Toyota Motor Corporation (NYSE: TM) said that its operating profit jumped 54% in the quarter that ended on Dec. 31, thanks to strong sales in its home market and favorable shifts in key exchange rates.
Toyota's 673.6 billion yen ($6.2 billion) operating profit for the period was well ahead of the consensus analyst estimate of 527.22 billion yen as reported by Thomson Reuters. Its net income was even higher: 941.8 billion yen ($8.6 billion), nearly double its year-ago result, thanks to a windfall related to the new U.S. tax laws.
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Buoyed by the strong result, Toyota raised its guidance for the full fiscal year that will end on March 31.
The raw numbers
Like many Japanese companies, Toyota uses a fiscal year that begins on April 1. The quarter that ended on Dec. 31, 2017, was the third quarter of Toyota's 2018 fiscal year.
What drove Toyota's year-over-year profit gain
Unlike rival Honda (NYSE: HMC), which manufactures most of its vehicles in the regions where they're ultimately sold, Toyota still makes a significant percentage of its total production in Japan for export to other markets. That makes it especially vulnerable, for better or for worse, to swings in exchange rates -- the yen-to-dollar and yen-to-euro rates in particular.
For investors, the key point is that when Toyota has a significant year-over-year change in operating profit, exchange rates are usually a major factor. That was definitely true in this quarter: Toyota's operating income increased by 235 billion yen ($2.15 billion) from the year-ago quarter, and the company attributed 83% of that increase -- 195 billion yen ($1.78 billion) -- to exchange-rate movements.
And the rest? The results of Toyota's ongoing cost-cutting effort were offset by increased expenses in the quarter. Selling a higher percentage of (higher-profit) SUVs to (lower-profit) sedans helped by about 60 billion yen, though much of that was offset by increased spending on incentives, particularly in North America. Increases in the valuation of derivatives (like interest rate swaps) held by Toyota accounted for much of the remaining gain.
Here's a look at how all of that affected Toyota's operating profit by region.
As you can see, Toyota's operating profit rose sharply in Japan, thanks to favorable movements in exchange rates and a modest (3.3%) jump in sales. But profits fell sharply in North America, in part because of exchange rates -- and in part because of Toyota's decision to boost its incentives in the sluggish U.S. market.
What about that tax break?
Toyota's net profit nearly doubled from a year ago, increasing by 455.3 billion yen year over year. Part of that increase was due to the gains in operating income, of course -- but Toyota also realized a 291.9 billion yen reduction in income taxes, much of it due to the new, lower U.S. corporate tax rate.
The windfall for Toyota contrasts sharply with the experience of rival General Motors (NYSE: GM), which took a $7.3 billion charge against its fourth-quarter earnings related to the new tax law.
GM has carried what it calls "deferred tax assets," tax breaks that it's entitled to take because of past losses, on its balance sheet for several years, using them up as allowed over time; those assets are now worth less (on paper) because of the cut in the U.S. corporate tax rate from 35% to 21%.
A boost in Toyota's full-year guidance
For the full fiscal year, Toyota now forecasts:
- Revenue of 29 trillion yen, up 500 billion yen from prior guidance. (Fiscal 2017 result: 27.6 trillion yen.)
- Operating income of 2.2 trillion yen, up by 200 billion yen from the prior forecast. (Fiscal 2017 result: 1.99 trillion yen.)
- An operating margin of 7.6%, up from 7% in the prior forecast. (Fiscal 2017 result: 7.2%.)
- Net income of 2.4 trillion yen, up by 450 billion yen from the prior forecast. (Fiscal 2017 result: 1.83 trillion yen.)
Why the increases? Toyota now expects the euro to weaken a bit more versus the yen than it had expected. Its forecast for the yen-to-dollar rate is unchanged from prior guidance.
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