Honda Motor Co., Ltd. (NYSE: HMC)

Honda's sales revenue for FY2025 increased by 6.2% to ¥21.69 trillion from the previous fiscal year, primarily driven by increased sales in the Motorcycle business and favorable foreign currency translation effects. Despite the top-line growth, operating profit decreased by 12.2% to ¥1.21 trillion, reflecting several key challenges faced by the company during the fiscal year.

The decline in operating profit was primarily attributable to three factors: decreased profit from sales impacts, increased research and development expenses, and a ¥127.6 billion negative impact from a change in the estimation model for automobile product warranties. This was partially offset by increased profit from favorable price and cost impacts, demonstrating the company's ability to manage pricing strategies and cost control initiatives effectively in a challenging environment.

Profit before income taxes saw a more significant decline of 19.8% to ¥1.32 trillion, which was further impacted by a substantial decrease in the share of profit from investments accounted for using the equity method in Asia. This resulted in profit for the year attributable to owners of the parent decreasing by 24.5% to ¥835.8 billion.

Basic earnings per share (EPS) decreased to ¥178.93 from ¥225.88 in the previous fiscal year, representing a 20.8% decline. The company's return on equity attributable to owners of the parent declined from 9.3% to 6.7%, reflecting the lower profitability during the fiscal year. Despite the decrease in profits, Honda maintained a solid ratio of operating profit to sales revenue at 5.6%, although this was lower than the 6.8% reported in the previous fiscal year.

The company completed a three-for-one stock split of its common stock effective October 1, 2023, which has been reflected in the calculation of per-share metrics for both the current and previous fiscal years to ensure comparability.

Motorcycle Business demonstrated strong performance in FY2025, with revenue increasing 12.6% to ¥3.63 trillion and segment profit rising 19.3% to ¥663.4 billion. This segment emerged as a bright spot for Honda, with robust demand across global markets and effective margin management. The Motorcycle Business now contributes approximately 17% of Honda's total revenue but delivers a significant 54.7% of the total segment profit, highlighting its importance to the company's overall profitability.

Automobile Business, Honda's largest segment, showed moderate revenue growth of 4.9% to ¥14.47 trillion, but experienced a substantial 56.5% decline in segment profit to ¥243.9 billion. This significant profit decrease was largely due to the ¥127.6 billion negative impact from the change in the estimation model for automobile product warranties, increased R&D expenses for future models, and challenging market conditions in certain regions. Despite representing nearly 67% of Honda's total revenue, the Automobile Business contributed only 20.1% to the company's segment profit in FY2025, down from 40.6% in the previous fiscal year.

Financial Services Business continued its steady growth trajectory with revenue increasing 8.0% to ¥3.51 trillion and segment profit rising 15.2% to ¥315.6 billion. The segment benefited from higher financing volume, improved interest spreads, and effective risk management. Financial Services now represents approximately 16% of Honda's total revenue and contributes 26.0% to total segment profit, reflecting its growing importance to Honda's overall business model.

Power Products and Other Businesses faced challenges with a 1.8% revenue decline to ¥414.6 billion and an operating loss of ¥9.4 billion, which was slightly worse than the previous year's loss. This segment continues to be a focus area for potential improvement, with ongoing efforts to streamline operations and develop new product offerings.

The divergent performance across segments underscores Honda's reliance on a diversified business model, with the strong performance in Motorcycle and Financial Services businesses helping to offset the significant profit decline in the Automobile business. This segment mix also highlights Honda's ability to navigate varying market conditions and capitalize on growth opportunities across different parts of its business.

Honda's total assets as of March 31, 2025, increased by ¥1.0 trillion to ¥30.78 trillion compared to the previous fiscal year-end. This increase was primarily driven by growth in receivables from financial services and equipment on operating leases, partially offset by negative foreign currency translation effects. Total liabilities increased by ¥1.38 trillion to ¥18.15 trillion, mainly due to increased financing liabilities to support the growth in financial services business.

Total equity decreased by ¥378.0 billion to ¥12.63 trillion, primarily due to share repurchases and dividend payments, partially offset by profit for the year. The ratio of equity attributable to owners of the parent to total assets declined from 42.6% to 40.1%, reflecting the decrease in equity and increase in total assets. Despite this decline, Honda maintains a solid equity base, providing financial stability and flexibility.

Cash flow performance showed significant changes from the previous fiscal year:

• Operating Cash Flow: ¥292.2 billion, down ¥455.1 billion from the previous year, mainly due to increased payments for parts and raw materials and equipment on operating leases, partially offset by increased cash received from customers
• Investing Cash Flow: ¥942.0 billion outflow, up ¥74.7 billion from the previous year, primarily due to increased capital expenditures and acquisitions of financial assets
• Financing Cash Flow: ¥280.5 billion inflow, down ¥638.1 billion from the previous year, mainly due to increased share repurchases and dividend payments

The company's cash and cash equivalents decreased by ¥425.8 billion to ¥4.53 trillion at the end of FY2025. Despite this decrease, Honda maintains a strong liquidity position, with cash and cash equivalents representing approximately 14.7% of total assets. This provides the company with significant financial flexibility to navigate market uncertainties and invest in strategic initiatives.

