Toyota Motor - Q4 2023

Transcript

Aki Irie (General Manager of the Public Relations)

Ladies and gentlemen, thank you very much for coming today. We will now like to start the financial results meeting for the year ending March 2023. My name is Irie from Public Relations, and I will be the MC for today's meeting. Before we announce the financial results, Koji Sato, our President, has a few words to mention. Mr. Sato, please. I am Koji Sato. Before announcing our financial results, I would like to explain the current situation regarding the Daihatsu procedural irregularities issue, which was announced on April 28th. Since the announcement, we have had an independent third-party review entity conduct a retest of the vehicles concerned. It has once again been confirmed that the vehicles concerned present no quality or safety issues.

Based on the results of the retest, and after consulting with the related authorities, we have resumed shipments of the Toyota brand vehicles to Malaysia, Mexico, and Ecuador. As for Thailand and Middle Eastern countries, we will continue to consult with the related authorities. The day before yesterday, Chairman Toyoda visited Thailand to explain to our customers and stakeholders what had happened, and to convey to them that the vehicles were safe and that our entire corporate group was committed to working to prevent this type of misconduct from ever happening again. Daihatsu and Toyota are confirming the facts from various perspectives to prevent a recurrence. Toyota is a company in which all members always stop when a problem occurs. It pursues the root cause of problems by going and seeing the location or process where the problem exists, makes improvements, and works to prevent recurrences.

We will continue to investigate the root cause, believing that it is important to change the environment in which such misconduct occurs. We will keep you informed as and when progress is made. Thank you.

Speaker 15

We'd like to call upon Yoichi Miyazaki, the Executive Vice President and Chief Financial Officer, to explain about the financial results.

Yoichi Miyazaki (EVP and CFO)

I'm Miyazaki, the CFO. This is the first time I take the podium in this title, so I hope you'll bear with me. Before sharing with you the financial results, we would like to express our heartfelt appreciation to our customers around the world, who choose us, as well as our shareholders, our dealers and suppliers, and all other stakeholders who support us in our daily activities. Thank you so very kindly. Let me provide a summary of the financial performance of the fiscal year ending March 2023. While we experienced production constraints due to tight semiconductor supplies, natural disasters, and COVID-19, et cetera, dealers and suppliers, as well as production sites, have all worked hard in order to deliver as many cars as possible to our customers.

In spite of our actual operating income decreasing compared to the last fiscal year due to the impact of such things as soaring material prices, our results exceeded the previous forecast due to our continuous efforts to improve our profit structure. For the forecast for the next fiscal year, we expect production volumes of 10.1 million, and sales volume increase in all regions as a result of such things as improvements in semiconductor supply and the efforts of production sites. We will continue to both advance our activities towards carbon neutrality and improve our profit structure. Also, without slowing down our growth investments, we will promote activities to change the future of cars. In terms of return to shareholders, in order to reward our long-term shareholders, we have a new dividend policy to increase dividends stably and continuously.

We have placed more focus on dividends for our shareholder returns. The year-end dividend will be JPY 35 per share, which is an increase of JPY 7 compared to the previous fiscal year. The total dividends will be JPY 60 per share, which is an increase of JPY 8 from the previous fiscal year. As for the share repurchases, under our policy to conduct flexibly, taking into account our share price levels, et cetera, for our year-end repurchases, we will proceed with a maximum of JPY 150 billion, which is equivalent to our interim repurchases. Let me explain the summary of our performances for the fiscal year ending March 2023. Consolidated vehicle sales for the period was at 8,822,000 units, which was 107.2% of such sales of the previous fiscal year.

Toyota and Lexus brand vehicle sales was at 9,610,000 units, which was 101.0% of such sales of the previous fiscal year. As for the vehicle sales by region, we saw an increase in all regions compared to the previous fiscal year. Also, the ratio of electrified vehicles became 29.6%. Consolidated financial results were sales revenue of JPY 37,154.2 billion, operating income of JPY 2,725 billion, income before income taxes of JPY 3,668.7 billion, and net income of JPY 2,451.3 billion. Now, I'd like to explain the factors which impacted operating income year-on-year. First, the effects of foreign exchange rates increased operating income by JPY 1,280 billion.

Second, cost reduction efforts decreased operating income by JPY 1,290 billion. The JPY 1,545 billion impact of soaring material prices includes JPY 500 billion for activities aimed at strengthening the structure of the entire supply chain, in addition to fluctuations in market conditions for materials. Third, marketing efforts increased operating income by JPY 680 billion. Fourth, increase in expenses decreased operating income by JPY 525 billion. Lastly, we also incurred a negative impact of JPY 415.6 billion, largely due to swap valuation losses and the cost 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 1,135 billion year-on-year.

Now let me explain the operating income for each region. Japan increased by JPY 477 billion year-on-year due to the effects of foreign exchange rates, despite the negative effect from soaring material prices. North America decreased by JPY 457.8 billion year-on-year due to soaring material prices. Going forward, further, Europe also decreased by JPY 115 billion year-on-year due to soaring material prices and the cost to terminate our production in Russia, despite the positive effect from our marketing efforts. Asia increased by JPY 55.7 billion year-on-year due to the effects of foreign exchange rates and increase in sales volume. Other regions increased by JPY 36.7 billion year-on-year. In the next slide, let me explain about our business in China as well as our financial service business.

As for our business in China, while the operating income of consolidated subsidiaries decreased year-on-year, mainly due to the impact of fluctuations in foreign exchange rates and a decrease in sales volume, our share of profit of investments accounted for using the equity method increased year-on-year, mainly due to cost reduction efforts. Regarding the financial services business, operating income for the fiscal year increased year-on-year due to the impact of fluctuations in foreign exchange rates. I'd like to explain about our return to shareholders.

In order to reward our long-term shareholders, we have eliminated our conventional guideline of consolidated dividend payout ratio of 30%. Instead, we have revised our policy to increase dividends stably and continuously, so as to have more focus on dividends.

