Toyota Tsusho Corporation (8015) Earnings Call Transcript & Summary

Hello, everyone. I am Kashitani, President of Toyota Tsusho Corporation. First, I would like to express my appreciation for your support to our business. Thank you very much. As the impact of COVID-19 continues, we decided to live stream this presentation to prevent spread of infection. Please allow us to speak online instead of directly talking in front of you. I also want to express my appreciation for those who are participating in this event during the Japan's holidays. Thank you very much.

Hello, everyone. I am Iwamoto, CFO of Toyota Tsusho Corporation. I will explain the outline of consolidated results for fiscal year 2020. Please look at Page 3 of our PowerPoint presentation. Regarding the foreign exchange rate on the upper left, U.S. dollar is JPY 106, JPY 3 appreciation from the previous year. Euro is JPY 124, JPY 3 depreciation from the previous year. Please look at the FY 2020 results in the red box, which is on the second column. Gross profit was JPY 607.6 billion. Operating profit was JPY 213 billion. Profit attributable to owners of the parent was JPY 134.6 billion. Gross profit decreased by JPY 32.2 billion from the previous year, largely as a result of decreases in trading volume of automobile production-related products and automobile sales. Meanwhile, we reduced SG&A expenses by JPY 30.1 billion, including the impact of the businesses newly added to our consolidated results. As a result, the operating profit increased by JPY 2.7 billion to JPY 213 billion. If you look at the results of the first half and the second half of the year, the net profit of the first half was JPY 41.6 billion, which decreased by 47% from the previous year. However, the result of the second half was JPY 93 billion, which was an increase of 165% from the previous year. Page 4 shows the comparison of the fourth quarter results. In the fourth quarter, sales recorded the highest quarterly sales in the past. And the JPY 178.2 billion gross profit was also the record quarterly result. Operating profit was JPY 69.7 billion. Profit was JPY 45.2 billion, which increased substantially by 139% from the previous quarter. Usually, in the fourth quarter, there is impact of impairment or other factors. However, there was no onetime impact in this quarter. That was one of the reasons for this good result. Also, automobile companies and parts manufacturers increased production volume by around 10%, which made substantial contribution to the result. Page 5 shows the profit analysis. The waterfall chart shows the transition of the profit from the previous year to this year. The profit of the last year on the left side was a record high JPY 135.5 billion, and the profit of this year on the right side was JPY 134.6 billion. Regarding the others, explained at the top, the numbers are almost similar. As for the finance income and costs, there was special profit last year around JPY 13 billion, but there was no special profit this year. Therefore, it reduced substantially. However, as for the equity gain and loss, there was impairment last year, but there was no impairment this year. That is the reason why the numbers are similar. The operating profit increased JPY 2.7 billion from $210.3 to JPY 213 billion. To be specific, ForEx effect was minus JPY 1.3 billion. As for market prices, there was JPY 3.8 billion increase for metal. We do not have oil or coal business. Markets, prices here mainly refers to the prices of aluminum and precious metals such as palladium, vodium and neodymium. Because the prices of those metals increased, there was a positive impact. Food and consumer made some contribution to the positive JPY 6.1 billion due to the price increase in the business of South American cotton seed oil and feed. As for demand, trading volume, mainly in the areas of automotive-related business, including metals, global parts and machinery, there was a substantial reduction. The negative number for the food and consumer was because of the reduction of the volume in apparel business. As for the Africa, particularly non-automotive section, such as pharmaceuticals and retail business, there was JPY 4.8 billion increase. As for the chemicals and electronics, there was a growth of alcohol and detergent in chemical business and memory and display in the electronics business due to the increase of remote work. Automotive retails decreased by JPY 11.7 billion. There was JPY 7.3 billion decrease for non Africa. It is because our business in Asia, Oceania, Caribbean and Papua New Guinea did not recover to the level of the previous year. Russia was the only place where the number was positive. Even with that, the overall result substantially decreased from the previous year. As for Africa, the result of South Africa was good, and there was a recovery in the third and fourth quarter. But the results of other regions did not recover to the levels of the previous year. Page 6 shows gross profit by division. I want to skip the detail of this page because the contents overlap with the contents I just explained. As you can tell, gross profit of all the divisions decreased year-on-year. Page 7 shows the one-off gains and losses of profit. It was negative JPY 5 billion last year. And this year, it was negative JPY 