The resurgence of SUVs in the U.S. -- and elsewhere -- is helping to power big profits for Toyota. U.S. sales of the RAV4 are up 25.7% this year. Source: Toyota

On Wednesday, Toyota Motor Corp. (NYSE:TM) said its net income surged 23% in the quarter ended Sept. 30, on favorable exchange rates and the effects of a major cost-cutting effort.

Toyota's net profit of 539 billion yen ($4.9 billion) was well ahead of the 499.5 billion yen result expected by Wall Street analysts, as well as the 438.4 billion yen it reported in the year-ago period. It also beat the pre-tax earnings reported by Toyota's two biggest global rivals, Volkswagen Group and General Motors, for the same quarter. 

Shares of Toyota were up over 1.5% in early trading on the news.

A cheaper yen leads to a big boost in profits
CEO Akio Toyoda's efforts to improve Toyota's profitability by cutting costs were already starting to take hold before the Japanese government's moves to devalue the yen -- but the resulting exchange-rate shifts have turbocharged the Japanese auto giant's profitability

Japan's moves to devalue the yen against major currencies like the dollar and the euro have been a boon for Japanese firms that do business overseas but report earnings in yen, like Toyota. Two years ago, the yen was trading at about 80 for a dollar -- but now, with the yen trading around 114 to the dollar, every dollar earned by Toyota in the U.S. means 34 more yen at home.

Some Toyota rivals, like Nissan, have used that currency advantage to cut prices at the expense of profits -- but Toyota has chosen to take a big boost in profitability. Toyota's global operating margin in the quarter was a spectacular 10.4%, beating VW's 7.8% and GM's 6.7% -- and also beating the margins posted by luxury-makers BMW and Mercedes-Benz, typically among the best in the global auto business.

A look at Toyota's regional business units
Despite the big jump in profits, Toyota's results for the quarter were relatively modest. 

Toyota's revenue rose 4.3% to 6.554 trillion yen ($59.9 billion), with global sales of 2.24 million essentially flat versus the year-ago period. Here's how the results came in for each of Toyota's regional units:

  • Japan: Toyota's home region reported 352.8 billion yen in operating income, a drop of 5.7% from its year-ago result. Sales were down about 9%, to 524,000 vehicles, on what Toyota characterized as "marketing-related factors." The region posted a 9.9% operating margin, down from 10.7% a year ago.
  • North America was a clear beneficiary of the exchange-rate movements. Its 139.3 billion yen profit represented a 70% surge from its year-ago result, one that Toyota credited to cost reductions as well as the exchange-rate advantage. The region's sales increased 12.4% over year-ago results. 
  • Europe posted a drop in sales -- but again, profits rose thanks in part to the yen's devaluation. Operating profit rose 12.1% to 102.5 billion yen despite a 4.2% decline in sales versus the year-ago period. Operating margin was a healthy 8.7%, up a full point from a year ago.
  • China: Toyota's joint ventures in China generated 21 billion yen in equity income during the quarter, down from 22.4 billion in the year-ago period. Sales rose 2.5% to about 238,000 vehicles.
  • Rest of the world: Toyota's catch-all division includes its operations in Latin America, Africa, the Middle East, and Oceania, and again the exchange-rate advantage was helpful. The unit posted a 43.9 billion yen profit, up almost 31%, with sales essentially flat at about 450,000 units. 
  • Financial services, Toyota's global captive-financing unit, earned 81.1 billion yen in the quarter, down slightly from 84.3 billion yen a year ago. 

Increased full-year guidance
Just as it did in the year-ago quarter, Toyota upped its guidance for the full fiscal year ending on March 31, saying this time that net income for the year could reach 2 trillion yen ($17 billion). That's an increase from its previous forecast of 1.78 trillion yen. Toyota is also expecting pre-tax operating profit of 2.5 trillion yen ($22.85 billion), on revenue of 26.5 trillion yen ($242.16 billion). 

Toyota's luxury brand, Lexus, is also benefiting from the SUV boom. U.S. sales of Lexus SUVs are up 13% this year. Source: Toyota Motor Corp.

All of those results would be records for Toyota, and they come despite an expected increase in R&D expenses to 980 billion yen and capital expenditures at 1.03 trillion yen -- also records. 

Toyota also announced an "interim dividend" of 75 yen a share, and executive vice president Nobuyori Kodaira said that the company will raise dividends going forward in a "stable and sustainable manner."

The upshot: Full speed ahead for Toyota
Toyota's massive exchange-rate-enabled profitability is allowing the Japanese giant to make big investments in future product and infrastructure while still reporting huge after-tax profits.  While the company is benefiting from the market shifts we've seen at other automakers -- more SUVs, more luxury vehicles -- the exchange-rate advantage, and CEO Toyoda's relentless focus on cost control, look set to pay big dividends for the company for a while longer.