Toyota Tsusho Corp

TSE:8015

Earnings Call Transcript 2021-Q2

[Ichiro Kashitani, executive]

Hello, everyone. I am Kashitani, President of Toyota Tsusho Corporation. Before I start my presentation, I want to express my deepest condolences for those who lost their lives due to the COVID-19 pandemic and express my deepest sympathy to those who are undergoing treatment. Also, I want to express my appreciation and pay tribute to those who are working hard on the frontline to save lives.

To prevent spread of infection of the coronavirus, we are holding this event by live streaming. I would like to express my appreciation to your participation in spite of this extraordinary situation. Thank you very much.

[Hideyuki Iwamoto, executive]

Hello, everyone. I am Iwamoto, CFO of Toyota Tsusho Corporation. I will explain the outline of consolidated results for the second quarter of fiscal year 2020. Please look at the Page 4 of our PowerPoint presentation.

Regarding the foreign exchange rate on the upper left, our assumption for U.S. dollar is JPY 107, down JPY 2 from the previous year. Euro is JPY 121, unchanged from the previous year.

Gross profit was JPY 262.2 billion. This is a decrease of JPY 50.9 billion or a 16% decrease from the previous year. In the first quarter, it was minus 30%. If you only look at the second quarter, it was minus 7%. Therefore, we think there was a strong rebound in the second quarter.

Operating profit was JPY 71.9 billion, decreased JPY 36.7 billion or 34% year-on-year. Profit was JPY 41.6 billion, decreased JPY 37.5 billion or 47% year-on-year. In the previous year, there was around JPY 13 billion onetime impact to the profit. If you consider that, the actual reduction wasn't as big as 47%.

Regarding operating profit, if you only compare the number of the second quarter against the previous year, it's almost the same as the previous year. Regarding the forecast of JPY 80 billion profit we announced on June 10, our current progress is 52%.

Please look at Page 5. This is a waterfall chart analysis of profit. The number on the left side is the profit of the previous year. The number on the right, JPY 41.6 billion, is the profit of this year. The operating profit was JPY 108.6 billion in the previous year and JPY 71.9 billion this year, and this waterfall chart shows the breakdown of the difference.

Regarding the others explained at the top, the change was very small. In the previous year, there was effect from profit of divestment of electric power business in Canada. Therefore, it could have made certain impact this year. However, if you make an apple-to-apple comparison, due to decrease of the numbers in profit, tax expense and noncontrolling interests, there wasn't big difference.

Operating profit decreased JPY 36.7 billion from JPY 108.6 to JPY 71.9 billion. There was around JPY 1.2 billion decrease due to the foreign exchange rate and the increase of market price of metals, such as PGMs, caused JPY 1.6 billion increase. As for demand and trading volume, it increased JPY 23.9 billion, mainly due to the impact of coronavirus. Automotive sales for Africa and outside Africa decreased JPY 15.4 billion.

Page 6 shows the gross profit by division. As for the Metals Division, profit decreased by 27%. This is because of the decrease in sales and profit of the automobile productions due to the impact of coronavirus. There was a big reduction in Japan, North America and Thailand. However, business in China increased year-on-year.

As for the Global Parts & Logistics, profit decreased by 32%. Same as the Metals Division, this is due to a decrease in automobile production in Japan, North America and Thailand. So the Automotive Division, which handles automobile sales, profit decreased by 27%. This is gradually as a result of a decrease in automobile sales, mainly in Southeast Asia and Central and South America and the decrease in lockdown export.

As for the Machinery, Energy & Project, profit decreased by 11%. Different from the previous year, there was no exports of automobile production plants to China and export of plant equipment to Iraq. Therefore, we consider that the actual business performance was almost the same as the previous year.

As for Chemicals & Electronics, profit decreased by 11%. There was a substantial decrease in automotive materials, such as chemicals and plastics and also car electronics. However, there was a growth of nonautomotive electronics business.

Also due to a special procurement demand, there was a growth of business in remote activity-related products, such as memory; and chemical-related business, such as alcohol-based materials for detergents. Growth of such businesses made up for the decrease to a certain extent.

As for the Food & Consumer Services, profit decreased by 6%. Food business performed very well, especially there was substantial increase of profit in Brazil-related business. However, there was a substantial decrease in growth-related business. As a whole, gross profit decreased by a small percentage.

As for the Africa division, profit decreased by 5%. Mainly, there was an impact from a decrease in automotive sales in East and South Africa. But there was a substantial recovery from the impact of lockdown in the first quarter.

Page 7 shows one-off gains and losses. There was positive JPY 2 billion impact in the previous year. This year, there was a decrease of JPY 7 billion from the previous year, and the number for this year was negative JPY 5 billion. The main factor was the impairment in Resources business in South America.

