Toyota Motor Corp (NYSE:TM) lifted its annual forecasts beyond market expectations as cost cuts and sales exceeded its plans, but a heavy reliance on exports will keep it a laggard as long as the yen stays strong.
The world's top automaker posted a smaller-than-expected fall in third quarter profits and hiked its sales forecast for the year to March 31 by 70,000 vehicles to 7.48 million, thanks to better than expected sales in Asia, Japan and Russia.
It kept its forecasts unchanged in North America, however, as uncertainty over the impact of its worst ever recall lingers, and expects losses in its Japanese operations to continue.
"Compared with other Japanese automakers, Toyota has greater exposure to the domestic market and therefore is more subject to the negative impact of the country's slow economic growth," said Kazuyuki Terao, chief investment officer at RCM Japan in Tokyo.
Toyota, which stayed ahead of General Motors Co as the world's biggest automaker by a thinner margin last year, lifted its operating profit forecast for the year to 550 billion yen ($6.7 billion) from 380 billion yen, well above the 489 billion yen consensus in a survey of 23 analysts.
Toyota expects cost-cutting to add 170 billion yen to annual operating profit, 30 billion yen more than it had expected three months ago, and also expects to save 20 billion yen by trimming research and development and other spending.
"Our efforts to improve our profitability came through faster than we expected," Senior Managing Director Takahiko Ijichi told a news conference. "Our break-even point has undoubtedly fallen and our earnings power is gradually improving."
Still, Toyota is only forecasting an operating margin of 2.9% for the year to end-March, lower than Japan's No.2 Nissan Motor and third-ranked Honda Motor.
Underlining its exposure to the yen, which hit a 15-year high against the dollar in the October-December reporting period, the maker of the Prius hybrid and Corolla sedan built nearly 3.3 million vehicles in Japan.
Excluding units from subsidiaries Daihatsu Motor Co and Hino Motors Ltd, that represents 43% of its total production, much higher than Honda and Nissan which build 27-28% of their vehicles in Japan.
Toyota shipped more than half of those vehicles overseas, making a loss on many of them with the dollar well below the rate of 90 yen that President Akio Toyoda has said is the minimum to keep Japan's manufacturing sector competitive.
Nissan is expected on Wednesday to report a drop in third-quarter operating profits and Honda has already posted weaker results for the period.
U.S. AND JAPAN EYED
Toyota is also still grappling with quality issues after recalling almost 16 million vehicles since late 2009, most of them in the United States, where it under-performed last year.
The U.S. Department of Transportation is due later on Tuesday to release its long-awaited findings of the review of Toyota's electronic throttles over complaints of unintended acceleration -- the problem behind most of the recalls in the crisis.
With overall demand in the key U.S. market improving, however, analysts say Toyota's disproportionately large Japanese operations will remain the biggest drag on its earnings.
Although Japan's car market is shrinking with a declining population and urbanization, Toyota's founding family chief, Toyoda, has vowed to build a minimum 3 million vehicles a year at home to keep the tradition of manufacturing alive. Honda built less than 1 million cars in Japan last year, while Nissan produced 1.13 million.
That has kept Toyota's parent-only operations deep in the red, with an operating loss of 420 billion yen expected this year and some investors are keen to see a greater proportion of cars built where they are sold.
"I would like to see progress in rebalancing of their production footprint to mitigate eroding export margins," said Neo Chiu Yen, vice president at ABN AMRO Private Bank.
Ijichi conceded Toyota had no quick fix to absorb the yen's debilitating rise. For now, Toyota was raising product prices wherever possible, pushing sales of higher-margin cars and trying to sell more cars made outside Japan, he said.
The Japanese currency may become less of a burden with a February 2 Reuters poll forecasting a weakening to 90 per dollar in a year's time.
Toyota's October-December operating profit fell 48% to 99.07 billion yen, while net profit fell 39% to 93.63 billion yen.
Wide-ranging estimates from nine analysts surveyed by Reuters had put the third-quarter operating profit at an average 70.6 billion yen. Profits made in China are not counted on the operating level at Toyota, which reports under U.S. accounting rules.
Toyota's shares have risen 18% in the past three months versus a 13% gain in Tokyo's broad TOPIX index. Honda gained 22% and Nissan rose 13%.
Before the results were announced on Tuesday, Toyota ended trading unchanged from the previous day at 3,490 yen, while the TOPIX gained 0.4%. ($1=82.32 Yen)