Earnings Call Transcript
TOYOTA MOTOR CORP/ (TM)
Earnings Call Transcript - TM Q4 2023
Ellie Gibbs, MC
Ladies and gentlemen, thank you very much for coming today. We would now like to start the financial results meeting for the year ended March 2023. My name is Ellie from Public Relations, and I will be the MC for today's meeting. Before we announce the financial results, Koji Sato, our President, has a few words to mention. Mr. Sato, please.
Koji Sato, President
I am Koji Sato. Before announcing our financial results, I would like to explain the current situation regarding the Daihatsu procedure realities issue, which was announced on April 28. Since the announcement, we have had an independent third-party review entity conduct a retest of those vehicles concerned. It has once again been confirmed that the vehicles concerned present no quality or safety issues. Based on the results of the retest and after consulting with the related authorities, we have resumed shipments of the Toyota brand vehicles to Malaysia, Mexico, and Ecuador. As for Thailand and Middle Eastern countries, we will continue to consult with the related authorities. The day before yesterday, Chairman Toyoda visited Thailand to explain to our customers and stakeholders what had happened and to convey to them that the vehicles were safe and that our entire corporate group was committed to working to prevent this type of misconduct from ever happening again. Daihatsu and Toyota are confirming the facts from various perspectives to prevent a recurrence. Toyota is a company where all members always stop when a problem occurs. It pursues the root cause of problems by going and seeing the location of the process where the problem exists, making improvements, and working to prevent recurrences. We will continue to investigate the root cause, believing that it is important to change the environment in which such misconduct occurs. We will keep you informed as and when progress is made.
Ellie Gibbs, MC
Thank you. Now we would like to call upon Yoichi Miyazaki, the Executive Vice President and Chief Financial Officer, to explain the financial results.
Yoichi Miyazaki, CFO
I'm Miyazaki, the CFO, and this is the first time I am taking on this title, so I hope you bear with me. Before sharing the financial results, we would like to express our heartfelt appreciation to our customers around the world who choose us, as well as to our shareholders, dealers, suppliers, and all other stakeholders who support us in our daily activities. Thank you very kindly. So let me provide a summary of the financial performance for the fiscal year ending March 2023. While we experienced production constraints due to tight semiconductor supplies, natural disasters, COVID-19, etc., our dealers and suppliers, as well as production sites, have all worked hard to deliver as many cars as possible to our customers. Despite our actual operating income decreasing compared to the last fiscal year due to the impact of soaring material prices, our results exceeded the previous forecast due to our continuous efforts to improve our profit structure. For the forecast for the next fiscal year, we expect a production volume of 10.1 million and an increase in sales volume in all regions due to improvements in semiconductor supply and the efforts of production sites. We will continue to advance our activities toward carbon neutrality and improve our product structure. Without slowing down our growth investments, we will promote initiatives to change the future of our cars. In terms of return to shareholders, in order to reward our long-term shareholders, we have a new dividend policy to increase dividends stably and continuously. We have placed more focus on dividends for our shareholder returns, and the year-end dividend will be JPY35 per share, an increase of JPY7 compared to the previous fiscal year. The total dividend will be JPY60 per share, which is an increase of JPY8 from the previous fiscal year. As for share repurchases under our flexible policy, we will proceed with a maximum of JPY150 billion for our year-end repurchases, which is equivalent to our interim repurchases. Now then, let me explain the summary of our performances for the fiscal year ended March 2023. Consolidated vehicle sales for the period were at 8,822,000 units, which was 107.2% of such sales over the previous fiscal year. Toyota and Lexus brand vehicle sales were at 9,610,000 units, which was 101% of such sales in the previous fiscal year. Vehicles sales by region showed increases in all regions compared to the previous fiscal year. Moreover, the ratio of electrified vehicles became 29.6%. Consolidated financial results showed sales revenue of JPY37,154.2 billion, operating income of JPY2,725 billion, income before income taxes of JPY3,668.7 billion, and net income of JPY2,451.3 billion. Now I would like to explain the factors that impacted operating income year-on-year. First, the effect of foreign exchange rates increased operating income by JPY1,280 billion. Second, cost reduction efforts decreased operating income by JPY1,290 billion. The impact of soaring material prices included JPY500 billion for activities aimed at strengthening the structure of the entire supply chain, in addition to fluctuations in market conditions for materials. Third, marketing efforts increased operating income by JPY680 billion. Fourth, increases in expenses decreased operating income by JPY525 billion. Lastly, we incurred a negative impact of JPY415.6 