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Morningstar | Honda Finishes Fiscal 2019 With Europe Charges and Announces Ambitious Efficiency Plans

We are leaving our Honda fair value estimate in place after it reported fiscal 2019 fourth-quarter results weighed down with JPY 68.1 billion of impairment and benefits charges for closing its U.K. and Turkey plants in 2021, as previously disclosed. Management expects another JPY 10 billion of European charges in fiscal 2020. Operating income fell 67% year over year and operating margin came in at 1%, down 220 basis points. However, excluding a JPY 55.9 billion currency headwind, likely mostly from Australia and Argentina, and the Europe charge, we calculate 31% operating income growth. Cost reductions and a small tailwind from mix chipped in most of the improvement.

For fiscal 2020, management guides for 6% operating growth and a 1.6% rise in pretax income. The latter is hampered by a 3.9% expected fall in equity income that we think is for weaker profits from Chinese joint ventures due to the industry slowdown there. Tailwinds to operating income are the nonrepeat of most of the Europe charges and continued cost-cutting, while currency is expected to take JPY 50 billion from operating profit. This JPY 50 billion is an improvement from the JPY 160.3 billion headwind for full-year fiscal 2019, mostly from unnamed currencies that we think include the Argentine peso and the Australian dollar. Unlike Toyota, Honda is increasing its fiscal 2019 dividend versus fiscal 2018, although only by JPY 1 per share to JPY 111. Fiscal 2020's dividend guidance is JPY 112 per share.

Honda CEO and president Takahiro Hachigo in a speech coinciding with earnings announced plans to pare costs further via enhancing manufacturing efficiencies. He feels too many trims are available on vehicles so Honda plans to reduce the variations in vehicles to one third of current offerings by 2025. No vehicles will be eliminated, and we like the idea of more simple production for better scale.

Honda also is launching the Honda Architecture, which will be a global platform with its first vehicle launching next year. This platform targets more parts sharing and a 30% reduction in workhours for the development of mass production models. These hours will be reallocated to R&D in advanced areas, which we think means electrification, hydrogen, and autonomy. Honda seeks to electrify two thirds of its global unit sales by 2030, and Hachigo announced in his speech that the intelligent multi-mode drive hybrid system will come to the entire Honda lineup and a new i-MMD system for small vehicles will debut in the new generation Fit that will be unveiled this fall at the Tokyo Motor Show. Honda expects to reduce the cost of the i-MMD system 25% by 2022 relative to 2018 levels. Also, further efforts at capacity utilization will be made to increase global utilization excluding China to full levels by 2022, up from 90% in 2018.