Honda Motor Co Ltd Q1 FY2024 Earnings Call

Thank you very much for coming despite your busy schedule today. We would like to now start Honda Motors Company Limited's briefings on FY 2024 Q1 Financial Results. We have interpretation service for the non-Japanese investors and analysts. Thank you for your understanding. First of all, let me introduce today's speakers. We have Eiji Fujimura, Executive Officer and CFO.

I'm Fujimura.

We have Masao Kawaguchi, Operating Executive, Head of Accounting and Finance Supervisor Unit.

I'm Kawaguchi. Thank you very much for today.

Finally, I am from the IR department, and I will be facilitating today's meeting. So without further ado, I would like to have Fujimura to provide a summary on the 2024 Q1 financial results followed by the details of the earnings by Kawaguchi. Over to you.

Thank you very much for taking the time out of your busy schedule today. I would like to review the results from the first quarter of fiscal 2024. First, I would like to touch on the highlights of the results. In Q1 FY24, with the improved fixed cost structure that we have been optimizing, we maximized the effect of increased sales unit, mainly in North America, and achieved a significant growth in automobile operating profit year-on-year. With respect to the total profit, operating profit grew ¥172.2 billion year-on-year to ¥394.4 billion, a quarterly record with operating margin at 8.5%. The fiscal year 2024 forecast is kept unchanged. Today, at the board, a resolution was adopted approving a stock split. I will now turn to the automobile business results in the main markets. The overall results from the first quarter of fiscal 2024 exceeded the same period of the previous year. In the United States, the improved supply of semiconductors and recovery in production, in addition to strong sales of models introduced last year, resulted in substantially surpassing the Q1 of last year. On the other hand, in China, the expansion of the new energy vehicle market, resulting in more intense competition, impacted the results, which were lower year-on-year. We maintain the previous forecast for fiscal 2024. Regarding our electrification efforts, in order to develop the next generation competitive software-defined mobility products and services, we reached a basic agreement on a partnership with SCSK Corporation. In North America, seven automakers, including Honda, concluded an agreement to establish a joint venture to create a high powered charging network for EV. Next, turning to the motorcycle business. The number of units sold was lower in India and Vietnam year-on-year. However, in Indonesia, in comparison to last year when we were impacted by semiconductor supply issues, production has become stable and sales results significantly outpaced the same period last year. Overall, results exceeded the same period last year. The forecast for FY '24 remains unchanged. Regarding electrification efforts, we announced this month the launch of the personal use electric motorcycle, EM1e, the first of its kind for Honda in Japan. Next, I will go over the consolidated results from Q1 FY '24. As I highlighted earlier, operating profit rose by ¥172.2 billion year-on-year to ¥394.4 billion. Profit for the period attributable to owners of the parent increased ¥213.8 billion to ¥363 billion. Next, I will discuss the stock split and dividends. At the Board today, a resolution was adopted approving a stock split by reducing the company's stock price per investment unit. We aim to establish an environment where it is easier to invest in our company for the purpose of expanding the investor base. Each share of common stock will be split into three shares. Annual dividend forecast for fiscal '24 remains unchanged on a stock split basis. The dividend forecast calculated based on the number of shares after the split is as shown here. Next, I will turn the microphone over to Kawaguchi who will give the details of the earnings result from Q1, fiscal '24.

Let me explain. First, Honda Group's unit sales for Q1 FY 2024 were 4.47 million units in the motorcycle business, mainly due to higher sales in Asia compared to the same period last year. Sales in the automobile business were 101,000 units, mainly due to an increase in sales in North America. Sales in the power products business were 983,000 units, primarily due to lower sales in North America. Next is the changes in profit before income taxes in Q1 compared to the same period last year. First of all, operating profit increased by ¥172.2 billion year-on-year. Let me walk through the factors. Impact from sales was plus ¥133.7 million as a result of higher sales units of both automobile and motorcycle. In regard to the impact from price and cost, the increase was ¥65.9 billion, as a result of lower raw material prices, especially for precious metals, and the effect of pricing commensurate with the improvement in product value. Regarding expenses, while quality related expenses decreased, as a result of higher advertisement cost and labor cost, the impact was negative ¥29.8 billion. R&D was negative ¥20.8 billion, and currency effects were positive at ¥23.2 billion. In addition to higher operating profit and unrealized gains from foreign currency bonds, pretax profit was plus ¥277.5 billion. Next on the sales revenue and operating profit by business segment. Operating profit for the motorcycle business was ¥143.5 billion. For automotive business, ¥176.9 billion, ¥69.5 billion for financial services, and ¥4.4 billion for power products and other businesses. Next is cash flows. Cash flows in the three months of Q1 FY '24 were ¥285.6 billion. Net cash at the end of Q1 was ¥2 trillion and ¥984.1 billion. That is all for the explanation. Thank you very much for your attention.

The first question comes from Citigroup Securities. Please activate your video and microphone.

Thank you for taking my question. First question, results were quite strong. Operating profit how do you, how much was it better in comparison to internal forecast? However, you have kept, FY '24 forecast for the year unchanged. What is the background? That is the first question. The second question is about China. When we look at the numbers, it seems that in terms of unit sales, you are struggling, what is the latest status, including price competition and what is the risk in terms of a unit sales for this term? And, what is the impact based on equity method profit?