2 billion. There were no substantial onetime gains and losses this year. Page 8 is consolidated financial position. Total asset of this year has increased by around JPY 682.8 billion to JPY 5.228 trillion. I believe this is the record high number. One of the reasons for this is that we held additional cash of around JPY 180 billion to secure liquidity to counter the effect caused by COVID-19. Also, accounts receivable and inventory increased in the fourth quarter towards the end of March. Net worth has increased by around JPY 273 billion to JPY 1.4696 trillion. Net interest-bearing debt is JPY 993.4 billion. The number excluding lease liabilities is JPY 882.5 billion. We were able to reduce the number to the level much lower than JPY 1 trillion. As a result, net DER, excluding lease liabilities, is 0.6. Page 9 shows our consolidated cash flow. Cash flows from operating activities was positive JPY 245 billion. It did not reach the level of the previous year, but we have achieved cash flows we forecasted. Cash flows from investing activities was JPY 102.1 billion. However, gross investment was JPY 157.8 billion. This is a little less than JPY 181.5 billion gross investment of the last year. However, we believe we could make reasonable investment at the level of around JPY 150 billion. Free cash flow after dividend payment increased substantially to positive JPY 107.7 billion. Page 11 shows full year earnings forecast for FY 2021. Our assumption for foreign exchange rate for dollar is JPY 100 and euro is JPY 120, expecting appreciation of yen. We are forecasting that Toyota Motor's automotive production will increase substantially as indicated here. Forecast of gross profit is JPY 650 billion. Forecast of profit is JPY 150 billion. With these forecasts, we want to try to achieve the record high results again. Page 12 shows the forecast by division. Some divisions show a reduction of numbers. Page 13 shows our shareholder returns policy. Dividend was JPY 112 in the previous year. We plan to pay JPY 120 dividend for the current year. With the dividend payment ratio of 25% or more as our basic policy, we will endeavor to increase dividend for 12 years in a row. That's all for me. Thank you very much.

Hello, once again, I am Kashitani, President of Toyota Tsusho Corporation. In FY 2020, COVID-19 changed our social life dramatically and caused a big impact on the economy. Among our associates and their families or business partners, there were victims of COVID-19. I want to express my deepest sympathies for those people. Also, I want to express my appreciation and pay tribute to the medical workers and other people who are working hard to treat patients and prevent infection in a situation like this. Now let me explain our 3 years management plan. Before I explain our midterm management plan for the period from FY 2021 to 2023. I want to review the 3 years management plan we disclosed 3 years ago. Regarding the constative objectives we announced in May 2018, we did not achieve the target for profit attributable to owners of the parents. However, we were able to achieve the targets for ROE, net DER, RA/RB ratio and shareholder return. On this page, I want to review the targets and results of the profit. When we made the midterm management plan for the 3 business areas, our target was to increase profit by JPY 15 billion for Mobility, JPY 7 billion for Resources & Environment and JPY 8 billion for Life & Community. As for Mobility, although there was impact of the pandemic, measures were effective, and the profit did not fall to the level we could anticipate based on the indicators we had 3 years ago. As for Resources & Environment, there was impact from delay of production increase of lithium and market downturn. As for Life & Community, our business result was supported by the growth of so-called Economy of Life business, such as health care and IT. Next, I want to review investment. Because of the COVID-19, we couldn't achieve the target for profit. However, I believe we were able to make strategic investment for the future, aiming to achieve our vision, Be the Right ONE. We made investment for each area within the range of cash flows from operating activities, and we achieved our objectives, as shown here. During the past 3 years, we pursued lean cash flow management, eliminating waste extensively. As a result, we were able to substantially increase cash flows from operating activities, reduce interest-bearing debt and secure stable resources for dividend payment and investment. This page shows full basic policies for the 3-year management plan. Same as the previous year, we maintained these basic policies for this year. In order to achieve our midterm business plan goals, we are determined to make efforts as follows: First is strong individuals to shift our organization to a strong organization, implement lean management amid the new normal, accelerate our unique four business areas, sustain our growth during and after COVID-19 and materialize our vision, Be the Right ONE, aiming to become a company that is irreplaceable, a one and only presence for partners and stakeholders. As explained on this page, the concept of lean management is very simple. Use expenses wisely to eliminate waste and utilize digital transformation to maximize