DBRS Confirms Toyota Motor Corporation at AA (low) and R-1 (middle)

DBRS has today confirmed the long- and short-term ratings of Toyota Motor Corporation (Toyota or the Company) and its subsidiaries at AA (low) and R-1 (middle), respectively. The ratings continue to incorporate the Company’s very strong business profile as a leading global auto manufacturer with highly efficient operations and a product line well positioned to benefit from the structural change in demand toward smaller and more fuel-efficient vehicles. The trend on the long-term ratings has been changed to Stable from Negative. DBRS recognizes that Toyota’s results have been weak, most recently due to substantial production disruptions, attributable initially to the Great East Japan Earthquake and subsequently to the severe flooding in Thailand. Accordingly, the Company has incurred material market share losses in the important U.S. market. In addition to significantly lower volumes, Toyota’s results remain significantly impeded by ongoing negative currency effects (i.e., Japanese yen-to-U.S. dollar exchange rate). The previously assigned Negative trend (for the ratings) incorporated the expectation that Toyota’s further recovery could prove quite protracted. However, DBRS now observes that the worst of the recent challenges confronting the Company would appear to have passed, with Toyota’s fiscal 2013 (F2013, ending March 31, 2013) performance likely to show considerable year-over-year improvement given significantly higher expected volumes attributable not only to replenished inventory levels but also to forecasted improving industry conditions across most of the Company’s major markets. Additionally, while earnings and cash-flow based metrics have been adversely affected by the above-cited factors, Toyota’s financial position continues to be excellent, with the industrial operations having a very significant net cash position. Finally, the Company continues to benefit from a loyal customer base, which should bolster Toyota’s efforts in recovering its lost market share upon resolving its recent production shortages, notwithstanding increasing competition in the U.S. market.

The Company’s industrial operating results improved moderately in fiscal 2011 (F2011, ending March 31, 2011) as a function of higher volumes and positive mix effects in line with industry growth in Asia’s emerging markets and the ongoing (albeit moderate) recovery in the United States. However, performance in the first half of F2012 fell sharply, with the automotive segment incurring an operating loss for the period. The loss reflects significantly weaker volumes as a result of the above-cited production disruptions. Furthermore, Toyota was most adversely affected in the United States and Japan, which are the Company’s two primary automotive markets, with Japan and North America typically accounting for close to 60% of total vehicle sales.

In the United States, shortages of Toyota vehicles prevented the Company from benefiting from that country’s ongoing automotive recovery, with year-over-year unit sales through the first half of F2012 contracting by 18%. In line with the above, Toyota’s U.S. market share for calendar 2011 stood at 12.90% (vis-à-vis 15.2% for 2010). In Japan, year-over-year unit sales through the first half of F2012 fell by 27%, with vehicle demand hit by the expiry of government automotive subsidies in addition to the effects of the Great East Japan Earthquake.

While F2012 results will be relatively weak, DBRS expects Toyota’s performance through F2013 to substantially improve as the extensive production disruptions are gradually resolved. Replenished inventory levels should enable the Company to participate in the expected recoveries of both its major markets. In Japan, demand should grow from very weak 2011 levels. DBRS notes that the Company recently increased its calendar year 2012 sales forecast for its native market, with total unit sales targeted at 1.63 million, which would represent a year-over-year increase of 36%. DBRS further notes that this projected increase incorporates expected gains in market share, with Toyota’s expanding product line of hybrid vehicles likely to derive additional benefits from the reintroduction of government subsidies (toward the purchase of fuel-efficient vehicles). In the United States, volumes are also projected to materially increase this year, with industry levels likely approaching 14 million units. DBRS notes that, in addition to the replenished inventories, Toyota’s performance should likely benefit from the Company’s relatively fresh product cadence. Toyota recently introduced its revised Yaris and Camry models, while also expanding its Prius line of vehicles to include the Prius v wagon and forthcoming Prius c city vehicle. As such, the core of Toyota’s product line over the near term will be relatively new; this should benefit its efforts in recovering lost market share, notwithstanding stronger competition. DBRS notes further that, despite the recent recall crisis, Toyota continues to enjoy a strong brand image in the U.S., with Toyota ranking first in Consumer Reports’ 2012 Auto Brand Perception Survey.

In other global markets, while Europe is projected to remain weak, the Company’s exposure to this region is significantly less relative to other major geographic market segments. Conversely, Toyota is expected to benefit from its increasing presence in Asia’s emerging markets, with its performance over the medium term expected to be solidly in line with the projected growth of the global automotive industry. DBRS observes that the Company’s forecast of 8.6 million global unit sales for calendar 2012 is roughly equivalent to the pre-crisis F2008 sales level of 8.5 million units.

The ongoing strengthening of the Japanese yen remains a significant headwind for the Company. However, Toyota is undertaking several measures to help mitigate the negative impact of the yen, including a more flexible domestic production system. The Company is also looking to import lower value-added components into Japan while seeking to increase its local procurement practices in foreign markets, with both measures benefiting from the ongoing strengthening (and higher purchasing power) of the Japanese yen.

The Stable trend for the ratings incorporates DBRS’s expectation that earnings and free cash flow generation should rebound considerably subsequent to the first quarter of F2013 (in line with replenished inventory levels and full production capacity). However, in the event that Toyota’s new models do not fare well and the Company does not significantly recover its lost market share in the important U.S. market as expected (thereby leading to protracted weak performance of the automotive operations), this could result in negative rating actions.

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.