Honda Motor Co Ltd Q3 FY2020 Earnings Call

Thank you very much for viewing Honda Motor Company Limited’s live broadcast of Financial Results announcement for the Second Quarter of the Fiscal Year ending in 2021. My name is Watanabe from Corporate Communication, the moderator for this announcement. First of all, I'd like to introduce the attendees attending today, we have Mr. Seiji Kuraishi, Executive Vice President, Representative Director.

Good to see you everyone.

And then we have Mr. Kohei Takeuchi, Senior Managing Director.

Good to see you everyone as well.

This financial results announcement will be impacted by COVID-19. We have no audience on site, and this is going to be an all-live broadcast. Thank you very much for your understanding and cooperation. So first of all, we would like to have Mr. Kuraishi, he’s a Vice President to explain the financial results for this term.

The COVID-19 pandemic spread around the world since the end of the fiscal year ending in March 2020. It continues to rage globally, bringing serious damages to the economy. However, in the second quarter of this fiscal year ending in 2021, economic activities have been reopened in many markets, resulting in a gradual recovery in demand. In some markets, the second wave of the pandemic has arrived, and the situation remains unpredictable. But Honda will continue to be thorough in its actions to prevent infection and proceed to supply products to the market in a timely manner. Now, I'd like to present to you the outline of the financial results for the second quarter and the full year forecast for the fiscal year ending in 2021. Starting with the unit sales of the Honda Group cumulative to the second quarter of the fiscal year, it was 6,322,000 units for motorcycles, 2,045,000 units for automobiles, and 2,453,000 units for the Life Creation business. Next, I'd like to explain the situation in each of the main markets. First, looking at the Japan market. The total market is showing a moderate recovery from the impact of COVID-19 since May. However, due to the last minute demand before the consumption tax hike in the previous year, the total demand was considerably lower than compared with the same period last year. Honda's unit sales fell below last year's numbers. Looking at the unit sales by model, the new Fit surpassed the sales in the same period last year, indicating a recovery in the second quarter. The Inbox series ranked number one in new car sales for the first half of the fiscal year ending in 2021. Our outlook for the total market demand for the fiscal year ending in 2021 remains unchanged from the previous forecast and is expected to be lower than last year. Due to the market slowdown, Honda expects to see lower sales compared to the previous year. However, in light of recent sales results, we have revised our forecast upwards from the previous forecast. In the U.S. market, the total market demand has gradually been recovering since May due to easing regulations and reopening of the feeder business. However, demand was lower than the same period last year due to a decline in the fleet market. Honda's unit sales were also lower compared to the same period last year, but we are seeing recovery at a better than market pace, mainly with the CR-V and Civic maintaining leadership in this segment with high product features. Also, at the end of September, the new TLX was launched. Total market demand for the full year ending in 2021, beginning with the second half of September, has seen COVID-19 cases increasing primarily in the Midwest, and thus the outlook remains uncertain. The forecast is for lower demand compared to the previous year. Honda expects lower year-on-year results in this uncertain market. Now looking at China. In addition to the resumption of economic activities, consumption stimulus measures were taken, so the total market has exceeded the same period last year. Honda has favorable sales of models such as the Vezel and XR-V. In the second quarter, we launched three models: the Civic hatchback, Fit, and MVX hybrid, which contributed to better than market growth. From July to September, single month sales results reached record high numbers consecutively for those three months. For the calendar year 2020, total market demand exceeded that of last year from April to September. However, since the market experienced a large decline due to COVID-19 in January to March, the impact could not be fully recovered, and thus total market demand is expected to be lower than last year. Honda, by launching new models and running factories at full capacity, aims to exceed last year's sales. We have revised our forecast upwards based on recent sales situations. Now for motorcycles, the impact of COVID-19 differs significantly from one region to another. In China and the U.S., due to increased use of motorcycles instead of public transport and heightened outdoor leisure demand, the market has almost fully recovered. However, in Asia, the largest market, the market contracted due to tightening loan screening criteria and the impacts of COVID-19 in Indonesia, Iran, and Iraq. Honda has seen strong sales in China and the U.S., and in India and Brazil. We began production in June, leading to steadily recovering sales, but we still saw sales fall below the same period last year. For the fiscal year ending in 2021, even though recovering trends continue in many markets, Indonesia is expected to see continued declines in personal spending due to tightening of loans, so the market will likely be lower than last year. Honda expects lower sales in Indonesia and other markets, but expects higher sales in India, Brazil, and the U.S. Therefore, our global forecast is for sales equivalent to the previous forecast. Now moving on to the outline of the six-month results for the fiscal year ending in 2021. The first quarter posed significant challenges due to COVID-19, but in this environment of living with COVID, we have proceeded to solidify our existing businesses and simultaneously conducted fundamental reviews across all areas of our activities to secure a robust and resilient business structure that supports future growth. As a result, we achieved better control of SG&A expenses and cost reduction through a turnaround from the first quarter, yielding an operating profit of ¥169.2 billion for the six-month period. Profit for the period under review was attributed to investment contributions based on the equity method, amounting to ¥160.0 billion. The unit sales and income statement are as shown. Moving on to the forecast for the fiscal year ending in 2021. For unit sales, we have increased our automobile forecast from the previous estimate considering favorable sales in China and other markets, and we also increased our Life Creation business forecast in light of strong sales in North America. For operating profit, incorporating a reinforced business structure in the first half, we estimate ¥420.2 billion, an upward revision of ¥220.0 million from the previous forecast. Though uncertainties persist in the market due to COVID-19, with our initiatives to cut SG&A expenses and further reduce costs, Honda aims to enhance its business characteristics. The profit before taxes, influenced by increased investment profit share from the equity method, is expected to be ¥660.0 billion. The unit sales and income statement details are indicated. Regarding the dividends, the forecast for the full fiscal year indicates an increase in dividends per share from the previous forecast from ¥44 to ¥68, with an interim dividend for the second quarter set at ¥19 per share. Now, I'd like to hand over the microphone to Mr. Takeuchi, Senior Managing Director, Chief Financial Officer, to present the details of the financial results and forecasts.