The year-end dividend for the current fiscal year will be JPY 35 per share, which is an increase of JPY 7 compared to the previous fiscal year. Together with the interim dividend of JPY 25, the total full year dividends for this fiscal year are JPY 60 per share, which is an increase of JPY 8 from the previous fiscal year. Previously, we have conducted share repurchases based on factors such as investment in growth, dividend levels, and cash on hand. However, we have revised our policy to conduct flexibly, taking into account our share price levels, et cetera. For year-end repurchases, considering the current share price level, we set aside JPY 150 billion as the maximum limit of year-end repurchase, which is equivalent to our interim. Next, I will explain the forecast for the fiscal year ending March 31st, 2024.

First of all, I will explain the production volume forecast for the Toyota and Lexus brands. We expect 10.1 million units, which is 110.6% of the previous fiscal year. The reason behind the increase in production forecast for the previous fiscal year is as follows. We have been working on examination of alternatives regarding them in light of supply risks in the future, as well as on promoting improvements aimed at improving operating rates at factories. Since March, we have been able to continue high-level production while prioritizing safety and quality. At sales sites in each region, the production volume still cannot keep up with customer demand, so we will continue to promote improvements together with our suppliers in order to further increase the production volume.

We expect consolidated vehicle sales of 9,600,000 units, which is 108.8% compared to the previous fiscal year. As the semiconductor supply and demand has improved, we expect growth in all regions.

As for Toyota and Lexus brand vehicle sales, we expect 10,400,000 units, which is 108.2% compared to the previous fiscal year. We expect electrified vehicle sales of 3,843,000 units, which is 134.9% compared to the previous fiscal year. The electrified vehicles ratio is expected to be 37.0%. Next, I will explain the forecast for the fiscal year ending March 31st, 2024. We have adopted the full year foreign exchange rate assumption of JPY 125 per U.S. dollar and JPY 135 per EUR.

Based on this, our forecast for full year consolidated financial performance are sales revenue of JPY 38 trillion, operating income of JPY 3 trillion, income before income taxes of JPY 3,690 billion, and net income of JPY 2,580 billion. Next, I would like to explain the factors that may impact operating income. First, the effects of foreign exchange rates will decrease the operating income by JPY 875 billion. Second, the cost reduction efforts are expected to increase profits by JPY 360 billion, while the impact of decreasing materials cost is expected to be JPY 510 billion, resulting in a total decrease of JPY 150 billion.

Third, the effects of marketing activities will increase the operating income by JPY 1,285 billion due to an increase in sales volume and an improvement in product mix led by improved semiconductor supply and demand, while other expenses are expected to decrease by JPY 260 billion. Compared with the pre-COVID fiscal year ended March 31st, 2020, we became able to offset the impact of soaring material costs through TPS, cost reductions, and marketing efforts as a result of our long-standing product-centered and region-centered approach. We have also established a foundation for steadily increasing growth investments. We live in an era where there is no right answer, and the future is uncertain. We will always keep our antennas up and carefully manage risks in preparation for changes in the business environment. This brings us to the end of our presentation.

Thank you very much.

Speaker 15

Thank you. We'd now like to ask our President, Koji Sato, to take the floor again.

Koji Sato (President)

Once again, I am Koji Sato. As Miyazaki-san just mentioned, despite the severe business environment, including soaring material prices, we were able to secure an operating profit of JPY 2.7 trillion in the previous fiscal year. Our new management team assumed the reins on April 1st. However, the financial results figures for the previous fiscal year were based on the 14 years of former President Akio Toyoda's efforts, making me once again keenly aware that our change in management took place while Toyota was being managed at top speed. As such, our new management team will be able to focus on strategic initiatives in growth areas based on this current foundation.

When Chairman Toyoda took office as president, he said, "Growth is about being able to continuously change ourselves in response to ever-changing needs of customers and society." I believe that his 14 years as president embodied exactly that. Now that he's chairman, he's in a position to support our new management team, and we will implement a new form of team management with the chairman and president working simultaneously and according to an optimal division of roles at any given time. Our team will take advantage of this environment to promote speedy management. With that in mind, I would like to once again talk about our future management.

I believe that the growth Toyota should aim for going forward is growth that creates a future in which the automobile industry transforms itself into a mobility industry through enhancing its added value as it works in cooperation with many other industries. The foundation for this is carbon neutrality. Toyota aims to reduce new vehicle CO2 emissions by more than 50% globally by 2035. To achieve this, we will continue to provide regionally optimal solutions at an accelerated pace without wavering from our multi-pathway approach. When it comes to battery electric vehicles or BEVs, which are especially rapidly progressing, we have set a pace of selling 1.5 million units by 2026 as our base volume, and we plan to launch 10 models ranging from luxury vehicles to compacts and commercial vehicles, mainly in the United States and China.

Regarding the battery supply, we will seek to speedily secure the necessary volume by increasing our in-house production capacity and collaborating with our partners. Our new model scheduled for launch in 2026 will be built on three new platforms, the body and chassis, the electronic platform, and the software platform. They will all be renewed as we aim to achieve mobility by way of a new vehicle packaging with a rational structure that is unique to BEVs. From now on, the new dedicated organization, BEV Factory, will lead the initiatives, and the initiatives will be accelerated. We would like to present concept for vehicles of such at the Japan Mobility Show this autumn. At the same time as our BEV initiatives, we will also accelerate our efforts to realize a hydrogen society.

We will advance our projects in the commercial domain, especially in Europe and China, where hydrogen consumption is particularly high, centered on fuel cell electric vehicles. We will focus on the use of hydrogen energy for personal mobility and on the cycle of producing, transporting, and using hydrogen, and we will conduct activities for the development of social infrastructure, including through social implementation in Thailand. To actively promote these initiatives, we will also increase our immediate earning power. In Asia and emerging markets, which are expected to grow 30% or more by 2030, we will strengthen our earning base by focusing on hybrid electric vehicles to capture market growth. To transform automobiles into a mobility industry, we will further increase our current approximately JPY 3 trillion in R&D expenditures and capital investment, while increasing the ratio of future investment to achieve sustainable growth.

