Earnings Review: Toyota Profits Fall On Yen Appreciation
Toyota Motors (NYSE:TM) announced financial results for the second quarter of fiscal year 2017 on Thursday, November 8th. The Japanese auto maker reported a 25.2% drop in net income in dollar terms as the result of a 15.4% appreciation in the value of the yen and an increase in operating expenses for the company. Even though in yen terms, the company reported an 8.8% year over year decline in overall revenue, the appreciation of the yen meant that this unfavorably translated a 6% year over year growth in dollar terms. Despite this, the company’s operating income declined by 33.4% to $ 4.5 billion as a result of a 11.2% increase in operating expenses.
North America Car Market Slowdown Neutralizes Gains In Other Segments
North America is Toyota’s biggest market in terms of unit sales. Toyota has historically dominated the passenger car market in this region but the recent decline in passenger car sales has affected its market position. Although the company is increasing its presence in the segments of the auto car market that are still growing. These include trucks, crossovers, SUVs and luxury vehicles, where it respectively offers the RAV4, Highlander and Tacoma, Still, the sedans Camry and Corolla, along with the hybrid vehicle Prius, are still equally important for the company. On a year-to-date basis, car sales have declined by almost 9% in 2016, with Camry sales down 9.4% and Corolla sales down 0.8%. The gains made by Toyota in other segments have not been able to offset this decline, as first half sales for the fiscal year 2017 (1.4 million units) for the company came in at a slight decline compared to the previous fiscal year (1.413 million units). In the second quarter of the fiscal year 2017, new unit sales for the company were flat at 684K units. The result of this performance was that the company’s operating margin increased by 60 basis points in the region.
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Yen Appreciation, Low Transaction Prices Eat Into Toyota Japan Profits
In contrast, the company’s performance in Japan had almost no saving grace. Even though new vehicle sales have increased by close to 10% this year, sales in yen terms are down by almost 50%. In the quarter, new vehicle sales increased to 567K units but revenue fell from 482 billion yen to 195.6 billion yen. As a result, the operating margin fell by 760 basis points to 5.4%. An important thing to note is that the decline in exchange rate from 122 yen for each dollar to 105 yen for each dollar over the quarter, only accounts for around 7% of the decline in the sales for the company. The rest of the decline is mostly attributable to the lower transaction prices commanded by the company in this fiscal year so far.
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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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