Toyota Motor Corporation (NYSE:TM) said that its operating profit in the quarter that ended on Dec. 31 was roughly flat versus the year-ago period, at 676.1 billion yen ($6.13 billion), as higher costs offset gains from strong Lexus sales and favorable exchange-rate movements. But net income fell sharply on an accounting charge for unrealized investment losses.

Toyota cut its guidance for net income in the full fiscal year that will end on March 31, because of declines in value of some equity holdings. But it reiterated its prior guidance for revenue and operating income.

An orange 2019 Toyota Levin, a sporty version of the compact Corolla sedan

Strong sales of the Toyota Levin, as the sporty version of the compact Corolla is called in China, helped Toyota to a good quarter despite a weak overall market in China. Image source: Toyota Motor Corporation.

Toyota earnings: The raw numbers

Like many Japanese companies, Toyota uses a fiscal year that begins on April 1. The quarter that ended on Dec. 31, 2018, was the third quarter of Toyota's 2019 fiscal year.

All financial results are shown in yen. Vehicle sales are rounded to the nearest thousand.

Metric Q3 FY 2019 Q3 FY 2018 Change (YOY)
Revenue 7.80 trillion yen 7.61 trillion yen 2.6%
Vehicle sales 2,282,000 2,289,000 (0.3%)
Operating income 676.1 billion yen 673.6 billion yen 0.4%
Operating margin 8.7% 8.9% (0.2 ppts)
Net income 180.9 billion yen 941.8 billion yen (81%)
Yen per U.S. dollar, average during period 113 yen 113 yen No change
Yen per euro, average during period 129 yen 133 yen (4 yen)

Data source: Toyota Motor Corporation. Vehicle sales include the vehicles sold by Toyota's joint ventures in China. YOY = year over year; "ppts" = percentage points.

Why Toyota's net income fell 81%

Toyota said that two factors unrelated to its core business accounted for most of the steep year-over-year decline in net income:

  • An accounting loss of 395.4 billion yen related to unrealized losses on equity securities: Toyota didn't give details, but the company owns 16.5% of Subaru Corporation, and Subaru's share price fell by almost 31% in the quarter.
  • In the year-ago period, Toyota had a gain of 291.9 billion yen related to the U.S. tax-law overhaul. That wasn't repeated in the most recent quarter.

How Toyota's business units performed

Toyota reports separate operating results for each of its regional business units as well as its captive financing arm. Here's how each performed in the quarter that ended on Dec. 31, 2018:

  • In Japan, Toyota's operating income rose 4.5% to 492.5 billion yen, as sales rose 2.4% to about 565,000 vehicles. The company's ongoing cost-reduction effort helped boost its operating margin in its home market to 11.6% from 11.3% in the year-ago period.
  • In North America, Toyota's operating income fell 2.2% to 26.4 billion yen. Sales fell 7.5% from a year ago, to about 680,000 vehicles, on weak demand for the company's bread-and-butter sedans. Toyota's operating margin in North America was a very thin 1%, unchanged from a year ago.
  • In Europe, Toyota's operating income rose 7.2% to 25.1 billion yen despite a 2.1% drop in sales, as the euro fell in value versus the yen. Toyota's margin in Europe rose to 3.2% from 3% a year ago.
  • In Asia, excluding Japan but including China, Toyota's operating income fell 2.7% to 118.7 billion yen. Sales in the region rose sharply, up 14.9% to about 464,000, as demand for Toyota's inexpensive sedans in China stayed strong despite a decline in the overall market. Toyota's margin in Asia fell to 7.9% from 9.1% a year ago.
  • Toyota's "rest of the world" region includes Latin America, Oceania, Africa, and the Middle East. Here, Toyota's operating income fell 40% to 20.4 billion yen, with a margin of 3.5% (down 2 percentage points), as sales fell 5.5% from a year ago to about 341,000 vehicles.
  • Toyota's financial services unit earned 89.7 billion yen in operating income, up 17% from a year ago, on growth in its lending business and higher auction values for vehicles returned as leases ended.

Looking ahead: Changes to Toyota's full-year guidance

As noted above, Toyota cut its full-year net-income forecast, but maintained its prior guidance for revenue and operating income and slightly boosted its expectation for overall sales. For the fiscal year that will end on March 31, 2019, Toyota now expects:

  • Sales (excluding China joint ventures) of about 8,950,000 vehicles up from 8,900,000 vehicles in its prior forecast (fiscal 2018 result: 8,964,000)
  • Revenue of about 29.5 trillion yen, unchanged from its prior forecast (fiscal 2018 result: 29.38 trillion yen)
  • Operating income of 2.4 trillion yen, unchanged from the prior forecast (fiscal 2018 result: 2.4 trillion yen)
  • Operating margin of 8.1%, unchanged from the prior forecast (fiscal 2018 result: 8.2%)
  • Net income of 1.87 trillion yen, down from 2.3 trillion yen in the prior forecast (fiscal 2018 result: 2.49 trillion yen)

Toyota also now expects average exchange rates of 110 yen to the U.S. dollar (unchanged from prior guidance) and 128 yen to the euro (prior guidance: 130 yen).

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