Earnings Call Transcript - TM Q4 2020

Operator, Operator

Thank you very much for taking time to participate today despite your busy schedules. We would now like to begin Toyota Motor Corporation's financial results announcement for the fiscal year 2020. In order to prevent the infection of the new coronavirus and also based on the guidelines provided by the government, we have decided to hold this announcement online. And for the venue of our announcement, we have minimum staff standing by. And in order to secure the announcement clarity, we have decided to then provide the sound without using masks. Now we have two sections today. Session 1 will begin at 1:15 and continue until 2, and the session 2 will begin from 2:10 to 2:55. There will be a 10-minute break in between. I would now like to introduce our session 1 participants. We have our operating officer, Kenta Kon, also operating officer, Masayoshi Shirayanagi. Now we would like to begin by providing an overview of our financial results.

Kenta Kon, Operating Officer

Hello, everyone. Thank you for joining us today. I am Kenta Kon. First and foremost, we would like to convey our deepest condolences to those who have lost loved ones to COVID-19 and wish all those who have been affected by the virus a speedy recovery. We also wish to extend our sincere gratitude to the health care professionals and officials who are on the front lines for their tireless work. We also 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. Now I would like to discuss Toyota's financial results for the fiscal year, which ended in March 2020. Compared to the previous fiscal year, consolidated vehicle sales decreased by 19,000 units to 8,958,000 units. This was a result of decreased sales, mainly in Asia due to market deterioration in Thailand, India, and Indonesia. This includes a sales decrease of 127,000 units caused by COVID-19. Consolidated financial results for the fiscal year were net revenue of ¥2,929.9 billion, operating income of ¥2,442.8 billion, pretax income of ¥2,554.6 billion, and net income of ¥2,076.1 billion. Due to the spread of COVID-19, net revenues were decreased by ¥380 billion and operating income was decreased by ¥160 billion. Using Slide 6, I would like to explain the factors which impacted operating income year-on-year: Firstly, the effects of foreign exchange rates decreased operating income by ¥305 billion; secondly, cost reduction efforts increased operating income by ¥170 billion; thirdly, marketing efforts improved operating income by ¥90 billion; and finally, a reduction in expenses increased operating income by ¥45 billion. As a result, excluding the overall impact of foreign exchange rates, swap valuation gains and losses, and other factors, operating income improved by ¥125 billion year-on-year. As for the breakdown of the negative impact of ¥160 billion caused by the spread of COVID-19, ¥100 billion was due to a decrease in volumes of vehicle sales and ¥60 billion is due to an increase in provisions for the financial service business. Now I would like to elaborate on operating income for each region. In Japan, operating income was down ¥121.8 billion year-on-year to ¥1,568.5 billion, mainly due to the impact of marketing efforts. In North America, operating income was ¥289.5 billion, up ¥145.4 billion compared to the previous fiscal year, thanks to marketing efforts and a reduction in expenses. In Europe, operating income was up ¥190.6 billion year-on-year to ¥140.7 billion, primarily as a result of marketing efforts. In Asia, operating income, including that of consolidated subsidiaries in China, is down ¥66.9 billion year-on-year to ¥386.8 billion due to the effects of foreign exchange rates caused by the depreciation of the Chinese yuan and appreciation of the Thai baht. In other regions, operating income decreased by ¥6.9 billion year-on-year to ¥82.6 billion. This was largely due to the effects