Honda's Q1 FY 2014/15 net profit rises nearly 20% y/y, full FY outlook revised upwards

Honda yesterday (29 July) released its financial results for the first quarter (April-June 2014) of the current fiscal year (FY) that ends in March 2015. For the three months ended 30 June 2014, the company's net profit jumped 19.7% year on year (y/y) to JPY146.5 billion (USD1.44 billion) and its operating income rose 7.1% y/y to JPY198.0 billion, on sales of nearly JPY2.99 trillion, up 5.4% y/y. The automaker's group-wide unit sales totalled 1.061 million vehicles during the quarter, up 6.2% y/y. Honda attributed the rise in operating profit to "profit-increasing factors including an increase in automobile sales in Japan and Asia resulting from the positive effect of new model introductions and full model changes as well as the positive effect of cost reduction efforts".

By region, group unit sales surged 44.3% y/y to 202,000 in Japan and grew 10.9% y/y to 316,000 in Asia (excluding Japan). Volumes dipped 3.1% y/y to 445,000 units in North America, stayed flat in Europe at around 40,000 units, and declined 22.7% y/y to 58,000 units in all other regions combined. Operating income remained largely flat at JPY62.1 billion in Japan, declined nearly 6.0% y/y to JPY67.5 billion in North America, grew 21.4% y/y to JPY65.2 billion in Asia (excluding Japan), and fell 15.2% y/y to JPY4.5 billion in all other regions combined. In Europe, the automaker incurred an operating loss of JPY1.4 billion, compared with an operating loss of JPY9.7 billion during the same quarter of the previous FY.

FY 2014/15 forecasts

Honda has also revised upwards its forecasts for the current FY from those announced in April, now projecting a net profit of JPY600.0 billion (up 4.5% from FY 2013/14) and an operating profit of JPY770 billion (up 2.6% y/y), on sales revenues of JPY12.8 trillion (up 8.0% y/y). Honda has assumed higher average exchange rates of USD1:JPY101 and EUR1:JPY136 when arriving at these forecasts. In terms of global group sales volumes, the automaker has maintained its earlier target of 4.83 million units announced in April, which represents a y/y increase of nearly 12%.

Outlook and implications

The robust first-quarter results, stemming largely from solid sales in Japan and the rest of Asia, provide a good start to Honda's FY 2014/15 aspirations. They come after Honda ended FY 2013/14 on a strong note, helped mainly by an even stronger fourth and final quarter (see Japan: 25 April 2014: Honda's FY 2013/14 net profit jumps 56.4% on higher sales in Japan, North America; Fit output to rise 20%).

In Japan, sales were bolstered by back orders from a buying rush that preceded the sales tax hike on 1 April, while model changes boosted sales in China, India, and Indonesia. These offset Honda's flagging sales in Thailand due to prolonged political turmoil and a sales drop in the United States, where its average sales incentive per vehicle has been on the rise. The automaker has been boosting sales in emerging markets to help reduce its reliance on North America, which accounts for almost half of its revenue. Honda has introduced vehicles tailored for China, India, and Indonesia since last year, and the results have started to show. Honda's US sales fell 1% in the first six months of 2014, dragged down by the Accord sedan and Acura models including the ILX and TSX. Honda's average US incentive per vehicle during April-June was USD1,941, according to TrueCar, up 11% y/y and slightly higher than Toyota's average, although below Nissan's. "We want to hit our annual [US sales] target of 1.55 million vehicles, and we are doing our best to do so," said Honda's executive vice-president Tetsuo Iwamura, who heads the company's US operations, even as he seeks to keep incentive levels low for key models such as the Accord and the Civic. Honda's lacklustre US sales during the first quarter of the FY were also caused by the delay to the launch of the new Acura TLX sedan. Honda's sales rose 40% y/y in April-June to about 40,000 units in India, helped by diesel versions of its City and Amaze cars. The automaker is counting on the seven-seater Mobilio multi-purpose vehicle (MPV) introduced this month to further boost deliveries (see India: 24 July 2014: Honda enters Indian MPV market with Mobilio, targets higher sales contribution and component sourcing from India). In Indonesia, sales surged 68% y/y to more than 82,000 vehicles in the first half of 2014, with more than half of the volumes contributed by the Mobilio, which qualifies for the government's new low-cost green car subsidy programme.

New factories in Southeast Asia, Japan, and Mexico augur well for Honda as it looks to expand in emerging markets as part of its mid-term strategy, which envisages half of its global sales by FY 2016/17 coming from these markets. That said, Honda would ideally want to push back the start of a new USD430-million Brazilian plant, according to Iwamura. In China, Honda's sales grew 11.7% y/y during January-June as a consumer backlash over a territorial dispute between Japan and China eased. However, owing to an inventory pile-up, Honda has curtailed operations at its Wuhan (China) plant to one shift per day from two, according to Iwamura. Honda expects to sell 900,000 vehicles this year and double its annual sales in China to 1.3 million units in the three years through to 2015. The company also plans to halt output at one of the two production lines at its Swindon plant in the United Kingdom from later this year as it forecasts no or very little growth in Europe over the next two to three years. During FY 2014/15, Honda faces a weak domestic market following the consumption tax hike but has so far been kept afloat by brisk Fit and minicar sales. Its prospects are positive in North America, where the automaker now has separate, dedicated sales and marketing functions for the Honda and Acura brands – a development that augurs well for the launch of the Fit-based HR-V B-segment sport utility vehicle and the 2015 Acura TLX scheduled for later this year (see United States: 11 March 2014: Honda Motor Company creates separate Honda and Acura divisions for North America). Its prospects also look bright in China, where sales have regained momentum following the waning of the anti-Japanese sentiment that erupted following the Sino-Japanese political stand-off in 2012. Honda's new net profit estimate for FY 2014/15 is on a par with its current record of JPY600.03 billion set in FY 2007/08.