Page 8 shows consolidated financial position. In the middle of the coronavirus pandemic, we increased liquidity on hand substantially. As a result, total assets increased approximately JPY 140 billion. As for the net worth, we were able to increase JPY 64.7 billion to JPY 1.2613 trillion.

On the other hand, we were able to reduce the net interest-bearing debt to less than JPY 1 trillion or JPY 968.4 billion, including lease liabilities. Net DER was 0.77. And net DER, excluding lease liabilities, was 0.68, which was an improvement of 0.09 point.

Page 9 shows consolidated cash flows. The accumulated cash flows from operating activities for the second quarter this year was positive JPY 139.4 billion. Actually, the number of the second quarter only was positive JPY 102 billion, which I think is a substantial improvement of the balance sheet.

As for the cash flows from investing activities, they were income from subsidies and cash recovery from the sale of assets. Actual cash-out was JPY 66.9 billion and the net amount was JPY 43.2 billion. Free cash flow after dividend payment was positive JPY 78.6 billion.

Regarding the business outlook ending March 2021, we haven't changed the figures from the ones we announced on July 31, including numbers for each segment and JPY 80 billion profit. This is cause the magnitude of the second or third wave of coronavirus outbreak in the Western countries is not clear yet.

There are some other uncertain factors such as the presidential election in the U.S., impact of the U.S.-China trade friction, fluctuation of foreign exchange rate swinging to stronger yen and economies of emerging countries. Because of these uncertainties in the third and fourth quarter, we decided to keep the business forecast unchanged from what we announced on July 31. Monitoring the situation in the third quarter, we want to determine our 2 outlook.

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

[Ichiro Kashitani, executive]

Hello, once again. I am Kashitani, President of Toyota Tsusho Corporation. I will explain FY 2022 midterm business plan and status of related initiatives. Regarding the quantitative target for the midterm plan, considering the future after the COVID-19 pandemic, we had various discussions internally, and I want to present our conclusion here.

As for FY year 2020, we have achieved increase of profit 4 years in a row in spite of the impact of the COVID-19. However, our forecast for this year is JPY 80 billion. There will be remaining impact of COVID-19, mainly in the automotive-related businesses. However, in our midterm business plan, we want to take steady actions for recovery and growth of the market and aim to put our business back on track and achieve JPY 150 billion profit in FY 2022.

Let me explain the assumptions we made for that plan. The chart on the left side shows the number of automobiles manufactured. With almost 1-year delay, we expect that it will catch up with the pre-COVID-19 assumptions and will gradually increase after that. There may be regional differences for GDP outlook. But as a whole, we forecast that it will recover to the level of pre-COVID-19 in around 2 years. Based on this assumption, we examined the situation of each business headquarters and regions and made a profit recovery scenario.

Page 5, please. We think that East Asia, which seems to have quickly recovered from the impact of COVID-19 will shift from recovery to growth, and North America and Europe will follow that. Based on this assumption, I am sending the following 3 messages to our employees, aiming to bolster resilience from the pandemic:

First, we will continue business only after thoroughly ensuring the health and safety of employees and their families. As for the area related to the economy of life, the concept that economy is essential to protect people's lives, we were able to maintain stability in spite of substantial fluctuations in supply chain and market. I think this is one of the results of our efforts to expand business foundation and especially strength in B2C business.

Second message is the importance of lean management that is free of waste. In the past, we have tried to reinforce the cash flow management by reducing inventory and improving efficiency of working capital. But recently, I gave direction to all employees to further eliminate wastes, taking the crisis management for the COVID-19 as a good opportunity.

The third message is that we must continue to undertake new challenges under this pandemic, and especially, we shouldn't reduce investments. As for the future investment, we want to carefully select candidates to create portfolio and continue activities with a strong will.

While implementing these activities, as a result of the impact of COVID-19, I renewed my recognition about several things. First, because mobility provides means of movement by which we can avoid close contact with others and plays a role in logistics of necessary goods, there is a renewed necessity and superiority in the mobility.

Second, as for manufacturing of automobiles, I realize necessity to protect supply chain under difficult circumstances in order to quickly recover production and logistics.

Third, businesses of economy of life, such as energy, food and pharmaceuticals, which are essential for development of sustainable society have high resistance to environmental changes.

Fourth, because of the drastic changes of environment, it is necessary to enhance value added using digital technologies and accelerate digital innovation. Based on that, I renewed my recognition that the directions of our 4 priority areas are not mistaken, even in the pandemic. And therefore, we should further promote them.

We want to broadly implement reforms to further enhance resilience to environmental changes aiming to realize ideal to be the right one. From here, I want to report status of initiatives in priority areas.