of foreign exchange rates. Next, let me explain our consolidated subsidiaries and equity method affiliates in China as well as our financial services business. As for our China business, operating income of consolidated subsidiaries decreased by ¥15.2 billion year-on-year to ¥134.4 billion. Excluding the effects of foreign exchange rates caused by depreciation of the Chinese yuan, operating income increased by ¥30.9 billion year-on-year. Equity earnings of equity method affiliates were up ¥13.1 billion year-on-year to ¥118.1 billion, largely thanks to marketing efforts. Regarding financial services, operating income was down ¥32.6 billion year-on-year to ¥309.7 billion, mainly due to an increase in allowance for doubtful accounts. Next, I'd like to explain our return to shareholders. We have decided to make the year-end dividend on shares of common stock ¥120 per share, thus the total dividend on shares of common stock for the fiscal year will be ¥220 per share, which includes the interim dividend of ¥100 per share, and the payout for the fiscal year will be 29.9%. We always aim to pay dividends in a stable and sustainable manner using a consolidated provision of 30% as a benchmark. Considering our earnings performance, we have decided to pay the same dividend amount as the previous fiscal year. We will continue to aim to create stable and sustainable dividends. Regarding share purchases, we have decided not to repurchase our common stock as a form of year-end shareholder return. Given any glowing sense of uncertainty in the global economy, we would like to leverage our cash reserves to sustain the automotive manufacturing industry, pursue competitiveness, and continue activities towards achieving a new mobility society together with all our stakeholders. I would appreciate your understanding and cooperation. Now I'd like to discuss the outlook for the full fiscal year ending March 2021. Please note that we will adopt IFRS beginning from the first quarter of the fiscal year ending March 2021. Therefore, the consolidated forecast is calculated in accordance with IFRS. Consolidated vehicle sales for the fiscal year ending March 2021 are expected to be 7 million units, down 1,958,000 units year-on-year. At this moment, states of emergency and lockdowns have likely been implemented in many countries due to the progression of COVID-19, so it is difficult to foresee the future, and the situation varies by region and country. With our book being deployed, we have assumed that sales will gradually recover to 2019 levels by the end of next year. We are not able to provide a regional sales breakdown as it is difficult to foresee the future spread of infection and containment. Next, let me explain the full-year consolidated financial performance. We have assumed the foreign exchange rate to be ¥105 per dollar and ¥115 per euro. Based on this, our forecast of consolidated financial performance is net revenue of ¥24 trillion and operating income of ¥500 billion. Forecast of other items has yet to be determined. I would like to explain the factors which will impact operating income year-on-year. Firstly, the negative effect of foreign exchange rates will be ¥430 billion, as we have assumed that the yen will appreciate against the U.S. dollar and euro. Secondly, we anticipate a drastic decrease in the volume of vehicle sales will have a negative impact on operating income of ¥1,500 billion. The fiscal factors other than vehicle sales will break even. Although this includes the effects of cost reduction, marketing efforts, changes in fixed costs, product mix, and differential mix, we are not able to provide detailed analysis. While re-strengthening the TPS and the volume cost at all levels, we remain committed to transforming ourselves into a mobility company and to continue sowing the seeds for future results. This concludes my presentation. I thank you very much for your attention.

