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Toyota Announces Financial Results for FY 2007/08, Expects Profits to Fall in Following Year
8 May 08
Toyota has announced its financial results for fiscal year 2007/08, posting continued growth; however, because of pressures surrounding its business, the automaker anticipates a decline in profits during fiscal year 2008/09.
Global Insight Perspective | | Significance | Once again Toyota has posted growth in both sales and profitability with the announcement of its fiscal year 2007/08 results. | Implications | The results show that although large amounts of revenue came from mature markets, the automaker’s future prospects rest with emerging markets, such as China, India, and Russia. | Outlook | Currency exchange rates, rising raw material costs, and global economic pressures are all expected to take a toll on Toyota's bottom line in fiscal year 2008/09, with profitability falling as a result. |
Toyota has announced yet another strong year with the release of its financial results for fiscal year (FY) 2007/08. For the 12 months ending 31 March 2008, the company said that it achieved sales revenues of ¥26.29 trillion (US$250.3 billion), an increase of 9.8% year-on-year (y/y) from ¥23.948 trillion, on sales of 8.913 million vehicles, an increase of 4.6% y/y. Operating income grew at a slower rate though, up just 1.4% y/y to ¥2.27 trillion, having been hit by a ¥48.1-billion valuation loss on interest-rate swaps, but it enjoyed a ¥290-billion gain from its marketing efforts and a ¥120-billion boost from its cost-reduction programme. Net profits increased by a greater percentage, however, by 4.5% y/y to ¥1.718 trillion. Toyota’s Financial Results: FY2007/08 | ¥ bil. | FY2007/08 | FY2006/07 | Y/Y % Change | Sales Revenues | 26,289.2 | 23,948.0 | 9.8 | Operating Earnings | 2,270.3 | 2,238.6 | 1.4 | Net Profits | 1,717.8 | 1,644.0 | 4.5 |
On a market basis, Toyota’s largest regional market remained North America, where it sold 2.96 million vehicles over the year, an increase of just 0.7% y/y. It was helped along by the Toyota Camry, which remained the largest-selling vehicle in the United States, and even greater sales of the now-ageing Prius thanks to capacity increases in Japan. It suffered a decline in its domestic market from 2.27 million units sold to 2.19 million as a result of the continuing malaise in Japanese vehicle demand. European sales expanded by around 5% y/y to 1.22 million units thanks to the latest-generation Corolla and its sister vehicle, the Auris, although the main strength in this region came from the eastern half, where demand for the Avensis and Camry, particularly in Russia, continued to climb. The market for Toyota vehicles in Asia expanded by over 20% y/y to 0.96 million units because of rising demand for the company’s IMV model and its B-segment Yaris, although the Chinese market remained the biggest driver of all. Elsewhere, sales in Oceania, Africa, and Latin America surged by nearly 18% to 1.53 million units. Toyota has also announced that it is seeking approval from shareholders to buy back up to ¥200 billion of stock. This, it said, would total up to 30 million shares, or around 0.95% of outstanding stock. The buyback period is expected to take place over a 12-month period following the day after the shareholder meeting on 24 June. Outlook and Implications The company's results on a regional basis reflect those of rival automakers and show that Toyota is likely to gain the most joy from non-mature markets in future. The markets in Japan, the United States, and large swathes of Europe are now at saturation point, with any gains having to be made at the expense of rivals. The current economic climate is unlikely to help matters here, with the United States in particular anticipated to go through a recessionary phase. Instead, markets such as China, Russia, India, and the Association of Southeast Asian Nations (ASEAN) could well be the areas where strong gains are made. China is likely to be the strongest region in the near term given the plant investments that have been made there and the company’s strategy of carrying out one big model launch a year, beginning with the Camry in 2006 and the latest-generation Corolla (which is now built alongside the previous-generation model) in 2007, and continuing with the Yaris in 2008. This, alongside the entry of other, more niche models such as sport utility vehicles (SUVs), which are also booming in the region, is expected to help the Japanese company post a 36% increase in Chinese sales during the current year to 640,000 units. The Russian and Indian markets are likely to see a similar trend when investments in manufacturing plants in these countries come to fruition; Toyota opened its plant in Russia late last year, with a second production line said to be planned (see Russia: 11 January 2008: Toyota Eyes Second Russian Plant for Low-Cost Car), while its Bangalore plant in India will also receive a second line in 2010 that will build both the Corolla and a yet-to-be-announced small vehicle (see Japan - India: 11 April 2008: Toyota Widens Ties with Fuji Heavy, Announces Second Facility in India Will Be Built). Toyota now appears to be facing some immediate difficulties that will affect its profitability. It has benefited over the past couple of years from the weak exchange rate of the Japanese yen against the U.S. dollar and the euro. However, recently the yen has started to firm up, to the point where the average exchange rate for the current year is expected to be ¥100:US$1 and ¥155:1 euro, against ¥114:US$1 and ¥162:1 euro last year. Added to this, the business environment does not look at all healthy for some of its major markets during the coming year, with North America likely to bear the brunt of the downturn. Raw material costs have also surged recently, with the cost of iron ore, the main ingredient in steel production, having been raised by 65% by some suppliers, and this will be passed onto customers eventually. As a way of counteracting this, Toyota is implementing a cost-cutting programme called “Value Innovation”, which it says will cut its costs by US$2.7 billion per annum (see Japan: 12 December 2007: Toyota Aiming to Make US$2.7-bil.-Worth of Cost Cuts Annually), helping it reach and sustain a planned 10% profit margin. It is unlikely that any of these cost cuts will take full effect in the coming fiscal year, which has led Toyota to anticipate a downturn in its profitability, with operating earnings predicted to fall to ¥1.6 trillion and net income to ¥1.25 trillion. Sales revenues are also expected to fall to ¥25.0 trillion; it remains to be seen whether Toyota is being conservative in its outlook or whether it really will be as badly hit as it anticipates.
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