billion largely due to swap valuation losses and the cost of terminating our production in Russia. As a result, excluding the overall impact of foreign exchange rates, swap valuation gains and losses, and other factors, operating income decreased by JPY1,135 billion year-on-year. Now let me explain the operating income for each region. Japan increased by JPY477 billion year-on-year due to the effects of foreign exchange rates, despite the negative effect from soaring material prices. North America decreased by JPY457.8 billion year-on-year due to soaring material prices. Europe also decreased by JPY115 billion year-on-year due to soaring material prices and the cost to terminate our production in Russia, despite the positive effect from our marketing efforts. Asia increased by JPY55.7 billion year-on-year due to the effect of foreign exchange rates and an increase in sales volume. Other regions increased by JPY36.7 billion year-on-year. In the next slide, let me explain about our business in China as well as our financial services business. Regarding our business in China, while the operating income of consolidated subsidiaries decreased year-on-year mainly due to the impact of fluctuations in foreign exchange rates and a decrease in sales volume, our share of profit of investments accounted for using the equity method increased year-on-year mainly due to cost reduction efforts. Concerning the Financial Services business, operating income for the fiscal year increased year-on-year due to the impact of fluctuations in foreign exchange rates. Next, I would like to explain about our return to shareholders. In order to reward our long-term shareholders, we have eliminated our conventional guideline of a consolidated dividend payout ratio of 30%. Instead, we have revised our policy to increase dividends steadily and continuously. The year-end dividend for the current fiscal year will be JPY35 per share, an increase of JPY7 compared to the previous fiscal year. Together with the interim dividend of JPY25, the total full-year dividends for this fiscal year are JPY60 per share, an increase of JPY8 from the previous fiscal year. Previously, we conducted share repurchases based on factors such as investment in growth, dividend levels, and cash on hand. However, we have revised our policy to conduct this flexibly, taking into account our share price levels, etc. For year-end repurchases, considering the current share price level, we set aside JPY150 billion as the maximum limit for year-end repurchase, which is equivalent to our interim. Next, I will explain the forecast for the fiscal year ending March 31, 2024. First of all, I will explain the production volume forecast for Toyota and Lexus brands. We expect 10.1 million units, which is 110.6% of the previous fiscal year. The reason behind the increase in the production forecast for the previous fiscal year is due to our examination of alternatives regarding supply risks and promoting improvements aimed at increasing operating rates at factories. Since March, we have been able to continue high-level production while prioritizing safety and quality. At sales sites in each region, the production volume still cannot keep up with customer demand, so we will continue to promote improvements together with our suppliers to further increase the production volume. We expect consolidated vehicle sales of 9,600,000 units, which is 108.8% compared to the previous fiscal year. As semiconductor supply and demand improved, we expect growth in all regions. For Toyota and Lexus brand vehicle sales, we anticipate reaching 10,400,000 units, which is 108.2% compared to the previous fiscal year. We expect electrified vehicle sales of 3,843,000 units, which is 134.9% compared to the previous fiscal year, and the electrified vehicles ratio is predicted to be 37.0%. Next, I will explain the forecast for the fiscal year ending March 31, 2024. We have adopted a full-year foreign exchange rate assumption of JPY125 per U.S. dollar and JPY135 per euro. Based on this, our forecast for the full-year consolidated financial performance is: sales revenue of JPY38 trillion, operating income of JPY3 trillion, income before income taxes of JPY3,690 billion, and net income of JPY2,580 billion. Next, I would like to explain the factors that may impact operating income. The effects of foreign exchange rates will decrease operating income by JPY875 billion. The cost reduction efforts are expected to increase profit by JPY360 billion, while the impact of falling material prices is anticipated to be JPY510 billion, resulting in a total decrease of JPY150 billion. The effects of marketing activities will increase the operating income by JPY1,285 billion due to an increase in sales volume and an improvement in the product mix, led by improved semiconductor supply and demand, while other expenses are expected to decrease by JPY260 billion. Compared with the pre-closed fiscal year ended March 31, 2020, we have been able to offset the impact of soaring material costs with GPS cost reductions and marketing efforts as a result of our long-standing product-centered and region-centered approach. We have also established a foundation for steadily increasing growth investments. We live in an era where there is no right answer and the future is uncertain. So we will always keep our antennas up and carefully manage risks in preparation for changes in the business environment. This brings us to the end of our presentation. Thank you very much.
