Toyota Earnings Call Insights: Inventory Level, Export Assumption

On Wednesday, Toyota Motor Corp ADR (NYSE:TM) reported its fourth quarter earnings and discussed the following topics in its earnings conference call. Here’s what executives shared.

Inventory Level

Takahiko Ijichi – Senior Managing Officer: Thank you for the question. First of all, with respect to the level of inventory, let me look back at the past a little bit. Last year, because of the impacts of earthquake and Thai floods, we suffered from supply shortage and that caused those people working at the forefront of sales activities to have a very tough time. However, thanks to the production recovery in the autumn of last year, for the fiscal year ending in March 2012 on the global basis, we have determined that we have been able to secure adequate level of inventory or grow on globally. However, there is one other point that I would like to mention with respect to the inventory. I have just mentioned that generally speaking on the global basis, the inventory levels are adequate. However, by looking at inventory situation model-by-model, especially in the Western market, because of the very strong sales and sales increase of environmentally friendly vehicles, especially hybrid vehicles, we are starting some – from some inadequate inventories, of course, some of the models. So, that’s the current situation of inventory. With respect to the other part of your question that is to say whether we are expecting to see breakeven or even positive profit, for the second half with respect to the parent company on the standalone basis from the negative JPY70 billion outlook for the next fiscal year. Assuming all the preconditions or assumptions that we have currently. In the second half of this year the positive profit is still not in the prospects. However, the size of the loss is JPY70 billion and therefore still further profit improvement, we intend to continue every activity aiming at achieving breakeven. Allow me to elaborate a little bit with respect to the standalone basis. The fiscal year ending in March 2012 saw the operating loss of JPY440 billion, but that includes JPY70 billion coming from earthquake and floods, the negative impact from them and therefore excluding that JPY70 billion the actual real level of operating loss was JPY370 billion. Starting from that loss of JPY370 billion, our current expectation of operating loss of that JPY70 billion means that we are planning to reduce the operating loss by approximately JPY300 billion and we are expecting the outlook of achieving that JPY300 billion improvement still continued earnings improvement activities and that’s the important point in the outlook that I would like to (indiscernible) for understanding of. Same applies to the consolidated figure as well. Especially with respect to sales efforts and positive impact is coming from them, most specifically had pricing actions and price improvements. What is included already in the outlook are those price improvements that we have clear prospect of achieving and therefore anything beyond that, any price increase to be implemented going forward will generate a positive opportunities and by continuing those activities for the next year, we will be able to achieve the profit improvement on the standalone basis as well. So, we are determined to push ahead with those activities aiming at achieving breakeven.

Unidentified Analyst: The first one is regarding the China market in your equity income, I was wondering if you could comment about your expectations for the growth rate of the Chinese auto market this year, your share or your position and your distribution strength outside the largest Tier 1 cities. My second question is regarding your expectations for the Japanese auto market. Can you comment on what impact you believe the Eco subsidies will have, how much of demand will be one-time replacement vehicles for those lost in the tsunami, and whether you expect the market to fall back down to a lower level, reflecting the declining population and the (indiscernible) impact that we have seen until recently? Thank you.