Thank you for your kind attention.

Speaker 15

Next, we'll have a question and answer session, please do wait for a few seconds while we set up the stage. Thank you. We'd like to start the Q&A session. Could we ask the respondents to the questions to please take the stage. Let me introduce the members on the stage. President Koji Sato. Executive Vice President, Chief Technology Officer, Hiroki Nakajima. Executive Vice President, Chief Financial Officer, Yoichi Miyazaki. Chief Communication Officer, Jun Nagata. Chief Officer, Accounting Group, Masahiro Yamamoto. Please do take your seats on the stage. We are ready to take questions. If you have any questions, please raise your hand to indicate that you'll be asking a question and wait for the microphone. We'd like to give the opportunity to as many people as possible, we would like to restrict your questions to two questions each, please.

The third person, the person in the third row from the front, please. Thank you.

Speaker 14

I am from Yomiuri. My name is Yamauchi. Thank you for the invitation. I have a question to President Sato. The first question. How would you sum up the overall financial results? What were good points? What are the points which you highly evaluate or points that you think were below standard or were not actually satisfactory? How do you think about this as president? Second question is about the profit or earning structure. When you look at the breakdown of the operating profit, the external environment such as Forex and the soaring materials prices highly affected your results. How about the growth in reduction of costs, et cetera, I think which did have an impact on the results.

Koji Sato (President)

As president, how do you intend to evolve or increase the basic earnings power of the company? Thank you. Thank you for that question. The first question had to do with my summing up or impression of the financial results. Well, when we look at the short-term financial results, we were able to obtain an operating income of JPY 2.7 trillion, which I believe in terms of our earning power, we were able to indicate an earnings power that exceeds our power of last year. I'm sure you realize that the impact of Forex and also the soaring materials prices were actually improved through various efforts to generate operating profit, a good operating profit in the end.

Manufacturing cars and delivering them to customers was a very difficult endeavor this year. However, I think the financial results indicate that in that process, there were various ingenuities and various devices that we were able to endure due to these difficulties, and that there are many factors included in the financial results which indicate our ability to strengthen our financial prowess. For example, the production plan fluctuation was very large, but especially the suppliers responded so flexibly to them and also the members involved in manufacturing internally and also their efforts also are very important, and also in order to meet the customers' needs, providing smiles to customers through e-engineering, various production improvements, et cetera. I think all of these efforts have led to the financial results.

In the short run, despite the difficulties, I think that there is still room, much room for improvement, and as such, improvement efforts have been launched. I think that was what the financial result indicated. In the long run, the economic environment has long been deflationary for many, many years. Against that backdrop, we have been involved in manufacturing centered around cars and around our products. If you look at things from a span of 10-20 years, then not only domestically but against the U.S., for example, inclusive of incentive payment, we were able to increase the marketing power of our products. In the end, we will not make automobiles a commodity.

We must provide a good value added, which develop a strong business that is appreciated by customers. Such efforts have been made over these many years, which culminated in such good results, despite the very demanding economic conditions and despite the very difficult supply constraints that we had. We were able to create a corporate structure, which could meet those adversities. In the short term and the long term, I believe that the financial results do indicate that we have been able to reinforce the corporate fiber through our years of efforts. As for the profit structure, this I think overlaps with what I said in relation to the first question.

Because we will manage our operations centered around products, what we must do first and foremost is to develop good quality cars and deliver them to the customers. For supply issues, we are seeing improvements in supply constraints. As was mentioned earlier, we have set some vehicle sales forecasts which must be produced. We will improve the appeal and attractiveness of our products to generate higher profitability. These are the basics, but it's very important to return to these basics. By so doing, the Forex or soaring material prices, which are of course variables, we can create a good resistivity against them. On a global scale, we run a global business. We are a company that runs a global business.

Stabilizing the profit structure requires not focusing on a specific geography, but to be able to create a corporate foundation that would enable us to generate profit in all regions and areas. Against various risks, we must flexibly grapple with good management in the regions so as to establish a very stable profit structure. I think that would be very important in creating a corporate management that is resistive to external factors. We must also create a strong global product portfolio, and by doing so, we believe that we can strengthen our financial base.

Speaker 15

Thank you very much. Let us take the next question. The person in the third row from the front.

Speaker 11

Thank you very much. My name is Hiraoka from NewsPicks. This year, if there is no parts supply constraints, I believe the production should go up. In the case of Toyota, you have always been focusing on producing in Japan. Mr. Sato, what is your view on domestic production? Is it possible that you will recover the 3 million mark for production? If there are more electrified vehicles, I believe the parts used will be different. How is your communication with the suppliers? Second, how to make profits and how to make sure that your products don't become commodities are important. You have many profitable vehicles, and that is the source of competitiveness.

At the same time, BEV and other models, including all models, are you trying to make profits for all models?

Koji Sato (President)

Your first question was about domestic production. For TMC, domestic production is the starting point in protecting manufacturing in Japan. That positioning will not waiver, and we will always consider how to protect manufacturing in Japan. With electrification, the parts used will change, and including transactions with our suppliers. What is my forecast, I believe was your second question. With electrification, of course the parts used will be different. On the other hand, the supply chain is not just part of the business. Each party has its own strength, and respect each other as partners. With that stance, we do business with them in vehicle manufacturing.

Each supplier has their own strengths, and if you look at each piece of technology, even if the parts change, there are some suppliers who have advantages in specific areas. We will partner with them and communicate to them what kind of vehicles we want to produce. We will communicate that earlier than before, and we would like to create a business where we can capitalize on each other's strengths gradually. Your next question was, what should we do to make sure that vehicles do not become commodities? As you mentioned, hybrid technology is one of our strengths. As I mentioned in my presentation, one of the growth areas is emerging countries. In these countries, CO2 reduction is necessary, and at the same time, demand is expected to grow.

