Toyota reports 47.6% slump in Q3 operating profit

Toyota reports 47.6% slump in Q3 operating profit
Company hit by strong yen and falling sales in Japan

Automotive News | February 8, 2011 – 1:31 am EST

TOKYO (Reuters) — Toyota Motor Corp. reported a 47.6 percent drop in quarterly profit, hit by slumping Japanese car sales and a high yen that underlined its exposure to loss-making exports.

But the company still lifted its forecast as cost cuts kicked in.

Domestic rival Nissan Motor Co. is seen suffering a drop in October-December profits and Honda Motor Co. has already posted weaker results for the period.

But the decline at Toyota is set to be the deepest given its heavier exposure both to unprofitable exports from Japan and to the shrinking Japanese market.

“Compared with other Japanese automakers, Toyota has greater exposure to the domestic market and therefore is more subject to the negative impact of the country’s slow economic growth,” said Kazuyuki Terao, chief investment officer at RCM Japan.

Toyota exported more than half of its Japan-made vehicles last year, making a loss on many of them with the dollar well below the rate of 90 yen that President Akio Toyoda has said is the minimum to keep Japan’s manufacturing sector competitive.

Underlining its exposure to the yen, which hit a 15-year high against the dollar in the October-December reporting period, the maker of the Prius hybrid and Corolla sedan built nearly 3.3 million vehicles in Japan.

Global sales forecast

For the full year to March 31, the world’s biggest automaker lifted its forecast for annual operating profit to 550 billion yen ($6.68 billion) from a cautious 380 billion yen, after profits for the first nine months exceeded the initial full-year outlook.

Toyota expects cost-cutting to add 170 billion yen to annual operating profit, 30 billion yen more than it had expected three months ago, and also expects to save 20 billion yen by trimming research and development and other spending.

“Our efforts to improve our profitability came through faster than we expected,” Senior Managing Director Takahiko Ijichi told a news conference. “Our break-even point has undoubtedly fallen and our earnings power is gradually improving.”

Still, Toyota is only forecasting an operating margin of 2.9 percent for the year to end-March, lower than Japan’s No.2 Nissan Motor and third-ranked Honda Motor.

A survey of 23 analysts by Thomson Reuters I/B/E/S forecast annual operating profit of 489 billion yen for Toyota, trailing expected earnings at smaller rivals Nissan Motor Co. and Honda Motor Co.

The carmaker also nudged up its global sales forecast to 7.48 million vehicles from 7.41 million. Domestic sales are expected to reach 2.02 million vehicles compared with an earlier prediction of 1.99 million. It kept its North America forecast unchanged at 2.09 million units.

U.S. and Japan weak spots

Toyota is still grappling with quality issues after recalling more than 18 million vehicles since late 2009, most of them in the United States, where it under-performed last year.

The U.S. Department of Transportation is due later on Tuesday to release its long-awaited findings of the review of Toyota’s electronic throttles over complaints of unintended acceleration — the problem behind most of the recalls in the crisis.

With overall demand in the key U.S. market improving, however, analysts say Toyota’s disproportionately large Japanese operations will remain the biggest drag on its earnings.

Although Japan’s car market is shrinking with a declining population and urbanization, Toyota’s founding family chief, Toyoda, has vowed to build a minimum 3 million vehicles a year at home to keep the tradition of manufacturing alive. Honda built less than 1 million cars in Japan last year, while Nissan produced 1.13 million.

That has kept Toyota’s parent-only operations deep in the red, with an operating loss of 420 billion yen expected this year and some investors are keen to see a greater proportion of cars built where they are sold.

“I would like to see progress in rebalancing of their production footprint to mitigate eroding export margins,” said Neo Chiu Yen, vice president at ABN AMRO Private Bank.

Ijichi conceded Toyota had no quick fix to absorb the yen’s debilitating rise. For now, Toyota was raising product prices wherever possible, pushing sales of higher-margin cars and trying to sell more cars made outside Japan, he said.

The Japanese currency may become less of a burden with a February 2 Reuters poll forecasting a weakening to 90 per dollar in a year’s time.

Toyota’s October-December operating profit fell 48 percent to 99.07 billion yen, while net profit fell 39 percent to 93.63 billion yen.

Wide-ranging estimates from nine analysts surveyed by Reuters put Toyota’s third-quarter operating profit at an average 70.6 billion yen. Profits made in China are not counted on the operating level at Toyota, which reports under U.S. accounting rules.

Toyota, which stayed ahead of General Motors Co. as the world’s biggest automaker by a thinner margin last year, built 3.28 million vehicles in Japan last year, compared with 992,000 for Honda and 1.13 million for Nissan.

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