looknow12

Good afternoon.
Our thanks to all of you for being here, and to Morgan Stanley for this fine forum.
It is our first opportunity to bring Lexus to this group, except for the times when we were here with our cousins from Toyota.

Please refer to our cautionary statement before we begin this afternoon's presentation.

We'd like to use these few minutes to talk about three topics...
* The luxury vehicle market, and our take on it today...
* How changes in the market revise the conventional wisdom about luxury purchases...
* And how Lexus is preparing to meet the challenges that these changes bring about.

Last year, luxury automakers built and sold 1.8 million vehicles, accounting for 11 percent of the U.S. new-vehicle market.
That share, by the way, has grown from around eight percent of the total in just the past five years.

More on that in a minute.
Last year, Lexus sold almost 260,000 vehicles in the United States, registering the Number One market share at 14.0 percent.
It was our fourth consecutive year of leadership in the luxury vehicle segment. This year, first quarter sales totaled 64,970...up an impressive 25 percent from the same period a year ago.
In 2004, luxury vehicle sales should grow to 1.9 million units, or about 11.4 percent of the estimated total of 16.9 million U.S. light-vehicle sales.
Lexus aims to account for sales in excess of 270,000 while maintaining our market share.

All of you know well how crowded and competitive the luxury vehicle market has become.
When Lexus introduced the LS 400 back in late 1989, it competed with 40 vehicles in the luxury market.
Today, there are 70.
The reasons aren't hard to figure out if you look at the demographics.
The Federal Reserve report on changes in U.S. Family Finances shows that median and mean family income come to a peak in the 45-54 year age group.

And the people who were born between 1946 and 1964 - all 78 million of them - are today between 40 and 58.
In fact, another American turns 50 every eight seconds, landing right in the middle of that peak-earning group.
What's more, the Boomers are the first generation to have gone to college on a large scale.
And when you relate peak income to education, you find that families led by earners with college degrees have incomes twice those of families that are not.
So, we have a massive population of comparatively well educated people...at just the right age...
right at the peak of their lifetime earning potential.
That's a tempting market for makers of luxury products of all kinds - and...for makers of luxury motor vehicles...it's irresistible.

Americans in the so-called "middle class luxury" category - those with annual incomes of $100,000 or more - have become a fast-growing group.
According to the Census Bureau, this group accounted for 13.8 percent of all U.S. households in 2001, up from nine percent just ten years earlier.
That gives us a total of 15.1 million households in the United States with total annual income over $100,000.
Another factor is the amount of money American families have left to spend on discretionary purchases when their household expenses are paid.
We're told that the average family of four spends 21 percent less on clothes, 22 percent less on food, and 44 percent less on appliances, after inflation, than it did a generation ago.
And mortgage payments that consumed nearly a third of household income in 1980...and about one-fourth in 1990...have fallen to about 18 percent of monthly household income today.

Thank you, Chairman Greenspan.
Still another factor is the ratio of a car's cost to a family's income.
Today, an average-priced new car is more affordable than its been in 24 years...
Costing the equivalent of under 20 weeks of median family income.

So, more Americans in their peak earning years...generally better educated, as a group...bringing home more money...and spending less of it on necessities...with more to apply to car purchases.
That's a winning formula.
It means more and more families can move up into the luxury and near-luxury vehicle segments of the car buying population.

Now, what about this huge market?
What's the latest on luxury car buyers?
And how have they changed?

Well, we've recently concluded an extensive two-year study of the changing luxury market in an effort to forward the Lexus Brand Strategy.
We studied spending habits of affluent people, and of people in that "middle-class luxury" segment.
We looked at purchases of all kinds of luxury goods.
We examined the habits, the interests, the needs, the desires, even the values of people who bought our cars, and of those who did not.

What we learned from our studies was that Americans' notions about luxury have changed a great deal.
When Lexus was launched in the late 1980s, luxury in this country was all about possessions.
It was about accumulations of high-ticket assets of all kinds.

