Toyota Earnings Review: Weak Yen Boosts Profits

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Toyota Motor

Toyota Motors (NYSE:TM) announced financial results for the second quarter of fiscal 2016 on Thursday, November 5. [1] The Japanese auto maker reported a 13.5% increase in net income to $5.1 billion for the quarter, despite a 3% decrease in overall unit sales. The company achieved higher profits on the back of a successful implementation of cost-cutting measures, higher sales of more profitable SUVs and trucks, and the positive impact of currency fluctuations. [2] The company lowered its forecasts for consolidated unit sales and revenue for the full fiscal year, but left the operating income and net profit figures unchanged. [3]

See our complete analysis for Toyota Motors here

Favorable Currency Impact Cancels Out Sales Declines

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Toyota’s operating profit jumped by $1.4 billion on a year-over-year basis. [4] Most of this increase can be explained by the movement in exchange rates between the Japanese Yen and the U.S. dollar. During the second quarter of the last fiscal year, the conversion rate between the two currencies stood at around 104, while it increased to 122 in the second quarter of this year. This meant that even though the company’s operating profit fell in dollar terms, it actually increased when converted back into Yen. The currency factor alone accounted for $1.55 billion in the change in operating profits. To be sure, the ongoing efforts in cost reduction contributed $660 million in increased profits, but that effect was offset by lower sales volumes and a $170 million increase in Research & Development expenses. [4] The most pronounced effect of the exchange rate fluctuation was felt in Japan, where operating profits jumped $1.08 billion despite a 2% decline in sales. [4]

Truck Sales Drive North America Revenue

Toyota sold around 984,000 units in North America in the first half of the fiscal year 2016, a decrease of 46,000 units compared to the first half of the last fiscal year. [4] The company’s operating income fell from $1.34 billion in the fiscal second quarter last year to $1.13 billion in the second quarter of this year. This was despite just a marginal decline in revenue, which was boosted by higher presence of Toyota and Lexus SUVs and trucks in the sales mix. Operating margin fell by 120 basis points to 5%.

In recent months, Toyota has benefited from the growth in unit sales of its Corolla and Camry sedans, as well as the Prius. The three vehicles posted surprising gains in September after faring tepidly earlier in the year. The company is set to introduce new 2016 versions of the Camry and Prius, so it held clearance sales for these vehicles, offering generous incentives, which drove sales but resulted in lower than usual average unit prices. The new Prius will be made on Toyota’s new Global vehicle architecture and modeled after its fuel-cell vehicle Mirai. The car is expected to be more stylish in appearance, and the shift to a more modular vehicle manufacturing process should help cut the cost of manufacturing. However, low gas prices have resulted in a shift in consumer behavior, with a growing sales mix of SUVs. A reversal of this trend is hard to foresee until gas prices go up again.

On a more positive note for Toyota, its trucks division has been faring quite well, along with the trucks division of its luxury brand Lexus. Toyota’s own SUV division’s sales grew by over 15% in the month of September, driven by a 34.6% gain for Sequoia, a 32.6% gain for 4Runner and a 19.3% gain for RAV4. ((September 2015 Sales Conference Notes, Toyota Corporate Newsroom, October 2015)) Overall truck sales for the Toyota brand grew by 10.3% for the month. [5] For Lexus, the introduction of the Lexus NX boosted overall sales. Over the first nine months of the year, Lexus truck sales have grown by a strong 28.4% driven chiefly by the sales of NX. [5]

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Notes:
  1. Toyota Motor Corporation FY16 Second Quarter Financial Summary, Toyota Investor Relations []
  2. Ref: 1 []
  3. FY 2016 Second Quarter Financial Results, Toyota Investor Relations []
  4. Ref: 2 [] [] [] []
  5. Ref: 3 [] []