Toyota Motor Corp. F3Q10 (Qtr End 12/31/09) Earnings Call Transcript

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 |  About: Toyota Motor Corporation (TM)
by: SA Transcripts

Operator

(Operator Instructions). We'll take our first question from Steve Usher with Japaninvest.

Steve Usher - Japaninvest

Good evening and thank you very much for this call. I just have two questions, first of all could you please comment on the cost associated with the closure of NUMMI and are those, I don’t want to imagine those are including the recall cost so if you could please give us a bit more detail on that. My second question is could you please talk about the profitability's in China and included in that question could you comment on the recall costs in china, you had a number of recall, recall thus far this year and if you could give us a bit more detail on those costs I'd appreciate it. Thank you very much.

Takuo Sasaki

With respect to NUMMI as the production moved towards the completion and final closure, there maybe the possibility of that operation may lapse in stability going forward. And in order to assure stable delivery of Corolla's and Tundra's for which demands are very high. Without causing any troubles or consent I want the part of customers we will incur a second cost. And those cost and expenses are in the reasonable extent incorporated and booked on the third and fourth quarters.

However, when it comes to specific amount involved, please accept my statement that I would like to refrain from mentioning those numbers.

With respect to China we actually recalled 75,000 units of RAV4 and therefore there are certain recall related expenses or cost. It is not a very significant amount, although I cannot cite any specific number in relation to that. Please do understand, that recall cost related to China is incorporated in the [unmet] number I cited earlier the number such as ¥100 billion, for example.

Anyway, please do understand that the census related to China is not significant amount. With respect to the market in China, we expect that market is likely to grow very substantially in the fiscal year 2010 as well. For example the market in 2009 in China was slightly less than 14 million units that is to say in the higher part of 13 million units. And this year the growth of the market is likely to be even bad and then the part of Toyota, we have sold approximately 710,000 units in China and this year, we are planning to sell upper level of around 800,000 units. We believe our Chinese market is of course the market with a very strong and high potential over a medium long term.

Steve Usher - Japaninvest

Thank you very much, could you comment on the profitability in China? And is the profit contribution to equity earnings in Q3 and as far in this fiscal year?

Takuo Sasaki

During the three months of the third quarter in the equity method profit, the profit-related to our Chinese business is included and through the tune of between ¥20 billion to ¥30 billion and in addition to that we do have a process from Chinese subsidiaries as well as profits and by delivering parts and [recall] from Japan, and therefore during the three months, the third quarter we booked approximately ¥70 billion in profit, Chinese business.

Allow me to correct earlier statement I earlier mentioned that the profit from Chinese business is included to the profits accounted for by equity methods to the tune of between ¥25 billion to ¥30 billion. Actually, that amount included in the equity, net of profit was actually less than ¥25 billion, but the profit-related Chinese business is about ¥70 billion as I mentioned earlier.

Operator

Margaret Moore with DuPont Capital Management, please go ahead.

Margaret Moore - DuPont Capital Management

Thank you for the call. The first question is I was wondering if the recall cost includes the most recent announcement of problems with the (inaudible) and if not, do you have any estimate at this time for what the annual inventory cost for that would be. My second question is regarding the financial services. In your assumptions for the financial services business, are you now revisiting [lease sales value] functions in the guidance process?]

Takuo Sasaki

First of all with respect to this year it appears it has not been clearly identified what sort of improvement on the [ratio] measure specifically are going to be implemented and therefore any cost relating to the [players] is not incorporated in the forecast I mentioned earlier.

Regarding of the resale price of used vehicles it's very difficult to forecast where those prices are likely to be. However, I earlier sighted that the likely impact on sales of about ¥70 billion to ¥80 billion and a part of that includes the risk of possibly reduced value of used cars. Thank you.

Operator

And we'll take our next question from Kurt Sanger with Deutsche Bank.

Kurt Sanger - Deutsche Bank

Hi this is excellent. Thank you for the call. Two questions, one on the North America profit for the third quarter excluding valuation gains you have ¥69.7 billion. Can you give us a rough idea of how much was the finance business and how much was with the order business of that?

Takuo Sasaki

Please give us a moment.

Takuo Sasaki

In the third quarter excluding interest rate flock related earnings the profit of North America where the ¥69.7 billion and of that about ¥50 billion are related to the financial services or gains from TMCC.

Kurt Sanger - Deutsche Bank

The second question what fund is on the domestic market, the sales in Japan have been extremely strong helped by the government consensus that certainly helped your parent company and domestic production levels over the last quarter. Just looking into next year after the incentive program and in September what is your view of the domestic market and I am more concerned about the domestic production levels going forward. Thank you.