Ellie Gibbs, MC
Thank you. We'd now like to ask our President, Koji Sato, to take the floor again.
Koji Sato, President
Once again, I am Koji Sato. As Miyazaki-san just mentioned, despite the severe business environment, including soaring material prices, we were able to secure an operating profit of JPY2.7 trillion in the previous fiscal year. Our new management team assumed the reins on April 1. However, the financial results figures for the previous fiscal year were based on the 14 years of former President, Akio Toyoda's efforts, making me once again keenly aware that our change in management took place while Toyota was being managed at top speed. Our new management team will be able to focus on strategic initiatives in growth areas based on this current foundation. When Chairman Toyoda took office as President, he said growth is about being able to continuously change ourselves in response to ever-changing needs of customers and society. I believe that his 14 years as President embodied exactly that. Now that he is Chairman, he is in a position to support our new management team, and we will implement a new form of team management with the Chairman and President working simultaneously and according to an optimal division of roles at any given time. Our team will take advantage of this environment to promote speedy management. With that in mind, I would like to once again talk about our future management. I believe that the growth Toyota should aim for going forward is growth that creates a future in which the automobile industry transforms itself into a mobility industry through enhancing its added value as it works in cooperation with many other industries. The foundation for this is carbon neutrality. Toyota aims to reduce new vehicle CO2 emissions by more than 50% globally by 2035. To achieve this, we will continue to provide regionally optimal solutions at an accelerated pace without wavering from our multi-pathway approach. When it comes to battery electric vehicles or BEVs, which are especially rapidly progressing, we have set a pace of selling 1.5 million units by 2026 as our base volume, and we plan to launch 10 models ranging from luxury vehicles to compacts and commercial vehicles, mainly in the United States and China. Regarding the battery supply, we will seek to speedily secure the necessary volume by increasing our in-house production capacity and collaborating with our partners. Our new model scheduled for launch in 2026 will be built on three new platforms: the body and chassis, the electronic platform, and the software platform. They will all be renewed as we aim to achieve mobility through renewed vehicle packaging with a rational structure that is unique to BEVs. With a new dedicated organization, the BEV factory will lead the initiatives, and these initiatives will be accelerated. We would like to present concepts for such vehicles at the Japan Mobility Show this autumn. At the same time, as our BEV initiatives, we will also accelerate our efforts to realize a hydrogen society. We will advance our projects in the commercial domain, especially in Europe and China, where hydrogen consumption is particularly high, centered on fuel cell electric vehicles. Furthermore, we will focus on the use of hydrogen energy for personal mobility and on the cycle of producing, transporting, and using hydrogen, conducting activities for the development of social infrastructure, including social implementation in Thailand. To actively promote these initiatives, we will also increase our immediate earning power, especially in Asia and emerging markets, which are expected to grow by 30% or more by 2030. We will strengthen our earnings base by focusing on hybrid electric vehicles to capture market growth. To transform automobiles into our mobility industry, we will further increase our current approximately JPY3 trillion in R&D expenditures and capital investment while increasing the ratio of future investment to achieve sustainable growth. Thank you for your kind attention.
Ellie Gibbs, MC
Next, we'll begin the question-and-answer session. Please hold on for a moment while we prepare. Thank you. We would like to start the Q&A session now. We invite the panelists to take the stage. Let me introduce the members here: President Koji Sato; Executive Vice President and Chief Technology Officer, Hiroki Nakajima; Executive Vice President and Chief Financial Officer, Yoichi Miyazaki; Chief Communication Officer, Jun Nagata; and Chief Officer of the Accounting Group, Masahiro Yamamoto. Please have a seat on the stage. We are now ready for your questions. If you have a question, please raise your hand to indicate so and wait for the microphone. To allow as many people as possible to ask questions, we ask that you limit yourself to two questions each. The third person in the third row from the front, please.
