Earnings Review: Declining U.S. Car Sales, FX Headwinds Eat Into Toyota’s Profits
Toyota Motors (NYSE:TM) announced financial results for the first quarter of fiscal year 2017 on Thursday, August 4th. The Japanese auto maker reported a 5% drop in net income in dollar terms as the result of: 1) a decrease in passenger car sales in North America; 2) a production shutdown due to an earthquake at Kumamoto prefecture; and, 3) an increase in the value of the dollar. Some of the impact of these factors was offset by the company’s strong performance in Japan and China, as well as the appreciation of the yen by 11% over the quarter.
North America Slowdown
Over the April-to-June period, the passenger car market in the U.S., Toyota’s biggest market, slowed as new vehicle sales in the segment declined year over year by 9.8%. Toyota’s two highest selling vehicles are the sedans Camry and Corolla, and both have seen their sales decline so far in the year 2016. The former was down 7.4% through June, while the latter saw its sales decline by 4.2%. In many ways, the impact of the slow down is underscored by the performance of the new model of the Prius hybrid in the U.S. Prius sales have declined by 26% so far this year, despite the redesigned vehicle, which now boasts better mileage and an improved interior. In contrast, the redesigned model sold like hot cakes in Japan to become the highest selling model in each month so far this year. Low gasoline prices have boosted Crossover and truck sales in the U.S. so far this year, with new vehicle sales in these two segments combined growing by 7.3% so far this year. Toyota’s RAV4, Highlander and Tacoma have benefited because of this trend.
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Yen Appreciation Boosts Japan Profits But Also Beefs Up Costs
The combined impact of the failure of the Bank of Japan to raise inflation expectations in the domestic market through a policy of competitive devaluation and the flight to safety to the Yen following Brexit have resulted in the appreciation of the value of the Yen by 11% against the dollar so far this year. New vehicle sales in Japan grew by 8.8% year over year in this quarter and the higher value of the yen boosted the impact of this sales bump. Even though in constant currency terms, automotive sales this quarter declined by close to 6% but the impact of favorable currency fluctuations meant that reported revenue in dollar terms actually increased by 5.4%. However, since close to half of Toyota’s production is still based in Japan, this also meant higher expenses, and as a result operating profit declined by 5% year over year, with a 100 basis point decline in operating margin. Currency effects also dampened the impact of a 16% increase in new vehicle sales through June for Toyota in China so far this year, as the Chinese remnibi has declined relative to the U.S. dollar.
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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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