Toyota Motor Corporation (NYSE:TM)
Q2 2020 Earnings Call
Nov 7, 2019, 8:30 a.m. ET
- Prepared Remarks
- Questions and Answers
- Call Participants
Kenta Kon -- Operating Officer
Hello, everyone, and thank you so much for joining us today. I'm Kenta Kon. First of all, we would like to take this opportunity to thank our customers who choose us as well as our stakeholders who support us. It is my pleasure to discuss Toyota's financial results for the first half of the fiscal year ending March 2020.
Let me start with Slide three. I would like to explain our results for the first half of the year compared to the first half of the previous fiscal year, consolidated vehicle sales increased by 220,000 units to 4,639,000 units. This was a result of solid sales mainly in Japan, North America and Europe driven by new models such as the RAV4 and Corolla.
Now please see Slide four. Consolidated financial results for the first half of this fiscal year were net revenue of JPY15,285.5 billion; operating income of JPY1,404.3 billion; pre-tax income of JPY1,583.4 billion; and net income of JPY1,274.9 billion. Now using Slide five, 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 JPY90 billion, cost reduction efforts, increased operating income by JPY60 billion. Thirdly marketing efforts, which resulted in increased sales as well as improved profitability in financial services increased operating income by JPY185 billion.
Finally, expenses decreased operating income by JPY120 billion due to a proactive allocation of R&D expenses in advanced and cutting-edge technology fields, while promoting efficiency through GPS and refining costs at all levels. As a result, excluding the overall impact of foreign exchange rates swap valuation gains-losses and other factors, operating income improved by JPY125 billion year-on-year.
Now, I would like to elaborate on operating income for each region starting from the left hand side on Slide six. In Japan, operating income was up JPY76.1 billion year-on-year to JPY827.8 billion mainly due to marketing efforts. In North America operating income was JPY222.6 billion, up JPY85.3 billion compared to the first half of the previous fiscal year. Mainly thanks to marketing efforts including increased operating income from financial services and the reduction in expenses.
In addition, we are promoting activities on all fronts, such as carefully and strategically examining the allocation of incentives, strengthening model based cost reduction activities, making efforts to improve the supply of SUV light trucks, improving the productivity of each of our manufacturing plants and reducing fixed costs on companywide scale.
In Europe, operating income was up, JPY8.7 billion year-on-year to JPY70.6 billion, this was mainly a result of marketing efforts. In Asia, operating income, which includes consolidated subsidies in China was down JPY45.5 billion year-on-year to JPY230.7 billion, excluding the effects of ForEx rates caused by the depreciation of the Chinese yuan and appreciation of the Thai baht, operating income increased by JPY2.7 billion year-on-year. In other regions, operating income decreased by JPY16.5 billion year-on-year to JPY47.3 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 using Slide seven. As for our China business despite increased vehicle sales, operating income of consolidated subsidiaries decreased by JPY12.2 billion year-on-year to JPY78.5 billion, mainly due to the depreciation of the Chinese yuan. Equity in earnings of equity method affiliates was up JPY3.5 billion year-on-year to JPY61.5 billion largely thanks to marketing efforts. Regarding financial services, operating income was up JPY41.5 billion year-on-year to JPY215.6 billion and this was mainly due to an increase in the lending balance and a decrease in costs related to residual value losses.
And next please look at the Slide eight on shareholder returns, with regard to the interim dividend on common stock, we plan to make it JPY100 per share, the same amount as the last fiscal year. Regarding the full-year dividend, we will strive for the stable and continuous payment of dividends considering a consolidated payout ratio of 30%.
Please turn to Slide nine. With regard to the interim shareholder return we also plan to buyback up to JPY200 billion reduced by JPY50 billion compared to the interim period of the previous fiscal year. We deem the benefit of shareholders as one of the priority management policies and continue to enhance corporate value. We intend to continue to flexibly exercise share repurchases with the purpose of promoting capital efficiency, while actively investing in our growth areas, notably case.
Now, I would like to move on to discuss the outlook for the full fiscal year ending March 2020, with regard to our consolidated vehicle sales we have reduced the forecast from the time of our Q1 results by 50,000 units to 8.95 million units. We anticipate the vehicle sales in Japan, where the market is solid will increase by 30,000 units, as well as in other regions by 20,000 units, while vehicle sales in Asia will decreased by 100,000 units. Considering market deterioration in countries such as India and Indonesia.
