Toyota Motor - Q2 2023

Transcript

Operator (participant)

Thank you very much for participating in this financial results announcement despite your occupied schedule. We would like to start the presentation on the financial year 2023 second quarter financial results. First of all, let me introduce to you the participants from TMC. Executive Vice President, Chief Financial Officer, Kenta Kon. Chief Communication Officer, Jun Nagata. The Chief Officer for Accounting Group, Masahiro Yamamoto. Chief Officer of Purchasing Group, Kazunari Kumakura. Deputy Chief Officer, Production Group, Yoshio Nakamura. Now, ladies and gentlemen, first of all, Yamamoto will share with you the outline of financial results.

Masahiro Yamamoto (Chief Officer of the Accounting Group)

We 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. I would like to express appreciation for those of you who are participating in this financial results announcement.

At the same time, we sincerely apologize for the inconvenience caused to our customers who are waiting for their vehicles. We are working to deliver them as soon as possible. First, let me provide a summary of the second quarter of the fiscal year ending March 2023. The result for the first half was operating income of JPY 1.1414 trillion. The business environment is changing dramatically, such as the rapid changes of foreign exchange rates, rising interest rates, soaring materials prices, and more. While production constraints continue due to low supply of semiconductors, a lockdown in Shanghai, the flood in South Africa, et cetera, we worked hard with our dealers, suppliers, and production sites in order to deliver as many cars as possible to our customers.

Operating income decreased due to soaring materials prices and one-time costs, despite the positive effects from the depreciation of the yen. As for the full year forecast, it remained unchanged from the previous forecast, so we anticipate operating income of JPY 2.4 trillion. We have revised our vehicle production forecast downward by 500,000 units to 9.2 million units, taking into consideration risks such as the procurement of semiconductors. We will continue with our activities to strengthen our profit structure throughout the supply chain, even though we are in a situation in which it is difficult to predict the future due to rapid changes in the business environment. In terms of return to shareholders, the interim dividend is JPY 25 per share, an increase of JPY 1 compared to the previous fiscal year.

We have set aside the full amount of JPY 150 billion to make share repurchase in a consistent manner. Let me explain our financial results for the first half ended September 2022, covering the six months from April to September. Consolidated vehicle sales for the period was 4,159,000 units. That is 101.6% of the same period of the previous fiscal year. Toyota and Lexus vehicle sales was at 4,742,000 units, which was 97.7% of such sales from the same period of the previous fiscal year. As for the regional sales breakdown, the sales volume decreased in developed countries due to production constraints, but the sales volume increased in regions such as Asia and others due to recovery from the impact of COVID-19.

Consolidated financial results were sales revenue of JPY 17.7093 trillion, operating income JPY 1.1414 trillion, income before income taxes of JPY 1.8342 trillion, and quarterly net income of JPY 1.171 trillion. I would like to explain the factors which impacted operating income year-on-year. First, the effects of foreign exchange rates increased operating income by JPY 565 billion. Second, cost reduction efforts decreased operating income by JPY 650 billion, largely due to the impact of soaring material prices, which account for JPY 765 billion. Third, marketing efforts increased operating income by JPY 130 billion. Fourth, an increase in expenses decreased operating income by JPY 310 billion.

Lastly, we also incurred a negative impact of JPY 341 billion, largely due to swap valuation losses and costs to terminate our production in Russia. As a result, excluding the overall impact of foreign exchange rates, swap valuation gains and losses, and other factors, operating income decreased by JPY 830 billion year-over-year. Let me explain the operating income for each region. Japan increased by JPY 50.1 billion year-over-year due to the effects of foreign exchange rates, despite the negative effect from soaring material prices. North America decreased by JPY 332.1 billion due to soaring materials prices and increase in expenses.

Europe also decreased by JPY 106.5 billion due to soaring material prices and the cost of terminating our production in Russia, despite the positive effects from our marketing efforts. Asia increased by JPY 62.8 billion year on year due to the effects of foreign exchange. Other regions decreased by JPY 15.2 billion. In the next slide, let me explain the business in China.

As well as financial services. As for business in China, while the operating income consolidated subsidiaries decreased because of a decrease in sales volume, our share of profit of investments accounted for by equity method increased year on year, mainly due to increase in sales volume and effects of foreign exchange rates. In financial services business, the operating income here increased year on year, largely due to the impact of foreign exchange rates, increase in earning assets and others. With respect to the shareholder return, we decided to pay an interim dividend of JPY 25 per share, an increase of JPY 1. We intend to continue to maintain and improve consolidated dividend payout ratio, as well as stably and substantially increase toward our shareholders who hold our shares over the midterm to long term. Now let me explain the forecast for the fiscal year ending March 2023.

Please note that the volumes, the sales revenue and operating income of Toyota Motor Corporation are included in numbers from this forecast. Let me explain the vehicle production forecast for Toyota and Lexus. We have set a high production plan of 9.7 million units, and worked hard with the suppliers and production sites in order to deliver as many cars as possible, as soon as possible to our customers who have been waiting for a long time for their cars to be delivered. However, it's still difficult to predict the future due to risks such as procurement of semiconductors. Therefore, we decided to revise our plan to 9.2 million units, which is down by 500,000 units from the previous forecast. We intend to continue to consider all possible countermeasures and make every effort together with our suppliers and production sites.

For consolidated vehicle sales volume, we have revised our forecast downward by 50,000 units from the previous forecast, and we now anticipate 8.8 million units. Regional sales breakdown is as stated in the presentation. As for the sales volume for Toyota and Lexus vehicles, we have revised our forecast downward by 500,000 units from the previous forecast, and the new forecast is 9.4 million units. Let me explain the full year consolidated financial forecast. We have adopted the full year foreign exchange rate assumption of JPY 135 per U.S. dollar and JPY 137 per euro. The foreign exchange rate for October onwards is based on a three-month average rate of the second quarter, which makes the foreign exchange rate assumption at JPY 135 for both per U.S. dollar and per euro.

