DBRS Comments on Toyota’s Product Recall Developments and Q3 Results

DBRS notes that Toyota Motor Corporation (Toyota or the Company) recently provided an initial estimate regarding the cost and sales impact associated with the numerous product recalls and production/sales suspensions recently initiated by the Company (for details please refer to DBRS’s press release dated January 28, 2010). Toyota currently assesses the aggregate cost at approximately US$2 billion. The Company estimates that costs associated with the recalls amount to 100 billion yen (US$1.1 billion). Furthermore, the sales impact through fiscal 2010 (ending March 31, 2010) is roughly assumed at 100,000 units, which would translate to an additional 70 billion yen to 80 billion yen (Toyota previously announced that its January 2010 U.S. sales were negatively impacted by approximately 20,000 units – included in the 100,000 unit figure above).

However, DBRS notes that the cumulative effect of recent events will likely persist well beyond the end of the current fiscal year. Concurrently, Toyota also announced its third quarter fiscal 2010 (for the period ending December 31, 2009) results. As anticipated by DBRS, Toyota continued its pattern of progressively improving results, with the Company sharply narrowing its forecasted loss for the fiscal year. While DBRS recognizes Toyota’s improving financial performance, which, in isolation, may have caused the trend of the ratings to be changed to Stable from Negative, the ratings remain on Negative trend in connection with the product recalls and sales/production suspensions, which are negative although it remains early to assess their long-term impact. DBRS will continue to monitor and assess the situation and will take appropriate action as more clarity transpires around these developments.

For the nine-month period ending December 31, 2009, the Company generated an operating profit of 52 billion yen (approximately US$575 million). The Company now forecasts an operating loss of 20 billion yen (US$221 million) for the fiscal year-ending March 31, 2010, DBRS notes that Toyota has been progressively increasing its financial projections for this fiscal year. (Initially, the Company had estimated an operating loss in the amount of 850 billion yen (US$9.4 billion); this was subsequently revised to 350 billion yen (US$3.9 billion) when the Company announced its first half fiscal 2010 results.) Toyota’s improving performance and more optimistic outlook is essentially a result of extensive cost cutting efforts implemented by the Company combined with improving conditions in its key markets, particularly in last half of calendar 2009. Relative to fiscal 2009, Toyota expects to achieve approximately 1 trillion yen (approximately US$11.3 billion) in cost reductions. Additionally, the Company increased its volume/mix assumptions by 270 billion yen (US$3 billion) relative to its prior forecast. DBRS notes that Toyota was a strong beneficiary of the Car Allowance Rebate System (CARS) implemented in the United States last summer, while sales in its native Japan were also supported by tax incentives targeting compact, fuel-efficient models.

DBRS notes, however, that Toyota’s current difficulties may persist well beyond March 2010, as there continue to be ongoing developments. These include likely additional recalls involving the hybrid Prius model, with owners in several markets issuing complaints regarding the vehicle’s brakes. Furthermore, the U.S. Department of Transport and the National Highway Traffic Safety Administration are also pursuing other actions, including a probe of Prius brakes and a review of Toyota vehicles’ electronics systems. DBRS also notes that there are several existing and pending class action lawsuits against the Company across many jurisdictions, the possible eventual impact of which cannot be determined at this time.

Perhaps most significantly, it also remains too early to assess the outcome of Toyota’s current difficulties with respect to the brand’s reputation going forward and the associated effects on revenues and market share in the medium- to long-term. In the event that DBRS were to determine that these could prove detrimental to the Company’s business and financial profiles, negative rating implications would likely result. However, DBRS notes that Toyota’s position continues to be very strong as the world’s leading automotive manufacturer with a formidable balance sheet and abundant liquidity. Additionally, the Company previously enjoyed an excellent reputation for quality, safety and reliability that had been developed over several decades, with Toyota’s ability to mitigate the negative impact of recent events critical in alleviating any long-term damage to the brand’s image and sales.

Note:
All figures are in Japanese yen unless otherwise noted.

The applicable methodology is Rating Automotive, which can be found on our web site under Methodologies.

This is a Corporate (Autos & Auto Suppliers) rating.