Earnings Call Transcript - TM Q3 2021

Operator, Moderator

Thank you for joining us for today's press briefing. We will now start the FY 2021 Third Quarter Financial Results Press Briefing. I would like to introduce our participants: Operating Officer Jun Nagata and CFO Kenta Kon. Mr. Kon will now explain the financial results for Q3.

Kenta Kon, CFO

Hello, everyone. Thank you for joining us today. I am Kenta Kon. First and foremost, the battle against COVID-19 is still continuing and I would like to extend my sincere gratitude to the medical workers and all of you who support our daily lives. We also would like to express our heartfelt appreciation to our customers around the world who choose us, as well as our shareholders, dealers and suppliers who support us. Let me discuss our financial results for the first nine months from April to December 2020. Consolidated vehicle sales for the first nine months ended December 2020 were at 5,438,000 units, which was 79.3% of consolidated vehicle sales for the same period of the previous fiscal year and mainly a result of the continued spread of COVID-19 in all regions. Toyota and Lexus brand vehicle sales were at 6,627,000 units, which was 89.5% of such sales for the first nine months of the previous fiscal years. As for the trend in Toyota and Lexus brand vehicle sales, with April being the floor, global Toyota and Lexus brand sales have been solidly recovering. Since September 2020, they recovered to above the previous year's levels namely over 100% year-on-year and the trend in each region is as stated in the presentation. Once again, we would like to express our sincere gratitude to our customers around the world who chose us and all of our stakeholders, including our sales outlets and suppliers who have made efforts to deliver as many vehicles as our customers want, as possible. Consolidated financial results for the first nine months of this fiscal year were: sales revenue of JPY 19,525.2 billion, operating income of JPY 1,507.9 billion, pre-tax income of JPY 1,869.9 billion, and net income of JPY 1,468 billion. I would like to explain the factors which impacted operating income year-on-year. First, the effects of foreign exchange rates decreased operating income by JPY 175 billion; second, cost reduction efforts increased operating income by JPY 100 billion; third, the effects of marketing activities decreased operating income by JPY 615 billion, largely due to the decrease in sales volume caused by the continued spread of COVID-19. Finally, a reduction in expenses increased operating income by JPY 85 billion. As a result, excluding the overall impact of foreign exchange rates swap, valuation gains and losses and other factors, operating income decreased by JPY 430 billion year-on-year. Regarding the changes on a quarterly basis, also, operating income decreased year-on-year between April and June and between July and September; operating income increased year-on-year between October and December 2020, thanks to marketing efforts and other factors. As for operating income for each region, although, operating income decreased year-on-year in all regions, largely due to the decrease in sales volume caused by the continued spread of COVID-19, we succeeded in increasing operating income year-on-year in all regions between October and December 2020. 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 increased by JPY 75.8 billion year-on-year to JPY 178 billion, thanks largely to marketing efforts. Our share of profit of investments accounted for using the equity method was up JPY 25 billion year-on-year to JPY 113.9 billion, thanks largely to marketing efforts. Regarding financial services, operating income excluding swap valuation gains and losses for the fiscal year increased by JPY 50.6 billion year-on-year to JPY 355.3 billion, thanks to a decrease in costs related to residual value loss and an increase in lending margins. Now let us move on to discuss the outlook for the full fiscal year ending March 2021. With regards to our consolidated vehicle sales, we have increased our forecast that was announced in November 2020 by 100,000 units to 7.6 million units. The regional sales breakdown is as stated in the presentation. As for Toyota and Lexus brand vehicle sales, we anticipate that vehicle sales will be at 8.9 million units, a 300,000 unit increase from our forecast that was announced in November 2020. With respect to Toyota and Lexus brand vehicle sales in the fourth quarter, we anticipate that sales will be approximately 110% of the same period in the previous year. Next, let me explain the forecast for our full year consolidated financial performance. We have adopted foreign exchange rate assumptions from January onwards of ¥100 per dollar and ¥125 per euro, which makes the full year assumptions ¥105 per dollar and ¥123 per euro. Based on this, our forecast for our full year consolidated financial performance: our sales revenue of ¥26,500 billion, operating income of ¥2 trillion, pre-tax income of ¥2,550 billion, and net income of ¥1,900 billion. Now I would like to explain the factors that contributed to the change in the operating income forecast. Operating income is now expected to be ¥2 trillion, up ¥700 billion from the forecast that was announced in November 2020. A detailed analysis is as stated in the presentation. Please see Slide 14 which compares the latest operating income forecast for this fiscal year versus the result of the previous fiscal year. The environment surrounding us remains highly uncertain considering the ongoing spread of COVID-19. While carefully monitoring the risks, we will continue to make efforts together with all our stakeholders including cost reduction efforts at all levels and efforts at manufacturing sites and sales outlets. We also remain committed to continuing to steadily sow seeds for the future and accelerate our transformation. This concludes my presentation. Thank you for your attention.

