Toyota Motor - Q4 2022

Transcript

Operator (participant)

Thank you very much for joining us today despite your occupied schedule. We would like to start the Toyota Motor Corporation's financial result announcement for the period ending in March 2022. First of all, let me introduce to you the members present for this briefing. Executive Vice President, Chief Financial Officer, Kenta Kon. Executive Vice President, Chief Technology Officer, Masahiko Maeda. Chief Communication Officer, Jun Nagata. Accounting Group Chief Officer, Masahiro Yamamoto. Now, ladies and gentlemen, first of all, Yamamoto will share with you the overview of the financial results.

Masahiro Yamamoto (Accounting Group Chief Officer)

Hello, everyone. Thank you for joining us today. I am Masahiro Yamamoto. 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. We would like to express our sincerest gratitude to all the stakeholders.

I sincerely apologize for the inconvenience caused to our customers due to the recent production volume reductions. We will work hard to deliver our product as soon as possible. First, let me explain the summary of our performances for the fiscal year ended March 2022. Under the production constraints due to the spread of COVID-19 and semiconductor shortages, dealers, suppliers, and production sites have all worked tirelessly in order to deliver as many cars as possible to customers.

Despite soaring materials prices and increase in expenses for the investment in new business fields, we achieved growth in revenue and profits thanks to cost reduction and marketing efforts. This is attributable to the improvement of our revenue structure, which we have been working on for a long time towards one that is not dependent on foreign exchange rates and volumes.

As for the forecast, we have set our production volume assumption to an appropriate level, having safety and security as our top priority. We expect a decrease in our operating income due to unprecedented increases in materials and logistics costs. However, we'll continue with our future investments and promote our various activities. As for the shareholder return, the year-end dividend is JPY 25 per share and maintain a steady increase. Share purchases will be up to JPY 200 billion, including JPY 100 billion set aside to enable more flexible share repurchases than before, while considering share price levels. Let me explain our performance for the fiscal year ending in March 2022.

Consolidated vehicle sales for the period was 8.23 million units, which was 107.6% of the consolidated vehicle sales for the same period of the previous fiscal year. Toyota and Lexus brand vehicle sales was 9.512 million units, 104.7% of the same sales of the same period of the previous year. The ratio of electrified vehicles was 28.4%. The consolidated financial results for this fiscal year were sales revenue JPY 31,379.5 billion, operating income JPY 2,995.6 billion, income before income taxes JPY 3,990.5 billion, and net income of JPY 2,850.1 billion.

I would like to explain the factors that impacted operating income year on year. First, the effects of foreign exchange rates increased operating income by JPY 610 billion. Second, cost reduction efforts decreased operating income by a net of JPY 360 billion. This consisted of JPY 280 billion increase due to cost reduction efforts and JPY 640 billion decrease due to the impact of soaring material prices. Third, marketing efforts increased operating income by JPY 860 billion, largely due to the increase in sales volume and improved earnings in the financial services business. Finally, an increase in expenses decreased operating income by JPY 220 billion.

As a result, excluding the overall impact of foreign exchange rates and swap valuation gains and losses and other factors, operating income increased by JPY 280 billion year-on-year. As shown here, the operating income for each region increased year-on-year in all regions. This is largely due to the impact of foreign exchange rates, cost reduction, and marketing efforts. Next, let me explain our business in China as well as the financial services business. As for our business in China, both the operating income of consolidated subsidiaries as well as our share of profit of equity methods affiliates increased mainly due to the impact of foreign exchange and marketing efforts. Regarding the financial services business, operating income excluding swap valuation gains and losses for the fiscal year increased year-on-year, largely due to the increase in the lending balance and margins.

Next, let me explain the return to shareholders. We plan to make a year-end dividend of JPY 28 per share. We will continue to aim to pay stable and sustainable dividends while maintaining and improving upon our consolidated dividend payout ratio in the medium to long term in order to reward shareholders who hold our shares over the medium to long term.

As for share repurchases, we set the maximum limit to JPY 200 billion, including JPY 100 billion set aside to enable more flexible share repurchase than before while considering share price levels. Aiming at enhancing capital efficiency, we plan to implement the share repurchases in a flexible manner, taking into account various factors, including investment in growth, dividend levels, cash on hand, and share price levels.

Next, I will explain the forecast for the fiscal year ending March 31, 2023. Consolidated vehicle sales is expected to be 8,850,000 units, which is 107.5% of the previous fiscal year, with growth in sales expected in all regions. As for Toyota and Lexus brand vehicle sales, it is expected to be 9,900,000 units, which is 104.1% of the previous fiscal year. As for electrified vehicles, by improving our product lineup to better meet customers' needs in each region, sales are expected to be 3,070,000 units, which is 113.6% of the previous fiscal year. We expect that the ratio of electrified vehicles will amount to 31.0% of vehicles sold.

Towards carbon neutrality, we will continue to make efforts to provide a wide range of options to meet the needs of each region and hence, be selected by customers in those regions. Next, let me explain the forecast for the full year consolidated financial performance. We have adopted forex rate assumptions of JPY 115 per U.S. dollar and JPY 130 per euro. Based on this, our forecast for the full year consolidated financial performance are sales revenues, JPY 33 trillion, operating income, JPY 2.4 trillion, income before income taxes, JPY 3.13 trillion, and net income of JPY 2.26 trillion. Next, I would like to explain the factors that impacted operating income. First, the effects of foreign exchange rates are expected to increase operating income by JPY 105 billion.

