The world’s largest automaker, Toyota Motor Corp. (TM, Financial), has just released its third-quarter results and has left the auto analysts agape surpassing the Street expectations; just about a few days after Honda Motors (HMC, Financial) displayed a dismal report card. The Japanese automotive honcho also raised the outlook for the entire year, which was contrary to the downsized outlook posted by Honda Motors in its third quarter earnings call last week. Let’s quickly plunge into the facts that have been shared by the top brass and what outlook the management expects to see in the near future. So, here we go.
Top line sees a whopping jump, though sales plunge in most geographies
Revenue for this quarter rose by a whopping 8.9% year over year to 7.17 trillion yen ($62.9 billion) surpassing Zacks analysts’ estimate of $51.12 billion. Such growth in revenue was majorly attributed to the foreign exchange effect due to the weakening of the yen against the dollar and euro and some model sales such as the RAV4 and Lexus RX model which propelled the company to report record SUV deliveries in North America in 2014.
However, if judged from the sales angle, the Japanese automaker did see a fall in car sales almost in every region including its home turf which normally contributes to almost half of its consolidated revenue for a quarter. Barring the better results witnessed in North America, sales fell in all regions across Europe, Japan, Asia and other countries. In North America, the peak seen in the SUV sales market helped in improving the sales in units by 7.3% to 712, 518 vehicles sold during the third quarter. Unit sales exhibited a decline of 7.8% in Japan to 497,933 units, 1.5% in Europe to 219,361 units, 11.3% in Asia to 373,895 units and 1.9% down to 458,929 units in other regions ( including Central and South America, Oceania, Africa and the Middle East).
In fact, on a global basis Toyota’s sales in units have slumped 2.3% year over year to 2.26 million vehicles. It is to be noted that in China which is considered to be the second largest automotive hub after the U.S. market, Toyota’s performance for the quarter was rather lacklustre with sales lagging behind those reported by immediate rivals such as Volkswagen and General Motors. In China last year, Toyota had missed its sales target of 1.1 million vehicles and now the company has started to feel the heat of competition with local dealers threatening to move out of its distribution network citing reasons such as lowered sales and profits being generated in the nation.
Operating profit grows across regions, irrespective of sales decline
Though the sales showed a slump domestically as well as in most international locations for this quarter, the cost reduction efforts of Toyota along with the positive effect of the weakening yen led to a surge in its profit generated from all the operating regions. The surge in operating income margin in North America, Europe and Japan stood at 6.3%, 4.3% and 11.6%, respectively when compared from that reported a year earlier. However, in Asia the operating income showed a decrease of 2.3 billion yen standing at 107.6 billion yen at the end of the third quarter mainly due to the plunge in vehicle sales witnessed in China and other regions.
The bottom line of the story is that though sales saw a downfall in almost every operating region except North America, the cost reduction efforts promoted by Toyota’s management aided in keeping its operating income safely on an upward trajectory in most of these regions. Total operating income surged phenomenally by 27% to 762.8 billion yen from 600.5 billion yen reported a year ago. Net income improved 14.2% reaching 600 billion yen ($5.1 billion), up from 525.4 billion yen in the year-ago same quarter. Net income did also beat the Bloomberg analysts’ consensus of 549.2 billion yen for the quarter.
Outlook is highly promising due to present tailwinds
As profits have been driven by the favorable foreign exchange factor in the quarter and as the weakening of the yen is expected to continue into the following fourth quarter of the 2015 fiscal year, the management has been quick to raise its earnings outlook for the upcoming quarter.
The automaker has raised the annual operating income forecast by 200 billion to 2.7 trillion yen advocated by the windfall profit generated due to the increase in export revenue where Toyota earns in dollars and euros and then gets the conversion benefit as it assumes exchange rates of 109 yen to a dollar and 139 yen to an euro.
During the earnings presentation, CEO Akio Toyoda seemed upbeat on the near future and has lifted the earnings outlook stating that Toyota now looks well positioned to earn a net income of 2.13 trillion yen, or $18.1 billion, on an annual basis for the 2015 fiscal year. This marks a 6.5% improvement over the earlier prediction of net income standing at 2 trillion yen for the entire fiscal year.
Toyota’s managing officer Takuo Sasaki stated that Toyota is raising the full year profit forecast based on its assumptions for foreign exchange rates as well as due to continuous cost reduction efforts which have proved to be effective even when sales has been hurt is most of the operating geographies.
Besides the improvement in the earnings outlook, the management have also raised the sales forecast for the annual year and now expects to end the fiscal year in March with consolidated revenue standing at 27 trillion yen, a 500 billion yen increase from 26.5 trillion yen projected a quarter earlier.
Last word
The management has formulated effective strategies to date to keep its bottom line intact even when sales showed a plunge in most of the geographies in the quarter, except for North America. In fact, Toyota has abstained from any expansion plans until the end of 2016 and is instead focusing on improving its existing facilities and their expansion plans. Currently the weak yen is also serving as a boon for the company’s growth in revenue as well as in net income, and since the tailwind is yet to remain in the early part of this year we will possibly get to see promising numbers in the next quarter as well. But the declining sales do remain a huge concern to be addressed by the company, something that was not discussed much during the earnings call yesterday. Let’s stay tuned and keep an eye on how Toyota uses its innovative style to improve its withering sales chart in most of the geographies. But to now, the third quarter could be branded as an impressive one from the company’s corner.