Thank you. Now, I, Takeuchi, am going to explain. Starting with the FY 2021 second quarter financial results consolidated. Honda group unit sales of motorcycles increased in Pakistan, the Philippines, and Brazil, but decreased in Indonesia and India. Unit sales of automobiles decreased in Japan and Indonesia while increases were observed in China and the United States. Moving on to the income statement. Sales revenue increased; however, the financial services business decreased. Overall, we reported ¥3,651.3 billion. Operating profit stood at ¥282.9 billion, mainly due to a reduction in SG&A expenses and cost-cutting measures, despite decreased sales revenue and changes in model mix. To explain changes in profit before income taxes, profit before tax for the second quarter in FY 2021, owing to reduced SG&A and other cost-cutting efforts, was ¥345.7 billion, which is up by ¥56 billion year-on-year. We saw operating profits of ¥282.9 billion, up by ¥628 billion. Performance by business segment indicated that operating profit for the motorcycle business was ¥68.4 billion due to cost reductions but decreased in profit due to decreased sales revenue and model mix changes, amounting to ¥168.4 billion. For financial services, we recorded ¥93.2 billion. Life Creation business and others showed fluctuations, and losses for aircraft and aircraft engines categorized in others and also in Life Creation business were ¥8.1 billion. Summarizing, the operating profit for automobiles and financial services was ¥214.6 billion. The FY 2020 six-month profit and loss statement is shown here. Profit before tax decreased by ¥307.1 billion. Operating profit due to cost reductions and SG&A expenses, offset by a decline in sales revenue, was ¥169.2 billion, down by ¥303.3 million. Transitioning to the total for the second quarter, six-months amounted to ¥57.9 billion. Cash and cash equivalents at the end of the second quarter stood at ¥2,626.5 billion, with net cash at ¥1,843.9 billion. Regarding the FY 2021 consolidated forecast, unit sales of motorcycles remain as previously forecast at ¥14.8 million, while automobiles have increased from China and Japan, with an upward revision of 100,000 units to 4.6 million units. Life Creation business shows an increase of 190,000 units to 5.5 million units. The consolidated business focus for FY 2021 showcases changes from the previous fiscal year, and the impact of unit sales decline due to changing auto sales mix and negative FX effects, yet positive benefits arose from reduced SG&A and other costs. Hence, we are planning for an operating profit of ¥420 billion. For FY 2021, we've estimated CapEx, depreciation, amortization, and R&D expenditure as presented here. That concludes my explanations to you. Thank you very much.

Thank you, and with that, we conclude the FY 2021 Q2 presentation. Now, we will receive questions from the media members. As previously announced, questions will be received through the Zoom system. We will resume at 15:40, 3:40 PM Japan time. Thank you. Now, we are moving on to the question and answer session. As announced prior to this meeting, we will receive questions through the Zoom session. If you have a question, please use the hand icon on the screen. In the interest of time, we may suggest limiting your questions to two per person. If you have a question, please use the hand icon.

Refer to pages 13 and 16 in the material. For the second quarter sales, among the factors that contributed to the sales were impacts from COVID-19. How much of an impact was there from COVID-19? And also, looking at the first half of the fiscal year, you have a negative of ¥488.2 billion? How much of that is due to COVID-19 would you say?

