production-related business centering on parts and improvement of equity market. As a result of the increase of the sales, gross profit was JPY 315 billion, which was an increase by JPY 17.5 billion year-on-year.

As for the operating profit, it was JPY 107.4 billion, an increase by JPY 12.6 billion. Although SG&A expense has somewhat increased, increase of gross profit was bigger than that. Profit was JPY 78.6 billion, achieving a record high result for the second half of the year. It has increased by JPY 5.2 billion year-on-year. It seems to be only 7% increase. However, out of JPY 73.4 billion profit of the previous year, about JPY 8.7 billion came from the profit of sales and valuation by the application of equity method to some of our subsidiaries. If you exclude that, it is an increase of 21%, according to our analysis.

Let's look at the next page. This waterfall chart shows our profit analysis. Profit on the far left and far right has changed from JPY 73.4 billion to JPY 78.6 billion. Finance income on the left side is JPY 17.4 billion, and on the right side, it is JPY 6.1 billion. The difference, which is nearly JPY 12 billion, is what we had in the previous year as finance income by application of equity method to the subsidiaries. The operating profit has increased by JPY 12.6 billion from JPY 94.8 billion to JPY 107.4 billion.

I want to explain how it has increased. As indicated on the graph, there was increase by foreign exchange effect by JPY 0.6 billion and increase by markets and prices by JPY 0.5 billion. Demand has substantially increased by JPY 6.6 billion, especially Global Parts & Logistics has substantially increased by JPY 28 billion (sic) [ JPY 2.8 billion ]. Also, Machinery, Energy & Project has substantially increased due to good performance of Eurus and increased demand for automotive-related equipment, mainly in North America and China. The number for Africa was negative. Automotive slightly increased. But other areas, such as beer and pharmaceutical businesses, decreased to a certain extent. Automotive retails increased by JPY 1 billion due to the good performance in Russia.

Under the category of others, there are some big numbers, including positive and negative numbers. First, there was reactionary effect of the previous year's construction materials inventory valuation losses in Australia. Then there was gains due to foreign exchange rate fluctuation in Angola and other countries. As for gas business, we had profit last year from selling the business and there was reactionary fall this year. In North America, there was tax refund in relation to the solar power generation business in Hawaii. As a special factor for this year, there was JPY 2.2 billion allowance for bad debt for energy business. Loss is not realized yet, but it was provided just in case. As for the business restructuring, there was partial withdrawal from business in Algeria and provided extra bad debt allowance for the business in Cameroon. Those are the reasons for this negative number.

Let's move on to Page 6. This is summary of division profits. Regarding Metals, except for the onetime loss in Australia recorded in the previous year, there was slight increase. Therefore, I think it is maintaining good performance.

Regarding 3 divisions, including Global Parts & Logistic, Automotive and Machinery, Energy & Project, I have an image that they are performing steadily. As to the Machinery, Energy & Project, if you exclude special factors, there was around JPY 4 billion profit, which means it's performing well.

Regarding Chemicals & Electronics. If you exclude the factor related to the subsidiaries, we consider it as a slight increase. Electronics has increased, but Chemicals decreased. It's because previous year was good. And as the oil price became stable and our spread became smaller, profit decreased slightly.

Regarding Food & Consumer Services, there was around JPY 800 million from sales of investment property. But even without it, it still slightly increased.

As for Africa, it shows an increase by JPY 3.5 billion. However, it includes foreign exchange valuation gain and therefore, it is actually flat.

Others increased by JPY 6.4 billion. This was actually related to Machinery, Energy & Project. However, because it's a tax-related item, we listed it separately as others.

Next page is the balance sheet. Total asset is JPY 4.4748 trillion, an increase of JPY 164.8 billion. There was some increase due to the impact of foreign exchange rate. Considering that factor and business growth, I think that assets did not increase much. However, the inventory increased by JPY 88.1 billion and operating receivables increased by JPY 62.8 billion. I feel that we have a little too much safety inventory, especially because there is strong demand for electronics, there seems to be a tendency to procure them while it's possible to do so.

Net worth increased by JPY 34.6 billion, reaching JPY 1.2093 trillion. Actually, there was accumulation of profit bigger than this. However, as a result of fair valuation of unlisted stock, especially for emerging market, our realized profit decreased. In addition, there was some decrease from foreign currency translation reserve. I think those factors made these numbers smaller.

Net interest-bearing debt was JPY 1.0357 trillion, an increase of JPY 28.8 billion. Considering the impact of foreign exchange rate, it actually has not increased much. Net DER was 0.9. To be specific, it was 0.86. I think it is within our target.

Next page is cash flow. Cash flows from operating activities was negative in the first quarter, but there was recovery in the second quarter. As a result, we had positive cash flow of JPY 62.2 billion for the 6 months. Personally, I wanted to have a little better number because of the increase of inventory. We hope to have better numbers in the third and fourth quarter.