Takahiko Ijichi – Senior Managing Officer: First, the Chinese markets and let me start by describing the overall picture in China. In 2011, the Chinese automotive market stood at 18.5 million units, approximately and this year there maybe some increase, but we are not expecting substantial growth from the previous year. So the market is expected to be a little bigger than that last year. So in terms of the regular growth, it could be a few percent. Importantly, at the present moment, the actual result is slightly below the previous year’s level. In fact, general market environment, Toyota sold slightly less than 900,000 units last year and we would like to sell at least 1 million units this year. Well, the market maybe marking time or if anything could be little small than that year, I think we can definitely increase some market share in China. Now, we do not have this figure that breaks out our distribution capabilities between major cities, Tier 1 cities and non-Tier 1 city. So that’s why I just shared the video the general picture of a Chinese market and our position there. Moving onto the Japanese markets, your first question is related to the impact of eco-car subsidies. First in calendar year 2012, we expect the demand to be increased or added, increased by 100,000 units by eco-car subsidies. On the fiscal year basis, in fiscal 2012 that ends in March 2013, we are expecting positive impact of somewhere around 80,000 units and those are the assumptions we used for the planning purposes. With respect to the impact of earthquake and also the reconstruction or recovery demand from that and the impact of that on the new car sales, of course the new car sales expanding from that recovery demand is in tangent one-time sales, but we do not have any detailed figure on that, true. Sales are increasing in the Northeastern parts of Japan that has been hit by earthquake and tsunami, but is the entire sales increase all due to the earthquake, the replacement of earthquake damaged cars. We have not analyzed that situation. You asked whether the Japanese market can grow despite population decrease or (indiscernible) and your observation is quite accurate and well taken. It is quite sure, that we cannot have a very bright and (valued) prospect for the Japanese markets going forward. Having said that, even this as a market, it’s not expected to grow very rapidly. We are carrying out activities as to stimulate younger people’s interest in vehicles or by launching ever better cars that we are trying to increase the interest in cars and (then saw your) markets not just among younger people and the same time we are carrying out activities working of the Japanese government to introduce policies that can back up higher vehicle sales, as we thought car maker in the Japanese market. At the same time, we have initiated activities to secure domestic sales of 1.5 million units on the part of Toyota and this 1.5 million units means that we are determent to sell 50%, one-half of the domestic production the vehicles produced in Japan within the Japanese market. Good example now in that regard is the recently launched Hachi Roku, which is a small sports-type vehicle and Hachi Roku has been extremely well received and is extremely popular among younger people and this is the joy and excitement that cars can offer which remind – in the minds of younger people how attractive and how appealing vehicle does. So, we are quite hopeful about the future sales levels of the Hachi Roku.

Export Assumption

Unidentified Analyst: Two questions please. The first is on your export assumption. The parent company export 2 million units this year. Do you view that as optimal? Is this simply necessary to meet demand for certain products? It seems rather high in this yen environment. You earlier stated that 1.5 units you wanted to sell in Japan, that’s about half the target Japanese production. Does that imply that exports in the future maybe or will be lower than this 2 million unit number? I’m just trying to understand this in a mid-term context. That’s my first question.

Takahiko Ijichi – Senior Managing Officer: The outlook of exports for the current fiscal year is 2 million units and compared with the actual situation in the past few years this 2 million represents a very high level of exports for various reasons. First of all, the newly launched vehicles such (prestamini) models or hybrid vehicles increasing aqua and also we have a very good outlook of prospect of metrics models are introduced to sell pretty well. And therefore those vehicles produced in Japan are expected to grow in sales quite rapidly and the figure of 2 million reflects that. Having said that, we are not planning to reduce the export from that level right away, for example, by the end of the current fiscal year, because if the export destination receives a certain – above certain level of vehicles such as 100,000 units, then it may deserve a study for the production locally in that particular destination. However, we have been exporting to over 150 destinations, which means many of the models are exported or actually sold in small volumes but in large varieties. We are quite aware that 2 million represents a very high level of exposure for exports markets and eventually we’ll be reducing the export from that level. However, it is physically impossible for us to reduce those exports right away, simply in response to the initial demand, and therefore for the current fiscal year, we are planning to continue exporting at that level because those exports represent a very – we are making good money and profit on those vehicles exported. At annual rate our policy of producing vehicles where those vehicles are sold remains unchanged for the future and therefore, gradually, we will be moving toward increased local production outside of Japan, but key in doing so would be that we will be initiating or prioritizing those models that represents greater than certain magnitude of volumes, and at the same time the vehicles whose production is between Japan and overseas would also receive priority in initiating local production.

Unidentified Analyst: My second question is much more simple. For North America, operating profit of JPY186.4 billion, can you just give me a simple break down of the finance business and the auto business please?