Speaker 15

With hybrid, securing a profit base is necessary, and we will have to be close to the local community to make ever better cars. On the other hand, we take a multi-pathway approach. That means we do not specialize in specific areas. We look at the characteristics of each area or geographic area, and we provide products that are most suitable for that region. Not only hybrids, but in all our vehicles, we need to provide vehicles that is very Toyota like. We are trying to look at how we can provide BEVs and various vehicles that are very car manufacturer like. It's not just the powertrain that changes. We are going to focus on BEV as well.

The purpose of establishing the new organization of the BEV Factory is that. We want to create appealing battery cars as well. One additional point. In domestic production, not only volume, but you're trying to make a profit through various supply chains, right? We're not just looking at TMC alone. We have suppliers. With the suppliers, so we want to change the characteristics of vehicles. In the past, the hardware accounted for the majority of the value of the vehicle. That was in the past, but now we have software and also post-marketing updates and customization is possible. We want to make sure that the vehicles meet the customers' demands more. It's not just the car manufacturers that should be making efforts.

We have to work with many suppliers and capitalize upon our advantages so that we can transform mobility.

Koji Sato (President)

Thank you, Hiraoka-san. Next question. The person at the very front.

Hans Greimel (Automotive News Asia Editor)

I'm Hans from Automotive News. I'd like to ask you two questions. One is about production, and one is about the profit structure for EVs. About production, it seems that you are aiming for a, maybe a record production in the current fiscal year. Is that correct? How do you expect to get there? Is the chip crisis then seeing an end? Do you have some kind of new approach to securing enough chips, or is it naturally coming to an end? How do you get this new production to a new record level? The second question is about the BEV profit structure after 2026.

Right now you have a operating profit margin around 7%, but in 2026, you want to introduce a new platform which will have lower costs, maybe faster turnaround time, and also new revenue sources through the software side. What do you imagine the profitability to be like in the second half of the 2020s compared to today? Will it be higher? Often we think about EVs as being more expensive or more costly with slimmer margins, but maybe it's the opposite. That will be a turning point for higher margins. Thank you.

Koji Sato (President)

Thank you for that question. Regarding the first question, I would like to answer. As in related to the first question, the previous term, we wanted to deliver as early as possible to the customers' demand, but we were not able to fulfill the demand. The numbers that we have cited are an accumulation of the response of the production site to the customers' needs and also the products that we want to launch going forward. Regarding that, we believe that we can probably set a base volume of 10.1 million units, as was mentioned earlier. These 10.1 million units, as Hans-san questioned earlier, how do we intend to achieve those goals because we were having such a difficulty manufacturing last year? That's probably the point of your question.

Yoichi Miyazaki (EVP and CFO)

One year ago, we had no idea which semiconductor chips will be in short supply at what time. As Sato said.

Suddenly, there would be a shortage of components and we had to lose the production volume against the plan. That was the situation that continued last year. We want to make these risk semiconductors visible, and once we gained visibility, then we will change the design so that we can have alternative sources. The sellers will try to actively sell the non-risk semiconductors. Through these efforts over one year, although things are not perfect, our ability and power to manage semiconductor supply has been greatly improved. As a new base volume, we believe that the 10.1 million units is a feasible number that we can cite.

What we want is the customer smiles. For that, we want each person in the production site or in the regions to set up a good communication relationship with the customers. As a result of a focus on a product and manufacturing, we were able to cite this number of 10.1 million. As you said, our base volume would be a record number of vehicle sales. May I respond to the second question? Hans-san, thank you for that question. After 2026, we intend to launch next generation battery EVs. As was explained at the policy meeting earlier, the key point would be how to reduce costs. I think that is one angle that's critical.

In the case of battery EVs, as you know, the proportion of batteries against the total cost structure is very high. How to develop a car or design a car that can most efficiently utilize the power of the battery. Now, battery EV, through the development and manufacture of battery EVs, we've learned a lot of things. We want to incorporate these learnings. At the same time, the next generation BEV must change the factories themselves. We are now discussing this point. The manufacturing process itself will be totally changed. It's not placing an engine on the body and then assembling parts on top. A totally new and refreshed process. For example, reducing the total line by half or improving the production efficiency.

Through these very drastic improvements, we would like to reduce cost, the manufacturing cost. How to reduce the increasing costs will be a key factor. Another factor is, as Hans-san said, battery EV value add must be improved. I think this is adding intelligence. Adding intelligence is most important. There are some appealing, attractive software using a product value add that can only be achieved with the BEV. We believe it's possible to enhance the customer's experience value as the result of this. So we just earlier released a new news on the new organization, and leaders who have learned in China, under a new team membership, will grapple with developing a new battery EV. So we have just started this team's activities.

I do hope that you will support these activities going forward as well. Thank you.

Hans Greimel (Automotive News Asia Editor)

What about the profitability level in the later half of the 2020s? Will it be comparable to what we see today or higher?

Yoichi Miyazaki (EVP and CFO)

Well, the, not only battery EVs, but we'll be delivering various electrified vehicles through multi pathways. We want to secure the same level of profitability as today. We've already said this earlier. There may be various difficulties, but we want to deliver even better cars to customers. By pursuing this goal, we believe that we should be able to achieve that goal of profitability. Thank you.

Speaker 15

Thank you very much. To the next question. The person in the fifth row from the front.

Speaker 10

My name is Yamane from NHK. I have two questions. The first question is related to the number 10.1 million production. This number, you're not pursuing volume. Is that the intent? That is my first question. Second question is about the Chinese business. Mr. Miyazaki said last year sales volume went down. New energy vehicles are increasing and the Japanese makes are struggling in the Chinese market. At TMC, what is your stance on the current state of the Chinese market, which is said to be the largest in the world? What about your future prospects?

Koji Sato (President)

Thank you very much for your question. 10.1 sales volume forecast, as Mr. Miyazaki mentioned. We need production and sales that will be able to meet the demand so that we'll be able to meet the needs of the customers.

Ultimately, we need to be selected by the customers, and only when that happens we'll be able to achieve that number. Chinese business will be discussed by Mr. Miyazaki. On the Chinese business. Looking back on the results of last year, we weren't able to secure sufficient semiconductors. Something that is specific to China was the COVID impact from the beginning of the year. Demand went down from time to time. Lexus exported to China from Japan went down last year. However, as you know, in China we have local businesses. If you look at Chinese business overall, last year, although we were struggling in terms of volume, compared to the previous year, our share increased steadily in the Chinese market.