Capital expenditures increased substantially across all business segments, with total capital expenditures rising from ¥3.14 trillion to ¥4.04 trillion, reflecting Honda's continued investment in future growth. The company also increased its shareholder returns, with dividends per share of ¥68.00 for FY2025 and significant share repurchases totaling ¥722.4 billion during the fiscal year, demonstrating a commitment to returning value to shareholders despite the challenging profit environment.

Honda significantly increased its investment in research and development during FY2025, with R&D expenses rising 19.0% to ¥1.10 trillion, representing approximately 5.1% of sales revenue compared to 4.5% in the previous fiscal year. This substantial increase reflects Honda's strategic focus on:

Key R&D Focus Areas

• Electrification: Accelerating the development of next-generation electric vehicles and expanding the EV product lineup across all segments
• Autonomous Driving: Advancing autonomous driving technologies and ADAS (Advanced Driver-Assistance Systems) capabilities
• Connected Services: Enhancing the digital experience and connectivity features across Honda's product portfolio
• Motorcycle Innovation: Developing new models and technologies for the strategically important Motorcycle business
• Safety Technologies: Continued investment in advanced safety features and quality improvements

The company also implemented several strategic initiatives to enhance operational efficiency and address market challenges:

Strategic Initiatives

• Quality Improvement: Established a new "Quality Innovation Operations" organization to monitor progress of specific warranty programs and related costs across Honda
• Cost Management: Implemented comprehensive cost control measures to mitigate the impact of inflation and supply chain disruptions
• Capital Allocation: Enhanced shareholder returns through increased dividends and share repurchases, totaling ¥1.07 trillion returned to shareholders during FY2025
• Manufacturing Optimization: Continued to optimize production capacity and manufacturing efficiency globally
• Segment Diversification: Leveraged the strong performance of Motorcycle and Financial Services businesses to offset challenges in the Automobile business

As part of its product warranty strategy, Honda implemented a significant change in its estimation model for automobile product warranties. The company moved from estimating provisions individually for each specific warranty program to a comprehensive approach that estimates provisions at the time of vehicle sales, based on historical experience. This resulted in a one-time ¥127.6 billion negative impact on operating profit but is expected to provide more reliable and consistent warranty cost management going forward.

These strategic initiatives, combined with the increased R&D investments, demonstrate Honda's commitment to long-term growth and technological advancement despite near-term profitability challenges. The company is positioning itself to navigate the rapidly evolving automotive landscape and capitalize on emerging opportunities across its diverse business segments.

Honda has provided a conservative outlook for the fiscal year ending March 31, 2026, reflecting anticipated challenges in the global automotive market and specific headwinds facing the company:

• Sales revenue expected to decrease 6.4% to ¥20.30 trillion
• Operating profit projected to decline 58.8% to ¥500.0 billion
• Profit before income taxes anticipated to decrease 62.8% to ¥490.0 billion
• Profit attributable to owners of the parent forecast to fall 70.1% to ¥250.0 billion
• Basic EPS expected to decrease to ¥62.84 from ¥178.93

The significant projected decline in profitability is primarily attributed to several key factors:

• Tariff Impact: ¥450.0 billion negative impact from tariffs and related recovery efforts, representing a substantial headwind for the upcoming fiscal year
• Currency Effect: ¥452.0 billion negative impact from foreign currency fluctuations, based on an assumption of ¥135 to the U.S. dollar
• Increased R&D Expenses: ¥126.0 billion in additional R&D investments, continuing the company's focus on future technologies
• Other Expenses: ¥219.1 billion increase in other operating expenses

These negative factors are partially offset by:

• Sales Impact: ¥156.1 billion positive contribution from sales volume and mix
• Price and Cost Impact: ¥250.0 billion benefit from pricing actions and cost management initiatives
• Non-recurrence of Warranty Impact: ¥127.6 billion positive impact from the change in warranty estimation model that affected FY2025 results but will not recur in FY2026

The company plans to maintain its shareholder-friendly capital allocation policy despite the projected profit decline, with a proposed annual dividend of ¥70 per share for FY2026, representing a 2.9% increase from the ¥68 per share paid in FY2025. This translates to a projected dividend payout ratio of 111.4%, highlighting Honda's commitment to shareholder returns even during challenging periods.

Honda's outlook reflects a pragmatic assessment of the challenging market conditions and specific headwinds facing the company in the upcoming fiscal year. Management is focusing on mitigating these challenges through continued cost management, strategic pricing actions, and operational optimization while maintaining investments in future growth initiatives.