Honda Motor Co Ltd Q2 FY2022 Earnings Call

Thank you very much for taking the time to view our program today. Now we'd like to start Honda Motor Co., Ltd.'s Fiscal Year 2022 Second Quarter Financial Results presentation meeting. I am - my name is Okamoto from Corporate Communications, facilitator for today. Allow me to introduce today's presenters. We have Director, Executive Vice President and Representative Executive Officer, Mr. Seiji Kuraishi.

Good to see you. I would like to begin by expressing my profound gratitude to the support given to us by our loyal customers, supporters and all other stakeholders around the world. Currently, there are customers who are awaiting Honda products. We sincerely apologize for the vehicle production delay and the inconvenience caused. The drop in production is attributable to a combination of supply shortage of certain parts, including semiconductors, and lockdowns, mainly in Southeast Asia, due to the resurgence of COVID-19, which was greater than our previous forecast. As a result, FY 2022 Q2 Automobile Group unit sales were 917,000 units. Honda is developing alternative equivalent parts and taking other measures to promote dual sourcing of components. We will recover production from the beginning of next year, but given the prolonged lockdown in Asia, amongst others, FY 2022 Automobile Group unit sales forecast is revised downward from 4.85 million units to 4.2 million units. With the cooperation from various stakeholders, we will strive to keep the impact on production to a minimum and we will work to deliver our products to our customers as early as possible. Now move on to present the outline of FY 2022 second quarter financial results and fiscal year 2022 financial forecasts. FY22 six months unit sales were: Motorcycles 8,173,000 units; Automobiles 1,915,000 units; Life Creation business, 3,230,000 units. Next, the main markets. Japan's six month industry demand exceeded the same period last year but the three-month sales were hard hit by semiconductor supply shortages and were below the same period last year. Despite the strong sales of Vezel, Honda's three-month unit sales were down from the same period last year. The N-BOX Series had number one sales in the mini-car segment for the first half of FY 2022. Forecast for FY 2022: industry demand is expected to be strong despite semiconductor shortage. Honda has revised the previous forecast given the current production situation. Next is the United States. Industry demand recovered due to stimulus packages and others. Fiscal six months' total was above the same period of the previous year. Second quarter three months were lower due to semiconductor supply shortages. Honda outperformed the market growth with light trucks as the main driver. Passport updated its single month sales record. It set an all-time monthly sales record in September. In June, we announced the name of the first Honda brand volume EV SUV in North America, and the name is Prologue. FY 2022 industry demand forecast: despite semiconductor supply shortages, demand is expected to continue to be strong. Honda has revised the previous forecast reflecting the current production situation. Next, China. Industry demand recovered primarily due to economic stimulus measures. But semiconductor shortages resulted in demand lower than the same period last year. Honda also saw strong sales of XR-V, among others. But the Q2 three-month sales underperformed the same period last fiscal year. The calendar year 2021 industry demand forecast is expected to stay strong, exceeding last calendar year and will increase its EV lineup and offer attractive products. In October, we announced our electrification strategy in China. Our first Honda brand China EV car, the e:N series, was unveiled. Honda's omnidirectional advanced driver assistance system Honda SENSING 360 will be deployed in China in 2022. Moving on to our Motorcycle business. Industry demand in many countries recovered and exceeded the same period last year. Honda's Q2 six months' total exceeded the previous year. But regarding the second quarter three months total, wholesales dropped from the same period last year in Vietnam and Thailand due to the resurgence of COVID-19. FY 2022 forecast: industry demand, though there is still a concern over a COVID-19 resurgence, is expected to increase steadily. Honda revised upward its forecast primarily based on the current sales in India and Indonesia. The outline of FY 2022 three months results. Despite the impact of semiconductor supply shortages and increases in raw material costs, due to positive effects of unit sales increase, cost reduction, and currency, operating profit increased from JPY 272.9 billion to JPY 442.1 billion. Also, earnings per share attributable to owners of the parent due to the increase in share of profit from investments accounted for using the equity method increased from JPY 229.1 billion to JPY 289.2 billion. Unit sales and the income statement are as shown. And next, our FY 2022 financial forecast. The COVID-19 resurgence and shortages of certain parts including semiconductors and the rise in raw material prices are expected to continue. Though we anticipate a harsh external environment, a reduction in SG&A, cost reduction, and other profit enhancement efforts are expected to result in maintaining operating profit at JPY 660 billion, equivalent to last fiscal year. Unit sales and income statement are as shown. Next about dividends, FY 2022 interim dividend is JPY 55 per share, and the annual dividend outlook remains unchanged. Honda will strive to continue to realize stable shareholder returns aiming towards a payout ratio of around 30%.

