Earnings Review: Appreciating Yen And Higher Tax Expenses Eat Into Honda’s Profits

Honda Motors (NYSE:HMC) announced financial results for the first quarter of fiscal year 2017 on Tuesday, August 2nd. The Japanese auto maker reported a net income decline of 11% compared to the first quarter of the previous fiscal year, despite a 5.8% increase in new vehicle sales. The company’s revenue decreased by 6.3% year over year to $ 33.8 billion on the combined impact of an appreciating yen, an appreciating dollar and production shut down at a Honda motor cycle manufacturing plant in Japan (following an earthquake). In contrast, operating profit actually increased by 120 basis points as a result of cost cutting efforts and the impact of new model launches in North America and Europe. However, increased one time tax expenditure resulted in an 11% decline in net income.

Geographic Performance

North America was the most profitable region for the company as usual, contributing close to 50% of automotive sales revenue and nearly 70% of automotive division profit, despite only a 2.6% increase in sales. Revenue increased by 7.1% on the impact of Honda Pilot, Ridgeline and Civic full model changes, but operating profit increased by a massive 57.7% as cost cutting efforts and the appreciation of the U.S. dollar against the currencies of countries where Honda’s manufacturing is based resulted in higher profitability. Going forward, two things from Honda’s North America performance in the quarter were of note: 1) Light trucks only contributed 47% of overall Honda sales, compared to 48% last year; and, 2) However, Honda’s mid size pick-up Ridgeline went on sale in the month of June and sold 2,472 unis compared to just 7 in the previous year. Increasing presence in this category can help boost sales for the company going forward.

Honda’s international operations reported a 7% increase in operating profit on the back of a 2.8% increase in revenue. This was largely the result of a near 30% increase in sales in Europe and a 12% increase in sales in Asia driven mostly by high SUV sales in China. These gains were cancelled out by the appreciating value of the Japanese yen, however, as even a 12% increase in revenue on flat sales resulted in an 170% decline in operating profit.

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