Earnings Call Transcript - TM Q4 2022

Operator, Moderator

Thank you very much for joining us today despite your occupied schedule. We would like to start the Toyota Motor Corporation's Financial Result Announcement for the period ending in March 2022. First of all, let me introduce to you the members present for this briefing. Executive Vice President, Chief Financial Officer, Kenta Kon, Executive Vice President, Chief Technology Officer, Masahiko Maeda, Chief Communications Officer, Jun Nagata, and Accounting Group Chief Officer, Masahiro Yamamoto. Now ladies and gentlemen, first of all, Yamamoto will share with you the overview of the financial results.

Masahiro Yamamoto, Accounting Group Chief Officer

Hello, everyone. Thank you for joining us today. I am Masahiro Yamamoto. We would like to express our heartfelt appreciation to our customers around the world who chose us, as well as our shareholders, dealers and suppliers who support us. We would like to express our sincere gratitude to all the stakeholders. I sincerely apologize for the inconvenience caused to our customers due to the recent production volume reduction. We will work hard to deliver our products as soon as possible. First, let me explain the summary of our performances for the fiscal year ended March 2022. Under the production constraints due to the spread of COVID-19 and semiconductor shortages, dealers, suppliers, and production sites have all worked tirelessly in order to deliver as many cars as possible to customers. Despite soaring materials prices and increase in expenses for the investment in new business fields, we achieved growth in revenue and profits, thanks to cost reduction and marketing efforts. This is attributable to the improvement of our revenue structure, which we have been working on for a long time, towards one that is not dependent on foreign exchange rates and volumes. As for the forecast, we have set our production volume assumption to an appropriate level, having safety and security as our top priority. We expect a decrease in our operating income due to unprecedented increases in materials and logistics costs. However, we will continue with our future investments and promote our various activities. As for the return to shareholders, the year-end dividend is JPY 25 per share, and we maintain a steady increase. Share repurchases will be up to JPY 200 billion, including JPY 100 billion set aside to enable more flexible share repurchases than before while considering share price levels. Let me explain our performance for the fiscal year ended March 2022. Consolidated vehicle sales for the period were at 8.23 million units, which was 107.6% of consolidated vehicle sales for the same period of the previous fiscal year. Toyota and Lexus brand vehicle sales were at 9.512 million units, 104.7% of the sales of the same period of the previous fiscal year. The ratio of electrified vehicles was 28.4%. The consolidated financial results for this fiscal year were, sales revenue of JPY 31,379.5 billion, operating income of JPY 2,995.6 billion, income before income taxes JPY 3,990.5 billion and net income of JPY 2,850.1 billion. I would like to explain the factors that impacted operating income year-on-year. First, the effects of foreign exchange rates increased operating income by JPY 610 billion. Second, cost reduction efforts decreased operating income by a net of JPY 360 billion. This consisted of a JPY 280 billion increase due to cost reduction efforts and a JPY 640 billion decrease due to the impact of soaring materials prices. Third, marketing efforts increased operating income by JPY 860 billion, largely due to the increase in sales volume and improved earnings in the financial services business. Finally, an increase in expenses decreased operating income by JPY 220 billion. As a result, excluding the overall impact of foreign exchange rates, and swap valuation gains and losses and other factors, operating income increased by JPY 280 billion year-on-year. As shown here, the operating income for each region increased year-on-year in all regions. This is largely due to the impact of foreign exchange rates, cost reduction, and marketing efforts. Next, let me explain our business in China, as well as our Financial Services business. As for our business in China, both the operating income consolidated subsidiaries, as well as our share of profit of equity method periods increased mainly due to the impact of foreign exchange rates and marketing efforts. Regarding the Financial Services business, operating income excluding swap valuation gains and losses for the fiscal year increased year-on-year, largely due to the increase in the lending balance and margins. Next, let me explain the return to shareholders. We plan to make a year-end dividend of JPY 28 per share. We will continue to aim to pay stable and sustainable dividends, while maintaining and improving upon our consolidated dividend payout ratio in the medium to long-term, in order to reward shareholders who hold our shares in the medium to long-term. As for share repurchases, we set the maximum limit to JPY 200 billion, including JPY 100 billion set aside to enable more flexible share repurchase than before, while considering share price levels. Aiming at enhancing capital efficiency, we plan to implement share repurchases in a flexible manner, taking into account various factors including investment in growth, dividend levels, cash on hand, and share price levels. Next, I will explain the forecasts for the fiscal year ending March 31, 2023. Consolidated vehicle sales are expected to be 8,850,000 units, which is 107.5% of the previous fiscal year, with growth in sales expected in all regions. As for Toyota and Lexus brand vehicle sales, they are expected to be 9,900,000 units, which is 104.1% of the previous fiscal year. As for electrified vehicles, by improving our product line-up to better meet customers' needs in each region, sales are expected to be 370,000 units, which is 113.6% of the previous fiscal year. We expect that the ratio of electrified vehicles will amount to 31.0% of vehicles sold. Toward carbon neutrality, we will continue to make efforts to provide a wide range of options to meet the needs of each region and hence be selected by customers in those regions. Next, let me explain the forecasts for the full-year consolidated financial performance. We have adopted FOREX-rate assumptions of JPY 115 per US dollar and JPY 130 per euro. Based on this, our forecasts for the full-year consolidated financial performance are, sales revenues of JPY 33 trillion, operating income of JPY 2,400 billion, income before income taxes of JPY 3,130 billion, and net income of JPY 2,260 billion. Next, I would like to explain the factors that impacted operating income. First, the effects of foreign exchange rates are expected to increase operating income by JPY 195 billion. Second, cost reduction efforts are expected to increase profits by JPY 300 billion, while the impact of a sharp increase in materials costs is expected to be JPY 1,450 billion, resulting in a total decrease of JPY 1,150 billion. Marketing efforts are expected to increase operating income by JPY 815 billion, largely due to the increase in sales volume. Finally, an increase in expenses is expected to decrease operating income by JPY 440 billion. Although we continue to face a difficult business environment, we will continue to further improve our profit structure and accelerate our efforts to transform into a future mobility society. This concludes my presentation on the financial results. Next, EVP, Kenta Kon will talk about changes in profit structure.

