Honda Motor Company Ltd. (NYSE:HMC) 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.

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