Cash flow from investing activities was negative JPY 43.4 billion, which was bigger than the previous year. Actual investment outflow was JPY 58.6 billion. Including collection from the sales of assets, the final figure was negative JPY 43.4 billion.

Free cash flow was positive JPY 18.8 billion. Even after subtracting dividend, it still is positive. I have provided some other detailed information as attachment.

That's all for me. Thank you very much.

[Ichiro Kashitani, executive]

I am Kashitani, President of Toyota Tsusho Corporation. I will explain our activity to achieve our midterm business plan. In the midterm business plan we announced in May 2017, we specified Next Mobility strategy and African growth strategy as our 2 important strategies based on our global vision. We believe that we can demonstrate our strength in these 2 areas, and we can aim to become #1 in the industry.

First, I will explain our Next Mobility strategy starting from Page 5. For the Next Mobility strategy, we defined 3 major areas: first, replacement of materials; second, next-generation services; third, energy management. Our main activities in each area are marked with black stars, and I will explain one by one starting from the next page.

First, let me explain the weight reduction efforts in the area of replacement of materials. Due to increasing demand for protection of the global environment and strong expectation in the improvement of vehicle performance, weight reduction of vehicles has become inevitable. As measures to achieve weight reduction, we have been conducting blanking as a method to process steel. Now we are paying attention to aluminum processing. It requires advanced processing technology, but it comes with various merits. Utilizing our technology we gained through blanking of steel sheet, we want to change the aluminum processing, which is more difficult to tackle. We have already started our business in Kentucky State in the U.S. I visited Kentucky in September and saw the production site. We paid attention to this technology because in the future the demand for aluminum parts for automotive industry is expected to grow further. We want to deploy this activity not only in the U.S., but also in Asia as well.

Let's look at the next page. Second item is regarding securing lithium resources. In the future, demand for lithium will definitely increase. As of the end of 2017, we have already secured about 8% of the global demand for lithium carbonate. By production increase, we are aiming to secure around 12% of the global demand by 2020. The diagram at the lower left shows investment relationship of all the parties involved. Our company has 100% of sales rights of the lithium carbonate obtained by this operation. Our current production capability is 17,500 tons, but we are aiming to expand the capability by 25,000 tons and achieve 42,500 tons by 2020. Also, we have a plan to start a business in Japan to produce lithium hydroxide from the lithium carbonate produced by this operation. We will explain this in detail at the right time in the future. This means that we are trying to add further value to our lithium business.

I want to show you some pictures I took when I visited the site in Argentina 2 weeks ago. It is Olaroz salt lake at the altitude of over 4,000 meters in Andes Mountain range. When I went over a mountain pass, there was this point at the altitude of 4,170 meter. And I had difficulty of breathing, only to climb up about 5 meters to get to this sign. Right side of the picture is me, and the left side is Mr. Katayama, department manager in charge of metal resources.

This is a picture of another salt lake we stopped by before going to the Olaroz salt lake. As you can see, all the surface is solidified by salt. The monument behind us is an alpaca made by salt.

This is Olaroz salt lake, where we have mining and sun drying operation. The altitude is approximately 3,900 meters. When you work there, you have to wear a device on your finger which measures blood oxygen level and check the level every 30 minutes. If the number comes down to around 60, you need to inhale oxygen. In such an environment, our expatriates are working together with a partner company, Orocobre.

This is a picture taken in front of the sun drying facility at the salt lake with the manager on the right side. These are the staff members. This is the office where they explained to me about the operation.

Next, I want to explain our next-generation service, which is related to electronics field. In the automotive industry, environmental friendliness and improvement of safety has become a trend. To address that, we are trying to further improve the technology of automotive electronic systems. Automotive electronic system has a wide range of scope. As of 2017, the market size is about JPY 18 trillion. By 2025, we forecast that it will expand to around JPY 30 trillion, which is almost twice the current size. Especially, as for the 3 areas of e-mobility components, autonomous driving and connectivity, we forecast that they will become more than 3x larger than 2017. Centering the business of our subsidiary, NEXTY Electronics, we will try to capture business opportunities by leveraging our expertise. We want to increase the sales by JPY 100 billion and reach JPY 600 billion by 2020.

Let's move on to the next page. NEXTY Electronics is regarded as a trading company of automotive electronic parts. However, its function is not limited to trading of goods, which also cover wide range of value chains, including development, design, manufacturing, storage, logistics and quality assurance. That is the strength of this company. Especially, it is offering advanced solutions to automotive and electronics components makers. It's conducting business with around 250 top-class suppliers in the world. One of the major strengths of NEXTY Electronics is that, in addition to their mass production technology, it also has capability to develop software.

Regarding the area of quality assurance, we have a function called TAQS, by which we can check and inspect quality by ourselves. If you sent parts to automotive makers for quality inspection, it takes 2 or 3 months to get the result. But we can do that by ourselves and provide the results of quality inspection the next day or within 1 week to the makers or customers. Leveraging our strength like this, we want to continue working actively to serve the field of automotive electronics.

