Toyota Motor Corp (TM) on Q4 2020 Results (Session 1) - Earnings Call
Toyota Motor Corp (NYSE:TM) Q4 2020 Earnings Conference Call May 12, 2020 12:15 PM ET
Company Participants
Kenta Kon - CFO, Chief Officer, Accounting Group & Fellow, Advanced R&D and Engineering Company
Masayoshi Shirayanagi - Senior Managing Officer, Chief Officer, External & Public Affairs Group and Purchasing Group
Conference Call Participants
Sean McLain - Wall Street Journal
Unidentified Company Representative
Thank you very much for taking time to participate today despite your busy schedules. We would now like to begin Toyota Motor Corporation's financial results announcement for fiscal year 2020. In order to prevent the infection of the new coronavirus and also based on the guidelines provided by the government, we have decided to hold this announcement online. And for the venue of our announcement, we have minimum staff standing by. And in order to secure the announcement clarity, we have decided to then provide the sound without using masks.
Now we have two sections today. Session 1 will begin 1:15 up to 2, and the session 2 will begin from 2:10 to 2:55. There will be a 10-minute break in between.
I would now like to introduce our session 1 participants. We have our operating officer, Kenta Kon, also operating officer, Masayoshi Shirayanagi.
Now we would like to begin by providing an overview of our financial results.
Kenta Kon
Hello, everyone. Thank you for joining us today. I am Kenta Kon. First and foremost, we would like to convey our deepest condolences to those who have lost loved ones to COVID-19 and wish all those who have been affected by the virus a speedy recovery. We also wish to extend our sincere gratitude to the health care professionals and officials who are on the front lines for their tireless work. We also would like to express our heartfelt appreciation to our customers around the world who chose us as well as our shareholders, dealers and suppliers who support us.
Now I would like to discuss Toyota's financial results for the fiscal year, which ended in March 2020. Compared to the previous fiscal year, consolidated vehicle sales decreased by 19,000 units to 8,958,000 units. This was a result of decreased sales, mainly in Asia due to market deterioration in Thailand, India and Indonesia. This includes a sales decrease of 127,000 units caused by COVID-19.
Consolidated financial results for the fiscal year were net revenue of ¥2,929.9 billion, operating income of for ¥2,442.8 billion, pretax income of ¥2,554.6 billion and net income of ¥2,076.1 billion. Due to the spread of COVID-19, net revenues were decreased by ¥380 billion and operating income were decreased by ¥160 billion.
Using Slide 6, I would like to explain the factors which impacted operating income year-on-year: Firstly, the effects of foreign exchange rates decreased operating income by ¥305 billion; secondly, cost reduction efforts increased operating income by ¥170 billion; thirdly, marketing efforts to operating income by ¥90 billion; and finally, a reduction in expenses increased operating income of ¥45 billion. As a result, excluding the overall impact of foreign exchange rates, swap valuation gains and losses and other factors, operating income improved by ¥125 billion year-on-year. As for the breakdown of negative impact of ¥160 billion cost by the spread of COVID-19, ¥100 billion was due to a decrease in volumes of vehicle sales and ¥60 billion is due to an increase in provisions for financial service business.
Now I would like to elaborate on operating income for each region, point from the left-hand side to the right-hand side on Slide 7. In Japan, operating income was down ¥121.8 billion year-on-year to ¥1,568.5 billion mainly due to the impact of marketing efforts. In North America, operating income was ¥289.5 billion up ¥145.4 billion compared to the previous fiscal year. Many thanks to marketing efforts and reduction in expenses. In Europe, operating income was up ¥190.6 billion year-on-year to ¥140.7 billion, mainly result of marketing efforts. In Asia, operating income, including that of consolidated subsidiaries in China is down ¥66.9 billion year-on-year to ¥386.8 billion due to the effects of forex rates caused by depreciation of the Chinese yuan and appreciation of the Thai baht. In other regions, operating income decreased by ¥6.9 billion year-on-year to ¥82.6 billion. This was largely due to the effects of forex rates.