Unidentified Company Representative, Moderator

We would now like to receive questions and provide responses. Mr. Chiba from Asahi Newspapers, your question please.

Unidentified Analyst, Analyst

This is Chiba speaking from Asahi Newspapers. Regarding the change or revision in the information, the reasons why your revenue has increased and why you have strengthened your company structure, I would like to hear further detailed explanation. Those will be my two questions. And starting with the three months in the quarter, the per region income for North America, Japan and Asia, the operating income margin has improved. So what will be the factors of why you have made improvements in the operating income margin? Per market, would you be able to explain to me in more detail? This will be my first question. Going on to my second question. For your operating income, the revision that you have made for year-on-year comparison, you have made an improvement in the cost reduction of ¥185 billion. So how to understand this number? I think variable cost is included here too. On a year-on-year comparison, probably it will be on the same level. And cost reduction efforts what kind of improvements have you made this quarter and how was that reflected in this number? And based on that for the third quarter financial results, can you provide your assessment and appraisals?

Kenta Kon, CFO

Thank you for your question. I would like to explain the financial results. The reasons for the revenue increase include improvements in the operating income margin across Japan, Asia, and North America over the past three months. As mentioned, we've seen an increase in income in each of these regions. In Japan, the operating income margin is now at 12.3%, and in North America, it stands at 6.8%, showing an improvement from last year. The main factor for Japan's performance is the impact from sales, which has led to a positive influence of about ¥150 billion. North America shows similar results, benefiting from sales impacts, including volume and model mix effects. Asia reflects a similar situation, particularly with China and Southeast Asia contributing significantly to the increase of ¥70 billion in income, with each accounting for half of this gain. Specifically in China, improvements in sales volume and product mix due to price revisions have positively influenced results across the markets. Regarding cost reduction for the full year forecast, we had a target impact of around ¥300 billion annually, and we have realized a gross effect of ¥185 billion thus far. Despite market fluctuations, we are seeing this figure increase, although it remains below our usual metrics due to a year-on-year decline in volume, which was just over one million units. Despite ongoing efforts at our suppliers and within our operations, it has been challenging to observe significant positive impacts from cost reductions primarily owing to this volume drop. However, as noted, the fourth quarter operating profit reached ¥13.9 billion, with an operating income of ¥506 billion for the quarter and ¥980 billion for the full year. While each quarter holds its significance, we do observe a recovery trend in these figures. At the start of the term, our target was an 8 million volume and ¥500 billion in operating income, which we diligently worked towards with all stakeholders involved. I would like to express gratitude to the 5.5 million contributions from our stakeholders in the automobile industry. These numbers reflect strong efforts that have continued since the global financial crisis. Over the past year, we revisited our fundamentals and were committed to these objectives, resulting in the positive outcomes we're witnessing today. Thank you for your patience with my detailed response.

Unidentified Analyst, Analyst

Thank you very much. Just one point. North America, when you talked about midterm financial results, you said that incentives are starting to decrease. Is that situation continuing? If incentive is going down, what is the reason for that? Sorry, a follow-up question.

