Honda Motor Co Ltd Q2 FY2023 Earnings Call

Thank you very much for attending. This is Honda Motor Company FY '23 Second Quarter Financial Results Announcement Meeting. First, I'd like to introduce the executives represented Director, Executive Vice President and Representative Executive Officer, CFO, Kohei Takeuchi. This is Takeuchi speaking. Thank you.

How do you do? I am Fujimura.

First of all, I'd like to thank all of you for your support towards Honda products and activities. I'd like to thank our customers and all stakeholders. Thank you. We apologize that the delay in vehicle production is causing inconvenience to our customers who are waiting for these products. We are working hard to deliver our products as soon as possible. We hope to gain your understanding. Now to explain the financial results for the second quarter of FY '23 and give a summary of the forecast for the fiscal year. First, FY '23 results. Amidst a difficult business environment, including the semiconductor shortage, which is driving down automotive production and unit sales combined with soaring raw material prices, Honda has been making company-wide efforts to improve profitability. In addition, the increase in motorcycle unit sales and the impact of yen depreciation have resulted in increased sales revenue and operating profit for the first six months. In the second quarter, the semiconductor shortage affected production of main models, mainly in North America. However, we made worldwide production allocations, utilized substitute parts, and replaced models sold, resulting in a year-on-year increase in group unit sales of automobiles. Furthermore, sales revenue, operating profit, and profit for the period all increased year-on-year due to price increases commensurate with improved product value and the strong Motorcycle business's impact of the yen's depreciation. In the FY '23 forecast, group unit sales of automobiles have been lowered by 100,000 units to 4.1 million units, taking into account the impact of semiconductor supply shortages. Along with the decline in unit sales, we expect continued inflationary pressure on costs. However, we have revised upward our previous forecast for sales revenue, operating profit, and profit for the period, reflecting profitability improvement efforts, motorcycle unit sales increases, and the recent weak yen. Despite the challenging business environment, Honda will continue to accelerate initiatives for electrification and new growth in preparation for the future. Next, the status of our automobile business in major markets. First-half sales decreased from the same period year-on-year due to semiconductor supply shortages and others, despite the positive effect of new model launches. In the second quarter, sales in Japan and China increased year-on-year, but in the U.S., the shortage of certain semiconductors drove down production of mainstay models and inventories at dealers. Although demand is expected to be firm, we have revised downward our previous forecast for FY '23. In the second quarter, Honda announced its initiatives for electrification. In the U.S., Honda has agreed with LG Energy Solutions to establish a joint venture to produce EV batteries and to manufacture them in the State of Ohio. Honda has also decided to evolve three existing plants in Ohio as home to EV production in North America. In China, Honda has established a new joint venture with Dongfeng Motor Group and also Guangzhou Automobile Group to procure EV batteries. In addition, we signed an MOU with CATL to further strengthen our partnership, aiming to establish a long-term stable procurement system in China and further enhance our competitiveness. Honda will continue to accelerate its efforts towards electrification. Next, the Motorcycle business status: although there were some effects of semiconductor supply shortages, sales in many countries were higher than in the same period of the previous year due to the replacement of models sold and the use of substitute parts, etc. In Vietnam, we recorded record high sales for the month of September. Although sales in Pakistan, affected by flooding, as well as in China and other countries dropped, sales in India, Vietnam, and other countries were strong, leading to an upward revision of the previous forecast for consolidated FY '23 unit sales. In September, Honda announced it will launch more than 10 electric motorcycle models globally by 2025 and aims for 3.5 million unit sales by 2030 to achieve carbon neutrality. Here is an overview of the first half of FY '23: despite a decrease in automobile production and unit sales due to semiconductor shortages and rising raw material prices, operating profit increased by ¥11.2 billion, reaching ¥453.4 billion due to price increases commensurate with enhanced product value and reduced incentives, as well as increased motorcycle unit sales and currency impact. Earnings per share attributable to owners of the parent was ¥338.5 billion, mainly attributable to the share of profit from investments accounted for using the equity method of Japanese affiliates. The table shows unit sales and profit and loss. Next, consolidated FY '23 forecast: although we expect to see continued pressure on costs in addition to the impact of lower automobile unit sales, we revised upwards the forecast for operating income by ¥40 billion to ¥870 billion, reflecting further efforts to improve profitability, including higher motorcycle unit sales in India, Vietnam, as well as in other countries and currency impact. Earnings per share attributable to owners of the parent is revised upward by ¥15 billion to ¥725 billion. Exchange rate assumptions are ¥135 to the dollar for the second half and ¥135 to the dollar for the full year. Unit sales and profit/loss are shown in the table. As for dividends, the interim dividend is ¥60 per share. The annual dividend forecast remains unchanged at ¥120 per share. Honda will continue to strive for stable and sustainable dividend payments, aiming for a consolidated dividend payout ratio of 30%. Regarding the share buyback announced on August 10, as of October 31, the total number of shares repurchased was 50.33 million shares at a total cost of ¥53 billion. Fujimura, Operating Executive and Head of Accounting of Finance Supervisory Unit, will give the details.