Next let me explain our consolidated subsidiaries and equity method affiliates in China as well as our financial services business. As for our China business, operating income of consolidated subsidiaries decreased by ¥15.2 billion year-on-year to ¥134.4 billion. Excluding the effects of forex rates caused by depreciation of the Chinese yuan, operating income increased by ¥30.9 billion year-on-year. Equity and earnings of equity method affiliates was up ¥13.1 billion year-on-year to ¥118.1 billion, largely, thanks to marketing efforts.
Regarding financial services, operating income was down ¥32.6 billion year-on-year to ¥309.7 billion, this is mainly due to an increase in allowance for doubtful accounts.
Next, I'd like to explain our return to shareholders. We have decided to make the year-end dividend on shares of common stock ¥120 per share, thus the dividend and shares of common stock for the fiscal year will be ¥220 per share, which includes the interim dividend of ¥100 per share and the payout for the fiscal year will be 29.9%. We always end the year to pay dividends in a stable and sustainable manner using the consolidated provision of 30% as a benchmark.
Considering our earnings performance, we have decided to pay the same dividend amount as the previous fiscal year. We will continue to aim to create stable and sustainable dividends.
As for the share, the purchases, we have decided not to repurchase our common stock as a form of year-end shareholder return. Any glowing sense of uncertainty in the global economy, we would like to play with the uncertainty of our cash reserve to sustain the automotive manufacturing industry to pursue competitiveness and continue activities towards achieving the new mobility society together with all our stakeholders. I would appreciate your understanding and cooperation.
Now I'd like to - now going to discuss the outlook for the full fiscal year ending March 2021. Please note that we will adopt IFRS beginning from the first quarter of the fiscal year ending March 2021. Therefore, the consolidated forecast is calculated in accordance with IFRS.
Consolidated vehicle sales for the fiscal year ending March 2021 are expected to be 7 million units down 1,958,000 units year-on-year. At this moment, state of emergency and lockdowns have likely been implemented in many countries due to the progression of the COVID-19. So it is difficult to foresee the future and situation varies by regions and countries, with our book being deployed, we have assumed that sales will gradually recover to 2019 level by year-end to next year.
We are not able to provide region sales breakdown as it is difficult to foresee future spread of infection and [indiscernible] containment. Next, let me explain the full year consolidated financial performance. We have assumed the foreign exchange rate to be ¥105 per dollar and ¥115 per euro. Based on this, our forecast of the consolidated financial performance are net revenue of net ¥24 trillion, operating income of ¥500 billion. Forecast of other items have yet to be determined.
I like to explain the factors which will impact operating income year-on-year. Firstly, the negative effect of forex rates will be ¥430 billion, as we have assumed that yen will appreciate against the U.S. dollar and euro. Secondly, we anticipate drastic decrease in volume of the vehicle sales will have a negative impact on operating income of ¥1,500 billion. The fiscal factors other than vehicle sales will breakeven. Although, this includes the effects cost reduction, marketing efforts, changes in fixed cost, product mix and by differential mix we are not able to provide detailed analysis. While re-strengthening the TPS and the volume cost at all levels, we remain committed to thoroughly [indiscernible] ourselves into mobility company and to continue sowing the seeds for the future results growing there.
This concludes my presentation. I thank you very much for your attention.
Question-and-Answer Session
Operator
[Operator Instructions]. Mr. Suzuki of [indiscernible]. [Operator Instructions].
Unidentified Analyst
I have mainly two questions. My first question is for March 2020 fiscal year for this financial results, what would be your comment and evaluation? And also about your forecast for the next fiscal year. As you have explained, at the end of this - the ended term, you had the COVID-19 impact. And therefore with how you have ended, how do you evaluate the results? For your forecast of the next fiscal year with the uncertain visibility with the coronavirus impact, there are many companies who have refrained from making an announcement of forecast for the next term. However, how have you come up with the basis for the calculation to come up with the forecast? And my second question will be for the current sales situation. In China market, we see that recovery is quicker than other markets and sales is recovering. However, in the other - so for Toyota, compared with your competitors, it seems that your recovery of sales is faster than competitor. And even for the domestic market, there is a big drop in the domestic demand. But compared with other competitors, I think Toyota's sales drop is not that big. So how do you see this - how do you see the current situation?