Kenta Kon, Executive Vice President & CFO

I am Kenta Kon. Although the results for the fiscal year ended March 31, 2022, are for a single fiscal year, they represent the accumulation of improvements so far in our profit structure, so I would like to add a few words from that perspective. These graphs compare the change in our operating income in the year of the 2009 global financial crisis and the COVID-19 pandemic last year, each case compared to the previous year. In both cases, sales volume decreased by 15% compared to the previous year. But at the time of the global financial crisis, profits decreased significantly, pushing Toyota into the red, while in the fiscal year ended March 2021, we were able to secure a profit. This shows the break-even volume from the fiscal year ended March 31, 2009, onward. If we assign our break-even volume at the time of the global financial crisis a value of 100, we have lowered our break-even volume most recently to the 60 to 70 range, demonstrating that we have made significant progress in improving our condition over the past 13 years. This was not something that could be done overnight. Immediately after the global financial crisis, we had to put the brakes on all of our R&D expenditures and capital investments. We could do nothing to invest in the future. But while overcoming the numerous crises known as the Six Hardships, such as our quality crisis, we continuously worked to improve our profitability. Improved profitability was not something that Toyota was able to achieve on its own. Rather, it was the result of a desperate and concerted effort with all of our stakeholders. To them, we say thank you. During that period, one of Toyota’s strengths is having a full line-up of products globally, we shifted to an in-house company system that would allow us to provide high-quality and reasonably priced vehicles at the right place and time to an even higher degree. Along with the in-house company system, we introduced our Toyota New Global Architecture, or TNGA, shared vehicle platform to improve the basic performance and product appeal of our vehicles and enhance the reflection of regional characteristics with the aim of not being the best in the world but best in town. In the past, we often introduced completely new vehicle models on a one-off basis as the market grew. But now we are continuously evolving our long-time, best-selling cars, such as the Yaris and Corolla, to keep them current so that they can continue to be long-time best sellers. We believe that this has resulted in our being able to increase profitability. I would like to explain the changes in our profit structure over the past six years since we transitioned to our in-house company system. Looking at the factors behind increases and decreases in operating income, our profit has increased despite major negative factors such as foreign exchange rates, sales volume, and increases in materials prices. In terms of sales, our greater-than JPY 2 trillion improvement in profit is due to sales price revisions and a reduction in selling expenses. We believe that this is the result of our customers highly evaluating our products. Also, post-sale vehicle quality helped customers maintain high vehicle value, leading to improved profitability not only in the automotive business but also in the financial services business. In terms of cost improvements, we believe that significant improvements have been achieved by the effect of switching to new products that are based on the TNGA platform and through the power of our production work sites, including those of suppliers, which can respond to the launch of various new products and environmental changes, as well as produce high-quality products. We used to increase profit through foreign exchange rates and volume growth, but this has certainly changed over the past six years. Comparing 2015 and 2021, we have increased our market share for new car sales in 11 of the 15 major countries, including China, the United States, and Japan. The graph on the right shows by-model used car prices in the U.S. three years after purchase. Our RAV4 has received higher appraisals than vehicles by other manufacturers in the same segment, and it is evident that those appraisals have gotten even higher since we switched to the TNGA-based RAV4. Being able to command a high price in the used car market protects the value of customers’ owned assets, and we believe this is building trust in our brand. Our in-house company system, best in town activities in each region, TNGA, product line-up strategies, the creation of ever-better motorsports-bred cars, and the human resource development that supports these activities, as well as various in-house system reforms. As mentioned, although our performance in the fiscal year just ended represents our situation for a single fiscal year, it is the result of efforts that have been ongoing for a long time, and we would once again like to thank everyone involved for their support. Many customers are currently waiting for a long time for the delivery of their vehicles. We would like to take this opportunity to apologize again. This concludes my explanation. Thank you.

Operator, Moderator

We would like to open the floor for discussion and questions. Mr. Hukoi, please go ahead.