productivity and reduce SG&A expenses. Transform business models of existing operations and utilize digital transformation to enhance value-added and increase gross profit. By the combination of these activities, we will try to increase profit and promote lean management. Now I want to talk about the digital transformation, which I mentioned earlier. In order to improve business productivity, we are tackling new areas of digital transformation. We divided our activities into 3 areas, namely: strong, new and fun and conducting activities in a flexible manner. In our group, there are more than 300 activities for digital transformation. We will firmly implement those activities to steadily promote our digital transformation. Now I want to explain qualitative aspect of our 3 years management plan. We established 3-year midterm business plan by which we update our rolling targets every year. This page shows its basic concept, while addressing our organic area steadily, we will strengthen 4 priority areas linked with the materiality aiming to achieve a great leap in 3 years. As we have announced in our press release in April, we have newly added efforts to contribute to transition to decarbonized society. I will explain this in detail later. Now let me explain the quantitative aspect of our 3 years management plan. By promoting the strategies and measures I mentioned earlier, we aim to increase our net profit by JPY 30 billion from the result of FY 2020 for organic business and by JPY 15 billion for 4 priority areas. Our overall target for FY 2023 is JPY 180 billion, and we plan to invest JPY 150 billion and JPY 250 billion, respectively. From the next page, I will explain our investment, business growth and measures for each area. Regarding our organic business growth, we are planning to make JPY 150 billion investment to address the increase of automobile production volume, including improvement of equipment capacity. As for profit, we aim to increase JPY 15 billion by bolstering unique strength we have cultivated through maintaining and strengthening supply chain. Increase JPY 5 billion by expanding the Economy of Life business, including medical business and Green business. And increase JPY 10 billion by practicing lean management and promoting digital transformation under the new normal. Next, I will explain our 4 priority areas. First one is Next Mobility strategy. Regarding the Next Mobility strategy, in order to contribute to creation of a safe and comfortable mobility society, we will make over JPY 20 billion investment and aim to increase our profit by JPY 6 billion. At our facility at the Salar de Olaroz in Argentina, we will increase production capability of lithium carbonate material of vehicle origin battery by 2.5x for stable supply, preparing for full-scale adoption of a next-generation eco-friendly vehicles. Also, we will provide connected services, which connect vehicles by wireless communication in a safe, comfortable and convenient manner. And with that, we will take on the challenges of CASE. Next item is our renewable energy strategy. In order to contribute to the transition to decarbonized society, we will make over JPY 140 billion investment. However, because of the large-scale upfront investment for transmission business in Hokkaido and offshore wind power generation, the profit will be negative JPY 2 billion. We will participate in our first overseas hydropower generation business in Vietnam. Utilizing the know-how of our partner, Tokyo Electric Generation, we will steadily expand our business in renewable energy area besides the wind power generation. This is our global expansion status of the Renewable Energy business. 3 years ago, as of the end of March 2018, our total global power generation capacity was 2,753 megawatts. After that, we went into other countries, such as Netherlands and Australia, and the total capacity became 3,420 megawatts at the end of March 2021. We will further expand our business into other countries and work on offshore wind power generation. And at the end of March 2024, we aim to have total output of 4,900 megawatts. This is our African growth strategy. We are planning to invest over JPY 80 billion and increase our profit by JPY 9 billion. As for Automotive area, in addition to our existing 6 policies, we have 3 new policies, namely connected mass and HR support and development. By this, we will further enhance our presence in Africa market to contribute to the development of the region. Left side of this page shows the countries where we have knocked down business by which we aim to achieve local production for local consumption of vehicles. Right side shows the African countries where we are selling Toyota Starlet of Toyota brand. This small-sized vehicle is OEM model produced by Suzuki in India. This page shows our business other than Mobility business area. Regarding the health care, we will strengthen and expand the value chain, sensing on the wholesale and expand our business by developing our business in English-speaking regions and North African markets. Regarding the retail business, we will increase the number of stores by 2.5x. As for the infrastructure, we will utilize our expertise to further expand our business. This page shows the countries where we have businesses other than