Toyota Tsusho Corp

TSE:8015

Earnings Call Transcript 2020-Q2

[Ichiro Kashitani, executive]

This is Kashitani, the President of Toyota Tsusho Corporation. Thank you for coming to the briefing despite your busy schedule. I also would like to express my gratitude to you, once again, for sending out various information to connect the company with the market.

Business environments are changing drastically at the moment. Changes are occurring not only in the international affairs, not only in our automotive industries, but also in many different industries. But we are making efforts every day, so that we can transform that risk to a chance. I would like to share with you some of our stories, so you can understand what we are up to.

[Hideyuki Iwamoto, executive]

Hello. This is Iwamoto, CFO of Toyota Tsusho Corporation. I would like to explain about our consolidated financial results using the PowerPoint slides for the second quarter of fiscal year 2019.

Please turn to Page 4. Let's go over the P&L first. Gross profit was JPY 1.9 billion decrease year-on-year. In African division, we see a steady increase of automotive sales, so the business is growing. On the other hand, profit ratio of the Chemicals & Electronics division decreased, and that is why we ended up JPY 1.9 billion decrease. That's our perspective.

As for operating profit, although gross profits have decreased, we have gained profits from foreign exchange fluctuations, so we ended up JPY 1.2 billion increase year-on-year. While profit attributable to owners of the parent, though investment loss on equity method got worse, we have made gains on the sale of shares of affiliated companies in the first quarter. As a result, we made JPY 500 million increase in net profit year-on-year. For your reference, profit of JPY 79.1 billion marks a record profit for the third consecutive year. Progress is 53% based on net profit.

Please turn to Page 5. This waterfall chart shows the profit analysis and explains about the reasons of profit increase and decrease. Let me talk about the operating profit, specifically. Please take a look at the third green bar from the left-hand side, JPY 107.4 billion; and the third blue bar from the right, JPY 108.6 billion. This shows the breakdown of this difference of JPY 1.2 billion. ForEx effect was minus JPY 2.7 billion. We have minus JPY 1.9 billion for Chemicals & Electronics. When you see demand and trading volume, although demand has not decreased much, profit margin has decreased for chemicals, and that's why it is negatively affected.

Automobile retail has greatly increased by JPY 5.6 billion, and the main reason for that is that we did very well in the African market as well as transfer from Toyota Motors has also contributed positively. Other than operating profit, with finance income and costs, we had income from divestment of Canadian electric power business. And with equity loss, we had impairment loss in the metal resource business. Our main business was mostly better than the previous year.

Let's go to Page 6. We have laid out reasons for changes in profit for each division. Let me explain about divisions with greater fluctuations. Metal is negative by JPY 9.6 billion. We had transient impairment in metal resource business and aluminum forging business in the U.S. Profitability accounted for by equity method has deteriorated. As for Machinery, Energy & Project division, we gained about JPY 13 billion from divesting the Canadian electronic power plant. Other than that, we also made some profits from our ordinary business.

We also have put together supplementary materials of financial results to show you the year-on-year fluctuations of each division for your referral.

Next, let's move on to Page 7 and take a look at the balance sheet. Total assets as of September 30, 2019, was JPY 4.4985 trillion, slight increase from the end of the previous fiscal year. Net worth was JPY 1.2137 trillion, JPY 17.9 billion increase year-on-year. And this was due to the retained earnings increase of JPY 60 billion. Foreign currency translation adjustments have decreased by JPY 38.6 billion since we lose money as the yen appreciates against euro.

Net interest-bearing debt was JPY 1.0325 trillion, which actually includes the impact of liabilities of the operating leased -- leases based on the IFRS 16, which is JPY 93 billion. As we compare apple to apple, it has improved from the previous term. Therefore, net debt equity ratio has improved from 0.83 at the end of last year. As we calculate with JPY 1.0325 trillion, we come up with 0.85. If you calculate apple to apple and exclude the operating liabilities, it is 0.77. So the balance sheet itself has not deteriorated so badly.

Let's go to Page 8 and talk about the cash flow. Cash flow from operating activities for the second quarter of fiscal year 2019 was plus JPY 112.2 billion. It was JPY 62.2 billion the same time last year due to large inventories, and the situation was bad. But this term, we have recovered to our regular state. Since the target for the whole year is JPY 230 billion, I think we are doing good.

