Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Toyota Motor Corporation (NYSE:TM)

F2Q08 Semi Annual Financial Results Conference Call

November 7, 2007, 9:00 AM ET

Executives

Ikuno Fujii - Accounting Division

Takeshi Suzuki - Senior Managing Director

Analysts

Jairam Nathan - Banc of America Securities

Presentation

Ikuno Fujii - Accounting Division

Hello everyone, thank you for joining us today. My name is Ikuno Fujii and I am in Member of Accounting Division of Toyota Motor Corporation. I would like to welcome you to the fiscal year 2008 Semi-Annual Financial Results Conference Call. I am joined by Mr. Takeshi Suzuki, Senior Managing Director of Toyota and our Narrator Mr. Andrew Homer [ph]. Today's conference call consists of two parts, first Mr. Suzuki will discuss highlights of Toyota's earnings results and Mr. Homer will take over the rest of the presentation. At the conclusion of the presentation we will open for your questions. We expect that the entire call will last approximately one hour. Also please note that the following presentation contains forward-looking statements that reflects our plans and expectations and our actual results maybe materially different from those expressed by this forward-looking statements. A complete cautionary statement with respect to forward-looking statements is included on page 3 of today's presentation material, which can be downloaded from our internet homepage. In addition, a complete cautionary statement with respect to insider trading is included on page 4 of today's presentation material. Now I would like to turn the call over to Mr. Suzuki.

Takeshi Suzuki - Senior Managing Director

Thank you Fuji and hello everyone and thank you for joining us. It is my pleasure to present company's financial results for the first half of the fiscal year 2008. Consolidated vehicle sales increased in all regions outside Japan by 156,000 units to 4.321 million units. In Asia in particular, our sales trend has turned up a lot supported by the recovery of the market. In addition, sales in the Middle East and Central and South America has been robust. Total retail sales indicated in bottom of the bar chart grew year-over-year by 241,000 units to 4.701 million units due to an increase in production volume in China.

The consolidated financial summary shows the cause of semi-annual result in every line from the net revenues to net income. We believe that this is a result of the implementation of our gross strategy across the products and the regions and our efforts to establish a profit structure that is well balanced globally. The 21.3% increase in net income is attributable to an impressive rise in equity earnings from affiliated companies. Toyota's consolidated net income has been growing rapidly in recent years; this is due a significant increase in equity earnings in affiliated companies plus an increase in operating income. Net income in the first half year has grown by nearly 70% over the last two years. We will reflect this net income growth into our shareholder return policy. We proposed 65 Yen per share for the interim dividend, up 15 Yen per share. This implies a 1.3% improvement in the consolidated pay out ratio compared to the first half of fiscal year 2007.

We continue to aim at 30% consolidated dividend payout ratios on a full year basis and plan to achieve it within about three years. Our share buybacks after the ordinary general shareholders meeting held in June 2007. The annual program was approved up to 30 million shares to 150 billion Yen equivalent. As far we have bought back 5 million shares, 36.4 billion Yen equivalent under the annual program. At the meeting held today, the Board of Directors reserved to acquire our shares of up to 1.5 million shares or 110 billion Yen equivalent. We will continue to return the values to shareholders proactively through both dividend payment and share buyback. As we move on to discuss the details of the financial results, let me hand it over to our English narrator, Mr. Homer [ph]. I will be available to answer your questions at the end of the presentation, thank you.

Unidentified Company Representative

Thank you Suzuki sir. Please look at slide 11, the bar chart shows the trend over the past five years of quarterly operating income. As you can see Toyota's overall operating income has been consistently growing. For the first half year ending September 2007, our operating income has increased by 178.7 billion Yen year-over-year. As summarized in slide 12 marketing efforts particularly increased vehicle sales as-well-as cost reduction efforts exceeded the increase in R&D and other expenses.

