Toyota Reveals Net Profit Nearly Doubled in FY 2010/11, Updates Production Outlook

Toyota has announced its financial results for fiscal year (FY) 2010/11, showing that it has doubled net profits thanks to a strong recovery in global operating conditions and swift cost-cutting measures. For the year ending 31 March 2011, it posted a net profit of JPY408.1 billion (USD5.06 billion), up 198.7% year-on-year (y/y) compared with a net profit of JPY209.4 billion during FY 2009/10. It also posted a spectacular rise in operating profit to JPY468.2 billion, up 217.4% y/y in the FY, while pre-tax profit surged 93.3% y/y to JPY563.2 billion. The significant improvement in operating earnings was largely thanks to JPY180-billion in savings through cost-cutting measures and JPY169.6 billion in savings through a reduction in fixed costs. However, revenues remained largely flat at JPY18.99 trillion in FY 2010/11 compared to JPY18.95 trillion during FY 2009/10, as a result of the decline in vehicle demand in major markets, including Japan, North America and Europe, and unfavourable currency translation effects.

Toyota was able to post better-than-expected results despite a 77% y/y decline in net profits during the fourth quarter of FY 2010/11. For the three months ending 31 March 2011, Toyota posted a net profit of JPY25.4 billion compared to JPY112.2 billion during the same quarter last FY. It cited supply disruptions caused by the disastrous earthquake and the subsequent tsunami during March as the major contributor to its dismal performance in the quarter, when sales revenues declined 12.5% y/y to JPY4.64 trillion. Operating profit in the quarter plunged 52% y/y to JPY46.1 billion compared to operating profits of JPY95.3 billion during the same quarter last FY.

During the last FY, Toyota reported marginal increase of 71,000 units in its global vehicle sales to 7.308 million units. Of this total, sales in Japan during the period declined by 11.6% y/y to 1.913 million units, while sales volumes across in North America and Europe declined 3.2% y/y and 7.2% y/y to 2.031 million units and 796,000 units, respectively. However, its sales volumes in Asia and other markets were up 28.2% y/y and 15.3% y/y to 1.255 million units and 1.313 million units, respectively, largely making up for the loss in volumes across developed markets.

Outlook and Implications

Toyota's results were achieved despite some difficulties through the year. Despite the increase in Asian sales and some judicious cost cutting, Japan abruptly ceased its eco-car scrapping scheme that propelled the market for over a year. The scheme ended three weeks before it was due and the market subsequently fell dramatically on the high base of comparison. The scheme had propelled the Prius to the top of the market, although it managed to hold retain this position afterwards. Toyota's strength in Asia also belies the fact that the Japanese giant is not exactly flourishing in the booming Chinese market as it should. It has been beset by a combination of the fall-out from the earlier strike action and poor Sino-Japanese political relations, which have dented both Toyota's and rival Honda's image in the country. As consequence, footfall in showrooms has fallen, and sales have been muted. Furthermore, the strong yen continues to bear on the company as it does on many of its rivals, and it is estimated that for every JPY1 appreciation against the US dollar, Japanese manufacturers are likely to see a decline of almost JPY16 billion in operating profits. Toyota has also struggled in the US market in the wake of the recall saga, and the strength of the yen has put pressure on the competitiveness of its prices. The automaker has also been struggling in Europe, and more notably in the depressed Western European markets due mainly to the hangover from the scrapping incentives that were in operation in 2009 and early 2010. Toyota appears to have been one of the worst hit of the foreign brands as a combination of uninspiring product and stiff local competition has seen sales retreat in the region.

Meanwhile, the near term does not present a positive picture for its financial situation following the natural disaster which hit its domestic market and operations in the final month of FY 2010/11. The disaster severely damaged the supply chain in the affected area of Japan and led all domestic automakers to announce comprehensive production suspensions, resulting in production losses of several hundred thousand vehicles. Toyota, along with its Daihatsu and Hino units, has re-opened all vehicle production plants in Japan during April, but this has been followed by a production halt during the first week of May as a result of the annual spring holiday. The Japanese automaker will operate at about half its normal capacity amid continuing uncertainties over component supplies (see Japan: 8 April 2011: Toyota to Resume Limited Vehicle Production at All Domestic Plants from 18 to 27 April). Previously, Toyota has admitted that it is facing uncertainty regarding the supply of some 500 components. The problems with sourcing components from Japan are also affecting Toyota's production schedules at its overseas facilities, leading the company to announce production adjustments in North America, Europe, and Asia (see Japan - Europe: 13 April 2011: Five Toyota Plants to Undergo Temporary Stoppages Due to Component Supply Difficulties).

In this scenario, Toyota is finding it difficult to draw up production and sales forecasts for FY 2011/12. However, it is expected that the automaker will see a sharp decline in its financial performance during the first quarter, which will obviously hit its full-year earnings. The automaker remains cautiously optimistic about its prospects in FY 2011/12. President Akio Toyoda said, "We finished the fiscal year to March 31, 2011 with improved operating income as a result of our efforts on marketing and cost reduction despite a negative impact of around JPY100 billion from the Great East Japan Earthquake. Our business environment continued to be challenging due to Yen appreciation among others." The company is expected to release its earnings forecasts for FY 2011/12 in the coming months when it has clearer visibility about the extent of the impact of the disaster on its financial performance in the medium term.