Takuo Sasaki

As we've just mentioned in September, the domestic subsidy regarding environmental friendliness will expire. However that's only one aspect of those incentives. The ecological or environmental friendly [test brake] will last a little longer up until 2012, and as I mentioned just the part of that provided its ecological subsidy expired in September, and therefore we are also concerned about the potential decline in demand in October this year. However, at the same time, the markets in other regions of the world are recovering and will start to recovering further and therefore we are hoping that above the stronger market recovery in the regions of the world, outside of Japan would be able to cover and make up for potential decrease in demand here in Japan.

Kurt Sanger - Deutsche Bank

Okay thank you. The impact has been to help shrink the parent losses to only ¥20 billion in the third quarter. Would you be hopeful that the parent company could actually break even next year?

Takuo Sasaki

The plan for the next fiscal year is something that we are working on right now and therefore its very difficult for me to answer either way, and especially when you talk about parent company there is another factor that it’s a the exchange rate may fluctuate quite significantly from what is it today. And therefore, all I can say at this point is that we'll make a very serious effort so that, we can breakeven.

And this year on a standalone basis or at the parent company basis earnest efforts are being made to reduce that fixed cost for example and therefore comparing to this situation in the past, we have a prior stronger fundamental capabilities which allows us to make earnings even at the current exchange rate level. And therefore, we need to make of course even further efforts going forward for next year as well.

Operator

And, Ben Moyer with BlackRock. Please go ahead.

Ben Moyer - BlackRock

Yes hi. Thanks for the call. I had a question about your volume assumption for the fourth quarter and the impact of the recall. You said that you anticipated a 100,000 unit impact? I'm assuming that at the retail level are you assuming that the wholesale volume will be impact at the same amount or by a lesser or larger amount. That’s the first question.

Takuo Sasaki

Basically speaking I think you will be able to understand the impact on the wholesale is in line with about the same level as that on the retail level.

And formulating the consolidated, the full year forecast of the volume assumption was made on that basis.

Ben Moyer - BlackRock

Okay and this is kind of a follow up to that I am curious how you came up with this 100,000 units estimate. It looks like if we look only at north America and we look at the run rate in north America through the end of the third quarter our 100,000 unit drop in the fourth quarter would imply about a 20% drop from the run rate through the end of the third quarter and that is only at north America so it just seems to me that its possible your assumption of 100,000 unit impact may be a little bit too conservative, in other words the impact could be larger than 100,000 units that is just my impression I wonder if you could comment on that.

Takuo Sasaki

I earlier mentioned that the impact globally could be 100,000 units and for North America, we estimated impact to be around 80,000 units and in the remaining areas, specifically Europe and others of 20,000 units. So 80,000 North America, and 20,000 Europe and other regions are totaling 100,000 units, but this is the estimates been made for the purpose of formulating the full-year projections to the used as an assumptions for that. And as I mentioned earlier, the actual impact maybe potentially different from those assumptions I've just mentioned. So rather than being able to describe how we have arrived at those numbers, let me just say that estimation was made by soliciting opinions and views of those people as the forefront of sales.

On (inaudible) say those before at the forefront of sales we’ll be making every possible efforts in order to keep those impact on volume to be at the minimal possible level and they are working hard in order to regain trust and confidence of the customers and therefore, the actual results arise is maybe different from those assumptions I have just mentioned.

Ben Moyer - BlackRock

Okay. And then my other question is more about the recall and the problems that have been mentioned n the press continuously for the last two weeks or less than two weeks. I’m not sure but it seems a lot of focus is now being put on the electronics in the vehicles and some people believe that there could be an electronic problem. Toyota had so far said that there is no electronic problem, and I believe they seem to saying that with a lot of confidence. And I'm just wondering if you could tell us something about why you are so confident that the problem is not electronic?

Takuo Sasaki

Not being an engineer myself all I can do in respond to your question is to convey what I have heard from engineers or engineers' opinion. Now Toyota's engineers said that the electronics total control system has many layers of redundant sales type mechanism and systems incorporated. And therefore there has not been any fact that have been confirmed that certain unintended acceleration are caused by electronics total control system that’s what I heard. And I simply cannot mention any more specifics than what I had just mentioned.

Operator

And, James Irwin with Moon Capital. Please go ahead.

James Irwin - Moon Capital

The last question was focused on what I had the same issue on your methodology on 100,000 hit from on the sales side. I did have one follow-up on that though and that's simply if we looked at your sales results in United States in January and we looked at the sales level in the first 20 days, versus the underlying sales level in the last 10 days of the month what was the actual hit now in terms of that sales run rate and like the prior caller I thought that the 100,000 unit was a potentially low number in terms of the real impact here just based on the market share trends. May be I am missing something can you share with me what happened in the last 10 days of January in terms of US sales rate? Thank you.