Second, cost reduction efforts are expected to increase profits by JPY 300 billion, while the impact of a sharp increase in materials cost is expected to be JPY 1.45 trillion, resulting in a total decrease of JPY 1.15 trillion. Marketing efforts are expected to increase operating income by JPY 815 billion, largely due to the increase in sales volume. Finally, an increase in expenses is expected to decrease operating income by JPY 440 billion. Although we continue to face difficult business environment, we will continue to further improve our profit structure and accelerate our efforts to transform into a future mobility society. This concludes my presentation on the financial results.

Kenta Kon (EVP and CFO)

Next, EVP Kenta Kon will talk about changes in profit structure. I am Kenta Kon. Although the results for the fiscal year ended March 31, 2022 are for a single fiscal year, they represent the accumulation of improvements so far in our profit structure. I would like to add a few words from that perspective. These graphs compare the change in our operating income in the year of the 2009 global financial crisis and the COVID-19 pandemic last year, in each case, compared to the previous year. In both cases, sales volume decreased by 15% compared to the previous year. At the same time, at the time of the global financial crisis, profits decreased significantly, pushing Toyota into the red, while in the fiscal year ended March 2021, we were able to secure a profit. This shows the break-even volume for the fiscal year ended March 31, 2009 onward.

If we assign our break-even volume at the time of the global financial crisis a value of 100, we have lowered our break-even volume most recently to the 60-70 range, demonstrating that we have made significant progress in improving our condition over the past 13 years. This was not something that could be done overnight.

Immediately after the global financial crisis, we had to put the brakes on all of our R&D expenditures and capital investments. We could not do any investments in the future. While overcoming the numerous crises known as the Six Hardships, such as our quality crisis, we continuously worked to improve our profitability. Improved profitability was not something that Toyota was able to achieve on its own. Rather, it was the result of a great and concerted effort with all of our stakeholders. To them, we say thank you.

During that period, as one of Toyota's strengths is having a full lineup of products globally, we shifted to an in-house company system that would allow us to provide high quality and reasonably priced vehicles at the right place and time to an even higher degree.

Along with in-house company system, we introduced a Toyota New Global Architecture, or TNGA, a shared vehicle platform to improve the basic performance and product appeal of our vehicles and enhance their reflection of regional characteristics with the aim of not being best-in-town in the world, but the best-in-town. In the past, we often introduced completely new vehicle models on a one-off basis as the market grew. Now we are continuously evolving our long-time best-selling cars, such as the Yaris and Corolla, to keep them current so that they can go on being long-time best sellers.

We believe that this has resulted in our being able to increase profitability. I would like to explain the changes in our profit structure over the past six years since we transitioned to our in-house company system. Looking at the factors behind increases and decreases in operating income, our profit has increased despite major negative factors such as foreign exchange rates, sales volume, and increases in materials prices. In terms of sales greater than JPY 2 trillion, an improvement in profit is due to sales price increases and a reduction in selling expenses. We believe that this is a result of our customers highly evaluating our products. Also, both sales volume and quality helped customers maintain high vehicle value, leading to improved profitability, not only in the automotive business, but also in the financial services business.

In terms of cost improvements, we believe that significant improvements have been achieved by the effect of switching to new products that are based on the TNGA platform and through the power of our production workforce, including those of suppliers, which can respond to the launch of various new products and environmental changes, as well as produce high-quality products. We used to increase profit through foreign exchange rates and volume growth, but this has certainly changed over the past six years. Comparing 2015 and 2021, we have increased our market share for new car sales in 11 of the 15 major countries, including China, the United States and Japan. The graph on the right shows the by-model used car prices in the U.S. three years after purchase.

Our RAV4 has received higher appraisals than vehicles by other manufacturers in the same segment, and it is evident that those appraisals have gotten even higher since we switched to the TNGA-based RAV4. Being able to command a high price in the used car market protects the value of customers' owned assets, and we believe this is building trust in our brand. Our in-house company system, best-in-town activities in each region, TNGA, product lineup strategies, the creation of ever better motorsports-bred cars and the human resource development that supports these activities, as well as various in-house system reforms.

As mentioned, although our performance in the fiscal year just ended represents our situation for a single fiscal year, it is the result of efforts that have been ongoing for a long time, and we would like to once again thank everyone involved for their support. Many customers are currently waiting for a long time for delivery of their vehicles. We would like to take this opportunity to apologize again. This concludes my explanation. Thank you.

Operator (participant)

From here on, we would like to open the floor for discussion, Q&A. If you have a question, please press the hand button on the screen, and when your name is mentioned, please turn on the microphone and also the camera. We would like to receive questions from as many people as possible, so please ask only the maximum of two questions, no more than two questions. Mr. Fukui of Automotive Journal, Daily Journal. We will switch the screen, and once you see yourself on the screen, please start your question. Mr. Fukui, please. Fukui of Nikkan Jidosha Shimbun.

Speaker 7

Can you hear me?

Operator (participant)

Mr. Fukui, your voice is quite low. Could you once again repeat yourself?

Speaker 7

Can you hear me?

Operator (participant)

Yes, we can. Yes. Thank you.