Based on this, our forecast for the full year consolidated financial performance are sales revenue of JPY 36 trillion, operating income of JPY 2.4 trillion, income before taxes of JPY 3.34 trillion, and net income of JPY 2.36 trillion. Now let me explain the factors that may impact operating income as compared to the previous forecast. First, the effects of foreign exchange rates will increase the operating income by JPY 220 billion. Second, cost reduction efforts will increase operating income by JPY 60 billion. Third, effects of marketing activities will decrease the operating income by JPY 185 billion due to the decrease in sales volume from supply constraints and worsening of sales mix.

Lastly, we also believe that we will incur a negative impact of JPY 90 billion on operating income due to swap valuation issues and the cost to terminate our production in Russia. As a result, we have kept the operating income forecast unchanged from the previous forecast. The factors that we expect will impact operating income compared to the same period of previous fiscal year are as shown in the presentation. Although we are in a situation that makes it difficult to predict the future due to rapid changes in the business environment, we will continue our activities to strengthen our profit structure.

Akio Toyoda (Chairman)

Akio Toyoda speaking. Today's financial results announcement relates to the performance of Toyota over the past six months. However, these financial results reflect not only what has occurred over these six months, but also the outcome of our long-standing efforts since the global financial crisis. I believe they also reflect the competitiveness of Toyota as a whole, including our many colleagues in the auto industry, so that customers around the world will want Toyota products. We have continuously evolved our products by introducing such things as an in-house company system, a regional system, and the TNGA common vehicle platform. We believe that this resulted in our products being accepted by the market. However, the environment has rapidly and significantly changed in the last half year.

The U.S. dollar Japanese yen exchange rate, which since 2017 had long remained stable between JPY 105 and JPY 115 to the dollar, rose from JPY 121 at March end to JPY 150 recently, while the yield of 10-year U.S. government bonds has risen from 2.3% to 4.1%. Also, as shown on the slide, energy and materials price, as well as the worldwide labor situation, are rapidly and significantly fluctuating. All of these tremendous changes, including the semiconductor procurement situation and other factors, are occurring concurrently in the auto industry. These changes could have a significant impact in the future as well as my honest feeling is that it is difficult to predict the future of the auto industry even six months ahead, let alone Toyota's earnings and production volume.

With regard to the response to our response to soaring raw materials prices, mentioned in the first half analysis explained by Yamamoto, we have been constantly discussing with suppliers without drifting away from our focus of enhancing competitiveness over medium and long term. The cars consists of about 30,000 parts, and competitiveness cannot be increased by Toyota's efforts alone. Faced with the soaring raw materials prices, Toyota and each and every one suppliers work as one to implement competitive measures to address these things.

Even now, our solution is not in sight. Although the production volume forecast is revised, doing our utmost to deliver to customers who ordered early as soon as possible, this basic stance has not changed. In reality, there are many difficulties, and we apologize for the wait, but we'll continue to make efforts. There have been many times in the past when it was difficult to predict the future, such as at the time of the global financial crisis. Every time we had a major impact, we are seeing changes that are beyond the scale we have seen before. I believe that our efforts that have been ongoing for a long time allowed us to manage to maintain production levels.

The product-centric managements we have implemented following the global financial crisis has not only strengthened our production competitiveness, but also honed manufacturing skills and techniques at our suppliers and production sites. It has also led to significant improvements in efficiency in development, sales, and production, which allowed us to reduce the break-even number of units by more than 30% compared to before the global financial crisis. I believe that this is a result of steady efforts with many stakeholders over a long period to improve our structure. Since 2009, Japanese auto and parts industries have invested a cumulative JPY 28 trillion in R&D and JPY 23 trillion in capital expenditure, and have provided customers with attractive products created numerous jobs that pay taxes to the national and local government, and obtained foreign currency to finance energy imports.

The Japanese auto industry has grown by sharing with many people the value created by mobility. I believe this is a tremendous strength that will enable the entire Japanese industry, including the Japan Automobile Manufacturers Association and the Japan Auto Parts Industries Association, to move forward as one team, even in these times of great change. This is something that has never happened before. Even now, headwinds such as sudden production increases and decreases due to the semiconductor shortage and rising costs due to the soaring material prices continue. Although we cannot predict the future, we will leverage our long-cultivated competitiveness, profit structure, and strong bonds and relationship of trust that we share with our many colleagues in the auto industry to overcome challenges and further increase our competitiveness. We sincerely request your support. We will now start the Q&A session.

Operator (participant)

If you wish to ask a question, please use the Raise Hand button on the screen. When we call on you, please turn on your camera and microphone. We would like to take as many questions as possible, so I would like to ask a number of questions for each person to two. Let us start with Mr. Yamamoto of Yomiuri Shimbun. I will switch the screen, so if you see yourself on the screen, please turn on the microphone and start speaking, or unmute the microphone and start speaking.

Mr. Yamamoto, could you start asking your question, please?

Speaker 11

Thank you very much for this opportunity. Yamamoto of Yomiuri Shimbun. Thank you for the presentation. I have two questions. Question number one, the financial results that you have announced, today, what is your assessment of that? Could you explain that once again? The second question relates to the volume, especially production volume. You made downward revision to the production volume in this announcement. I think the greatest factor behind that was the supply shortage of semiconductors. What sort of semiconductors are in short supply? And in order to recover and in order to increase the volume, what sort of measures do you think are necessary?

Akio Toyoda (Chairman)

Thank you very much. Thank you, Mr. Yamamoto, for your question. I think there are two major questions, one related to our assessment of the financial results that we announced today. The second one related to the downward revision of production and what is the semiconductor short supply and what sort of measures do we think are necessary for recovery. The first question will be answered by Kon, and the second one would be responded by Nakamura. The third question, Mr. Kumakura of the Procurement Department will respond to that.