Kenta Kon, CFO

In the first and second quarters, incentives decreased due to a drop in volume, leading to a lower total amount. However, the decrease per unit was minimal since the overall number of units fell. In the third quarter in North America, we are now seeing an increase in volume, which means the total decrease is not significant. Per unit, we are maintaining a low level. In North America, the main factors influencing this situation are the number of units sold and the model mix, particularly the higher ratio of SUVs compared to previous periods. Additionally, used car values in North America remain high, benefiting our financial services. A few years back, we integrated our automotive and financial operations at our North American headquarters, which has improved collaboration and communication between the two sectors. We have also been taking a conservative approach in reviewing lease residual values to ensure sound asset valuations. Since the financial crisis, we have gained a clearer view of our assets, which have become much healthier as we continue our efforts. With the current favorable used car prices, we are seeing improvements in residual values and a decline in bad debt, which positions us to increase our profits. Thank you.

Unidentified Company Representative, Moderator

Thank you very much, Mr. Chiba. Going on to the next question, from Yomiuri Newspapers, Katori-san. Mr. Katori, please revert now, switch the screen when you see yourself on the screen. Please start with your question. We’re now searching the screen.

Unidentified Analyst, Analyst

This is Katori speaking from Yomiuri Newspaper. My first question. So, again on the per region results for China, looking at the January figure, there's an improvement of about 30%, but why is this so strong? I'd like to know further in detail about the improvement in China. Another question is, you have made a second revision on the numbers this time. And in spring, you started with a reduction in production volume and up to the second revision of the forecast you have done various restructurings on the structure and also the way of work. I think various initiatives have been taken by the company. So, for the areas other than sales volume, do you have any positive factors to make this revision?

Kenta Kon, CFO

Thank you. So I'll start with your question regarding China. The reason why it is in an increase, as Katori-san has mentioned, we can see an increase of 30% in the sales and you could have seen the operating income situation for the FY 2021 third quarter. Looking at each model, the new model effects are being seen. The new model launches like Camry, Corolla, and Levin; also RAV4, and Wildlander which is a sister model, those new models that have been released are received positively from the customers and we have been able to improve the sales there. Also for Lexus ES, RX, NX, the globally mass-producing Lexus models have been accepted very positively from the customers as well. Of course, this is because of the lean inventory and lean incentives that have been achieved by strong efforts. We can't say that it's a simple result of new model launches. But looking at the used car market also, the residual value of Toyota vehicles or the assessment has become very high. That is now becoming more a general trend in the Chinese market. When customers repurchase a new car, their burden and payment will have advantages on selecting our cars. Also, on the quality side, the strength of the used cars of Toyota is seen in the quality aspects, easy-to-repair, and also the availability of parts. Originally, we had strong durability as a feature of Toyota cars. This is once again reevaluated and probably this is one reason why it has seen a positive response. There will be a further additional comment from Mr. Nagata about the domestic sales. About the forecast revision, there was a drop in production volume in spring and I think until the revision, there had been many initiatives taken. To respond to that question, yes, it's difficult to explain briefly and this was not something we have achieved just by ourselves with our dealers and also our suppliers, also people in transportation, and people working at the gasoline stations. I really think that the people who have made strong efforts in recovering the economy. There are many people who believe that is our mission related to the automobile industry and I could feel those strong efforts made with strong feelings. If I say it in simple words, I think I can say that we did the things that we thought were the basics we need to do. But, and we had been introducing new models, around to 10 new model launches. That's very simple to say but difficult to do. But with strong efforts, we were able to make that a reality. In Japan, in springtime, there were no plant production operations, but people made efforts to try to work. VA activities were done to promote the cost reduction efforts and also there were people who visited the suppliers to find areas where we could make improvements in costs. There were people who worked on making masks, protective gear, and then facials as well. When the fixed costs became very lean and when the recovery time period arrived, we were able to make rapid improvements. In the meantime, everyone was focused on not to stop the economy, the improvement of productivity for protective gear that was another activity that people engaged in. For the vaccine refrigerator manufacturing, there was a manufacturer who had a bottleneck process and therefore there were members who visited these manufacturers. In order to make efficient the vaccination process because we see in the US, UK, long lines to receive vaccine shots, there were members who thought that, we will be able to apply our TPS concept so that we can streamline and make efficient this process. Those were some examples of the efforts that was made up to today. From the sales side, maybe, Mr. Nagata would like to add some explanations.