Speaker 7

First of all, with respect to the assessment of the financial results of the fiscal year just ended, the sales revenue is at JPY 31 trillion, and the operating income is around JPY 3 trillion, both are record high levels. With respect to those good financial results, how do you assess that? What is your view of that? The second question is as follows. Due to the soaring raw materials prices and cost improvement efforts, according to the information published in the period fiscal year ended, the soaring impact of soaring raw materials prices was JPY 640 billion, and this current year it is already JPY 1.55 trillion. Mr. Kon has been talking about JPY 300 billion to improve operating income through cost improvement efforts.

I think the soaring raw materials prices is so high that that cannot be covered by the further cost reduction. Is there any further room for cost reduction? Including therefore overseas manufacturers are increasing their prices. What is your approach to passing on higher raw materials costs to the final prices?

Jun Nagata (Chief Communication Officer)

Thank you, Mr. Fukui. With respect to the good results of financial results of the fiscal year ending in March 2022 that will be explained by Mr. Kenta Kon, EVP. The assessment of that. For the fiscal year just ended as the raw materials prices soared, what are we going to do with the cost improvement efforts? Mr. Masahiro Yamamoto will respond to that. With respect to pricing, I, Jun Nagata, will respond to that aspect of the question. First, may I ask Mr. Kon to respond to the first aspect.

Kenta Kon (EVP and CFO)

Thank you, Mr. Fukui, for your question. With respect to our assessment of the fiscal year just ended, earlier, I made additional comments in the presentation. As reflected there, the fiscal year just ended in March 2022 in terms of the financial results for the full year of that. Up until that particular moment, over 13 years altogether, we made accumulated efforts which brought down the break-even units, and that reduced the break-even units. That is the major driver of financial results. This is the financial results achieved in a single year. It is just one year. Over many years that we continue to make efforts. It depends on the economic conditions prevailing any fiscal year. It's reflected in those numbers.

On the foundation and basis of that is the not just the initiatives and activities pursued in that particular fiscal year, but the accumulated efforts for improving profit structure pursued over many years. In that sense, the fact that we've been able to make this financial results could indicate that good results of our efforts to improve our operating structure is reflected and manifested in that. As I said, the financial results reflect the efforts of a single year. In terms of production gemba, every day they are engaged in production activities which produce a certain number of units. Sometimes the line is stopped or at other times efficiency might suffer. In that sense, the books are closed every single day. Every effort is made to achieve better results tomorrow than yes, today, and maybe even better results after that.

Those efforts pursued over 13 years or so is reflected in the financial results. We have suffered from the impact of raw materials inflation on the current variant of COVID. I think the most important factor and characteristic of this financial results was the continued and accumulated efforts over many years for improving operating structure. That's my assessment of the financial results. Thank you.

Jun Nagata (Chief Communication Officer)

With respect to cost reduction efforts, if you could refer to slide 16, maybe. Thank you. Yes. JPY 2.4 trillion, aiming at that, this shows the waterfall chart. It shows -JPY 1.45 trillion. That is the soaring material costs and JPY 300 billion achieved through the cost reduction efforts and also from that subtraction of JPY 1.45 trillion of soaring raw material costs.

Therefore, to continue making efforts to achieve around JPY 300 billion in cost improvement efforts, manifestation is certainly very difficult. What we have been continuing to do will continue to be pursued going forward. When the raw materials prices are very high and soared, what sort of materials should we be using is a new aspect that we will consider. That might represent a certain perspective from which the cost improvement efforts can be continued. Every day, probably we can find those new seeds for cost improvement. Lastly, with respect to the efforts to pass on higher cost to prices, let me respond to that. Overall, within Toyota, one of the characteristics of a Toyota is to have the operational full lineup, both the passenger cars and commercial vehicles on the global side level.

We are operating globally with the full lineup of a product. Therefore, in each region, we have many different customers in different segments, and we are trying to satisfy those differing needs in a very fine-tuned manner every day. From that perspective, the production plan and pricing is made.

There are a variety of customers, different types of customers in that. Because of the soaring raw material prices, sometimes there may be segments from whom we may be able to receive a higher consideration. At the same time, there are other segment of customers who need and who use vehicles for as means of transportation, as a work vehicle. From those customers, even if the raw materials prices soared and increased, trying to increase the prices charged to those customers would represent a very difficult thing to do.

As Kon mentioned earlier, for products, we focus on regional differences and different product lines. In each region, for each lineup of product, where can we set higher prices or where is it very difficult to change prices, those will be closely examined before a decision is made. That is what we keep in mind, even in the current context. If I may further add, one of the characteristics of Toyota as an OEM, we have the Crown or the Corollas or HiAce in a sense. There are so-called long-selling brands, and we have so many of those long-selling vehicles. That's one of the characteristics of Toyota as an OEM. Those brands are really enjoying patronage of many customers belonging to many segments.

Therefore, for customers with respect to product strength and the pricing, they have a certain level of a market level they keep in mind. We need to satisfy those expectations, meet those customers' expectations. Even if inflation has set in to increase price, we simply cannot satisfy those customer needs and expectations. Including that aspect, and as Mr. Yamamoto mentioned, we will continue to improve cost, not on a single year basis, but also over many years, so that we can meet customers' expectations as much as possible. That's our approach. Thank you.

