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Fitch Affirms Toyota at 'A', Stable Outlook
October 14, 2016 / 8:11 AM / a year ago

Fitch Affirms Toyota at 'A', Stable Outlook

(The following statement was released by the rating agency) SINGAPORE/SEOUL, October 14 (Fitch) Fitch Ratings has affirmed Japan-based Toyota Motor Corporation's (Toyota) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) and senior unsecured debt rating at 'A'. The Outlook is Stable. Fitch has also affirmed the company's Short-Term Foreign- and Local-Currency IDRs at 'F1'. KEY RATING DRIVERS Leading Global Automaker: Toyota's ratings reflect its leading global market position, wide product range across the premium and mass-market segments, geographic diversity, economies of scale and leadership in hybrid vehicles. Robust Profitability Under Pressure: The appreciation of the yen against the US dollar since early this year (by almost 15% YTD) - if sustained - will weigh on Toyota's profitability and cash flows in financial year to March 2017 (FY17). Negative currency effects, combined with higher R&D and selling, general and administrative costs are likely to outweigh the positive effects of cost efficiencies and a strong product pipeline. We expect some downward pressure on operating margins as a result, with EBIT margins (industrial operations) of around 5% in FY17 and FY18. Profitability declined slightly in 1QFY17 with an EBIT margin (industrial operations) of 9.0% (1QFY16: 10.6%) as negative currency effects more than offset cost efficiencies and an improved volume/model mix. Toyota's FY16 results were robust - cost-reduction and a continued weak yen against the US dollar contributed to an EBIT margin (industrial operations) of 9.5% (FY15: 9.3%). Cost Reduction to Continue: Toyota will continue to launch a series of models over the next few years using new and common platforms and components, which should support its cost-efficiency targets. Toyota has rolled out its new Prius hybrid under this Toyota New Global Architecture (TGNA) project, and aims to increase the proportion of TGNA vehicles to half of total new vehicles by 2020. Modest Volume Growth in FY17: We expect Toyota's sales volume growth in FY17 to be in the low-single-digits. Growth is likely to be flat in the US as overall sales there slow, while growth in Europe and Asia including Japan will be modest to moderate.. These will offset continued weakness in the emerging markets. A sharper-than-expected slowdown in key regions - notably the US and Asia - as well as fiercer-than-expected competition in these markets could erode margins further. Japanese automakers are less reliant on China than some of their global competitors, but south-east Asia is an important market, and the demand outlook there is sluggish. Elevated Capex and Investments: We also expect the costs of complying with increasingly stringent emissions standards and investments in new technologies, including connected cars, electric vehicles and autonomous driving, to absorb an increasing share of Toyota's cash flows. Capex will remain relatively high in FY17-FY18 under our base case scenario, with capex/revenue of around 5.5% (FY16: 5.3%). Strong Financial Profile, Liquidity: Toyota has one of the strongest balance sheets in the industry. It has further strengthened its capital structure over the last three years due to a benign operating environment and the benefits of a weak yen. This should provide it with additional financial flexibility as the operating environment becomes tougher. We expect it to maintain robust cash flow from operations in FY17-FY18. We expect solid credit metrics and ample liquidity, despite higher capex and R&D costs and a stronger yen. We expect Toyota to remain net cash positive in FY17-FY18, with CFO/adjusted debt of at least 90%, and FFO-adjusted leverage at 1.0x or less. KEY ASSUMPTIONS Fitch's key assumptions within the rating case include: - Sales volume growth of around 2% in FY17 (FY16: -3.2%) - EBIT margin on industrial operations of around 5% in FY17-FY18 - Capex/revenue of 5.5% in FY17-FY18 RATING SENSITIVITIES Negative: Future developments that may collectively or individually lead to negative rating actions include: - EBIT margin on industrial operations falling below 4% and FCF margin at below 1% (FY16: 4.0%) on a sustained basis; - Any erosion of Toyota's competitive strengths, such as large scale, breadth of product line-up and leadership in hybrid vehicles. Positive: A near-term upgrade of Toyota's ratings is unlikely as the inherent cyclicality and potential financial pressure of the auto manufacturing industry results in a soft cap on IDRs at the 'A' level. In rare cases, a manufacturer with a very strong business profile and unusually strong credit protection measures could be considered for the 'A+' level. FULL LIST OF RATING ACTIONS Toyota Motor Corporation Long-Term Foreign-Currency IDR affirmed at 'A', Outlook Stable Long-Term Local-Currency IDR affirmed at 'A', Outlook Stable Senior unsecured rating affirmed at 'A' Short-Term Foreign-Currency IDR affirmed at 'F1' Short-Term Local-Currency IDR affirmed at 'F1' Contact: Primary Analyst Isabelle Katsumata Director +65 6796 7226 Fitch Ratings Singapore Pte Ltd 6 Temasek Boulevard #35-05 Suntec Tower Four Singapore 038986 Secondary Analyst Jeong Min Pak Senior Director +82 2 3278 8360 Committee Chairperson Kalai Pillay Senior Director +65 6796 7221 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Additional information is available on Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1013117 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. 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