Next, I will review the operating income by region. In Japan the operating income rose 88.9 billion Yen to a total of 773.3 billion Yen. This was supported by an improved product mix driven by increased sales of the Lexus LS both in Japan and overseas. In Japan, sales have been trending upwards since August thanks to new model launches which began in May. Toyota's October vehicle sales rose by 7% year-on-year. Going forward we will continue to stimulate additional demand.

Next, North America. Vehicle sales exceeded the results of the same period last year, thanks particularly to the new Tundra and Prius. Consequently the operating income remained high at 254.1 billion Yen. In the second half of this fiscal year, we planned full model changes of the Sequoia, a full size SUV and the Corolla, the global core model. We expect both to contribute to North American operating profits through local manufacturing and sales operations.

Next, Europe. Vehicle sales increased significantly with the Auris, which has been manufactured locally since the beginning of calendar year 2007 and the fully remodeled Corolla. Russia contributed substantially to the increase in European operating income as sales of the Lexus brand models Camry and Corolla have been growing rapidly. We hope to maintain this momentum in the second half of this fiscal year.

In Asia, the operating income increased 1.9 times over the pervious year to a total of 116.7 billion Yen. Asia therefore now represents a growing new pillar that will support Toyota's global earnings. We have been actively responding to the overall recovery of the Asian markets including Indonesia which drove the profit increase. Also, Asian operating income includes a significant contribution from the Chinese subsidiary that distributes Lexus in China.

In Central and South America, Africa, Oceana and other regions, operating income roughly doubled to 71.7 billion Yen representing a remarkably high increase. Vehicle sales have been robust driven by IMVs now manufactured in Argentina and South Africa and the new Camry.

Let me move on to financial services. Operating income from financial services maintained a trend of growth reflecting the steady increase in the outstanding loan balance. The sub prime lending issue has been insignificant to our financial business. Our loan loss ratio has remained below 1% and the funding for our financial business has not been impacted, thanks to Toyotas high credit rating.

Please look at slide 19, equity earnings from affiliated companies increased by 55.7 billion Yen year-over-year to 145.1 billion Yen. This was thanks to a particularly strong performance by joint ventures in China and Toyota Group companies in Japan. Our efforts to steadily build on our operational foundation has contributed to the increased income of our joint ventures in China.

As for on consolidated financial results please refer to slide 20. Toyota marked record semi-annual results in every line from net revenues to net income. In unconsolidated operating income improvement in the model mix for both domestic sales and exports combined with cost reduction efforts as-well-as the effect of favorable foreign exchange rates contributed to operating income.

From Slide 22 we would like to highlight Toyota's major activities in growing markets including resource rich and emerging countries. The bar chart on the left shows operating income from Asia and other regions and the bar chart on the right shows the equity earnings of affiliated companies in China. We see rapid profit growth in these regions. These markets have been growing to represent a new pillar of support for our global earnings. I would like to now give you an overview of each of these markets.

Let me start with South East Asia. The IMV project has been a profit driver since 2004. Excellent profitability has been achieved through optimized network and allocation of vehicle production and parts procurement through Asia with Thailand and Indonesia as the largest centers. Also through exports outside Asia including the Middle East and Oceania, the IMV project enjoys profit structure which is resistant to fluctuations in individual markets. Asian demands as a whole have been clearly recovering from the low level of the last year. We plan to enhance the trend of earnings growth in South East Asia by flexibly responding to recovering demands within the region in addition to export to other regions.

Next, Central and South America. This market has already grown to the scale of 4 million vehicles sales a year under the expansion of the FTA. In order to respond strategically to this changing environment since the 1990s, Toyota has consolidated the vehicle manufacturing plants in 10 different countries in the region into Brazil, Argentina, and Venezuela. At the same time we commonized the vehicle specs across the region to enable local procurement in a substantial scale and reduce cost dramatically. Toyota's strong competitiveness in products has been supported by our customer's confidence and the quality of the Toyota brand. Going forward, we will continue to pursue profit expansion with the Corolla in Brazil and the IMV in Argentina.