Mobility, such as pharmaceutical products and consumer goods. In addition to the sales of products, we will continue to strengthen manufacturing in the areas other than mobility to achieve local production for local consumption and industrialization of the region. The fourth priority area is the circular economy strategy. In a circular economy strategy, which contribute to the circular society, we will make over JPY 10 billion investment and expand businesses such as recycles of end-of-life vehicles or Green Metal business in order to increase the profit by JPY 2 billion. Also, we will tackle 3 [indiscernible] business, which means rebuild, reuse and recycle of batteries, which is a core component of the next-generation eco-friendly vehicles. As we are developing easy to recycle materials and components, together with Toyota, we want to further contribute to the circular economy by providing feedback to the development of new vehicles. Here, I want to explain our efforts to contribute to transition to decarbonized society. This chart shows our key sustainability issues we set up in 2018. Our objective is to contribute to the transition to a decarbonized society by reducing CO2 from vehicles and plants through the use of clean energy and innovative technology. As we accelerate our materiality initiatives, our activity aiming at carbon neutrality is an urgent task. In order to squarely tackle this task, our group established a task force for promoting carbon neutrality under the supervision of our Chief Digital and Technology Officer in April 2021. Aiming to realize decarbonized society, which reduces greenhouse gas to 0, we want to accelerate our company-wide activities in all the businesses where we can reduce CO2 emissions through industry life cycles. Let me explain some of those activities. First, we changed effectively 100% of the energy consumed at 18 business sites and 11 pre factors to renewable energy. To be specific, utilizing J-Credit scheme generated using renewable energy sources, we achieved a target of CO2-free for the power used in our business sites after January 2019. In addition, after Toyota branch building, we introduced solar power generation batteries and energy management system. The second diagram on this page shows the renewable energy management verification test we conducted there. At this site, during the 4 months from December 2020 to March 2021, we confirmed reduction of [ elected ] cost, improvement of energy recycling ratio and improvement of PCP for disasters. We will conduct further verification test and eventually aim to establish business of the energy management package for companies and buildings. In addition, we are promoting to install solar panels on the roofs of Toyota plants and dealers in Africa. By this activity, we aim to reduce CO2 emissions by 25% in 2025 compared to the level in 2020. We will also pursue energy management solution and promote local production for local consumption by installing necessary equipment at each business side. This page shows our activity in North America. At the Port of Los Angeles in California, air pollution caused by diesel vehicles has been a problem for many years, and they are aiming to achieve zero-emission by 2030. To help achieve that objective, we started feasibility study for utilization of hydrogen by changing diesel vehicles to hydrogen fuel cell vehicles and also for production, transport and storage of hydrogen. Based on the result of the study, we intend to examine feasibility to operate business in Japan. From here, I will explain our new management structure and financial policy. Regarding the 2 key issues, which support the growth of the company, namely safety and compliance and respect for human rights, I want to explain our structure, focusing on governance. After the general meeting of shareholders in June, we will have 5 inside directors and 4 outside directors, total 9 directors. In an attempt to streamline and rejuvenate our management structure and improve transparency, we added 2 new directors to our existing structure. Regarding our financial policies. First of all, we want to secure a strong financial base. We also intend to continue our extensive cash flow management. As for the accumulated results over past 3 years, free cash flow after dividends is positive. Regarding our 3-year midterm business plan, we are forecasting over JPY 600 billion operating cash flow, and we intend to keep our investment and dividend within that range. Regarding dividend policy, our basic dividend payout ratio is 25% or more, and we will endeavor to maintain a stable dividend and increase the amount of dividend per share. As I mentioned earlier, our target of the profit for FY 2023 is JPY 180 billion. We plan to increase the amount of dividend per share every year. As for FY 2021, we plan to pay JPY 120 dividend in a year, which is an increase for 12 years in a row. Regarding ROE, we will strive to manage our business with capital efficiency in mind so that we can maintain ROE higher than 10%. This concludes my presentation. For your information, there are some reference materials, which shows development status of our main businesses. Thank you very much. [Statements in English on this transcript were spoken by an interpreter present on the live call.]