IHS Global Insight Perspective | |
Significance | Honda's net profit during the third quarter of fiscal year (FY) 2010/11 fell 39.7% due to declining vehicle sales in Japan. |
Implications | This is the first decline in net profit that Honda has recorded after five quarters of successive increases and comes despite continuing focus on improving operating cost and manufacturing efficiency. |
Outlook | Despite underperformance in the third quarter of 2010, Honda has raised its full-year earnings outlook on expected growth in vehicle sales in the overseas markets. |
Honda has reported a 39.4% decline in net profit for the third quarter of fiscal year (FY) 2010/11 due to declining sales in Japan and strong yen. For the three months ended 31 December 2010, the automaker posted a net profit of ¥81.1 billion (US$879.2 million) compared with a ¥134.6-billion net profit during the same period of FY2009/10. The company witnessed a 29% decline in operating profit to ¥125.6 billion over ¥176.9 billion during the third quarter the previous FY. Honda recorded a 5.8% decline in revenue to ¥2.1 trillion compared with ¥2.24 trillion on the previous FY mainly due to unfavourable currency translation the decrease sales in automobile business in Japan. The Automobile Business unit witnessed a 7.9% decline in sales to ¥1.6 trillion over ¥1.7 trillion a year earlier, while segment income declined 38% to ¥68.4 billion over ¥110.4 billion during the comparable quarter.
Despite underperformance during the third quarter, Honda closed nine months of the current FY with higher sales and increased profits, primarily as a result of strong performance during the first two quarters of the financial year. Net profit more than doubled to ¥489.5 billion compared with ¥196.2 billion a year ago. Honda recorded a 95.6% increase in operating profit to ¥276.6 billion over ¥95.7 billion a year ago, primarily due to increased profit in automobile business in Japan, North America and Asia. Strong growth in earnings was driven by a 6.7% increase in revenue to ¥6.7 trillion compared with ¥6.3 trillion a year earlier. The Automobile Business unit reported a 6.7% increase in net sales of ¥4.8 trillion compared with ¥5.1 trillion and 200% increase in segment income to ¥303.7 billion over ¥102.7 billion in the first nine months of previous financial year.
Honda's Q3 FY 2009/10 Financial Results (¥ Bil.) | ||||||
Q3 FY 2010/11 | Q3 FY 2009/10 | Y/Y Change % | YTD FY 2010/11 | YTD FY 2009/10 | Y/Y Change % | |
Sales Revenues | 2,110.4 | 2,240.7 | -5.8 | 6,723.7 | 6,299.6 | 6.7 |
Operating Income | 125.6 | 176.9 | -29.0 | 523.5 | 267.6 | 95.6 |
Net Profit | 81.1 | 134.6 | -39.7 | 489.5 | 196.2 | 149.5 |
Honda recorded a 6.5% decline in vehicle sales during the October-December quarter to 855,000 units compared with 914,000 during the same period in 2009. Vehicle sales declined in Japan by 33.3% to 118,000 units. Vehicle sales in the overseas market remained flat during the quarter as increased sales in North America outweighed fall in sales in the European market. In the first nine months of FY2010/11, sales increased 5% to 2,652,000 units over 2,518,000 units. Honda sold 440,000 vehicles in Japan, a 5% year-on-year (y/y) decline. However, it recorded a 7.6% increase in sales in overseas markets to 2,212,000 units, led by increased sales in North America and Asia excluding Japan, despite lower sales in Europe.
Outlook and Implications
After registering strong growth in five successive quarters, Honda reported first decline in net profit during the third quarter of the current financial year. Two factors are mainly responsible for the company poor performance during the quarter. Honda reported sharp decline in vehicle sales in Japan during the quarter after the Japanese government withdrew its eco-car sales incentives in September 2010. The company's executive vice-president told reporters that: "The impact of withdrawal of the government rebates was bigger than we had anticipated." In addition to the decline in sales, Honda like other automakers, suffered due to unfavourable currency translations and a stubbornly high yen which reached a 15-year high in November 2010. Honda estimated that its net revenue would have declined by less than 1% if calculated at the same exchange rate as the corresponding period a year ago.
Given declining sales in Japan, Honda is relying on overseas markets, especially in North America and Asia, excluding Japan. However Honda, along with other Japanese automakers, is facing stiff competition from its Korean rivals, namely Hyundai and Kia which recorded a strong growth in the October-December quarter. In order to retain customers and protect its market share, Honda is refreshing its product lines in major automotive markets. It recently unveiled the 2012 New Civic at the North American International Auto Show (NAIAS) in the United States. It plans to launch all variants of the new Civic by the second quarter of this year. Honda is planning to unveil its redesigned Accord sedan and wagon for the European market at the 2011 Geneva Motor Show (Switzerland), scheduled to be held in March. The company also unveiled the production version of compact car Brio in Thailand, which will go on sales during the year (see India - Thailand: 1 December 2010: Honda Showcases Brio Small Car for Indian and Thai Markets). Overall, Honda has set a goal to increase its vehicle sales by 80% by over next ten years, and is drafting a long-term sales strategy.
Buoyed by strong performance in North America and Asia, Honda has revised its full-year outlook for the current financial year ending 31 March 2011. The company has increased net profit forecast to ¥530 billion, up from ¥500 billion. It is expecting operating profit of ¥620 billion, up from earlier forecast of ¥500 billion, and expects an improvement in earnings as a result of cost-cutting initiatives and steps taken to improve manufacturing efficiency. However, Honda has announced that it will take a ¥15-billion hit in operating profit after it discovered that staff at one of its subsidiaries, Honda Trading had engaged in inappropriate trades in shrimp and shellfish (see Japan: 26 January 2011: Honda to Take Hit from Improper Trades). Honda has reduced its full-year sales projection from ¥9 trillion to ¥8.9 trillion as it expects the declining sales trend in the domestic market to continue for the rest of the financial year. Honda's full-year forecast is based on the assumption that the average exchange rate of the yen to the U.S. dollar and euro will be ¥85 and ¥112 respectively. For the full year, Honda forecasts a 5.2% y/y increase in vehicle sales to 3,580,000 units, an increase of 188,000 units over the previous financial year.