Let me explain. Honda Group's cumulative unit sales until the second quarter FY 2023 were as follows: Motorcycle business is 9.202 million units sold mainly with incremental sales in Asian countries year-on-year, and the Automobile business is 1.785 million units due to the decline in sales in North America. The Power Products business recorded 2.935 million units due to a decline in North America. Next, let me explain factors behind the ups and downs of the profit before income tax for the first two quarters year-on-year. The profit before taxes was ¥515.8 billion, a ¥44.5 billion decline year-on-year. Operating profit was ¥453.4 billion, up by ¥11.2 billion year-on-year. Excluding factors of foreign currency impact, the profit was practically negative at ¥141.9 billion. The breakdowns are as follows: regarding the impact of sales, profit declined by ¥100.1 billion due to reduction in unit sales, changes in model mix and profit decline in financial businesses. Regarding the impact of retail prices and costs, there were impacts from soaring raw material prices and product pricing that reflect product value improvement; however, the profit increased by ¥8.2 billion. Regarding miscellaneous expenses, profit declined by ¥41.9 billion due to quality-related costs. Regarding research and development expenditures, profit declined by ¥8.2 billion. In terms of sales revenues and operating profits in each of the business categories, operating profit in the Motorcycle business was ¥224.7 billion. In the Automotive business, OP was ¥63.5 billion, and in our Financial Services businesses, it was ¥153 billion. Out of the Automobile and Financial Services businesses combined, the operating profit associated with automobile sales is estimated to be ¥211.3 billion when aggregated together. Next, operating profit of the Power Products and Other businesses was ¥12 billion, which includes operating losses of aircraft and aircraft engine businesses amounting to ¥12 billion. Next, I will explain our cash flow situations: the free cash flow of the non-Financial Services businesses was ¥153.3 billion. Net cash at the end of the second quarter was ¥2,560.9 billion. Let me talk about our forecast of consolidated business performance for FY 2023: regarding the Honda Group's unit sales in the Motorcycle business as compared to the previous forecast, the expected unit sales will be 18.43 million, mainly reflecting the flood in Pakistan and the demand decline in China, and so on. When consolidated, we expect unit sales to be 12.02 million units, up by 360,000 units, reflecting good sales performance in countries such as India and Vietnam. Unit sales expected in our Automobile business would be 4.1 million, mainly reflecting a decline in North America. For Power Products businesses, we maintained the previous forecast of 5.556 million units. Next, I'll explain factors behind our understanding of profit before income tax as compared to the results from last year. We expect the profit before tax to be ¥1,080 billion, up by ¥9.8 billion year-on-year and operating profit to be around the same level as the results of the last fiscal year. Excluding foreign currency impacts, we expect a negative profit of ¥287.2 billion, with the breakdowns as follows: for the impact of the sales, our profit will be increasing by ¥41.8 billion due to unit sales increase of motorcycles and automobiles. Regarding retail price and cost impact, profit declined by ¥110 billion due to soaring raw material prices and so on. Regarding the miscellaneous expenses area, our profit would decline by ¥152 billion due to incremental sales and quality-related costs. For research and development expenditures category, we expect the profit to drop by ¥67 billion. Comparing our new expectations to the previous forecast, the differences as well as profit before income taxes will be revised upwards by ¥40 billion, and operating profit will be revised upwards by ¥40 billion. Excluding foreign currency impact, we expect a negative profit of ¥80 billion, which breakdowns are: regarding the sales impact, down by ¥128 billion mainly due to unit sales decline in automobiles. And in the area of the retail pricing cost impact, although some cost increase is expected due to inflation impact, we will manage pricing practices to reflect enhanced product values to add profits by ¥36 billion. Regarding research and development expenditures, we expect the profit to go up by ¥16 billion. Finally, for CapEx, depreciation and amortization as well as R&D spending for FY 2023, we revised the previous expectations to reflect the currency impact. That concludes my explanation. Thank you very much.