As with the cash flow from investing activities, since some of the investments have been realized, it decreased by JPY 95.6 billion. As a result, free cash flow increased by JPY 16.6 billion. However, as I have laid out the breakdown at the lower right of the slide, actual investment cash out was JPY 77.7 billion, and some fixed time deposits over 3 months are included here. So the actual free cash flow is about JPY 40 billion surplus instead of JPY 16.6 billion.

As for the forecast of the second quarter 2020, we haven't made any adjustments from the announcement we made on April 26.

On Page 17, we have the full year consolidated forecast for fiscal year 2019 for each segment. However, we had some impairment loss with Metals and some gain on sale of shares with Machinery, Energy & Project. These are the adjustments we made to come up with the revised forecast.

That's all for me. Thank you for listening.

[Ichiro Kashitani, executive]

Hello again, this is Kashitani. I would like to expound on how to achieve our midterm business goals for the fiscal year 2021.

Let me talk about our progress on our focus areas from Page 3. This May, I have explained about our midterm business plan for fiscal year 2021. Today, I would like to talk about how we progressed in those 3 focus areas for the past 6 months. First, I'd like to talk about our growth strategy in Africa. Through these 6 pillars, we're going to strengthen Toyota business in all directions, and we try to expand at a speed that is twice as fast as the combined GDP per growth rate of Africa. There are 6 pillars, but I would like to discuss these 2 pillars marked in red, in particular, this time since they made substantial progress from the next page.

First, let's talk about the development of KD, Knock-Down business. Based on the governmental support or tax incentive policies of each country in Africa, we are developing a system that promotes local production for local consumption. We have started discussion about building Toyota factories in 2 new countries: Ivory Coast and Ghana. In order to strengthen our product lineup, we are discussing to add more Toyota models in Egypt and Kenya. In addition, though not included in your reference, we are planning to build Suzuki vehicles in Ghana and other countries.

Next, let me talk about expansion of value chain. Used car market, which leads to new car purchase, is expanding rapidly and the backdrop of the needs for more automobiles backed by population and economic growth. Currently, its market size is about 10x as large as the new automobile market. There's 10 second-hand cars against 1 new car. However, they include low-quality used cars, which were sold through nonregular routes. In addition, as repair is needed after the purchase, low-quality parts can be used, and there are many instances of insufficient maintenances -- maintenance due to lack of technical expertise. As we observe these situations, we are tackling issues at each stage of the automotive value chain. Let me explain about that initiative in the next page.

First one is Automark. Through Automark brand, we want to expand dealership that sells certified Toyota used vehicles. Currently, they operate in 7 countries, but we want to expand that to 30 countries in 3 years.

Next initiative is to supply parts and consumables. We selected automobile repair factories above certain technical standards and certified them as supported by team Toyota to provide them with DENSO and Aisin parts. For engineers at certified factories, we collaborate with DENSO to provide technical training. And we also plan to hire those who went through the training at Kenya Academy.

The last one is AutoFast, which is a joint venture with Total, a French company who has gas stations across African continent.

We're going to expand our automotive maintenance and repair businesses. With those 6 pillars, we're going to deal with motorization in Africa in all directions and expand our automotive business in Africa.

Let me go on to talk about Next Mobility strategy. With Next Mobility strategy, we are building our network all over the world to become more globally active. In East Asia, in China, we send staff to Changshu, which is known for battery production to Shanghai. We also have our offices and staff in Silicon Valley in North America and in Israel to build our network. We also have 260 staff in total globally in Europe, Middle East and Africa who are involved in Next Mobility business. Our new endeavor is to have our office as part of the share office in Nagano Campus near Nagoya, which was developed by Towa Real Estate, then we try to collaborate with venture companies and start-up companies. Through our global network, we grasp new business opportunities promptly and aim to create new businesses.

Our Next Mobility strategy utilizes our global network to tie up with key players and start-ups. This includes dealing with case technologies. In the future, by creating synergies and establishing mass production technologies, we aim to be the next-generation mobility market leader.

