Foreign Exchange the Only Bright Spot in Toyota's Fiscal 2023 First Quarter

Toyota’s fiscal 2023 first quarter suffered from supply chain shortages and inflated materials costs, but we see no reason to change our fair value estimate. Operating income fell 42% year over year and operating margin declined 580 basis points to 6.8% despite a JPY 195 billion foreign-exchange tailwind that was mostly from the yen weakening by 18.2% versus the dollar. A JPY 245 billion headwind from volume and mix plus JPY 315 billion from what Toyota called “soaring materials prices” were the main negative profit variances. Management also increased its full-year expected headwind from materials prices to JPY 1.7 trillion from JPY 1.45 trillion and remains committed to absorbing all of its Tier 1 suppliers’ cost pressures in this area. We’ve heard some skepticism from our supplier coverage on this promise, but we like that Toyota is offering to help and says it is giving suppliers a rolling three-month production schedule plan every month. We think this visibility is hard for even Toyota to predict, but suppliers are struggling with constant last-minute production stoppages, so any clarity helps the supply chain optimize its capacity to help Toyota maximize output.