Lastly China. We have been rapidly building production and sales foundations in China, utilizing three sales channels, FAW, Guangzhou and Lexus. In sales, we have established a high brand status for Toyota and Lexus through the launch of high quality, high performance models. In production, we will achieve a high level of profitability through the introduction of state of the art manufacturing facilities and enhanced local procurement. Going forward, we intend to pursue improvements in our product line up and further reinforcement of our business foundation to achieve annual sales of 1 million vehicles in the early 2010 and a dramatic expansion of profit.

Finally we'd like to discuss the full year prospects for this fiscal year. We have made an upward revision to our consolidated vehicle sales target by 40,000 units to a total of 8.93 million units up 406,000 units from last year. We have also made an upward revision to the consolidated earnings, operating income up to 2.3 trillion Yen and net income of 1.7 trillion Yen. The foreign exchange rate assumptions for the second half of the year are 110 Yens to the U.S. dollar and 155 Yen to the euro. We intend to achieve an improved level of full year financial results through increased vehicles sales and further cost reduction.

Prospects with respect to CapEx, depreciation costs at R&D expense remain unchanged. Unconsolidated prospects are as summarized in slide 29. This concludes the financial results presentation for the first half of fiscal year 2008. Thank you very much for your kind attention.

Ikuno Fujii - Accounting Division

Thank you Mr. Suzuki and Mr. Homer. During the Q&A session; we will have constructive interpretation for questions and answers in both Japanese and English. Now our conference call operator will explain how to connect your line.

Question And Answer

Operator

[Operator Instructions]. We will first go to Steve Usher at Japan Investments [ph].

Unidentified Analyst

Thank you very much. I have got three questions here if I may. First of all could you please comment on the model mix in North America with profits essentially flat there, can you discuss what impact mix had there and what the outlook is? Secondly, congratulations on the excellent equity market performance during the China operations. Can you give us an idea of your full year expectations of the China contribution within the equity earnings, you have increased your prospectus on the equity side, if you could just give us an idea what the China contribution is on that? And thirdly, could you comment and give us a bit more detail in terms of the profitability in Latin America, particularly your Brazilian operations. What kind of margins can we expect there and can you give us a bit more number detail in terms of the profit contribution? Thank you very much. Hello?

Takeshi Suzuki - Senior Managing Director

First let me respond to your question regarding the model mix in North America. Comparing the first half of this year against the first half of last year, there has been very little impact of model mix on profitability. If anything it sounds like improved impact from model mix on the profitability. The improvement in model mix is primarily due to the launch of LX which has been very profitable model. On the other hand the hybrid vehicle, the Prius had somewhat longer profit margin than the average margins and offsetting that, the overall model mix impact on the profitability was somewhat on improving side of it, favorable side. Let me explain to you the earnings situation of the Chinese affiliates accounted for under equity methods. The contribution made by the Chinese affiliates accounted for under equity message made to the Toyota's overall profit, was at 30 billion Yen in the first half of this year. Our Chinese business have been doing extremely well with volume increasing and therefore in the second half of this year we are expecting her to receive at least the same level of our earnings or some of the higher than the first half from the Chinese affiliates and because we are expecting substantial growth of our Chinese business, on the full year basis, probably we can accept 70 billion Yen to 80 billion Yen coming from the Chinese affiliated companies accounting for under equity method per year.

Let me move on to the situation of Brazil. The Toyota's subsidiary in Brazil are just one company there generated 22.5 billion Yen in profit between April and September in the first half of this year. And as a percent of sales this operating income represented 14.5%. With the volumes going up we are conducting excellent business which shows increasing operating income performance of growth. That's all, thank you.

Unidentified Analyst

Thank you very much.

Takeshi Suzuki - Senior Managing Director

You are welcome.

Operator

Next we will take a question from Kurt Stanger [ph] at Deutsche Security.

Unidentified Analyst

Good evening. Two questions please, first on the finance business. If I look at the second quarter only the operating margins sell considerably year-on-year and quarter-on-quarter. You said that there was no problem with sub prime or any of those issues; could you help me understand why the profitability then has declined so dramatically, is it higher lease stake rate, higher provisioning, how can I understand that number?

