May 8 (Bloomberg) -- Toyota Motor Corp. fell the most in two months in New York after quarterly earnings dropped more than analysts estimated and the automaker forecast its first annual profit decline in at least seven years on shrinking U.S. sales and a stronger yen.

``We are facing a severe business environment,'' President Katsuaki Watanabe said today. The world's second-biggest auto company said fourth-quarter net income decreased 28 percent and predicted a 27 percent slump in earnings this year.

Toyota joins Honda Motor Co. and Mazda Motor Corp. in saying profit will be lower this year as the yen's 15 percent gain against the dollar in the past 12 months erodes the value of sales in North America. Watanabe projected sales of Siennas, Avalons and other vehicles in Toyota's biggest market will decline 6.4 percent in the fiscal year that ends March 31.

``This reflects the serious slowdown in the U.S. economy and conditions that are profoundly difficult for the auto industry,'' said John Casesa, managing partner of Casesa Shapiro Group in New York. ``Toyota is a now a full-line manufacturer in the U.S. market; they are in all segments, so it's getting harder for them to keep growing through the downturns.''

The Toyota City, Japan-based company's American depositary receipts fell $4.20, or 4 percent, to $100.56 at 4:15 p.m. in New York Stock Exchange composite trading for biggest drop since March 14. The shares were down 1.8 percent on the Tokyo Stock Exchange before the earnings were released.

Profit Drop

Fourth-quarter net income declined to 316.8 billion yen ($3 billion) from 440 billion yen a year earlier, Toyota said in a statement today. Sales rose 3.8 percent to 6.57 trillion yen. Profit missed the 375.2 billion yen median of six analyst estimates compiled by Bloomberg.

Toyota last reported an annual earnings decrease in the fiscal year that ended March 31, 1999, based on a Japanese- standard accounting method. Trina Ewald, a New York-based spokeswoman, said net income last fell seven years ago, in the period that ended March 31, 2002, under the U.S.-based accounting rules Toyota adopted four years ago.

The carmaker predicts net income will drop to 1.25 trillion yen in the year started April 1, from a record 1.72 trillion last year. Operating profit may fall 30 percent to 1.6 trillion yen. The stronger Japanese currency will probably trim 690 billion yen from operating profit, the company said.

GM Battle

Toyota, vying with General Motors Corp. to be the world's largest carmaker, boosted U.S. retail sales in April for the first time in five months on demand for the Yaris and the Prius.

Record high fuel prices and a sluggish economy have led U.S. drivers to favor smaller, fuel-efficient Toyota models rather than its more profitable luxury Lexus vehicles and larger light trucks from it, GM and Ford Motor Co.

``The U.S. has been the crown jewel for Toyota in terms of profit,'' said David Cole, chairman of the Center for Automotive Research in Ann Arbor, Michigan. ``They're very diversified around the world, so they can look to other markets to make up some of that.''

Toyota, which gets about 50 percent of operating profit from North America, based its earnings forecast on exchange rates of 100 yen to the dollar and 155 yen to the euro compared with 114 yen to the dollar and 162 yen to the euro last fiscal year. Every 1 yen gain against the dollar and euro trims Toyota's annual operating profit by 40 billion yen and 6 billion yen, respectively, the company said today.

`Time to Readjust'

``It's now time to readjust our structure after having years of constant growth,'' Watanabe said at a Tokyo press conference. ``It's a golden opportunity to eliminate waste'' in the company.

The overall U.S. market dropped 8.1 percent in the three months ended March 31. The price of regular gasoline gained 8 percent to $3.29 a gallon in the period and cost $3.62 a gallon as of yesterday.

``I expect more bad news from the industry,'' said Edwin Merner, president of Tokyo-based Atlantis Investment Research Corp., which manages $2 billion in assets. Still, ``Toyota should come through this period stronger and better'' because of its lead in gasoline-electric hybrid technology.

GM reported a first-quarter loss of $3.25 billion last month because of deteriorating performance in North America. The Detroit-based carmaker was profitable in every other region. Ford reported a surprise profit for the quarter as earnings from Europe offset losses in North America.

Sales Slump

This calendar year, rising job insecurity may cause auto sales in the U.S. to slump to the lowest since 1995, according to Standard & Poor's.

Toyota will delay opening its eighth North American factory, Senior Managing Director Takeshi Suzuki told reporters in Tokyo. The company originally planned to start production of Highlander sport-utility vehicles at the plant by 2010, it said last year.

Mike Goss, a spokesman for the company's North American manufacturing group said today the Blue Springs, Mississippi, plant is schedule to open by mid-2010.

The carmaker forecasts its North American sales will drop to 2.77 million vehicles this fiscal year from 2.96 million last year. Global sales will rise about 1.7 percent to 9.06 million vehicles for the period. Sales in China will rise 36 percent to 640,000 vehicles this fiscal year.

``We see a perfect storm: dramatic increases in materials prices -- steel, aluminum, copper -- hitting everyone; rising costs for health care and retirees,'' Cole said. ``Toyota is hit by the currency, but also people shifting from more-profitable vehicles to less-profitable ones.''

R&D

Toyota's budget for research and development will fall 4 percent to 920 billion yen. Its capital spending will also drop 5.4 percent to 1.4 trillion yen. The company will raise its annual dividend by 17 percent to 140 yen a share from 120 yen.

Toyota plans to raise prices for models including the FJ Cruiser sport-utility vehicle, Yaris compact and Prius hybrid by as much as 2.1 percent in North America later this month to help offset rising materials costs.

Nippon Steel Corp. and JFE Holdings Inc., Japan's two biggest steelmakers, raised wholesale sheet steel prices 25 percent last month to cover an unexpected tripling in annual coking coal prices. They are seeking a further 10 percent increase as early as June, traders familiar with price talks said on April 22.

Nissan Motor Co., Japan's third-largest automaker, is to give its forecast and fourth-quarter earnings on May 13.

To contact the reporter on this story: Naoko Fujimura in Tokyo at nfujimura@bloomberg.net; Tetsuya Komatsu in Tokyo at tekomatsu@bloomberg.net.

Last Updated: May 8, 2008 19:05 EDT