Masayoshi Shirayanagi
Thank you very much for your questions. First of all, regarding your question about the results of the FY 2020 financial results, with the COVID-19 impact that I have explained earlier, including those, we have seen a drop in volume. Also, we had seen a drop in both revenue and also profit. And if you have your slide at hand, if you can open to Slide 6, please. This is the analysis of the consolidated operating income, the ups and downs, the plus factors and the negative factors. And among these factors, excluding the - looking at the center square box that says, excluding the overall impact of foreign exchange rates and swap valuation gains and losses, this was a positive ¥125 billion. And we shouldn't be talking on hypothesis basis, but if we did not have the COVID-19 impact, this number would have been an improvement of ¥285 billion.
For the past few years, this area where we exclude the overall impact of foreign exchange rates and swap valuation gains and losses, we had a determination to always be on the positive side. And we have made profit improvement activities and actually improved private cost profit. And even considering those activities, this plus ¥125 billion has been a significant improvement. And for the past few years, we have been able to continuously make positive improvement in this item. And it is thanks to everyone's support. However, we are very grateful that we make this positive improvement and also for the expense reduction efforts and also investments, we have been proactively making investments for the future.
However, even though there are positive investments for the future, I think this is an opportunity to look back and review on whether there are any areas that we should be reviewing and see if there's a waste. So that will be a challenge that we will be taking on.
And repeating myself, making profit improvements for continuous years has been a good thing. That would be my response for your first question. And for the evaluation of the next financial fiscal year, as you have said, it is going to be very difficult to foresee the sales volume and also the financial performance. And in this environment, we have decided to make a forecast. And for our actual business activity side, it is very difficult to see, it is very invisible. And we have consulted with our President of Toyota, and we were saying that it would be very difficult to come up with the forecast.
However, we said that we do need to have a certain kind of standard criteria so that will be able to manage the abnormality values. So in order to do good management, we believe that it's necessary to have a criteria. And also, we are in the automobile industry. We are an OEM here in this industry. And this industry has very wide supporting businesses. So we thought that there is a necessity for us to show a forecast as some kind of criteria as we move forward. That was the reason why we decided to make an announcement of this year's forecast. However, as you had said, it is very difficult to do a clear forecast. And therefore, that is why we have made this type of forecast.
And also compared by year-on-year from April to March - April to June, there will be about a drop of 60%. From July to September would be a drop up around 80% year-on-year and October to December, year-on-year, 90%. This is our estimate of our market situation compared to the past term. That is the basis of our calculation.
But also, we did not look just as a - from a short-term profit perspective. We looked at what we need to stop, what we need to change, what we need to continue to do. Those are the perspectives that we held in reviewing our various activities, not just stopping or changing certain activities that we have been executing, we have - are looking for the perspective of something that we will continue to do. This will be from the perspective of making investments for the future.
So this is all reflected into our forecast that has been announced. And for the details, usually, we do provide further details on geographical breakdowns. However, we are not able to do at this point of time. We're very sorry for that. So that will be the situation for the - this running terms forecast. And also for your next question about the China market. Compared with other competitors, so your question was that, we are somehow holding on. And as we have said correctly, with China market, the April results have been about slightly over 100% year-on-year. So for the automobile sector industry, the market has been below. But I think compared with the drop in the market, I think we have done - our results were good. I think this is because mainly with the hybrid models, new models has been accepted by our customers in the market very well. Corolla, Levin, RAV4. Also in February, we have launched Wildlander, a new model for this year. Those new models have been accepted by our customers in a positive way. I think this is one of the reasons.
And for the domestic market, yes, it is a very tough situation. But as we have entered May, we have moved into selling all models at all channels. This initiative has started. Therefore, if there is - we have been able to create a structure where, if there is a customer who wants a certain model, they will be even more accessible. And Kinto as new service has also started. We are trying to provide various and more opportunities options for customers to select from. So that is my understanding of the current situation. That will be my response. Thank you.
Operator
[Operator Instructions].