Jun Nagata, Operating Officer

This is Nagata speaking. I would like to provide some additional insights regarding the sales situation. During the spring of COVID, we were uncertain about our sales potential. However, President Mr. Toyoda set a target for ¥500 billion in operating income and eight million units in sales volume. My focus in Japan extended beyond the national level to individual dealerships, where we established targets and weekly activities to monitor our performance and inventory levels. While this approach is standard for us, we put significant emphasis on these fundamental strategies. Each model has varying profitabilities, and certain models are more challenging to sell during particular seasons. We aimed to streamline operations across different plants and models while working on increasing sales and minimizing operational discrepancies. Globally, we promoted our online sales in a contactless manner, emphasizing ways to reach our customers and receive orders without physical contact. Payment processes were also challenging, so we utilized online transactions and our financial products to create a more accessible buying experience for customers. When customers visited dealerships for maintenance or inspections, we implemented disinfectants and other preventive measures to ensure they felt secure. This effort to provide a reassuring environment was a worldwide initiative. We prioritized understanding our customers' concerns and making them feel safe, translating those considerations into actionable efforts. Additionally, among our employees and stakeholders, effective communication became a critical element during this period. Our communication style underwent significant changes. President Mr. Toyoda enhanced his engagement with employees and stakeholders through online platforms, holding weekly meetings with senior team members. Previously, participation for these meetings was limited to those who could physically attend at our headquarters in Toyota City. The online format made it easier for more people, including global senior executives and regional CEOs, to join, facilitating quicker decision-making and information sharing. Every four years, Toyota holds a mid-term announcement regarding our product lineups, known as the Toyota World Convention. Although we couldn't hold the traditional physical convention this time due to COVID, Mr. Toyoda suggested delivering his message through video online to global stakeholders. In the past, attendance was limited to about 1,000 to 2,000 participants, primarily from global distributor companies and top management of dealers. This year, due to the online format, around 50,000 members were able to participate. This shift in communication allowed employees and stakeholders involved in various activities to understand Toyota's direction, helping them remain focused and calm. Moreover, since April, we have been posting in English on Toyota Times, leading to a significant increase in page views—about double compared to last year. As an internal communication tool, this change proved effective. Shifting topics, earlier this year, we expressed our appreciation to the 5.5 million individuals engaged in the automotive industry through a TV commercial. Following that, Mr. Toyoda, as President of JAMA, reached out to all stakeholders in the industry, including five auto associations and around two million members, as well as those in the transportation sector and gasoline stations. Their collective efforts during COVID contributed to our accomplishments, and we aimed to convey our gratitude. In turn, the 5.5 million individuals, including workers at gas stations and in transportation, expressed appreciation for our message. As we look ahead in the automotive industry, we face various challenges, such as carbon-neutral initiatives. We hope that this collaboration can serve as a catalyst to achieve these goals. I believe that adapting our communication style might also play a role in fostering a united effort towards future objectives. Thank you.

Unidentified Analyst, Analyst

Thank you very much.

Kenta Kon, CFO

Thank you very much, Mr. Chiba.

Operator, Moderator

The next question comes from NHK, Noguchi-san, please.

Noguchi Shuji, Analyst

Yes. Noguchi from NHK. I have two points, a little bit aside from the financial results. But first of all regarding the semiconductors. Automotive semiconductors are in shortage globally. Regarding the impact, what are your thoughts? Do you have an impact for the near term and also for the mid to long-term? The second question is a completely separate topic from the financial results, but the Tokyo Olympic-Paralympic Committee, the President, Mori, there was a comment of discrimination against women. You are a sponsor of the Olympic-Paralympic games. How do you view this?

Kenta Kon, CFO

First of all, regarding semiconductors, I will explain our situation. There is a globally tight demand-supply situation for semiconductors, and we are in a similar circumstance. However, in the near term, we do not anticipate any reduction in our production volume. For the mid to long-term, we do recognize the risks involved. That’s why we are in constant communication every day, week, and month with not just Tier-1 suppliers but also semiconductor manufacturers to grasp the situation. Regarding the forecast, we have heard that the situation might persist until the summer. Nevertheless, discussions with our suppliers and purchasing division suggest it might be resolved sooner than that. That is one perspective.