Takeshi Suzuki - Senior Managing Director

Regarding our financial services business, translated into the Japanese Yen during the second quarter of this year, this financial services business generated a profit of 40.8 billion Yen. Because of the profit level in the first quarter was 45.4 billion Yen relative to that year in the first quarter, the profit margin decreased by... profit decreased by 10%. And in the second quarter of last year on the year-on-year basis the sense is to do that 40.8 million Yen the profit level did not change. However the figures I have just introduced are those figures excluding devaluation to losses stemming from interest rate throughout the transactions. So, from that perspective in substance the operating income decreased from once in the first quarter to the second quarter. And regarding the major reason behind that primarily, the provisions established against the residual loss increased. And regarding this provision against residual loss especially in the leasing business it looks as though grows very rapidly that results in an increase in that level. Well the figure that I would like to share with you relates to the sub prime loan related issues, in terms of the loan loss currently it is standing at around 0.6% to 0.7%. Now at the level of 0.6% to 0.7%, generally speaking this is probably 0.1 percentage point higher than the loan loss ratio of the cruising speed so to speak at the TMCC and therefore I think it is safe for me to say that a sub prime loan related problem has had hardly any impact on Toyota's financial service.

Unidentified Analyst

Okay, thank you. Yes sorry.

Takeshi Suzuki - Senior Managing Director

I think said that, we also intend to remain very vigilant regarding the trends of our financial services, loan loss ratio.

Unidentified Analyst

Okay thank you. Suzuki, so, my next question is on the Corolla, as you launch it into the North American market and even roll it out further in China. When the Camry was launched there was a lot of talk about the cost that was being taken out of the product. What kind of net cost savings do you expect to achieve from the Corolla relative to the old model, as you get the full global volume impact from the second half of this year.

Takeshi Suzuki - Senior Managing Director

Let me put it this way. The new Corolla has lower cost than the previous Corolla and it is more profitable than the previous generation or previous model of corolla. That's said and without any doubt. And the overall amount of our cost savings we achieved in the first half of this year was 50 billion Yen. And we expect to generate somewhere around 80 billion Yen in terms of cost reductions. Although I do not have any concrete figures that I can share with you at this juncture, but it is 80 billion Yen in cost of reduction includes substantial cost of savings actually achieved through the Corolla?

Unidentified Analyst

Is it sufficient to understand that with the VI cost savings that are supposed to accelerate from next fiscal year and over the next two or three years that the Corolla is really the beginning of those efforts?

Takeshi Suzuki - Senior Managing Director

Corolla is not the beginning of that trend because Corolla is still showing the cost reduction effect or benefits coming from CCC21activities. And the actual benefits of VI activities cost of reduction will be incorporated in the Crown that will launched here in the Japanese market, next year. And so we have a lot of expectations and looking forward to that a great deal.

Unidentified Analyst

Great. Thank you very much.

Takeshi Suzuki - Senior Managing Director

You're welcome.

Operator

[Operator Instructions]. We'll take our next question from Jairam Nathan at Banc of America Securities.

Jairam Nathan - Banc of America Securities

Hi. Thank you. I just had... Suzuki, if you could talk to us about what you're thinking on the U.S. sales outlook for '08 and also I noticed from my other question on North America was your operating margins on the North America region seems to have... seems to be coming at under 4% and it seems to be a low at least over the last two or three years so I'm just wondering what would... what is the reason behind it and what would change... what could change that?

Takeshi Suzuki - Senior Managing Director

You asked about your sales outlook for 2008, right?

Jairam Nathan - Banc of America Securities

Yes.

Takeshi Suzuki - Senior Managing Director

On the calendar year basis we expect the U.S. market this year to be higher than 16 million units but the market overall is likely to be somewhat smaller than that last year.

