August 06, 2018 01:00 AM

Flooding will dent Honda's sales, earnings

"We currently estimate that the impact from the suspension at the Mexico plant will likely translate into a decline in sales of about 75,000 units." Seiji Kuraishi, Celaya factory executive vice president, on theJune flood thatdamaged the plant

TOKYO — Honda Motor Co. was largely spared from the July floods in Japan that washed out roads, killed scores of people and crippled production at rivals' auto plants.

Flooding in Mexico has been a different matter.

Honda suspended operations at its Celaya assembly complex June 28, when it was inundated with water released from a nearby dam after torrential rains filled the dam to dangerous levels.

Celaya's transmission factory has since restarted. But shipments to U.S. dealers of the Fit small car and HR-V subcompact crossover will be interrupted into November because of the flooding, Honda said. An engine parts shortage caused by the flooding of Celaya will also force Honda to suspend production of its newly introduced Insight hybrid sedan for a month as well.

The shutdowns had only a small effect on the company's fiscal first quarter, as the waters hit with just a few days left in the reporting period. Honda's sales outlook for the balance of the year, however, has been lowered, and the company expects an earnings hit.

The Celaya factory, which opened in 2014, makes the Fit and HR-V as well as engine parts for the Insight assembled at Honda's factory in Greensburg, Ind. The monthlong suspension of Insight output begins this month.

"We predict it will take about four months to get the production at the Mexico plant back to normal," Executive Vice President Seiji Kuraishi said. "We currently estimate that the impact from the suspension at the Mexico plant will likely translate into a decline in sales of about 75,000 units."

Honda now expects North American group sales to increase 2 percent to 1.94 million vehicles in the current fiscal year ending March 31, 2019. It had earlier forecast regional sales to expand 5.9 percent to 2.02 million vehicles.

Before the flood

Honda's April-June results

Net income +18%.

Operating profit +11%

Revenue + 8.4%

N.A. sales + 7.7%

Source: Honda Motor Co.

The carmaker also will book a ¥50 billion ($451.8 million) charge this year for lost sales and the cost of repairing the Celaya factory.

The looming supply crunch dimmed an otherwise bright earnings report last week from Japan's No. 3 carmaker.

Honda's global operating profit climbed 11 percent to $2.71 billion in the quarter, as robust sales in North America and aggressive cost cutting offset foreign exchange rate losses and increased r&d outlays.

Net income advanced 18 percent to $2.21 billion in the April-June period.

Revenue increased 8.4 percent to $36.32 billion, as worldwide sales expanded 3 percent to 1.3 million vehicles.

The increase in global operating profit came in part from $332.5 million in improved wholesale volume and mix; cost cutting chipped in another $165.4 million. Those gains offset the Japanese yen's appreciation against the U.S. dollar and other currencies.

Exchange rates lopped $231.3 million off the quarterly operating profit.

Boost from redesigns

Group sales in North America, one of Honda's traditional profit centers, climbed 7.7 percent to 518,000 vehicles in the quarter, while regional operating profit grew 8.6 percent to $997.2 million. In the key U.S. market, results were buoyed by the introduction in June of the redesigned Acura RDX crossover and Honda Insight hybrid sedan.

Kuraishi said Honda is playing wait-and-see on the possibility of U.S. auto import tariffs and the renegotiation of the North American Free Trade Agreement with Mexico and Canada.

Honda is better insulated than many Japanese rivals, he said, because its local procurement rate is around 70 percent in the U.S. and 90 percent for all of North America.

"We have a high local procurement rate in North America. So, the biggest impact would come from a renegotiation of the NAFTA," Kuraishi said. "We hope free trade prevails."

Honda also lowered its global sales outlook for the fiscal year, mostly because of the suspended production at the flooded Celaya plant. Global sales are now expected to expand 1.5 percent to 3.7 million vehicles. Honda originally had forecast a 4 percent increase to 3.8 million vehicles.

Yet, Honda still managed to lift its profit forecast, citing more aggressive cost controls and better-than-expected exchange rates. Honda predicts operating profit will fall 15 percent to $6.42 billion in the fiscal year. It had earlier projected a steeper decline to $6.33 billion.

Naoto Okamura contributed to this report.