As I explained in May, we identified 6 CSR material issues. Out of them, 4 priority issues for solving social problem and achieving corporate growth are linked with the following 4 critical areas to achieve sustainable growth: first, let me explain next mobility area. As for the next-generation cars, we made investment in all polymer batteries manufacturer, and we will examine if their products can be applied to automobiles. As for the next-generation services, in order to promote analysis and management of automotive software and address OTA systems, we made investment in Aurora Labs Ltd. in Israel. This will help us to address advancements of technologies and services. As for the energy management, we consolidated control of charging and discharging of electric vehicles by V2G control system in Toyota plants. By this, we are verifying if we can improve management of electricity demand in the factory and consolidate adjustment capability in the factory to eventually participate in the supply demand balancing market.

Next one is renewable energy area. In the first half of this year, we have added 21-megawatt wind power generation capacity in the Netherlands. In the second half, additional 144-megawatt capacity will be added in the Netherlands and Australia. As a competitive and clean electric power company, we will further expand renewable energy business globally in a well-balanced manner.

As for Africa, according to the data released by IMF in this October, economic growth rate in Sub-Saharan Africa is expected to improve from negative 4.7% this year to positive 4.8% next year. However, the levels of recovery differ greatly depending on the country. I feel that our company should play a big role in Africa, where countries are aiming to recover economically from the impact of the pandemic.

As for the pharmaceutical business, because of the pandemic, we have renewed our recognition of the importance of this business and the importance of solution of social issues. Regarding pharmaceuticals manufacturing, we started business in Morocco following Algeria.

As through the delivery of pharmaceuticals by drones, we started operations in Ghana following Rwanda. Regarding the remote medicine, which we are promoting in Nigeria and Ghana, together with pharmaceuticals' delivery by drones, we want to further develop this new business because it can be provided under the pandemic according physical contact.

As for the mobility field, we launched Toyota brand compact car in African market in September this year, with OEM supply from Suzuki manufactured in India. Through these activities, we want to contribute to the development of mobility society in Africa to help people and play a role in the recovery of the economy.

Regarding the circular economy business, just like regulation of dirty waste plastic was added to Basel convention, there is an accelerated global trend towards circular economy. Together with our partners conducting recycled business, we have established a company which recycles PET bottles called Toyota Pet recycling systems in July 2020.

As for waste plastic, Planic Co., Ltd. is scheduled to start operations in 2021, as I explained before. We will continue to make contribution to the formation of a circular economy as a trading company with connections to the manufacturing industry.

Now I want to talk about digital transformation initiatives and globalization, which are our cross-functional activities to accelerate the 4 priority areas. Our digital transformation initiatives are aiming to tackle new areas to improve productivity of our businesses. And currently, we have more than 350 activities. One example is supply chain optimization of machinery, equipment and stockpiled goods. This is aiming to improve efficiency of existing businesses, examining measures to solve concerns of customers and establish vision and basic concept from customers' perspective. Starting with operation in Japan and the U.S., we will aim to establish universal platform.

Regarding the globalization, as the physical movement crossing borders are restricted due to the pandemic, it is an urgent task to develop local manpower, aiming to establish structures to contact businesses only by the local manpower. Also, we need to redefine the roles of expatriates dispatched from Japan. Therefore, we will further promote talent management of global leaders, build a global personnel platform and promote globalization of the head office. Especially, we are focusing on the talent management activities. In addition to the visualization of local manpower, we are aiming to achieve global optimal placement regardless of nationality or attribute based on our growth strategy.

As for the financial policies, we will continue to establish stable financial foundation. We have secured positive cash flows after dividends for the past 3 years. In the midterm business plan, we are forecasting around JPY 600 billion operating cash flow, and we want to continue making investment within that range. Our basic dividend policy is to maintain dividend payout ratio of 25% or more. We will endeavor to maintain a stable dividend and try to increase dividend per share.

As I mentioned at the beginning, our target of profit for FY 2022 is JPY 150 billion. According to our forecast, we will not achieve ROE target this year, but we will try to recover and maintain ROE of 10% or higher and continue to manage business with focus on capital efficiency. In our midterm business plan, we are expecting to invest approximately JPY 350 billion or more to the areas explained here.

Lastly, in relation to the corporate governance, we changed the structure of our Board of Directors in June this year, and we currently have 4 inside directors and 4 outside directors, total 8 directors. During past several years, we accepted outside directors from foreign countries and research organizations and appointed women directors. By this, we have streamlined management structure and promoted diversity and transparency, so that we can have discussions from various positions.

Also in this year, in order to separate management and execution for the improvement of transparency, we changed Chairman of the Board and Chairs of Executive Compensation Committee and Executive Appointment Committee to nonexecutive Chairman of the Board. The members of the Board are listed on this page. That's all from me.

Thank you very much for your attention.

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