Toyota Earnings Review: Strong Quarter In U.S. Closed Out Year As FX Headwinds Continue To Mount

Toyota Motors (NYSE:TM) announced financial results for the third quarter of fiscal 2016 on Friday, February 5. ^[1] The Japanese auto maker reported a 4.7% increase in net income to $5.1 billion for the quarter, despite overall unit sales remaining just about flat and the less beneficial contribution of exchange rate effects. In the previous three years, Toyota had benefited from the declining value of the yen against the U.S. dollar, emerging market currencies and the Euro, as sales made in those currencies became more valuable when translated back into the yen. However, in the October-December period, while the yen remained weak against the dollar, it strengthened against the euro and emerging markets currencies. Still, the company posted a 4.7% increase in net income on the back of cost cutting efforts and low tax payments. ^[2]

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Truck Sales Drive North America Revenue

Toyota did not have a strong performance in the March-September period of 2015 in the U.S. However, in the final three months of the year, the company’s sales grew at a rate of close to 9%. The Japanese auto maker’s strength lies in the passenger car market.  However, SUV, crossover and light truck sales have driven gains in the U.S. market. driven by a combination of low gas prices, the construction market boom and an aging demographic, . While U.S. auto sales were on pace for their best year since the turn of the millennium, Toyota’s sales were declining. However, clear out sales on heavy incentives and the launch of new models of the Camry and Prius propelled the company’s unit sales in the October-December period. Additionally, the crossover RAV4, and the SUVs Sequioa and Highlander, experienced strong growth towards the end of the year. Lexus too had a strong year in 2015, registering a market share of close to 19% in the U.S. luxury car market for the full year.

Overall North America sales grew at a pace of about 2.3% over the quarter but the company’s operating income fell by over 15%. ^[3] According to company management, operating income fell only due to increased sales expenses, but those sales expenses likely include lower transaction prices achieved by the company as it looked to clear out its inventories of Prius, Camry and Corolla at dealerships. The same trends are likely to continue in the coming quarter.

Weak Markets Continue To Affect Sales

While the strongest U.S. sales year this decade helped Toyota raise its unit sales overall, weakness in markets such as Asia-Pacific, South America and Japan continued to affect sales. In Japan, for example, sales fell only slightly year over year, but operating profit fell by 7.5% year over year, leading to a 140 basis points decrease in operating margin to 10.2%. ^[3] Company management attributed the declining margin to increased R&D expenditure, as Toyota seems set to step up its self-driving efforts. ^[4]

Toyota also lost ground in Europe and Asia, with sales declining by 4.5% in Europe and 3.2% in Asia. ^[3] However, its profitability varied as heavy incentives and discount offers ate into the company’s operating profits in Europe.  This resulted in a 38% decline, while lower costs and favorable exchange rate swings led to a 25% gain in Asia. ^[3] The company left its forecasts for the fiscal year ahead unchanged. ^[3]

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1. Toyota Motor Corporation FY16 Third Quarter Financial Results Presentation, Toyota Investor Relations [↩]
2. Toyota Q3 Financial Summary, Toyota Investor Relations [↩]
3. Ref: 1 [↩] [↩] [↩] [↩] [↩]
4. Behind Toyota’s Late Shift Into Self-Driving Cars, Wall Street Journal, January 2016 [↩]