Unidentified Analyst, Analyst
I'm from Yomiuri. My name is Yamauchi. I have a question for President Sato. The first question, how would you sum up the overall financial results? What were good points? What are the points which you highly evaluate or points that you think are below standard or not satisfactory? How do you feel about this as President? My second question is about the profit or earnings structure. When you look at the breakdown of the operating profit, the external environment such as foreign exchange and soaring material prices highly affected your results. How about the growth in reduction of costs, etc., which did have an impact on the results? So as President, how do you intend to evolve or increase the basic earnings power of the company?
Koji Sato, President
Thank you for that question. The first question had to do with my summing up or impression of the financial results. When we look at the short-term financial results, we obtained operating income of JPY2.7 trillion, which I believe demonstrates earnings power that exceeds last year's. I'm sure you realize that the impact of foreign exchange and soaring material prices improved through various efforts to generate a good operating profit in the end. Manufacturing cars and delivering them to customers was a very difficult endeavor this year. However, the financial results indicate that there were various ingenuities and devices we were able to implement due to these difficulties, and many factors included in the financial results indicate our ability to strengthen our financial progress. For example, the production plan fluctuation was large, but especially our suppliers responded flexibly to these changes, and the members involved in manufacturing internally also made significant contributions. In order to meet customers' needs, we provided smiles to our customers through various production improvements, etc. I think all these efforts have led to the financial results. So in the short run, despite the difficulties, I think there is still much room for improvement, and such efforts have been launched. In the long run, the economic environment has been deflationary for many years. Against that backdrop, we are involved in manufacturing centered around cars and our products. Over a span of 10 to 20 years, not only domestically but in the United States, we were able to increase the marketing point of our products. We must not make automobiles a commodity. We must provide good value-added products and develop a strong business that is appreciated by customers. Our efforts over the years culminated in good results despite very demanding economic conditions and supply constraints, creating a corporate structure capable of meeting these adversities. In both the short term and the long term, I believe the financial results indicate that we have been able to reinforce the corporate foundation through our years of efforts. Regarding the profit structure, as I mentioned in relation to the first question, we will manage our operations centered around products. First and foremost, we must develop good quality cars and deliver them to customers. For supply issues, we are seeing improvements in supply constraints. We have set vehicle sales forecasts that must be produced, and we will improve the appeal and attractiveness of our products for higher profitability. These are the basics, but returning to these fundamentals is crucial. By so doing, we can create resilience against variables like foreign exchange and soaring material prices. As a global business, stabilizing the profit structure requires not focusing on a specific geography. We must create a corporate foundation that enables us to generate profit in all regions. Against various risks, we must flexibly manage well in different regions to establish a staunch profit structure. I believe this is vital for creating management that is resilient to external factors and strengthening our global product portfolio.
Ellie Gibbs, MC
Now let us take the next question. The person in the third row from the front.
Unidentified Analyst, Analyst
My name is Hiroaka from Newspeak. This year, if there are no part supply constraints, I believe production should increase. However, considering Toyota's consistent focus on domestic production in Japan, Mr. Sato, what are your thoughts on this? Do you think it’s feasible to reach the 3 million mark in production? Additionally, with more electrified vehicles, I anticipate that the parts used will differ. How are you communicating with your suppliers regarding this?
Koji Sato, President
Your first question was about domestic production. For Toyota, domestic production is the starting point in protecting manufacturing in Japan. We will not waver from that position. We will always consider how to protect manufacturing in Japan. With electrification, the parts used will change, and including transactions with our suppliers, what is my forecast, I believe, was your second question. With electrification, the parts used will differ. However, the supply chain is not just a part of the business. Each party has strengths that we respect as partners. Together we do business in vehicle manufacturing. Each supplier has strengths and, if you look at each piece of technology, even if parts change, there are suppliers who have advantages in specific areas. So we will partner with them, communicate what kind of vehicles we want to produce, and do so earlier than before. We want to create a business that capitalizes on each other’s strengths gradually. Your next question was what should we do to ensure vehicles do not become commodities. As you mentioned, hybrid technology is one of our strengths. Our growth area is emerging countries, where CO2 reduction is necessary and our demand is expected to grow. So with hybrid, securing a profit base is necessary, and we must be close to local communities to make better cars. While we take a multi-pathway approach, we do not specialize in specific areas. We study the characteristics of each geographic area and provide our products that are more suitable for that region. Not only hybrids, but in all vehicles, we need to provide those that are very Toyota-like.