It was about pride of ownership...ownership for its own sake, often unrelated to the utility or performance of the possessions.
Remember "He who dies with the most toys wins"?

Then the luxury market entered a phase where experiences became more important.
It wasn't just about possessions, but also about how purchases enriched your life.
Luxury consumers started looking at high-ticket activities that included extreme sports in some extremely remote places.
Mount McKinley wasn't high enough, and it isn't remote enough...so let's send postcards from the top of K2 instead.
And luxury skiing meant hela-skiing in the back country of a nation on the other side of the world.

During this period, our lives became busier and busier, and time became more scarce.
So luxury consumers started looking for ways to not only save time, but to savor time.
These trends have created a new view of luxury.
It is understated and less formal.
It is oriented less to possessions, more to high-quality uses of time.
In place of conspicuous consumption is the new notion of consumption of experiences.
It is oriented to a pursuit of those things that help people savor time -- travel time, relaxation time -- that's the real luxury today.
People are looking at things that make life easier or more manageable so there is more time to enjoy one's life.

Consider, for example, that commuters in one-third of our nation's largest cities spend an average
of more than 40 hours a year - a full work week - sitting in gridlocked traffic with their engines running.
And if one cannot escape that situation, surely there must be a way to make that time more tolerable, if not pleasant.

When we asked our owners, "What does Lexus mean to you?" and "How does Lexus fit into your life?"
They told us that Lexus respects their time with things like...Mobile service...service pick-up and delivery...complimentary car washes...Lexus Luxury lounges where you can relax...or conduct business...and the most problem-free vehicles in the industry.

So when you consider Lexus in the context of this new view of luxury, it seems as though the stars are perfectly aligned for Lexus.

Our research confirms that consumers are looking for brands they can trust.
Lexus is rewarded by its customers with the highest loyalty rate of any nameplate - 53 percent.
Nevertheless, we resolved to study every aspect of our operations - every customer touch point - to see how we could further improve and meet these needs even better.

Our people talk about "seamless anticipation" of the customer's needs.
We brought our response to the customer's new view of luxury from three directions...product diversity...product design...and dealer operations.
Building a more diverse product lineup meant making additions of both new models and new features, new technology and new performance to our existing lineup.
Some competitors have been going down-market in the attempt to capture greater volume.
The Lexus way is to add features, improve performance, and generally try to anticipate what the customer will want next, remaining within our value ranges.
And that's why, tomorrow, we'll unwrap a concept vehicle that will give IS owners more choices
within this sport/luxury class.
This is our near-luxury entry point -- the market that will produce lifetime loyalists for the Lexus lineup.
Nearly 90 percent of IS buyers are first-time Lexus owners.
The median age of IS buyers is 29, the lowest in the segment, and well below the 39-year-old average of its nearest competitor.
In fact, the IS has done a better job of meeting the needs of young buyers than any other model in this segment.
Lexus IS competes directly with the BMW 3 series, which, with 15 variants accounts for 10,000 units per month...half that company's sales.
Today, IS has only 2 models.
While we never intended for IS to represent such a large percentage of our volume, clearly additional body configurations...such as a coupe and convertible would offers Lexus the opportunity to significantly increase today's volume of approximately 1,000 units per month.

As we look to grow our business in this highly competitive segment, we will introduce, at the New York auto show tomorrow, a new concept luxury-sports coupe...the LF-C.
The LF-C will attract young, sophisticated consumers seeking more than the traditional European sport sedan formula.

Another example of product diversification is in the Lexus SUV lineup - the most complete in the luxury market.
Today, Lexus dominates the segment with more than one in four luxury SUVs sold bearing the Lexus nameplate, and our RX 330 is the #1 luxury sport utility in the market.

Nearly every buyer can already find the features and price point he or she is seeking in our RX, GX and LX sport utilities.
Nevertheless, we will add a fourth SUV to our lineup this year...offering even more selection.

