Toyota (NYSE:TM) reported quarterly earnings on Tuesday, August 4. Here's what you need to know.
The key numbers
Net profit in the quarter ended June 30 (Toyota's fiscal first quarter) rose 10% to 646.39 billion yen ($5.22 billion). That beat expectations: Analysts polled by Thomson Reuters had expected a 607.5 billion yen profit. Revenue rose 9.3% to 6.98 trillion yen ($56.27 billion).
That's a record profit, but it was driven by favorable exchange-rate shifts. Toyota's worldwide vehicle sales fell by 0.4%, to just over 2.5 million. Without the exchange-rate shifts, operating profit would have fallen as well.
Toyota's shares were down about 1.5% in early trading in New York after the news was released.
Exchange-rate shifts have left Toyota with a huge windfall
First, the good news: By automaker standards, Toyota's net profit was massive, best in the world. Operating income jumped 9.1% to 756 billion yen ($6.1 billion), giving the company a global operating profit margin of 10.8% for the quarter. That's exceptionally strong.
CEO Akio Toyoda's ongoing global cost-reduction efforts added about 60 billion yen ($483.9 million) to operating income. But favorable exchange-rate shifts added much more.
Unlike rival Honda, which has moved much of its production abroad, Toyota still exports many vehicles from Japan to the U.S. and other markets. Paying production costs in yen for cars sold in dollars has proven to be a huge boon for Toyota as the yen's value has dropped 17% versus the dollar in the last year. Toyota says that for every additional 1 yen rise in the value of the dollar, its full-year operating profit will increase by an additional 40 billion yen ($322.6 million).
That effect was worth 145 billion yen ($1.17 billion) all by itself last quarter. Without the exchange-rate boost, Toyota's operating profit would have declined by more than 11% from a year ago.
That's because the not-so-good news was, well, not so good.
Sales hampered by production constraints, regional slumps
Toyota's sales declined in nearly all of its global regions. Only North America, Toyota's largest market, managed a modest (2.7%) year-over-year gain.
To some extent, this is a self-inflicted problem: CEO Toyoda froze production-capacity expansions for three years to focus on quality improvements and cost reductions. Many Toyota factories are running at or near full speed, but its ability to boost production further (without investing in new production lines) is very limited.
Production constraints are an issue, but Toyota also has demand problems in some parts of the world. New-car sales have dipped in key emerging markets such as Brazil and parts of southeast Asia. In addition, Toyota's sales in China have come under pressure as the economy there has slowed and competition has intensified.
Domestic Chinese automakers are boosting production and sales of affordable small SUVs and competing aggressively with the global brands on price; that has put particular pressure on Toyota's popular RAV4 model. Toyota has boosted incentives in an effort to keep sales going, but such moves squeeze profits.
Toyota has recently resumed factory-building. It has new factories under construction in Mexico and China that will add about 300,000 annual units of production by 2019. But its ability to boost production significantly will remain constrained for some time, until those new plants are operational.
Toyota's full-year guidance is (mostly) unchanged
Slumping sales and the near-term constraints on Toyota's production capacity led the company to trim its production plan for the calendar year slightly, though it left its sales forecast for the fiscal year that will end next March 31 intact at 10.15 million vehicles. Toyota officials have said that the company will attempt to make up the dip in emerging-market sales by boosting sales in developed markets, including the U.S.
Toyota also reiterated its previous guidance for full-year net income (2.25 trillion yen, or $18.13 billion). But it boosted expectations for net revenue by 300 billion yen to 27.8 trillion yen ($224.1 billion) on exchange-rate assumptions.
The upshot: So-so results, but Toyota's profits still lead the industry
Toyota's forecasts for the full fiscal year assume that exchange-rate benefits (and some small sales gains) will offset its increased spending on "marketing activities" (including incentives) as well as a moderate boost in research and development costs.
But the company remains in an exceptionally strong position, with a big (and growing) cash reserve, a solid product pipeline, and a good handle on costs. Absent any major disruptions, its profits should continue to lead the industry.