Many people look at the BEV market alone, but in China, there is the hybrids, the PHEVs as well, and many of our customers are using these vehicles. Last year our share has gone up to around 9%. The market will continue to be very competitive. However, vehicles that will be loved by Chinese customers and vehicles that will please the Chinese customers is something that we will continue to pursue. As a result, we will make efforts so that as a result our business will grow. Let me add one point from my side. Our product competitiveness or our products or the market in China is changing very quickly.

As we mentioned at the Shanghai Motor Show, in a timely manner, we need to provide vehicles that will be loved by Chinese customers, and therefore, we have a development site in China, and we're trying to localize development in China so that we can develop at a place that is close to the customer and catch up with the demands of the customers in the Chinese market.

Speaker 15

Thank you, Yamane-san. Any further questions? Yes, the person in the front row again.

Speaker 13

Umeda from TBS. I have two questions. Both have to do with battery EVs. The first question is to Executive Vice President Nakajima. You just explained about the BEV and how you view the Chinese market for BEV. Could you be more specific at the... You went to the Shanghai Motor Show and I think from the viewpoint of genchi genbutsu, going to the site to see the facts. What is your impression of the Chinese market shift to electrified vehicles? As Toyota, what do you think is you're lacking in terms of product development? What do you have to change in order to address the Chinese market? Could you be specific about this? Second question is to President Sato.

The battery EV interim objective of target of 1.5 million was announced last month. You said that you'll be injecting JPY 3 trillion in R&D for BEV this term. In order to achieve your goals, what specifically do you intend to do within the extent possible to disclose?

Hiroki Nakajima (EVP and CTO)

Thank you, Umeda-san. Going on to the first question first. As you said, when we went to the Shanghai Motor Show, frankly, I was totally amazed. Especially the electrification of battery EV was progressing very rapidly. Not only that, but that's already taken for granted and that differentiation and competition over differentiating through adding intelligence was much faster than we expected. As I said, Chinese customers, how to timely deliver on their needs. For example, infotainment, digital cockpit development. It'll take too long if we were to develop in Japan, that's why we want to accelerate localization. Also, we wanted to gain the cooperation of the local suppliers in speeding up our endeavors. Thank you.

Koji Sato (President)

Regarding the second question.

1.5 million units is not a target per se, but it's a base volume, a criteria that we want to work toward. As I said, not only Toyota, but many suppliers, many dealers will be all cooperating to make the shift toward battery EV. So we have to set the pace and show the pace to the others. So that's our viewpoint. Against that backdrop, as I said earlier, we must, first of all, create a firm lineup of products. Immediately, we already have several models of battery EVs launched in the market. We have received a lot of feedback from the market. So we want to improve our marketing power and market or product development power in an agile manner. That's critical.

Cruising range and the charging time necessary, there are voices requiring some improvements there. We want to speed up the efforts to improve the marketing power of our products. We want to engage in speedy Toyota-like Kaizen and entice.

As many people as possible to want to ride Toyota BEVs, we must assort a lineup that will not fail their expectations. Of course, China and the United States will be the central markets. Not only Toyota alone, but we want to collaborate with our partners to respond with a good full lineup to respond to customers' needs and also to provide and develop products that have a Toyota-like appeal and specific attractiveness to customers.

Speaker 15

Thank you very much to Mr. Umeda. The person along the aisle in the middle.

Speaker 7

My name's Narabi from the Asahi Shimbun. I have two questions. The first question is about the soaring material costs. Of parts prices and supporting suppliers is something that you are doing, including paying for utility charges. Toyota can only directly support the primary suppliers, but you have a secondary or tier three suppliers. What is the current status at these tier two or three suppliers? At the moment, JPY 51 million, the impact of the soaring material prices, we understand. How much support went to suppliers, and what kind of support will continue till when is another question I would like to ask. My second topic is related to what Mr. Sato mentioned at the outset, which is about Daihatsu.

In the automobile industry, you have the suppliers and you have the dealers, and many people are involved in the industry. These people working together is part of a strength of the industry. That may have turned into pressure, like, not being able to change the plans. That. Some people say that that may be the root cause of this problem. Mr. Sato, you mentioned the development environment possibly being a problem, you also talked about creating an environment in which you can speak your mind. You also talked about making an environment where people can freely talk. About, you are about to identify the root cause, but what is your current stance on governance and corporate culture?

Yoichi Miyazaki (EVP and CFO)

Thank you very much for your question.

Your first question was about soaring material costs. With the suppliers, we've had close communication. We talk directly with tier one suppliers. If you look at the numbers, changing the sales price and adjustment of purchase costs is something that you can see from the numbers. If you look at tier two and tier three suppliers, many people have different opinions, and we are still on our way to further improvement. Our intent is to protect the supply chain so that we can overcome the current, rough, times. We want to continue dialogue with the suppliers and continue the initiatives that we are undertaking. Another point is about this fiscal year.

Koji Sato (President)

Overall, the general material prices have started to stabilize, and some, for some of the materials, the prices have started to come down. In particular, if you look at utility charges in Japan, over the past year, it has continued to increase, and this year it still stays at a high level. We need to continue to talk with the suppliers on that factor. TMC in addition to TMC and suppliers, the JAMA or the automobile industry as a whole will have to tackle this together, and are actually trying to tackle this together. Your second question was about the Daihatsu issue. Let me talk about something that I have in mind. With regards to this irregularity, this was about a certification or collision safety.

Yoichi Miyazaki (EVP and CFO)

This irregularity itself should never have happened, but it did happened, which means that there should be a root cause. How to identify the root cause and eliminate that root cause is something that we have to tackle. Blaming this on somebody is not the solution. We are in the auto industry, and there are rules in the industry, and we are manufacturing cars in this industry. There shouldn't be anybody who do a misconduct intentionally, but there was, which means that there should be some environmental factors. The subject vehicles, they are used by customers, and we have to make sure that we do not cause any inconvenience to the customers. We need to clarify what happened. As a first step, we need to identify that.