On the next page, I want to talk about energy management. Left side of this page is about renewable energy. Because generation of power depends on weather condition, it is necessary to make adjustment between demand and supply. To solve this problem, we are investigating to utilize the electric vehicle batteries. If there is excess electricity generated from renewable energy, it is stored in the vehicle batteries. If electricity demand increases, stored electricity is discharged. By doing so, it can level off the electricity supply from thermal power generation, et cetera. We are currently conducting demonstration experiment of this business with Chubu Electric Power. By around February next year, we will be able to report its result.

Please look at the right side of this page. Not only the electric vehicle batteries, we are working to utilize storage batteries for power generation by renewable energy. In North Hokkaido area, where the power grid is vulnerable, we will improve the power grid by ourselves and install storage batteries. By storing electricity in the batteries, we will supply electricity to electric power companies. That is the business we are planning now. And we are aiming to start this operation in 2023. By conducting these businesses, we want to contribute to realization of low carbon society.

Next, let me explain about African growth strategy. On June 1, 2018, it was reported on the newspaper that Toyota Motor started investigating transferring sales operation in Africa to Toyota Tsusho. Actually, in order to have a total transfer in January next year, we received manpower from Toyota Motor and started making preparation for the transfer. If this transfer is complete in 54 countries in Africa, we'll be able to have pan-African deployment of Toyota vehicles. To be specific, wide range of operations will be transferred, including product planning, revenue management, product proposal, supply-demand management and provision of services and parts. With this transfer of operations, we want to capitalize on our front line strength in Africa to achieve further growth of African Toyota sales.

Let me move on to the next page. On the left side, there is breakdown of actual results. We have been selling Toyota vehicles mainly in sub-Saharan Africa. After the operation transfer, we will sell Toyota vehicles in Southern and Northern Africa as well. Especially in Southern Africa, market size and sales volume of Toyota vehicle is big, centering on South Africa. Therefore, we are expecting a big impact.

Let's look at how the sales volume of Toyota vehicles will change. Before the transfer, the sales volume in 2017 was around 36,000 vehicles in 41 countries. However, in 54 countries, with the addition of 13 countries, the sales volume will increase over 5x and will become 191,000 vehicles. We want to continue taking advantage of our strength in Africa to grow the sales of Toyota vehicles in Africa.

Let's look at the next page. Regarding strategy in Africa, the most certain forecast is that its population will increase. Current population of Africa is about 1.2 billion, and 80% is living under $4 a day and 20% is living over $4. In this population structure, bottom side is very big. We expect that the low-income population will shift to middle-income population, and middle-income layers will expand. People living over $4 a day or people who belong to lower intermediate layer and above will become our target. We want to provide products of various brands suitable to each different layer.

Please look at the next page. Regarding the business of Suzuki, shown on the left side, we are currently handling this business in 22 countries. We are expecting to capture entry-level car buyers. In the past, it was difficult to capture entry-level car buyers with Toyota vehicles. However, we'll be able to cover this area by selling Suzuki vehicles.

Regarding the used vehicle business. In Africa, ratio of market size of new vehicles against that of used vehicle is 1:5 or 1:10 depending on the country. However, in our case, the ratio of new vehicle sales against used vehicle sales is 1:0.1. Although there are some restriction on import of used vehicles, we believe that we are losing opportunities, and we are aiming to increase the sales of used vehicles to the same level as the new vehicles. That is the vision for our used vehicle business.

Regarding auto parts business. In addition to the genuine Toyota parts, we want to further strengthen the sales of aftermarket parts.

Next, let me explain about business development other than automobiles. This is mainly related to the business conducted by French company, CFAO. We are operating pharmaceutical business in 22 countries, mainly in West Africa. In Morocco and Algeria, we have local production and selling the products locally and in neighboring countries.

Regarding the B2C business, we have plans to expand our business into new sectors, including medical centers, retailing and health insurance.

Regarding the renewable energy infrastructure business on the right side, we started business in partnership with Eurus Energy and a major French electric company, ENGIE, in East Africa.

As for the infrastructure business, we are conducting co-development and rehabilitation at Mombasa Port in Kenya, which is regarded as the biggest commercial port in East Africa. In the future, we want to deploy renewable energy generation and infrastructure development business further from East Africa to West Africa and also deploy pharmaceutical business from West Africa to East Africa in order to cover both areas.

Let's move on to the next page. Regarding beverage business, we have been doing business for decades in Congo with our partner, Heineken. Last year, we started business in Ivory Coast. Since then, we have selected the third country, and we are conducting feasibility study now.

Regarding consumer material business, we have the business of BIC ballpoint pen and plastic, et cetera. In addition to that, we want to strengthen our business of shopping center and supermarket in Ivory Coast and Cameroon with our joint venture partner, Carrefour.

In Africa, there are big risks. However, by having good portfolio, combining business and country, we want to diversify risks and expand our business. This is the end of my presentation. Thank you very much.