DBRS Confirms Toyota Motor Corporation, Changes Trend to Negative

DBRS has today confirmed the ratings of Toyota Motor Corporation (Toyota or the Company) and its subsidiaries, including its long-term ratings at AAA. DBRS has, however, changed the trend of the long-term ratings from Stable to Negative. The short-term ratings remain unchanged at R-1 (high), with the trend remaining Stable as the Company’s liquidity position continues to be exceptional.

The trend change on the long-term ratings reflects sharply deteriorating market conditions worldwide that have meaningfully reduced the Company’s earnings prospects over the near to medium term. This has been exacerbated by Toyota’s recent expansion investments, which have increased the Company’s cost structure amid sharply declining sales volumes; this has put additional pressure on margins. Additionally, DBRS notes that companies rated AAA are typically not expected to undergo any period of significantly weaker performance, irrespective of prevailing market conditions. However, the ratings confirmation in turn incorporates Toyota’s ongoing very strong business profile, with the Company’s position as the world’s leading automotive manufacturer with highly efficient operations remaining firm. The financial profile continues to be excellent, as the industrial operations have a very significant net cash position.

Toyota recently announced a revised profit outlook for fiscal 2009 (ending March 31, 2009) that follows an earlier profit warning issued last November. The Company now expects annual revenues of 21.5 trillion yen and an operating loss of 150 billion yen, vis-à-vis fiscal 2008 levels of 26.3 trillion yen and a 2.3 trillion yen operating profit, respectively. Given that Toyota was able to generate an operating profit of 580 billion yen in the first half of fiscal 2009, the revised outlook indicates that the Company expects to incur an operating loss of 730 billion yen for the six-month period ending March 31, 2009.

The consecutive downward profit guidances are a function of weak automotive markets that prevailed throughout 2008, but which have worsened considerably in recent months and are expected to persist in 2009. Despite a moderate decline, unit sales have held relatively firm in Toyota’s native market of Japan, where the Company maintains a dominant share above 45%. However, sales in the United States (Toyota’s primary market in terms of unit sales) reached an annual level of 2.2 million units in 2008, which represented a year-over-year decrease of 15%. More significantly, sales for the months of November and December were very weak, declining 34% and 37%, respectively, year-over-year. The sharp U.S. sales declines in recent months reflect severe market conditions as aggregate demand has contracted sharply from already poor levels, given restricted access to credit and much lower consumer confidence. These factors are also leading to sizeable sales decreases in Europe, as the American economic crisis has proliferated globally. Emerging automotive markets, which previously were expected to represent a source of growth for the Company over the medium term, have been adversely impacted as well.

In response to the weakening demand, the Company is aggressively lowering production, with many assembly plants moving to a single shift. The Company has announced production shutdowns across all its plants in Japan for a total of 11 days from February to March 2009. Expansion projects have also been delayed, including the completion of the Mississippi plant that was slated to produce the next generation Prius.

As Japan continues to represent the majority of its total production base, Toyota’s profitability is also negatively affected by the stronger yen, which has appreciated considerably relative to the U.S. dollar and the Euro. Through the first eleven months of 2008, Japanese production totaled 4.6 million units, of which 2.6 million units were slated for export.

Notwithstanding the weak markets and significant currency headwinds, Toyota’s business profile remains very solid. Despite the recent drop in sales, DBRS notes that Toyota has fared well relative to its competitors, with the Company maintaining or increasing share in 2008 in all significant markets with the exception of Europe. The Company remains among the most efficient of automotive original equipment manufacturers, with a strong product line and an envied reputation for quality. Additionally, the Company’s hybrid technology has generated favourable publicity and remains very-well positioned in light of the global trend toward more fuel-efficient vehicles driven by volatile fuel prices and tightening emissions regulations across major markets.

Furthermore, the Company’s financial profile remains exceedingly strong, with the industrial operations having a significant net cash position of approximately 700 billion yen as of March 31, 2008. Toyota’s formidable balance sheet enables it to withstand the severe market conditions much better than its peers, with the Company able to sustain important development programs that should increase the competitiveness of its product portfolio going forward.

Toyota should prove resilient through the sharp downturn in the automotive industry. While the severe market conditions will likely result in significantly lower margins (relative to historical levels) and cash flow over the near to medium term, this will be somewhat offset by much reduced capital expenditures in fiscal 2010. Additionally, DBRS expects the Company to moderate its shareholder initiatives to help defend its stellar financial profile (while dividend payouts have thus far been maintained, share repurchases have been deferred). However, the demand for automobiles globally is expected to remain subdued, particularly in the United States. Furthermore, the Company’s reliance on exports from its Japanese manufacturing base will continue to pressure margins (due to the strength of the yen), at least in the medium term. If Toyota is able to sufficiently mitigate these challenges, then the ratings would likely remain constant. However, negative ratings implications could result if future market conditions prove so severe that Toyota incurs significant losses and cash burn in the forthcoming periods.

Notes:
All figures are in Japanese yen unless otherwise noted.
The applicable methodology is Rating Automotive, which can be found on our website under Methodologies.
This is a Corporate (Autos and Auto Parts) rating.