Also, we need to explain to the relevant parties, and we have to explain... We have already explained that to relevant parties and started to take initiatives to make sure that this does not happen again. There's something that we think is important. The cause of issues like this is not a specific person. There was a mechanism or environment that forced that person to undertake a misconduct. We need to go to the gemba, repeat the discussions, and make sure that people talk their minds to us. We need to continue dialogue, and we need to put ourselves in their shoes and think and understand why this happened. The current situation will have to be accurately communicated to many people.

We need to do away with the concerns, and we need to secure our psychological safety. As I mentioned at the outset, Chairman Toyoda went to Thailand, which is a producing country and the main market of the target vehicle. Mr. Toyoda went to Thailand and met many stakeholders face to face and talked to them. Mr. Nagata was with Mr. Toyoda at that time. What is the thinking of Toyota in facing this issue will be discussed by Mr. Nagata. Thank you very much. My name is Nagata. The day before yesterday, which was Monday, with our chairman, I went to Thailand to explain. Basically, Yaris ATIV is produced in Thailand, and exports are made, and Thailand is a large volume market for Yaris ATIV.

Basically, we knew that the vehicle was safe. We wanted to communicate the fact that the vehicle is safe to the customers and stakeholders. As Mr. Sato mentioned at the outset, what we thought was important was that Thai Toyota as a gateway factory is producing the vehicle. With Daihatsu, we have a development site, which is TDEM. The TDEM members, many of them are from Daihatsu. The people producing the vehicle and the TDEM members were all concerned and had anxiety about what was really happening. What is happening and the fact that the vehicle is safe, and as Mr.

Sato mentioned, Toyota is a company that stops things when a problem happens and tries to identify the root cause until it is known and countermeasures are taken. That cycle is repeated at Toyota. Toyota is a company where people can freely speak their minds, that was to be communicated to people in Thailand. The people producing the vehicles, the TDEM developers, dealers, we wanted to communicate that this to these stakeholders. As you mentioned, for the group governance, we want to make sure that we have a culture where you can freely speak your mind, and we need to use a genchi genbutsu to identify the root cause. That is something that I learned anew at Thailand. We will collaborate with other group companies in tackling this issue. Thank you.

Speaker 15

Thank you very much. We'd now like to receive questions from those reporters who are now online or participating online. We would like to take this time to entertain questions of online. Bloomberg's Inajima-san. Inajima-san from Bloomberg. We will switch the screen. Please start speaking if you see your face on the screen, please.

Speaker 8

Hello, can you hear me?

Speaker 15

Yes, we hear you.

Speaker 8

Thank you. This is Inajima from Bloomberg. I have two questions as well. One is about dividends and the share repurchase. Regarding dividend, you will conduct increase dividends stably and continuously. As for share repurchase, conduct repurchases in a flexible manner, focusing in on our share price levels. How do you intend to do this for share repurchases? When you think talk about share levels, would it be one times PBR? Would that be one of the factors for a share buyback? Or do you have some other criteria internally? When that internal threshold is falls short, then you will, for example, reduce the share repurchase volumes.

Secondly, since President Sato talked about Mobility Show and that you'll show a concept car of the BEV at that show. The next generation BEV concept cars which you intend to launch in 2026 will be shown at the Mobility Show in autumn, is that what you meant? Thank you for that question. Yes, regarding the dividend and share repurchase, as we explained, our major policy is to reset our approach to both, and that's what we have conveyed to you earlier. As we said earlier, up to now, in terms of dividend, we had a criteria of consolidated payout ratio of 30% as a policy. Those shareholders, what would please our shareholders? How can we contribute more to our shareholders?

Yoichi Miyazaki (EVP and CFO)

We had that sort of a discussion internally. We decided to increase dividends stably and continuously as a new revised policy. As a result, regarding share repurchases, of course, this will depend on share price levels, but the major policy is, as we have been saying all along, to be flexible in our approach. We will make judgments on the absolute value of a share repurchase flexibly. Our major revised policy is to focus more on dividends rather than share repurchases. Anything to add, Chief Officer, Accounting Group? We will look at the share price levels in our share repurchases. Our share price levels currently are not a satisfactory level at all for us.

The PBR, it's of course below 1x of PBR, we also are not satisfied with this, we take this very seriously. To prove this, for example, PBR can be divided into PER and ROE. As Sato-san said, this mobility concept or electrification and adding intelligence and more functionality, how can we more specifically provide this to customers of this vision? I think that we must focus on developing and delivering cars that satisfy people's expectations. As for ROE, this is rather detailed, but of course, we have achieved this ROE with some intention, intentionally, for example, in finance or inventory.

This automobile industry, we have to defend this industry, and when we experience various natural disasters, then we had to have on-hand finance which could sustain our business operations for the next six months. That's a role. Also last year, semiconductors, and when production was reduced, then we had to protect the supply chain and our assets, which means that we had to hold a certain level of inventory to do that. The entire automotive industry has to work together and fight together. I believe that part of the ROE numbers include this intentional measure. We are not at all satisfied with the results, we would like to continue to make improvements against these numbers. Thank you.

Koji Sato (President)

Let me try to respond to the second question, Inajima-san.

The next generation battery EV, would we be showing them in the 26 mobility show? The answer is yes. Rather than explaining words, we thought it was much better to have you see the concept models and give us your feedback. We decided to showcase it at the mobility show. As was released today, the new organization called the BEV Factory, Kato-san will be the head of this. Kato-san was developing battery EVs in China previously. Let me share with you his comment. He said that he wants to change the future of cars with these next generation BEVs. When he talks about the future, of course, he's talking about the future of cars, both in form, as well as the adding of intelligence to cars.

The second point with the factories, that is to change the future of the production factory.