Thank you very much. Thank you for your attention. And now I would like to proceed to Q&A.

My name is from Nikkan Jidosha Shimbun newspaper. Can you hear me? I have two questions. First, currently we're seeing a depreciation of the yen, and this has boosted your profit. But can you elaborate on what ideas will come up when Honda localizes its production? Are you making any changes to your approach? The second question is, worldwide, there is concern about a recession in your major markets, the U.S. and China. How do you see the prospect of the economy?

First, regarding your question about the exchange rate, we have a policy of producing where the demand exists. This is our fundamental approach, and it informs how we establish our production sites. Consequently, our products are produced and consumed locally. While major fluctuations in currency rates do affect us to some extent, I believe our impact is less significant compared to other manufacturers exporting from Japan. To clarify the currency impact, for every ¥1 fluctuation, there is a difference in our current situation amounting to 10 billion yen, down from 12 billion. Of this, half comes from the export of components or loyalty from overseas, which primarily contributes to cash flow-generated profit. We convert this into Japanese yen, which accounts for half of the difference observed. In terms of our yearly forecast, we are currently estimating an exchange rate of ¥135 against the dollar, which would result in an impact of ¥120 billion in profit. However, due to our supply chain dynamics and relationships with suppliers, we cannot swiftly shift our production to Japan. Our policy of producing where demand exists will continue to guide us. As for the U.S. and China's economies, with the midterm elections underway in the U.S. and ongoing 8% inflation projected to persist toward the year’s end, we recognize potential economic impacts, and we share those concerns. Currently, due to semiconductor shortages, we have experienced some lost unit sales for certain car models, but our customers are still waiting for our products. We believe that the cars we produce will ultimately be purchased. That said, with rising interest rates and inflation, we anticipate some impact. In China, while the GDP compared to a few years ago is seeing a decline, annual passenger car sales are around 23 million units. Notably, last month, electrics made up about 19% to 20% of the market. Thus, we aim to meet our customers' demands in China, particularly in the expanding EV market. Thank you.

Nakamura from Yomiuri Shimbun Newspaper. Can you hear me? Two questions. First of all, sales. What are the potential price increases overseas and also in Japan? Secondly, the Japan and Southeast Asia markets are performing well. What do you think the reason for this is, and how long do you think it will continue in the Motorcycle business?

Thank you for your question. Regarding pricing and retail price situations and the pricing reflecting product values, in the U.S., we are repricing to reflect our product values considering the inflation situation. Of course, raw material prices are soaring, and safety equipment's are rearranged as well. Including this, people will buy the products. In the U.S., the stock level is quite low, and so we try to price the products at an appropriate level for them to buy. In Japan, when we have soaring raw material prices, this also impacts revenue. However, we have a relationship with competitors in the industries, and we observe how they react. If necessary, we will adjust our prices accordingly. At this moment in Japan, we do not have specific information. As for the motorcycle segment, thankfully, in the second quarter, the business performance was strong. Specifically, our Asian markets, particularly Vietnam and Thailand, recorded good unit sales, which resulted in additional revenue. How long this momentum will continue remains dependent on market stability. As of now, without any unfavorable economic conditions, we see a potential for continued growth in the Motorcycle business. We also have electrification plans for our motorcycles, particularly in India and other regions toward 2030 and 2035. We will aim to reinforce our pricing strategies and to support those electrification plans.