Takuo Sasaki

I'm sorry I can't give you any specific answer because I don't have those specific numbers with me at this moment, but one thing I can say is that this very last week of January includes the weekend that is Saturday and Sunday and on the 26th of January, the announcement was made at the start of the sales, and so the impact on sales was clearly observed in the last week because of that. And well rather than trend of the last week continuing on into the future, since the announcement of counter measures and implementations, therein was made on the 1st of February, dealers have been making all out efforts fixing the vehicle currently used by the customers.

And then moving onto modifying the vehicles and the inventory, since subsequent to that, and that will result in the redemption of sales going forward, and therefore I must (inaudible) it is appropriate for simply to extrapolate the figure of the sales of the last week of January into the future.

James Irwin - Moon Capital

Thank you. I would agree to that, but directionally we have in the US Congress, a couple of hearings coming up in February relating to the [NXTS] and the recall issues, and from a communication standpoint as Ben Moyer mentioned there is a lot of confusion and negative press startup there in the market place and again two big congressional hearings coming up in February. As of today has not too early have identified the fix and is implementing it has Toyota plan to embark on a significant public relations or advertising campaign to address a lot of a negative commentary that’s being put out there regarding the (inaudible) or is that still to be determined?

Takuo Sasaki

As I mentioned earlier, now that we have identified the problem we are making all our efforts in adjusting and fixing this problem. And first the primary focus is to restore confidence and trust of those customers (inaudible) who have been moving towards the (inaudible) thus far. And that will be the first measure that needs to be implemented and that will be implemented.

Now about the news and media coverage's and press reports what total public relations efforts need to be made was included in the question. And of course that is something that we need to consider implementing some counter measures at the corporate level but for me it’s a bit difficult to give you some direct answers to that. In the auto context taking in to account the various factors that public relations campaign will be one of the options that we need to consider.

Operator

We'll take our final question from John Buckland with MF Global.

John Buckland - MF Global

I just wonder if you can offer some insight into the markets as you see them, post incentives particularly in Europe but also the underlying picture for North America because its not clear to me exactly why you increased your forecast clearly you have done better up until now in terms of the sales but is that a real underlying improvement is it the funds you've benefited more than you expected to from incentives. In Europe particularly this seems to be quite a contrast in terms of forecast, for example Ford give a forecast down 15, Fiat says it could be down 12 or 16; yesterday, Volkswagen said the German market wasn’t so bad may be even European market is flat. So I am wondering if you could tell us what you think the calendar year forecast would be what your assumption for 2010 is. And in North America excluding the impact of the recall do you see the actual recovery rate improving such that you that’s what’s underlined your higher forecast there?

Takuo Sasaki

Let me confirm that your question regarding the management decisions in Europe and the United States. Have you raised a question regarding calendar year 2010 rather than fiscal year ending in March 2010?

John Buckland - MF Global

Yes, it's a calendar year.

Takuo Sasaki

Actually it's a 2010, right?

John Buckland - MF Global

Yes because clearly, you're right to the end of the current fiscal year, the last quarter of the old fiscal year in the first quarter of calendar year 2010, where in Europe for example, there still is the impact of incentives being felt in a particular some markets still have there and intentions in place, others are just running out, but there is still impact there. So I really what I'm trying to judge is your assumptions about what happens in Europe post incentives, so you really need to look at the whole of 2010 calendar year and then in the U.S. obviously, it's just the rate of pace of sales recovery which is of better supplies also the whole of 2010.

Takuo Sasaki

We've referred on higher price rates, last year government sent (inaudible) to use scrappage incentives and other measures and but the countries in which evolving centers will continue in the subsequent year are France and Italy. And in other countries all the incentives are to expire or have expired so it's quite a situation is quite different from country to country.

In terms of our sales assumptions for calendar year 2010. At the retail basis our assumptions stands at 840,000 units for calendar 2010. And this contrast to the calendar year 2009 the decrease of 50,000 units so this is down 50,000 units from the actual level reached in calendar 2009.

Takuo Sasaki

As for the United States the market for the entire period of this year is assumed to be around 11.5 million units partly due to expected increase in productions standing from inventory adjustments made by corporate United States. And also all albeit at a very has slow [flip] there are some finds of improvement in six months in general. And further more the first half of last year was really the worst period and therefore compared with that we are assuming that we'll do some ride in the market its 11.5 million units.

And with respect to the assumptions for North American sales for the calendar year this year we have already announced that we forecast about 2.19 million units of sales volume for North America. This is the assumption made prior to incorporating the impact of recall which I mentioned earlier and therefore we are constantly monitored their development in the market and its impact going forward. The assumptions for the U.S. sales is 1.97 million units.

Operator

This concludes today’s conference call should you require further information regarding today’s conference in Toyota basically you need to contact our investor relation representatives in London and New York. Their contact details were given at the end of the invitation to this conference call. Thank you again for joining us today. Good bye.

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