Unidentified Analyst, Analyst

Can you hear me?

Kenta Kon, Executive Vice President & CFO

Mr. Hukoi, your voice is quite low. Could you once again repeat it yourself.

Unidentified Analyst, Analyst

Can you hear me?

Kenta Kon, Executive Vice President & CFO

Yes. We can. Yes, thank you.

Unidentified Analyst, Analyst

First of all, regarding the assessment of the financial results for the recently ended fiscal year, the sales revenue reached JPY 31 trillion, and the operating income was approximately JPY 3 trillion, both setting record highs. In light of these positive financial results, what is your evaluation? The second question pertains to the increase in raw material prices and efforts to enhance cost efficiency. According to the information released for the fiscal year ending in October, the surge in raw material costs was between JPY 640 billion and JPY 1.55 trillion. Mr. Kon has mentioned JPY 300 billion in cost improvement strategies to enhance operating income. However, given the significant rise in raw material prices, it seems unlikely that product reductions alone can compensate. Is there additional potential for cost reductions? Also, as overseas manufacturers raise their prices, how do you intend to pass on the increased raw material costs to consumers?

Unidentified Company Representative, Company Representative

Thank you Mr. Hukoi. With respect to the good results, so financial results of the fiscal year ending in March '22, that will be explained by Mr. Kon, EVP, assessment of that and for the fiscal year just entered as the raw materials prices soared, what are we going to do with the cost improvement efforts, Mr. Yamamoto will respond to that. And with respect to pricing, Nagata will respond to that aspect of question. So first, may I ask Mr. Kon to respond to the first aspect.

Kenta Kon, Executive Vice President & CFO

Thank you, Mr. Hukoi for your question. With respect to our assessment of the fiscal year just ended. Earlier, I made additional comments in the presentation. And as reflected there, the fiscal year just ended in March 2022, in terms of the financial results for the full year. But up until that particular moment, over 13 years altogether, we made accumulated efforts, which brought down the break-even units. And that reduced the break-even unit. And that is the major driver of these financial results. So this is the financial results achieved in a single year. So it is just one year. Over mid years, we continue to make efforts. So it depends on the economic conditions that prevail in any fiscal year reflected in those numbers. But on the foundational basis of that is the - not just the initiatives and activities pursued in that particular fiscal year, back the accumulated efforts for improving profit structure pursued over many years. So in that sense, the fact that we've been able to make this financial results could indicate that good results of our efforts to improve our operating structure is reflected and manifesting in that. As I mentioned, the financial results represent the work of a single year, but the production team is involved in daily production activities, yielding a certain number of units. Sometimes the line is fully operational, while at other times efficiency may decline. In that context, the production results are assessed every day. Each effort is aimed at achieving better outcomes tomorrow than today, and perhaps even superior results thereafter. The cumulative efforts over approximately 13 years are evident in the financial results. We have faced challenges due to raw material prices and the Omicron variant of COVID. However, the most significant aspect of these financial results is the consistent and cumulative efforts made over the years to enhance our operational structure. That's my assessment of the financial results. Thank you. Regarding our cost reduction initiatives, if you could refer to slide 16. Thank you. We are targeting JPY 2.4 trillion while noting that we experienced a negative impact of JPY 1.45 billion due to soaring material costs. We have managed to achieve JPY 300 billion through our cost reduction efforts. After accounting for the JPY 1.45 trillion increase in raw material costs, we aim to maintain our efforts toward achieving around JPY 300 billion in cost improvements. Although manifesting these efforts is challenging, we will continue to pursue them moving forward. And when the raw materials prices are very high and soared, what sort of materials should we be using is a new aspect that we will consider. So, that might represent a certain perspective from which the cost improvement effort can be continued. So, every day probably we can find those new seeds for improvement. Lastly, with respect to the efforts to pass on higher costs to prices and let me respond to that. Overall within Toyota, one of the characteristics of Toyota is to have the operational and core line-up, both the passenger cars and commercial vehicles under the overall side level. So, we are operating globally with the core line-up of our products, and therefore, in each region we have many different customers in different segments, and we are trying to satisfy those differences in a very fine-tuned manner every day. So from that perspective, the products are planned and pricing is made. So there are a variety of customers, different types of customers and feedback because of the soaring raw material prices. Sometimes, there may be segments from whom we may be able to receive a higher consideration, but at the same time, there are other segments of customers who need and who use vehicles for transportation, as the work people. So from those customers, even if the raw materials prices are soared and increased, trying to increase the prices charged to those customers who repeat them is a very difficult thing to do. And as Kon mentioned earlier, for products we focus on regional differences and different product lines. So, in each region for each line-up of products, where can we set a higher price or where is it very difficult to change prices, those will be closely examined before a decision is made. And that is we took in mind even in the firm context. Masahiro Yamamoto will add, one of the characteristics of Toyota as an OEM, we have the Crown or the Corollas or high Ace in the sales. They are so-called long-selling brands, and we have so many of those long-selling vehicles. That's one of the characteristics of Toyota as an OEM. And those brands are really enjoying patronage of many customers from numerous segments. And therefore, customers with respect to product strengths and pricing, they have a certain level of the market level they keep in mind. So we need to satisfy those expectations, meet those customers' expectations. And therefore, even if inflation has set in to increase price, we simply cannot satisfy those customer needs and expectations including that aspect. And as Masahiko Maeda mentioned, we will continue to improve cost, not on a single year basis, but also over many years so that we can meet customers' expectations as much as possible. That's our approach. Thank you.