Kenta Kon (EVP and CFO)

Kon speaking. Thank you, Mr. Yamamoto, for your support. I would like to share with you how we assess and how we view the financial announcements. Let me share with you my view. As I mentioned in the presentation earlier, in the past six-month period, there has been major and significant changes, not just one, but several of those changes taking place concurrently. Exchange rate fluctuation was one of them, interest rates, the raw materials prices, energy, semiconductors, and also the COVID impact still lingers on. Therefore, we are faced with huge changes, and each one of them represented the change impacting us significantly, but we are hit by all of them at the same time. This six-month period was a very demanding and difficult period in my view.

Despite that, the level of profit, it's not that we just are focused on and assess the profit level, but we've been able to secure profit. We caused inconveniences to customers and suppliers because we had to decrease production from the previously announced levels. Still, we think we were able to keep the current level of production. Compared with the past levels, we were able to maintain a very high level of production. This, I think, owes to the assiduous efforts we made over many years. At the same time, this is not made possible by Toyota's efforts alone, the carmakers, members of JAMA and also the suppliers and everyone that made focused efforts concerning what we should be doing to deliver vehicles and how can we deliver as many cars as possible to the customers.

We shared those objectives and purposes together, and the fact that we were able to create such an environment was very important. This was not made possible through efforts overnight. I think this is the financial results that really made us grateful for such an environment. At the same time, the profit decreased and therefore, we would like to achieve as much recovery as possible. Vis-à-vis the impact of soaring raw materials prices, for a single year, probably it will be extremely difficult and demanding for us to achieve recovery in a single year. B2C business and with the full lineup of product lines, and we have many suppliers, we may not be able to make that achievement in the short period of time.

Even if may take longer than we expect, but we would like to achieve a solid recovery, and we intend to plan for that purpose. Thank you very much. That's all from me.

Kazunari Kumakura (Chief Officer of the Purchasing Group)

Thank you, Mr. Yamamoto for your question. With respect to the production plan, let me respond in the following manner. Let me explain the background that led to the downward revision of a production plan. Since last year, supply has been interrupted and the production continued to decrease. So from suppliers and those in the actual forefront of the production, they were really seeking support. In the Labor-Management Council this year, we decided to take a pause and re-examine and review the production structure itself. Therefore, we have decided to take the intentional pause.

While we have done that with suppliers, we continue to have a very attentive and detailed discussion with the suppliers. Also incorporating future risks, we were able to come up with a plan and share that with the suppliers, in advance, to facilitate the suppliers to create their own plans. We made such communication efforts in earnest. In the early part of last year, we set 9.7 million as the baseline. Of course, we have been making every effort to deliver as many vehicles as possible to customers, and we made efforts to that. Not only the supply issues relating to semiconductors, we are faced with the lockdown in Shanghai, and we were hit by many natural disasters this year. Those are unexpected events.

Because of those events occurred simultaneously, even if we wanted to make more cars, and even though we made every effort to that end, we were unable to achieve what we wanted to do, causing some inconvenience to customers and suppliers. That's the environment in which we had to operate. With suppliers and with the departments concerned, prepared the maximum amount of facts to predict and read the future and what is likely to take place in the future. Every day, we had the repeated discussion with suppliers and departments in question. However, when it comes to specific numbers, we think that probably we may be able to produce 9.55 million units. As I mentioned earlier, we have not been able to fully predict and forecast the future risks.

Therefore, bearing that in mind, within the range of 9.55 million-9.2 million units, we came up with this new figure as a reference baseline point. That reflects the background that led to 9.2 million we announced.

Akio Toyoda (Chairman)

Continuing on, I would like to refer to the supply situation of semiconductors. What is the actual situation, including the past history? I would like to share with you a detailed account as much as possible. Because of the COVID-19 outbreak, the semiconductors for consumer electronics increased in demand because of the PCs, the smartphones and games. The production was prioritized for consumer electronics.

Also some of the semiconductors were hit by natural disasters of fire and also the lockdown in Southeast Asian countries or China, that really impeded supply, which couldn't keep pace with the demand. Such conditions still continue today. Since Great East Japan Earthquake, Toyota has been implementing BCP risk, and we have increased electronic parts inventory and working together with Tier 1 suppliers. Up until the first half of 2021, we have been able to keep at the limited level the negative impact on production. The general condition I described continues even today. In terms of the usage of semiconductors in the automobiles for different usage, the automobile uses different types of semiconductors. In many cases, 1,000 semiconductors are used per vehicle.

As shown on this slide, the microcomputers, the power semiconductors, image sensors, and analog semiconductors all together, about 1,000 of them are used for vehicles. With the advent of electrification, and also with the enhanced level of advanced safety measures, the usage for automobiles or semiconductors is expected to increase. In the case of semiconductors from raw materials that moves to pre-processing processes as well as the following processes, there are many different semiconductor manufacturers. For each process, those production is divided in different parts of the locations throughout the world. Even if one element of the semiconductor is in short supply or eliminated, a single car cannot be built. With respect to the current situation of semiconductor supply, for the automotive semiconductors, in terms of the total semiconductor market, it accounts for about 10%.

About 10% is for automotive use, and the majority of the semiconductor market is accounted for by telecommunications or data processing, and also combined for electronic consumer usage. For electronic consumer semiconductors, because of the active investment, the supply and demand situation has relaxed. In the case of automotive semiconductors, stability of supply was restored in those areas, semiconductors that are also used by electronic consumers. In the case of semiconductors for which the capital investment is not really catching up or CapEx have not been done, in this area, the supply is still in a shortage, a very tight supply demand condition continues.

In that, collaborating with the Tier 1 suppliers and strengthening communication with the semiconductor manufacturers, extending support for logistics or production, and also switching to substitute products, we have been able to steadily decrease the number of semiconductor items with inherent risks. At the same time, as I mentioned earlier, for some parts, the inventory is very short. In the overall process of semiconductor manufacturing process, which extend for several months, if a single day production is impeded, that will result in stoppage of supply. This situation is likely to continue. As I mentioned, the external environment remains tough, but we have been able to visualize the semiconductor products with risks apparent. Working with Tier 1 manufacturers, the semiconductor producers will implement every possible measures to address them.

