When the largest and the top automaker of the world, Toyota Motor Corp. (TM, Financial), reported its earnings on October 5, all numbers appeared as magical ones as its revenue and profits surged mainly being driven by favorable exchange rate convertibility. Even analysts were pleased with the second-quarter performance of the company which has made its mark in the U.S. and Chinese markets. Let’s take a look at Toyota’s financial playbook to judge its performance during the quarter.
A quick quarter recap
The carmaker has maintained its narrow lead over rivals in the global sales ranking this year, and has reported net profit of $4.2 billion, up 23% from that reported in the previous year similar quarter. The automotive honcho reported sales of 7.615 million vehicles, up nearly 3% from the previous year in the first nine months of the year. This is well comparable with the vehicle sales of Volkswagen (VLKAY, Financial), which stand at 7.4 million vehicles, and General Motors (GM, Financial) standing at 7.37 million in the first nine months of the year.
Regionally, the automaker did well in the U.S. where its profits surged around 70%, reaching 139.3 billion yen compared to the year-ago quarter, and Toyota attributed the improvement to cost reduction efforts and the exchange-related advantage. On the home turf, the operating income has dropped nearly 5.7% at 352.8 billion yen, and that is mainly due to increase in taxation made effective on all vehicles from April this year. Sales in Europe were not very rosy and it declined nearly 4.2%, but the operating income rose 12.1% to 105 billion yen versus the previous year’s quarter mainly due to the yen’s devaluation. However, in China Toyota’s joint ventures aided in boosting sales which grew 2.5% to about 238,000 vehicles in the quarter.
Total revenue was $125.6 billion for the six months ended September 30, up 3.3% from the previous fiscal year. The company stated that it had sold around 4.47 million vehicles in the second quarter worldwide, despite the drop in sales seen in the home turf.
The two key drivers
The exchange rate conversion factor and the sales improvement in the U.S. have helped the company carve a niche in the auto market where it's currently holding the top position but has several competitors trying to beat it or at least match its figures. Analysts have opined that this success noticed in Toyota’s second quarter earnings havr been buoyed by a weak yen and strong sales in North America, mainly in the U.S.
The Japanese government’s moves to devalue the yen have boosted the auto giant’s growth outside Japan, and it has taken the maximum advantage in the U.S. where presently the yen is trading at around 114 to a dollar that was previously trading at around 80 for a dollar almost two years back. Therefore, though CEO Akio Toyoda is trying to improve the company’s bottom line through aggressive cost cutting, the currency fluctuation is providing an extra advantage to Toyota.
Sales in the U.S. have improved 12.4% over year-ago results. Besides, the U.S. is the beneficiary to the exchange rate movements. Thus, the company posted improvement of margins in the U.S. as the number of vehicles sold increased by 76,000 units when compared to last year’s quarter. Japan’s central bank has furiously printed money to stimulate the country’s economy, an effort that has helped to knock more than 30% off the currency’s value against the dollar. As Toyota’s cars and especially its SUVs are well-acclaimed in the U.S. the currency swing has magnified the benefits of demand worldwide being on the rise. For instance, the Toyota RAV4’s U.S. sales are up 25.7% this year.
Guidance remains promising
As the yen is clearly benefiting from the U.S. dollar as is eminent from the second quarter results, the management has upped their profit guidance for the full financial year, which ends in March 2015. The new forecast is 12% higher than that in the previous estimate. The world knows that Toyota is conservative on such calculations, and if that is true then it could become the first Japanese company to earn a profit of 2 trillion yen in a single year.
Currently the yen was trading a bit lower at 114 yen to a dollar. However, while doing estimates for the full-year Toyota has considered an exchange rate of 105 yen to a dollar. Thus, such differences could purely add extra profit on Toyota’s foreign income.
The operating profit estimates for the year were pulled up to 9.1% while reporting the second quarter results of the 2015 fiscal year, and that was due to the sharp decline in the yen which could make up for lowered sales in some regions. The world’s biggest automaker now expects operating profit of 2.5 trillion yen for the 2015 fiscal year, rather than the earlier forecast of 2.30 trillion yen.
While speaking during the earnings conference, Executive Vice President Nobuyori Kodaira stated, “Of course, exchange rates helped, but we also made efforts to offset negatives such as a rise in fixed costs, with cost-cutting and sales efforts …”
For North America where the economic revival has been rapid and car sales have been positively affected by lower gasoline prices, Toyota raised its sales forecast for the entire year to 2.74 million vehicles from 2.71 million vehicles projected earlier. Also with respect to China, the company is looking ahead of its peers, Nissan (NSANY, Financial) and Honda (HMC, Financial) as its joint venture partners China FAW Group Corp. and Guangzhou Automobile Group Co. Ltd. have seen sales gain in the past few months.
Returning to shareholders
Toyota has always maintained a flow of funds to its shareholders to hold on their trust on the company’s financials. Even in this quarter, the company has declared an interim dividend of 75 yen per share. The cash and equivalents at the end of the second quarter of the 2015 fiscal year stood at 230.9 billion yen.
Last word
With the yen getting devalued and the cost reduction efforts being in place, Toyota seems to be playing a safe game. Investors are happy with the dividend pay-out and they are eager to find out how the company performs in the coming quarters. So, it’s best to stay tuned and keep watching!