Operator, Moderator

Thank you very much to Mr. Hukoi. Now, let us move on to the next question from Asahi Kondo, please. We will switch the screen so when you see yourself on the screen please start your question. Mr. Kondo, please.

Kohei Kondo, Analyst

From Asahi Newspaper. My name is Kondo. This question is related to the first question. The year in – in March 2022 the impact of raw material cost is much higher than the previous year. So what is your perspective on the market conditions? And in the short term yen is weaker, so there may be impact to FOREX. So, can you tell us your view on that? And you do are reporting, if you look at the supply chain – with regards to supply chain assistant to support and distribution, what is your view, that is my first question. And the second question in relation to global production last year initially a JPY 9.3 million was the plan and after that you view that plan and ultimately you had about JPY 8.57 million. For this year JPY 9.7 million which is very high. There was this release of semiconductors and yet JPY 9.7 million is the number you have, why do you have this number? And because of product shortage from China some of your production site in Japan is going to suspend production, so, what is your perspective on the risk regarding the Chinese zero COVID policy? Thank you very much.

Unidentified Company Representative, Company Representative

First, your first question was about the soaring raw material prices. And second how are we going to respond to our suppliers that will be explained by Kenta Kon, the EVP. And your second question JPY 9.7 million for this year production. What is the basis for this question? Because of the Chinese supply chain production is going to be suspended and we would like to have that included in our response.

Masahiro Yamamoto, Accounting Group Chief Officer

Thank you very much to Mr. Kondo. First of all, the raw material price and the market conditions, JPY 1.45 trillion, as we mentioned, it is unprecedented. JPY 640 billion last year was the highest ever impact, and this year, it is more than twice that number. So the impact was very high. With our suppliers, with regards to raw material prices in principle Toyota will bear the burden; that is the basic rule. And based on that rule, globally, how much impact there will be, taking into consideration short term market and how much Toyota should bear the burden was calculated. In the short term, the weaker yen may have a major impact you mentioned, but JPY 1.45 trillion, if you look at the breakdown, about half of that comes from global affiliates, subsidiaries and affiliates. And the remainder comes from the Japanese business. In particular, with the weaker yen, we don’t think it had a major impact on the results. Suppliers JPY 1.5 trillion, the impact of material prices impacted both OEMs and suppliers. So, we have to work together to respond to the situation, and we have to think together and implement the necessary measures together. As Mr. Yamamoto mentioned, the raw material prices have gone up. So, the amount of raw materials used to the extent possible and when possible, with reduced lower-cost material, those are measures that have to be taken. Vehicle development and production in sales in terms of our company, and therefore we have to develop our products that offer higher value to the customers, so rather than just simply raising the prices. We have to make further efforts as a company in product development. In a single year, JPY 1.45 trillion, that cannot be very absorbed in a single year. So even if it may take time, we have to take solid steps and measures so that in several years' time we will maintain or improve our competitiveness in the market. Cost reduction of JPY 300 billion per year, actually, I think through efforts and activity, we have to make further efforts in these areas. So we have a sense of crisis. And we do realize that we have to continue these efforts. That's all from my side. The second point was about the production volume. Last year, the production volume was lower than planned, and we have mentioned that multiple times. However, we remained committed to producing each vehicle with our full effort and dedication. The team at Gamba will work very hard, and I want to express my gratitude for their efforts. This year's production target is JPY 9.7 million. That was the focus of your question. Initially, we announced an unofficial plan of JPY 11 million in January, which was later revised to JPY 9.7 million. Considering last year's situation, what's crucial is ensuring safety and quality, and to decrease the production per vehicle, we need to return to those fundamentals. With that perspective, we established the target of JPY 9.7 million. We are uncertain about the future of this number, but this is our strategy for the coming year. We have factored in the effects of COVID-19 and the availability of semiconductors this year. We spoke with the team on the ground, and sudden production cuts mean some workers might not have tasks, which could lead to shifts in responsibilities and changes in personnel. They have faced substantial challenges. If the plan can be communicated to them sooner, such as by shortening check times, the team can continue working and use any extra time for closing tasks. As Mr. Kon previously mentioned, we must keep focusing on human resources development, and the team is committed to that mindset as we move forward with production efforts.

Operator, Moderator

We would like to proceed to the next question. Please look at the screen and begin your question if you see yourself on it. We are currently in the process of switching the screen.

Unidentified Analyst, Analyst

Can you hear me?

Unidentified Company Representative, Company Representative

Yes, we can. Thank you very much.