In this manner, for two and a half years, every single day, we have been conducting supply measures conferences and meetings. We discuss not just the semiconductors, but natural disasters, the COVID impact among others, which resulted in difficult supply conditions. Every day, we had emergency supply measures for the past two and a half years, and therefore, it is no longer emergency. It is in constant care. At the same time, in the procurement with the suppliers, both in Japan and overseas, we are conducting overall stocktaking of parts and components. How best we can maximize the production of vehicles is discussed every day, and measures are implemented so that that can be reflected in the actual production and assembly plant.

In the sales area, although we are not able to foresee the future, trying to minimize the inconveniences caused to customers is impossible, we are trying to change the supply. In the design area, how quickly the substitute products and components can be used are studied every day. For suppliers, for a long period of time, we cause impact from our decrease of production, and we cause inconveniences to suppliers here, among others. That notwithstanding, in line with the production plan, they have been making efforts alongside. The impact of semiconductors continues to have impact. As I said, we are anxious to produce as many vehicles as possible. Contacting customers, we are explaining the reasons why the delivery date is extended, among others.

In this manner, all of us are working hard, working together to overcome the current difficult period. I personally do have the serious feeling that we feel sorry for customers for inconveniences. At the same time, I'm full of gratitude for these because everyone is making serious efforts working together. I hope you understand the situation. Thank you very much.

Operator (participant)

Thank you, Mr. Yamamoto. Let us move on to the next question from Asahi Shimbun, Mr. Narita. We will switch the screen. When you see your face on the screen, please start asking the question. Mr. Narita, thank you for waiting. Mr. Narita, your microphone is not on.

Yasuhiro Narita (Journalist and Reporter)

Now can you hear me?

Operator (participant)

Yes.

Yasuhiro Narita (Journalist and Reporter)

My name is Narita from the Asahi Shimbun. I have two questions. The first question is electricity charges and other material charges increase. Toyota has supported suppliers in the past, and they have announced that they will support them. If you go down that tier, like secondary or tertiary tiers, they are struggling more. What are the support measures to the parts manufacturers and suppliers? How do you deliver those support? Overall for support, how much will it cost on an amount basis? The second question is, as you mentioned in your presentation, worldwide, we are seeing an increase in interest rates. For North America, I think this will have a direct impact on your lease business, and this may bring down consumption.

What is your outlook for the global economy?

Akio Toyoda (Chairman)

Thank you very much, Mr. Narita. Your first question was about soaring material prices and how to support the supply chain and the suppliers with which we have a business relationship, and in particular, how to support the secondary and tertiary suppliers. What kind of support and how much of a support will we give? Mr. Kumakura from procurement will answer that question. Your second question was about the interest rates, in particular North America and globally. Global economy or global market forecast, how will it change in the future? I will answer that question. Now, I will talk about soaring material prices. There are many changes, and it's very difficult to predict the future. Many materials are tight in supply and are rising in prices.

The surrounding environment is very difficult. Now, for the concern of deceleration of the global economy, depending on the material, the market is becoming more stable. Overall, still the prices are very high. In Japan, because of the weaker yen, the import prices are going up. In particular, our raw material and energy prices are going up, which is a burden to our suppliers. Our basic stance is that we aim at coexistence and mutual prosperity with the suppliers. Our cars consist of tens of thousands of parts, and there are about 60,000 suppliers, including the very deep tier suppliers. There are many suppliers supporting us. A single part or a single company missing will not allow us to produce vehicles, and that will lead to reduction in competitiveness in the future.

It is a difficult time now. Rather than short-term measures, we have to look at the medium to long term, and the supply chain as a whole will have to collaborate with each other. With a sense of purpose, we will move forward. For major materials, which market data we will look at and when that data will be reflected in parts prices, has been discussed with the suppliers, and we set a rule. 100% of the changes are reflected in the parts prices. However, the speed and the scope of increasing prices in the short term is unprecedented. The burden on the suppliers is much larger than what we have incorporated into the rules.

The timing of reflecting the prices in the parts prices are reviewed to reduce the burden, and we try to come closer to the reality so that the burden on the suppliers will be weaker. We take the necessary countermeasures. Now, on the energy cost, in the past, there were no drastic changes, and we haven't had any voices from the suppliers to reflect those changes in the prices. Regardless of the market, that was not reflected in the prices. However, because of recent sudden and drastic changes, the suppliers are telling us that they are struggling. From the viewpoint of protecting the suppliers, this time we decided to take measures.

We will continue to look at the market, production status, and the profitability of our suppliers in detail to take the necessary responses. We are taking these responses, but the effects will have to be permeated to all suppliers. Because of the commercial practices, we will not be directly talking with tier two suppliers on prices. In order to maintain competitiveness in the future, we have to make sure that the effects will be felt by tiers at all levels, from Tier 1 -Tier 2, from Tier 2 -Tier 3 suppliers. We are asking them to swiftly reflect the market change in the price changes. I believe this will lead to enhancing competitiveness in the future. That is why we are taking these measures. There may be further changes.

Kenta Kon (EVP and CFO)

We will look at the situation each time to take the necessary responses. Overall, we have to make sure that the supply chain is not impaired. If that happens, we'll not be able to produce vehicles. Therefore, we need to make sure that the suppliers become stronger. Please understand that situation.

Kazunari Kumakura (Chief Officer of the Purchasing Group)

Mr. Narita, your next question was about the global market. I think I should talk about each region specifically rather than talking about the totality. First, the overall economy. Frankly speaking, as you mentioned, Mr. Narita, the energy supply issue leads to inflation, and that leads to a hike in interest rates. That is the spiral that we are in now. What we are struggling with is that from the second half of 2022 to 2023, recovery from COVID has been the general trend.