Ellie Gibbs, MC
Next question, and the person at the very front.
Hans Greimel, Analyst
I am Hans from Automotive News. I have two questions. One is about production, and one is about the profit structure for EVs. About production, it seems that you are aiming for maybe a record production in the current fiscal year. Is that correct? And how do you expect to get there? Is the chip crisis then seeing an end? Do you have some new approach to securing enough chips? Or is it naturally coming to an end? How do you get this new production to a new record level? The second question is about the BEV profit structure after 2026. Right now, you have an operating profit margin around 7%. But in 2026, you want to introduce a new platform, which will have lower costs, maybe faster turnaround time, and also new revenue sources through the software side. What do you imagine the profitability to be like in the second half of the 2020s compared to today? Will it be higher? Often, we think about EVs as being more expensive or more costly with slimmer margins, but maybe it's the opposite that will be a turning point for higher margins.
Yoichi Miyazaki, CFO
Regarding the first question, I would like to answer. I think related to the first question, previously, we wanted to deliver as early as possible to meet customer demand, but we were not able to fulfill the demand. The numbers that we have cited are an accumulation of the responses of the production site to customers' needs and the products that we want to launch going forward. We believe we can probably set a base volume of 10.1 million units, as was mentioned earlier. This 10.1 million units, as Hans-san questioned earlier, reflects how we intend to achieve these goals because we were having such a difficulty manufacturing last year. One year ago, we had no idea which semiconductor chips would be in short supply at one time. So, as Sato mentioned, suddenly, there would be a shortage of components, and we had to lose production volume against the plan. That situation continued last year. But we want to make risk semiconductors visible. Once we gain visibility, we will change the design so we can have alternative sources, and sellers will try to sell the non-risk semiconductors. Through these efforts, over one year, although things are not perfect, our ability to manage semiconductor supply has improved greatly. We believe that the base volume of 10.1 million units is a feasible number we can cite. What we want is customer smiles, and for that, we want each person in the production site or in the regions to set up good communication and relationship with customers. As a result of our focus on product and manufacturing, we were able to cite this number of 10.1 million. So as you said, our base volume would be a record number of vehicle sales.
Koji Sato, President
May I respond to the second question, Hans-san? Thank you for that question. After 2026, we intend to launch next-generation battery EVs. The key point will be how to reduce costs. This is one critical aspect. In the case of battery EVs, the proportion of batteries against the total cost structure is very high. So how to develop or design a car that can efficiently utilize battery power. Through the development and manufacture of battery EVs, we have learned many things, which we want to incorporate. The next-generation BEVs must involve a change in the factories themselves. So we are currently discussing this point. The manufacturing process will change significantly. So it is not just placing an engine on the body and assembling parts on top; it involves a totally new and refreshed process, for example, reducing the total line by half or improving production efficiency through very drastic improvements. We would like to reduce manufacturing costs, which will be key. Another aspect is as Hans-san said, the BEV must add value. Adding intelligence is crucial. There are appealing and attractive software enhancements that can only be achieved with BEVs, and we believe it's possible to enhance customer experience value. The new organization and leaders who have learned in China will grapple with developing a new battery EV. We have just started these activities, and I hope you will support these efforts going forward as well.
Hans Greimel, Analyst
And what about the profitability level in the later half of the 2020s? Will it be comparable to what we see today or higher?
Koji Sato, President
Not only battery EVs but we will deliver various electrified vehicles through multi-pathways. We want to secure a similar level of profitability as today. We've said this earlier, there may be various difficulties, but we want to deliver even better cars to customers. By pursuing this goal, we believe we should be able to achieve profitability.
Ellie Gibbs, MC
Now to the next question. The person in the fifth row from the front.
Unidentified Analyst, Analyst
My name is Yamani from NHK. I have two questions. The first question is related to the number 10.1 million production. So this number, you're not pursuing volume. Is that the intent? And that is my first question. The second question is about the Chinese business. Mr. Miyazaki said last year that sales volume went down and that Japanese makers are struggling in the Chinese market. So TMC, what is your stance on the current status of the Chinese market, which is said to be the largest in the world? And what about your future prospects?