Let me talk about connected technology, which is one of the case technologies. With connected, we have 4 areas, namely: electric device, next-generation data center, OTA or over-the-air and security. We have already monetized with electric devices, and we expect to increase our transaction volumes with cameras and semiconductors that are required for automatic driving. At the next-generation data center, we not only store and analyze data, but we also try to create new businesses using such data in the future. In the area of OTA software distribution, we invested in Airbiquity in the U.S., and we collaborated developing OTA software together. We continue our work to provide infrastructure services.

We also take with security, which is an important element of the connected technology. We aim to provide infrastructure service that underpins future mobility service.

Next, let me elaborate on the Next Technology Fund initiatives. In April 2017, we established Next Technology Fund to facilitate speedy investment decision-making in yet to be developed markets. From April 2019, we established No. 2 fund with a set budget of JPY 6 billion in 2 years. Through Next Technology Fund, we would like to continue working on developing new technologies and services.

I would like to talk about the progress of the last of the 3 focus areas, Renewable Energy. As I have already explained in May, we aim to accelerate global expansion and challenge into new business domains. We're working on bringing new initiatives such as micro hydro technology to the global stage in the future.

Today, I'd like to talk about the global expansion of the onshore wind power generation. Please take a look at the next page. Particularly, I would like to focus on our efforts in Africa, Europe and Japan. In Egypt, the first-ever wind power generation plant started its commercial operation. In Holland, we started building 3 wind power plants. In Japan, power generation and transmission project in Hokkaido is steadily making progress. We plan to launch its operation in March 2024. And we are discussing to launch our business in Mexico and Taiwan, and we continue to accelerate our global expansion.

Next, let me talk about onshore wind power and solar power generation in the near future. As you can see in this diagram, we plan continuously to develop Renewable Energy businesses in each area of the world, so that we can increase the ratio of clean energy power generation. Since we take risks in the undertaking of our businesses, probably it is safe to say it is our characteristics that there is not much difference between our total capacity and equity capacity.

Next, let me talk about the combination of the 3 focus areas, which was discussed in the midterm business plan. From those 3 areas, we came up with something new by combining them: Africa as an area, Next Mobility as technology or service, Renewable Energy as an infrastructure. By combining the 2 strengths, we generate new businesses.

Let me give you some specific examples from the next page. First example is the combination of Africa and Next Mobility. In developed countries, due to the regulations by the government and so on, technical advancement and transfer progress is only gradually. However, that's not the case with developing countries. This is a phenomenon called leapfrog. In Africa, this phenomenon has already started. In addition to our conventional automotive business, we have established Mobility 54, so that we can initiate new business models such as car sharing. Through this entity, we invest in start-ups, which develop new services and advanced technologies in Africa, so we accelerate MaaS and CASE business initiatives in Africa.

Next, let's discuss combination of Renewable Energy and Africa. We expect increase of demand for power as its population grows in Africa, so we think the possibility of Renewal Energy further expands. In addition to the wind power generation in Egypt, which I just explained, we are implementing mini-grid business in non-electrified areas in Kenya and East Africa as well as developing wind power business through wind condition analysis and battery storage prediction in Tanzania. Using that as a stepping stone, we aim to expand our business in West Africa.

Lastly, let me talk about cross between Next Mobility and Renewal Energy. As the electric cars become more popular, number of batteries that we recover through recycling of scrap pickles is expected to increase, so we implement so-called 3R for batteries, which are recycle, reuse and rebuild them. As for Renewable Energy, we have a depth of understanding through our Eurus Energy Corporation. And we are working on VPP initiative, which controls multiple small-scale power generators. We reuse the storage batteries that we recover from electric vehicles, and we combine with renewable energy power generation, and that is called V2G, vehicle-to-grid business that we are going to work on. We also would like to promote another means of power supply.

For Africa, TICAD7 was held in Yokohama at the end of this August. We hold an important position as the Chairman related to African issue for KEIDANREN, Japan Business Federation; and KEIZAI DOYUKAI, Association of Corporate Executives. We got actively involved with the spirit of With Africa and For Africa. The following pages explain the achievements at TICAD7. As we laid out here, we signed 60 MOUs with 10 African countries, which include development of automotive industries in Ivory Coast and Ghana.

That's all for me. Thank you for listening.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]