Morningstar DBRS Confirms Toyota Motor Corporation at AA (low); Trends Remain Stable

DBRS Limited (Morningstar DBRS) confirmed the Issuer Ratings of Toyota Motor Corporation (Toyota or the Company), Toyota Financial Services Corporation, Toyota Motor Finance (Netherlands) B.V., and Toyota Credit Canada Inc. (TCCI) at AA (low). Additionally, Morningstar DBRS confirmed TCCI's Medium-Term Notes and Commercial Paper at AA (low) and R-1 (middle), respectively. The trends on all credit ratings are Stable.

KEY CREDIT RATING CONSIDERATIONS
The credit ratings incorporate Toyota's solid business-risk assessment (BRA) as a leading global original equipment manufacturer with a strong presence in both mainstream and luxury automotive segments as well as a dominant position in its native Japanese market. Additionally, the Company's operating performance has persisted at strong levels, with Toyota's F2024 (ended March 31, 2024) earnings significantly increasing year over year (YOY). This strong earnings performance, amid the Company's very conservative financial policy, renders Toyota's financial risk assessment (FRA) at inordinately strong levels, providing meaningful cushion in the context of the currently assigned credit ratings.

CREDIT RATING DRIVERS
Consistent with the assigned Stable trends, Morningstar DBRS expects the Company's credit ratings to remain constant over the near to medium term. Morningstar DBRS notes that Toyota's FRA, including its inordinately strong liquidity position, provides a cushion against unexpected challenges, rendering a credit ratings downgrade unlikely. Conversely, a ratings upgrade over the medium term is unlikely given the limited earnings visibility of the automotive sector, with Toyota (as with its peers) facing substantial costs and investments associated with the progressive electrification of the automotive industry and development of new mobility services.

EARNINGS OUTLOOK
Toyota's F2025 earnings performance is expected to soften YOY, albeit from very strong F2024 levels that benefitted from a moderation in selling expenses amid rather favourable industry conditions. The Company projects industry conditions in the forthcoming year to normalize somewhat, with Toyota also planning significant investments in the total approximate amount of JPY 700 billion, to be primarily allotted to human resources in addition to ongoing investments targeted toward the Company's transition to a provider of new mobility services (these include investments in the development of electric vehicles (EVs) and fuel cell electric vehicles (FCEVs), as well as software-defined vehicles). As a function of these factors, Toyota forecasts its consolidated operating income will moderately decrease to JPY 4.3 trillion (from the F2024 level of JPY 5.4 trillion).

Going forward, over the medium term, Morningstar DBRS expects Toyota's profitability to remain solid, albeit likely decreasing from very strong F2024 levels in line with an anticipated slowing of volume growth, moderation in pricing, and ongoing cost headwinds. Morningstar DBRS notes, however, that Toyota aims to significantly offset such cost headwinds through ongoing efficiency gains, with the Company also targeting to further diversify its earnings base by geography.

FINANCIAL OUTLOOK
Morningstar DBRS anticipates Toyota's cash flow from operations in F2025 to remain solid, albeit likely decreasing compared with prior-year levels amid an anticipated softening in earnings. Capital expenditures (capex) are forecast to remain substantial and increase YOY to an approximate level of JPY 2.15 trillion, in line with ongoing investments associated with Toyota's electrification efforts and expansion into new mobility businesses. Dividend payments in F2025 are projected to be moderately higher YOY, taking into account the increased F2024 year-end dividend of JPY 45 per share. In line with the above, Morningstar DBRS expects gross free cash flow (i.e., before working capital items) in F2025 to result in lower levels compared with F2024, albeit while remaining sizably positive. While working capital is anticipated to represent a use of cash for the fiscal year, net free cash flow for the year is still estimated to be materially positive.

Going forward, cash flow from operations is projected to remain solid but could potentially decline somewhat over the medium term amid some anticipated pressure in earnings. Capex will likely persist at substantial levels for the foreseeable future. Dividends are projected to range from essentially constant to moderately higher levels over the next few years. Notwithstanding the substantial capex and roughly constant dividend payments, Morningstar DBRS anticipates Toyota's free cash flow to persist at positive levels over the medium term. Combined with the Company's very conservative financial policy, Toyota's FRA is estimated to persist at very strong levels, likely providing cushion in the context of the currently assigned credit ratings.

