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Honda Earnings Fall 40% on Recalls, Rising Incentives

By John Rosevear – Updated Apr 13, 2019 at 11:33PM

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Even Honda is feeling the pressure to discount.

Honda Motor Company Ltd. (HMC 0.39%) says that its operating profit in the quarter that ended on Dec. 31 fell 40.2% from a year ago, to 170.1 billion yen ($1.55 billion), on a shift toward less-profitable models and higher recall-related costs.

But despite the decline in quarterly profit, Honda slightly boosted its revenue and per-share earnings guidance for the full fiscal year.

A red 2018 Honda CR-V, a compact crossover SUV

Higher incentives on CR-Vs were one factor in Honda's year-over-year profit decline, company officials said. Image source: Honda Motor Company.

Honda earnings: The raw numbers

Like many Japanese companies, Honda uses a fiscal year that runs from April 1 through March 31. The quarter that ended on Dec. 31, 2018, was the third quarter of Honda's 2019 fiscal year.

Honda reports its financial results in yen; as of Dec. 31, $1 equaled about 109.6 yen.

Metric Q3 FY2019 Q3 FY2018 Change
Revenue 3.974 trillion yen 3.957 trillion yen 0.4%
Automobiles sold 1.408 million 1.344 million 4.8%
Operating profit 170.1 billion yen 284.5 billion yen (40.2%)
Operating profit margin 4.3% 7.2% 2.9 ppts
Net profit 168.2 billion yen 570.2 billion yen 70.5%
Yen per U.S. dollar, average during period 113 113 No change

Data source: Honda Motor Company. Ppts = percentage points.

How Honda's business lines performed during the quarter

Honda has four business units: automobiles, motorcycles, "power products" (including tractors, generators, and lawn equipment), and financial services.

Honda attributed its decline in operating profit to four key factors:

  • An unfavorable year-over-year shift in "model mix": While Honda's overall automobile sales were up, it sold a less profitable mix of vehicles than it did in the year-ago quarter.
  • Higher incentives: Honda boosted discounts to sell down leftover CR-V crossovers, company officials said. The company also changed its accounting method for incentives, which led to an on-paper increase in spending.
  • Higher recall-related costs: These were due in part to the ongoing global recall of airbag inflators made by now-defunct supplier Takata. Honda added nearly 1.4 million vehicles to its Takata-related recall list in late September.
  • Unfavorable exchange-rate effects: These notably included the devaluation of the Argentine peso versus the U.S. dollar.

Honda's auto sales rose 4.8% from the year-ago period, on strong gains in China and Japan and continued good results in North America. But automotive revenue fell 1.4% to 2.86 trillion yen ($26.1 billion), due to a weaker mix of products sold. The mix effects had a more drastic effect on the bottom line, as automotive operating profit fell 75.4% to 41.2 billion yen ($380 million). Honda's automotive operating margin was just 1.4% for the quarter, down from 5.8% in the year-ago period.

Global sales of Honda motorcycles rose 2.9% from a year ago, as higher sales in Vietnam, Indonesia, and Brazil more than offset a modest sales decline in North America. Operating profit rose 7.3% to 69.5 billion yen ($630 million), with a margin of 13.5% (up 0.5 percentage points from a year ago).

Revenue in Honda's power products business rose 6.3% from a year ago on a 13% increase in sales, but the unit swung to an operating loss of about 900 million yen ($8.2 million) from a profit of 1.5 billion yen a year ago, on increased expenses and unfavorable currency effects.

Honda's financial-services revenue rose 7% to 564 billion yen ($5.15 billion), on an increase in leasing contracts. Operating income rose 19% to 60.3 billion yen ($550 million), for an operating margin of 10.7%.

Looking ahead: Honda increased its full-year guidance

Honda boosted its revenue and net income forecasts for the fiscal year that will end on March 31. It now expects:

  • Revenue of 15.850 trillion yen, an increase of 50 billion yen from the prior forecast. (Fiscal 2018 result: 15.361 trillion yen.)
  • Operating profit of 790 billion yen, unchanged from the prior forecast. (Fiscal 2018 result: 833.5 billion yen.)
  • Operating margin of 5%, unchanged from the prior forecast. (Fiscal 2018 result: 5.4%.)
  • Net income of 695 billion yen, up 20 billion yen from the prior forecast. (Fiscal 2018 result: 1.059 trillion yen.)

Honda's updated forecast anticipates slightly lower motorcycle and power-product sales versus its previous guidance, but expects a modest improvement in automotive mix to drive slightly higher revenue for the full year.

Check out the latest earnings call transcripts for companies we cover.

John Rosevear has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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