Honda's Profit Jumps on Strong SUV Sales

It's called the HR-V in the U.S. and the Vezel in China, but no matter what you call it, sales of Honda's smallest crossover SUV were strong in both markets last quarter. Image source: Honda.

Honda said on July 31 that its quarterly net income rose 20%, as favorable exchange rates and strong SUV sales in the U.S. and China more than offset the costs of an extensive series of recalls.

Honda's net profit for the three-month period ended June 30 was 186 billion yen ($1.5 billion), up from 155.6 billion yen in the year-ago period. Analysts polled by Thomson Reuters had expected net income of 145.8 billion yen. Revenue was 3.7 trillion yen, up 15.5%.

Honda's share price rose over 3% in early trading on the New York Stock Exchange after the news was announced.

Big sales of a small SUV powered big profit gains inNorth America and Asia

The rise in value of the U.S. dollar relative to other major currencies has helped many overseas companies that do a lot of business in the U.S., and Honda is no exception. At the end of Honda's most recent quarter (June 30), one U.S. dollar bought about 123 yen. A year earlier, that same dollar bought 101 yen. For companies like Honda that earn dollars and report profits in yen, that shift has brought a happy windfall.

But Honda's earning money the old-fashioned way, too -- or, at least, the same way that most of its rivals are earning it right now: by selling a lot of very profitable trucks.

Honda isn't a player in America's huge and lucrative full-size pickup market, but it is a big seller of crossover SUVs. Honda's U.S. truck sales, which include its Honda and Acura SUVs as well as its midsize Ridgeline pickup and Odyssey minivan, rose over 9% in the second quarter. The early success of Honda's newest SUV, the small Fit-based HR-V crossover, was a big contributor to that gain.

Honda's selling a lot of SUVs in Asia, too. Strong sales of the Honda Vezel (that's the HR-V's name in other parts of the world) in China contributed to a 19% jump in Honda's overall sales in Asia during the quarter.

Generally speaking, SUVs generate more profit per sale than the car models they're based on. For Honda, rising sales of SUVs in North America and Asia translated into big profit gains in both regions that more than offset slumps in Europe and Japan. Honda booked 109 billion yen ($881.1 million) in pre-tax profit in North America, a 63.5% gain, while profit in Asia (excluding Japan) rose 38.5% to 95.5 billion yen ($772.4 million).

Despite a strong quarter, Honda is sticking with conservative guidance

Like many Japanese companies, Honda starts its fiscal year on April 1. For Honda, the quarter ended June 30 was the first quarter of fiscal 2016.

Honda has previously said that it expects a 3.1% year-over-year increase in net profit, to 525 billion yen ($4.25 billion), for the full fiscal year (which will end on March 31, 2016).

It left that guidance unchanged on Friday. Executive vice president Tetsuo Iwamura told reporters that while profits had increased more than expected in the fiscal first quarter, Honda was reluctant to raise guidance because of uncertainties around future exchange-rate moves as well as "costs related to quality issues."

Honda has struggled with a series of quality issues recently, but the biggest concern is that the automaker is is still absorbing costs related to the huge Takata airbag scandal. The automaker has already recalled tens of millions of vehicles around the world to replace faulty airbag inflators made by Japanese supplier Takata. The defective parts have been linked to eight deaths, all in Hondas.

But this past quarter's results showed that while Honda may not be known for its trucks, it's still a full participant in the SUV boom that is driving big profits for its rivals in the U.S. and China. As long as that boom continues, Honda's bottom line should continue to look strong as the year progresses.

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