Toyota Motor Corp forecast a 20% decline in operating profit for the current fiscal year despite posting robust annual car sales, citing an “unprecedented” rise in costs for logistics and raw materials that are negating the benefits of a depreciated yen.
The world’s largest automaker forecast an operating profit of 2.4 trillion yen ($18.4 billion) for the fiscal year through March, short of 3 trillion yen posted during the just-ended period, and well down on analysts’ average projection for 3.4 trillion yen. Shares fell 4.4%, the most in two months.
Although Toyota is known for issuing conservative guidance only to exceed it later, the tepid outlook took investors by surprise. In recent months, Toyota’s sales have kept up a strong pace, leading the automaker to post its second-highest unit sales ever for the year ended March.
Toyota’s results are also being buoyed by a sharp decline in the value of the yen, which increases the value of earnings it brings back from overseas sales.
“It’s going to be a challenge,” said Satoru Aoyama, senior director of Asia-Pacific corporates at Fitch Ratings. With the current year bringing supply chain issues, chip shortages, Covid-related lockdowns in China and cost inflation, “there are many factors that are compiling to create a negative trend,” he said.
Toyota is predicting higher vehicle sales for the current fiscal year, with a target of 10.7 million units, compared with 9.5 million for the period that ended March. Net sales for the year are also predicted to climb about 5% to 33 trillion yen, Toyota said, also announcing plans to buy back as much as 200 billion yen of its own stock, or about 1% of total shares.
At the same time, Toyota executives said the company is grappling with “unprecedented” increases in materials and logistics costs, speaking at a briefing Wednesday. Because Toyota is forecasting a 1.45 trillion yen hit from soaring material prices for the current year, chief financial officer Kenta Kon said the weakened yen won’t deliver a “major” lift.
Toyota is also assuming a exchange rate of 115 yen for each dollar, which implies a smaller boost compared with current levels near 130 yen, leading some to question Toyota’s forecasts.
“Given current Bank of Japan communications we are not convinced that the risk of yen appreciation is greater than that of further yen depreciation,” Mio Kato, an analyst at LightStream Research, wrote in a note. Toyota’s added burden of material costs “could be almost completely offset by a weaker yen,” according to Kato.
Though the yen’s historic fall had somewhat bolstered optimism around Japanese automaker earnings, industry analysts have, at the same time, been warning of a growing number of risks related to both automotive supply and demand in the coming year.
In March, IHS Markit downgraded its output forecast for the current calendar year in order to factor in the impact from Russia’s invasion of Ukraine, then revised it down further last month in response to the fallout from Covid-related lockdowns in China, along with other mounting risks.
Others are warning of potential shocks to demand. Jefferies Financial Group Inc. sees expectations for Toyota’s earnings as being “too bullish” for the current fiscal year. The aggravation of cost inflation due to the Ukraine crisis and a potential slowdown in global economic growth will probably cause “considerable damage” to the auto sector overall, according to analyst Takaki Nakanishi.
Fitch Ratings’ Aoyama said that for Japanese automakers in general the yen depreciation has a positive impact accounting-wise for the medium-term. At the same time, “the yen depreciation, it’s like window-dressing. It doesn’t resolve the real, underlying issues,” he said.