Now we'd like to have Mr. Takeuchi, our Director and Senior Managing Executive Officer, to provide details for our quarter financial results and forecasts.

Okay, allow me to explain. Looking at the results of the second quarter for the three months, unit sales of the Honda Group showed declines in Vietnam and Thailand in Motorcycle operations, declines in China and the US in Automobile operations, and an increase in the US and other markets in Life Creation operations. Turning our eye to the earnings. Sales revenues due to lower sales in Automobile operations declined from the second quarter last year to JPY 3,404.3 billion. Operating profit was, due to reduced profit from lower sales revenues and model mix, JPY 198.9 billion. Our equity and earnings of affiliates were due to reduced profit in China, it was JPY 51.3 billion. Next, I would like to explain the different factors affecting profit. Pretax profit for the second quarter was JPY 249 billion, which was down by JPY 96.6 billion compared to the same period last year. Operating profit was, even though there was an increase due to currency effects, due to decreased sales revenue and model mix leading to lower profit, it was JPY 198.9 billion, down by JPY 83.9 billion versus the same period last year. Next, going to our financial results by business segment. Operating profit for Motorcycle operations was, due to reduced profit due to volume fluctuation and model mix, it was JPY 67.4 billion. Next, going to operating profit from Automobile operations and operating profit related to Automobile sales included in financial services operations is expected at JPY 127.7 billion, added together. Operating profit from Automobile operations was, due to volume decrease and lower margin from model mix, it was JPY 46.4 billion. Operating profit from finance services operations was due to the difference in the amount posted as provision for credit losses JPY 84.5 billion. Next, looking at the operating profit for Life Creation operations and other operations, it was JPY 500 million. Of this amount, the operating loss from aircraft and aircraft engines was at JPY 7.2 billion. Next, the earnings for the first half of the fiscal year are as shown on the slide. To explain the factors affecting the profit, pretax profit was JPY 560.3 billion, which is up JPY 288.1 billion versus the same period last year. Operating profit was, due to sales change and model mix impact, increased as well as currency effect JPY 442.1 billion, which was JPY 272.9 billion, up from the same period last year. Next, the free cash flow for the non-financial services operations for the first half of the fiscal year was minus JPY 18.7 billion, and the balance of cash and cash equivalents at the end of the second quarter was JPY 2,310.6 billion. Now I'd like to explain the full year forecast for the consolidated performance for 2022. First, the sales volume, the unit sales of the Honda Group forecast for Motorcycle operations is 17.5 million units, which is up 100,000 units compared to the previous forecast. In Automobile operations, considering the impact from the shortages in part supply including semiconductors, our estimate is for 4.2 million units, down 650,000 units. In Life Creation operations, our prospects are for sales of 6.1 million units. The financial forecast for fiscal year 2022 on a consolidated basis is shown here. To explain the factors affecting the forecast, pretax profit is expected at JPY 860 billion, down JPY 54 billion compared to last fiscal year. For operating profit, there have been a positive effect from currency effects, sales revenues, and model mix but this was offset by surging raw material prices and differences from the amount posted as provision for credit losses, and other SGA expenses increase so that the operating profit is expected to be flat as last fiscal year. Equity earnings of affiliates were, because in the previous fiscal year, we had posted a temporary one-off impact of JPY 56.8 billion due to a restructuring of three affiliates. It is expected to be lower by JPY 72.7 billion. Comparing our new forecasts to our earlier forecasts in August, pretax profit is expected to be low by JPY 140 billion. In operating profit though, SGA of reduction in currency effect generated positive impact. This will be offset by reduction in earnings due to sales revenue decline and model mix. Now the forecast is for JPY 660 billion, down 120 billion compared to the previous forecast. Lastly, our prospects for capital expenditure, depreciation, and R&D expenses are as shown on the slide. This concludes my presentation. Thank you very much.

