Toyota Motor Corporation on Thursday reported sharp drops in operating and net income for the first fiscal quarter ended 30 June.

Operating income fell 38.9% to 412.5bn yen, while income before income taxes net income decreased 28.1% to 353.6bn yen.

Consolidated net revenues for the first quarter fell 4.7% to 6.22 trillion yen.

"Operating income decreased by 262.9bn yen, mainly due to the impact of exchange rate fluctuations, such as the appreciation of the yen against the US dollar. The sharp increase of raw material prices exceeded cost reduction efforts by 10.0bn yen. These negative results surpassed the positive contributions from marketing efforts," TMC said in a statement.

It added that equity in earnings of affiliated companies increased by 13.2bn yen to 95.0bn yen, mainly due to continued strong results of joint venture companies in China.

TMC executive vice president Mitsuo Kinoshita added: "The financial results for this quarter were severe, due to our rapidly changing business environment."

Consolidated vehicle sales for the first quarter inched up just 24,000 units to 2.19m.

Japan sales increased 12,000 to 512,000 units and exports rose due to strong demand in markets such as Russia, Australia and the Middle East.

However, due to negative impacts such as exchange rate fluctuation including the yen appreciation against the US dollar, operating income decreased 45% (179.5bn yen) to 217.1bn yen.

Sales in North America fell 33,000 to 729,000 units. Operating income plunged almost 57% (91.1bn yen) to 69.1bn yen including 67.5bn yen of valuation profit on interest rate swap transactions.

"Although the US market, primarily the truck segment, is slowing down, Toyota earned a record high market share of 17.4% for this quarter. However, decrease in sales volume, the shift of product mix to compact cars, increase in sales expenses such as incentives and increase in reserves for bad debts, resulted in declining profits," the automaker said.

"Toyota will take swift actions in accordance with market changes by increasing the supply of models in high demand and launching new models."

Toyota last month said it would switch a new plant being built in Mississippi to make Highlander (Kluger) SUVs to the next generation Prius hybrid instead.

Europe sales fell 32,000 units to 301,000 units and operating income was off 47% to 18.2bn yen.

"Total vehicle sales decreased, despite strong sales in Russia and Eastern Europe, due to slowdown in western European markets. Toyota will launch new models that will continue to meet regional standards of CO2 regulations later this year and into next year to boost sales and generate profit," TMC said.

A brighter light: Asia increased by 40,000 vehicles to 262,000 and operating income in the region also rose, by almost 40% or 19.7bn yen, to 69.3bn yen.

"The successful launch of the remodelled Corolla early this year, the steady sales volume increase in the region, especially in Indonesia, and the increase in export volume due to continued strong demand of the IMV in regions outside of Asia, contributed to Asia's operating income growth," the automaker noted.

In Central and South America, Oceania and Africa, sales rose 37,000 to 382,000 vehicles and operating income rose 15.3% or 5.9bn yen to 44.5bn yen.

"In Brazil, the remodeled Corolla launched this March, and the sales volume as a whole increased by approximately 30% compared to the last first quarter. Sales in Australia and Argentina remained brisk," Toyota noted.

In the financial services segment, operating income increased almost 64%, or 30.8bn yen, to 79.1bn yen, including 55.5bn yen of valuation profit on interest rate swap transactions. But, excluding this, operating income decreased 21.6% or 21.8bn yen.

"Although the expansion of lending margins contributed to the increase in profit, higher percentage of credit losses in the US as well as the increase in reserves for bad debt and residual value losses resulting from decline of used car prices, were the main reasons for the decreased profit," TMC said.

"However, with Toyota's traditionally prudent approach in lending, together with its efforts to further strengthen the credit control and collection system, the percentage of credit losses has shown some stability.

"As for residual values, Toyota will continue to keep a close eye on the used car market and set suitable values in a timely manner."

TMC estimates that vehicle sales for the fiscal year ending next 31 March will be 8.74m - last month it cut 350,000 from its projections. Its consolidated revenues and earnings forecast remains unchanged, with consolidated net revenues of 25.0 trillion yen, operating income of 1.60 trillion yen and net income of 1.25 trillion yen. A Japanese report said that would mean a 27% drop in profit - Toyota's first full-year profit drop in seven years - and a 4.9% fall in sales.

"The company has retained its guidance for the full year, but it has also reduced its currency exchange-rate forecasts, which will offset some of the damage resulting from the current economic conditions," said Ian Fletcher, a research analyst for the China, India and ASEAN regions at Global Insight in London. He said there was some "positive news" in the results, "mainly coming from developing markets".

"The downturn in Toyota's finances was not wholly unexpected, as domestic and global rivals that had already reported their accounts for the quarter had offered some indication of the pressures currently facing the automotive business," Fletcher added.

"Surging raw material costs have been one area of concern for some time, and although Toyota has taken steps through its value innovation (VI) programme to cut expenditure, as well as increasing prices for some of its line-up, its profitability has still been hit. Exposure to the downturn in the US market has also hurt the company over the course of the period, although thanks to its broad vehicle line-up it has not suffered as badly as some of its rivals as it has been able to offer up its more fuel-efficient models such as the Yaris and the Prius to replace pick-ups and sport utility vehicles (SUV).

"However, this has had a knock-on effect on profits."

Fletcher said the leasing market is a further pressure in the US given that some of the most attractive incentive deals of late have been offered on the vehicles that are seeing the greatest declines in their resale values.

However he added that Toyota believes that it will avoid much of this pressure as its models have stronger overall residuals, although the 42bn yen provisionally booked by Nissan for the North American region over the next three years "gives a good indication of what could occur in the future".