Toyota Tsusho Corp

TSE:8015

Earnings Call Transcript 2019-Q4

[Ichiro Kashitani, executive]

[Interpreted] Hello, everyone. I am Kashitani, President of Toyota Tsusho Corporation. Thank you very much for taking time to attend this meeting in Shinagawa in your busy schedule. Today, we have participation of many institutional investors, security analysts and people from rating institutions. I want to express my appreciation for the important roles you are planning to connect our company and the market. Today, in order to deepen your understanding about our company, we will try to talk in a candid manner and explain the real state of our company and what we are aiming to do. Again, we really appreciate your participation in this meeting. Thank you.

[Hideyuki Iwamoto, executive]

[Interpreted] Hello, everyone. I am Iwamoto, CFO of Toyota Tsusho Corporation. I will explain the outline of consolidated results for FY 2018 and earning forecast for FY 2019. Please look at Page 4. These are the results or profits of FY 2018 compared to the previous year. Gross profit was JPY 638.4 billion, an increase by JPY 32.2 billion from the previous year. The reason for the increase was the flow of Metal & Global Parts were good, and the performance of automobile related business was good.

Operating profit was JPY 215.1 billion, an increase by JPY 32.5 billion. In spite of the good gross profit, we were able to keep SG&A expenses under control, therefore substantial profit remained. Regarding the profit attributable to owners of the parent, there were some one-time loss in Chemical & Electronics, Machinery, Energy & Project, but we were able to cover the impact of them, and the result was JPY 132.6 billion, an increase by JPY 2.4 billion. However, it did not reach JPY 140 billion, the number we forecasted and we apologize for that. But I would like to mention that these full levels of profits are record high numbers.

Please look at Page 5. This waterfall chart shows our profit analysis. Operating profit of the previous year was JPY 182.6 billion. It has increased by JPY 32.5 billion to JPY 215.1 billion, and this chart shows the factors of the increase. There is JPY 13.6 billion as others. According to our analysis, we think the special one-time loss in the previous year caused a reactionary effect, which led to the increase of JPY 13.6 billion. However, due to the factors such as the increase of market prices, demand and trading volume and automotive retails, there was around JPY 20 billion increase in our organic businesses, which led to the increase by JPY 32.5 billion.

Page 6 is a summary of division profits. As you can tell by the color, profits of Metals division has increased. Machinery, Energy & Project and Chemicals & Electronics had substantial negative numbers, and Food & Consumer Services also had the negative number. However, they were one-time losses.

As for the Chemical & Electronics, there was JPY 12.8 billion profit in the previous year, but we didn't have it this year. As for the Machinery, Energy & Project, there was profit of sales of gas business in the previous year, and there was impairment loss this year. According to my analysis, if you subtract all of them, I think the profit has somewhat increased from the previous year. Therefore, if you look at the numbers by divisions, Metals, Global Parts & Logistic and Automotive had good performances.

As for Africa, there was JPY 13.3 billion increase. We think the reason for this increase is the reactionary effect of one-time loss recorded in the previous year in relation to the business in Congo. So I think the results of all divisions were relatively good.

Page 7 shows the balance sheet. Total assets as of March 31, 2019, was JPY 4.4414 trillion, which is an increase of JPY 131.4 billion. I think the reason for that was an increase of inventory, which is a part of the current assets. Net assets was JPY 1.3896 trillion, which is an increase of JPY 27.5 billion. Although there was accumulation of profit, net assets did not increase so much. I consider the reason for that was the negative evaluation of financial stocks designated as FVTOCI, and foreign currency translation adjustment was also negative.

Page 8 shows the cash flows. For this year, cash flows from operating activities was JPY 210.7 billion, which was almost the same level as last year. There was some noncash allowances for impairment, but cash flows remained at this level. I analyze that cash outflow related to inventory was fairly large. And as a result, it remained at almost the same level as last year.

Regarding the cash flows from investing activities, we actually had investment of JPY 156.1 billion and the net amount became JPY 137.5 billion and the free cash flow was JPY 73.2 billion.

