Toyota Tsusho Corp

TSE:8015

Earnings Call Transcript 2023-Q2

[Ichiro Kashitani, executive]

Good morning, everyone. I'm Kashitani, the President of the company. I would like to thank you again for your ongoing support of our company.

As announced by the moderator, we will be using a live webcast again to prevent infection. We apologize for any inconvenience this may cause. As Iwamoto, our CFO, will explain the details later, the profit attributable to owners of the parent company was JPY 151.2 billion, a record high, far exceeding the JPY 127.5 billion in the same period of the previous fiscal year. Although the outlook for the economic environment remains uncertain in light of the solid first half performance, we have revised our full year target upward by JPY 60 billion to JPY 270 billion for the fiscal year ending March 31, 2023 or fiscal year 2022.

Before today's briefing, we also issued a press release regarding the formulation of our Green Finance Framework. This is to implement financing for renewable energy products. We hope you will check our release for details. Our company will continue to strengthen its efforts to achieve carbon neutrality. Our CFO, Iwamoto, will give you more information on the financial results.

[Hideyuki Iwamoto, executive]

Now we would like to move on to the outline of consolidated results of the second quarter of the fiscal year 2022. My name is Iwamoto. First, regarding the exchange rate, the profit loss account on a yen-dollar basis, the Japanese yen depreciated by JPY 24 from JPY 110 in the previous fiscal year to JPY 134 in the current fiscal year to the dollar. The balance sheet is also impacted by the Japanese currency depreciation by JPY 23 from JPY 122 to JPY 145 to the dollar. The first page is an overall overview.

Although not included in this document, revenue increased 31% to JPY 4.9 trillion, and gross profit increased 33% to JPY 483.4 billion. The operating profit increased by JPY 58.5 billion or 39% to JPY 207.9 billion year-on-year. Details of this part will be explained later.

After-tax income increased by JPY 23.7 billion or 19% to JPY 151.2 billion. Since the previous fiscal year included a onetime gain of JPY 21.5 billion, we consider it a 43% increase. Operating cash flow was JPY 78.7 billion, a slight recovery from the first quarter, while investing cash flow was minus JPY 62.1 billion with a relatively steady gross amount of JPY 92.1 billion. The JPY 185 billion invested in Eurus, which became a wholly owned subsidiary during the period, is not included in the investing cash flow here because it is a financial transaction for accounting purposes.

The net DER deteriorated by 0.13 points due in part to the onetime write-off of JPY 113 billion in connection with the acquisition of Eurus as a subsidiary, which was included in the table surplus. In addition, taking into account the results of the first half, the foreign exchange situation, market condition, the acquisition of Eurus as a wholly owned subsidiary and automobile production volume, the revised full year forecast has been increased by JPY 60 billion to JPY 270 billion, as explained by the President. As a result, we have increased the annual dividend to JPY 190 plus JPY 30 compared to the plan, up JPY 30 from the previous year.

The second page shows the breakdown of after-tax profit and operating profit. The increase in operating profit of JPY 58.5 billion was due to the impact of foreign exchange rate fluctuations, which accounted for JPY 14.8 billion to the rise. In terms of metal market conditions, the second half saw an increase of JPY 12.5 billion, mainly in nonferrous metals markets such as aluminum, lithium and neodymium.

In terms of market conditions, the Brazilian grain business was minus JPY 3.3 billion due to higher land transportation costs. In the Machinery and& Energy, included in the demand item, JPY 10.9 billion is primarily due to higher electricity prices in Europe, the Netherlands, Spain and Italy. The Chemicals & Electronics business grew operating profit by JPY 1.8 billion from basic chemicals, biochemicals and so on, other than automotive materials, mainly due to the rise in naphtha prices and from iodine, which is our fourth due to higher market prices.

The electronics sector increased by JPY 2.6 billion for display-related products and JPY 1.7 billion for automotive-related products. We believe that the supply-demand balance for semiconductors, which we handle, is almost even. Price hikes in other measures have made their penetration. On the other hand, operating profit for memory, mainly for Samsung's memory products, was down by JPY 2.1 billion due to the decline in the market. As for automobile sales in Africa, as mentioned above, they were solid.

On Page 3, one-off gains and losses are shown. There was a net loss of JPY 0.5 billion for the period under review, which had almost no impact. The fourth page shows the after-tax profit analysis by division by segment. And for metals, excluding the impact of one-off gains in the previous fiscal year, we estimate a 35% increase for the current year. The results are based on the market conditions and the rise in production volume.

