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Customer LoginsToyota reports 22.5% y/y drop in Q3 FY 2016/17 net earnings, begins formal talks with Suzuki on technological partnership
Toyota has reported another slump in net profit during the third quarter of the current fiscal year as a strong yen continued to weigh on its earnings.
IHS Markit Perspective:
- Significance:Toyota posted a net profit decline of 22.5% year on year (y/y) to JPY486.5 billion (USD4.32 billion) during the third quarter of the current fiscal year (FY) 2016/17. Operating income also tumbled 39.3% y/y during the quarter to JPY438.5 billion, on sales revenues of JPY7.084 trillion, down 3.5% y/y. For the first nine months (April-December) of the current FY, Toyota's net income slipped 24% y/y to JPY1.432 trillion.
- Implications: A negative impact from unfavourable foreign exchange fluctuations of JPY770 billion plus higher expenses including labour costs, depreciation, and research and development (R&D) totalling JPY405 billion hit the automaker's earnings during the first nine months of the current FY.
- Outlook:Toyota has revised its consolidated financial forecasts for the current FY from those announced in November 2016. The automaker is now projecting a net profit of JPY1.7 trillion (down 26.5% y/y) and an operating income of JPY1.85 trillion (down 35.2% y/y), on sales revenues of JPY26.5 trillion (down 6.7% y/y).
Toyota Motor Corporation (TMC) has released its group-wide financial results (including Hino and Daihatsu) for the third quarter and first nine months of fiscal year (FY) 2016/17. According to the official statement, Toyota's net income in the third quarter (October-December 2016) dropped 22.5% year on year (y/y) to JPY486.5 billion (USD4.32 billion). Operating income also declined 39.3% y/y during the quarter to JPY438.5 billion, on sales revenues of JPY7.084 trillion, down 3.5% y/y. For the first nine months (April-December 2016) of the current FY, Toyota's net income declined 24% y/y to JPY1.432 trillion. The automaker reported an operating income of nearly JPY1.555 trillion during the nine-month period, a drop of 32.5% y/y. Revenues reached JPY20.154 trillion, down 6% y/y. Major factors contributing to the decline in operating income included unfavourable currency effects worth JPY770 billion and an increase in expenses including labour costs, depreciation, and research and development (R&D) totalling JPY405 billion. Other expenses including translational forex impact concerning overseas subsidiaries and valuation losses came to JPY180.2 billion. Together these factors offset gains from cost-reduction efforts of JPY305 billion and marketing efforts worth JPY300 billion.
Group-wide vehicle sales volume during the third quarter reached nearly 2,280,000 units, an increase of 2.9% y/y or 65,000 units from the corresponding quarter of the previous fiscal year. A regional breakdown of Toyota's unit sales during the third quarter reveals that volumes climbed 8.3% y/y to nearly 534,000 units in Japan, while those in Asia (excluding Japan) grew by more than 12.6% y/y to around 428,000 vehicles. In North America - Toyota's biggest market - the automaker sold more than 745,000 vehicles during the third quarter, a rise of more than 2.3% y/y. In Europe, sales increased by nearly 11% y/y to around 233,000 units. In all other regions (Central and South America, Oceania, Africa, and the Middle East), Toyota sold a total of 340,000 vehicles, down 19.4% y/y. For the nine-month period, group-wide vehicle sales totalled 6,643,386 units, an increase of 2.3% y/y or 150,602 units from the year-earlier period.
Full-year outlook revised upwards
Toyota has revised its outlook for the full FY that ends in March 2017 from its forecast announced in November 2016. The automaker is now projecting a net profit of JPY1.7 trillion (down 26.5% y/y) and operating income of JPY1.85 trillion (down 35.2% y/y) on sales revenues of JPY26.5 trillion (down 6.7% y/y). Previous forecasts by the automaker included a net income of JPY1.55 trillion, an operating income of JPY1.7 trillion, and sales revenue of JPY26 trillion. Commenting on the operating income forecasts for the current fiscal year, TMC managing officer Tetsuya Otake said, "We have revised up our forecast by JPY150 billion to JPY1.85 trillion, based on the assumption of the weaker yen and the increase in vehicle sales." When arriving at these new forecasts, Toyota has assumed exchange rates in January-March 2017 staying at JPY107:USD1 and JPY118:EUR1. Furthermore, Toyota has also revised its consolidated vehicle sales estimate for FY 2016/17 from 8.85 million units to 8.90 million units, in consideration of the latest sales trends worldwide.
Toyota and Suzuki partnership
Toyota and Suzuki have agreed to begin formal talks to collaborate on technical development in areas such as environmental, safety, and IT technologies, as well as the mutual supply of products and components. The two automakers signed a memorandum today (6 February). According to the joint press release, "Toyota and Suzuki have agreed to work towards the early realisation of a business partnership. To that end, the two companies are to immediately establish an implementation framework aimed at bringing to realisation the points agreed on today."
Outlook and implications
While all Japanese automakers' earnings are feeling the currency pinch, Toyota is more exposed to swings in foreign exchange because it produces nearly two-fifths of its vehicles in Japan, half of which it exports. During the third quarter of the current FY, a negative impact from unfavourable foreign exchange fluctuations of JPY205 billion hit the automaker's earnings. Earnings were also affected by an increase in labour costs, depreciation, and R&D expenses amounting to JPY180 billion, and other expenses of JPY78.6 billion. These factors offset gains from cost-reduction efforts worth JPY85 billion and marketing efforts worth JPY95 billion. Toyota also reported a 35.6% y/y decline in net profit to JPY393.7 billion during the second quarter and a 14.5% y/y decrease in net profit to JPY552.4 billion during the first.
Toyota's global sales results during the nine months were mainly buoyed by a surge in demand in Japan (up 9.2% y/y), Europe (up 8.1% y/y), and Asia (up 17.3% y/y), while sales in the United States were weak (up 0.2% y/y). Demand in the automaker's domestic market of Japan, which accounts for a sizeable portion of its sales, has slowed following the consumption tax rise in 2014 and the mini-vehicle ownership tax increase in 2015, but models such as the Prius, the C-HR, and the recently launched Tank and the Roomy are helping the automaker's sales volume.
The latest agreement between Toyota and Suzuki takes the two Japanese automakers a step closer to a partnership that is expected to give Suzuki, a maker of low-cost mini-vehicles, access to Toyota's research into environmentally friendly vehicles and autonomous technologies. Toyota is expected to benefit from Suzuki's strong market position in emerging nations such as India, where Toyota intends to strengthen its foothold. The companies announced in October that they were exploring a partnership, citing technological challenges facing automakers and the need to keep up with consolidation in the global automotive industry.
Suzuki has said it has been struggling to keep pace with the speed of R&D in the industry, a technology race that Toyota is better able to compete in. Toyota invests heavily in R&D in areas including automated driving, artificial intelligence, and environmentally friendly vehicles. During FY 2015/16, the automaker spent JPY1.055 trillion on R&D expenses. It expects this figure to rise to JPY1.070 trillion by the end of this FY.
About this article
The above article is from IHS Automotive Same-Day Analysis of automotive news, events and trends, and is a deliverable of the World Markets Automotive Service. The service averages thirty stories per day and also provides competitor and country intelligence. Get a free trial.