Toyota Motor ADR Earnings Call Nuggets: Camry Segment Competition and Expansion in China

Toyota Motor Corp ADR (NYSE:TM) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

Camry Segment Competition and Expansion in China

Unidentified Analyst: So, two quick questions. First in the U.S. market, in the Camry segment, there has been very recent price cutting action by your competitors. Are you finding that Camry segment has got more competitive than it used to be where you used to dominate it? Then secondly in China, I’m interested if you can give us some color about future investment plans given the difficulties over the Island dispute and the difficulties of the Japanese brand sales in China. I know we are getting back to prior year levels, but the market is 20% bigger. I am just wondering what the view of your company is about future expansion plans in China.

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Takuo Sasaki – Managing officer: First, with respect to the Camry segment, your first question. Since the latter half of 2012, as you correctly pointed out, our competitors have enhanced their models product competitiveness or appeals, and that has, of course, as you correctly pointed out, the competition to strengthen and intensify. Having said that, I have say that in terms of the actual sales between January and March of this year in the model-specific names of the ranking, again we still maintained number one position in that rankings. Going forward, while continuing to strengthen our competitiveness of our product and product features we intend to continue offering very attractive vehicles so that customers will be fully satisfied with the Camry and with the products we offer. Now, Camry has consistently be number one in the United States, stemming from the solid sales that’s been going on over the years and therefore with a strong determination that we will never be beaten by our competitors in this particular segment, we intend to further strengthen and reinforce the appeals and competitiveness of our product. About your second question relating to China, last year since the occurrence of so-called political issues, the volume has declined at certain point in time. However, in terms of the pace of recovery, currently the recovery is on track with the pace and speed of recovery that we had anticipated. In April of this year, the sales was 94% of the same period last year. However, in the second half of this year and beyond, the segment out – the SUV segment, which is expanding currently, we’ll receive the launch of a new and remodeled RAV4 from the company and following that we will be introducing a new version of Vios to the smaller segment of the market. Through those means, we intend to make very solid onslaught starting in the second half of this year. Bearing that in mind, for the full year, this year we are aiming at selling over 900,000 units. Expect an increase in volume, of course, we are thinking of expansion of our capacity. Currently, the joint venture we have in Tianjin with the first auto is going to see the expansion in the middle of next year, we are considering that at this moment and also the new company to produce CVT is expected to become operative in September 2014.

Unidentified Analyst: Could comment on the breakdown of your financial services by geography, you mentioned that much of the expansion has occurred in emerging markets and I was wondering if you could comment on that? Secondly, you’re using an assumption of JPY90 exchange ratio and I was wondering if you could comment on how much of this year’s transactions have already been hedged and why you’re using the JPY90?

Takuo Sasaki – Managing officer: First of all with respect to the breakdown in the financial services, based upon the assets, currently the United States accounts for 55% of the total and so the remainder is non-U.S. assets. Especially with respect to the remainder portion, non-U.S. portion, the Australia and Asian region are experiencing increase in assets currently and is expected to increase going forward. Furthermore, this Australia and Asian region accounts for 16% to 17% of the total financial assets and with respect to the rest of the world, Europe accounts for 10%, South America and others approximately 8%, and Japan slightly less than 10% and China 3%, and I’m not sure whether they all add up to 100, but that’s the feel I have. About the future growth of those financial assets, of course the – fundamentally the U.S. asset is expected to continue to grow gradually or bit by bit. In terms of the speed of growth, we expect the Australia and Asian region as well as China to grow quite significantly or we are expecting that. Regarding the exchange rate hedging or currency hedging, we use of course a forward exchange contract as well as our currency options and roughly looking out to three months or six months, we take hedge to approximately 50% or 60% of the amount of the foreign currency denominated inflow of funds expected. Regarding the reason why we chose JPY90 to the $1 as exchange rate assumption, it doesn’t represent any change in the policy from the past. When the financial results of books were closed at the end of the March, we took the average of the exchange rate of the months during that fiscal year end period and used that figure as the basis of our assumption to calculate our earnings projections. Therefore, the assumptions used for the projection and calculation was JPY90 and which as I said, is the average of the most recent one-month period. Actually, it was somewhat higher than JPY90 to the $1, but it was rounded to that level.

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Ben Williams: It’s (Ben Williams) again. I have a question about your forecast vehicle sales for two regions. One, for Europe, you have sales growing 31,000 units, which given the recent figures coming out of Continental Europe, looks quite aggressive forecast. So if you could give us a bit more detail on that, that would be helpful. Plus also your Asian sales as well growing 76,000 units, could you perhaps give a more detailed breakdown by country, because last year Indonesia and Thailand were both very strong. Do you expect those countries to continuing to be strong in the current year?