The recovery trend and the interest rate hike and inflation increase leading to less disposable income of our consumers. If you look at that balance, it's very difficult to determine what will be the overall balance. Based on that, we created our forecast. Now, you look at America, Europe, and Japan. I would like to talk about these markets in comparison to 2022. For 2022, for these three regions, there has been supply constraints. We saw a global supply constraint. For 2023, the current outlook is that for Japan, United States and Europe, the markets will increase. As was mentioned in your presentation, interest rates will go up. The customers are thinking about lease and loans.

How much impact this will have on the leases and loans is something that we have to watch carefully. On the second point, which is China. Just the same level as 2022 is what we forecast. Now, amid zero-COVID, because of COVID, there has been some subsidies activating the market. How that will change and how the market will move, including the real estate situation, will have to be watched closely in China. For Asia, India probably will be higher than this year, but for the other countries and regions, just the same level as this year. On the other hand, for Asia, the risk is weaker currencies and how that will impact the local economy is something that we will watch closely.

2022, we saw a supply shortage. Compared to 2019 before COVID, overall, the market will achieve about 80%-90% of 2019 in 2023. We will look at the situation in 2023 and make our business decisions. I imagine this is difficult at the outset. Last year, this time, I don't think anyone has expected where we are now. Every month, or at least every quarter, we will get information from the local markets and make the decisions as necessary. That is all.

Operator (participant)

Thank you, Mr. Narita, for your question. Let us move on to the next question. Mr. Oka of NewsPicks, please. I will switch the screen, so if you see yourself on the screen, please start speaking. Mr. Oka, please.

Hiroyuki Oka (Journalist)

Thank you very much. Oka of NewsPicks. I have two questions, if I may. First question, which relates to the operating income of different regions, especially in relation to North America, conspicuous is the decrease in profit in North America. Could you explain to us the reason behind that? That's the first question. The second question is relating to the restrictions of gasoline vehicles in California and Europe. There has been rather rapid progress in restricting gasoline engines. Refer to the change in production of BEVs, and if there is initial explanation relating to your BEV strategy, I would like to be enlightened on that.

Akio Toyoda (Chairman)

With respect to your question among the geographical income, you asked about the factor behind the profit decrease in North America. Yamamoto, the Chief Operating Officer for Accounting, will explain to you. In California and Europe, there has been a restriction of vehicles relating to the achievement of carbon neutrality, and you asked about whether there has been any change in Toyota's battery EV strategy, and I will respond to that question.

Masahiro Yamamoto (Chief Officer of the Accounting Group)

Thank you for your question, Mr. Oka, and we would like to share the screen with you about the geographical regions. As you correctly pointed out, the second one from the left that shows North America last year, it decreased from JPY 395.1 billion to JPY 23 billion, so there has been significant decrease in profit. The biggest factor behind that was the soaring materials prices. Through cost improvement efforts in the production plant, and also the selling prices adjustment or modifications, more than we do every year, we have been making pricing changes once or twice a year. By increasing the frequency of a pricing change, we would like to reflect those higher prices. Of course, this is not something that we alone can decide.

We would like to work with customers to achieve the better pricing, and local Toyota people are making efforts to that. We are making every effort to recover the impact of higher prices. Every effort is made. This JPY 63 billion includes the financial services business as well. The environment remains very tough, but with respect to North American business, how are we going to restore its strength is something that we have begun discussing right now. Thank you. Now, with respect to the battery EV, or I would like to talk about our plan for electrification, electrified vehicles. Before that, I would like to talk about what we have been explaining in the past. We talk about carbon-free world or how to reduce carbon, how to achieve carbon neutrality. I would like to start describing that.

In trying to achieve carbon neutrality for different regions, the energy conditions vary from country to country, and the degree of a transition to green energy is totally different from region to region throughout the world. As you mentioned in your question, in California, the United States, or especially in Europe, in those regions, compared with Japan or Asian countries, quite significantly, there has been a transition made to greener energy using renewable energy more and more. Based upon that, in Europe, by 2035, including battery EV, they're talking about achieving 100% zero-emission vehicles. Therefore, Japan has its own way of achieving carbon neutrality. As I mentioned, the Europeans will have their own way of achieving carbon neutrality, the way to climb the mountain called carbon neutrality.

In line with the energy situation in each region, of course, the battery EV will be extremely formidable weapon. At the same time, other powertrains, including hybrid EVs or plug-in EVs, the fuel cell electric vehicles or the hydrogen engines that we have embraced as a new energy, and also the synthetic fuels, I think there are many options that could be used in the future. Which one of that is going to be adopted would vary from country to country. To reduce the CO2 as much as possible by using different options is something that we are considering in the local and regional context. Now, has Toyota changed its strategy or policy with respect to the battery EV?

In December last year, we had the forum in which we made a presentation or a strategy for BEV, and we talked about 3.5 million units of BEVs to be achieved by 2030. In the case of Lexus, we cited a figure of 1 million. Those basic figures or baselines have not been changed. With that in mind, we introduced bZ4X, which is the battery dedicated EV. In China this month, we introduced bZ3 in China, which is the dedicated Chinese vehicle in the battery EV. In China, we work with the BYD in developing the battery EVs by taking advantage of the strong technology. This China example would be quite easy to understand. In China, where the battery EV will grow going forward, we will introduce those products going forward.

In Japan and the United States, as we explained to you in a battery presentation forum, in order to reduce CO2 emission, we'll introduce and launch those BEVs or other vehicles, in line with the local and regional requirements. In line with the local conditions, we introduce BEVs so that we can achieve carbon neutrality altogether. I would appreciate it if you could understand Toyota's strategy from that perspective. Thank you very much.

Operator (participant)

Thank you very much to Mr. Oka. Now to the next question. From NHK, Mr. Enoshima. We will switch the screen, so when you see your face on the screen, please start asking the question. Thank you for waiting.

Speaker 12

My name is Enoshima from NHK. I have two questions. First is about the impact of the weaker yen. The results reflect the weaker yen, but tell me about the impact of the weaker yen on the business results. The second point is about the cost of termination of production in Russia. You have about $90 billion reflected in the financial results. Is there a possibility that related costs will be added to the expenses of the future?