Operator (participant)

Thank you very much to Mr. Fukui. Now let us move on to the next question. From Asahi, Kondo-san, please. We will switch the screen. When you see yourself on the screen, please start your question.

Speaker 6

Mr. Kondo, please. From the Asahi Shimbun newspaper, my name is Kondo. This question is related to the first question. The year end, in March 2022, the impact of raw material cost is much higher than the previous year. What is your perspective on the market conditions? In the short term, the yen is weaker, so they're hitting in terms of foreign. Can you tell us your view on that? When you do a reporting, if you look at the supply chain. With regards to supply chain assistance, support and distribution, what is your view? That is my first question. The second question, in relation to global production, last year, initially 9.3 million was the plan. After that, you reviewed that plan, and ultimately you had about 8.57 million.

For this year, 9.7 million, which is very high. There was a shortage of semiconductors, and yet 9.7 million is the number you have. Why do you have this number? Because of car shortage from China, are some of your production sites in Japan is going to suspend production. What is your perspective on the risk with related to the Chinese zero-COVID policy?

Jun Nagata (Chief Communication Officer)

Thank you very much. First, your first question was about the soaring raw material prices. Second, how are we going to respond to our suppliers? That will be explained by Mr. Kondo and the EVP. Your second question, 9.7 million for this year production, what is the basis for this, was the question. Because of the Chinese supply chain, the production is going to be suspended, and you would like to have that included in our response. Mr. Yamamoto will respond to that second question.

Masahiro Yamamoto (Accounting Group Chief Officer)

Thank you very much to Mr. Kondo. First about the raw material price and the market conditions. JPY 1.45 trillion, as you mentioned, it is unprecedented. JPY 640 billion last year was the highest ever impact. This year it's more than twice that number. The impact was very high with our suppliers. With regards to raw material prices, in principle, Toyota will bear the burden. That is the basic rule. Based on that rule, globally, how much impact there will be, taking into consideration short-term market.

How much Toyota should bear the burden. That was calculated. In the short term, the weaker yen may have a major impact, you mentioned. JPY 1.45 trillion, if you look at the breakdown, about half of that comes from global affiliates, subsidiaries and affiliates. The remainder comes from the Japanese business. In particular, with the weaker yen. That we don't think had a major impact on the results. Suppliers, JPY 1.5 trillion, the impact of raw materials. Impacts both OEMs and suppliers. We have to work together to respond to the situation, and we have to think together and implement the necessary measures together. As Mr. Yamamoto mentioned, the raw material prices have gone up, so the amount of raw materials used should be reduced to the extent possible.

When possible, we should use lower cost material. Those are measures that have to be taken. A vehicle development and production and sales is from our company, and therefore, we have to develop the products that offer higher value to the customers. Rather than just simply raising the prices. We have to make further efforts as a company in product development. In a single year, JPY 1.45 trillion. That cannot be totally absorbed in a single year. Even if it may take time, we have to take solid steps and measures so that in several years' time, we will maintain or improve our competitiveness in the market. A cost reduction of JPY 300 billion per year will have to be achieved through SSA activities. We have to make further efforts in these areas.

We have a sense of crisis, and we do realize that we have to continue these efforts. That's all from my side. The second point was about the production volume. Last year, against the plan, the production volume was lower, and we repeated that several times. We wanted to produce each vehicle with all our efforts and passion. The people at the gemba all worked very hard, and I would like to thank everybody for those efforts. This year's plan, 9.7 million, and I think that was the point of your question. In January, 1.1 million was the unofficial plan that we announced, and that was changed to 9.7 million. Taking into consideration the situation last year, what is important is safety and quality being protected and continue to produce each vehicle.

We have to go back to those basics. With that thinking, we came up with 9.7 million. We don't know what will happen to this number in the future, but that is the approach for the next year. COVID-19's impact and how much semiconductors can be procured this year have been taken into consideration. We asked the people on the gemba.

A sudden reduction in production means they have no work, and they may be switched to other work, and there may be replacement of people changes, and they have made or gone through a lot of struggles. The plan, if the plan can be conveyed to the people earlier, for example, by reducing takt time, the people on the gemba can continue to work, and if they have some spare time, they can work on kaizen activities. As Mr. Kon mentioned at the outset, human resource development will have to continue, and the gemba people have that mentality of continuing human resource development. That will continue to be kept in mind as we proceed with production activities.

Operator (participant)

Thank you very much to Mr. Kondo. We would like to move on to the next question from Chunichi Shimbun, Shiraishi-san. I'll go switch the screen. If you see yourself on the screen, please start your question. We are now trying to switch the screen. Shiraishi of Chunichi Shimbun. Can you hear me?

Speaker 8

Yes, we can. Thank you very much. Thank you for this opportunity. I have two questions as well. Question number one relates to Hino Motors. Because of the misconduct with respect to exhaust gas, and that really lost and impaired the trust and confidence of consumers, and also that really required improvement of a corporate culture. Because of the stoppage of shipments, the financial well-being of the company is in question. There are huge and mounting challenge over Hino.