Global Parts & Logistics performed very well, partly due to an increase in the handling of auto parts. The Automotive business, South Pacific regions such as Papua New Guinea and Cambodia, Latin America, the Caribbean and the Caucasus have been favorable with an extremely high number.

In Machinery, Energy & Project, after-tax profit, excluding onetime gains and losses in the previous year, has almost doubled. The profit from Eurus, which became a wholly owned subsidiary, positively contributed to the profit for August and September. In Chemicals & Electronics, as I explained later, nonautomotive materials contributed to the increase. And in Electronics, price hikes penetrated and contributed to the rise in profit. Regarding Food & Consumer Services, I have already explained. On Africa, growth in Automotive sales volume was JPY 2.5 billion in West Africa, JPY 2.5 billion in South Africa and JPY 1 billion in pharmacy, while FMCG struggled slightly in net profit.

Next is the cash flow on Page 5. We still have many inventories, so the increase in operating cash flow is expected to be smaller than expected.

Page 6 shows the consolidated financial position. The total assets increased to JPY 6,694.2 billion, but the foreign exchange impact was JPY 290 billion. Inventory has increased by JPY 200 billion, including JPY 82.9 billion from exchange rate effects. There has been a roughly JPY 400 billion increase in the past 2 years. We're managing inventories very strictly and expect to enter a significant adjustment phase in the third and fourth quarters of the current fiscal year. However, as I mentioned earlier, sales have been increasing significantly, and the inventory turnover period in days has not worsened that much in terms of sales scale.

On Page 7 is the revision of the full year earnings forecast. As I explained earlier, the exchange rate has been revised to JPY 140 to the dollar.

Page 8 explains the approach to revision of financial forecast by segment. Regarding Metals, we expect an after-tax profit of JPY 27.7 billion in the second half of the fiscal year. This is because we expect market conditions to slow down. Global Parts & Logistics will be JPY 16.7 billion in the second half, almost the same as the first half, but this is mainly due to favorable exchange rates and the fact that fleets are stabilizing. We consider the business will be good. We are a little conservative in estimating JPY 19.9 billion for Automotive as we expect some shortages to appear in the second half.

Machinery, Energy & Project is JPY 10.6 billion, which looks very conservative. As Eurus has become our wholly owned subsidiary, you may think it is a more positive factor. However, we do not expect the high price of electricity in Europe to continue for an extended period. And this portion will be eroded. We are also planning to have a replacement concerning Eurus business in the second half of this fiscal year, and we expect to incur upfront costs.

Food & Consumer Service may look strong in the latter half. The figure of JPY 118.8 billion includes gains from the sale of real estate, which we already have contracted for the second half of the year. Since that market conditions and foreign exchange rates will impact Q3 and Q4, so I think the forecast may be slightly conservative, but this is how we are projecting it.

The following pages are supplementary materials. That is all for me. Thank you.

[Ichiro Kashitani, executive]

My name is Kashitani, and I'm the President. I want to explain about achieving our midterm business plan for fiscal year 2024. Today, I would like to explain the progress cases in the business strategy of the midterm business plan for fiscal year 2024, which was announced in May 2022, a review of TICAD8 held in August this year and quantitative progress in the first 6 months of the midterm business plan.

I'd like to reiterate our management strategy. We will continue to grow by building on foundation, Toyota Tsusho's unique points of difference, the foundation for our growth and by accelerating our initiatives through digital transformation and globalization. In addition to the 4 key areas of organic materiality, which are our existing businesses, we will also promote initiatives for carbon neutrality and a circular economy aiming to be the right one.

First, let me talk about the combination of Next Mobility and battery. We are strengthening our efforts in the battery supply chain to meet the ever-increasing demand for batteries. In raw materials and price processing, we are expanding our lithium carbonate production capacity at Salar de Olaroz in Argentina to 42,500 tons, approximately 2.5x the current capacity. In addition, we will start full-scale commercial production of lithium hydroxide, which is more similar to the raw materials for batteries at Toyotsu Lithium Corporation in Naraha, Fukushima Prefecture. This fiscal year will be the first commercial production in Japan. We aim at producing 10,000 tons in the future.