Please turn to Slide 11, we have adopted ForEx rate assumptions for October onwards of -- JPY105 per dollar and JPY150 per euro which makes the full-year assumptions JPY107 per dollar and JPY118 per euro. Based on this our forecast for full-year consolidated financial performance are: Net revenue of JPY29,500.0 billion; operating income of JPY2,400.0 billion; pre-tax income of JPY2,630.0 billion; net income of JPY2,150.0 billion. We have maintained our operating income forecast, which was announced in our Q1 results.
Please see Slide 12, for an analysis of our latest operating income forecast in comparison to our previous forecast at the time of our Q1 results, compared year-on-year, we anticipate a JPY67.5 billion decrease in operating income. Currently, we are in a phase of transforming ourselves to a mobility company and proactively undertaking investments for the future and creating friends. Furthermore, in order to have a corporate structure that can promote such transformation, we are striving to pursue TPS and refining costs at all levels, which -- with all members of Toyota United.
Next, Executive Vice President, Kawai will explain our Human Resources development in the transformational period. This concludes my presentation on the financial results for the first half of the fiscal year ended March 2020.
Mitsuru Kawai -- Executive Vice President
Hello, I'm Kawai. Today, I would like to discuss what Toyota continues to value in particular in the so-called once in a century transformational period from the perspective of developing people. Since, I entered the engineer training school in 1963, I have been involved in Monozukuri or manufacturing at the production site for more than half a century. At that time, it was a small company with only a head office plant and motomachi plant all work was manual.
We have promoted automation by changing manual skills to technology. The situation at production sites or Genba is ever-changing. Each and every day, you never know what is going to happen at a production site. Equipment failure, quality defects, missing items, et cetera. In that sense, the Genba is always alive. If there is insufficient stock, you need to make quick decisions and at times gather or call on team helpers, so that customers are not kept waiting.
At Toyota, we first stop if there is a problem, then we extract the root cause of the problem. Then we implement preventative measures and conduct kaizen. We repeat this process over and over again. Thanks to the experience of dealing with changes on a daily basis, we are able to response swiftly. This is a story This is a story from six years ago, when it was decided that a group of people welding dusty frames would be producing power generators for fuel cell vehicles.
It was a Genba situation at a plant, were even, if a small amount of dust entered the machine, large sums of money would go to waste. I hand it over this important Ganba task to them saying, I trust you and I think I can leave it up to you. They reported hundreds of potential hazards, even while navigating through their new task. They extracted various issues beforehand, including hand-washing, clothing, cleaning and quality assurance and responded to them appropriately enabling a smooth establishment and set up of their new work.
The workers at the production sites are always conscious of crisis. For them with their kaizen mindset, it is natural to engage in cost reduction measures through the Kaizen efforts by considering quality, quantity and cost with safety as the basis, while dealing with change on a daily basis. I always tell the production sites, this may be today's best, but this may not be tomorrow's best. Kaizen activities are constantly required, I think this spirit of Kaizen allows our staff members to adapt to large scale change when needed.
As I mentioned so far, the plant or Genba has easy to understand indices or indicators such as productivity and cost targets were improvements appear immediately in the results. However, in the office and technical work places, where there is division of work. It is difficult to see the results of employees work and the culture of repeating kaizen efforts every day is less prevalent. To spread the culture of continuous kaizen across the company, we must not only think of what is ideal, but also change the work and actually take the first step. And only then will the Kaizen points be recognized. To this end this spring, we started to encourage all of our staff members to submit suggestions for Kaizen of their work under the creative suggestion systems. The participation rate throughout Toyota increased significantly from 60% to 90%, but true change has not taken place in the administrative and technical field, with some divisions participation rate still at a low level, which I interpret as the corporate culture still having room for further change.
I have been communicating in the labor management negotiations as well that a 100% participation rate is crucial, and that the quality of the proposals, need to be improved. Not only are the roles of staff members important, but so are the roles of superior's and managers. For example, when a staff member has contributed in reducing six hours of ones work through kaizen activities, the superiors must add further value to this reduced six hours by performing further kaizen. Such improvement activities must lead to major reforms and should ultimately contribute to the company.
