Earnings Call Transcript - TM Q2 2023

Akio Toyoda, President

Thank you very much for participating in this financial results announcement despite your occupied schedule. We would like to start the presentation on the financial year 2023 second quarter financial results. First of all, let me introduce to you the participants from TMC, Executive Vice President, Chief Financial Officer, Kenta Kon. Chief Communication Officer, Jun Nagata. The Chief Officer for Accounting Group, Masahiro Yamamoto. Chief Officer of Purchasing Group, Kazunari Kumakura. And Deputy Chief Officer, Production Department, Yoshio Nakamura. Now ladies and gentlemen, first of all, Yamamoto will share with you the outline of financial results.

Masahiro Yamamoto, Chief Officer for Accounting Group

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. And I would like to express appreciation for those of you who are participating in this financial results announcement. But at the same time, we sincerely apologize for the inconvenience caused to our customers who are waiting for their vehicles. We are working to deliver them as soon as possible. First, let me provide a summary of the second quarter of the fiscal year ending March 2023. The result for the first half was operating income of ¥1,141.4 billion. The business environment is changing dramatically, such as the rapid changes of foreign exchange rates, raising interest rates, soaring materials prices, and more. While production constraints continue due to low supply of semiconductors, a lockdown in Shanghai, the flood in South Africa, et cetera, we worked hard with our dealers, suppliers and production sites in order to deliver as many cars as possible to our customers. Operating income decreased due to soaring materials prices and one-time costs, despite the positive effects from the depreciation of the yen. As for the full year forecast, it remained unchanged from the previous forecast, so we anticipate operating income of ¥2,400 billion. We have revised our vehicle production forecast downward by 500,000 units to 9.2 million units, taking into consideration risks such as the procurement of semiconductors. We will continue our activities to strengthen our profit structure throughout the supply chain, even though we are in a situation where it is difficult to predict the future due to rapid changes in the business environment. In terms of return to shareholders, the interim dividend is ¥25 per share, an increase of ¥1 compared to the previous fiscal year. We have set aside the full amount of ¥150 billion to make share repurchases in a flexible manner. Let me explain our financial results for the first half ended September 2022 covering the 6 months from April to September. Consolidated vehicle sales for the period were 4,159,000 units. That is 101.6% of the same period of the previous fiscal year. Toyota and Lexus vehicle sales were at 4,742,000 units, which was 97.7% of such sales from the same period of the previous fiscal year. As for the regional sales breakdown, the sales volume decreased in developed countries due to production constraints, but the sales volume increased in regions such as Asia and others due to recovery from the impact of COVID-19. Consolidated financial results were sales revenue of ¥17,709.3 billion. Operating income was ¥1,141.4 billion. Income before income taxes was ¥1,834.2 billion. And quarterly net income was ¥1,171 billion. I would like to explain the factors which impacted operating income year-on-year. First, the effects of foreign exchange rates increased operating income by ¥565 billion. Second, cost reduction efforts decreased operating income by ¥650 billion, largely due to the impact of soaring material prices, which account for ¥765 billion. Third, marketing efforts increased operating income by ¥130 billion. Fourth, an increase in expenses decreased operating income by ¥310 billion. Lastly, we also incurred a negative impact of ¥341 billion, largely due to swap valuation losses and costs to terminate our production in Russia.

Kenta Kon, Executive Vice President

Kon speaking. Today's financial results announcement relates to the performance of Toyota over the past 6 months. However, these financial results reflect not only what has occurred over these 6 months, but also the outcome of our long-standing efforts since the global financial crisis. I believe they also reflect the competitiveness of Toyota as a whole, including our many colleagues in the auto industry, so that customers around the world will want Toyota products. We have continuously evolved our products by introducing such things as an in-house company system and a regional system. We believe that this has resulted in our products being accepted by the market. However, the environment has rapidly and significantly changed in the last half year. The U.S. dollar, Japanese yen exchange rate, which since 2017 had long remained stable between ¥105 and ¥115 to the dollar, rose from ¥121 at March end to ¥150 recently. While the yield of 10-year U.S. government bonds has risen from 2.3% to 4.1%. Also, as shown in the slide, energy and materials prices, as well as the worldwide labor situation, are rapidly and significantly fluctuating. All of these tremendous changes, including the semiconductor procurement situation and other factors, are occurring concurrently and could have a significant impact in the future. My honest feeling is that it is difficult to predict the future of the auto industry even 6 months ahead, let alone Toyota's earnings and production volume. With respect to the response to soaring raw material prices, as mentioned in the first half analysis explained by Yamamoto, we have been constantly discussing with suppliers without drifting away from our focus of enhancing competitiveness over the medium and long term.