Jun Nagata, Operating Officer

Yes, regarding the comment of President Mori, I would like to introduce the comment from our President Akio Toyoda on this matter. Toyota was born in Japan and we have grown into a global company thanks to the support of people from all over the world. Our goal is to be a company that is the best in town and to create happiness everywhere that we do business. In the same way that we respect our hometown and our home country, we also care deeply for our home planet Earth, the home to all human beings, which is why we are working to help realize the United Nations Sustainable Development Goals. This is also the spirit of the Olympic and Paralympic games which through sports aim to create a peaceful and inclusive society without discrimination in which anyone can participate. We became a top partner of the Olympics and Paralympics because we share these values. We are disappointed by the recent comments from the President of TOCOG, which are contrary to the values that Toyota respects and supports. That is the comment from President Toyoda. We have discussed this matter in depth within our company. To convey Toyota's values and perspective towards the world correctly, we have concluded that we should not keep silent. Therefore, we decided to issue President Akio Toyoda's message today. That is all.

Unidentified Company Representative, Moderator

Going on to the next question from Toyokeizai, Kigawa-San, please go ahead with your question. We are now switching the screen.

Yukinobu Kigawa, Analyst

This is Kigawa speaking from Toyokeizai. Can you hear me?

Unidentified Company Representative, Moderator

Yes.

Yukinobu Kigawa, Analyst

I have two questions. First, regarding the current tight supply of semiconductors in the automobile industry, you are making efforts to maintain daily operations. It seems that Toyota is less impacted compared to other manufacturers. Do you believe this limited impact is connected to the experiences from the East Japan earthquake? Given the damage at Renesas's plant, I assume that the business continuity plans implemented after those events have helped you navigate the current semiconductor shortage. My second question is about electrification. The Japanese government has announced a policy stating that by 2030, all new car sales must be electrified. Since Daihatsu Motors is part of your Toyota Group, how do you plan to address the need for electrification in Kei vehicles? Hybrids could be a practical solution, but I would like to hear your thoughts on this.

Kenta Kon, CFO

Thank you. Regarding the first question about semiconductors, I apologize for not providing a full response to the earlier question. As Mr. Kigawa mentioned, after the global financial crisis, we reflected on seeing a stop in our supply chain. So we have looked into the multiple tiers of our suppliers and tried to create a system that we call RESCUE to find out where we need to rescue after challenges. That system, we have worked on creating since the global financial crisis. To the suppliers this time with the semiconductors, we have made confirmation about the current situation and why it occurred, and what we hear is that, to suppliers, we are providing a sure production plan on a monthly or several month basis. For a long-term plan, it is about a three-year forecast, and we have been repeatedly communicating with our suppliers with these plans. That has supported us this time. For BCP, with our business continuity plan, of course each part has different plans. But for each of the parts, we had secured four to six months of stocks as necessary. Regarding the tight supply, we cannot cover all challenges with our RESCUE system. So, key is to have communication with our suppliers, including not just the Tier 1 suppliers but Tier 2 and so forth. To align, to work together, we’ve heard from our purchasing division that there were about 10 or more telephone conferences held with the suppliers. When we had supply problems, communication was enhanced with the suppliers. When we listened to various voices, it seems that the style that we make our orders to our suppliers is regarded as a sure order based on a sure production plan. Continuing this practice has probably helped us in the difficult situation we are facing. That was at the basis that we have built with our relationship with our suppliers.

Yukinobu Kigawa, Analyst

Mr. Kon, in relation to semiconductors and the electric industry during the work-from-home era, you have some challenges to address. There is competition for semiconductor resources between home appliances and gaming devices. Are you worried that prices might rise due to this tight competition?

Kenta Kon, CFO

We expect there may be some price increases for semiconductors. There is competition for these semiconductors, particularly from the gaming industry. However, the semiconductors used in consumer products, smartphones, and game consoles are not the same type that we utilize for automobiles. The allocation of semiconductors by manufacturers and foundries will depend on our communication with them. It is essential to communicate thoroughly about our anticipated demand for semiconductors over the next two to three years, not only with Tier 1 suppliers but also with Tier 2, Tier 3, and beyond.