Unidentified Analyst, Analyst

Thank you for this opportunity. I have two questions as well. The first question relates to Hino Motor Corporation. Due to the misconduct regarding exhaust gas, the trust and confidence of consumers have been significantly affected, which has necessitated improvements in corporate culture. Additionally, the halt in shipments has raised concerns about the financial health of the company, presenting substantial challenges. As the parent company, how does Toyota Motor Corporation evaluate and address Hino's issues? Given the various challenges Hino is facing, particularly in human and financial resources, what support does Toyota plan to extend to Hino? My second question pertains to your product-driven management and your commitment to continuous improvement. I would like to know about your future strategy. While the focus has been on internal combustion engines, it is evident that the market is shifting towards battery electric vehicles. In this transition, battery costs may represent about half of the overall expenses, which will create a new cost structure. How do you plan to maintain the cost competitiveness and overall quality of your products? These are my two questions.

Unidentified Company Representative, Company Representative

Thank you, Mr. Shiraishi. We have received two questions. The first question is about Hino Motor and its misconduct, specifically how Toyota, as the parent company, will respond. Kon, our Executive Vice President, will address this. The second question pertains to product-driven management, which Mr. Kon discussed in an earlier presentation regarding electrification and the cost improvements related to battery electric vehicles. Maeda, our Executive Vice President, will respond to this question. Mr. Kon, please proceed.

Kenta Kon, Executive Vice President & CFO

Thank you, Mr. Shiraishi for your question. With respect to the first question that relates to Hino Motors. Hino is a consolidated subsidiary of TMC. And Hino Motor was engaged in the misconduct relating to exhaust gas and also fuel consumption efficiency, the customers, dealers, the suppliers, and also the regulatory authorities will all supported Hino not to date. We see tremendous inconvenience because of this, and the confidence, the trust they placed on Hino was completely ignored. And as a parent company, I feel really sorry for that; it is very regrettable to what Hino did. Hino is a consolidated company engaged in the production and manufacturing of commercial vehicles. And in terms of the supervisory and oversight responsibility for Hino as a parent company, we intend to support Hino and efforts to restore the confidence of those stakeholders. And as a parent company, we intend to work with Hino to restore such confidence; that I think is the role to be played by a parent company. Currently, the special investigation committee composed of outside experts are now investigating the root cause of this problem, and we will pay attention to the outcome of that special committee and bearing that in mind, in terms of the governance of Hino Motors but not limited to that, the reform of the corporate culture, the promotion of business, including those aspects of Hino Motor, and placing the greatest priority on the efforts to restore confidence and trust of stakeholders and customers. So we really can't - caused this inconvenience for which we sincerely sorry. That's my response to the first question. Thank you, Mr. Shiraishi. So with respect to the second question allow me to respond to that as aspect. In the age of electrification, how Toyota is going to keep its competitiveness? That’s your question. The competitiveness, what does that mean actually? As far as we are concerned, the fact that our customers choose our product is the indication of our customers. We think that it is the customer who has the final say on the product message and whether we can be - our product can be chosen by the customer is the key. And I think there are various different reasons that factors based upon which the choice and decision is made by customers. As Nagata mentioned, some customers will focus on the affordable product quality. But in other segments, customers might refer to value-added aspects that enhance their lifestyle or they enjoy, and in certain areas where the usage is that made in the adverse natural environment, the durability may be a very important factor for the choice of vehicles. So as Kon mentioned on - his own presentation, we will continue with those activities as a part of our efforts to improve operating structure. We have in-house company systems through that we focused on what other businesses we are doing on the global stage, what sort of product line-up we have and paying attention to those different in-house companies, focus on their own line-up and made efforts to respond to the customers of those different pointers. In the past, we tended to focus on volume or margin, but rather, some of those insurance companies compete against other in-house companies. So that ultimate difference will be made to deliver different cars to customers, the best vehicles to customers. And if we can share with you slide number 31, this shows one of the characteristics of Toyota. In the different regions of Toyota where the regions in which Toyota is doing business. Toyota can be on the top. So it's not that our business is biased in any specific region. We talked about pool line-up operations globally. In many different regions the customers in different regions and throughout the world as a deep B2C company, we are allowed to do business. So amongst many different regions, we do see – feel track of customers in different regions. And unless we operate through best in-house companies, we want to be able to capture those feedbacks. In the past, we tended to focus on certain areas or services, but through those best in-house companies, every effort is made to receive feedback from customers. In-house companies is one effort of that and also focusing on being the best in town is that. So offer value, customers even after the delivery of product and receive feedback from customers and this report led the result of efforts Toyota made over the years to improve operating structure. And by doing so, you can develop human resources, so this efforts improve operating structure, also include as one aspect, the human resource development as well and that results in enhanced competitiveness. And those efforts should be continued in a sustainable manner. For the customers to choose Toyota on a stable manner, we need to continue with those efforts. There is no end in our efforts for operating structure improvement; continuous pursuit will lead to us continuing with our customers, choosing customers, at Toyota Motor customers. And added to that would be the strength of software that will represent one new element. So together with Woven Planet, we intend to increase our strength in the software aspect. Vehicles tend to be focused on hardware, but including software-driven - we intend to get diversify the needs and desire of customers and customers and sending by the customers with different meanings. We intend to enhance our competitiveness because that leads to better products and improvement of our attractiveness, and I think the only way is to simply make those efforts and don’t get mannered. Thank you very much. Thank you, Mr. Shiraishi.

