HONDA MOTOR CO LTD annual report, Q4 FY2023

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Honda Motor Co., Ltd. — FY2023 Form 20-F Summary

Reporting period: Fiscal year ended March 31, 2023, compared primarily with the year ended March 31, 2022. This is an annual report, not a standalone 2022 fourth-quarter filing. Financial statements are prepared under IFRS as issued by the IASB and audited by KPMG AZSA LLC, which issued an unqualified opinion.

Financial performance and position

  • Revenue: ¥16.91 trillion, up 16.2% from ¥14.55 trillion. Honda estimated that, excluding positive currency translation effects, revenue rose approximately 1.7%.
  • Operating profit: ¥780.8 billion, down 10.4%. Operating margin was approximately 4.6%, versus 6.0% in FY2022. Honda attributed the decline mainly to sales impacts and higher expenses, including product warranty costs; positive currency effects partially offset the decline.
  • Profit: Profit before tax was ¥879.6 billion, down 17.8%; net profit was ¥717.3 billion, down 5.7%. Profit attributable to Honda shareholders was ¥651.4 billion, down 7.9%; basic EPS was ¥384.02 versus ¥411.09.
  • Cash flow: Operating cash flow was ¥2.13 trillion; investing cash outflow was ¥678.1 billion; financing cash outflow was ¥1.47 trillion. Cash and cash equivalents ended the year at ¥3.80 trillion, up ¥128.1 billion.
  • Liquidity and debt: Honda said cash represented about 2.7 months of sales revenue and that liquidity was sufficient. Financing liabilities were ¥7.67 trillion at year-end, down from ¥8.10 trillion; these include funding for the financial-services business. Honda separately reported ¥802.7 billion of liabilities for non-financial-services funding. Contractual payments for financing liabilities were ¥8.00 trillion, including ¥3.41 trillion due within one year.
  • Balance sheet: Total assets were ¥24.67 trillion, total liabilities ¥13.17 trillion, and total equity ¥11.50 trillion. Finance-services receivables were ¥5.89 trillion; equipment on operating leases was ¥4.73 trillion.
  • Investment and shareholder returns: Accrual-basis capital expenditures were ¥2.04 trillion, including lease equipment; excluding equipment on operating leases, they were ¥493.9 billion. Honda repurchased about 46.4 million shares during FY2023 and reported dividends of ¥120 per share for the year.

Material changes versus FY2022

  • Motorcycle revenue rose 33.1% to ¥2.91 trillion and segment operating profit rose 56.9% to ¥488.7 billion; consolidated unit sales increased 13.4% to 12.16 million.
  • Automobile revenue rose 15.8% to ¥10.59 trillion, but segment operating results shifted from ¥236.2 billion profit to a ¥16.6 billion loss. Consolidated unit sales declined 1.7% to 2.38 million.
  • Financial-services revenue increased 4.7% to ¥2.95 trillion, while segment operating profit fell 14.2% to ¥285.9 billion. The reported revenue increase reflected currency effects; on Honda’s prior-year exchange-rate basis, it estimated revenue decreased 10.2%.
  • Power-products and other revenue increased 13.0% to ¥451.1 billion, and segment operating results improved from a ¥9.5 billion loss to ¥22.8 billion profit. Unit sales declined 9.0% to 5.65 million.
  • Research and development expense rose 11.9% to ¥880.9 billion. The year-end product-warranty provision increased to ¥535.1 billion from ¥419.2 billion; FY2023 warranty provisions accrued were ¥289.9 billion.
  • Share of profit from equity-method investments fell to ¥117.4 billion from ¥202.5 billion, including ¥68.5 billion of impairment losses on certain investments. A ¥96.2 billion Japanese deferred-tax benefit from recognizing previously unrecognized tax assets also reduced FY2023 tax expense.

Outlook, management commentary and risks

  • Profitability target: Honda aims for operating return on sales of at least 7.0% in FY2026. This is a target, not a guarantee.
  • Electrification and investment: Honda plans roughly ¥8 trillion of R&D spending over the decade beginning FY2022, including about ¥3.5 trillion for electrification and software. It targets more than 2 million annual EV production capacity by 2030, with global automobile sales targets of 40% EVs and fuel-cell vehicles in developed markets by 2030, 80% by 2035, and 100% globally by 2040. The company also set motorcycle electrification sales targets of 1 million units by 2026 and 3.5 million by 2030.
  • Near-term plans: Estimated FY2024 capital expenditures are ¥400 billion, excluding equipment on operating leases. Honda’s North American battery joint venture aims for approximately 40 GWh annual capacity, with mass production targeted by the end of 2025. Ohio plant retooling for EV production is planned to begin operating in 2026.
  • Operating conditions: Management cited semiconductor shortages, inflation, COVID-19 effects, and geopolitical uncertainty. Automobile production and sales were affected by semiconductor constraints, particularly in North America and China. Currency translation materially boosted reported FY2023 revenue and operating results.
  • Key risks: Supply interruptions and higher input costs; foreign-exchange and economic volatility; intensifying competition and changing consumer demand; tighter environmental, emissions, safety, data-protection and human-rights requirements; cyberattacks; natural disasters; joint-venture risks; financial-services credit and lease-residual-value risk; and product defects, recalls or litigation.
  • Contingencies and controls: Honda said pending litigation was not expected to materially adversely affect consolidated results or financial position, while noting that some product-liability claims seek punitive damages. Additional airbag-inflator recall provisions may be required, but Honda said the amount and timing could not be reasonably estimated. Management and the auditor concluded internal control over financial reporting was effective as of March 31, 2023.

Most important facts for investors to verify

  • Whether automobile operations can return to profitability and deliver the FY2026 operating-margin target, given FY2023’s ¥16.6 billion segment loss and elevated warranty costs.
  • How much reported growth depended on yen translation, and whether underlying volumes, pricing and costs support continued improvement.
  • Whether semiconductor and other supply constraints ease, especially in automobile operations and China.
  • Progress, funding commitments and execution risks for EV and battery plans, including the remaining US$1.63 billion commitment to the North American battery joint venture.
  • Credit-loss assumptions and used-vehicle residual values in U.S. finance operations, as well as the adequacy of the ¥535.1 billion warranty provision and any future airbag-inflator costs.
  • Near-term financing maturities, liquidity backstops and the effect of higher financing rates on financial-services earnings and funding costs.