Takuo Sasaki – Managing officer: First of all, about European Continent, the total market for 2013, we project to be 7% lower than the market in 2012 last year, but (just it to) say our outlook is overall 17 million units. Therefore, the market per say is expected to remain very tough. However, in the current year of 2013, Toyota is planning to introduce various new models including new Auris, Auris Touring Sports, RAV4 and new type of Verso. And therefore, of course we did have our share of difficulty last year, but we are planning to sell very solidly to exceed 850,000 units this year. Especially with respect to Europe, there are certain weakness in the part of Toyota and (fleet) segment. Therefore, we are now contemplating on strengthening and reinforcing sales so that we can sell solidly in the (fleet) business as well. Moving on to Asia; especially Thailand and Indonesia, let me first of all describe the situation in January-March period this year starting with the market conditions in Thailand. At the end of last year, the backlog of orders have expanded significantly, which have been delivered this year and has been completed. Therefore, the market has reached 413,000 units, that is 149% of the previous year. Let me elaborate on this backlog of orders. In Thailand, the vehicles ordered by the end of 2012, that is the year before that is subject to vehicle order tax reduction or tax credit and therefore all the companies enjoyed substantial inflow of orders at the end of 2012, which had been actually delivered during this period, January and March, and that has resulted in extraordinary expansion of the entire market in January-March period this year. Likewise, with respect to the sales of Toyota in January-March period, it somehow is fully aligned with the market trend. That is to say, the vehicles of order for which we had received in the previous fiscal year – previous year’s end had been gradually delivered. Therefore, our sales in January-March period reached 125,000 units making a new record sale. In terms of the outlook for 2013, we expect the tight economy to remain very solid, however because of the automobile purchase at tax credit or tax deduction, which resulted in orders of vehicles made earlier than otherwise and therefore, we expect some reversal reduction in the demand and order itself and therefore we expect the market to be around 1.2 million units representing 83% of the previous year levels. For sales of Toyota reflecting the market reduction, we are expecting the sales level of around 500,000 units or higher than that this year compared with last and therefore this would stand around 96% of previous year’s level. Moving onto Indonesia, total market during January-March period this year, reflected very strong sales promotion activities conducted by Japanese on manufacturers there resulted in increase in sales, which caused the market to reach 279,000 units, which is higher than last year’s levels. The total sales reached 97,000 units making a record high level in sales. As for the outlook for 2013, we expect our economy to remain very strong and therefore we expect the market to be higher than that in 2012 standing at around (1.098,000) units. As far as sales, I don’t have the exact full year sales figure projection for 2013 with me at the moment, but looking at the actual results reach in the previous year in which we had the market share of 36%, we would like to exceed that market share in this year…

Unidentified Analyst: Two quick questions. First of all, in terms of just your fourth quarter results volume and mix was a negative JPY10 billion and I would just like to know why that went negative in Q4? Secondly, in terms of your cost reduction efforts in March 2014, you’re projecting only a JPY160 billion positive impacts. So I’m wondering, if there is – or you’re going to be giving back some of the currency benefits to your parts suppliers or why you are projecting your rather conservative contribution from your cost down efforts in the March 2014 fiscal year?

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Takuo Sasaki – Managing officer: About the negative JPY10 billion impact on the sales coming during the fourth quarter, I actually referred to some of the characteristics which relates to the fourth quarter of the previous year, which was a very a rather irregular quarter because the fourth quarter of the previous year happens to be the period in which we did have impact stemming from flooding in Thailand or also the impact of a Great East Japan earthquake and we have been trying to make recoveries from those negative impacts by increasing substantially both the production and sales during the fourth quarter. So because there has been substantial increase in both production and sales in the fourth quarter last year, the last year’s figure was a rather irregular (for us). As a result of that if you look only at the volume, the – comparing fourth quarter against the previous year’s fourth quarter, the consolidated sales decreased by 116,000 units. More specifically – 103,000 units in Japan, reduction in Japan; 220,000 units reduction in Europe and 170,000 units reduction in Asia – excuse me, there was a 17,000 units reduction in Asia. The decrease in Europe was 22,000 units and because of this decrease in volume the negative impact on the earnings or operating income was JPY45 billion in the negative. For the rest of the factors, we made efforts to reduce sales expense as well as revising prices and those resulted in boosting of a profit by JPY35 billion. So, netting them out during the fourth quarter as we pointed out, the impact was negative JPY10 billion. With respect to the cost reduction efforts, first contribution is JPY160 billion. Compared with the previous fiscal year, there is significantly different factor which I would like to elaborate on. That is during the previous fiscal year, the raw materials and materials prices decreased, and therefore that factor contributed to boosting operating income whereas during the current fiscal year, both the markets for raw materials and overall materials increased, market prices increased and over and above that, there has been impact from cheaper yen there. Therefore, we incorporated negative impact stemming from this in the projection for the current fiscal year. Furthermore, in terms of the company-wide VA activities or efforts to improve our planned logistics, we have assumed that we will continue to make a very serious and earnest efforts as we have been doing up until last year in those two areas. However, another factor which is different from the previous year relates to the fact that in the previous year a very large volume model such as Camry and (FY) in the case of Japan experienced model changes and that had the significant positive impact for the full year. This could be referred to as beneficial effect of a design or beneficial effects stemming from new vehicles launched into the market which is very substantial. However, this year the benefits we can enjoy from those new model changes relating to very large volume sellers will be less than that we experienced last year and therefore that was also incorporated in our assumptions or projection for the current year. Furthermore, thus far we have consistently said that excluding higher raw materials prices and other factors, we do have the ability to generate gross impact of our cost improvement efforts of JPY300 billion and this factor remains unchanged in the current fiscal year as well. Therefore the current – projection for the current fiscal year, we have incorporated cost savings benefits for which we already have incorporated in the plan or in the pipeline and we intend to make every effort so that we can exceed those existing cost savings already factored in. One aspect of your question related to return of the benefits to the suppliers, but that is not incorporated in our assumptions at all.