Can you hear me? Regarding automobile unit sales and the number of semiconductor shortages, can you elaborate on regional differences? What do you expect for the next fiscal year?

Thank you very much. Regarding the units, the automobile units have been revised down by 100,000 units in the U.S. We are trying to recover here in Japan and Asia. It is a specific type of semiconductor that has caused these issues, mainly affecting models like CR-V, Civic, and so forth. For these specific models, we have been impacted. In North America for the second half of the year, it's likely to be challenging to increase production, making it difficult for us to catch up. Conversely, in China, the first half faced challenges, but the production system in the second half is structured to allow us to catch up. Concerning Asia, while car numbers are comparatively low, we have a favorable supply of semiconductors, and we can catch up as perceived. We understand that we have caused inconveniences for our customers, and we sincerely apologize. However, we need to monitor the ongoing semiconductor supply issues closely. Additionally, regarding the currency situation, we believe that we should be producing where demand exists, thereby limiting the currency impact. Nonetheless, fluctuations in a short span have significant effects, and we cannot hedge against such volatility. We prefer long-term stability in currency management.

Thank you very much. I have a follow-up question on semiconductors. Other automakers feel they have passed the worst of the semiconductor shortages. Is that your view as well? Regarding electrification, we've heard from General Motors that they are pushing back some of their timelines due to battery capacity issues. Are you experiencing similar challenges?

Regarding semiconductors, I think that from a high-level perspective, the general shortage has improved. However, we deal with different types of semiconductors for various applications in our vehicles, and those specific to certain models could still be in short supply. Therefore, we continue working to resolve these challenges to deliver our products to customers as soon as possible. On the subject of electrification, we have a program with GM scheduled for after 2025 that includes two vehicle plans. For that specific initiative, we anticipate no impact from battery production capacity yet. Thank you very much. Ms. Davies.

Regarding raw material costs and inflation outlook, do you foresee a stop in the rise, or will it likely continue? How will this impact your profitability?

Regarding raw material costs over the past few months, metals have shown a slight downturn. I believe this will reflect partially in our forecast. However, will we see a dramatic decline? It depends on material type. With battery raw materials, supply may not be adequate. Overall, we expect gradual increases if our current situation persists, but a dramatic decrease seems unlikely in the short term. With the progression of electrification, demand and supply balances will dictate these prices. Specifically, in terms of operating profit for the first six months, we indeed show profit on the operating side. However, the reasons for the negative net profit stem from non-operating profits and share profits tied in the equity method investments. Interest rates, exchange rates, and ongoing market conditions add to uncertainties which impacts the bottom line.

About motorcycle sales, particularly in Indonesia, growth seems slower compared to others. What is the reason for this? What pressures do you see from competitors regarding electric motorcycles?

In Indonesia, growth is over 100%, but slower than other regions. The slower growth within Asia is due to the economic downturn experienced last year. Comparatively, competitors are pushing for EV motorcycle sales. We are committed to achieving significant unit sales in the upcoming electrification efforts, especially as we move towards 2030 and 2035.

About the operating margin related to automobiles and how the model replaces vary in regions.

As to what models are replaced, I cannot provide direct specifics. However, particular focus has been on models like Civic and CR-V that faced semiconductor shortages. In contrast, the smaller models in Japan and Asia have fared better relative to semiconductor impacts. Weekly and regionally tailored decisions are made to ensure consistency in product delivery. The automobile segment has been impacted by semiconductor shortages, affecting intended unit sales.