This past January in Detroit we announced the addition of the RX 400h, the world's first luxury hybrid vehicle.
This revolutionary SUV will be available late this year.
Powered by an all-new, advanced Hybrid Synergy Drive system, the 400h brings a performance dimension
to the traditional hybrid advantages of high mileage and low emissions.
The new RX will offer 20 percent more power, faster acceleration with better fuel consumption than the RX 330.
What's better than that?
The emissions rating.
The RX 400h will be rated a super ultra low emissions vehicle, one of the most stringent emissions ratings in the industry.
Drive this vehicle in nine round trips between New York and Los Angeles, and you'll produce less smog-forming emissions than in painting a room in your house with one gallon of paint.

We've done a lot of research on how affluent consumers will respond to this revolutionary vehicle.
We have found that it is not necessarily about being green...or more fuel-efficient...or even about the higher level of performance.
It's all about delivering a better total package to a very loyal customer who has come to trust the Lexus marque.

The new luxury hybrid, incidentally, will also introduce another industry first called Vehicle Dynamic Management.
VDM is an all-new system that combines Lexus vehicle stability control with an all-new electronic brake technology.
It is capable of anticipating impending vehicle stability problems and then automatically engaging a combination of braking and throttle control to help correct the situation.
It will be largely invisible to the driver...an example of the seamless anticipation of a customer's needs.

And here's another - our Adaptive Front Lighting System, or AFS, that turns the headlights in the direction of a turn making night driving safer.

A central controller calculates the optimum direction and swivels the right and left headlights independently so the driver can see further into a curve before turning in to it.

In addition to greater product diversity and technology, a second step in our evolution of the brand is a new, more passionate design direction.
Last year, at the New York Auto Show, we took the first step in this direction with the world premiere of the Lexus LF-X, a luxury crossover concept.
Last fall, at the Tokyo Motor Show, we unveiled the Lexus LF-S, a luxury sedan concept.
And this year in Detroit, we premiered the third-generation Lexus GS sport sedan.
Arriving early next year, the GS will be the first production vehicle from Lexus to benefit from this passionate new styling approach.
Combined with a Lexus first all-wheel-drive system, Vehicle Dynamic Management, and a back-up camera the next generation GS will offer us a significant opportunity for volume growth.

As I mentioned earlier, the concept vehicle that will be shown tomorrow will be the next in the LF-series of Lexus concept vehicles.

This new design direction is bold and striking, but simple and intriguing.
It is consistent with our findings about what consumers are looking for in luxury purchases.

The third initiative we've taken up as we meet the changing expectations of the luxury consumer has to do with dealer operations and their critical role in the Lexus ownership experience.

Thanks to an early and uncompromising adherence to what is called the Lexus Covenant, our dealers have become the industry benchmark for success.
They not only foster our brand's exceptionally high loyalty rate...they also produce a service retention rate that is unprecedented in the industry.

Nearly two-thirds of our cars that have been on the road for up to ten years return to Lexus dealers for service.
The tremendous owner loyalty and the high service retention rate combine to build dealer profitability.
Our 207 dealers are the most profitable in the automotive industry.
In addition to being the most profitable, Lexus dealers are also number one in retail sales per outlet.
What's more, the National Automotive Dealers Association annually ranks Lexus number one in every category, from sales and profit per store to relations with the manufacturer.

Just to give you an idea of how rapidly we are growing...
It took 10 years and 3 months to deliver our first one-millionth vehicle.
Yesterday in south Florida, we just sold our two-millionth vehicle - a North American-built RX 330.
This time, it only took us 4 years and 4 months.
And in about 3 years and 5 months, we estimate we'll sell our three-millionth Lexus.
And because our already large Units in Operation is growing quite rapidly, we've been working with our dealers to make certain they have the parts and service capability they need to keep the Lexus brand growing into the future.
Our business model is based on two fundamentals - building a perfect product and delivering the perfect customer experience, and for this, we have to rely on our dealers despite our tremendous growth.

We did not want to risk a rise in customer waiting times or a decline in customer satisfaction.

