Toyota operating profit declines 39% on foreign exchange hit, higher expenses

[Tragic Bronson]

http://www.autonews.com/article/201...it-declines-39-on-foreign-exchange-hit-higher

TOKYO -- Toyota Motor Corp. reported a 39 percent tumble in global operating profit in the latest quarter as foreign exchange losses and higher expenses offset an increase in worldwide sales.

Operating profit plunged to 438.5 billion yen ($3.76 billion) in the fiscal third quarter ended Dec. 31, Managing Officer Tetsuya Otake said Monday while announcing financial results.

Net income dropped 23 percent to 486.5 billion yen ($4.17 billion) in the October-December period. Worldwide revenue declined 3.5 percent to 7.08 trillion yen ($60.7 billion) in the quarter, even as global retail sales advanced 2.9 percent to 2.28 million vehicles.

Toyota, which surrendered its four-year reign as world's biggest automaker to Germany's Volkswagen AG last year, is feeling the bite of the Japanese yen's increased value against foreign currencies including the U.S. dollar. The appreciation has hit profits across the board at Japanese automakers and has derailed Toyota from a three-year streak of record earnings.

Meanwhile, Toyota is facing additional headwinds in the U.S., its traditional cash cow.

The Japanese carmaker was slow to tap the U.S. boom for light trucks and is now facing rising price pressure and higher markdowns for falling residuals on a glut of cars coming off lease.

“Competition has intensified in the market. Incentives in the market trended upward,” Otake said, adding that Toyota expects the overall U.S. market to decline about 2 percent in calendar year 2017, after a record finish in 2016. “We expect a tough used car market going forward.”

Trump uncertainty

Further uncertainty looms for Japan's top carmaker as U.S. President Donald Trump threatens tariffs on vehicles imported from Mexico and a border adjustment tax on other vehicles shipped from overseas. Otake said Toyota was taking a wait-and-see approach.

“As of today, the impact of the Trump Administration's policies is very difficult to incorporate [into Toyota's strategic planning,]” Otake said.

Toyota is especially sensitive to any pressure on imports.

More than half the cars it sells in the United States come from outside the country.

Toyota already has a small truck plant in Mexico. But it is investing some $1 billion on another assembly plant in that country that will begin making Corolla small cars in 2019.

That plant, in the state of Guanajuato, will have annual capacity of 200,000 vehicles.

The carmaker ships cars to the U.S. from Japan, Canada, Mexico and France. Japan accounted for about 26 percent of all the Toyota and Lexus vehicles sold in the U.S. last year. Canadian-made vehicles accounted for 20 percent of the U.S. sales total, and Mexico was the source of 5 percent of the carmaker's U.S. volume. France chipped in about 10,872 Yaris subcompacts in 2016.

Toyota and America

Trump rattled Toyota with a Jan. 6 tweet criticizing its decision to build the Corolla plant in Mexico instead of in the U.S. “NO WAY!” Trump wrote. “Build plant in U.S. or pay big border tax.”

Since then, Toyota has been scrambling to underscore its contributions to the U.S. economy.

At the Detroit auto show, Toyota President Akio Toyoda touted his company's plans to invest some $10 billion in the United States over the next five years. Much of that amount had been already earmarked and includes outlays for regular activities such as retooling plants.

Later in January, Toyota also announced plans to invest $600 million in its Princeton, Ind., plan to add 400 new jobs and expand annual capacity of Highlander SUVs by 40,000 units in 2019.

Japanese Prime Minster Shinzo Abe is expected to visit the United States later this week to meet Trump. The Japanese leader has told reporters he wants to explain Japan's stance on trade, foreign exchange rates and overseas investment and win understanding from the new president.

Ahead of the trip, Abe huddled last week with Toyoda. Japanese media has speculated that Abe is rounding up Japanese companies to support a job-creation package for the United States.

At the earnings announcement, Otake repeated the theme that Toyota helps the U.S. economy.

“For close to 60 years we have extended roots in the United States,” he said. “We want to continue to contribute to the United States a good corporate citizen.”

Truck supply

Regarding financial results, Otake said fluctuating foreign exchange rates undermined earnings in the latest quarter, even as overall sales rose in every major market.

North American regional operating profit plummeted 53 percent to 70.6 billion yen ($604.9 million) in the quarter. Sales in Toyota's biggest market rose 2.3 percent to 745,000 vehicles.

Results were hurt by foreign exchange losses and outlays for declining residuals.

Otake conceded the company was slow to react as U.S. consumers stampeded away from passenger cars toward light trucks, as gasoline drop and tastes change.

Hot-selling light trucks accounted for just 53 percent of volume at Toyota Motor Sales U.S.A. last year. But industrywide, trucks gobbled 61 percent of all U.S. sales. Toyota Motor Sales car volume fell 12 percent for the full calendar, while its truck sales gained 8.8 percent.

But Otake said increased capacity for pickups, crossovers and SUVs should bolster sales going ahead. Toyota will also get a boost in the coming year from the arrival of the C-HR crossover, which targets a sweets pot in U.S. demand, and the redesigned Camry sedan, he said.

Toyota lifted its North America wholesale outlook for the current fiscal year. It now expects to sell 2.84 million vehicles, up from its earlier forecast for just 2.82 million vehicles. The new target is essentially flat with the 2.839 million Toyota sold there the year before.

Improved outlook

In Europe, retail sales volume climbed 11 percent to 233,000 vehicles in the quarter, while regional operating profit increased 11 percent 233 billion yen ($2.0 billion).

Citing a more lenient foreign exchange rate assumption, Toyota lifted its profit forecasts for the second time for the current fiscal year ending March 31, 2017.

Operating profit is now expected to fall to 1.85 trillion yen ($158 billion), as opposed to dropping to 1.70 billion yen as earlier predicted. The new forecast represents a 35 percent drop from the previous year. It also improved its net income outlook to 1.7 trillion yen ($14.6 billion), up from its earlier target of 1.55 trillion ($13.3 billion) but still down 26 percent from the year before.

Toyota improved its global retail sales forecast by 50,000 vehicles, mostly on the higher North American outlook. Worldwide volume is now seen at 10.15 million vehicles, up from 10.1 million.