Toyota Returns to Profitability During Q1, Upgrades FY 2010/11 Earnings Projections

Toyota has announced its financial results for the first quarter of fiscal year (FY) 2010/11, showing that it returned to profitability thanks to strong demand for its vehicle amid a sustained global economic recovery and its swift-cutting measures. For the three months ending 30 June 2010, Toyota reported a net profit of ¥190.4 billion (US$2.2 billion), compared with a ¥77.8-billion net loss during the same period last year. The automaker also posted an operating profit of ¥211.6 billion during the period, compared with an operating loss of ¥194.9 billion during the first quarter of FY 2009/10, while pre-tax profit stood at ¥263.0 billion, compared with a pre-tax loss of ¥138.5 billion during the year-earlier period. The significant improvement in operating earnings was largely thanks to ¥400 billion in savings through marketing efforts and ¥50.0 billion in savings through cost-cutting efforts. Meanwhile, revenues at the company increased by 27.0% year-on-year (y/y) in the three months from ¥3.8 trillion to almost ¥4.9 trillion. Commenting on the financial performance, Toyota's senior managing director, Takahiko Ijichi, said that, "Due to an increase in vehicle sales and a large decrease in the costs related to loan losses and residual losses in Financial Services, operating income improved substantially on last year."

For the first quarter, the automaker reported a 29.9% y/y increase in its global passenger car sales to 1.840 million units. Of this total, sales in Japan increased 22.9% y/y to 500,000 units thanks to its fuel-efficient models, including the Prius hybrid, which qualify for the Japanese government's tax subsidy and "eco-car" incentive scheme. Sales in North America increased almost 35.9% y/y to 526,000 units. Sales in the European market, however, fell 12.2% y/y to 187,000 units, while sales in Asia (excluding Japan) totalled 285,000 units, up 46.9% y/y. Sales in "other" markets grew 61.0% y/y during the period to 322,000 units.

Outlook and Implications

Toyota's latest financial results are in line with the general overall trend for Japanese vehicle manufacturers in the first quarter of FY 2010/11. Last week, Honda and Nissan announced huge increases in profitability during the period thanks to swift cost-cutting measures and sustained global economic recovery (see Japan: 30 July 2010: Honda Posts Huge Rise in Net Profit During Q1 on Strong Global Sales and Japan: 29 July 2010: Nissan Posts Net Profit During Q1 on Strong Global Sales). Toyota's much-improved quarterly results were also partially thanks to a lower base of comparison provided by the same period last year, when it posted a huge net loss (see Japan: 4 August 2009: Toyota Reports Lower-than-Expected Results for Q1 FY 2009/10, Upgrades Full-Year Earnings Outlook). However, the strengthening of the Japanese yen vis-à-vis other currencies globally continues to put Japanese automakers' formerly profitable exports under significant pressure, particularly those destined for the United States and Europe.

Toyota vehicles, once known for their rock-solid reliability and excellent resale values, have been facing concerns over quality issues. The automaker is facing more than 300 separate lawsuits in the United States. More recently, it has been asked to submit documents related to problems with defective steering relay rods on its 4Runner and T100 pick-ups (see United States: 21 July 2010: Toyota Receives Second Grand Jury Subpoena for Documents). However, Toyota has yet to feel the impact of the recall saga on its global sales; demand for its vehicles has thus far been unaffected in most of Asia, especially China, Japan, and India, which will potentially help the automaker overcome the crisis in the key markets of the United States and Europe over the months ahead. The automaker is speeding up its efforts to rebuild its tarnished image in the global market following the high-profile recalls worldwide over separate manufacturing defects, affecting almost 10 million of its vehicles (see United States: 30 July 2010: Toyota Recalls 400,000 More U.S. Vehicles over Steering Issues). It recently announced that it will spend an average of four additional weeks on development of its vehicles. Toyota has already increased the size of its quality review group to 1,000 engineers and has also appointed a new team of 100 engineers independent of development to audit vehicle quality from the perspective of drivers. In addition, it intends to reduce the number of contract engineers and increase in-house development to improve quality control.

Moreover, Toyota is shifting some of its domestic production to overseas facilities and promoting exports from foreign plants in order to reduce costs and counter unfavourable currency translation effects (see Japan: 8 July 2010: Toyota to Extend Product Development Time; JAMA Still "Very Concerned" over Strengthening of Yen). It is expected that with every ¥1 appreciation of the yen against the U.S. dollar, Toyota will suffer a drop in operating profit of between ¥30 billion and ¥35 billion. It has already reportedly started shipping engines to its plant in West Virginia (United States) from its Takaoka facility in Aichi Prefecture (Japan) for use in the Corolla passenger car, while it is considering procuring more components for its Camry sedan in the United States and exporting some of them to Japan. Alongside restructuring its domestic operations, the automaker has reportedly been shifting its resources to emerging markets of late in an attempt to cater to increasing demand in these high-growth markets. It aims to raise its global sales ratio for areas other than Japan, Europe, and the United States from the current 40% to 50% as soon as possible. It plans to increase sales in markets such as China, Brazil, and the Association of Southeast Asian Nations (ASEAN) by launching new and revamped fuel-efficient models (see Brazil: 20 July 2010: Toyota to Construct Third Brazilian Plant). It has already invested around 32 billion rupees (US$693 million) in its new facility in India, which includes engine manufacturing, and it recently announced a further investment of almost ¥9 billion in engine and transmission production for its upcoming Etios model in India (see India: 22 July 2010: Toyota Launches Corolla Altis Diesel in India, Targets 67,000 Sales of Etios in 2011).