Unidentified Analyst
I have two questions, in the major countries what are taking place for the individual markets I don't think you have the details and the results of analysis, but North America and Europe, in those major markets, what is the trend for the car markets? And North America, there are supply from Mexico. This is a [indiscernible] for us and also China, Southeast Asia. These nations are sending their parts to North America. And there's a big hand to the supply chain because of the COVID-19. Do you have that already? And if there is a concern, what is your reaction? And second question about financial, about the cash reserve. Now [indiscernible] ¥1,950 billion was the equipment line that we have secured according to the mass media. But do you think that the current cash reserve is enough? So what is your idea including your action to supporting the suppliers? So I'd like to ask your comments on the cash reserve if it's enough or not, including our support to the suppliers.
Unidentified Company Representative
Thank you very much for your question. First of all, major markets that you have asked to me, first of all, to look at the each region in a separate manner seems to be very difficult as of now. However, for North America, first of all, in May, starting from May, the lockdown regulation is released as of today and also starting of the [indiscernible] have started already. And after COVID-19 is over, since the [indiscernible] economy seems very strong as of today, and also there's supporting activities and the nations [indiscernible] government. In the early phase of this year, it may return to the normal condition. And also Europe, you can say the same thing for Europe as well. There are economic decisions taken by the government, so after July the sales will recover in Europe. This is an assumption.
So in the early period of the 2029 the situation in Europe will return to the condition as the previous year. And also, you have asked the cash reserves condition activity. So [indiscernible] commitment line is what we have as of today. And as of now cash reserves is in shortage according to our analysis. Therefore, for monozukuri and for automotive industry itself, we have to protect the automotive industry for the continuation of the business. And that means that wide ranging suppliers and partners, we are having the business with. So with these people, with these stakeholders, we have to continue our monozukuri activities firmly to the future.
So some of our partners are suffering from the shortage of finance, we have to help them. And then the cash on hand or cash reserves as of today, is it enough or not? We don't think it is in shortage as of today. So I hope I have answered your question.
Unidentified Company Representative
So supply chain or breaking down of the supply chain. With the COVID-19, there seems to be [indiscernible] visualization of the supply chain has been searched with the structured business scheme of the supply chain visualization. So with this visualization of supply chain, I think we are [indiscernible] now. We will take - we took 2 weeks for identifying the supply years with a problem, but it is now reduced to half a day [indiscernible]. And also, due to business improvement for instance, having the support from the suppliers, prevention of the accident and also the alternative supplier identification and also return to the normal position, for these activities, we have reported our service on a day-to-day business. And assemble concentration in China used to be the problem. And with the China, it suffered a lot from the COVID-19. We were able to secure the supply chain with the alternative suppliers also China. And also when we're not able to support the venture in China with these activities, we have to [indiscernible] but how we solve these problems, which may take place in the future again, we have no perfect answer. But together with the suppliers, we will discuss more so that we can be ready for any accidents.
Operator
[Operator Instructions].
Unidentified Analyst
This is [indiscernible] I have two questions. My first question, with the impact of COVID-19 for the term ending March 2021 and including that this year, would that be an impact in your new model launch plans? For 2019, April to June financial results, you said that until 2021, you're going to introduce the 18 new models. So I believe that was your past new model introduction plan. So was there any change to that? That's my first question. My second question is about R&D expenses. And you've mentioned that you're going to continue your investments for the future. Regarding Woven City project and plans, do you have any changes to this? And in addition, regarding Woven City, what is the total amount of investment that you are considering? That will be all for my questions.
Unidentified Company Representative
Thank you for your questions. Starting with the new model launch plans, if there is - if there is a change or not with COVID-19, well partially when we have looked in the future new model plans, there will be some projects that will be delayed than the original plan. There will be some delays in some projects in the development activities. And for the new model launches, we are going to take this as a - this timing as an opportunity and we view what else we have done in the past as business as usual. So for our full model changes, minor changes in our refinement, small change projects, we are doing a total review of whether we should do it or not. I'm sorry, but at hand, I do not have the details of the original 18 new model launches, how it is going to be changed. So I will not be able to give you the details, but I don't think that there is a significant change in the - from the original plan. I'm sorry, I'm just talking based on some assumptions, but that is what I can say now.