Takahiko Ijichi – Senior Managing Officer: I cannot describe in details the breakdown of that figure. For the fiscal year that ended in March 2012, quite unfortunately as things turns out, North America was the region of the world that received or suffered from the negative impact of earthquake for the longer period of time. Because of that, the operating income for automotive business in North America was extremely tough and therefore please do understand that most of that operating income figures stands from financial services. However, for fiscal year ending in March 2013, we are planning to increase the U.S. sales by at least 300,000 units and therefore we are quite positively thinking that we will be able to increase earnings of automotive business for both the production businesses as well as the sales business substantially.

Unidentified Analyst: Yes. My question is on the Toyota new global architecture. I wonder if you could explain the key points of this program and also how this program will differ from previous cost cutting programs. Also, when you began this program, when you expect to see the benefits from the program and how large the benefits will be?

Takahiko Ijichi – Senior Managing Officer: I received the impression that there may be some misunderstanding regarding the (TNGA) activities and therefore let me start describing that element. The first point that I would like to make is (TNGA) activities are not pursued for the purpose of reducing cost. (TNGA) activities are initiatives that we are implementing in order to achieve ever better cars More specifically, by establishing the platform or defining a platform that will enhance our fundamental basic performance improvement, we will achieve on the basis of that platform the development of (total) number of that project. In other words, we will engage ourselves in group based development activities, and in that process we will commonize parts and some of the engine units. As a result of those commonization, the benefits of commonization may also be conducive to lower cost. But important thing is our primary objective of this (TNGA) activities is to achieve ever better cars. Though (TNGA) activities began in this year and probably the vehicles covered by this (TNGA) activities will start to be launched between 2014 and 2015.

Takahiko Ijichi – Senior Managing Officer: Therefore, we have not yet calculated or captured the specific benefits stemming from (TNGA) activities in terms of cost reduction, and we would never like to avoid describing the benefits of (TNGA) activities in terms of the benefits it generates in lower cost. We would be delighted if beneficial impact stemming from (TNGA) activities could also be conducive to lower cost, but that’s the current sense of as we embark ourselves on a (TNGA). You may be disappointed by listening to the description of (TNGA), but even today going forward we do have the capability of generating cost improvement of our round JPY300 billion and we have actually realized the cost reduction of that magnitude, and there are many ways and means of reducing cost. So, we will continue to achieve and implement those cost reduction activities.

Unidentified Analyst: Then could I ask one other – my last question, and that would be on cost cuts. I don’t have your presentation hand out in front of me, so I can’t see the amount of cost cuts that you achieved in March 2012. But could you tell me the amount achieved in March 2012, and the amount of cost reduction you expect in March 2013, and highlight any change in the composition of those cost cuts, whether more is coming from part supplier cost cuts or price cuts or material cost cuts etcetera. Thank you.

Takahiko Ijichi – Senior Managing Officer: First of all, the net amount of cost reduction for fiscal year ended in March 2012, was JPY150 billion. That figure includes JPY40 billion in negative impact stemming from earthquake and Thai floods. So excluding those negative impacts, the actual amount of cost reduction benefits was JPY190 billion. Earlier I mentioned that we do have the capability of achieving JPY300 billion approximately of cost reduction on the gross basis every year. In fiscal year that ended in March 2012, our cost reduction magnitude was even close to JPY400 billion, and therefore the difference between JPY400 billion or close to that level and JPY190 billion I mentioned earlier stems from the higher raw materials and other materials expenses. For the fiscal year ending in March 2013, we are expecting net cost reduction of JPY240 billion and the gross figure that we expected JPY300 billion and therefore the difference between the net and gross figures are approximately JPY50 or JPY60 billion represents a higher raw material cost. Now, in terms of a specific composition of cost reduction, the major significant change we have over there recently relates to so-called VA activities, especially a significant promotion of the improvements involving currently produced vehicles and that is one major characteristic of the current cost reduction efforts. In addition to that, we are expecting significant increase in new product effects. That is to say we are going to launch numerous new models this year and next year, and with those we are expecting a positive benefit of the new product. So that represents another important characteristics of cost reduction this year and next.