In battery manufacturing, the company will invest $126 million in TBMNC, Toyota Battery Manufacturing, North Carolina, to produce lithium ion batteries for battery electric vehicles. This investment is in addition to the first investment for hybrid electric vehicles made in October last year and will allow us to respond further to the growing demand. We'll strive to capture the numerous business opportunities in the battery supply chain and secure our competitive advantage as a leading lithium battery manufacturing, maximizing our accumulated know-how of renewable energy development.

In August 2022, Eurus Energy Holdings became our wholly owned subsidiary. This enhanced maneuverability and strategic flexibility will enable the Eurus Energy Holdings Corporation Group to work as one in the renewable energy business. Currently, we have 3.7 gigawatts of gross generation capacity worldwide, which we plan to expand to 5 gigawatts by fiscal year 2024, on the year ending March 31, 2025, and to 10 gigawatts by fiscal year 2029. We'll continue to develop a variety of power sources. We will continue to add value to our renewable energy business by developing diverse power sources, expanding our functions in the power value chain and entering the offshore wind power business after the period of the current medium-term management plan.

Now I'd like to explain Africa where we will create next-generation mobility and health care businesses through digital transformation and cross linkage with Economy of Life. Economy of Life refers to essential businesses indispensable to people's daily lives, such as food, medicine, telecommunications, logistics and insurance. With Africa, For Africa, as our vision, we'll continue to grow by expanding our value chain from upstream to downstream in each of our 4 business areas and developing markets in each area.

In the Mobility field, we acquired EIE, a leading manufacturer of industrial vehicles in South Africa and launched its business as CFAO Equipment South Africa. Fully utilizing Toyota Tsusho Group's network and know-how, we'll make efforts to sustain and strengthen our position as the market leader of industrial vehicles in South Africa to expand our business.

In the retail segment, we opened PlaYce in Cameroon, the country's fifth and largest shopping mall during the period of the medium-term management plan. We will continue to meet the demands of African consumers and create jobs. Through our business in Africa, we'll promote industrialization, seize the opportunity of growing middle class and further advance our African strategy.

Next, I would like to talk about the intersection of business creation in Africa and digital transformation, which are compatible. While further strengthening our corporate venture capital capabilities in Africa, investing in new technologies and services in mobility and health care, respectively. Mobility 54, launched in October 2019, has invested EUR 6.1 million in funds one and two, while Health54 has a total of EUR 10 million to support and commercialize the ideas of passionate African entrepreneurs.

Mobility 54 invested in OnePort 635 (sic) [ OnePort 365 ] digitalization of the African logistics industry in Nigeria. This has allowed seamless digitalization of global and domestic distribution for Africa and is aimed at creating a marketplace for distribution services. Health54 will promote the creation of our B2B market for pharmaceutics by investing in Lifestores Healthcare, its first project in Kenya.

In addition, in September this year, the [ Madinet Group ] played a central role in organizing a pitch event in Paris with entrepreneurs and venture capital investors who are the future leaders of Africa on the theme of companies and innovations. Together with passionate entrepreneurs, we aim to solve social issues in Africa and create next-generation business.

Next, the fourth area of focus, I would like to explain some examples of how the circular economy, battery and Economy of Life are interlinked. The first is our efforts to establish an automotive battery recycling scheme to realize our recycling scheme for collecting, reusing and recycling batteries will expand the business model we found in Japan to overseas markets. We're currently collecting hybrid batteries in 9 countries. PLANIC Ltd. uses Japan's first gravity-based sorting technology that sorts mixed plastics from various types of waste to achieve high-quality plastic recycling. PLANIC Ltd. started full-scale operation on October 11.

Toyotsu PET Recycling Systems Company Limited also started full-scale operation on October 3. We're contributing to reducing carbon dioxide emissions and recycling-oriented society through bottle-to-bottle recycling. As the world's leading circular economy provider, we will continue to take on the challenge of creating a circular economy.

Next, I'd like to introduce some examples of digital transformation that accelerate our initiatives and business strategies. To fundamentally solve inefficient trading processes, which have been an issue for many years, we launched investment in TradeWaltz, a blockchain technology-powered, cross-industry, trade-related, information-sharing platform. Trading houses, banks, insurance firms, shipping companies and others set up a consortium across industries.

The consortium will promote the use of digital technology to improve the efficiency and security of trading processes. Our company participates in this consortium and invested in TradeWaltz, which operates the consortium in 2020. In August of this year, we invested more in TradeWaltz to be more actively involved. First, we'll gradually introduce TradeWaltz into various processes in the trading business, expand its functions so that many parties can use it in a meaningful way and aim for global connectivity with peripheral platforms.

