Toyota Motor Corp. (TMC), the world's second-largest carmaker, reported the biggest drop in profit in five years as US sales of sport-utility vehicles and trucks plunged.
Net income fell 28 per cent to 353.7 billion yen ($3.2 billion), or 112.28 yen a share, in the three months ended June from 491.5 billion yen, or 153.89 yen, a year earlier, the company said in a statement today. Sales declined 4.7 per cent to 6.22 trillion yen.
Operating profit in North America fell 57 per cent as record gasoline prices cut demand for large vehicles, forcing President Katsuaki Watanabe to halt US production of Tundra pickups and Sequoia SUVs for three months from August. The models eroded gains from fuel-efficient vehicles that spurred an 8.1 per cent increase in net income for Honda Motor Co., which doesn't make full-size trucks. (See: Honda reports strong quarterly results in the wake of increased sales of fuel-efficient cars)
Operating income decreased by 262.9 billion yen, mainly due to the impact of exchange rate fluctuations, such as the appreciation of the yen against the US dollar. The sharp increase of raw material prices exceeded cost reduction efforts by 10.0 billion yen.
These negative results surpassed the positive contributions from marketing efforts. Equity in earnings of affiliated companies increased by 13.2 billion yen to 95.0 billion yen, mainly due to continued strong results of joint venture companies in China.
The Tokyo-traded shares fell 1.3 per cent to 4,580 yen before the earnings announcement. The shares have fallen 24 per cent this year compared with a 14 per cent decline for the Nikkei 225 Stock Average and a 59 per cent decline for General Motors Corp.
General Motors, the world's largest carmaker, and Ford Motor Co., both more dependent on trucks and SUVs, posted losses in the quarter as sales plunged and they wrote down the value of leased vehicles. (See: General Motors announces massive $15.5 billion quarterly loss and Ford announces $8.7-billion quarterly loss, goes for major restructuring)
Commenting on the results, Mitsuo Kinoshita, TMC Executive Vice President, said, "The financial results for this quarter were severe, due to our rapidly changing business environment, including exchange rates fluctuation such as the rise of the yen against the US dollar and soaring raw material prices."
Toyota's decline in profit was limited by stronger demand for hybrids and fuel-efficient Prius, Corolla and Camry models as gasoline surpassed $4 a gallon in the US. In fact, the company had recently announced plans to build its iconic product Prius in the US. (See: Toyota to build the Prius in the US for the first time)
Operating profit at the company's financial services unit dropped by 21.8 billion yen, excluding a valuation gain from interest rate swaps, as Toyota had to write down the value of loans and leased vehicles.
''A higher percentage of credit losses in the US as well as the increase in reserves for bad debt and residual value losses resulting from the decline of used car prices were the main reasons for the decreased profit,'' the company said in a statement.
Toyota is the latest carmaker forced to book a drop in the residual value of vehicles previously leased by its auto- financial units. The residual value is what a vehicle is worth when a customer returns it at the end of a lease.
Vehicle sales in North America totaled 729,000 units, a decrease of 33,000 units. Operating income decreased by 91.1 billion yen, to 69.1 billion yen including 67.5 billion yen of valuation profit on interest rate swap transactions. Although the US market, primarily the truck segment, is slowing down, Toyota earned a record high market share of 17.4 per cent for this quarter.
However, decrease in sales volume, the shift of product mix to compact cars, increase in sales expenses such as incentives and increase in reserves for bad debts, resulted in declining profits. Toyota will take swift actions in accordance with market changes by increasing the supply of models in high demand and launching new models.
In Europe, sales decreased by 32,000 units, to 301,000 units. Operating income decreased by 18.2 billion yen, to 20.3 billion yen. Total vehicle sales decreased, despite strong sales in Russia and Eastern Europe, due to slowdown in Western European markets. Toyota plans to launch new models that will continue to meet regional standards of CO2 regulations later this year and into next year to boost sales and generate profit.
On a positive note, sales in Asia increased by 40,000 vehicles to 262,000 vehicles. Operating income in the region increased by 19.7 billion yen, to 69.3 billion yen. The successful launch of the remodeled Corolla early this year, the steady sales volume increase in the region, especially in Indonesia, and the increase in export volume due to continued strong demand of the IMV in regions outside of Asia, contributed to Asia's operating income growth.
Carrying on the good news, Central and South America, Oceania and Africa, sales reached 382,000 vehicles, an increase of 37,000 units. Operating income totaled 44.5 billion yen, an increase of 5.9 billion yen. In Brazil, the remodeled Corolla launched this March, and the sales volume as a whole increased by approximately 30 per cent compared to the last first quarter. Sales in Australia and Argentina remained brisk.
The company increased its provision for leased vehicles by 9 billion yen compared with the previous year, Takahiko Ijichi, a senior managing director said on a conference call without giving the exact amount. The provision for possible loan defaults was increased by 30 billion yen.
Toyota, based in central Japan's Toyota City, cut its fiscal-year vehicle sales forecast to 8.74 million from 9.06 million. It slashed its North American forecast to 2.63 million from 2.77 million. Global sales to dealers totaled 2.19 million vehicles in the first quarter, little changed from a year earlier, Toyota said. The company scrapped its 2009 sales goal of 10.4 million vehicles and will set a new target later this month. (See: Toyota to invest $700 million in Brazil; reportedly cuts global sales target)
The company reiterated its fiscal-year forecasts. Net income will likely fall 27 per cent to 1.25 trillion yen for the year ending March 31. Operating profit may drop 30 per cent to 1.6 trillion yen, as sales may decline 4.9 per cent to 25 trillion yen.
Toyota based its annual earnings forecast on an assumption of exchange rates of 105 yen to the dollar and 161 yen per euro. That compared with its May forecast that was based on 100 yen and 155 yen respectively. The currency traded at 109.5 yen to the dollar today.