Unidentified Analyst, Analyst

I have mainly two questions. My first question is for March 2020 fiscal year for this financial results, what would be your comment and evaluation? And also about your forecast for the next fiscal year. As you have explained, at the end of this term, you had the COVID-19 impact. And therefore, with how you have ended, how do you evaluate the results? For your forecast of the next fiscal year with the uncertain visibility with the coronavirus impact, there are many companies who have refrained from making an announcement of forecast for the next term. However, how have you come up with the basis for the calculation to come up with the forecast? My second question will be for the current sales situation. In the China market, we see that recovery is quicker than other markets and sales are recovering. However, compared with your competitors, it seems that your recovery of sales is faster than competitors. And even for the domestic market, there is a significant drop in domestic demand. But compared with other competitors, I think Toyota's sales drop is not that big. So how do you see this - how do you see the current situation?

Masayoshi Shirayanagi, Operating Officer

Thank you very much for your questions. First of all, regarding your question about the results of the FY 2020 financial results, with the COVID-19 impact that I have explained earlier, including those, we have seen a drop in volume. Also, we had seen a drop in both revenue and profit. If you have your slide at hand, if you can open Slide 6, please. This is the analysis of the consolidated operating income, the ups and downs, the positive factors and the negative factors. Among these factors, looking at the center square box that says, excluding the overall impact of foreign exchange rates and swap valuation gains and losses, this was a positive ¥125 billion. We shouldn't be discussing on a hypothesis basis, but if we did not have the COVID-19 impact, this number would have been an improvement of ¥285 billion. For the past few years, in this area where we exclude the overall impact of foreign exchange rates and swap valuation gains and losses, we had a determination to always be on the positive side. We have made profit improvement activities and improved our cost profit. Even considering those activities, this plus ¥125 billion has been a significant improvement, enabling us to continuously achieve positive improvement over many years. However, we are very grateful that we made this positive improvement; additionally, for the expense reduction efforts and investments, we have been proactively making investments for the future. Yet, even though there are positive investments for the future, I think this is an opportunity to reflect and review whether there are areas we should examine for waste. So that will be a challenge we will be taking on. Making profit improvements for consecutive years has been a good outcome. Regarding the evaluation of the next financial fiscal year, it will be very difficult to foresee the sales volume and financial performance. In the current environment, we have decided to make a forecast. For the actual business activity side, it is very difficult to anticipate; it remains unclear. We have consulted with our President of Toyota, and we discussed that it would be challenging to establish a forecast. However, we need to have a standard criteria to manage abnormal values. There is a necessity to show a forecast as a kind of criteria moving forward. This was the reason we decided to announce this year's forecast, but as you’ve noted, it is quite difficult to provide a clear forecast. From April to June, we anticipate about a drop of 60%. From July to September, it could be a drop of around 80%, and from October to December, year-on-year, 90%. This is our estimate of our market situation compared to the past term. The basis of our calculation reflects a long-term view, not just a short-term profit perspective. We reviewed what we need to stop, change, or continue doing. In our investments for the future, all these considerations are reflected in our forecast. Regarding geographical breakdowns, we usually provide further details on that, but we are unable at this point in time. We apologize for that, and that will be the situation for the forecast this running term. Regarding the China market, your inquiry was about how we are managing. We have seen that recovery is quite positive, especially in the April results, showing about slightly over 100% year-on-year. Although the automobile sector market has been below, compared with the market drop, our results were strong. This is attributed mainly to the success of our hybrid models and acceptance of new models by customers. Our vehicles like Corolla, Levin, and RAV4 are doing well. In February, we launched Wildlander, a new model for this year, and these new models have been well-received by customers. Regarding the domestic market, yes, it is a tough situation. However, as we entered May, we started to sell all models across all channels. This initiative is essential for ensuring customer accessibility. Furthermore, Kinto, our new service, has also begun, allowing us to offer various options to customers. That will be my response. Thank you.

Unidentified Analyst, Analyst

I have two questions. In major countries, what is taking place in individual markets? I don't think you have details and results of analysis, but regarding North America and Europe, what is the trend for the car markets? And for North America, there are suppliers from Mexico; this poses a concern for us and also China and Southeast Asia are sending their parts to North America. There is a big hand in the supply chain disruption because of COVID-19. Do you have an assessment of that? If so, what is your reaction? My second question is about financials concerning the cash reserve. Now ¥1,950 billion is the equipment line that we have secured according to the mass media. Do you think that the current cash reserve is sufficient? What are your thoughts, including actions to support the suppliers?