CREDIT RATING RATIONALE
Toyota's credit ratings are supported by its favourable position as the world's largest automotive original equipment manufacturer ( OEM) (according to 2023 sales data), with the Company being the dominant player in its native Japanese market, while also having a solid presence in the United States and China. The Company's wide assortment of automotive nameplates enjoys a very positive reputation, not only in the mainstream segments but also in the premium auto space, thereby contributing to earnings stability. Toyota's consistent financial performance also significantly reflects its strong track record in attaining ongoing cost reductions and efficiencies. Regarding its electrification ambitions, Toyota is pursuing a multipronged strategy. This includes continued offerings of hybrid vehicles (that have undergone sales increases amid the slowing growth of EV sales) in addition to progressively expanding the product offerings of EVs while also developing FCEVs (notably for commercial vehicles). Toyota's financial services business provides further diversification benefits and plays an important role in supporting vehicle sales, with the segment also being a source of stable earnings. Finally, the Company's liquidity position is substantial, with the industrial operations having a sizable net cash position and Toyota having liquid assets of JPY 15.6 trillion (roughly USD 100 billion equivalent) as of June 30, 2024.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
ESG Considerations had a relevant effect on the credit analysis.

Environmental (E) Factors
The following Environmental factor(s) had a relevant effect on the credit analysis: Morningstar DBRS considered that the environmental factor related to carbon and greenhouse gas (GHG) emissions represents a relevant negative factor as Toyota faces an assortment of laws and governmental regulations related to environmental matters such as emission levels, fuel economy, noise, and pollution. Accordingly, the Company faces risks from the transition to a lower-carbon economy. The Company is promoting its vehicle electrification strategy from all directions, including EVs, hybrid models, and FCEVs. Specifically, by 2035, Toyota is targeting to reduce average GHG emissions from new vehicles by more than 50% (compared with 2019 levels), with the Company targeting to attain carbon neutrality from new vehicles (on average) by 2050. In May 2023, the Company announced plans to invest a total of approximately JPY 5 trillion in new capex, research and development expenses, and other investments relating to EVs and batteries by 2030. Regarding Toyota's corporate activities (including production), by 2035, Toyota is targeting to reduce GHG emissions by 68% (compared with 2019 levels), with the Company targeting to attain carbon neutrality from corporate activities by 2050. (For further details, please refer to the following commentary: "The Future is Electric: Climate Change and the Global Automotive Sector" at https://dbrs.morningstar.com/research/413419.)

There were no Social or Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) https://dbrs.morningstar.com/research/437781

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of BRA Factors
In the analysis of Toyota, the relative weighting of the BRA factors was approximately equal.

(B) Weighting of FRA Factors
In the analysis of Toyota, the relative weighting of the FRA factors was approximately equal.

(C) Weighting of the BRA and the FRA
In the analysis of Toyota, the BRA carries greater weight than the FRA.

Notes:
All figures are in Japanese Yen unless otherwise noted.

Morningstar DBRS applied the following principal methodology:

Global Methodology for Rating Companies in the Automotive Manufacturing and Supplier Industries (June 28, 2024)
https://dbrs.morningstar.com/research/435216

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (April 15, 2024), https://dbrs.morningstar.com/research/431186, which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodology has also been applied:

Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024)
https://dbrs.morningstar.com/research/437781

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

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 under Related Documents or by contacting us at info@dbrsmorningstar.com.

The following additional regulatory disclosures apply to Toyota Motor Corporation, Toyota Financial Services Corporation and Toyota Credit Canada, Inc.:

The credit ratings were initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

These are solicited credit ratings.

The following additional regulatory disclosures apply to Toyota Motor Finance (Netherlands) B.V.:

The credit rating was not initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is an unsolicited credit rating.

The credit rating of Toyota Motor Finance (Netherlands) B.V. is endorsed by DBRS Ratings Limited for use in the United Kingdom, and by DBRS Ratings GmbH for use in the European Union, respectively. The following additional regulatory disclosures apply to endorsed credit ratings:

Regarding Toyota Motor Finance (Netherlands) B.V., with respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, this is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer.

With Rated Entity or Related Third Party Participation: YES
With Access to Internal Documents: YES
With Access to Management: YES

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS trends and credit ratings are under regular surveillance.

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

Lead Analyst: Robert Streda, Senior Vice President,
Rating Committee Chair: Anke Rindermann, Managing Director,
Initial Rating Date: February 15, 1999

Information regarding Morningstar DBRS ratings, including definitions, policies, and methodologies, is available on https://dbrs.morningstar.com or contact us at info@dbrsmorningstar.com.

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