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Toyota's First-Quarter Profit Jumps on Stronger Sales

Toyota Motor's quarterly operating profit rose by a better-than-expected 32% as brisk overseas sales combined with a softer yen to make up for chronic weakness in domestic demand.

Toyota , the world's biggest and most profitable automaker, left its cautious annual forecasts unchanged, as expected.

A Tacoma pickup truck on the lot of a Toyota dealership.
David Zalubowski
A Tacoma pickup truck on the lot of a Toyota dealership.

The Japanese firm, valued at $215 billion -- more than 10 times the market capitalization of U.S. rival General Motors -- is on its way to a seventh straight year of record earnings, powered by a rapid expansion into developing markets such as China and Russia.

It is also cranking up market share in mature regions such as North America and Europe with fuel-efficient cars such as the Prius hybrid and RAV4 crossover as well as an entry into the full-sized pickup truck segment with the Tundra model.

"This is a very strong and good earnings result," said Koji Endo, auto analyst at Credit Suisse Securities.

"Others like Honda and Suzuki had good earnings but their results were pushed by exchange rate factors only, while Toyota's results were helped also by improvement in other fundamental factors."

Toyota's strength also lies in its lean operations and cost-cutting savvy, which have enabled it to absorb a stubborn rise in commodity prices. Although it spends heavily to develop next-generation environmental and safety technologies, Toyota has the highest operating margin in the global auto industry, at above 10% of sales for the latest quarter.

Operating profit for the April-June first quarter was 675.43 billion yen ($5.67 billion), far ahead of an average estimate of 612.4 billion yen in a poll of six brokerages by Reuters Estimates.

Net profit also soared 32% to 491.54 billion yen while revenue grew 15.7% to 6.52 trillion yen.

Currency gains added 100 billion yen to the growth in operating profit, but Toyota said its own efforts had also contributed to a record quarter for revenue and profits.

"We have increased our sales volume in all regions excluding Japan," Senior Managing Director Takeshi Suzuki told a news conference. "Our core earnings are growing solidly."

Toyota kept its forecasts for the year to end-March 2008 unchanged, saying that although exchange rates were trading at more favorable levels than its assumptions of 115 yen to the dollar and 150 per euro, it was too early to factor in other uncertain risk factors.

Toyota forecasts operating and net forecasts at 2.25 trillion yen and 1.65 trillion yen, respectively, versus consensus forecasts for 2.45 trillion yen and 1.77 trillion yen. It also kept its global sales volume forecast unchanged at 8.89 million vehicles.

Bullish on United States

Toyota's sales drive has helped its group, which includes Daihatsu Motor and truck maker Hino Motors, end GM's 75-year reign as the world's biggest automaker in 2006. It outsold the struggling Detroit behemoth by 128,000 units last year, according to Automotive News Data Center.

Analysts also say Toyota is taking steps to spread out its source of earnings to rely less on orth America through rapid growth in Europe and Asia.

That's important as sales growth in the United States inevitably slows down from the heady rate of the past few years. Last month, Toyota's U.S. sales fell for the first time in almost three years, mainly due to a high base the year before.

"A lot depends on the U.S. economy. Right now there are problems in the housing market, and we're hearing about an economic decline," said Shigemi Nonaka, special adviser at Polestar Investment Management. "But in terms of the stock price, Toyota looks cheap right now."

Toyota's Suzuki said the automaker viewed the U.S. economy as being firm based on personal spending, employment and corporate profits, adding that the general trend of increasing sales in the United States for Toyota remained intact.

Suzuki noted that although its U.S. sales had dipped last month, it was the second highest level of July sales the company has seen. The highest was a year ago, when industry volumes grew on back of big incentives being offered led by Detroit brands.

Toyota has had to slap thousands of dollars in incentives to fan sales of the all-important Tundra model in the United States, but it said per-unit incentives fell in July and would decline again in August.

"We don't see a change in our annual budget for incentives that would have a big impact on our consolidated earnings forecasts," Suzuki said.

Domestic rival Honda last week also reported a sharp rise in quarterly profits fuelled by better sales, and lifted its full-year forecasts to reflect a softer-than-expected yen.

Japan's third-ranked Nissan Motor, meanwhile, had a worse-than-expected drop in profits as sales of bigger vehicles tanked in the United States due to high pump prices.

In the three months to June 30, Toyota shares gained 3.3% to 7,800 yen, trailing Tokyo's transport sector subindex, which rose 5.8%. They have since lost another 9%, again underperforming the sector.

Prior to the earnings announcement, Toyota shares closed up 0.1% at 7,080 yen, just 2% above a year-to-date low of 6,950 yen hit in the previous session.

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