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

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 the leading global automobile 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 trends on the ratings remain Stable. As anticipated by DBRS, the Company’s performance in fiscal 2012 (F2012, ending March 31, 2012) through the first two quarters of F2013 has been progressively improving following initial losses from Toyota’s extensive production interruptions caused by the Great East Japan Earthquake and subsequent flooding in Thailand. Moreover, despite ongoing headwinds associated with the Company’s earlier recall crisis, Toyota has demonstrated a strong recovery across key end markets amid generally favourable global industry conditions, with the Company re-emerging as the world’s highest-selling automotive original equipment manufacturer (OEM) in 2012.

While the Company’s F2012 industrial operating results moderately improved over weak F2011 levels, Toyota’s performance was materially adversely impacted by the above-cited natural disasters. DBRS notes, however, that the Company’s operating performance nonetheless improved throughout the year as earnings progressively increased in each quarter. Moreover, through the first half of F2013, Toyota’s performance has been substantially stronger year over year. DBRS notes that Toyota’s improved performance reflects favourable industry conditions in North America and Japan -- (these two geographic market segments typically account for between 50% and 60% of total unit sales) -- bolstered by significant market share gains in the United States.

In the United States, vehicle sales through the first six months of F2013 (as well as through the remaining three months of calendar 2012) were dramatically higher year over year, with U.S. consumers demonstrating strong loyalty to the Company (electing to defer their respective vehicle purchases pending renewed availability of Toyota models). The sharp improvement also reflects the ongoing recovery in the U.S. automotive industry, as 2012 aggregate light vehicle sales volumes in the United States grew to 14.5 million units, an increase of 13% relative to the 2011 level of 12.8 million units.

The Company continues to face challenges linked with its earlier recall crisis, which commenced in 2009. Recently, Toyota announced an agreement toward resolving economic loss litigation in the United States related to these recalls through the offering of cash payments to certain customers as well as the launching of a new customer support program to provide supplemental coverage for certain vehicle components, with Toyota also retrofitting certain models (subject to the floor mat recall) with a free brake override system (for further details, please refer to DBRS's associated press release dated December 31, 2012). As a function of the settlement, Toyota took a USD 1.1 billion pre-tax charge against earnings for the quarter ending December 31, 2012. While the cost is meaningful, DBRS does not deem the settlement to materially adversely impact Toyota’s financial profile given the Company’s formidable balance sheet and abundant liquidity. The negative publicity of the recalls notwithstanding, Toyota still benefits from very strong consumer loyalty, as evidenced by the Company’s leading results in various recent surveys regarding brand sentiment and vehicle reliability. Moreover, as cited above, the Company’s sales and operating results in North America have reverted to very solid levels.

In Japan, Toyota benefits from its dominant position with the Company consistently achieving market share levels well above 40%. As in the United States, sales through the first half of F2013 were substantially higher year over year, reflecting Toyota’s restored production capabilities with sales being further bolstered by government incentive programs toward the purchase of fuel-efficient vehicles (these programs, however, expired in September 2012).

DBRS expects the Company’s results to continue improving through F2013, in line with generally favourable global conditions, with the exception of Europe. While demand in Japan will fall in response to the expiry of the government incentive programs, the decline is expected to be moderate (significantly reflecting progressively changing demographic trends in the country that are undermining vehicle demand). In the United States, the recovery of the automotive sector continues to well exceed that of the general economy; growth is expected to remain solid this year, with industry volumes in 2013 projected to exceed 15 million units as demand progressively reverts to secular trend levels. 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 notes that Toyota’s performance will also likely benefit from the Company’s relatively fresh product cadence. In addition to the Company’s expanded line of Prius (hybrid) models, Toyota recently launched an updated RAV4 as well as revisions of the Lexus ES and GS models. Forthcoming vehicle introductions include the Toyota Corolla as well as the new Lexus IS models, with the Company also planning several new models in the compact car segments to be launched primarily in China and Asia’s other emerging markets.

The persistent strengthening of the Japanese yen has been a significant headwind for the Company, until recently. However, Toyota is undertaking several measures to help mitigate such effects, including a more flexible domestic production system and increased sourcing from lower-cost countries. Moreover, while Toyota’s relative Japanese production (to its global total) is higher than that of other Japanese-based OEMs, DBRS notes that such production primarily consists of high technology/value-added models, including hybrid vehicles as well as various Lexus products. Going forward, however, the yen is likely to be positive to Toyota’s future earnings, in line with the recent (and forecasted) weakening of the currency following the results of the Japanese elections in late 2012.

The Stable trend on the ratings incorporates DBRS’s expectation that Toyota will maintain its very strong financial and business profiles, with its competitive position well defended by the recent launches of some core models as well as its strong product cadence across key global markets.

Notes:
The applicable methodology is Rating Companies in the Automotive Industry, which can be found on our website under Methodologies.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.