As a parent company, how TMC assesses and considers this Hino struggle and going forward, because of so many challenges facing Hino, the human resources, goods, and financial resources, what sort of assistance and support does Toyota intend to provide to Hino? Second question. You talked about the product-driven management, and you also talked about the efforts for continuous improvement. I would like to ask about your future approach going forward. Thus far, the world has been focused on internal combustion engines, but it is quite true that increasingly vehicles will be battery EVs. In the case of battery EVs, probably battery cost will be about one half of the overall cost. But in the age of electrification, that would result in different cost structure. How do you intend to keep your cost competitiveness or competitiveness of your products overall? These are my two questions.

Jun Nagata (Chief Communication Officer)

Thank you, Mr. Shiraishi. We received two questions. The question number one related to Hino Motors, relating to the misconduct of that. As a parent company, how does Toyota respond to that? Kon, I guess the vice president, will respond to that question. Second, a question related to the product-driven management, which Kon talked about in the earlier presentation. In relation to that, in the electrification, including the cost of battery EV, what will be the cost improvement efforts and also how we will address that? Maeda, EVP will respond to the second question. Mr. Kon, please.

Kenta Kon (EVP and CFO)

Thank you, Mr. Shiraishi, for your question. With respect to the first question, that relates to the Hino Motors, Hino is a consolidated subsidiary of TMC. The Hino Motors was engaged in the misconduct relating to the exhaust gas and also fuel consumption efficiency. The customers, the dealers, the suppliers and also the regulatory authorities who all supported Hino to date received a tremendous inconvenience because of this. The confidence and trust they placed on Hino was completely lost. As a parent company, I feel really sorry for that. It is indeed very regrettable what Hino did. Hino is a consolidated company engaged in the production and manufacturing of commercial vehicles.

In terms of the supervisory and oversight responsibility for Hino as a parent company, we intend to support Hino and its efforts to restore the confidence of those stakeholders. As a parent company, we intend to work with Hino to restore such confidence. That, I think, is the role to be played by a parent company. Currently, the special investigation committee composed of outside experts are now investigating the root cause of this problem, and we'll pay attention to the outcome of that special committee.

Bearing that in mind, in terms of the governance of Hino Motors, but not limited to that, the reform of the corporate culture, the promotion of business, including those aspects of Hino Motors, and placing the greatest priority on the efforts to restore confidence and trust of stakeholders and customers. We really caused this inconvenience, for which we are sincerely sorry for that. That's my response to the first question.

Masahiko Maeda (CTO)

Thank you, Mr. Shiraishi. With that, the second question, allow me to respond to that aspect. In the age of electrification, how Toyota is going to keep its competitiveness? That was the question. The competitiveness, what does that mean, actually? As far as we are concerned, the fact that our customers choose our product is the indication of customers. We think that it is the customers who has the final say on the product decision. Our products can be chosen by the customer is the key. I think there are various different reasons and factors based upon which the choice and decision is made by customers.

As I mentioned, some customers will focus on the affordable but high quality. In other segments, customers might refer to value-added aspects which enhance their lifestyle or their enjoyment. In certain areas where the usage is made in the adverse natural environment, the durability may be the very important factor for the choice of vehicles. As Kon mentioned in his own presentation, we'll continue with those activities as a part of our efforts to improve operating structure. We have in-house company system. Through that, we focus on what sort of business we are doing on the global scene, what sort of product lineup we have. Paying attention to those, different in-house companies focused on their own lineup and made efforts to respond to the customers of those, of different kinds.

In the past, we tend to focus on the volume or margin, but rather, some of those in-house companies compete against other in-house companies. So that ultimate efforts will be made to deliver ever better cars to customers, the best vehicles to customers. If we can share with you slide number 31, this shows one of the characteristics of Toyota. In the different regions of Toyota, where are the regions in which Toyota is doing business? Toyota can be on the top. It's not that our business is biased in any specific region. We talked about full lineup operation globally. In many different regions, the customers in those different regions throughout the world as a B2C company, we are allowed to do business. Amongst many different regions, we do receive feedback from customers in different regions.

Unless we operate through best-in-town company, we won't be able to capture those feedbacks. In the past, we tend to focus a certain area, the services. Through those best-in-town companies, every effort is made to receive feedback from customers. Our in-house company system is one effort of that, and also, focusing on being the best-in-town is that. Offer value, customers give an asset, deliver your products, and receive feedback from customers. This reflects the result of efforts Toyota made over the years to improve operating structure. By doing so, we can develop human resources. This efforts to improve operating structure also include as one aspect the human resource development as well, and that results in enhanced competitiveness. Those efforts should be continued on a sustainable manner.

For the customers to choose Toyota in a sustainable manner, we need to continue with those efforts. There is no end of our efforts for operating structure improvement. Continuous pursuit will lead to the continued customers, choosing customers, chosen by the customers. Added to that would be the strength of software going forward. That will represent one, a new element. Together with Woven Planet, we intend to increase our strength in the software aspect. The vehicles tend to be focused on hardware, but including software going forward, we intend to meet the more diversified needs and desire of customers. Standing by the customers with different needs, we intend to enhance our competitiveness because that leads to the better products and improvement of our attractiveness. I think the only way is to simply make those efforts in a dogged manner.

Operator (participant)

Thank you very much. Thank you, Mr. Shiraishi. Now let us move on to the next question from Yomiuri. Yamamoto-san, please. We will switch the screen, so when you see yourself on the screen, please start your question. We are switching the screen now. Mr. Yamamoto, thank you for waiting. Can you hear me? Can you repeat yourself? Do you hear me?