... so we will have a wholesale change of the manufacturing process. Also, the change, our change of work, the way we work, must also be revised in a large manner toward the future. As you know, within the group, we have Woven by Toyota and various other venture companies. We have a lot of connections with Toyota Ventures, et cetera, so we will continue aggressive investment into these endeavors. With various partners and various friends and colleagues, we, within the canvas of next generation BEV, we want to consider how we can change the future vision and change the way we work. This is of course Kato-san's personal views, but I do hope that you will watch, see the showcase of our new concept BEV models in the fall mobility show. Please look forward to it.

Speaker 15

We will take another question online from Wall Street Journal, Mr. River Davis.

River Davis (Reporter)

Hello, this is River Davis from the Wall Street Journal. Thank you very much for taking my question. I wanted to ask two follow-up questions. The first is on the China market. We heard a lot from auto executives coming back to Japan about how they felt there was a lot of competition that they realized is happening in China, and that they needed to find their own unique strategy of remaining relevant. Miyazaki-san, you spoke about the strength of hybrids in China. Do you feel like this is a unique kind of weapon for Toyota in that market going forward? My second question is on EVs and profitability. last month you spoke a lot about kind of how great profit margins are on hybrid vehicles at the moment.

As you're looking towards the 2026 EV target, the 2030 EV sales target, how do you prioritize maximizing profitability versus attaining those EV targets? Thank you.

Yoichi Miyazaki (EVP and CFO)

This is Miyazaki speaking. I will be responding to your first question. How we compete as of today and how we compete in the future is something that I would like to talk about. As Mr. Nakajima mentioned, what we saw at the motor show was something that we were surprised with. For China, from global perspective, just like the United States, the battery, they are moving quickly to battery EVs. For China, we want to prepare a solid battery EV strategy. The question is, including Chinese makes, how are we going to compete in BEVs? First we need to identify the needs of the Chinese customers, and supply a vehicle that are very much like a car manufacturer's vehicle. That is how we intend to prepare for the Chinese market.

Of course, the preferences of the Chinese customers and America and European preferences may be different. China has its own unique characteristics. We will study those so that we can enhance our competitiveness in the market. We are taking a multi-pathway approach. China is a very large market, and we are going to provide various products. One thing that we have to strengthen for the Chinese market is battery EV vehicles. That is the first thing we have to do.

Koji Sato (President)

This is Sato speaking, and let me add something. As Mr. Miyazaki mentioned, in the Chinese market, battery EVs are moving very quickly. For the Chinese market, battery EVs at TMC will make its utmost efforts. Also, on the other hand, there is solid demand for hybrid vehicles in China.

Battery EV demand is more or less new demand. Your part of your question was, hybrid, will hybrid be a TMC's advantage? The demand structure is different between HVs and BEVs, and so we would like to tackle both markets and try to be competitive in both.

Speaker 15

Thank you very much, Mr. River. Going back to this hall. The person in the very front again.

Speaker 12

Yao from Nihon Keizai Shimbun. I have two questions again. First question. The various auto OEMs are shifting toward battery EVs. In the case of Toyota, you have, your strength is in hybrid cars, but going forward, what do you intend to do going forward regarding BEVs? The second question overlaps a bit with the first one. Your the balance between investment and profitability from the battery EVs. The various auto OEMs are saying that BEV investment is becoming a burden on their profitability, and you said that you will aim for JPY 4 trillion in BEV investment by 2030, and you mentioned this in 2021. Have you updated these numbers? Also, Toyota's EV business, you'll be investing first without recouping the profit.

How do you intend to secure the funds for investment? Thank you.

Koji Sato (President)

Let me reply to the first question. Second one will be handled by Miyazaki-san. Our approach to battery EV, we have been communicating about all along, that Toyota would like to strongly focus on battery EVs going forward. However, the renewed message from me is that our ultimate goal is to achieve carbon neutrality and to achieve or to change mobility in the future. The customers' demands are diversing, becoming diverse, and the automotive industry's needs are diversifying. We want to reply to those diversified needs, and we also want to respond to changes in energy needs and enhance the value of cars and change the future of cars.

We believe that those are very important initiatives to expect more from vehicles. Not only that, powertrains are replaced with electricity, electric power plants, and that changes the cost structures of cars. That alone will not be enough to create a vision of a sustainable industry for automobiles. We can't lose sight of the ultimate goal. We will focus on battery EVs as one solution, but our goal is to change the future of cars. With this strong resolve, we want to grapple with this challenge with the local stakeholders.

Yoichi Miyazaki (EVP and CFO)

Let me answer to the second question.

Four trillion yen of investment in BEV was, of course, announced by our company as a base volume. Our current criteria is toward 1.5 million in 2026, maybe JPY 2.5 trillion investment will be necessary. Toward the year 2030, in order, we have set a volume, base volume of 3.5 million, but when we update this, perhaps this will require about a JPY 5 trillion investment as a base value or base volume. Against this backdrop, how do we intend to finance this investment? As I said earlier, up to now, we have been engaged in cost reduction efforts as well as marketing efforts.

By reinforcing our relationship with customers, we have been increasing our earnings power, we have shown an outlook of JPY 3 trillion in earnings power this year. In order to achieve this absolute goal, value, the profit structure that we aim for is one that can generate new room for investment. Through that, we can finance future investments, including investments in BEVs. Battery EVs, as Nakajima-san has mentioned all along, also we have to reduce cost in battery EV development as well. This is a challenge, yet a challenge. We have no prospects for this.

What we can do is to further promote the cost reduction of JPY 100 billion and then expand the value chain further so that we can reinforce the corporate stamina and become a structure where we can generate profitability despite the headwinds. Through these efforts, we want to finance our investment or generate enough funds for investment. May I? You talked about JPY 5 trillion in investment. You're, would that be counting from this year, this fiscal year? Yes. From this fiscal year. Thank you.

Speaker 15

Thank you very much. Thank you very much for the many question. Because of time limitations, let us take the two last questions. Person in the third row in the central, in the center.

