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Honda Profit Slumps on Restructuring Charges

By John Rosevear - Updated May 10, 2019 at 7:44AM

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The company expects better margins in the year ahead as cost cuts take hold.

Honda Motor Company Ltd. (HMC 2.27%) said that its operating profit fell by two-thirds in the quarter ended March 31, 2019, to 42.3 billion yen ($385.6 million), as unfavorable exchange-rate swings and the costs of a European restructuring more than offset gains from cost reductions and increased auto sales.

For the full fiscal year ended March 31, Honda's operating profit was 726.3 billion yen ($6.62 billion), down 12.9% from a year ago. 

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 March 31, 2019 was the fourth quarter of Honda's 2019 fiscal year. 

Honda reports its financial results in yen: As of May 8, $1 equaled about 110 yen. 

Metric Q4 FY2019 Change vs. Q4 FY2018 FY2019 Change vs. FY2018
Revenue 4.049 trillion yen 3.4% 15.889 trillion yen 3.4%
Automobiles sold 1,364,000 5.2% 5,323,000 2.4%
Operating profit 42.3 billion yen (66.6%) 726.3 billion yen (12.9%)
Operating profit margin 1% (2.2 ppts) 4.6% (0.8 ppts)
Net profit (loss) (13 billion yen) 120.7 billion yen decline 610.3 billion yen (42.4%)
Yen per U.S. dollar, average during period 110 2 more yen per dollar 111 0

Data source: Honda Motor Company, Ltd. Automobile sales are rounded to the nearest thousand. Ppts = percentage points.

A silver 2019 Honda Passport, a midsize crossover SUV.

Strong demand for Honda's new-for-2019 Passport SUV gave sales a boost in the quarter. Honda expects the Passport to continue to boost its sales in the upcoming fiscal year. Image source: Honda Motor Co., Ltd.

How Honda's business lines performed during the quarter

Honda reports results for four business units: automobiles, motorcycles, "power products" (including tractors, generators, and lawn equipment, as well as Honda's aircraft business), and financial services.

Results in this section are presented on an operating basis. 

  • Automobiles: Honda's automotive unit lost 53 billion yen ($483 million) in the quarter, down from a profit of 26.7 billion yen in the year-ago period. Profit gains from a 5.2% increase in vehicles sold were more than offset by unfavorable exchange-rate movements and a charge of 68 billion yen related to Honda's European restructuring. Honda said in February that it will close factories in the U.K. and Turkey in 2021. 
  • Motorcycles: Honda's motorcycle unit earned 44.9 billion yen ($409 million) in operating  profit in the quarter, down 18.1% from a year ago. Global sales fell 4% to just under 4.6 million units; unfavorable currency effects also hurt. The unit's operating margin fell to 9.2% in the quarter from 10.5% in the year-ago period. 
  • Power products: This unit lost 8.7 billion yen ($79.3 million) on an operating basis, versus a loss of 3 billion yen in the year-ago period. Revenue fell 3.5%, to 103 billion yen, on lower sales volumes and a less-favorable product mix. Honda said that its operating loss from aircraft and aircraft engines improved to 10.9 billion yen from 11.5 billion yen in the year-ago period.
  • Financial services: Honda's captive-financing unit earned 59.1 billion yen ($539 million), up 22.7% from a year ago. The story is simple and good: The unit's portfolio is growing and profitability is improving. Revenue rose 17.3%, to 622.5 billion yen, and the unit's operating margin rose to 9.5% from 9.1% in the year-ago quarter. 

What Honda's CEO said

CEO Takahiro Hachigo said that Honda will continue with its effort to make the most of its manufacturing capacity. That may mean more plant closings in some parts of the world.

But in North America, Honda is taking a different approach. According to Hachigo:

For our business in North America, while keeping pace with sales expansion, we enhanced our model lineup and established a flexible production system where our plants sometimes produce various models in duplication to accommodate changes in market demand. However, as a result of the pursuit of high flexibility, an increase in the investment amount and a decline in production efficiency started to become an issue.

Hachigo said that Honda will discontinue some models and trim versions to streamline manufacturing and reduce costs while it begins moving its vehicles to a new shared, modular architecture. 

Looking ahead: Honda's guidance for fiscal 2020

Honda's forecast for the upcoming fiscal year calls for a small increase in motorcycle sales, a somewhat larger (3.1%) decline in global auto sales -- and a boost in profitability driven by ongoing cost-reduction efforts. Specifically, Honda expects:

  • Revenue of about 15.7 trillion yen ($143.1 billion), down 1.2% from fiscal 2019
  • Operating profit of about 770 billion yen ($7.02 billion), up 6% from fiscal 2019
  • Operating margin of 4.9%, up 0.3 percentage points from fiscal 2019
  • Net income of 665 billion yen ($6.06 billion), up 9% from fiscal 2019
  • An exchange rate of 110 yen to the dollar, on average, down from 111 yen per dollar in fiscal 2019

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