Speaker 11

Yes, please. My name is Yamamoto from the Yomiuri Shimbun, the newspaper. The first question, the forecast for this year. In the United States and Europe, inflation, and China has the zero COVID-19, and there is a concern of recession. This year, overseas sales are expected to be 1.5 million. In this environment of recession, how do you see the market developing? Now, domestic production, 3 million. That was in the forecast again. For TMC, 3 million in Japan. What does it mean to Toyota?

Jun Nagata (Chief Communication Officer)

Thank you very much to Mr. Yamamoto. The first question I want to clarify. This year, in March 2023, your question about the, was about the overall market forecast?

Speaker 11

Yes.

Jun Nagata (Chief Communication Officer)

I will answer that question. The second question was about TMC 3 million production in Japan. What does that mean for Toyota? I think that was your second question. That will be answered by Mr. Yamamoto from Accounting Group. Your first question was about the overall market conditions. This fiscal year, it's going to be even more difficult than other years to make a forecast. As Mr. Yamamoto mentioned, overall, globally, if there is any positive factor, China still has many restrictions with the zero-COVID-19 policy. Overall, recovery from COVID-19 is going to be a big positive factor.

If you look at the negative factors, as we mentioned in our financial results announcement, the raw material prices are soaring, and inflation in various areas will have an impact on the daily lives of people. There is inflation, and then there is the Ukrainian factor, and that is causing a lot of concerns in many areas. Next, supply constraints of semiconductors and other parts will be a major limitation in the automobile industry. These factors will be compounded this year. By region forecast is also very difficult. Let me give you a rough outline of what we are thinking now. China and the United States, roughly speaking, in the year ending March 2022, compared to the year ending March 2022, we will see a slight improvement.

Japan and Asia, we have the positives and negative factors that I mentioned before. If you add them together, it will be about plus minus zero. It, the market will be about the same as fiscal 2021. The most difficult region to forecast, I think, is Europe. Energy, materials, the Russia-Ukraine issue will have a major impact, and that will have an impact on the economy in general. We think the risk will outweigh opportunities. For the European market, I think it will be below fiscal 2021. Those are the rough outlooks, the forecast for the major markets. That is for now. The situation in COVID-19 and the Ukrainian situation will change rapidly day to day. If the assumption in the general market changes, that means a change in the standard.

We'll have to make changes to our business, so that we can see improvement in cost, procurement process structure and delivery to our customers. Towards that end, we will continue to make efforts on a day-to-day basis. That is all from my side. 3 million units production in Japan. That was the second question, I believe, and Mr. Yamamoto speaking. This is something I heard from another person.

After the Great East Japan Earthquake, in Tohoku, we set up a factory, and we set up a foundation for industry, including employment. As a result, to the Japanese auto industry, which has to purchase materials from outside of Japan and has to earn foreign currency from outside of Japan, we have been able to make a contribution. Japan, we are a global company, but Japan is our home country. We think people are supporting us in our efforts that we are doing in this country. That's what the 3 million units means to TMC.

Operator (participant)

Thank you, Mr. Yamamoto. Let us move on to the next question. From NHK, Taruno-san, please. I will switch the screen, so if you see yourself on the screen, please start speaking. We're now switching the screen. Taruno of NHK. Can you hear me?

Speaker 9

Yes, I can. I also have two questions to ask. Question number one, that relates to Ukraine and Russian situation. In relation to that, your business in Russia, how are you going to do with your Russian business? Currently, you suspended your operation because of the confusion in logistics. Russian business, the outlook remains very uncertain, very difficult to read what's going to happen in the future. What's the current status, and what are you going to do with your business in Russia?

The second question, as was mentioned in the first question with respect to the passing, the higher cost to prices. In this meeting, it was mentioned that there has been unprecedented, raw materials cost increase exceeding JPY 1 trillion. Earlier, depending upon customers, you may be able to receive a higher amount of consideration for the product, you offer to the customers. Am I right in understanding that includes Japanese market as well? How can you pass the higher cost to prices in the Japanese market? I think it is very difficult decision to make. Here in the Japanese market, where deflationary trend still continues, how are you going to absorb the impact of higher raw materials prices in the Japanese market?

Jun Nagata (Chief Communication Officer)

Thank you, Mr. Taruno. The first question related to the current situation in Ukraine and what Toyota is going to do with Toyota's business in Russia, and I will respond to that question. Masahiro Yamamoto speaking. With respect to prices, I answered the earlier question in the same line. In the very difficult deflationary trend, what we are going to do with the pricing level was the question. Let me just respond to this question. With respect to Toyota's business in Russia, since February 24, and I'm sure you still remember very vividly in terms of the visual impact of that, the Russia made an invasion into Ukraine. Starting from that, many precious lives have been lost due to that. In addition to that, safe livelihoods are being threatened, and especially in Europe, and of course, Japan was no exception, but energy and food are becoming scarce.

That's the reality that we are confronted with. Many people throughout the world, together with them, we in Toyota are indeed heartbroken and seriously worried. We at Toyota believe that happiness is never born from aggression and war caused by aggression. We sincerely hope that peace and security be restored to Ukraine and the world as soon as possible. That's an ardent desire. Furthermore, Toyota has customers who own approximately 100 million vehicles worldwide. In addition to that, there are many stakeholders who support Toyota throughout the world, numerous stakeholders. With respect to our business in Russia, we will try to keep our approach of gaining the understanding and empathy of our many stakeholders and people, including in Russia as well. What we will be able to do is something that we will consider to.