Koji Sato, President
Thank you very much for your question. The 10.1 million sales volume forecast is about meeting customer demands, enabling us to be selected by the customers. When that occurs, we will achieve that number. The Chinese business will be discussed by Mr. Miyazaki.
Yoichi Miyazaki, CFO
Regarding the Chinese business, looking back on last year's results, we couldn't secure sufficient semiconductors. Something specific to China was the COVID impact from the beginning of the year, which affected demand. However, we have local businesses in China. So if you look at the overall Chinese business, last year, although we struggled in terms of volume compared to the previous year, our market share increased steadily in the Chinese market. Many people look at the BEV market alone, but we have hybrids and PHEVs as well. Many of our customers are using these vehicles, and our share has gone up to around 9%. The market will continue to be very competitive, but we'll pursue vehicles that will please Chinese customers and aim for business growth.
Hiroki Nakajima, Chief Technology Officer
Let me add one point from my side. Product competitiveness and the market in China are changing rapidly. As we mentioned at the Shanghai Motor Show, we mean to provide vehicles that will be loved by Chinese customers. Therefore, we have development sites in China and are trying to localize development to meet demand quickly.
Ellie Gibbs, MC
Any further questions? I guess, the person in the front row again.
Unidentified Analyst, Analyst
I have two questions. Both have to do with battery EVs. The first question is to Executive Vice President Nakajima. You just explained about the BEV and how you view the Chinese market for BEVs. Could you be more specific? You went to the Shanghai Motor Show and from the viewpoint of genchi genbutsu. What is your impression of the shift to electrified vehicles in China? What do you think Toyota lacks in terms of product development? What do you have to change to address the Chinese market? Second question is to President Sato. The battery EV interim objective target of 1.5 million was announced last month, and you said that you'll be injecting JPY3 trillion in R&D for BEVs this term. What specifically do you intend to do within the extent possible to disclose?
Hiroki Nakajima, Chief Technology Officer
Thank you. First, going on to the first question. At the Shanghai Motor Show, I was amazed to see that electrification of battery EVs was progressing rapidly. Not only that, but it’s already taken for granted that differentiation through adding intelligence happens much faster than we expected. The needs of Chinese customers are changing, so we must localize development to meet their demands. We want to gain the cooperation of local suppliers to expedite our efforts.
Koji Sato, President
Regarding the second question, 1.5 million units is not a target per se, but a base volume criteria we want to work towards. As I mentioned, not only Toyota but many suppliers and dealers will cooperate in making the shift towards battery EVs. We must set the pace and demonstrate our commitment. To achieve this, we must create a firm lineup of products. We have several battery EV models launched in the market, and we have received valuable feedback. We aim to improve our marketing power and product development efforts. This involves enhancing the necessary aspects mentioned earlier, like cruising range and charging time. We seek to improve the appeal of our battery EVs, enticing many to ride Toyota BEVs. Our focus will be on the key markets of China and the United States, ensuring a robust lineup that meets expectations.
Ellie Gibbs, MC
Thank you very much to Mr. Umeda. The person along the aisle in the middle.
Unidentified Analyst, Analyst
My name is from Asahi Shimbun. I have two questions. The first question is about storing material costs. Parts prices and supporting suppliers in terms of utilities. You only directly support primary suppliers, but what is the current status of your Tier 2 or Tier 3 suppliers? Currently, impacts related to soaring material prices are understood, and I would like to know how much support went to suppliers and what type of support will continue. The second question relates to what Mr. Sato mentioned earlier about Daihatsu. In the automobile industry, you have suppliers and dealers, and many people are involved in the industry. This collaboration may lead to pressure; some say, that might be the recourse of this problem. Mr. Sato, you mentioned the development environment. How do you stand on governance and corporate culture?
Masahiro Yamamoto, Chief Officer, Accounting Group
Thank you very much for your question. Your first question concerned soaring material costs and suppliers. With Tier 1 suppliers, we maintain close communication, while with Tier 2 and Tier 3 suppliers, many opinions differ, and we are still on our way to further improvement. Our intent is to protect the supply chain to overcome these challenging times. We want to continue dialogue with suppliers and maintain the initiatives we are undertaking. In terms of the current fiscal year, overall material prices have started to stabilize, and some materials' prices have begun to decrease. However, utility charges in Japan have remained high recently, and we need to maintain discussions with suppliers about that. Overall, TMC and suppliers, the JAMA, and the automobile industry must tackle these challenges together.