Thank you very much for the question. To address the first question regarding the second quarter, the factors contributing to fluctuations in sales due to COVID-19 amount to approximately ¥40 billion. This was observed in the motorcycle segment and the year-on-year comparison of this consolidated number reflects a 76,000 decline in automobile sales and 240,000 decline in motorcycles. However, it is challenging to determine whether all sales reductions stemmed solely from COVID-19. In the six-month results, the year-on-year comparison shows a total ¥500 billion decline, including 2.3 million units in motorcycles and 640,000 units in automobiles. These declines are included here. As explained, the results are consistent; there was no COVID-19 in the previous fiscal year; thus, certain factors are mixed in.

Thank you very much. So let's move on to the next question from Nikkei Newspaper. Mr. Hanada, the floor is yours.

Thank you very much. Apologies for not being able to ask properly a moment ago due to signal interference. Changes in the business environment are my broad question. The automobile businesses can change had expected, then in relation to gas running automobiles in Japan, what do you think of those expectations at Honda? And also, how do you see the potential impacts of U.S. Presidential Election on environmental regulation?

Thank you very much. So you raised two questions: the first regarding future regulations for gasoline-operated vehicles and the second regarding the U.S. Presidential Election. Recently, many nations, including the U.S., UK, and European countries are shifting from gasoline vehicles toward electrification. Currently, Honda aims to electrify two-thirds of its global automobile unit sales by 2030. Regional regulations and market penetration will vary, but we intend to emphasize characteristics that fit each region's market demands. Our President, Mr. Hachigo, is working to realize carbon neutrality by 2050, which requires us to accelerate electrification. Collaborating with other industry members and engaging in energy-related research activities is essential to attain this goal. As for the U.S. election outcome, we look forward to the formal announcement so we can adjust our approach accordingly without hindering our business activities going forward.

That's right. I'm interested in the profitability of the automobile business and how you are progressing with the alliance with GM and its resulting efficacy in the life creation business.

The profitability of the automotive business and collaboration with GM has been a significant consideration. Although details of our discussions with GM cannot be disclosed, we believe this partnership will significantly contribute towards our electrification efforts.

This is Inagaki from Asahi Newspaper. I hope you can hear me. I have two questions. You indicated that there is a recovery in China and the U.S., but how do you perceive the overall situation? Regarding the restrictions on economic activities, how do you foresee the total market for Honda results? That's my first question.

Thank you very much. Your question pertained to the recovery of total market demand in the States and China, and how Honda's results compare. The first quarter posed notable challenges for all, but we are seeing a recovery in the second quarter. While there is uncertainty regarding a second COVID-19 wave, we believe the upcoming unit sales will exceed the previous year, with a forecast of 4.6 million units. As for the U.S. market, despite cases increasing, we're closely monitoring the situation and acting quickly with dealerships. Our sales have improved month-on-month due to new promotional initiatives. Thus, we aim for better results this second half compared to the previous year.

The recovery in the U.S. market indicates purchases were delayed due to restrictions, and demand has returned. Additionally, regarding Page 13, you mentioned cost reduction and SG&A control. Can you provide details such as what measures were implemented?

Regarding the second quarter, production was halted due to lockdowns, leading to inventory shortages. However, we began seeing sales growth during the second quarter. Our initiatives in sales have also included incentives, which were reduced due to inventory constraints.

Comparatively, we have seen about ¥3 billion cost reductions in raw materials and precious metals due to market conditions, reflecting a cumulative result of our cost reduction efforts. The selling price adjustments have also contributed positively, and SG&A has benefited from reductions in business travel and credit allowances.

Thank you very much.

Moving on to the next person from NHK. Mr. Please.

Yes, from NHK. Is it audible?

Yes, we can hear you.

Thank you. Listening to your discussions and presentations, I'm curious if the recovery in the second quarter aligns with your expectations regarding China and the U.S., plus if you anticipate a net recovery of sales?

The recovery observed is indeed in line with our expectations, although we are currently responding proactively to challenges posed by rising COVID-19 cases. We expect our sales will match previously set expectations.

Yes, I am from Automotive News. Listening to Mr. Kuraishi, you mentioned your relationship with GM. What synergies in cost reductions do you anticipate and how might these costs benefit other areas?

We're currently in discussions regarding our agreement with GM, and while I can't divulge specific figures, we expect beneficial results from our collaboration that will induce cost savings. Additionally, we have no concern about maintaining our autonomy within the North American market.

My first question pertains to the domestic market. For the second quarter, how did the market perform relative to your expectations? My second question, you mentioned a reduction in R&D costs. Will there be an impact on product development?

Regarding the Japanese market, we’re observing recovery from July to September, with minivan sales rebounding. Our current forecast has also been adjusted to project 640,000 units in total market demand. However, uncertainties remain regarding future market conditions. As for R&D costs, we are aiming to adhere to our target. Despite some delays in new model developments due to COVID-19, we remain focused on future technological investments. Lastly, I must inform you that we will now conclude the event as we have exhausted our time. Press inquiries not addressed can be directed to our Corporate Communications team. Thank you for your attention and participation. You may now close this session.