Jairam Nathan - Banc of America Securities

Do you have an estimate for, kind of preliminary estimate for '08, calendar '08?

Takeshi Suzuki - Senior Managing Director

Frankly speaking it is a bit difficult to capture the market outlook for calendar 2008. So I hope I can have a little more time before I can share that information with you. But regarding specifically about our product lineup, our Toyota sales plan next year is expected to be higher than sales of this year and more concretely for the calendar next year we are planning to sell 3 million units in North America. And regarding the operating margin in North America it declined during two quarter so your right by pointing out that it was below 4%. One factor that relates... compares second quarter against the first quarter this year is that in the second quarter the operating margin decreased because of the fact that in the first quarter LS increased substantially, the volume of LS was predominant whereas in the second quarter it was the Prius that accounted for the large volume there. And therefore there was that mono-mix impact and the reason behind operating margin decrease over six months period, relates to first of all incentives that we are offering for Tundra. However from the very beginning we are aware that making in roads into the market segment which has been the exclusive preserves of the big three where the big three remains very strong, represents a very tough proposition for us and therefore we have been using incentives in a very strategic manner. And another reason related to the increase in invoice prices of raw materials used in our North American plant, raw materials are rising in their prices. From the view point of our structure of earnings, basically speaking we are going to make a further initiatives in bringing down costs further over U.S. produced and overseas produced vehicles overall. We created task force specifically for that purpose and so we're going to take concrete efforts, initiatives in further reducing costs of those vehicles locally produced outside of Japan, and with those in mind we are going to increase the operating margin of our U.S. cars to the level that we have seen previously and I'm confident that we can achieve that.

Jairam Nathan - Banc of America Securities

Okay, thanks. Just one more question on commodity prices. What is your outlook for commodity prices next year and can you... would the cost reductions of, I think 130 billion that you assume for this... all of this year, would it get better next year, is the outlook better?

Takeshi Suzuki - Senior Managing Director

Actually commodity prices decide anybody's prediction I must say, but we have the impression that they are showing some signs of settlement or slowing down. However, where the WTI price is reaching $100 per barrel, frankly speaking it really... we really can't tell what's likely to happen there. However, regarding the amount of cost reduction achieved at Toyota. As I mentioned earlier the true benefits and effects of VI activities will start emerging next fiscal year and at the same time expecting that commodity prices will start showing some subsiding signs we expect the cost reduction amount to be higher than a 130 billion next year.

Jairam Nathan - Banc of America Securities

Thank you.

Takeshi Suzuki - Senior Managing Director

Any other person you need to call on?

Operator

Mr. Nathan did you have anything further sir.

Jairam Nathan - Banc of America Securities

No, that's all I had. Thanks.

Operator

Thanks you. [Operator Instructions]. Over to Steve Usher with Japan Investment [ph].

Unidentified Analyst

Well, thank you for the second opportunity. Just a question on the second half, you had a very solid performance in the first half with operating profits up 16%, even with your upper revision however, you are anticipating a 10% decline in second half operating profits. Do you see that as a worst case scenario, are you adopting intentionally conservative numbers there, or are there particular reasons why you are expecting such a sharp decline in the second half? Thank you very much.

Takeshi Suzuki - Senior Managing Director

I believe in terms of business itself it is continuing to grow in a very proper and solid manner. However, the reason behind decrease in operating income year-on-year in the second half, the only reason shall I say relates to the changed assumption for exchange rate that is to say we are going to use a very conservative assumption for the dollar... of 110 Yen to a dollar. Actually in the second half of the previous fiscal year the actual average dollar rate, 119 Yen to $1. And therefore, our assumption assumed, sorry, incorporates 9 Yen appreciation of the Yen and that would have a major impact on the operating income trend. So if you exclude this impact stemming from exchange rate and the assumption1s therein, the volume will increase steadily and so does the operating income. I am hoping for the U.S. dollar to appreciate.