Thank you for your attention. We will now move on to the question and answer session. For the media, please use the Zoom link provided to submit your questions. The first question is from the Nihon Keizai Shimbun newspaper, Mr. Abhay?

This is Abhay from Nikkei. First, about the Group sales unit and revision that you made. Well this new number 4.2 million, what is the accuracy? The outlook of semiconductor shortage and the prospect of being able to secure the semiconductors, what measures are you taking to enhance the prospect? And also from April-September, the world production, how much reduction in production did you see compared to the original plan? The second question, well, currently there is the shortage of semiconductors but the profit has been undermined. Be it the automobile reform or investment in EV vehicles, does this not have any negative impact on your future plans? So can you elaborate on your views as to how the current shortage will impact future plans?

First, let me talk about the impact of semiconductor shortage. Last time some of the suppliers experienced a fire and there was a shortage of supply as well as the low temperature in the United States and lockdown in Southeast Asia. Therefore we believed that it was a one-time impact. We decided to reduce our prospect to 4.8 million from the 5 million originally anticipated. But we now see that the supply shortage is even more serious and will last longer, along with the lockdown. So it has been reduced to 4.2 million. But we were anticipating that we would see a recovery in supply from the third quarter. However, regrettably because of the long duration of the lockdown in Southeast Asia, we were unable to do so. We are planning to make a recovery from the beginning of next year. However, we believe that it will be difficult to achieve the recovery by the end of this fiscal year. As for the prospect of being able to secure the necessary semiconductors, we are trying to look into this now. As for the future prospects, due to the shortage of semiconductors, we don't know what the challenges will be in the future. We are starting to see improvements now, and we are also working to ensure dual sourcing to gain resilience against these incidents and improve the supply chain. So we are currently preparing for the next fiscal year. In addition to the recovery in production in the next fiscal year, our model cycle will be well-timed, and therefore we will do our very best to meet the demands. As for the April-September production, I'll explain about that later. Whether the current drop in production will have an impact on future strategies? From next fiscal year, we believe that the semiconductor supply will improve. This fiscal year, this negative operating profit will not have a direct impact on automobile reform and EV? No, we do not think so.

Thank you very much for the global production update. Our Corporate Communications team will provide further details later. The next question is from Mr. Katagiri with the Yomiuri newspaper. Please go ahead.

This is Katagiri from Yomiuri newspaper. I hope you can hear me?

Yes.

Okay, thank you. The impact from reduced production on Japan and China, it's okay. But it was lower than expected but in the States, there was good demand. But probably other than the models, was there any reason for the better demand in the US? And then if you could share with me the regional differences about the demand going forward for the rest of the fiscal year? For November, the demand is still very low but I just wonder how the demand is for the rest of the world? My second question is prospects for the future. But the raw materials prices, and then the risk for China, what do you - how do you view the risks in China? Okay, thank you.

Okay, I'm repeating myself, but with the COVID-19 impact, now the harbor traffic congestion, the lockdown in Asia is impacting the ports; there are various factors impacting the supply chain, that is the current situation. Particularly the lockdown in Asia is having a prolonged impact compared to our initial estimate. But we would like to continue to minimize the impact we suffer. As for stock, our inventory allocation, we are reviewing our allocation and production stock situation on a weekly basis. We are trying to monitor the supply, particularly semiconductors, and if there's any shortage, we will adjust production globally. We need to monitor the balance across different regions. The semiconductor demand varies; there are many different types. As a result, our stance is that we will continue to monitor the sales situation on a weekly basis and continue our timely allocation.

Thank you, the next question. Asahi Shimbun, Mr. Kameyama, please.

Asahi Shimbun newspaper, Mr. Kameyama, can you hear me?

Yes.