Yoshio Nakamura, Deputy Chief Officer, Production Department

Thank you, Mr. Yamamoto, for your question. With respect to the production plan, let me respond in the following manner. Let me explain the background that led to the downward revision of the production plan. Since last year, supply has been interrupted and production continued to decrease. Suppliers in the actual forefront of our production were really taking support. And in the labor management council this year, we decided to take a pause and reexamine the production structure itself. And therefore, we have decided to take the intentional pause. While we have done that with suppliers, we continue to have very attentive and detailed discussions with the suppliers and also incorporate future risks. We were able to come up with the plan and share that with the suppliers in advance to facilitate the suppliers to create their own plans. So we made such communication efforts earnestly. In the early part of last year, we set a baseline of 9.7 million. But we were able to achieve what we wanted to do, causing inconvenience to customers and suppliers. So that's the environment in which we had to operate. But we prepared the maximum amount of facts to estimate and predict potential future risks.

Kazunari Kumakura, Chief Officer of Purchasing Group

Continuing on, I would like to refer to the supply situation of semiconductors. Because of the COVID-19 outbreak, the semiconductors for consumer electronics increased in demand because of the PCs, smartphones, and games, and the production was prioritized for consumer electronics. Some of the semiconductors were hit by natural disasters or fires, and also the lockdown in Southeast Asia or China really impeded supply, which couldn't keep pace with demand. This condition still continues today. Since the Great East Japan earthquake, Toyota has been implementing BCP risk, and we have increased electronic parts inventory and collaborated with Tier 1 suppliers. Up until the first half of 2021, we have been able to keep the negative impact on production to a minimum. The general condition continues even today. In terms of the usage of semiconductors in automobiles, different types of semiconductors are used for various purposes. In many cases, 1,000 semiconductors are used per vehicle. As shown on this slide, microcontrollers, image processors, and analog semiconductors—about 1,000 of these are used for vehicles. With the advent of electrification and enhanced advanced safety measures, the usage of semiconductors in automobiles is expected to increase. In the case of semiconductors, if even one element of the semiconductor is in short supply or eliminated, a single car cannot be built. We have been conducting supply measure conferences and meetings for the past two and a half years. We're trying to minimize the inconveniences caused to customers while explaining the reasons why delivery dates are extended. So, that is our current approach.

Jun Nagata, Chief Communication Officer

Thank you, Mr. Yamamoto, for your question. One of your questions was related to our assessment of the financial results announced today. Another was concerning the revision of production and specifics about the semiconductor shortfall. I will respond to that question regarding the semiconductor shortfall. The first question will be answered by Kon. We are faced with multiple significant changes and each one has impacted us significantly, but we believe we have managed to secure a profit despite these enormous challenges.

Hodaka Yamamoto, Analyst

Yamamoto of The Yomiuri Shimbun. I have two questions. First, regarding the financial results that you have announced today, what is your assessment of that? Could you explain that once again? Secondly, concerning the volume, especially production volume, you made a downward revision to the production volume in this announcement. I think the greatest factor behind that was the supply shortage of semiconductors. What sort of semiconductors are in short supply? And in order to recover and increase the volume, what sort of measures do you think are necessary?

Yuzuha Oka, Analyst

Oka of NewsPicks. I have two questions, if I may. First question, which relates to the operating income of different regions, especially regarding North America, is the decrease in profit. Could you explain to us the reason behind that? The second question is relating to the restrictions on gasoline vehicles in California and Europe, which have been progressing rapidly. You referred to the change in production of battery electric vehicles (BEVs). If there is an initial explanation relating to your BEV strategy, I would like to be enlightened on that.

Hitomi Mashima, Analyst

Mashima from NHK. I have two questions. First, regarding the impact of the weaker yen, the results reflect the weaker yen, but could you elaborate on the impact of the weaker yen on the business results? The second point is about the cost of termination of production in Russia, which you have reflected in the financial results. Is there a possibility that related costs will be added to the expenses in the future?

River Davis, Analyst

This is River Davis for the Wall Street Journal. I have one follow-up question on the chip issue. Last week, I think the mood in Detroit was that we've made it through the worst of the chip shortage; however, I see that you're taking a more conservative forecast. Could you talk a little bit about why there's a difference? And Kumakura-san, I believe you're referring to perhaps analog chips when you're talking about chips with little investment. Is that a particular bottleneck at the moment? My second question is about vehicle pricing. Nagata-san, you spoke a little about interest rates and inflation, and I'm curious how that is impacting car prices at the moment and how you foresee it impacting car prices through the end of the year.

Hans Greimel, Analyst

Toyota is at a stage now where it is introducing several newly developed cars and new kinds of cars. We have the Crown series coming out, along with some new BEVs, as well as a new Prius. These are all cars that rely a lot on the semiconductors and special materials for batteries. To what degree are these price increases and semiconductor supply problems impacting product development? Is it slowing down the rollout of these cars? And how is the chip shortage affecting your prioritization of which models you prioritize for production and sales over others? When do you expect the shortage to end, perhaps 2023, 2024, or even 2025?