Page 10 shows the consolidated earnings forecast for fiscal year 2019. The numbers may look aggressive, but if you subtract one-time factors for this year, very reasonable numbers. Regarding profit, we are aiming at the record high profit and put JPY 150 billion for this year. If we can achieve this, it will be achievement of record profit for 4 consecutive years. As for foreign exchange, our forecast is JPY 110 for U.S. dollar and JPY 125 yen for euro.

Page 11 shows the forecast for fiscal year 2019 by division. For all divisions, we forecast increase in sales and profit. I believe that these are also numbers we can manage to achieve. Page 12 shows our dividend policy. In the past, we used to state that we will aim to maintain a dividend payout ratio of 25% or more. However, we change the expression to show our commitment to dividend.

Now it is our basic policy to maintain dividend payout ratio of 25% or more. We didn't achieve initial target of JPY 140 billion profit, however we are planning to pay JPY 100 dividend as promised. Next year, we want to increase the dividend payout ratio and pay JPY 120 as dividend. That's all from me. We prepared some supplementary materials. Please have a look at them. Thank you very much.

[Ichiro Kashitani, executive]

[Interpreted] Good afternoon. Once again, I am Kashitani, President of Toyota Tsusho Corporation. I will explain 3 years' management plan. This is our plan from FY 2019 to FY 2021. In the past, I stated that our priority areas for a mid-term plan were African growth and Next Mobility strategy. This time, we have added renewable energy strategy.

With this addition, we now have 3 priority areas. First, let me explain our first priority area, African growth strategy. Please look at Page 4. Last year, we announced that there would be a transfer of African business from Toyota Motor Corporation to us. The business transfer started on the full scale from January this year. 50 personnel from African division of Toyota motor came to this headquarters in Shinagawa, and the business transfer started.

As shown on this page, we will try to strengthen Toyota business in Africa based on 6 pillars listed here. Currently, the sales volume of Toyota cars in Africa is around 200,000 units. We are targeting sales volume growth of at least twice the Africa's combined GDP growth rate and increased the market share.

Let me explain our 6 pillars using slides in detail. First item is product lineup. Capitalizing on alliances with Toyota and Suzuki, we want to strengthen compact car lineup. Four models are listed here, especially we are considering to strengthen B segment cars of Suzuki.

In addition to selling them as Suzuki brand, we plan to sell them with Toyota brand through Toyota channel as well. Because Hilux and Land Cruiser are popular in Africa, we want to strengthen product lineup for pickup trucks and SUVs. Also we want to expand the sales of special edition models for Africa, such as vehicles suitable for rough roads and low-quality fuel.

The second pillar for African growth strategy is knockdown business. To be specific, it's not a complete knockdown, but a semi knockdown. Based on government supports or tax incentives provided by African countries, we want to make quick decision as to in which country or region we should conduct a small scale assembly operations and satisfy the needs for local production for local consumption. As an example, here is a picture of assembly plant in Kenya.

The third pillar is optimization of supply network or streamlining of logistics. Regarding vehicles, by establishing centralized inventories in 3 locations of Antwerp in Europe to buy and South Africa, we want to shorten delivery times and strength body mounting and conversion. Regarding parts components, by concentrating inventories in 2 locations of Europe and South Africa, we want to improve supply efficiency and shorten delivery times.

Our plan for the concentrated inventories of vehicles and parts are not applied only to Toyota products, but also to Suzuki products as well. As for sales, we will develop stores with added values and try to further expand our sales network.

The fourth pillar is to strengthen total fleet management, especially in B2B area. By analyzing fleet customers' data, we want to create opportunities such as fleet events and capture and cultivate customer needs and make proposals in order to expand sales of Toyota vehicles. Especially together with Toyota South Africa motors, which is a major production site in Africa, we will visit fleet users and promote collaboration including product development.

The fifth pillar is to strengthen Toyota operations. This means to strengthen our foothold. We want to improve the operation of best-in-town activities. We want to provide suitable quality service from customers' perspective and increase the number of fans of Toyota vehicles.

The sixth pillar, the last one, is expansion of value chain. The objective is to capture future buyers of new vehicles. We want to improve services while fostering brands in each process. We will have pan-African deployment of certified used vehicle system and expand the business through the Automark brand. By forming partnership with an oil major, Total, which has network throughout Africa, we are planning to provide car care services such as simple repair and part sales by franchise system. This is also related to our business of general purpose parts manufactured by Toyota Group such as DENSO and Aisin.

