Toyota Improves Profit Forecast -- WSJ

By Sean McLain Features Dow Jones Newswires

Auto maker still faces obstacles in U.S. from rising sales incentives and vehicle shortages

Continue Reading Below

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (November 8, 2017).

TOKYO -- Toyota Motor Corp. on Tuesday raised its profit projections for the year ending March 31, saying it could boost sales and rein in costs, but the U.S. market continues to weigh on earnings.

The company said that its operating margin in North America dwindled to about 2% in the quarter ended Sept. 30 as rising incentives on passenger cars offset sales of its trucks and sport-utility vehicles, particularly the RAV4 crossover.

The RAV4 is the best-selling vehicle in the U.S. without a truck bed, and it has helped propel Toyota's U.S. sales to within a hair's breadth of Ford Motor Co., the second-largest auto maker in the U.S. in terms of sales.

But Toyota faces a chronic shortage of RAV4s, its bigger cousin, the Highlander, and the Tacoma pickup truck -- the lingering effects of a self-imposed freeze on plant construction, which was lifted in 2015. Even its newest entrant, the hot-selling C-HR compact crossover, is in short supply, Toyota said.

Continue Reading Below

"Until recently, there was a bottleneck in SUV production," said Osamu Nagata, Toyota's chief financial officer. "In the future, we will expand capacity to deliver cars to customers in a timely fashion."

Like most other Japanese car makers, Toyota has historically relied on passenger-car sales to drive volume -- a segment of the market being pummeled as U.S. car buyers increasingly prefer trucks and SUVs because of low fuel prices.

This reliance helps explain why Toyota took a hit in operating income in North America for the quarter ended in September, despite relatively flat sales. The company reported that operating income for the region declined to 55.3 billion yen ($483.9 million) for the period, down from 139.8 billion yen a year earlier.

Although Toyota has focused on increasing SUV and truck supply, passenger-car sales still account for nearly half of Toyota's sales in the U.S.

Car makers, Toyota included, are forced to offer increasing incentives on passenger cars to maintain volume, eating into already thin margins on the vehicles. Toyota offered an average of $3,291 in incentives on its cars, compared with $2,063 for its light trucks in the first 10 months of the year, according to analysis by Jefferies.

The other issue that weighed on Toyota's operating profit was a spike in imports from Japan to compensate for a temporary decrease in North American production of around 88,000 units during the September quarter, Toyota said.

The company said this was largely due to preparations to produce Toyota's latest vehicles, including the new Camry midsize sedan.

Toyota hopes to solve its supply problems in the near future: A new plant for Tacoma trucks in Mexico is set to open in 2019.

The company is also scouting for a new production site in the U.S. with partner Mazda Motor Corp., which it aims to bring online in 2021. That factory will produce a variety of vehicles, potentially including compact crossovers -- a hot segment of the U.S. market.

The plan earned plaudits from President Donald Trump during his recent visit to Tokyo, when he singled out the companies for praise. "They're going to invest $1.6 billion in building a new manufacturing plant, which will create as many as 4,000 new jobs in the United States. Thank you very much. Appreciate it," he said.

Toyota's problems are relative. While it is trying to avoid a second consecutive year of declining profit, the company is still highly profitable by automotive industry standards. It reported a 17% increase in net profit to 481.21 billion yen for the quarter ended September, and an operating margin of 7.3%.

Some say Toyota shouldn't mess with success. Its profit margins "are probably the best in the global industry," said Takaki Nakanishi, an automotive analyst who heads firm Nakanishi Research.

With the U.S. market plateauing and costs associated with building next-generation vehicles rising, it wouldn't be a good idea to attempt to boost volume in the U.S., he said.

Toyota also raised its full-year profit projection on Tuesday, and now expects to earn 1.95 trillion yen for year ending in March, compared with net profit of 1.83 trillion last year -- a 6.5% increase. The company had earlier projected a decline in net profit of around 4.4%.

The increase is driven by stronger projected sales for nearly all its market, and by a lucky turn in foreign exchange rates. A weaker-than-expected yen is expected to boost operating income by around 175 billion yen. A weak yen helps boost the value of profits when they are repatriated.

Write to Sean McLain at sean.mclain@wsj.com

(END) Dow Jones Newswires

November 08, 2017 02:47 ET (07:47 GMT)