Akio Toyoda (Chairman)

Thank you very much for your question, Mr. Enoshima. Your first question was about the impact of the weaker yen. This will be answered by Mr. Kon, the Executive Vice President. The second point was about the cost of termination of Russian production and the potential of future losses in relation to this. This will be discussed by Mr. Yamamoto from the Accounting Group.

Kenta Kon (EVP and CFO)

Thank you very much, Mr. Enoshima, as always. I will talk about the impact of the weaker yen on the financial results. Whether the weaker yen has an impact on our results. We are an OEM, and we do production in Japan, and we export our products. Foreign currency received from the customers. The weaker yen means more sales and more profits. But if you look at our suppliers, there are differences between suppliers, but some suppliers have overseas affiliates, and they send parts to their overseas affiliates. In that case, they will be profiting from the weaker yen. On the other hand, there are suppliers that import our material from overseas. In that case, the weaker yen means purchasing prices will go up, and they will incur losses.

We are talking about Toyota financial results here, but we work with suppliers and distributors. There will be impacts felt on various fronts. We cannot say the impact is positive or negative from across the board. In the short term, over the past ix months, the yen came down by JPY 30. 10 years ago, there was a time when it was JPY 75-JPY 80 to the dollar. At that time, several manufacturing companies transferred their sites, manufacturing sites overseas to eliminate the impact of forex. Back then, Toyota and other automotive companies in Japan, according to Toyota's words, have tried to protect the domestic production at any cost. JPY 8-JPY 9 million for the industry, JPY 3 million for Toyota was the amount of production in Japan.

The supplier base and the employment, including that of suppliers, was protected by maintaining production in Japan. If there is an impact of foreign exchange rates, that would mean that you are producing a lot in Japan. This time, there was a negative impact on the suppliers, so that is true. As Mr. Kumakura mentioned, in order to maintain medium to long-term competitiveness, we will look at where they can enhance competitiveness and where they can improve the structure of their business.

Masahiro Yamamoto (Chief Officer of the Accounting Group)

Thank you very much, Mr. Enoshima. Your second question was about Russia. We had a bar chart in the presentation, JPY 96.9 billion. This is the amount of losses incurred in the first half. That includes retirement costs for retiring people and asset impairment costs.

These are included in this number. Since the conflict, the stakeholders, including the employers, should be protected. That has been what we were discussing every day and every week. For the employers, we wanted to secure them a second career or the next job. Lead time and funds would be necessary for that. The money that we keep in Russia could be transferred to the employees. When we decided that that could be achievable, we decided upon this. There may be some additional costs, but there will be no additional major costs incurred.

Operator (participant)

Thank you very much, Ms. Enoshima. Now let us move on to the next question. From The Wall Street Journal, Ms. River Davis, please. I will switch the screen, so if you see yourself on the screen, please start speaking.

River Davis (Reporter)

This is River Davis for The Wall Street Journal. Thank you very much for taking my question. I have one follow-up question on the chips issue. Last week, I think the mood in Detroit was sort of that we've made it through the worst of the chip shortage, and I see that you're taking a little bit more of a conservative forecast. Could you talk a little bit about why there's a difference there? Kumakura-san, I believe you were referring to perhaps analog chips when you were talking about chips that don't have as much investment in them. Is that a particular bottleneck at the moment? My second question is about vehicle pricing.

Nagata-san, you spoke a little bit about interest rates and inflation, and I'm wondering how that's impacting car prices at the moment and how you foresee it impacting car prices through the end of the year? Thank you.

Operator (participant)

The Wall Street Journal's River Davis. First, initial point, just to follow up on the earlier explanation regarding semiconductors. Just last week, the mood in Detroit was that the worst of the semiconductor shortage had probably already passed. However, listening to you today, it seems like you have a slightly more cautious forecast. Where exactly does this difference in mood between Detroit and your company come from? That is my first question. Then, second, excuse me, Kumakura-san, you mentioned earlier about semiconductor equipment that had not been invested in. This is probably referring to analog semiconductors, I believe. Is this now the biggest bottleneck or not? I would like you to tell me that as well. That was my first question. Then my second question, this is, as-

Mr. Nagata mentioned earlier when talking about vehicle prices, you spoke about interest rates or inflation. How is this currently impacting vehicle prices, and how do you think it will continue to affect them through the end of the year? That is my second question. Thank you very much.

Akio Toyoda (Chairman)

Yes, Davis, thank you very much.

Thank you very much, Ms. Davis.

Jun Nagata (Chief Communication Officer)

With respect to the first question relating to the chip, Mr. Kumakura, the Chief Officer for Purchasing Group, will respond. Your second question, Nagata is my name, I will respond to that. Could you refer to page 18? Could you share with us the screen of page 18 of the slides once again? This is the slide that I shared with you earlier. As you correctly pointed out, there are different types of semiconductors and chips, and at this juncture, I cannot officially refer to analog semiconductor as was the key issue. But in some semiconductors, the supply is getting better, and other semiconductors, the chips remains in short supply. Generally speaking, all in all, the worst situation I believe we have already overcome with, as is mentioned in the question.

At the same time, earlier, I talked about 9.2 million units, which is the result of a downward revision. The background to that is we are now discussing with the suppliers one by one, and we are identifying the risks for specific semiconductors that are incorporated in that figure. Including those unforeseeable figures, including those areas difficult to predict, we arrived at the figure of 9.2 million, as was explained by Mr. Nakamura. Every day, we have been following the situation of each types of chips. I guess we simply have to continue doing this going forward. Overall, as I mentioned earlier, if I may repeat myself, we have emerged from the worst situation.

If we look at each type of semiconductors, the supplies are not necessarily recovered to the satisfactory level. Therefore, suppliers are using different types of semiconductors for different parts of the vehicle. By following the situation in great detail, we would like to refer that situation in the actual production activities. That's all. Thank you.