In financing field, we want to expand our leasing business through a subsidy company, Loxea. With these 6 pillars, we intend to further expand our automobile business.

As you may know, at the end of August, TICAD7, or The Seventh Tokyo International Conference on African development will be held in Yokohama, organized by Japanese government. We will participate in this conference on our own initiative and intend to make business contracts with various countries and promote various projects.

We are chosen as a Chairman for Africa-related committees by both Japan Federation of Economic Organizations and Japan Association of Corporate Executives. With our slogan, which is With Africa, For Africa, we want to continue active involvement in this international conference.

After this, I want to show you some pictures which is related to our current activity. Spending one week out of the recent long holidays in May, I made a 7-day business trip to Angola and South Africa. This picture is the one when I had to talk with President Lourenço of Angola.

The person on my left side is Ambassador Sawada, the Japanese Ambassador in Angola, who joined me in this visit. The person on my left side is Mr. Nuno Borges da Silva, the Chairman of Toyota in Angola. Left side of the President is Ambassador Sawada and the person on his right side is Mr. Inoue, COO of Machinery, Energy & Projects division. The person at the far right is Mr. Imai, COO of Africa Division, who had worked at Toyota Motor until the end of last year and returned to our company. These are the members who met with the President of Angola. We requested his cooperation to our various development projects in Angola and exchanged opinions as to where we can find opportunities. One day after this visit, Japan's Foreign Minister, Kono, visited Angola and met the President in the same room.

Let me explain the next picture. As reported in newspapers in April, we made a successful bid for rehabilitation project of Namibe Port, which is located at several hundred kilometers south of Luanda, the capital of Angola. It's a project of around JPY 70 billion, and we took this picture when we visited the site.

In order to win the contract, we received financial support from JBIC and insurance-related support from NEXI. JICA is undertaking some repair work at this site. It's a project to extend this site and construct a container terminal.

Also on the right edge of this picture, there is another cape, and it will be rehabilitated as a terminal used for export of iron ore. This is a port rehabilitation project including those 2 constructions. The person on my right side is the Transportation Minister, who joined us in our visit. The person on the far right is the Chief Administrator of Namibe Port Authority. It says Namibe Port Office, but it's actually a City Hall. Four persons on the right side are all Ministers of Angola Government. The fact that so many government officials joined us shows that they have high expectation for this project, and I felt strong sense of responsibility. I also visited South Africa. As reported in newspapers, we entered into exclusive negotiation to acquire shares of Unitrans Motor, the biggest automotive dealer in South Africa. It's a little early, but we held a ceremony to present a painting of [ Redmont Fuzi ].

The person on my right side is the CEO of Unitrans. Person on his right side is the CFO. When I met them, I inquired about their management philosophy and the status of management of their business. As a result, I was convinced that this is a good company.

Now I want to talk about the second priority area, Next Mobility strategy. This is our action plan. As this page shows, we divided the vehicle lifestyle into 3 categories, namely development, production, use service and reuse. Corresponding to each stage of life cycle, we are working on the 3 areas, namely replacement of materials or rate reduction, next-generation service and energy management. As for the replacement of materials, we think it is necessary to respond to accelerated migration to electric vehicles. As for the next-generation services and energy management, we consider that creation of new business opportunities is necessary. We are aiming to build new business models that enable sustainable growth in next-generation mobility domain.

In order to respond to accelerated migration to EVs, the biggest area is replacement of materials. In order to respond to the growing demand for electric vehicles, we intend to accelerate our activities to materialize in-house production of new technologies, especially because China is the biggest market in the world and backed by its government policy, new energy vehicles are expected to grow substantially compared to other countries.

In the Chinese market, we are tackling to establish in-house production of new technologies, such as motor processing technologies. In order to accelerate this move, we want to further strengthen our activities in China.

Next, let me talk about the creation of new business opportunities. Regarding the next-generation services, we want to expand mobility service domain and especially establish infrastructure that will form foundation of future mobility services. As part of that, this is related to connected car. We are working on the over-the-air technology, which is necessary for wireless delivery of software updates.