Over the last few years the production volume has been stable at a successful 10 million unit level. However, we are also facing the need to eke out the development costs to develop future technologies. To this end, I am set to push forward and continue encouraging employees to conduct through Kaizen activities and cost-reduction measures. In the era of case, Toyota will also compete by increasing our competitiveness by utilizing alliances.
What is important here, of course is people. President, Toyota said at the Tokyo Motor Show that the keyword is human or people. Since I come from a production background, I really understand what he meant. A company newly working with other companies does not make those companies strong, people helping each other and working together with a sense of unity makes companies strong.
Last year, I created the Oyaji no kai, a group that strives to strengthen communication and grow together. I had this idea for about four to five years, and it was finally realized. I wanted to build a network with the senior members of technical fields in the Toyota Group told and helped each other with problems at production sites such as; manpower shortages and the gap between busy and less busy production lines.
The first gathering was just a social event, but once people from the same background got together, we got along with each other immediately and from the very next day our relationship literally became one, where we would help each other with a single phone call. When one group company had a large problem due to a machine breakdown, members of the Oyaji no kai Group took action right away and offered manpower and parts.
We held a second gathering in October of this year. In the meeting, I heard feedback that now they could ask for help easily with just a single phone call, without going through anyone else, such as the engineers or the human resources department. They say, it is great that there were such smooth communication with just a quick phone call asking for help and receiving replies instantly like, Okay, we can help or I got it. And I was happy to learn that they were inspired to create the same kinds of activities at their own companies.
Furthermore, in the meeting we also discussed strengthening efforts to solve problems that every company finds challenging such as; maintenance or developing maintenance personnel by reviewing each other's efforts. Also when natural disasters occur, I believe this network will also be helpful and recovery efforts in affected regions and Companies. I think alliances are not simply putting technologies and information of companies together. Learning about each other's knowledge and experience leads to noticing new things and provides clues in development in kaizen that they had never thought about before.
I believe, we must realize that in Alliance, we must maximize synergistic effect. One plus one can be more than two and people are the key to this.
I would like to build such relationships in alliances and the hope that it will generate greater energy. In order to be able to exchange direct opinions with people from different corporate backgrounds and to search for what we can achieve together, each one of us need to be professionals. Such a person needs to possess both expertise that enable swift decision making based on the kaizen mindset and leadership with a human touch that encourages people to get on board.
However, I also think people tend to stop growing and making efforts, when they think they have become professionals. I define a true professional as someone who always looks and things ahead and someone who engages in self-driven continuous growth. In this way, people see the professionals in action and think I want to be like him or her and continue to grow. This year, I was given the responsibility of Chief Officer of General Administration and the Human Resources Group. Under this responsibility, I am starting to see a need to make changes to the current HR system and in-house education.
In reality, nearly 30% of the senior management and labor union members have yet to shift their minds toward a new era in which the environment surrounding, the auto industry is drastically changing. Given such a situation, I am committed to working on nurturing people who can think proactively and take action, are tough enough to face new areas and to take up the challenge up to the point of conclusion, consider continues self improvement as crucial to the growth of the company.
I will also push forward in HR system are so-called or [Indecipherable] system, where people who make the most efforts will be evaluated properly regardless of one's educational background, age or position. Through these measures, I would strive to create and establish a corporate culture, where all employees make active efforts to exceed the level of the person, who runs -- sets its goal. At the same time, I would also like to develop people who are willing to nurtures sub-ordinates in the same manner. This is why, I'm hoping to bring back the Genba first policy to Toyota. To survive the once in a century transformation period, Toyota needs to get back to the basics that is back to the days, when the company was first established and look back and review ones attitude toward work and the way we do work.
This is because all of us at Toyota need to become true professionals. people who have the ability to fight through this period of drastic change. We distributed the employee handbook, so that each and every one of the employees conduct their work with a deep understanding of the five main principles of founder Sakichi Toyoda, TPS and cost reduction. Regardless of how much the time is change people are at the center of Monozukuri or manufacturing, that will allow Toyota to continue to grow sustainably, I will dedicate all my strengths to developing people.
Thank you very much for your attention.
Questions and Answers:
Duration: 22 minutes
Kenta Kon -- Operating Officer
Mitsuru Kawai -- Executive Vice President