Kazunari Kumakura (Chief Officer of the Purchasing Group)

With respect to the vehicle pricing, allow me to explain in greater detail. In the first presentation, as Mr. Yamamoto mentioned, substantial amount of inflation-related impact is included, and this is not limited to the United States. As far as we are concerned, I think the prices that has risen because of the inflation in terms of vehicle prices, we have begun to reflect those higher cost of prices to the vehicle price as much as possible.

It's not that we can pass on those higher costs to the vehicle price. As I mentioned earlier, the economic conditions vary from region to region, and also the vehicles offered in the market is quite different from region to region because of the different acceptability of customers. Therefore, for different regions, the models and brand, we examine them in great detail in deciding on the price adjustments. Let me explain to you the situation by region by region. The price revision or price adjustment, the United States and Europe, even in the past, we had the price reduction or model for that price every year in terms of year model. In line with that year model timing, we made adjustments to the vehicle prices.

Therefore, in Europe and the United States, in the inflationary situation, we actually feel that we have risen the prices significantly. Also in Japan, Asia, there is commonality between these two regions. The vehicle mix and their lineup have shifted toward compact vehicles, and substantial amount of the vehicle mix is comprised by compact vehicles. In the case of Japan, the economic growth have been seeing increase in income levels. The real income has not risen in Japan. That's a reality. Therefore, the higher models such as Lexus vehicles or higher brand vehicles, we charge higher prices. In those areas where the vehicle is really essential for customers' lifestyle and that is essential for living, we have been trying to moderate those price increase adjustments.

In the case of vehicles in the Toyota brand, many are long-selling vehicles, Crown or Land Cruiser or HiAce, the Corolla, the Camry, those models have been in existence for over 30 years, be it in the United States or in Japan. In the case of long-selling vehicles, customers do have very strong attachment to specific models. Therefore, they have their clear market clearing view of the appropriate level of prices. In the case of U.S. market, it is $25,000-$30,000 Corolla. With that, those models have been accepted and loved by customers. We would like to keep those general image of the vehicle and the prices in that relationship. We are really racking our brains to come up with the appropriate level of prices. Thank you very much. Thank you, Ms. Davis, for your question.

Operator (participant)

Let us move to the next question from Jiji, Toyoda-san. We will switch the screen, so when you see your face on the screen, please start asking the question.

Speaker 13

My name is Toyoda from Jiji. Can you hear my voice?

Operator (participant)

Yes.

Speaker 13

About the full year forecast. For the full year forecast, sales has been revised upward. Is this because of the weaker Japanese yen or are there other factors behind this upward revision? If you look at operating income, you have maintained the previous forecast, JPY 220 billion from forex and for product mix that has had a negative impact, I believe. What do you mean by aggravating product mix? You've been talking about the impact of the weaker yen. Among the Japanese manufacturers, manufacturing sites are coming back to Japan and exports levels may be changing. What is your thinking towards the future?

Akio Toyoda (Chairman)

I thank you very much for your questions. Your first question was about the upward revision of sales. Is the weaker yen the only factor? For the negative impact, the product mix has had a negative impact. What are the details of the aggravating product mix? This will be explained by Mr. Yamamoto from the accounting group. With the weaker yen, some manufacturing sites are coming back to Japan. What does Toyota think of this general trend? Mr. Kon, EVP, will answer that question.

Kenta Kon (EVP and CFO)

I thank you very much to Mr. Toyoda. Our full year forecast, JPY 3.6 trillion. That is a change of JPY 1.5 trillion upward revision in sales revenue. The dollar was JPY 130, and that went to JPY 135. This JPY 5 difference is behind this upward revision. Your second question was about operating income. If you look at the product mix, this has had a negative impact. The product mix and revision is a part of our revision. You know, for the product mix, as we have a global business, depending on the region, the profitability differs. There are region to region differences, and there is also models that have higher profitability and those with lower profitability.

In relation to the different regions, China, Lexus volume has come down, and that has had a negative impact on in product mix. Alphard and Vellfire volume in Japan has come down for various reasons. The main reason is the semiconductor chips. Supply to these models was not sufficient, and therefore it has had a negative impact. That is all from my side. With the weaker yen, there are some manufacturing companies moving back to Japan. In the case of the automotive industry, once you start operation in one country, primary, secondary, tertiary suppliers will also go to that area. The supplier chain or the supply chain of the automotive industry is like that, and each company has many employees. Sometimes schools, hospitals, or cities may be created around that company.

With the short-term changes in forex rates, it will be very difficult to switch quickly the location of the manufacturing sites. Each region will have to enhance their competitiveness so that they can respond to short-term changes. They will need to maintain strength so that they can respond to those changes. On the other hand, if you look at the supplier base, manpower, it is true that manufacturing industry in Japan is very strong. There will be no drastic changes in production. To the extent possible, we will try to improve the productivity in Japan to produce products to deliver them to our customers. In order to achieve that, the efficiency, the productivity in Japan will have to be focused on, so we can produce as much as possible in Japan.

That will be necessary under the current business environment, and we will continue to work on that. That is all. Thank you very much.

Operator (participant)

Thank you, Mr. Toyoda, for your question. There seems to be other questions, but since the scheduled closing time is approaching, I would like to dedicate only two persons to ask questions. Who, Mr. Hans Greimel of Automotive News. I will switch the screen, so if you see yourself on the screen, please start your question.

Hans, I think you're—Hans, you're still on mute, so could you unmute yourself?

Hans Greimel (Automotive Journalist and Business Reporter)

Can you hear me?

What about now? Can you hear me now?

Okay. Good. May I ask a question in English?

Thank you.

Toyota is at a stage now with introducing several newly developed cars and new kinds of cars. We have the Crown series coming out. We have some new BEVs coming out. I think we'll soon have a new Prius coming out. These are all cars that rely a lot on the semiconductors and special materials for the batteries especially. To what degree are these price increases and the semiconductor supply problems impacting product development? Is it slowing down the rollout of these cars? How is the chip shortage affecting your prioritization of which kinds of models you prioritize for production and sale over other kinds? Is there a prioritization of the mix that you are trying to achieve because of the shortage?