Speaker 6

Thank you very much. My name is Goro Okazaki. I'm auto journalist. Since COVID, supply was in shortage. The more you produce, the more you can sell, is what we have been saying. This was a very special time. If you look at the result of your rivals, they have raised their price significantly, and their operating margins were very high in many cases. If you look at the numbers of Toyota on the other hand, you may not have been that aggressive in raising your prices. If I'm wrong, please correct me. What is your exit strategy? At one time, there will be a time when supply will be higher than demand and products won't be selling that easy.

You might have been suppressing the amount of price hikes, taking that into consideration. That was what I thought. When supply goes up, what is the exit strategy that TMC has in mind?

Speaker 15

Thank you very much for your question. In a sense, supply was in shortage, and with regards to raising prices, ultimately, well, we think mass production is extremely important, so high quality products are being delivered to our customers at affordable prices so that we can see smiles on the faces of the customers. That is at the basis of our management strategy. In the short term, things were very difficult. Rather than taking the route of raising prices, we took a longer term perspective.

We needed to maintain the relationship of trust with our customers. First we focused on making efforts ourselves. As I mentioned before, at this moment, or in the past 14 years of Mr. Toyoda's presidentship, we've had a Corolla, Crown, and other long seller names. We have many products that are loved by the customers over the years. Including prices, there are expectations of our customers. It's not as simple as flexibly changing the prices because of economic conditions. That would not lead to long-term relationship of trust with the customers. Of course, we have to look at the economic environment and improve our profitability.

In the case of Crown, rather than just looking at a single Crown model, we need to pursue efficiency and improve the appeal of the product, and competitiveness of the product, and add value to the product. That is what we have been focusing on. Increase the basic strength and improve the appeal of the products. That is what we mean by product-centered management, and that will lead, over the long term, to establish a relationship of trust between TMC and its customers. When we enhance value add, of course, we need to consider prices that are commensurate with that value. We need to strike a balance. We will stick to our basic management strategy. That is why we are taking this approach. Thank you very much.

Speaker 6

In terms of profits, you seem to be struggling very much in North America, if you look at the numbers. If you look at news reports, soaring material prices did not allow you to increase prices according to news reports. It seems like you are very... in, your exit strategy was not to immediately raise prices, but what will be your future exit strategy?

Yoichi Miyazaki (EVP and CFO)

Thank you for the question. For North America, producing cars and delivering cars is something that we were struggling with. Speeding up recovery of production is number one, and if you look at the labor environment in North America, in terms of manufacturing cost, we have to make further efforts for improvements.

Based on TPS, Toyota Production System, we needed to undertake improvement initiatives so that we are very strong in manufacturing at North American factories. We need to create a corporate foundation of a strong manufacturing for North America. The market, we need to have a dialogue with the market, with the customers to propose an appropriate price. That would be the order in which we tackle things. Thank you very much.

Speaker 15

Thank you, Okazaki-san. Due to the interest of time, this will have to be the final question. The person in the middle, front row.

Speaker 9

Tanigawa from Impress Car Watch. I have two questions as well. Well, your sales have improved, and I think this is primarily due to the increased vehicle sales. As the delivery cycles are getting, I mean, longer, the dealers have good communication with the customers, I believe. What were some of the measures you took? Second question, I think that you had a backlog of close to 2 million units at one time that was announced. Could you talk about the current backlogs currently in Japan and overseas? When would these long delivery dates be reduced to normal delivery dates?

Koji Sato (President)

Thank you, Tanigawa-san. With dealers' communication, with the longer delivery dates, I think that really differed depending on the region.

Japanese dealers, they do have longer delivery dates to start with. What they did was to at least tell the customers when they can expect the delivery, because I think the biggest stress or frustration for customers would be not to know the steps of the delivery process. We had to provide information to them, and the dealers also were required to respond to their questions. That's the basis of communication. In the United States, they sell from their inventory. Because of this process of what cars best match the needs of the customers and are best-selling, they can get that information from the customers.

So the North American companies grabbed that number, and they can allocate from the location of the inventories in the dealers and then deliver to the customers. Through these efforts, this time, this term, we were able to cope with issues relating to customer delivery dates. As for Japan, due to the types of semiconductors required, we are having our Japanese customers wait longer. So as was explained at the very outset, semiconductor shortage is, of course, being alleviated gradually. We hope that we will be able to improve our communication regarding delivery dates with the customers. I hope you'll keep a watch on improvements going forward. How about backlog numbers? May I talk about backlog?

Through the longer delivery dates, our learning or our lessons was that the factory production site and the people in the distributorship and the dealers and the suppliers, we all were unified. We became one team. That was the biggest benefit. So we were able to share our own pains and headaches, and then we were able to talk about what each person can do or each member can do to improve the situation for others. In Japan, the backlog, the orders received as of the end of April, was a little more than 800,000. Among the customers, against those customers who request delivery by the end of April, we were not able to deliver on 10% of those 800,000 units.

We were asking the dealers to ask the customers when they want the delivery date by, so we will manufacture to the needs of customers who are in a hurry. We're now finally able to enter that sort of process. In the United States, in the past, the cars were all showcased in large dealerships, and the customer can pick and choose and then drive home with the car. Now a dealer had to, of course, bear the interest rate because of this. Because of the longer delivery dates today, from Japan or the U.S. factory, while the car is being transported to the dealership, the cars are already being sold during its transportation. We're able to deliver cars fresh off the production line, in a sense, without inventory.

As I said at the outset, we became one unified team. As a result, we came up with many new ideas, fresh ideas, and many ingenious ideas, which had helped us to alleviate the longer delivery dates. We want to continue with improvements at this pace so that the customers, suppliers, and the dealers, they can all enjoy delivering even better products to our customers. We want to further improve on these kinds of processes. We ask for your support. You said domestically it's 800,000 units backlog. How about overseas? Well, overseas, the definition of backlog is different by region. If I try to give you a number, it could lead to some misconceptions. It could be misleading. I'm sorry. I hope that you will use the domestic number.

Speaker 15

Thank you, Tanigawa-san. It is time to close the Q&A session. With this we conclude the financial results meeting. Those on the stage, please stand up. Thank you very much for coming today. Off the stage. Thank you very much.