Unidentified Analyst: I have two questions, one simple, one much broader. The first question, for North American profits on Page 8 of the slide deck, you give excluding swap gains OP of JPY189 billion, can you give us a breakdown between the auto and the finance divisions for that number please?

Takuo Sasaki – Managing officer: We have been only disclosing the total figure for different geographical regions and we have not disclosed the breakdown of that. So I hope you’ll accept my statement saying that we would like to referring from disclosing those breakdowns, but if I may just add one clue so to speak, for financial companies, the operating income overall out of the overall operating income over one half is attributable to North America and I hope you draw your own conclusion from that…

Unidentified Analyst: Okay that was my easy question. The more difficult question to touched on is really about balance sheet management and considering the current policy of the Bank of Japan, obviously they’re looking to drive inflation, put pressure on interest rates and that seems to be a risk to your bond portfolio. If I look at your marketable and investment securities held in long-term assets at the end of the year it was about JPY5.18 trillion in marketable and investment securities. Now historically a lot of that has been held in JGBs. Going forward and in consideration of the BOJ policies, how do you plan to manage your balance sheet to protect against valuation loss. Do you see Toyota using this traditional portfolio of bond holdings for other purposes? Whether it be buying back Toyota shares, M&A activity, increased dividend payout. Can you help me understand how you’re going to protect the value that you’ve built up in this massive amount of assets?

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Takuo Sasaki – Managing officer: First of all, fundamentally, it’s not that we have invested all in JGBs. While it is strengthening and reinforcing, monitoring our credit revenues as well as liquidity, we have been trying to diversify bond portfolio, including high rated highly liquid bonds in that portfolio. Therefore, in terms of fixed income assets, we invest not only in Japanese government bonds, but also we hold U.S. treasuries, German bonds and also the multilateral institution bonds. So we have been diversifying bong holdings as well, and through those efforts we have made shifts of both portfolio overall. So that it’s now accounted for by 50% JGBs and another 50% in non-JGB foreign government bond. Going forward, remaining extremely vigilant as there any changes in developments taking place in the market as needed, we intend to modify or adjust – make adjustments to portfolio as well as duration of our holdings. With respect to share repurchase or dividend policy, as we have proposed this time, we would like to increase our dividend payout ratio up to 30% through earnings. So, first and foremost, we would like to increase our earnings so that we can increase dividend. With respect to share repurchase, considering any changes in the environment or looking at circumstances surrounding us, if it is considered necessary, we will take into account or consideration the share repurchase program as well. But right now we are not making concrete consideration of share repurchase. On top of that, probably I should share with you how we regard or take the current situation surrounding us. Looking throughout the world, it seems that conditions still continue in which major occurrences such as economic changes, the political changes, financial issues or natural disasters take place quite substantially, very rapidly in a very precipitous manner with no continuation from the past in place. Given that leveraging our experiences and lessons learned in the financial crisis that followed the Lehman Brothers debacle, we think we need to be always prepared against any sudden and rapid change in the environment overall with the strong determination that we will never ever fall into loss making position and we would always be ready to respond to sudden reduction in funds availability. This applies to automotive business, but at the same time, likewise the same thing applies to financial services business as well. But at the same time we need to make investments quite proactively so that we can achieve sustainable growth investment including those spendings for research and development among others. Therefore, as I mentioned earlier over a long-term we would like to certainly increase our earnings, so that we can increase cash dividends. This is the manner, in which we would like to return value to shareholders and while doing so, we would like to retain liquidity on hand which stands at around JPY5 trillion at the moment to JPY5 trillion or JPY6 trillion or between JPY5 trillion and JPY6 trillion.

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