Yukinobu Kigawa, Analyst

Thank you. And my question is about electrification?

Kenta Kon, CFO

For your electrification question, I think Mr. Nagata will make some additional comments. But for the electrification of the Kei vehicles, we have to work on it. Our understanding is that we have strength in the electrification technologies inside of Toyota Group. Some people think that if we use Toyota technology, it might be expensive for a Kei car. For element technologies, of course, they will be shared with the Kei vehicles. Even with these Kei vehicles, we would like to proactively use it, so that we can utilize the synergy as a group. We will probably start with the hybrids in our area of strength. But from the past, when we look at a long-term perspective, it's important to provide the electrified vehicles that our customers want. That way of thinking has not changed. That way of thinking will also be applied to the Kei vehicles as well.

Yukinobu Kigawa, Analyst

Thank you.

Unidentified Company Representative, Moderator

Thank you very much. I think there are additional questions, but due to time limitations, we would like to take one final question from Chunichi Newspaper, Ms. Osada, please.

Hiromi Osada, Analyst

Yes. Osada from Chunichi Newspaper. Thank you. Very different from the figures of the financial results, but I would like to ask your views. You clearly showed a recovery trend this quarter. Under COVID-19, I think the financial results, how it is delivered is quite different from usual times. So maybe I should be asking in the final closure, but with COVID you have changed your work style drastically and also the response to semiconductor shortage there are new concerns. You are accelerating your cooperation with your partners. A year with COVID-19 experiencing that I believe your work style has changed drastically internally and externally. Your company is very famous for Genchi genbutsu going to the actual site and seeing the actual product. I believe that has changed and you transformed some of it online. So what I want to ask is your relationship with your suppliers how it has been transforming? And also how you calculate your cost reduction activity and your relationship with purchasing, I believe that might have changed. What kind of transformations have you experienced, please?

Kenta Kon, CFO

Thank you. First, I would like to comment. As Osada-san you said, yes, how we work has changed. It's difficult to explain with just one example. Today, I am in Toyota city; 60% of the people are coming to the office in Toyota city; Nagoya, 30%; and Tokyo, 15% are coming to the actual office. Of course, there are many challenges, but we believe that remote type of work style has penetrated. You mentioned Genchi genbutsu, going to the actual site and seeing the actual product. For example, the business trip costs that we have had last year were several billion yen because we were saying we have to go to the actual site. We did actual visits. However, this year, there is a decrease of 99% in TMC. Basically, no business trips were made. Why did we visit the actual site? I believe in retrospect there may have been wasteful business trips made, but the final part, for example, installing the equipment our skilled workers, our craftsmen visit from Japan and confirm at the final stage. That still remains our best option. Now we see it through the camera and provide instructions remotely. The most important part we decided to focus. We have been changing our work style in that way. Our relationship with our suppliers, I’m not sure if I should say this, but conventionally our relationship with suppliers was mainly focused on our Tier 1 suppliers. In the past, we asked Tier 1 suppliers to take responsibility. Regarding this year, of course, suppliers were struggling when our operation rate went down, sometimes there was a huge burden fluctuation. So Tier 2 suppliers, 10,000 suppliers, we actually communicated with them. This is a totally new kind of relationship we were able to build this year and last year. The relationship with our suppliers has changed and also SSA we call, which is parts where we set a very high level of quality standards. We did not request it directly but the suppliers see they want to deliver to Toyota. Even a very tiny scratch will not be accepted. We can visit the actual site and let them know. If it's just a small scratch, then we can accept it at Toyota. Our skilled workers actually visit the site and hold discussions to align the level of quality. Previously, Toyota members, the suppliers weren't familiar with us, and they may have felt TMC was intimidating. By seeing them directly, I think they felt a sense of security that we can work together. I think that also accelerated our cost reduction activities. I don’t think I can cover everything today, but if I may, I did share a few examples with you. Thank you.

Hiromi Osada, Analyst

Thank you.

Unidentified Company Representative, Moderator

Thank you very much Ms. Osada. With this, we would like to end our brief briefing for the financial results. Thank you very much for your participation today.