Unidentified Analyst

Okay, thank you very much and if might just ask one more, could you comment a bit more specifically on the profitability in your operations in Russia, you will be opening for dealers per plant in December; can you give us an idea of how the margins are proceeding in Russia and the profit contribution there?

Takeshi Suzuki - Senior Managing Director

Our plant is not in operation at the moment; the Russian business has some profit generated by Toyota Motors, Russia which is a distributor there. Between April and September this year and the Toyota Motor Russia sold 85,000 vehicles compared with 46,000 in the previous period representing an increase of 39,000 units. And the 85,000 units of vehicles sold generated 13.3 billion Yen in profit. So quite a high level of profit has been achieved.

Unidentified Analyst

Great, thank you very much.

Takeshi Suzuki - Senior Managing Director

Welcome.

Operator

[Operator Instructions]. We'll take a question from Takaki Makanishi [ph] at J.P. Morgan.

Unidentified Analyst

Hi. This is Takaki speaking JP Morgan. I have a couple of questions, if I may. First of all, I am pretty impressed with the China profit which is almost 10% of your automotive profit today but maybe something that we should focus on besides China could be Middle East of sales growth and profitability there. You have fairly big upper revision, Middle East sales and could you elaborate about this type of revision, what's driving your sales there, and can you comment how much... what kind of profitability you are generating in Middle East, I assume its going to be somewhere in the 10% of the total profit which is similar to the significance with China, that perception is right or not? And a second question is are the results of those emerging up, stronger profitability coming from those in emerging economies, how much percent do you now depend on U.S. or North America on profit, I suppose it's pretty getting close to 50 or may be even less than 50%, is that perception right or not?

Takeshi Suzuki - Senior Managing Director

First of all regarding our Chinese business profit, our local Chinese business is conducted through our joint venture and therefore it is not included as a part of the operating profit of the consolidated income statement. If you aggregate all together, the profit generated by vehicles we export from Japan to China and the profit generated by our subsidiaries located in China as-well-as the earnings generated by the Chinese affiliated companies accounted for under the equity method altogether, combined as you correctly pointed doubt those aggregate operating income accounts for about 10% of the income of automotive business. Regarding our business in the Middle and Near East, about 5% of overall profit is generated by... the profit of automotive business is generated by our business in Middle and Near East. And we have a very strong and robust distribution network located in the Middle and Near East. And given such in foreign oil prices, the purchasing power has increased substantially resulting in substantial improvement in the markets in Middle and Near East as well and in that general favorable context Toyota is conducting sales and the marketing efforts which is next to none. Regarding our dependence on income generated in North America, because the contribution from other regions increased substantially on relative terms, our dependence on North American profit has decreased somewhat to a level which is slightly less than 50% of the total profit.

Unidentified Analyst

Thank you very much.

Operator

Thank you and we'll take our final question, a follow-up from Jairam Nathan at Banc of America Securities.

Jairam Nathan - Banc of America Securities

I was wondering if you could talk about the IMV project. Have you... are there any capacity expansions or an increase in the number of products that you will be selling under that project.

Takeshi Suzuki - Senior Managing Director

I have been involved with this IMV project personally since a long time ago and at the initial stage, in terms of the sales volume per year the IMV project started with a little over 40... 400,000 units per year. However once this project was fully on stream, it remained extremely favorable and strong and in fiscal '06 total of 610,000 units were produced under IMV projects. And therefore we expanded capacity in various plants within IMV and at the moment, the annual production has increased to 640,000 to 650,000 per year.

Jairam Nathan - Banc of America Securities

Okay. Thank you.

Takeshi Suzuki - Senior Managing Director

You are welcome.

Ikuno Fujii - Accounting Division

There are no further questions today. So this concludes today's conference call. Should you require further information regarding today's conference or on Toyota, please feel free to contact our IR 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.

Operator

Thank you, everyone and good night.

Copyright policy: All transcripts on this site are copyright Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

Source: Toyota Motor Corporation F2Q08 Semi Annual Financial Results Conference Call Transcript
This Transcript
All Transcripts