And our dealer partners have stepped up to this challenge, investing three-quarters of a billion dollars in new and expanded facilities in just the past 20 months.
We're training and re-training dealer technicians, service associates and sales associates to be sure our high standards of performance aren't compromised by the additional volume.
There is an intensity about this training that I know is not duplicated
in the industry.
We insist that our industry-leading customer experience be delivered at every touch point.
So everyone from the dealer principal and the salesperson to the receptionist and the valet is brought into a culture of advocacy, engagement and empowerment.

Through these initiatives, our dealers have been able to enjoy consistent, continuous and sustainable progress year after year.
Their people produce the kind of discretionary effort
that team members add when they feel a devotion to a winning cause.

Now, despite our rapid sales and Units In Operation growth, we're adding new dealerships very cautiously and slowly - only about four or five a year.

And, we use customer demand to stock them with vehicles, not the production-push method common to other nameplates.
This means our dealers average a 20- to 25-day supply of product in a luxury segment that averages 50 to 55 days.
That lowers inventory costs and makes it unnecessary to discount aging product.
All of this adds up to superior support and more profit for the dealer.
And when our dealers are profitable,
They're able to sustain a world-class customer experience.

Perhaps you've already seen our recognition of the consumer's new view of luxury expressed in our advertising.
You might recall that when we started, Lexus had just one point to make with the consumer...and that was product superiority.
We had to show that a Japanese car company could build a luxury vehicle equal to world-class competition.
So, we showed our quality with the following commercial we call Ball-bearing:

Today, more than a dozen years later, we're still moving the message of product quality with this most recent spot, called dimples:

In summary, the outlook is good for the auto industry's luxury segment, and especially good for Lexus.
* Consumer demographics are going our way, with lots of new consumers coming into the right age and income sectors for the next decade or more...
* Household income and the amounts available for discretionary purchases are at record levels...
* Luxury vehicles are continuing to increase their share of total light vehicle sales...
* We have an exciting new design direction and ample new product in development...
* Lexus quality is being maintained and even improved, as we ratchet up our volume...
* Our products are marketed and serviced by the industry's most effective, profitable and committed dealer organization, with substantial expansion under way...and...
* We have the full support of a strong, diverse and well capitalized corporate parent.

As we look forward to continued, controlled growth toward unit sales in the 300,000 range within the next five years, we are often asked what's driving our phenomenal success?
Some would say its great products.
But if you go to the New York Auto Show, you'll see all kinds of vehicles that are faster, more fuel efficient, more advanced and that most likely cost less than the model they're replacing.
So, obviously, Lexus does not have a monopoly on great products.
Some would say it's our dealers and what they do for the customer. And our dealers are great.

Well many of our dealers also have other franchises.
So, we don't have a monopoly on great dealers.
What we do have at Lexus is a 15-year commitment for delivering the best product and a perfect customer experience.

Many companies tout their superior products, but clearly, Americans are more skeptical these days than ever before...of everything from Martha Stewart to terrorism, corporate scandals to political scandals.
Our research confirms consumers are looking for brands they can trust.
Which is why our philosophy of building a perfect product and delivering the perfect customer experience is more relevant today than when we launched in 1989.
Lexus is a brand you can trust.
And that's what we believe is driving our growth.
Thanks, now, let's take time to respond to your questions...

Gekko

"Lexus is a brand you can trust."

EXACTLY.

looknow12

Notice they said a new SUV is on the way this year. I guess that's the RX, but we can't be positive.

Vegassc400

Correct. The RX400h is the 4th SUV.

LexFather

looknow12, WONDERFUL thread. No wonder Lexus is #1. They did an incredible 2 year study to see where their market is going. I am sure they've done that before. Incredible how they sold 1 million in 10 years, 2 million in 4 1/2 and 3 million by 2007/8. Incredible.

looknow12

I'm sure a team wrote Danny's speech. It's filled with WOWS and it just keeps getting better and better.