We will continue to consider and rack our brains too. That's all with respect to Russian issue. With respect to the prices here in Japan, which might reflect the higher costs, depending upon the conditions of a region or depending upon the people who use vehicles as an essential means for business, in some cases, it may be easier to pass on costs, in others, not so. As Mr. Taruno knows, here in Japan, the business confidence is very low. The business sentiment remains very stagnant. Disposable income of people is very difficult and slow to increase. In that general context, are we going to raise price or not?

As mentioned earlier, within Japan and the Japanese context, in the case of vehicles, especially mini vehicles or compact vehicles, for used vehicles for, as an essential means of their business to raise prices, to those people, I think it's very difficult to do. Having said that, depending upon vehicles in different forms, there are certain vehicles

On which we can charge higher prices. In that sense, by looking at each model one by one, and we are now studying in a very detailed and fine-tuned manner what would be the best approach that we can take. I hope you understand what we have in mind in that sort of instance. In this current environment, we are making efforts so that customers will be satisfied and be happy being able to buy our cars in this very difficult environment, and that's how I'd like to understand our approach.

Operator (participant)

Thank you, Mr. Taruno. Now, let us move on to the next question. From Wall Street Journal. Mr. Sean McLain, please. We will switch the screen, so when you see yourself on the screen, please start your question.

Sean McLain (Reporter)

Sean McLain from the Wall Street Journal. Can you hear me okay?

Jun Nagata (Chief Communication Officer)

We hear you.

Sean McLain (Reporter)

I have a question about rising prices as well, and I'd like to ask particularly about the U.S. market, because I think it's a big source of your profits. We're around record highs in transaction values in the U.S. of around $46,000. What I'm wondering is, Toyota at all concerned about affordability of its products, particularly in the U.S., where maybe the average person can no longer afford a new car, and what Toyota is thinking about, if anything, doing about that? The second question is about hybrid sales.

I notice your electrified vehicle sales have started to increase, and while I understand that that might partly be influenced by the sort of model mix you have in the country, given production shortages, where do you see hybrid sales going in the next year or two? Do you think there's a lot of room to grow, hybrids around the world, but particularly in the U.S.?

Jun Nagata (Chief Communication Officer)

I thank you very much, Mr. Sean McLain. The first question was about the prices in the U.S. market. For Toyota customers, are we concerned about it being too high for Toyota customers? That will be answered by Mr. Kon, EVP. The second question was that over the one or two years, do we see hybrid vehicle sales to grow globally? If it is to grow, in which areas will that grow? That will be answered by EVP Mr. Maeda. Starting with Mr. Kon, please.

Kenta Kon (EVP and CFO)

I will answer your first question. About prices in North America, as Mr. Sean McLain mentioned, it's not just for Toyota, but for North America overall, prices are going up. As a manufacturer, what we can do is to provide various options to customers. That is what we believe.

As we mentioned before, on a global basis, we have a wide lineup, product lineup. In the United States, we have SUVs. SUVs, pickup truck are the main lines of products. We also have sedans, hatchbacks. These compact cars are also part of our lineup. These are important products that we are offering to our customers. We will continue to provide that wide variety of product lineup to our customers. In addition to that, rather than just selling new vehicles to the customers, we also offer leasing options like Full-Service Lease. In Japan, we have KINTO, and also recently, globally, we also have KINTO. How to supply vehicles is also something we are having a wide variety or a wide broad lineup on.

When we listen to what the dealers are saying, in the past price negotiations took place frequently, but recently, and partly because inventory is low, which vehicle is in which pipeline, and which vehicle comes with which options, and what advantages those vehicles provide to the customer. These kinds of conversation take place at dealers. They're focusing on the product. I think this is very good. For the customer, more options for models, more options on how to purchase vehicles. We will provide these various options and have the customer choose. That is all for the first point.

Masahiko Maeda (CTO)

Let me answer the second question. In the future, including the United States, in one or two years will hybrid sales go up? I think that was the question. If you look back, in the United States, when fuel prices go up, hybrid vehicle sales tended to go up in the past. Taking that history into consideration, currently we are seeing rising crude oil prices, and not only in the United States, but globally.

At least, I think that we can expect an increased trend of hybrid vehicle sales globally. There is another factor behind hybrid vehicle sales going up in the United States. The latest product, RAV4. In the past, hybrid vehicles tended to focus on fuel economy. The U.S. customers not only focus on fuel economy, but also they focus on driving comfort, including good acceleration. The new RAV4 has strengthened that characteristic. The RAV4 Hybrid that is currently on the market, and the plug-in hybrids are also very favorably accepted by our customers.

That is the voice we hear from the market. We, alongside the best-in-town activities, will listen to the customers' voice in the United States to strengthen our product. We do think the market will grow. Taking into consideration the environmental issue, I think we should grow sales of hybrid vehicles.

Operator (participant)

Thank you very much to Mr. Sean McLain. The scheduled concluding time is approaching, and therefore, I would like to have final questions. Mr. Ikarashi, can you switch the screen? If you see yourself on the screen, please start speaking. Ikarashi of NewsPicks.