Operator, Operator

Thank you very much for your question. First of all, regarding the major markets that you have asked about, looking at each region separately seems to be very challenging as of now. However, for North America, starting from May, the lockdown regulations are being lifted, and the restart of operations has already begun. After COVID-19 concludes, we expect the economy to become strong again, along with supporting activities from the governments. Thus, in the early phase of this year, it may return to normal conditions. You can say the same for Europe as well. Government decisions assume that by July, sales will recover in Europe. This is our assumption. As for the question about cash reserves, we do have a commitment line available. However, according to our analysis, cash reserves are in short supply; we need to protect the automotive industry for continuity. This entails working with our wide range of suppliers and partners. Many of our partners face financial shortages, so we must provide assistance. As of now, we do not believe we are lacking in cash reserve availability. I hope I have addressed your question. Regarding the supply chain management, with COVID-19, the need for visualization of the supply chain has become apparent. We previously required two weeks to identify supply issues, but this has now been reduced to half a day due to improvements in business processes. Through measures to support suppliers, accident prevention, alternative supplier identification, and restoring normalcy, we have reported our progress on a day-to-day basis. Concentration in China was a challenge, but we have secured the supply chain through alternative suppliers, including in China. Although it is uncertain how we will address future disruptions, we are committed to continued discussions with our suppliers to prepare effectively.

Unidentified Analyst, Analyst

This is from Bloomberg. I might be repeating the same question, but I'd like to ask about supply chain management. With COVID-19, the supply chain has been somewhat damaged, and governments are promoting industries to relocate manufacturing activities back home. What is your perspective on this issue? Additionally, what activities are you currently pursuing for your supply chain management amid COVID-19?

Operator, Operator

Thank you. I'd like to answer your question. As you've pointed out, there has been significant confusion due to the cutting down of the supply chain. It is important to maintain and allocate production volumes in each region going forth. Concentrating too much in a single location can pose risks, as we learned from COVID-19. Therefore, managing alternative production sites is required in the current situation, as is the need for effective communication among various manufacturing locations. Utilizing government support efficiently is something we want to consider deeply for supply chain management.

Unidentified Analyst, Analyst

I'd like to ask about the used car market in the United States. I've heard that the drop in used car values is significant, comparable to the drop seen after the financial crisis. How are you viewing this drop in the used car market? Additionally, regarding the supply chain issues caused by COVID-19 and securing the safety of your workers in production, do you foresee a shift toward further automation in your operations?

Operator, Operator

Thank you for your questions. First, regarding your inquiry about the U.S. used car market and the drop in values and its impact on our financial service divisions, you are correct in noting that used car market prices dropped significantly in April. Within the U.S., we have a large financial subsidiary, TMCC, and within our operations, we are including reflected assumptions about decreasing used car prices. With the fall in used car prices, the residual values will also decline. This increase in residual value loss is expected. When we closed the financial results at the end of March, we already identified some indications of this happening. Consequently, in our financial service business, we prepared provisions for this scenario, anticipating a ¥60 billion impact from COVID-19. This encompasses bad debts and non-performing obligations. Regarding your second question about automation in our plants, it is anticipated that society will trend toward minimizing physical contact as much as possible post-COVID-19. While we have not initiated any discussions, we have previously explored appropriate areas for automation, and that is a discussion we will continue.

Unidentified Analyst, Analyst

You are conducting remote work in R&D activities. Unlike the manufacturing world, there may be some communication challenges with promoting work from home for R&D. Additionally, since you must change certain activities due to COVID-19, quality issues have surfaced. With Toyota being known for quality, what analysis have you conducted regarding the current product quality problems?

Operator, Operator

Thank you very much. To address your first question regarding R&D, we have been managing to conduct remote work effectively. In reality, office workers, especially in R&D and design, have been adopting work from home heavily. While some vehicle evaluation needs occur on-site, our design tool, CAT, can be effectively used for remote work. Thus, this process is progressing rapidly. I cannot specify the exact percentage of remote work in R&D outputs, but it seems to be well received. However, the face-to-face communication essential in evaluation remains critical, and this is an area we are discussing deeply throughout our organization. Regarding your second question related to changes we need to make, it’s crucial to maintain quality, and this principle remains constant for us. We regret any inconvenience caused to our customers. Our commitment to quality is unwavering and will not change in the future. Thank you. This concludes my discussion. Thank you very much, Mr. Indiscernible. This marks the conclusion of the first part of the announcement of our financial performance and forecast. After the break, we will commence the second session at 2:10. Thank you.