And for the R&D expenses, if there are any changes that with the Woven City project investments, with the Woven City project, from your question, so before, as I start explaining, I have said that we're not going to start to review what we should stop or change, we're going to see what are the projects that we should be determined to continue to do. And regarding Woven City, this would be something that we will see through until the end. It will be in the third category of what we also do.
So with the - compared with the conventional plan, of course, with the changes in circumstances, there will be changes in the needs of the customers and related to that, there may be changes. But for the large part, there will be no significant change. And for the amount of investment, we are now working on the details of the plan. Therefore, I'm sorry, but I do not have any detailed numbers that I can provide you today. So that will be all for my response. Thank you.
Operator
[Operator Instructions].
Sean McLain
Sean McLain from the Wall Street Journal. Apologies for the question in English. Two questions. First of all, if I could ask about your projections in operating profit for the current year. Why is it so low? It seems that your results for this past year were doing well. You seem to believe that Europe and the U.S. are recovering sales-wise and China seems to be recovering. Why is your projection so pessimistic? And then secondly, if I could ask specifically about North America, in your manufacturing plants, you've started to resume production. By when do you expect to be back up to full speed and full production? That's my questions.
Unidentified Company Representative
Thank you very much for your questions. Starting with our forecast for the operating profit for the running term, why is it still so forecasted at a low level for Europe and United States if we are seeing some recovery, isn't it too low from the recovery that we are seeing now. I think that was your question - your first question. And for the forecast of operating profit, we said that we forecasted at ¥500 billion and the basis of the volume of sales, so we see it 7 million units on consolidated basis, and it is about a 20% decrease year-on-year. And for China, total net retail sales. Regarding this activity, we assume that it will be an 8 million sales basis. Because last year it was - the result was about a little over 9.4 million.
So it will be a drop of about 1.5 million units. And for China's market, as you have said, the margin was 80%. And in April, we've seen 100% of year-on-year results. That would be the result of our sales. And we do also see that we are going into recovery. And also for the United States, for April sales, we thought that it would be ending quite low. But from there, from our expectation of what we have expected, it was a little higher than we had expected. But as I have said earlier, going forward, we cannot foresee, we cannot be for certain that which will be the months that we can see a good recovery. That is why this is kind of a temporary premise or forecast that we are placing right now. As you have said, yes, Europe and United States, the operations are beginning gradually, and we're seeing signs of recovery.
So for those recovery that we see, we would like to securely capture those opportunities so that we can improve this forecast from the forecast level that we have announced. And regarding North America, we have seen the start of the operational plans for some plans. And your question was how long will it take for the full blast production. And for reopening some of the productions, we have been discussing with - about the safety guidelines with the federal government. And also, we have taken care to consider the safety and healthy - health of the workers in the plant. So that would be the big pre condition to start the operation. And by making sure that those measures are in place, we have started slowly to resume. So at this point of time, we're not really sure when we will be in full speed for production. It is still very difficult to say as of now. But our assumption is that we believe April will be the bottom and day by day we will recover. And by the end of the year, in the beginning of the new year, we believe that we will be in normal operation mode. So that will be all for my response.
Operator
[Operator Instructions].
Unidentified Analyst
[Indiscernible] from Bloomberg speaking. I might be repeating the same question, but I'd like to ask about the supply chain management. With COVID-19, supply chain is somewhat damaged. And the government is supporting the industries to return to your homeland or home nation for the manufacturing activities. So what is your acceptance of this issue? And also what kind of activities you are promoting for your supply chain management in the middle of the COVID-19?
Unidentified Company Representative
Thank you. I'd like to answer your question. So you have given us just one question. [Indiscernible]. You have asked one question.
Unidentified Analyst
Yes, I did.
Unidentified Company Representative
So as you said, for the cutting down on the supply chain, there was much confusion this time. And each region, I should say, how we maintain and allocate the production volumes in each of the regions is what we have to deeply consider for the future. Because too much concentration in 1 single place will pose a risk, which we have understood from this COVID-19. So alternative production management having come out of single production place will be needed in this COVID-19 situation. And also the communication breaching within the different manufacturing places will become important, together with the capability to find out the alternative production, alternative suppliers as quickly as possible. There is a support from the government. Therefore, whether or not you can use the support from the government efficiently is something that we'd like to deeply consider for the management of supply chain.
