Global Insight Perspective | |
Significance | Honda has announced its fifth consecutive year of record profits after booking a net profit of ¥597 billion in the financial year ending 31 March 2006, representing a 22.8% increase on the 2004/05 figure. |
Implications | Honda's strong performance in the last financial year was underpinned by strong U.S. sales, the weaker yen and by increased investment in model development as the new Honda Civic entered the market. |
Outlook | Honda appears in rude health as it looks to consolidate on its position as one of the world's most respected automakers in terms of its reputation for quality and innovation. The eighth-generation Civic, which was launched at the end of last year, is a key model for the company, and early sales have been encouraging. |
Honda Books Fifth Consecutive Record Net Profit
Honda has matched the recent results by fellow Japanese carmaker Nissan by posting a record net profit figure of ¥597 billion (US$5.2 billion) for the 2005/06 financial year (FY). It is the fifth consecutive year that Honda has posted record profits and represents a 22.8% increase on the 2004/05 figure. Honda's operating profit also hit a new high of ¥868.9 billion, which was a 38% improvement over the previous year's figure. The company's sales also climbed 14.5% to ¥9.9 trillion as a result of a strong performance in the U.S. market and a weakening of the yen against the U.S. dollar. The company's pre-tax profit also posted a record high of ¥814.6 billion, an increase on the FY 2004/05 figure of 24%. As well as a strong sales performance, the company's bottom-line figures were also aided by the one-off contribution of ¥138 billion from the handing over to the government of pension assets it previously managed on behalf of the state.
Poor Domestic Sales the Only Cause for Concern
These positive financial figures for FY 2005/06 were backed by strong sales, with the company's combined global volumes up 4.6% to 3.39 million units. However, despite an overall increase in sales volumes, Honda actually lost ground in its stagnant domestic market, where its sales actually fell by 2.2%. However, this was counteracted by a 6.8% rise in U.S. sales to 1.68 million units, while European sales rose by an even more impressive 9%. Speaking at the press conference to announce the results, Honda Chief Operating Officer Satoshi Aoki said, 'We achieved record-breaking profits as global vehicle sales surged. A weak yen and special pension gains also helped.'
Outlook and Implications
Honda's strong FY 2005/06 results show that the company, in common with Japan's other major carmakers, is in extremely good shape. Honda's productivity, cost efficiency and commitment to quality have added to the company's reputation in recent years and boosted its global sales performance and profitability. The new Civic, which was released at the end of last year, is a key model in Honda's global product mix, and the early response in the U.S. and European markets has been highly positive. Strong Civic sales underpinned a particularly strong financial performance in the fourth quarter of the financial year for Honda, when it posted net profits of ¥219.5 billion, in comparison to ¥94 billion in the same period a year earlier. However, the outlook for FY 2006/07 is slightly less optimistic as Honda is expecting the yen to strengthen against the U.S. dollar, which would render exports less profitable. The company has also made provision for increasing investment, setting aside ¥570 billion for fixed investment in the current year to March 2007, as well as ¥545 billion for research and development (R&D). Although Honda's FY 2005/06 results are impressive, they would have been less so without the benefits resulting from the weak yen and the one-off pension gain