Speaker 10

Ikarashi of NewsPicks, thank you very much. I have two questions as well, if I may. The first question, this is somewhat redundant from the previous question, but your view of the BEV. In one of the pages, you talked about the outlook of the sales. You talked about the increase of 593%, close to 600% increase in the BEV sales. In the past, when you had discussions with the battery electric vehicles, many customers buy BEVs as a second car, not the first primary car. In terms of the recent situation, and also considering the prevailing situations, the RZ, the bZ4X, including those, what is your view of the demands for BEVs? That's the first question.

Secondly, in the earlier response to the question with respect to the change in the earnings structure after the global financial crisis, and in a sense, you described what has been done thus far, which resulted in the current situation in terms of our earnings structure. In that general context, for the current fiscal year, starting from the first of April, you reestablished or introduced the executive vice president. You have been trying to reduce the number of directors or executives and try to accelerate the decision-making speed. That's what we've been talking about. What is the objective of restoring the position of executive vice president? What is your view? How Toyota's management is going to evolve and transform going forward, especially starting the current fiscal year? Those are my questions.

Jun Nagata (Chief Communication Officer)

Thank you, Ikarashi-san. The first question relates to the market of battery EV. What sort of change is foreseen? Maeda, EVP will respond to that question. The second question related to the new executive lineup, which restored the position of the executive vice president. What is the objective of that in the current fiscal year? What sort of a change or transformation in the management structure is considered? It was the second question. Kon will respond to that as executive vice president. Mr. Maeda, please.

Masahiko Maeda (CTO)

Thank you, Mr. Ikarashi, for your question. In terms of the market trend of battery EV, that was the question, according to my understanding. What I feel most important is that vis-à-vis the battery electric vehicles, the developments in relation to that has been accelerating in the market. That relates to the fact that there is broader product lineup in various OEMs, and also there are greater number of options available for battery EVs.

That's one aspect. Also in the United States, there has been tightening trend for regulations that cannot be disregarded. Globally speaking, such a very tough and rigorous regulation established was done for the first time in the United States. The United States is leading in that trend. Not just Toyota, but for other OEMs in the automotive industry, that is one factor accelerating various efforts by OEMs. This is for greenhouse gas regulations.

Those regulations and also the market trend has been strengthening more than we had expected in the past. As far as Toyota is concerned, you talked about RZ and bZ, we are yet to start receiving orders. Looking at the input in the market and general discussion in the market on those, there seems to be a heightened expectation for those models. Therefore, looking at the input or reaction of a customer in the market and also different reactions of different regions of the globe or worldwide, and those regulatory trends, and therefore, the battery electric vehicles will get accelerated. I think there are greater factors that lead us to think in that way. At the same time, there are certain factors as well.

As was mentioned in the presentation, soaring market material prices tend to become more manifest seriously in the case of the BEVs. As was mentioned in the presentation, the higher cost of the materials of battery does have a huge impact in the overall cost structure. We talked about the possibility of reflecting costs on prices, but we have to take a good balance, and also in different regions, different sort of subsidies may be considered for those vehicles. Therefore, currently, they tend to be more generous of those environmental vehicles, but customers are very sensitive to those adjustments. We tend to take a very conservative approach in responding to that. That's my response to your first question. Thank you.

Jun Nagata (Chief Communication Officer)

Thank you. With respect to your second question. In terms of the current executive lineup was the focus of your question. Since the global financial crisis, the lineup of executive officers and the system of senior advisors to the board, which was eliminated, and also with respect to the members of the board, we had more than 100 in the past, but currently, internally, TMC, only six, including outside board members, nine.

The board has been downsized substantially, and that's not the only change. For the purpose of sharing information using IT tools used for meetings and CEOs scattered throughout the world, and Toyota located in Japan, including them, we have weekly meetings so that information can be shared thoroughly and quite swiftly. 13 years ago, this was something unthinkable and unimaginable, and this sort of change has been actually implemented and achieved.

Starting in April this year, you talked about the position of executive vice presidents before, and I think there is very significance in that. Looking at myself, and what I personally consider is that as Toyota, as president, says often, we live in a world where there is no right answer known to all of us. In that world full of uncertainty, how can we manage and steer Toyota going forward?

As far as TMC is concerned, if we can discover a problem, TMC does have an ability to find solutions to those problems, which was demonstrated in the past. I think Toyota is a company that has ability to find solutions to various challenges or problems. We will be faced with diversifying society characterized by variety of problems. Nobody knows what's going to happen going forward.

In that general context, ability to find and discover problems becomes very important. In the past, Toyoda, as president, was the only person trying to find and discover problems in many cases. With three executive vice presidents working together with the president and trying to discover the problems in the world in which there is no right answer, we'll try to take countermeasures. Because there is no right answer known, we may not be able to find the right solution right away.

By discovering those problems, we'll just implement various potential countermeasures, and that I think is what we're aiming at. With that aim in mind, we will pursue our work going forward, and I hope you'll continue to support us as we make those efforts going forward. That's all from me. Thank you very much.

Operator (participant)

Thank you, Mr. Ikarashi. Now, with this, we conclude the financial results press briefing. Thank you very much for listening despite your busy schedules today. Thank you.