Operator, Moderator

Now let us move on to the next question. We will switch the screen, so when you see yourself on the screen, please start your question.

Unidentified Analyst, Analyst

Mr. Yamamoto, thank for waiting. Can you hear me?

Unidentified Company Representative, Company Representative

Can you repeat yourself? Do you hear me?

Unidentified Analyst, Analyst

My name is Yamamoto from the Yomiuri Shimbun Newspaper. I have a question regarding the forecast for this year in the United States and Europe, particularly considering the inflation in China and the impact of the zero COVID-19 policy, as well as concerns about a recession. This year, overseas sales are expected to be JPY 1.5 million. In light of this recessionary environment, how do you anticipate the market will develop? The domestic production forecast is JPY 3 million, which was mentioned for TMC in Japan. What does this mean for Toyota?

Unidentified Company Representative, Company Representative

Thank you very much to Mr. Yamamoto. The first question I want to clarify in March 2020 your question about the – was about the overall market forecast, yes. Then I will answer that question. And the second question was about TMC JPY 3 million production in Japan. What is - what does that mean for Toyota? I think that was your second question, and that would be answered by Mr. Yamamoto from Accounting Group.

Masahiro Yamamoto, Accounting Group Chief Officer

Your first question was about the overall market conditions. This fiscal year, it's going to be even more difficult than other years to make a forecast. As Mr. Yamamoto mentioned, overall globally, if there is any positive factor, China still has many restrictions with zero COVID-19 policy, but overall, recovery from COVID-19 is going to be a big positive factor. And if you look at the negative factors, as we mentioned in the financial results announcement, the raw material prices are soaring, and inflation in various areas will have an impact on the daily lives of people. So there's inflation and then there is the Ukrainian factor and that is causing a lot of concerns in our areas. Next, supply constraints of semiconductors in other parts will be a major limitation in the automobile industry. So these factors will be compounded this year. By region forecast, it's also very difficult. But let me give you a rough outline of what we are thinking now. China and the United States, roughly speaking in the year ending March 2022, we will see a slight improvement, and Japan and Asia we have the positive and negative factors that I mentioned before. And if you add them together, it will be about plus-minus zero. So, the market will be about the same as fiscal 2021, and the most difficult region to forecast I think is Europe, energy, materials, the wars in Ukraine issue will have a major impact and that will have an impact on the economy in general. So, we think the risk will outweigh opportunities. So, the European market, I think it will be below fiscal 2021. And those are the rough outlooks and forecasts for the major market. That is for now, but the situation in COVID-19 and the Ukrainian situation will change rapidly day to day. So if the assumption in the general market changes that means a change in the standard, so you will have to make changes to our business so that we can see improvements. In cost profit structure and delivery to our customers and towards that end we will continue to make efforts on a day-to-day basis, that is all from my side. JPY 3 million units production in Japan, that was the second question I believe. And this is Yamamoto speaking. This is something I heard from another person. After the Great East Japan Earthquake, in Tohoku we set up the factory and we set up a foundation for the industry, including employment. And as a result, to the Japanese auto industry, which has to purchase materials from outside of Japan and has to earn foreign currency from outside of Japan, we have been able to make a contribution. Japan, we are a global company, but Japan is our home country. And we think people are supporting us in our efforts that we are doing in this country and that's what the JPY 3 million units means to TMC.

Operator, Moderator

Thank you. Mr. Yamamoto, let's move on to the next question. I will switch the screen. If you see yourself on the screen, please begin speaking. We are now changing the display.

Unidentified Analyst, Analyst

I also have two questions. Question number, that relates to Ukraine and Russia situation. In relation to that your business in Russia, how are you going to do with your Russian business? Currently, you suspended your operation because of the confusion of logistics, but Russian business, the outlook remains very uncertain, and it is very difficult to read what's going to happen in the future? What's the current status? And what are you going to do with your business in Russia? The second question, as was mentioned in the first question, with respect to having the higher cost prices, in this meeting it was mentioned that there has been unprecedented raw materials cost increase, exceeding JPY 1 trillion. And earlier, depending upon customers, you may be able to receive a higher amount of consideration for the product you offer to the customers. Am I right in understanding that, that includes the Japanese market as well? How can you pass the higher cost to your prices in the Japanese market? I think it's very difficult decision for me. So here in the Japanese market, where a deflationary trend still continues, how are you going to absorb the impact of the higher raw materials prices in the Japanese market?

Unidentified Company Representative, Company Representative

Thank you, Mr. Terino. The first question related to the current situation in Ukraine and what Toyota is going to do with Toyota's business in Russia? And I will respond to that question, Yamamoto speaking. And with respect to prices, I answered the earlier question the same line in a very difficult deflationary trend, what we are going to do with the pricing level was the question. So let me just respond to both of these questions.