Koji Sato, President
Your second question was about the Daihatsu issue. Let me express my views. This irregularity regarding our certification or collision safety should never have happened, but it did. This signifies that a root cause exists. Identifying and eliminating that root cause is essential. Blaming someone is not the solution. We are in the auto industry, where rules apply, and we manufacture cars. There shouldn't be anyone who commits misconduct intentionally, but since it happened, we need to identify environmental factors involved. The vehicles used by customers must not inconvenience them, so we need to clarify what happened. As the first step, we must identify that and communicate with relevant parties. We must explain to them what happened, which we have done, and we have initiated actions to ensure this does not happen again. It's essential to understand the causes of issues like these are not specific to any person; there are systemic factors at play. We must visit the workplace, repeat discussions, and ensure open communication so that employees can speak their minds. Achieving psychological safety is crucial. As I mentioned earlier, Chairman Toyoda went to Thailand to communicate to customers and stakeholders that the vehicle was safe.
Jun Nagata, Chief Communication Officer
Thank you very much. My name is Nagata. On Monday, with the Chairman, we went to Thailand to explain that the Yaris Ativ vehicle is produced there and is a large market for exports. We wanted to communicate that the vehicle is safe. As Sato mentioned, we knew the vehicle was safe. Communication is crucial for team members involved in vehicle production and development. Toyota is a company that emphasizes addressing problems at the root.
Ellie Gibbs, MC
We now like to receive questions from those reporters who are online. We would like to take this time to entertain questions from online Bloomberg. Inajima-san from Bloomberg, we will switch the screen. Please start speaking if you see your face on the screen.
Tsuyoshi Inajima, Reporter
Hello, can you hear me?
Jun Nagata, Chief Communication Officer
Yes, we hear you.
Tsuyoshi Inajima, Reporter
This is Inajima from Bloomberg. I have two questions as well. One is about dividends and share repurchase. You indicate you'll conduct dividends stably and continuously, and for share repurchases, you conduct repurchases flexibly, focusing on share price levels. How do you intend to act on these share repurchases? When you talk about share levels, would it be 1x PBR? Would that be one of the factors for a share buyback, or do you have other criteria internally? When that internal threshold falls short, will you reduce the share repurchase volumes? The second question is President Sato talked about a mobility show where a next-generation BEV is expected to be shown. Will you be unveiling your next-generation BEV concept cars at that show in autumn?
Yoichi Miyazaki, CFO
Thank you for your question. Regarding dividends and share repurchase, our major policy is to reset our approach to both. We have conveyed that earlier. Regarding dividends, we previously had a payout ratio guideline of 30%. We discussed how we can contribute more to our shareholders, and thus we decided to increase dividends stably and continuously as a revised policy. Regarding share repurchases, this will depend on share price levels. Our approach will be flexible in evaluating the absolute value of share repurchase, with a revised policy focusing more on dividends rather than share repurchases.
Masahiro Yamamoto, Chief Officer, Accounting Group
We will look at share price levels in our share repurchases. Presently, the share price is not satisfactory for us. The P/B ratio is below 1x, and we are not satisfied with this, taking it very seriously. We plan to grow our business and improve this ratio by enhancing the quality of our future products.
Hiroki Nakajima, Chief Technology Officer
Let me try to respond to the second question, Inajima-san. Yes, we will be showcasing these next-generation battery EVs at the Mobility Show. We believe it’s better to demonstrate our vision through concepts than merely words. The new organization, BEV Factory, reflects our commitment to changing the future of cars using intelligence and enhanced forms. We will also revamp our manufacturing and working processes evidencing our resolve to pursue investments to this end.
Ellie Gibbs, MC
We will take another question online from the Wall Street Journal, Mr. River Davis.
River Davis, Reporter
Hello. This is River Davis from the Wall Street Journal. I wanted to ask two follow-up questions. The first is on the China market. We heard a lot from auto executives returning to Japan about the strong competition in China and the need for a unique strategy to remain relevant. Miyazaki-san, you spoke about the strength of hybrids in China. Do you feel this is a unique weapon for Toyota in that market moving forward? My second question is on EVs and profitability. Last month, you discussed strong profit margins on hybrid vehicles presently. As you look towards the 2026 and 2030 EV sales targets, how do you prioritize maximizing profitability versus attaining those EV targets?