Operator
[Operator Instructions].
Unidentified Analyst
I'd like to ask about the used car market in the United States. For the used car value, I hear that the drop is very significant, equivalent to the drop that we have seen after the financial crisis. So how are you viewing this drop in the used car market? [Technical Difficulty].
And for your model, now you've seen a lot of disruption in the supply chain with COVID-19 and receiving this COVID-19 crisis for the safety of your workers in the production plan, I think it is a big challenge to secure their safety. And in this kind of environment, whether the production operation will move toward further automation? That would be my second question. Do you foresee that?
Unidentified Company Representative
Thank you taking your question. First regarding your question about the U.S. used car market and the drop in used car value, and what kind of impact will that have on our financial service business. As you have rightly said, in April the used car market prices have dropped significantly. For us, especially the U.S. market, we have a large financial company, TMCC. And in our [indiscernible] that is running, a certain wish we have included reflected assumptions that there would be some drop in the used car prices. When the used car prices drop, these residual value will also drop. So it is from a financial terminology, the residual value loss will be increased with the drop in the used car prices. That is what we expect.
And going 1 term before, for the end of term in March, when we were closing the financial results, we have already seen some signs of that happening. Therefore, last term for the term ended March 2020 for the financial service business, we had some provisions to be prepared. And in the financial services, there was ¥60 billion impact from the COVID-19. That was the explanation that I've made. So this is from the bad debt and nonperforming debts and also the residual loss provisions increase. That is the impact. And so those are reflected into the current plan for this running term.
And for your second question, hold on please. For your second question about automation and the plant, whether it will progress further at the plants. And as we do assume that the society after this COVID-19 case will become toward more society where we try to reduce contact, physical contact as much as possible. And therefore, in our company, we are having - it is not that we are discussing this - from this opportunity. But from before, we have been discussing about what will be the appropriate areas to automate. So it will be discussed in that - those discussions.
Operator
[Operator Instructions].
Unidentified Analyst
[Indiscernible] you are doing remote work in the R&D activities. And of course, different from the real manufacturing world, maybe you will have some communication problems, when you try to promote work from home for the R&D activities. That's 1 thing. And also with the COVID-19, something you have to change - something you have to stop. You have explained those activities. But in recent past, 3.2 million [indiscernible] took place. So Toyota is famous for quality and Toyota car is famous for quality. However, as of now, you have problem of the quality actually taking place. So what is the problem according to your analysis in terms of the quality of your products?
Unidentified Company Representative
Thank you very much. So your first question, R&D against the target. So in designing in R&D, to what extent were you doing remote work with work from home? So this was your question. And in reality, when it comes to the office workers, especially for R&D or designing, the work from home is heavily needed as of today already. Now of course, you have to have own vehicle evaluation to the last minute of the R&D. We still need that office. However, we have CAT as a design tool, which can be used now remotely pretty efficiently. So this kind of process is going on very rapidly as of today. Therefore, designers and R&D engineers are able to handle this function even at home. So I do not know the actual percentage of the remote work for the R&D or designing activities, but I think it's then going very heavily. And of course, face-to-face communication, looking down on the same drawing paper at the last part of the drawing, but how much visualization or how much work from home can be remoted is something that we are trying and discussing very deeply in each of the company.
And your second question, the things to stop, the things to continue or change with the COVID-19, and you talked about what happened to the quality of the Toyota vehicle. So I think the change were important to stop. We need these activities. But the thing that you can never stop is the activities not the quality because the quality is important for the customers. And this idea never changed. And as for the report that you have mentioned, we are very much sorry that we have given inconvenience to our customers. But our quality first philosophy has never changed and will never change in the future.
Thank you. This is the end of my discussion.
Operator
Thank you very much, Mr. [Indiscernible]. And this is the end of the first part of the announcement of the financial performance and forecast. After the break, we will be starting the second session from 2:10. Thank you.