Masahiro Yamamoto, Accounting Group Chief Officer

With respect to Toyota's business in Russia, since February 24 and I'm sure you still remember that vividly in terms of the visual impact on that, the Russia made an invasion into Ukraine, and starting from that, many precious lives have been lost due to that. In return to that, certain livelihoods are being threatened, and especially in Europe. And of course, Japan was no exemption, but energy and food are becoming scarce. So that’s the reality that we are confronted with. And many people throughout the world together with them we are indeed heartbroken and seriously hurt. We at Toyota believe that happiness is never born from aggression and the war caused by aggression. We sincerely hope that peace and security be restored to Ukraine and the world as soon as possible; that’s an urgent desire. Furthermore, Toyota has customers who own approximately 100 million vehicles worldwide. And in relation to that, there are many stakeholders who support Toyota throughout the world, Hendrix. stakeholders. And with respect to our business in Russia, we will try to keep our approach of gaining the understanding and empathy of our many stakeholders and people, including in Russia as well. And what we will be able to do is something that we will consider to – we will continue to consider and wrap our brains to. So that’s all with respect to Russia. With respect to price here in Japan, which might reflect a higher cost depending upon the conditions of a region or depending upon the people who use vehicles as an essential means for business. In some cases, it may be easier to pass on costs and others not so. As Mr. Tara Nanos stated, business confidence in Japan is very low. Business sentiment is stagnant, and people's disposable income is also a challenge. This raises the question of whether we will increase prices or not, particularly in the context of vehicles, especially mini and compact vehicles. For used vehicles, which are essential for business, it seems quite difficult to raise prices for consumers. But having said that, depending upon vehicles, different forms, there are certain vehicles on which we can charge higher prices. So in that sense, by looking at each model one by one, we are now studying in a very detailed and fine-tuned manner what would be the best approach that we can take. I hope you understand of what we have imagined that. So how Japanese customers live in vehicles. In this current environment, we are making efforts so that our customers will be satisfied and be happy being able to buy our cars in this very difficult environment. And that's how I understand. Thank you, Mr. Terino.

Operator, Moderator

Now let us move on to the next question. From Wall Street Journal, Mr. Sean, please. We will switch the screen, so when you see yourself on the screen, please start your question.

Sean McLain, Analyst

Sean McLain from the Wall Street Journal. Can you hear me? Okay.

Unidentified Company Representative, Company Representative

Hi. We hear you.

Sean McLain, Analyst

So I have a question about rising prices as well. And I'd like to ask, particularly about the US market, because I think it's a big source of your profits, so we're around record highs and transaction values in the US around $46,000. And what I'm wondering, is Toyota at all concerned about affordability of its products, particularly in the US, where maybe the average person can no longer afford a new car? And what Toyota is thinking about, if anything, in doing about that?

Unidentified Company Representative, Company Representative

Thank you very much, Mr. Sean. So the first question was about the prices in the US market for Toyota customers. Are we concerned about being too high for Toyota customers? That will be answered by Mr. Kon, EVP. The second question was that over one or two years do we see hybrid vehicle sales to grow globally? And if it is to grow in which areas will grow, and that will be answered by EVP Mr. Yamamoto. Starting with Mr. Kon, please.

Kenta Kon, Executive Vice President & CFO

I will answer your first question. About prices in North America. As Mr. Sean mentioned, it's not just for Toyota but for North America overall prices are going up. As a manufacturer, what you can do is to provide various options to customers; that is what we believe. As we mentioned before, on a global basis, we have a wide line-up, product line-up. In the United States, we have SUVs, SUVs pickup trucks are the main lines of products, but we also have Sedan, Hatchback. The compact cars are also part of our line-up. These are important products that we are offering to our customers. And we will continue to provide a wide variety of product line-up to our customers. And in addition to that, rather than just selling new vehicles to the customers, we also offer leasing options, like full-service leaks. In Japan, we have KINTO and also recently globally, we also have KINTO. So how to supply vehicles is also something we are having a wide variety or a broad line-up on. And when we listen to what the dealers are saying, in the past, incentives or price negotiations took place frequently, but recently, and partly because inventory is low, which vehicles are in which pipeline and which vehicles come with which options and what advantages those vehicles provide to the customer. These kinds of conversations take place at Tiro. So focusing on the product. And I think this is very good. And for the customer, more options for models, more options on how to purchase vehicles. We will provide these various options and have the customer choose. So that is all for the first one. And let me answer the second question. So in the future, including the United States in one or two years, will hybrid sales go up? I think that was the question. If you look back in the United States when fuel prices go up, hybrid vehicle sales tended to go up in the past. So taking that history into consideration, currently we are seeing a surge in crude oil prices. And not only in the United States, but globally. At least I think we can expect an increasing trend of hybrid vehicle sales globally. There is another factor behind hybrid vehicles sales going up in the United States. The latest product RAV4. In the past, hybrid vehicles tended to focus on fuel economy. But the US customers not only focus on fuel economy but also on driving comfort, including good acceleration. So the new RAV4 has strengthened that characteristics. And the RAV4 hybrid that is currently on the market and the plug-in hybrids are also very favorably accepted by our customers; very positive feedback from the market. So we - alongside the best in town activities, we will listen to the customer's voice in the United States to strengthen our product. We do think the market will grow, and taking into consideration the environmental issue, I think we should grow sales of hybrid vehicle.