Two questions. First, you said the group unit sales have been reduced from 4.85 million to 4.2 million. I think that we are already seeing delivery delays now. But as a result of this reduction, what impact will it have on sales? And also, how long do you think the current situation will continue? That's the first question. The second question, while production is declining, but in the United States, they are seeing a drop in sales incentives and this is positive for your performance. So how much incentives have been reduced? And what impact has it had on your corporate performance, please?

Well first I will respond to the unit sales. The semiconductor supply delay has resulted in our customers waiting for the delivery of our products. We apologize for the delay. But currently, based on the plan that we have for the unit sales, we are in communication to ensure the delivery date. We don't think that we will see any further delays, but the COVID-19 impact requires us to remain vigilant. Observing the situation, we will work to deliver cars to customers as early as possible. As for semiconductors, we believe that from the fourth quarter, we will start to see a recovery, and enter recovery production phase.

Allow me to explain about the incentives in the United States and what impact it has on our performance, especially the incentives. Due to the large volume and the amount of money spent, this is the biggest part in the United States. As you know, because of the delay in component supply, production is down and dealer inventories are very low. Because of this, dealers have had to significantly reduce incentives, and this decline in unit sales has turned out to be positive in North America. Last fiscal year, there was about a JPY 200,000 incentive per vehicle, but this fiscal year it will be slightly above half of that. While the incentive includes non-incentives and cannot offset the drop in unit sales, it is still a positive for us.

Thank you very much. The next question will be from Nikon Automotive, Mr. Misitory, please.

Good afternoon. This is Misitory from a daily automobile newspaper. I have two questions. My first question is about the surge in raw material prices. At the beginning of the term, you were expecting an impact of JPY 250 billion throughout the year. With the change in your forecast, has there been any impact? I mean, the rising prices need to be considered. Have you thought about repricing the final product? My second question is regarding the RCEP starting in January. What are your expectations for that? I understand that vehicles and parts are localized in your case, but I would like to know your outlook. Thank you.

Let me address the issue of raw material prices. As mentioned, at the start of this fiscal year, we projected a surge in higher prices totaling between JPY 250 billion and JPY 260 billion for the full year. This projection reflects increases in metals, including precious metals used in catalysts. Prices have risen significantly, leading to this estimate. While the unit price for precious metals has seen some government intervention and is decreasing slightly from its peak, aluminum and steel prices are expected to remain elevated. We continue to expect an impact of JPY 260 billion. However, we can't directly pass all these cost increases onto our vehicle prices. We will keep an eye on competitor actions and may implement price increases if they align with customer expectations. Regarding RCEP, we are making good progress with localization in order to cater to local demand. Therefore, we do not anticipate a major negative impact, but we will remain vigilant and take appropriate actions as needed.

Thank you very much. Next, Automotive News. Hans, please.

Thank you. I have two questions. One is about the foreign exchange rate. It's been a real tailwind for a lot of Japanese automakers lately. I think you're keeping it steady for the rest of the fiscal year. Do you expect this exchange rate to improve your full year results in the end? The second question is about your provisions for the shift to electric vehicles. When will we start to see some kind of investment or outlays or announcements from Honda about your investments in batteries or new electric vehicle lines or factories? Other Japanese automakers have provided competitive electric vehicle investment plans, but Honda has not made any such ambitious announcements yet. When can we expect to see or anticipate announcements or provisions from Honda?

Regarding the transition to EV, we want to partner with the best local companies, such as GM in the US and CATL in China. We are making necessary investments for other regions as well. We have to examine the local conditions and consider various possibilities, including alliances. Recently, we announced our EV strategy and aimed for operations that create an environmentally friendly factory. As for details, I cannot disclose them now, but we are preparing and will announce investment numbers and our plans when the time comes.

Let me address the foreign exchange rate. Yes, as Hans says, the foreign exchange rate has an impact. On one hand, we supply components in North America, and we also have to convert the North American profit to Japanese yen. The weak yen is favorable to us. If we compare the forecast from last time, it was JPY 105, and it's actually JPY 110 in the second quarter. In the third quarter after accounting, we have replaced it at JPY 110 yen against the dollar. Subsequently, we see an impact of some JPY 50 billion on our profitability revenue. We hope to see a tailwind. However, it's not as simple, as we need to consider other currencies in addition to the US dollar.