While digitally transforming our trading processes, we will continue to apply TradeWaltz to our value chain, which handles numerous commodities. In this way, we're combining our organic business, which is the foundation of our business with digital transformation. We're making significant changes in our industry by using and expanding digital trading platforms.

Next, I'd like to review our participation in TICAD8, Tokyo International Conference on African Development, and conference results. TICAD is an international conference on African development held in Tunisia, North Africa on August 27 and 28 this year. This year marks exactly 100 years since Toyota Tsusho started its business in Africa and 170th year since CFAO of Toyota Tsusho Group started its business in Africa. This year also marks the 10th anniversary of the merger of Toyota Tsusho and CFAO.

Toyota Tsusho also participated in TICAD8, discussing with Africa, what we can do for Africa under the 4 themes of industry transactions, green economy, global health and capacity building. As a result, we were able to conclude 25 memorandums with many countries and companies with an eye to the future. We will continue to push forward these memorandum into concrete value-creating projects. For the future children of Africa, we will continue to lead the business in Africa and contribute to the growth of Africa while respecting the ownership of African countries and partnership with the international community.

I want to introduce the principal memorandum and concluded. We have concluded a total of 25 memorandum, including comprehensive memorandums aimed at strategic collaboration in health care, seawater desalination research using renewable energy and others. We will continue accelerating our contribution to solving social issues and economic development throughout Africa.

Next, I will explain our midterm management plan, quantitative targets and progress. As you can see, we're making good progress in the first 6 months of the 3-year plan. And in particular, we are on track to achieve the profit for the current fiscal year goal, well ahead of the schedule.

Here, I will explain profit of the year, shareholder returns and ROE. Over the past decade, we have been building profits in a step-by-step upward fashion. In fiscal year 2024, the final year of our medium-term management plan announced in May of this year, we have set a target of JPY 250 billion for profit for the year. For fiscal year 2022, the first year of our midterm management plan, we have revised our forecast upward and are aiming for a record high profit for the year of JPY 270 billion.

We're determined to achieve this goal well ahead of schedule in this challenging business environment. We will not revise our medium-term management plan for fiscal year 2024 as our medium-term management plan is formulated as an annual rolling forecast. However, in our new medium-term management plan to be released next year, we will look at our current situation and prospects and present a new medium-term management plan suitable for the next new stage of our company.

We'll also increase our dividend in line with the steady profit increase. For the first half of the fiscal year, we will pay a dividend of JPY 96 per share. If we achieve our full year profit plan of JPY 270 billion, we plan to pay an annual dividend of JPY 192 per share by our dividend policy of striving for consolidated dividend payout ratio of 25% stable dividend increases. We will continue to strive for leaner management and capital efficiency, including ROE to increase profits and pay dividends in line with shareholders' expectations.

About our investment policy, we have always invested within the limits of our operating cash flow, and we will not change this policy in principle during the medium-term management plan. However, depending on the strategic timing, we expect that investments for both may proceed and temporarily exceed operating cash flow. Even in such a case, we believe that this operating cash flow, which is operating cash flow adjusted for working capital, will continue to generate strong cash flow, and we will not stop investing in growth.

Based on this assumption, we will continue to strive to maintain a stable financial base. We'll do everything we can to maintain a solid operating cash flow, manage net DER within onetime and maintain a ratio of risk assets to risk buffer, less than one, will move toward growth while maintaining a robust financial base. We will further promote asset management liability to ensure a balance sheet and risk management appropriate to Toyota Tsusho, which is suitable for a company that will continue to grow.

In 2018, Toyota Tsusho selected 6 materiality issues we should be aware of to realize our global vision of be the right one. In response to this, in our midterm business plan, we'll combine our efforts in the 4 key areas where we have strength with carbon neutrality and the circular economy to achieve growth and solutions to social issues. The Toyota Tsusho Group has the Be the Right ONE is committed to enhancing our experience, creating value, expanding areas where we can grow and expanding areas where we can contribute.

With these words, I would like to conclude my presentation by saying that Toyota Tsusho will continue to take on the challenge of achieving suitable growth and realizing our corporate philosophy with a mission of creating a better global environment for the children of the future. As we broadly take on the new responsibilities and roles assigned, I hope you will look forward to our next challenge stage and further progress.

For more information on our initiatives that I have not been able to introduce today, please refer to the Consolidated Report 2022 published at the end of September in our brochure and on our website. Thank you very much for your attention.

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