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Toyota Profits Plunge as New Challenges Threaten Future Earnings

Maker withdraws future guidance as parts shortages worsen in wake of Thai flooding.

by on Nov.08, 2011

Toyota CEO Akio Toyoda at the launch of the Lexus GS in Pebble Beach last August.

Toyota reported a sharp 18.5% downturn in its latest quarterly earnings, largely the result of parts and product shortages caused by the earthquake and tsunami that struck northeastern Japan last March.  But the maker warned it is facing new challenges ahead.  On an operating basis, the maker said it lost $418 million for the first half of its fiscal year, compared with a $4.1 billion profit a year ago.

In a presentation from Tokyo, Toyota officials withdrew their earlier guidance for the rest of the fiscal year – which ends on March 31, 2012 – due to the potential havoc the company faces in the wake of the flooding that struck Thailand last month.  That has disrupted supplies of both vehicles and parts, resulting in new production cuts at Toyota plants around the world.

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Further complicating matters, the yen continues to gain strength against the dollar and other major currencies. The current exchange rates are “far beyond what is tolerable,” Toyota CEO Akio Toyoda said earlier in the week, warning that if the trend isn’t reversed Japan’s manufacturing base could be “destroyed.”

Unfavorable exchange rates alone cost Toyota about 80 billion yen, or more than $1 billion, during the July – September quarter, according to Toyota.  But the company’s bottom line was also hammered by lost production.  With dealer inventories down to bare-bones levels in much of the world, Toyota saw unit sales during the first half of the fiscal year tumble by 18.5%, to 3.03 million.

Sales and revenues for the most recent quarter slipped by a more modest 5%, year-over-year, to 4.57 trillion yen, or $58.7 billion.  For the first half of the fiscal year revenues were off 17.2%, to $8 trillion yen, or $102.6 billion.  Sales were off 33.8% in North America – and slipped in every region except Asia.

After accounting for exchange rates, higher raw materials costs and other negative factors, the maker’s second-quarter profit plunged to just 80.4 billion yen, or $1.03 billion.

Not everything went wrong for Toyota during the most recent quarter.  The maker said it did see some gains in Asia, notably in emerging markets like India and Indonesia.

It had meanwhile hoped to regain some momentum in the rest of the world during the final months of the current calendar year by ramping up production.  It had scheduled extended overtime in many of its factories in Japan and other markets, but those plans are now disrupted.

The flooding in Thailand will now result in production cuts that are likely to extend until at least November 18th and could drag on through the rest of the year.  Through just November 12, the maker said, it expects to lose 150,000 more units of production due to the disaster.  It remains unclear if the problem will impact the launch of some of Toyota’s newest products, such as the midrange luxury sedan, the Lexus GS.

But it will but certainly result in further hits to the company’s bottom line, Toyota officials confirmed by withdrawing their earlier guidance for the third quarter and the rest of the current fiscal year.

“More time is needed to complete an assessment of production and sales plans required by the impact of floods in Thailand,” the maker cautioned.

There is a positive side to the disaster, stressed Koji Endo, a senior analyst at Advanced Research Japan, who noted that it is suppliers, “rather than Toyota itself” who have been damaged by the flooding.

Nonetheless, the Thai disaster also will ensure that Toyota slips to the number three spot in the global automotive hierarchy, with Volkswagen likely to take its place as the world’s best-selling automaker followed by one-time leader General Motors.

Toyota remains by far the most highly valued by investors, however, with a market capitalization of $113 billion – though the stock is taking a hit in the wake of the latest news.  It was already down more than 20% this year.

While the Thai disaster is ultimately expected to have a short-lived impact on Toyota the effects of shifting exchange rates could drag on.  The maker said it now anticipates the yen growing to 78 to the dollar compared with 86 a year ago.

For the moment, CEO Toyoda continues to insist the automaker will maintain a strong production base in the home market, but industry analysts warn that could be a difficult position to maintain if things don’t improve.  Toyota’s competitors have been steadily moving their production overseas and the Japanese giant is taking some modest steps of its own, days ago announcing it will shift production of the Sienna minivan for the Korean market to a plant in the United States.

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