Honda's earnings during the first quarter of fiscal year (FY) 2017/18 were helped by cost reduction efforts and strong Asian sales, which offset higher selling, general and administrative expenses.
IHS Markit perspective
Significance: Honda recorded a net profit of JPY207.3 billion (USD1.87 billion), up 18.7% year on year (y/y) during the first quarter of fiscal year (FY) 2017/18. Operating income edged up 0.9% y/y from JPY266.8 billion to JPY269.2 billion, while sales revenues stood at JPY3.713 trillion, representing an increase of 7% y/y. Honda's group-wide unit sales during the quarter reached 1.267 million vehicles, up nearly 4.5% y/y.
Implications: The gains were mainly helped by cost reduction efforts and gains from a change in sales volume and model mix, which offset an increase in selling, general and administrative expenses.
Outlook: Higher vehicle sales in Asia and a weak yen encouraged the automaker to raise its full-year outlook. The automaker raised its operating profit forecast to JPY725 billion, from a previous forecast of JPY705 billion. The automaker is now projecting a net profit of JPY545 billion and sales revenues of JPY14.5 trillion, assuming an average exchange rate of JPY107:USD1.
Honda has reported better-than-expected financial results for the first quarter (ended 30 June) of fiscal year (FY) 2017/18. During the three-month period, Honda reported a net profit of JPY207.3 billion (USD1.87 billion), up 18.7% year on year (y/y). Operating income edged up 0.9% y/y from JPY266.8 billion to JPY269.2 billion, helped by cost reduction efforts and gains from a change in sales volume and model mix, which offset an increase in selling, general and administrative (SG&A) expenses. Sales revenues stood at JPY3.713 trillion during the quarter, compared with JPY3.471 trillion during the corresponding period of last year, representing an increase of 7% y/y. Of this total, the automotive business contributed JPY2.589 trillion (up 3.6% y/y), while the remainder was accounted for by the motorcycle, power products, and financial services businesses. Honda spent about JPY77.8 billion in capital expenditure during the period, down 23.1% y/y, while research-and-development (R&D) costs stood at JPY164 billion, up 2.8% y/y.
By volume, Honda's group-wide unit sales during the quarter reached 1.267 million vehicles, up nearly 4.5% y/y. Sales grew in its domestic market of Japan by 7.5% y/y to 157,000 units, while sales in Asia stood at 523,000 units, up 15.5% y/y. Sales in "other general markets" increased 8.5% y/y to 64,000 units during the three-month period. However, Honda's sales came under pressure in its largest market of North America, falling by 5.7% y/y to 481,000 units, while sales in Europe declined 6.7% y/y to 42,000 units.
Full-FY 2017/2018 forecasts revised upwards
Honda has upgraded its forecasts for the current FY ending in March 2018 and raised its operating profit forecast to JPY725 billion, from a previous forecast of JPY705 billion, as it expects a smaller negative currency impact. The automaker is now projecting a net profit of JPY545 billion, representing decline of 11.6% y/y. Sales revenues during FY 2017/18 are projected at JPY14.5 trillion (up 3.6% y/y), assuming an average exchange rate of JPY107:USD1. In terms of global group sales volumes, the automaker has maintained its forecasts and expects to sell 5,080,000 units during the full FY, up 1.0% y/y. According to a previous statement by the automaker, the tailwinds from higher revenues and a better model mix, as well as cost-reduction initiatives, are expected to be outweighed by higher sales and research expenses and currency effects.
Outlook and implications
Honda's latest first-quarter results for FY 2017/18 are in line with its continued recovery from Takata-related recall costs in recent years, cost reduction efforts, and improved sales. The first-quarter gains marked the fourth consecutive quarterly increase for the automaker as it saw net profit gains of 79% y/y in the last FY. For the automaker, 2016 was marked by several challenges in the form of the 2016 Kumamoto earthquake in Japan as well as the potentially faulty airbags supplied by Takata, which caused a global recall of millions of vehicles. Honda was the largest customer of Takata and, accordingly, one of the worst-affected automakers. As a result, the improvement in the latest period was largely aided by the absence of these expenses. Meanwhile, cost reduction initiatives and strong Asian sales are helping margins and earnings.
Although it must continue to handle the impact on its revenues of foreign-exchange fluctuations, the company has a much-improved cost base and is enjoying particularly strong vehicle sales in China, while it is also in the process of launching important key models in its main global markets. It unveiled production versions of the Clarity plug-in hybrid electric vehicle (PHEV) and battery EV (BEV) at the New York Auto Show in April. In its domestic market, the automaker released the updated Fit subcompact car in June.
According to IHS Markit light-vehicle forecasts, Honda's group-wide sales will come in at 5.137 million units in 2017, representing a growth of 4.6% y/y from 4.909 million units in 2016. The forecasts include the volumes of Honda's Acura brand, which is expected to post sales of 195,459 units this year, and the Everus brand, which is expected to post 1,856 units.
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