Toyota 2Q 2005 Profits Down Sales Up

TOKYO November 4, 2005; Chang-Ran Kim writing for Reuters reported that Toyota Motor Corp. posted a 3.2 percent fall in quarterly operating profit on Friday as it spent more money to expand capacity, but painted a rosier picture ahead fueled by a weaker yen and beefier sales than anticipated.

Japan's top auto maker does not provide group-based profit forecasts but said it aimed to exceed last year's record as long as the dollar averaged 110 yen for the year to March -- a conservative assumption given the U.S. currency is now fetching more than 117 yen.

The profit growth would come in spite of an upward revision to its capital expenditures for the year to 1.4 trillion yen from 1.25 trillion yen and bigger research and development costs than it predicted at the start of the year.

"Our reading on consumers' demand for our cars turned out to be conservative," Senior Managing Director Takeshi Suzuki told a news conference, explaining the unexpected rise in spending to boost production capacity.

"Given the high levels of spending on facilities and R&D, we think the results were pretty good."

Already the world's most valuable car maker worth $165 billion, Toyota is quickly closing in on General Motors Corp. as the world's biggest car maker by volume. It aims to grab 15 percent of the global market during the next decade.

Shaky demand in the all-important U.S. market presents some worries, but analysts expect Toyota to weather the storm thanks to the imminent introduction of new cars, including revamped versions of the high-volume Camry and Corolla.

Toyota's operating profit for the second quarter ended September 30 totaled 404.3 billion yen, falling short of an average estimate of 413.63 billion in a survey of six brokers by Reuters Estimates.

Net profit rose 2.1 percent to 303.7 billion yen while revenue climbed 10.1 percent to 4.97 trillion yen.

"Things are basically good for Toyota," said Christopher Richter, analyst at CLSA Asia-Pacific Markets.

"Some people might make a big deal out of the capex expansion, but Toyota has a good track record of turning investment into value."

Toyota's Suzuki said the 1.4 trillion yen in spending allocated for this year was abnormally high, and that annual outlays would not exceed that level by much over the next few years.

Market estimates put Toyota's operating profit at 1.74 trillion yen for the year to March, up 4 percent, according to 21 brokers surveyed by Reuters Estimates.

On a parent-only basis, Toyota lifted its operating profit forecast by a fifth to 750 billion yen and its net profit projection by a third to 670 billion yen.

WINNING IN THE U.S.

Toyota said damage to its profits from a ferocious price war in the United States was minimal, presenting a distinct picture from domestic rivals Nissan Motor Co. and Honda Motor Co., which slapped more sales incentives on their vehicles to compete with local U.S. brands' heavy discounts.

But even their setbacks are miniscule compared to the travails at GM and Ford Motor Co. , which booked massive losses in the same quarter on sliding sales and higher financing costs with their debt ratings downgraded to junk.

At a time when conditions in the U.S. auto market are spooking all players, Toyota sounded a positive note, saying business there would in fact improve, rather than worsen.

"Overall, we expect our revenue and profits in North America to step up a rank," Suzuki said. He noted that huge cost reductions would be built into the remodeling of the Corolla and Camry sedans, while bigger sales volumes would also help.

So far, the signs are good.

Despite a collapse in industry-wide sales in the United States last month, Toyota scored a 5.2 percent rise to grab a 15.1 percent share of the market -- a record high for Toyota and just one percentage point less than Ford's blue oval brand.

Riding on brisk sales of the Avalon sedan, Tacoma pickup and luxury Lexus GS car, Toyota tacked on 50,000 units to its North American sales forecast, expecting a total 2.55 million vehicles.

With better sales also anticipated in Japan and other Asian markets, Toyota is now expecting group-wide sales to surge 8.4 percent to 8.03 million units this business year, instead of 7.97 million.

Still, Koichiro Suzuki, senior investment manager at Sompo Japan Asset Management, said that investors -- who had high hopes for Toyota's earnings -- may sell the stock out of disappointment.

"The fact that profits fell shows that costs were higher than expected. This is the same sort of pattern as Nissan ... The result certainly falls a little short of expectations," he said.

Toyota shares gained 31 percent in the quarter to 5,200 yen, outpacing a 24 percent jump in the transport sector subindex and a 17 percent rise in the main Nikkei stock average ). The stock has since hit a five-year high of 5,420 yen.

Providing fodder for a further rise, Toyota raised its interim dividend by 10 yen to 35 yen, equivalent to a dividend payout ratio of 20 percent, up from around 18 percent at end-March but far from Toyota's eventual goal of 30 percent.

(Additional reporting by David Dolan of Reuters)