The top global automaker, Toyota (NYSE:TM) released its fourth-quarter and full-year earnings on Thursday, reporting record profits. But the lead carmaker has given a conservative outlook regarding its earnings in the current year, factoring in the various challenges that stand ahead.
Toyota has made enormous money in the recent past on the back of a weakening yen. Being a global player, the company sells cars overseas, and as a result, the steep fall in the yen bloated its repatriated profits. Recovery in the prime markets of the U.S. and China also boosted the automaker's sales volumes. Toyota's upbeat 2014 fiscal year result is also a reflection of recovery in such important markets. Improvements in the Chinese and American markets had a positive effect on auto players, such as Nissan (OTCPK:NSANY) and Honda (NYSE:HMC) as well, that reported massive soar in sales. For our coverage, let's restrict and dive into the numbers and assess the operational performance of the Camry maker.
By the Numbers
Toyota reported a net profit of 1.82 trillion yen, or $17.9 billion, during the fiscal year ended March, which is almost twice as much as the auto giant earned in the last fiscal year. This was a result of a solid sales gain of 16.4% to 25.69 trillion yen, which translates to more than $252 billion. It should be, however, noted that about half the profit earned by the company was on account of the depreciating home currency. The carmaker also reported a solid gain in operating profits that rose to 2.29 trillion yen, or $22.5 billion, compared with 1.32 trillion yen registered a year earlier.
Toyota president, Akio Toyoda attributed staggering results to the cost-cutting measures, and strong sales in the domestic market and North America. The company targets to deliver more than 10 million cars this year. In 2013, the world's largest automaker sold 9.98 million cars, surpassing the numbers reported by American arch rival, General Motors (NYSE:GM), and German foe, Volkswagen (OTCPK:VLKAY). Volkswagen, that has been very vocal about its aim of becoming the world's largest automaker, is inching closer to its goal to conquer the auto world. Like Toyota, the European player also expects to sell more than 10 million vehicles in the current year. However, there's something else that Toyota has its eyes on. The company expects to see steady growth going forward, but has cautioned stakeholders regarding the current year profit, which it expects to come down to 1.78 trillion yen.
Toyota has never seen its top position as the primary motive of its business. The automaker, rather, follows the principle of delivering better, and targets realistic goals that fall within the capacity of the company. Profits and the lead position, it believes, is the result or consequence of the quality and service that the company provides. The auto major is working towards "sustainable growth… profit is not an objective, but rather a consequence" - says Toyoda.
The Japanese carmaker's path hasn't been that rosy. Toyota took over the reign from General Motors in 2008, but not for long. It suffered a severe setback in 2011 from the Tsunami followed by the Thailand floods, and lost its lead position to the top American automaker. But soon again, it made an unbelievable comeback in the very next year to regain its top spot, and continues to reign to-date.
This year too is not without challenges, as the road ahead is not free of obstacles. Toyota predicts that revenue and operating income will remain flat, while profit will slide 2% in the current fiscal year. Domestic sales are expected to get hit by the sales tax hike in Japan that threatens to curb consumer spending. In addition, the political contention in Thailand, which is a big market for Toyota where it's making heavy investments, is another pain point that could weigh on the results. Moreover, it should be kept in mind that the depreciating yen, which made overseas sales extremely attractive and profitable, is not a permanent or organic factor that will keep boosting Toyota's result. The yen effect is gradually fading away as the currency is more or less stabilizing against the dollar and euro.
Obviously, to somehow balance the risk, Toyota is spreading its wings in emerging markets. Again, the demand from emerging markets may be growing, but people are looking for improved interiors, better quality, and safety features. Competition in these markets is also getting tougher as more automakers are crowding up to make the most of the budding markets. Understanding the need, the company is taking measures to overhaul its image of providing boring and conservatively designed cars by making changes at the management level too - evident in the case of its Lexus brand. This should aid steady growth. The upturn in the U.S. and European markets should also help set off the depression in other markets. Simultaneously, the company is working hard to keep costs under tight check, which is apparent from its effort of consolidating operations in North America.
The present year might be a testing one, but Toyota has weathered many a storm in the past, and should overcome the current and upcoming challenges too. Toyota has set a decent target this year, which is pretty achievable for the auto giant. But there are several headwinds that could factor in the results of the company. It would be interesting to see how the carmaker manages to make its way through the bumpy road.
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