Regarding energy management, we intend to combine 3 Rs, or rebuild, reuse and recycle of batteries with renewable energy to address the growing demand for clean energy. By these activities, we want to leverage our strength to create new markets instead of only accessing markets with promising growth prospects. This is regarding our activity to accelerate global expansion. Utilizing our expertise in the field we are doing business, we will actively expand our business in Africa and strengthen our operations in Asia, including Japan, North and South America and Africa.

In Egypt, we launched an IPP Project, which is our first wind power generation in Africa, and we plan to start commercial operation in December this year. Our plan is to generate 262.5 megawatts at the beginning. And in the future, we will double the capacity to generate 500 megawatts. Starting with this project, we are aiming to further expand our business in Africa.

Regarding new business domains of renewable energy strategy, in addition to power generation business to create electric power, we want to tackle business to store and regulate electric power. We think that there are 3 areas, namely power generation, power storage and power saving. As for power generation business, we entered into a new business of micro hydropower generation business, which has relatively high entry barriers.

By this, we want to secure stable and inexpensive power sources. Regarding domestic offshore wind power business, because the scale of operation is big, we want to examine its risk carefully and consider how we should enter this business. As for power regulation business, we want to enter into the business such as VPP business utilizing storage batteries, or power transmission business in Northern Hokkaido area considering the future after their feed-in tariff scheme ends.

Next I want to talk about measures to further accelerate the growth. Since I became the President in April last year, I have been talking about acceleration of globalization and digital transformation. Now I want to talk about this subject.

First item is globalization. We are promoting 3 globalization. They are globalization of business, human resources and organizations and systems. Now this picture shows people, capability and organizations, systems are the foundation of businesses. We want to strengthen those foundations, especially in Africa, China, India and Southeast Asia and create region-based businesses.

Next item is digital transformation. I think there are 2 viewpoints, namely internal reforms and customer value enhancement, and we divide them into 4 quadrants, as shown on this page. Digital transformation is an important field to us, and we plan to invest approximately JPY 20 billion over the next 3 years. This page shows positioning of digital transformation and globalization in our management strategy. It's based on a principle called Toyota Group Way, which we regard as our DNA. They are on-site, hands on, in touch, a passion for business and team power. The idea is to apply them to the priority areas.

Our company vision is be the right one. This means that we aim to become the one and only company for customers and partners. This page is about the CSR materiality for the Toyota Tsusho Group, which explains 6 material issues. We have 2 top priority issues that will become foundation for company growth and 4 top priority issues for solving social program and achieving company growth.

We believe that the various businesses and activities of our group are contributing to the solution of those issues. We want to make Toyota Tsusho a company where everyone is engaged in the business operations with awareness of the CSR materiality and can feel the meaningfulness of the daily work. And we want to keep making efforts so that as a result of these activities, we can contribute to solution of social issues. Lastly, I want to explain our financial policies and quantitative targets of FY 2021. Regarding the financial policies, we want to establish stable financial foundation. As it was explained in the earlier presentation by Mr. Iwamoto, our net DER was 0.8. We intend to further strengthen our cash flow management.

During the past 3 years, free cash flow after dividends were positive. In our midterm business plan for 3 years, we are forecasting cash flow of JPY 600 billion, assuming that it will be accumulated by JPY 200 billion every year. Our basic policy is to make investment and pay dividends within that amount. As for the dividend policy, we make dividend payout ratio of 25% or more as a basic policy. With this policy, we will endeavor to maintain a stable dividend.

Regarding the profit attributable to owner of the parents, our target for FY 2021 is JPY 170 billion. We plan to increase dividend per share every year, and this year, we are hoping to pay an annual dividend of JPY 120. Regarding ROE, in order to maintain 10% or higher, we will conduct business operations with an awareness of capital efficiency. Lastly, I want to explain major investment in our midterm management plan. We plan to make investment of JPY 450 billion or more as a total for 3 years. We will make investment in 3 categories: Mobility, Resources & Environment and Life & Community of the amount of JPY 170 billion, JPY 210 billion, JPY 70 billion respectively.

As I said earlier, the cash flow is JPY 200 billion. Therefore, we consider JPY 150 billion which is within that amount as an appropriate number. This concludes my explanation. We provided some additional supplementary materials. Please refer to them as needed. Thank you very much.