Toyota Earnings Preview: Declining Passenger Car Sales, Appreciating Yen Could Dampen Profits
Toyota Motors (NYSE:TM) is set to report financial results for the first quarter of fiscal year 2017 on Friday, August 5th. The Japanese auto maker posted a decline of 2.5% in earnings per share on a revenue decline of 4.4% in the previous quarter. The company saw its new vehicle sales decline in all geographies except North America, where sales increased 4.6% year over year. In this quarter, the company faced similar challenges to those it faced in the first quarter. These include the declining sales in the passenger car market in the U.S., the increasing value of the yen compared to the U.S. dollar, which pushes down sales in Japan and raises costs for the company, since close to half of its production is based in Japan and the appreciating value of the dollar against currencies in all other geographies.
North America Decline
In the April-June period, Toyota sales in the U.S. declined by 4.2% compared to sales in the same period in 2015. Sales of almost all high selling Toyota models have declined during this period, with sales of Camry down 7.4% and Corolla down 4.2% year to date through June. Toyota’s light trucks RAV4, Highlander and Tacoma have done better, especially RAV4, whose sales increased in the mid to high double digits in all three months. For the April-June period, passenger car sales in the U.S. declined by 9.8%, while sales of trucks increased by 6.6%, resulting in a small overall decline. Given Toyota’s heavy dependence on passenger car sales, this meant that its sales suffered from the overall downtrend in passenger car sales, even as its Crossovers and trucks segment benefited.
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For the first half of the year, passenger car sales have declined by just over 8% and truck sales have increased by 7.3%. Going forward, this trend is likely to continue, so this poses some difficulties for Toyota. One of the bright spots for Toyota so far this year was the 16% increase in new vehicle sales posted by the company in China. In the first half of the year, new vehicle sales in China have grown by 9.5% and Toyota’s sales have grown even faster resulting in increased market share.
Yen Appreciation Poses Difficulties
The yen has appreciated by close to 15% in the April-June period compared to last year. Honda, another Japanese car company, recently reported its results and assumed an exchange rate of 108 between the yen and the dollar compared to last year’s level of 121, which ended eating into operating profits for the company considerably. According to our own estimates, the average exchange rate over the quarter was somewhere closer to 103, even higher than what Honda used. As a result of the higher value of the yen, revenue generated from vehicle sales in Japan will mean more in dollar terms but since close to half of Toyota’s production is based in Japan, its expenses will also rise. The appreciating value of the dollar will also pose difficulty for the company as currency losses will eat into the gains made from higher Chinese sales. Consequently, we expect Toyota’s reported profits to decline in this quarter, although some of the declines might be offset by cost cutting efforts.
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Notes:
1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Toyota Motor
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