Earlier, you mentioned the semiconductor shortage. I would like to ask a more detailed question about your future actions regarding semiconductor shortages. You mentioned that many different types are used in the production. I believe some legacy types and advanced semiconductors are used in automotive production. Legacy semiconductor production is not prioritized, so it may become a bottleneck once shortages are resolved. Do you agree? Additionally, are you considering integration into newer technology semiconductors in production, with a focus on 28 nanometer or 22 nanometer technologies over the next few years?

Regarding short-term semiconductor supply, it is true that we need to consider how much inventory we want to hold. We should also review contracts and purchase agreements and strengthen our relationships with semiconductor manufacturers. We are addressing the supply chain challenges by collaborating with Tier 1 companies. We are currently testing off-the-shelf semiconductors as well. We believe that addressing semiconductor shortages will require a multi-faceted approach, and we will continue to think through various strategies to secure a stable semiconductor supply in the long term.

As for our view on resource prices, it is true that precious metals experienced price surges at the beginning of the fiscal year, due to speculation. Depending on the market, there are some metals where structural demand could remain high. Consequently, we anticipate that prices may persist at higher levels. To mitigate this, we will consider alternative materials for specific car parts or review our specifications to reduce usage. We might also engage in long-term purchasing contracts when necessary. We expect prices to trend upward.

I have a follow-up question regarding raw material prices. Crude oil prices are extremely high now. For steel and aluminum, you mentioned those earlier. However, I want to know how crude oil prices are affecting resin manufacturers. How much impact is it currently having? And if this continues, what impact do you foresee?

As we've been saying, yes, oil is about $85 per barrel. It is extremely high. For resin and plastics, they are made from crude oil and painting materials are also made from it. Currently, the prices have not gone up, but if crude oil prices continue to soar, it will have an impact. We are currently researching alternatives to mitigate the rising raw material costs. We aim to offset this with cost reductions in other areas to deliver good products for our customers.

Thank you. The next question comes from weekly Toyo Keizai, Mr. Yokoyama, please.

This is Yokoyama from Toyo Keizai. Thank you. I have two questions as well. The first one is about the profitability, the profit margin in the Automobile business, which is 2.6% at the end of the second quarter. This seems to have improved from 1.0% for the fourth term. How do you view this? You mentioned the incentives coming down. However, I wonder if the Automobile business renovation is bearing fruit. Or could it be that the low stock levels are boosting the profitability? Moreover, my second question is about batteries. You mentioned considering a lot of investments but have not specifically mentioned potential collaborators in Japan. While I understand you can’t disclose names, could you tell us your overall approach? For large markets such as the US and China, you’ve named GM and CATL, respectively. Is there a plan for multiple sourcing in those markets too?

About the Automobile business operations profitability. As Mr. Yokoyama said, the Automobile business is a significant challenge for our company. We have been working to innovate the profitability of the Automobile business. In our production volume, we aimed to optimize the production volume in the UK and Turkey, compressing fixed costs in these markets. Amidst COVID challenges, we have achieved good results. For example, in the UK, we have halted production already, and Sayama plant will stop by the end of December. Additionally, we have made organizational changes that increased efficiency in R&D. By moving the automobile development team from R&D to Honda Motors organization, we can provide better efficiencies and better products to our customers through lower prices. We have initiated these innovation projects and are seeing good benefits, but the full effects will take several years to materialize. For now, we are seeing profitability improvements while managing stock levels and addressing incentives.

Regarding the battery strategy, we aim to produce batteries in Japan for local consumption, effectively contributing to the local economy. We do not have specific plans to share now, but for multiple sourcing strategies in the US and China, we need to monitor the evolving relationships and make decisions accordingly. There is potential for multiple sourcing.

Thank you very much. The next question will be the last question. Nikkan Kogyo Shimbun, please? Ms. Atami, can you hear us? Please check if you are unmuted? Ms. Atami can check whether you are unmuted? We apologize. She does not seem to be able to unmute. So with this, we would like to conclude today's FY22 second quarter financial results presentation. Material and what we have presented today will appear on our website. We thank you for joining us today.