SEOUL (Reuters) – Hyundai Motor Co's (005380.KSNet income for the third quarter fell a staggering two-thirds, as a result of a one-time charge of $ 440 million attributable to US callbacks, with equities nearly down to nine-year lows on Thursday.
FILE PHOTO: A worker repairs the Hyundai logo on a vehicle in a Hyundai Motor factory in Asan, south of Seoul, February 9, 2012. REUTERS / Lee Jae-Won / File Photo
The unexpected costs associated with the recall of Hyundai engines were due to US pressure to respond to vehicle fire reports.
The recall headache adds to a plethora of problems at Hyundai that relied on new SUVs to recover after five consecutive years of annual profit losses due to weak sales in key US and Chinese markets.
Quarterly net income decreased to $ 269 billion ($ 236 million), the lowest level in over seven years, and well below a SmartEstimate of $ 831 billion, according to Refinitiv data. SmartEstimates gives more weight to recent estimates from analysts who are more consistent.
Operating income decreased 76 percent, while revenue increased 1 percent to 24.4 trillion won.
The automaker's shares dropped 6 percent, the lowest level since March 2010. Once they fell 12.4 percent, the lowest since January 2010. The shares of the subsidiary Kia Motors (000270.KS), which announces its result on Friday, fell by 5.9 percent.
A US consumer representative group this month called for an extension of the recall for engines announced last year by the South Korean duo and called for a rise in fire complaints.
A US Senate committee asked Hyundai and Kia officials to testify at a hearing next month. A South Korean whistleblower in 2016 reported engine failure concerns to the US Safety Regulatory Authority, which then reviewed the timeliness of the recalls and whether they covered enough vehicles.
"Transportation authorities in the US and other countries are dealing with quality issues more rigorously and in more detail than in the past," said Lee Hyang, head of the Global Quality Strategy Division, during a conference call with analysts.
"We continue to undertake enterprise-wide efforts to minimize further quality issues in the future," he added.
The one-time fee also covers the expenses for new engine detection technologies used in upcoming and existing models.
"The one-time cost was too big, and the question is whether the cost will be unique or if there will be more," said Jung Yong-jin, an auto analyst with Shinhan Investment & Securities, adding that he did not anticipate a significant earnings recovery.
Hyundai also said that the sharp decline in emerging market currencies such as Turkey and Russia weighed on the bottom line.
Hyundai said the escalation of the trade wars and the slowdown in growth in China and the United States are clouding the industry's outlook, but predicted that profit will recover in the fourth quarter, helped by new SUVs. It was not specified.
Hyundai had put on its new Santa Fe SUV to turn around the dizzy fortunes in the United States, where the SUV boom was missed due to its heavy reliance on sedans.
However, retail sales in the US only increased by 1 percent in the third quarter. Revenues in China fell 6 percent, despite an agreement between Seoul and Beijing last year to normalize relations, leading to a diplomatic dispute that had affected sales of South Korean goods.
The automaker said sales of Santa Fe should gradually increase.
"The first reaction to the Santa Fe is positive," said Koo Zayong, Head of Investor Relations. He added that the model would increase capacity utilization at its US factory to over 90 percent in the fourth quarter, compared to 86 percent in the second quarter.
Hyundai also supports a decision by the United States as to whether tariffs will affect imports of vehicles and vehicle parts.
South Korea has argued that it should be exempted as it has already made concessions in the automotive sector after a bilateral agreement was revised last month.
(1 $ = 1,139,0000 won)
Reporting by Hyunjoo Jin; Additional coverage by Choi Hayoung and Yoo Choonsik; Letter from Miyoung Kim; Edited by Edwina Gibbs and Muralikumar Anantharaman