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Toyota Cuts Guidance Due to Exchange-Rate Concerns

John Rosevear, The Motley Fool

Toyota Motor (NYSE: TM) delivered solid quarterly numbers on Friday, reporting operating profits of 741.9 billion yen ($6.9 billion), up 8.7% from a year ago.

It was Toyota's highest quarterly operating profit in nearly four years. But concerns about the rising yen led the company to trim its profit forecast for the full fiscal year.

A 2019 Toyota RAV4, a compact crossover SUV.

Cost reductions and strong sales of crossovers helped Toyota boost its operating margin in North America. Image source: Toyota Motor Corporation.

The raw numbers

Like many Japanese companies, Toyota's fiscal year begins on April 1. The quarter that ended on June 30 was the first quarter of its fiscal 2020.

Metric Fiscal Q1 2020 Change (YOY)
Revenue 7.646 trillion yen 3.8%
Vehicle sales 2,709,000 3.6%
Operating income 741.9 billion yen 8.7%
Operating margin 9.7% 0.4 pp
Net income  682.9 billion yen 3.9%
Yen per U.S. dollar,
average during period
110 1 yen
Yen per euro,
average during period
130 (7 yen)

Data source: Toyota Motor. YOY = year-over-year. Pp = percentage points Vehicle sales include the vehicles sold by Toyota's joint ventures with Chinese automakers. Vehicle sales are rounded to the nearest thousand.

What happened this quarter

  • In Japan, Toyota's operating income rose 10.2% to 436.4 billion yen on a 8.8% increase in sales to 555,291 vehicles. The operating margin in its home market was 10.4%, up from 10.2% in the year-ago period.
  • In North America, operating income rose 47.4% to 115.4 billion yen despite a slight (0.3%) decline in unit sales to 743,596 vehicles. Management credited the profit gain to cost reductions and "marketing efforts." Operating margin in North America was 4.1%, up from 2.8% a year ago.
  • In Europe, operating profit rose 50.2% to 34.7 billion yen. Sales rose 8.3% to 273,964 vehicles. Operating margin rose to 4% from 2.9% a year ago. 
  • In China, equity income from Toyota's joint ventures with Chinese automakers rose 15.3% from a year ago, to 31.7 billion yen, on higher retail sales. But operating income from Toyota's China subsidiaries fell 35%, to 36.4 billion yen, largely due to unfavorable exchange-rate movements. Toyota's unit sales in China rose 7% to about 348,000 vehicles. 
  • In the rest of Asia (excluding Japan and China), operating profit fell 18.1% to 116.5 billion yen on unfavorable exchange-rate movements. Sales rose 1% to 398,240 vehicles, but operating margin fell to 8.9% from 10.8% a year ago.
  • In Toyota's "rest of the world" region, which includes Latin America, Oceania, Africa, and the Middle East, operating income fell 47% to 21.7 billion yen, a decline attributed in part to inflation pressures in key Latin American markets. Sales fell slightly (0.1%) to 332,434 vehicles, and operating margin fell to 4% from 6.9% a year ago.
  • Toyota's financial services unit earned 105.7 billion yen in operating income, up 28.6% from a year ago. More loans and higher residual values (the resale values of vehicles returned when leases end) accounted for the gain, Toyota said.

Looking ahead

Toyota slightly lowered its full-year guidance due to concerns about the increasing strength of the yen versus the dollar and the euro. For the fiscal year that ends on March 31, 2020, management now forecasts:

  • Sales (excluding China joint ventures) of about 9 million vehicles, unchanged from its previous forecast. (Fiscal 2019 result: 8.977 million vehicles.)
  • Revenue of about 29.5 trillion yen, down from 30 trillion yen in the prior forecast. (Fiscal 2019: 30.226 trillion yen.) 
  • Operating income of about 2.4 trillion yen, down from 2.55 trillion yen in the prior forecast. (Fiscal 2019: 2.468 trillion yen.) 
  • Operating margin of 8.1%, down from 8.5% in the prior forecast. (Fiscal 2019: 8.2%.)
  • Net income of 2.15 trillion yen, down from 2.25 trillion yen in the prior forecast. (Fiscal 2019: 1.88 trillion yen.) 

Toyota also now expects average exchange rates of 106 yen to $1 (previous guidance: 110 yen) and 121 yen to 1 euro (previous guidance: 125 yen). 

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John Rosevear has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

This article was originally published on Fool.com