Yoichi Miyazaki, CFO
This is Miyazaki speaking. Regarding how we compete today and in the future, we want to prepare a solid battery EV strategy for China. About how we will compete with BEVs in China, we first need to identify the needs of Chinese customers and provide vehicles very much aligned with car manufacturers' vehicles. Preferences in China, America, and Europe may differ, but we will enhance competitiveness to meet localized customer demands through a multi-pathway approach.
Koji Sato, President
This is Sato speaking. As Mr. Miyazaki mentioned, battery EVs are moving quickly into the Chinese market. However, solid demand for hybrid vehicles in China exists as well. The demand structure differs between BEVs and hybrids, and we want to tackle both markets to remain competitive.
Ellie Gibbs, MC
So going back to this hall, the person in the very front again.
Unidentified Analyst, Analyst
I have two questions again. The first question, various auto OEMs are shifting toward battery EVs. In Toyota’s case, you have strength in hybrid cars, but what do you intend to do going forward with that? The second question overlaps with the first. The balance between investment and profitability in battery EVs seems to be a burden on overall profitability as various auto OEMs are indicating. You mentioned a JPY4 trillion investment in BEVs for 2030. Have you updated these figures?
Koji Sato, President
Thank you. Our approach to battery EVs is to focus strongly on that going forward while emphasizing our ultimate goal of achieving carbon neutrality. As customer demands and needs diversify, Toyota will leverage its strengths to meet the various energy demands and enhance vehicle values to change the future of mobility. We recognize that replacing engines with electric powertrains alone is insufficient for a sustainable automotive industry.
Yoichi Miyazaki, CFO
Regarding the JPY4 trillion investment in BEVs, which we've announced as a base value, we currently consider that JPY2.5 trillion might be necessary for the 2026 target of 1.5 million units. For the 2030 target of approximately 3.5 million units, we may require around JPY5 trillion. To finance these investments, as I mentioned earlier, we are engaged in cost reduction and by reinforcing relationships with customers, we have enhanced our earnings power. Our outlook predicts JPY3 trillion in earnings power this year, which we see enabling financing future investments, including BEVs.
Unidentified Analyst, Analyst
May I clarify? You mentioned JPY5 trillion in investments. Would this be starting from this fiscal year?
Hiroki Nakajima, Chief Technology Officer
Yes, this investment would begin this fiscal year. Thank you.
Ellie Gibbs, MC
Due to time limitations, let us take the last two questions. The person in the third row, in the center.
Unidentified Analyst, Analyst
My name is indiscernible from Asahi Shimbun. In discussing supply shortages, the common narrative is that increasing production leads to increased sales. If you look at the results of your rivals, many have significantly raised their prices and seen high operating margins. This raises the question: What is your exit strategy? At some point, there will be more supply than demand, leading to situations where products won't sell easily. It seems you have suppressed prices to take this into consideration. When supply increases, what is TMC's exit strategy?
Koji Sato, President
Thank you very much for your question. In a sense, supply is limited, and we understand the importance of mass production. Our strategy focuses on producing high-quality products at affordable prices to elicit smiles from our customers. Even during these difficult times, maintaining trust with customers was our primary concern rather than aggressively raising prices. Increasing basic strength and improving product appeal helps avoid temporary price fluctuations and secures long-term customer relationships. Enhancing product value allows us to balance pricing, enabling us to sustain profitability.
Unidentified Analyst, Analyst
In terms of profits, your numbers indicate challenges in North America. Reports state that soaring material costs restricted your ability to raise prices. Can you clarify your future exit strategy?
Koji Sato, President
Thank you for the question. We have struggled with producing and delivering cars in North America. Speeding up production recovery is our top priority. The labor environment has challenged manufacturing costs, so we must focus on improving our foundations based on the Total Production System. We need to work effectively with our customers to propose appropriate prices. This sequence outlines our strategy.
Ellie Gibbs, MC
Thank you, Kazaki-san. As we are now out of time, this concludes the Q&A session. With that, we close the financial results meeting. Those on the stage, please stand up. Thank you very much for coming today.