Honda’s Q4 operating profit falls by 32% on recall costs, flat car sales

Honda future

Honda’s Q4

Tepid sales and a barrage of recall costs hammered profits at Honda Motor Co. in the latest quarter, forcing the carmaker to miss its main targets for full-year earnings and unit sales.

Operating profit tumbled 32 percent to 111.94 billion yen ($935.7 million) in the January-March fiscal fourth quarter, from 165.29 billion yen ($1.38 billion) a year earlier.

Net income also fell, dropping 43 percent to 97.84 billion yen ($817.9 million), from 170.51 billion yen ($1.43 billion) the year before. Revenue advanced 8.3 percent to 3.35 trillion yen ($28 billion) in the quarter, while global sales inched ahead just 0.8 percent to 1.2 million vehicles, driven by North America and mainland Asia.

Earnings were hit by the lackluster sales volume and hefty costs for recalls as well as the ramp up of the HR-V crossover at Honda’s new factory in Mexico, Executive Vice President Tetsuo Iwamura said today while announcing the results at Honda’s global headquarters. Iwamura did not break out the recall amount.

But the costs, which cover Honda’s global callback of faulty airbags, were included as quality-related costs in 49.6 billion yen ($414.6 million) of selling, general and administrative expenses.

The potentially explosive airbags have been linked to five deaths in the U.S. and one in Malaysia. Worldwide, Honda has recalled some 14.4 million vehicles equipped with suspect airbag inflators made by Japanese supplier Takata Corp., more than any other automaker. About 9.87 million of those recalls came in the United States.

Global sales were also dented last year when Honda delayed the launches of several new vehicles to double-check quality, after its redesigned Fit Hybrid small car was recalled five times in one year to fix various drivetrain and computer control glitches.

In the Japanese home market, Honda’s sales plunged 22 percent to 221,000 vehicles in the quarter, as consumers stayed home after an increase in the nationwide sales tax. Sales in Europe slid 5.9 percent to 48,000 units.

Volume in Asia rose 15 percent to 464,000 vehicles. That eclipsed the 397,000 sold in North America, which notched a 2.8 percent sales gain over the previous year. North America, long Honda’s cash cow, slid to be being Honda’s third-biggest profit engine in the fourth quarter, behind Asia and Japan.

Regional operating income declined 72 percent to 11.6 billion yen ($97 million), hurt mainly by the Takata airbag recall costs. Asia’s regional operating profit, meanwhile, surged 31 percent to 70.7 billion yen ($591 million) in the quarter.

Europe swung to a regional operating loss of 5.7 billion yen ($47.6 million) in the January-March quarter, from an operating profit of 14.9 billion yen ($124.6 million) a year earlier. For the full fiscal year ended March 31, overall operating profit slid 13 percent to 651.68 billion yen ($5.45 billion), from 750.28 billion yen ($6.27 billion) a year earlier.

Honda had predicted operating profit of 720 billion yen ($6.02 billion) as recently as January. Yearly net income declined 8.9 percent to 522.76 billion yen ($4.37 billion). That result was also lower than Honda’s earlier forecast for net income of 545 billion yen ($4.56 billion), an outlook that was twice revised downward last year as Honda’s sales sputtered and recall costs mounted. Meanwhile, worldwide revenue rose 6.8 percent to 12.65 trillion yen ($105.74 billion), on a 0.9 percent increase in global sales to 4.36 million vehicles.

Honda twice cut its sales initial forecast of 4.83 million vehicles. It lowered it to 4.62 million in October and bumped it down to 4.45 million in January.

Its final full-year tally missed that target as well. For the fiscal year, operating profit in North America fell 31 percent to 200.2 billion yen ($1.67 billion), making it the No. 2 profit center behind Asia. Regional operating profit in Asia, which includes China, India and Thailand, rose 28 percent to 277.9 billion yen ($2.32 billion).

Europe’s fiscal-year operating loss widened to 18.8 billion yen ($157.2 million), from 17.1 billion yen ($142.9 million) the year before. Of the three big Japanese carmakers reporting so far this earnings season, Honda was alone in not achieving record profits.

Mazda Motor Corp. and Mitsubishi Motors Corp., which reported last week, each notched record net and operating profits, on rising sales and foreign exchange gains.

But Mazda and Mitsubishi both expect profits to retreat in the current fiscal year ending March 31, 2016. In contrast, Honda predicts an increase sales and profits, but just barely.

Looking ahead, the carmaker expects sales to increase 6.7 percent to 4.655 million vehicles worldwide in the year to March 31, 2016. That is up from the 4.364 million it sold last fiscal year.

While delivering its earnings results, Honda announced it is switching to international financial reporting standards, or IFRS, from U.S. GAAP accounting standards. Based on GAAP, Honda forecasts operating income to increase 1.3 percent to 660 billion yen ($5.52 billion) in the current fiscal year.

Under IFRS, net is expected to advance 5.1 percent to 685 billion yen ($5.73 billion). Net income is expected to increase just 0.4 percent to 525 billion yen ($4.39 billion) under GAAP, the same level it would achieve when calculated according to IFRS.

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