Unidentified Company Representative, Company Representative

That is all. Thank you very much to Mr. Sean.

Operator, Moderator

Scheduled concluding the time is approaching and therefore I would I can ask a final question. I'll switch the screen, so if you see yourself on the screen, please start speaking.

Unidentified Analyst, Analyst

Thank you very much. I have two questions as well, if I may. My first question is somewhat redundant from the previous question. But your view of the BEV, in one of the pages you talked about the outlook of sales, you talked about the increase of 593%, close to 600% increase in the BEV sales. And in the past, when you had discussion with the battery electric vehicles, many customers buy BEVs as a second car, not the first primary car. In light of the recent circumstances, how do you view the demand for battery electric vehicles? That's my first question. Secondly, regarding your earlier comments about the changes in your earnings structure after the global financial crisis, you've outlined the measures taken that have contributed to the current operating structure. In the context of the current fiscal year, which began on April 1, you've re-established the role of Executive Vice President, worked on reducing the number of directors and executives, and aimed to enhance the speed of decision-making. That's the essence of what we've been discussing.

Unidentified Company Representative, Company Representative

So, what is the objective of restoring the position of Executive Vice President is a view and how the Toyota's management is going to evolve and transform going forward, especially starting with the fiscal year. Those are my questions. Thank you. The first question relates to the market of battery EV, what sort of change is foreseen. And Maeda, EVP will respond to the question.

Masahiko Maeda, Executive Vice President & CTO

In terms of the market trend of battery EV, that was your question according to my understanding. What feel I most and most important is that vis-à-vis the battery electric vehicles, the development in relation to that has been accelerating in the market. And that relates to the fact that there is a broader product line-up on various OEMs and also there are greater number of option available for battery EV, that’s one aspect. And also in the United States, there has been tightening trends or regulations that cannot be disregarded. Globally speaking, in fact a very tough and rigorous regulation established was done for the first time in the United States leading in that trend, and not just Toyota, but for other OEMs in the automotive industry. That is one factor accelerating various efforts by OEMs. This is whole being policy against regulations. So as those regulations and also the market trends have been strengthening more than we had expected in the past. As far as Toyota is concerned, I talked about RC and BC, we are yet to start receiving orders. But looking at the input in the market and general discussion in the market and those there seems to be heightened expectations for those models. And therefore, looking at the input or reaction of customers in the market and also different reactions of different regions of the globe or worldwide and those regulatory trends and therefore the battery electric vehicles will get accelerated. I think there are greater factors that lead us, I think in that way. But at the same time, there are certain factors as well, as was mentioned in the presentation soaring market material prices tend to become more manifest and more seriously in the case of the BEV. As was mentioned in the presentation, the higher cost of the materials of the battery does have a huge impact on overall cost structure. We talked about the possibility of reflecting costs and prices, but we have to take a good balance and also in different regions different sorts of subsidies may be considered for those vehicles, and therefore currently they tend to be more generous than those environmental vehicles. But customers are very sensitive to those. So we tend to take a very conservative approach in responding to that. So that's my response to your first question. Thank you. Thank you. With respect to your second question, in terms of the current executive line-up, the focus of your question, since the global financial crisis, the line-up of executive officers and the system of senior advisors to the board, which was eliminated and also with respect to the members of the board, we had more than 100 in the past, but currently, internally, only six, including outside board members, including them, nine. So the board has been downsized substantially. And that's the only change for the purpose of sharing information using IT tools used for meetings and CEO's scattered throughout the world, and Toyota, located in Japan, including them, we have weekly meetings so that information can be shared thoroughly and quite swiftly. So 13 years ago, this is something unthinkable and imaginable. And this sort of change has been actually implemented and achieved. Starting in April of this year, you talked about the position of Executive Vice Presidents restored, and I think there is significance impacts. Looking at myself and I personally consider is that, as Toyota as President says, we live in a world where there is no right answer in front of us. And in that world full of uncertainty, how can we manage and steer going forward? As far as TMC is concerned, if we can discover a problem, TMC does have an ability to find solutions to those problems, which was demonstrated in the past. I think Toyota is a company that has the ability to find solutions to various challenges or problems that we will be faced with diversifying society, characterized by a variety of problems. Nobody knows what's going to happen going forward. So in that general context, the ability to find and discover problems becomes very important. In the past, Toyoda, as the President was the only person trying to find and discover problems, in many cases with three Executive Vice Presidents working together with the President and trying to discover the problems in the world in which there is no right answer. In many cases, if we discover those problems, we will just implement various potential countermeasures, and that I think is what we are aiming at. So with that aim in mind, we will pursue going forward, and I hope you will continue to support us as we make those efforts going forward. That's all from me. Thank you very much.

Operator, Moderator

Now with this, we’ve cleared the financial results. Thank you very much for listening despite your busy schedules today. Thank you.