Toyota operating profit slumps as strong yen, U.S. headwinds zap earnings

TOKYO – Toyota Motor Corp. reported a 43 percent tumble in global operating profit in the latest quarter as foreign exchange losses and an overreliance on lower-margin passenger cars in light truck-crazy North America offset gains from aggressive cost cutting and rising sales.

Operating profit declined to 474.64 billion yen ($4.69 billion) in the fiscal second quarter ended Sept. 30, CFO Takahiko Ijichi said today while announcing financial results.

Net income fell 36 percent to 393.71 billion yen ($3.89 billion) in the July-September period.

Worldwide revenue decreased 8.8 percent to 7.10 trillion yen ($70.10 billion) in the quarter, as global retail sales advanced 2.5 percent to 2.5 million vehicles.

Toyota, in a race against Volkswagen Group to finish the year as the world’s biggest automaker, is facing headwinds in the critical U.S. market, its traditional cash cow. Meanwhile, unfavorable foreign exchange rates are delivering hefty losses that will derail Toyota from a three-year streak of record earnings. Tepid sales are further clouding the outlook.

Japan’s No. 1 carmaker is also in the middle of restructuring itself to become more nimble and efficient as it navigates the complex waters of selling more than 10 million vehicles a year.

Truck supply

Ijichi said fluctuating foreign exchange rates undermined earnings in the latest quarter, even as overall sales inched higher and Toyota ramped up cost cutting measures. The flattening U.S. market and that market’s shift toward light trucks further hurt earnings.

North American regional operating profit declined 5.9 percent to 139.82 billion yen ($1.38 billion) in the quarter. North American wholesale volume stayed flat at 684,000 vehicles.

Ijichi said the company was slow to react as U.S. consumers stampeded away from passenger cars toward light trucks, as gasoline drop and tastes change. “Supply has not kept up with demand,” Ijichi said of Toyota’s truck lineup.

Because of the shortfall, Toyota trimmed its North America wholesale outlook for the current fiscal year. It now expects to sell 2.82 million vehicles, down from the original plan to sell 2.88. The target represents a 0.6 percent sales drop from the previous year.

The market shift pressures a Toyota lineup flush with fuel efficient offering such as the Prius hybrid, sales of which dropped 12 percent through October despite being redesigned last year.

Hot-selling light trucks accounted for just 52 percent of volume at Toyota Motor Sales U.S.A. through October. But industrywide, trucks gobbled 60 percent of all U.S. sales. Toyota Motor Sales car volume fell 12 percent in the first 10 months, while its truck sales gained 7.1 percent.

North American profit was also hit by swinging foreign exchange rates, especially the yen’s appreciation against the Mexican peso and Canadian dollar.

Improved outlook

The slowdown is also increasing pricing pressure and pushing players industrywide to lift incentives. Toyota said it was able to offset incentive and marketing cost increases in North America with cost cutting measure elsewhere, thereby limiting the profit decline.

In Europe, wholesale volume increased by 11,000 units to 212,00 vehicles in the quarter, while regional operating profit increased 14 percent to 25.52 billion yen ($251.95 million).

Citing more aggressive cost cuts and the adoption of a more lenient foreign exchange rate assumption, Toyota lifted its forecast for the current fiscal year ending March 31, 2017.

Operating profit is now expected to tumble 40 percent to 1.7 trillion yen ($16.78 billion), as opposed to dropping to 1.6 trillion yen as earlier announced. It also improved its net income outlook to 1.55 trillion yen ($15.30 billion), up from its earlier target of 1.45 trillion ($14.32 billion). The new goal still represents a 33 percent fall from last year’s result.

The declines from the previous year result from the yen’s steep appreciation in the interim.

Toyota cut its global retail sales forecast by 50,000 vehicles, mostly on the lower North American outlook. Worldwide volume is now seen essentially flat at 10.1 million vehicles.