Honda Zooms Past Earnings Forecasts, Misses Revenue

Consolidated net sales and other operating revenues fell 9.9% Y-o-Y to ¥3.26 trillion in Q2 FY17

h1Honda Motor Co. Ltd. (NYSE: HMC) announced its Q2 FY17 financial results on October 30th, 2016.

The Tokyo, Japan-based company engages in the manufacture and sale of automobiles, motorcycles, and power products. It operates through four segments: Automobile, Motorcycle, Financial Services, and Power Product and Other Businesses. The Automobile segment manufactures and sells automobiles and related accessories. The Motorcycle segment handles all-terrain vehicles, motorcycle business, and related parts. The Financial Services segment provides financial and insurance services. The Power Product and Other Businesses segment offers power products and relevant parts. The company sells its products through independent retail dealers, outlets, and authorized dealerships. Read more about Honda’s financial results below.

Q2 FY17 financial highlights

During Q2 FY17, Honda’s consolidated net sales and other operating revenues fell 9.9% Y-o-Y to ¥3.26 trillion, mainly due to unfavorable foreign currency translation effects, which offset higher revenues in the financial services business as well as the automobile and motorcycle businesses.

Source: Honda
Source: Honda

During Q2 FY17, Honda’s consolidated operating profit jumped 38.4% Y-o-Y to ¥228 billion, backed by cost reduction, lower selling, general, and administrative (SG&A) expenses that include quality-related expenses, and the impact of pension accounting treatment. These factors offset the unfavorable currency effects. The yen has strengthened about 15% against the U.S. dollar so far in 2016, eroding Japanese exporters’ repatriated earnings. Honda stated that foreign exchange swings reduced operating income by ¥178 billion in H1 FY17.

Source: Honda
Source: Honda

As a result, Honda’s consolidated income in Q2 FY17 jumped 38.6% to ¥177 billion, or ¥98.26 per share, versus ¥127.7 billion, or ¥70.88 per share, in the year-ago period.

Source: Honda
Source: Honda

Segmental highlights

Automobile: Honda’s Q2 FY17 revenues in this segment fell 10.5% to ¥2.37 trillion owing to unfavorable foreign currency translation effects. Unit sales were almost in-line with the year-ago period at 890,000 vehicles. Meanwhile, operating profit amounted to ¥131.8 billion, up 94.5% Y-o-Y, on cost-reduction efforts and the impact of pension accounting treatment.

Source: Honda
Source: Honda

Motorcycle: Honda’s Q2 FY17 revenues in this segment fell 9.7% to ¥409.3 billion due to unfavorable foreign currency translation effects, which offset the 10.9% increase in consolidated unit sales to 3.04 million motorcycles. Operating income rose 21.3% to ¥59.5 billion owing to higher sales volume and model mix as well as cost-reduction efforts and the impact of pension accounting treatment.

Source: Honda
Source: Honda

Power Product and Other: Honda’s Q2 FY17 revenues in this segment fell 16.7% to ¥73.5 billion due to lower consolidated unit sales in power product business. Unit sales in the segment dropped 3.1% to 1.24 million. The segment’s operating loss was ¥1 billion, narrower than the loss of ¥3.8 billion in the year-ago quarter due to lower SG&A expenses as well as the impact of pension accounting treatment.

Source: Honda
Source: Honda

Financial Services: Honda’s Q2 FY17 revenues in this segment fell 4% to ¥446.3 billion due to unfavorable foreign currency translation effects. Also, operating income fell 27.2% to ¥37.7 billion on higher SG&A expenses.

Source: Honda
Source: Honda

Other highlights

Cash: Honda’s consolidated cash and cash equivalents amounted to ¥1.68 trillion as of September 30th, 2016, down from ¥1.76 trillion as of March 31st, 2016. In H1 FY17, cash flow from operations plunged 44.4% to ¥392.1 billion, due to a decrease in cash received from customers, including unfavorable foreign currency translation effects, despite a lower payment for parts and raw materials.

Production facility in China: Honda is witnessing a surge in demand for Vezel and XR-V sport utility vehicle models in China, the carmaker’s second-largest market, as carmakers benefited from a sales tax cut for vehicles with smaller engines. Honda increased deliveries of the Vezel and XR-V models each by more than 50%, cashing in on the opportunity. China’s government is looking at extending the levy reduction set to expire this year, potentially helping Honda rebound from unprecedented recalls of faulty Takata air bags. Demand for vehicles with smaller engines paced Honda’s 26% gain in China sales this year through September 2016. Hence, Honda has revived plans to expand production in China, and will begin work on a new plant in 2016. The plant is scheduled to begin operations in 2019.

Launch of SUV: The carmaker is introducing a larger, redesigned CR-V SUV in December 2016 with a sportier look and expanded safety features. While the CR-V was America’s most popular SUV in eight of the past nine years, new models from Ford Motor Co. (NYSE: F), General Motors Co. (NYSE: GM), and other automakers are challenging its dominance.

Recalls: Honda has spent the last couple of years recalling Takata air-bag inflators that can deploy too forcefully, rupture, and spray metal shards at vehicle occupants. As many as 17 deaths, including 11 in the U.S., have been linked to defective air-bag inflators.

Guidance for full year FY17

Source: Honda
Source: Honda

For the full year FY17, Honda expects revenues to decline 8.2% to ¥13.4 trillion, lower than the previous guidance of ¥13.75 trillion. Operating income is likely to rise 29.1% to ¥650 billion, up from the previous estimate of ¥600 billion. Net income is projected to improve 20.5% to ¥415 billion, or ¥230.26 per share, up from the previous expectation of ¥390 billion, or ¥216.39 per share. Honda also raised its global sales forecast, expecting sales to increase 1.3% to 4.98 million vehicles, up from an earlier prediction of 4.92 million.

Stock Performance

h10Honda’s stock ended the day at $27.71, slipping 2.40%, at the close on Friday, November 4th, 2016, having vacillated between an intraday high of $27.92 and a low of $27.65 during the session. The stock’s trading volume was at 690,334 for the day. The Company’s market cap was at $50.49 billion as of Friday’s close.

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