Honda Cuts Profit Forecast After Recall Costs Mount

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Honda Motor Co., Japan’s third-largest carmaker, cut its profit forecast for the second time in as many quarters recall costs mount.

Net income will probably be 545 billion yen ($4.6 billion) in the fiscal year ending March, the Tokyo-based carmaker said in a statement today. That compares with the 565 billion yen the company previously forecast and the 591.2 billion yen average of 24 analysts’ estimates compiled by Bloomberg. Honda in October cut an earlier forecast.

Earnings were eroded by recalls tied to flawed Takata Corp. air bags and of the new hybrid systems in the best-selling Fit compact car and Vezel SUV. The carmaker’s worst quality issues in decades have derailed plans to introduce new models, led President Takanobu Ito to take a 20 percent cut in his monthly pay for three months and triggered the projection of its first profit drop in three years.

“These are deep-rooted problems and there are still uncertainties on what will happen next,” said Kentaro Hayashi, an analyst at Tachibana Securities Co. in Tokyo, whose target price of 3,100 yen is the lowest among analysts tracked by Bloomberg. “The foundation of Honda’s business is not as good as people might think.”

Shares of Honda declined 0.8 percent to close at 3,581 yen in Tokyo trading, before the announcement. The benchmark Topix index climbed 0.1 percent.

Honda lowered its profit projection to reflect the “decline in unit sales in Japan and China due to the difficult automobile market environment and a forecasted increase in quality-related expenses mainly in North America,” according to the statement.

Operating Profit

The automaker also cut its forecast for operating profit to 720 billion yen from an earlier prediction of 770 billion yen, while raising its sales forecast. Honda booked 50 billion yen in quality and recall-related costs in the quarter.

Honda is getting less of a boost from a weakening yen than Japanese peers Toyota Motor Corp. and Nissan Motor Co. after moving more aggressively to localize production in foreign markets. Honda cut exports from Japan to all regions of the world last year to 31,301 vehicles, down 75 percent.

By contrast, Nissan reduced exports by 13 percent to 472,638 vehicles. Toyota’s shipments from Japan declined 6.9 percent to 1.59 million passenger cars.

Fatal Crash

Honda’s net income fell 15 percent to 136.5 billion yen in the third quarter ended December, missing the 137.5 billion yen average of 13 analysts’ estimates compiled by Bloomberg.

The company is investigating a fatal crash in Houston this month related to defective airbags made by Takata, the fifth U.S. death linked to metal shards propelled by the exploding safety devices.

Honda hasn’t been able to inspect the vehicle involved in the crash to confirm that a rupture of the air bag inflator was involved, Executive Vice President Tetsuo Iwamura told reporters on Friday in Tokyo. He said the car hadn’t been repaired as required by a 2011 recall.

“We will try to facilitate the recall and improve the ratio of cars fixed,” Iwamura said.

Honda said it has reported preliminary information about the incident to the National Highway Traffic Safety Administration. The company agreed to pay a record $70 million in fines and submit to stricter oversight for failing to tell the U.S. regulator about warranty claims and more than 1,700 injuries and deaths linked to potential defects in its cars spanning 11 years.