DBRS Conf Toyota Motor, Toyota Credit Cda at AAA & R-1(high)

Dominion Bond Rating Service (“DBRS”) has confirmed the rating of Toyota Motor Corporation (“Toyota” or the “Company”) and the ratings of Toyota Credit Canada Inc. (“TCCI”) based on its ultimate parent, Toyota, as indicated above. The trends are Stable. The confirmations reflect Toyota’s continuing impressive operating performance, which is well above its industry peers, and its very strong balance sheet.

Toyota’s performance continues to be impressive across a broad front, as even some of its weaker sectors are starting to improve.
(1) The Company’s automotive operation has increased its market share and profitability in Europe, the only Japanese auto manufacturer able to grow market share in Europe; this was made possible by European designed and produced cars.
(2) The financial services operation is attaining size and critical mass, and showing growing profitability, after many years of relatively low earnings.

In addition, the auto operation is growing its market share in most major markets, particularly the U.S., and the Company offers much smaller sales incentives for its cars than its U.S.-based competitors.

DBRS recognizes that Toyota continues to rank number one globally in quality, and it is known for its innovative applications of technology. The balance sheet is overwhelmingly strong, with cash exceeding debt in the operating company. The Company can consistently generate ¥500 billion - ¥700 billion in free cash flow, even with capex near ¥1,000 billion, and it is now using the free cash flow to buy back shares.

The two main areas constraining earnings are the high levels of research and development (R&D) and the foreign exchange losses related to the strong yen, which it is adjusting by outsourcing from Japan. The Company produces about one million more cars in Japan than it sells, creating foreign exchange losses as it exports these cars from Japan. In the six months ended September 30, 2004, the Company lost ¥120 billion due to foreign exchange and with the declining U.S. dollar, this situation can only get worse.

Although R&D is expensive, Toyota benefits from the improving technology resulting from R&D, making it a short-term burden, but a long-term gain.

DBRS notes that the Company is in a relatively weak position in China, one of the fastest growing and important auto markets in the world. This situation can be overcome over time, as is presently happening with Toyota in Europe, where a sharp recovery from a long-time weak position is occurring.

Notes:
Issuer Rating
Issuer Ratings apply to all general senior unsecured obligations of the issuer in question.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.

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