Finally, can you give us any kind of an idea about when you expect the shortage to eventually end? 2023? 2024? 2025? I hope not, but what kind of a timeline do you see? Thank you.

Akio Toyoda (Chairman)

Thank you very much, Hans. The first question must be responded by several answers with respect to the semiconductor shortage. You also asked about the usage of new materials used for batteries, to what extent that would impact the vehicle development and what would affect the priority of the development. This will be responded by Kumakura in charge of procurement. The second question is very difficult, but Kumakura-san will respond to that question as well.

Kazunari Kumakura (Chief Officer of the Purchasing Group)

Thank you very much. Kumakura is my name. Let me respond to that question. With respect to the shortage of semiconductors or the materials used for batteries, to what extent do they impact the development of vehicles or launch of vehicles? They alone would not impact those. For the development of vehicles, if the volume is assembled, we can start the stage of development. Therefore, the development itself will not be affected or slowed by the factors you have mentioned. With respect to the models to be manufactured and produced, to what extent and how the supply situation is improved and what will be introduced were difficult. What is even more important relates to the customers who are waiting for the vehicles to be delivered.

They have purchased the vehicles, but the supply has not kept up with demand, and therefore, they have been kept waiting and waiting. There are many customers in queue. To those customers who are waiting, we would like to deliver as quickly as possible. That perspective is always kept in mind, in looking at the semiconductors and the parts comprising semiconductors as the supply are considered. That is the sequence of our thinking. With respect to your second question, the shortage of semiconductors, when that is going to be.

Removed or recovered, that's a very good question, but I personally had not expected that the supply shortage will continue this long. Earlier, I mentioned that we have been conducting emergency kanban meetings since 2.5 years ago. I never expected this to last for 2.5 years. Looking at individual elements, out of 1,000 semiconductors, some will still reflect the situation whose supply will remain short. Of course, I would like to see this shortage to be eliminated and removed as soon as possible. As mentioned in the question, is it going to be 2023 or 2024 for us to see the end to this shortage situation? I have not been able to predict the future and when the problem will be eliminated, so I do not know is my answer.

In this uncertain world, every day, all of us working together and strengthening our relationship with the semiconductor suppliers. We are making every effort to obtain the supply of the semiconductors. Probably my response is not really up to your expectations, but I hope that's the best I can do. Thank you.

Operator (participant)

Thank you very much. Now let us move on to the last question from Nikkan Kogyo. Masatoshi-san, when you see your question, please ask your question.

Speaker 10

This is Masatoshi from Nikkan Kogyo Shimbun. Thank you for the opportunity. I have three questions. First is the return to the suppliers. For the full year, the material cost rise has impact is reduced from JPY 1.7 trillion to JPY 1.65 trillion. Do you intend to continue to provide support to the suppliers next year? Second, Toyota has been adamant about protecting supply chain in Japan, and you've talked about JPY 3.5 million in Japan, but there are external factors as well, and you have not been able to maintain that number. As Mr. Kon mentioned, there are complex economic risks and manufacturing sites and procurement strategy of Toyota. What is your strategy over the medium term?

Akio Toyoda (Chairman)

Thank you very much, Masatoshi.

The first question was about the impact of material cost rise has been reduced by JPY 50 billion, and you also asked whether the supplier support will continue next year, and Mr. Yamamoto will answer that question. Your second question was about maintaining supply chain in Japan. What is our medium to long-term strategy? That will be explained by Mr. Kumakura, and as necessary, our EVP, Mr. Kon, will respond.

Kazunari Kumakura (Chief Officer of the Purchasing Group)

Thank you.

Impact on the revision of JPY 50 billion. On our relationship with our suppliers, basically there is no change. 1.65 trillion within this, supplier, the market ups and downs and other factors are included. Stable quality and stable production will have to be done, and also for manufacturing, our Kaizen activities will have to be continued. A stable environment is necessary for operations, and that is included in these numbers. Carbon neutral, when it comes to carbon neutral, the suppliers will also have to take action. The supply chain as a whole will have to think about carbon neutrality. Some suppliers are wondering what carbon neutrality is about, and sometimes the suppliers may not have meters in their production lines to measure CO2.

Time to consider and time to prepare is necessary for the automobile industry as a whole. In order to prepare, we have JPY 1.65 trillion. We will work on activities hard this year, and we will think again about what we will do next year. Next year, will we continue support to the suppliers? Protecting the supply chain, as I mentioned before, it is something that we have to continue to do work on. Each one will strive hard to enhance competitiveness. How changes will come about, we cannot predict that. If we have to continue supporting the suppliers, we will. If things become stable, we will look at the situation and take the necessary response looking at the changes. Now JPY 3 million in Japan.

JPY 3 million or more in to be produced in Japan was the plan, but semiconductors, floods, earthquakes, we had these natural disasters plus COVID. Unfortunately, we were not able to achieve JPY 3 million. It's not a matter of whether this is good or bad, but we have to keep JPY 3 million in mind and look at the overall picture of supporting the supply chain. Over the medium to long term, that perspective will remain unchanged.

Kenta Kon (EVP and CFO)

I have almost nothing to add to what Mr. Kumakura mentioned, but I may be repeating things. This year's production in Japan will be about JPY 2.7 million or so. Basically, we will continue to keep JPY 3 million in mind. There are some factors in Japan that lead to a lower production.

Over the medium to long term, we want to maintain JPY 3 million, and our thinking remains the same. There was a reference to the weaker yen, and there was a question about going out overseas and then coming back to Japan. That is not easy and that will not happen. We will use the source of competitiveness so that we can create the value of mobility.

Speaker 10

Thank you very much.

Operator (participant)

Thank you very much to Mr. Masatoshi. With this, we conclude the financial results meeting. Thank you very much for listening despite your busy schedules.