Toyota Tsusho Corporation Earnings Briefing for the Six Month ended - - PDF document

Toyota Tsusho Corporation Earnings Briefing for the Six Month ended September 30, 2015 Condensed Transcript of Q&A Session

• 1. Date & time: November 4, 2015 (Wednesday) 10:30–11:30
• 2. Attendees:

Jun Karube, President/CEO Hideki Yanase, Managing Director Hiroshi Tominaga, Executive Officer Hideyuki Iwamoto, Executive Officer Q: You say you are managing the investment cycle more rigorously than in the past. What are you doing differently? A: FSs were previously formulated by Groups and remedial action was taken once an FS deviation occurred. Now, Administrative Division personnel are involved from the start of the investment decision-making process and formulate FSs in collaboration with Groups. As soon as an FS deviation starts to emerge, the project is reassessed and remedial action is promptly implemented with involvement of Administrative Division personnel also. Q: What types of businesses do you plan to invest in going forward? A: We plan to shift our focus to investments where we can control the timeline until the final investment decision and quantify and limit risk within the purview of our knowledge and expertise. Q: You say you will invest more selectively in businesses in which you have a competitive advantage. Will you still invest in nonautomotive businesses? A: Being a trading company, we intend to maintain an aggressive posture. While of course proactively investing in automotive businesses, we have also been focusing on nonautomotive sectors in recent years to realize the TRY-1 concept in our Global 2020 Vision. We aim to contribute by expanding our operations in nonautomotive sectors and bringing new products and services to our customers, particularly the Toyota Group. Some of our previous investments, such as Elematec Corporation and Eurus Energy Holdings, have

• utperformed our initial forecasts.

In the food & Agribusiness Division, we have invested in NovaAgri Infra-Estrutura de Armazenagem e Escoamento Agrícola S.A. in light of the scale of our domestic grain silo operations. We are currently focusing intensively on building this business. We aim to expand our grain businesses, which is one of our strengths, by building a value chain extending from upstream to downstream. Q: How do you incorporate cost of capital into your evaluation and monitoring of investments? A: The concept of cost of capital is embedded in our TVA (Toyotsu Value Achievement) investment metrics. We seek to ensure that investments have a positive TVA. We use TVA to evaluate and screen investments even at the earliest stages of the investment decision-making process, including at Investment Strategy Meetings. Q: Could you itemize the ¥10 billion of tax benefits booked in second quarter? A: They include previously incurred losses that met tax-benefit recognition criteria in the second quarter. Beyond that, I do not have any further details.

Q: What is the background or cause of European scrap metal operations' loss? A: The main cause is deterioration in profitability due to a major decline in scrap metal prices. We had to write

• ff our entire investment because our initial cash flow projections proved unrealistic. The investee was also the
• wner company and the information it disclosed during our due diligence process was limited. We now realize

that our business valuation process was inadequate due to information and time constraints. Q: Your earnings forecast is disproportionately weighted toward the fiscal second half. What businesses do you expect to drive growth in the second half? A: Excluding losses due to non-recurring factors, businesses related to auto production performed well even in the fiscal first half. We believe that first-half performance was actually better than reported earnings. In the second half, Indian and Brazilian operations related to auto production are picking up. Thai operations related to auto production will need a bit more time to recover. We have had a cautious outlook for Chinese production from the outset. Our budgeted numbers for Chinese operations are not high in our view. Q: Looking ahead to next fiscal year and beyond, what are your anticipated earnings growth drivers aside from non-recurring factors and cessation of goodwill amortization? A: We do not expect any of our businesses to achieve dramatic earnings growth next fiscal year but we intend to steadily grow, step by step, over the medium to long term. The electric power assets we have been accumulating, mainly in North America, should contribute to earnings growth from the second half of the current fiscal year through next fiscal year. Additionally, we expect production growth stemming from automakers' overseas production capacity expansion to likewise contribute to earnings growth. The lithium business should also contribute to earnings growth if progress is made in terms of commercialization. We are currently in a growth lull. While continuing to invest in pursuit of further growth, we will also review past investments and share what we learn on a company-wide basis. We believe it is important to apply such information to future investments by rectifying previous deficiencies. Q: What is your current exposure to resource projects? A: By booking the losses we did last quarter, we have capped our future contributions for development expenses and limited our future risk. In the gas business, our exposure to all projects is under ¥70 billion. Our exposure to coal projects is only ¥2-3 billion. Our total exposure to lithium, iodine and rare earths is about ¥10 billion (excluding a completion guarantee to the Japan Oil, Gas and Metals National Corporation (JOGMEC) in the lithium business). Q: What is the current state of and future outlook for auto sales in Africa by region? A: In resource-producing countries affected by resource price declines (e.g., Angola), auto sales will likely take a while to recover. Kenya and other East African countries have been largely unaffected by resource price

• declines. CFAO expects auto sales in North Africa and Maghreb to continue to languish. Even in East Africa,

CFAO's sales were hard-hit by termination of certain OEM contracts and have yet to recover. In West Africa, sales of Toyota vehicles have been holding up well. From what I have heard, CFAO's African VW dealerships have not sold any models equipped with the software at the center of the recent emissions scandal, but we intend to closely monitor developments. Q: Are CFAO's earnings tracking below your expectations? A: In the auto business, conditions vary from region to region, but we anticipate steady growth over the long

• term. We feel that Toyota Motor has strong confidence in the Toyota Tsusho Group's operations, including

CFAO's African operations. CFAO's core new vehicle sales operations are profitable and CFAO is newly

focusing on used vehicle sales and automotive service businesses, including sales finance, in the aim of solidifying its earnings foundation. In the pharmaceutical business, CFAO has improved operationally since joining the Toyota Tsusho Group. We feel that it is outperforming rivals in this respect. CFAO and Carrefour plan to expand their supermarket joint venture into several countries, starting with Cote d’Ivoire at year-end. Additionally, CFAO has partnered with Heineken in the beverage business in other countries and with Yamaha Motor in the motorcycle business. Progress to date has regrettably been slower than we initially anticipated, partly because Japanese companies perceive Africa as a distant land, but we intend to continue to aggressively build our African operations. Q: For the current fiscal year, you plan to pay dividends of ¥62 per share, unchanged from the initial plan. What are your dividend plans going forward? A: Our target dividend payout ratio remains unchanged at 25% of net income before goodwill amortization. Accordingly, we intend to pay dividends linked to earnings as a general rule.