Thank you, Mr. Yoshida, for your questions. First of all, as you rightly mentioned, we have kept the full year forecast unchanged. We wanted to convey the Q1 results today. Regarding upside and downside, we would like to comment on upsides and downsides for your better understanding. As for how we look at the first quarter results before discussing profitability about unit sales in automobile business. 90,000 in comparison to the same period of last year, profit is maximized in North America, with an increase of 130,000 units. Annual plan is 4.35 million and the progress is at 21%. It is somewhat at a lower level, but we believe this was more or less on target. To begin with regarding China, in the beginning of the fiscal year, we mentioned in our announcement that there was a 6b pollution standard, resulting in discount competition and there is also an increase in market share in the net market, and we expected that it would be a difficult market. In that sense, regarding unit sales, China was as we expected. As for the semiconductor supply shortage last year, we struggled significantly. But we have a production plan one week, two weeks ahead of time that was suddenly changed last year. But this year in January, especially after January, the situation continued. However, in April to June, we no longer experienced such a difficult situation, but we cannot become too optimistic regarding China. So, I will come back to China later. As for the motorcycle business in the first quarter, unit sales were slightly below our expectations. That is the reality. In comparison to last year, group sales increased by 200,000. However, on a consolidated basis, unit sales declined by 100,000. India, on the other hand, saw a larger decline as for India. From April this year, environmental regulations have to be complied with. For that purpose, we are introducing new components. And for these new components, we were somewhat impacted by semiconductor supply issues, and it was about 50,000 down from the previous year. However, we expect to recover in the second half of the year, and we believe that we will be able to achieve unit sales in India. As for Vietnam, you are familiar with the situation. The economy is slowing down. There are signs of a slowing economy. To maximize our profit, we are also focused on Vietnam, and therefore, this is a cause for concern. However, regarding Vietnam, as opposed to Vietnam in Thailand and in Europe and the United States, sales units are increasing. So, we would like to offset the decline in Thailand. As for profitability, as you mentioned, operating profit, the annual target is ¥1 trillion. It is about a 40% progress at ¥390 billion. Regarding motorcycle, ROS is 19%. As I mentioned earlier, in Vietnam, we are struggling a bit. However, we were able to report rather strong results. As for the automobile business, we have always been saying that we are focusing on fixed cost reduction and introducing new models. We now have more or less all of the new models after Civic, and we are increasing profitability with these new models. We have been able to improve the COGS ratio and unit sales increase. Additionally, it has enabled us to maximize the effect of the increase in unit sales. However, in quarter Q1, quality related expense was only 0.6% of operating profit. There are also some changes in lag from the fund, and ROS for automobile is 5.8%. This is not a thorough analysis of the number, but gross profit was driven by strong unit sales, which we assess positively. As for three months, ¥30 billion was our expectation, but it is at ¥39 billion, rather than ¥300 billion, which is up by ¥90 billion and half is due to currency effect and half is because of the delay in delivery, etc. So for profit and for sales units, we are achieving the plan more or less inline as for full year forecast maintained unchanged. Well, there are, China and Vietnam situations, but in areas other than currency effect, on a real basis. We have the target of ¥1 trillion and we would like to make sure that that is achieved. In the beginning of the fiscal year, we felt that it was too premature to change the full-year forecast, and that is why the forecast remains unchanged. That is my response to the first question. Turning to the situation in China, in the beginning of the year, 1.4 million was the plan, and this plan is also kept unchanged. On this point, as I mentioned earlier, we expected for the first quarter to be somewhat weaker. From the second quarter onwards, our port and Breeze Inspire CRV. With these models, new models have been launched. We want to ensure that, with these new models, sales are expanded. But we believe we will have to focus significantly. We have to spend much effort. That is how we view the situation. In coastal cities, some of the cities and in inland cities, where we were not traditionally as strong, we will also have to reinforce our sales capabilities and in Chinese headquarters, with the partners, to achieve the target, efforts are being made. But a recent trend is such that in July, combining the results, including our joint venture, at the retail level, unit sales are about 80,000 to 90,000. We are also dependent on our partner's business. Currently, I'm not able to discuss the exact number of units, but the decline in number of units. We allocate components to regions, and we will make up for that in other areas on an effective or real basis. We will make up for profit, and unit sales will be offset on a global basis. I think that will be the focus area going forward. Those are my responses to your questions.

Thank you very much. One supplementary question here. So in the past - you used to change your forecast on a quarterly basis, but this time, the way you present it has changed. Is that the case? And would you be willing to comment on that? And the second point is that. You have not changed your forecast of 4.35 million, but the reductions in China will be reallocated to North America and other parts of the world. So maybe you see enough demand trend, or maybe you have some semiconductor forecast. So maybe you will see some opportunities in other parts of the world other than China. Is that the case?

With regards to the first point, depending on the situation, we will see what we do with this quarter, the next quarter, last next year. Yes, but because we're basically in line, and whatever we have laid out at the beginning of the year is our forecast and it's also our ambition, our targets. So if you exclude our foreign currency, we would like to make sure that we're able to go with our commitments. And that is the significance of it. Also, related to your latter question about 4.35 million units. The reason why we have kept this plan unchanged is basically, as you point out. If it turns out to be difficult in China, we will offset that in other parts of the world. I did not talk about North America, but actually, if you look at North America, we are producing in an extremely difficult environment. The supply shortage is beginning to be solved. However, we have been producing at a very low volume. And now we are trying to lift that up. I think last time in Q4, against the forecast, our production was not able to catch up. There was a shortfall, but we need to in the stage of wrapping up for our units, and suppliers are also struggling with us together. So we are cautious in that sense, but in any case, 4.35 million is our global target, which we would like to ensure we are able to achieve. We'd like to make that effort. That is why we kept it unchanged.

Well, thank you very much.

Thank you, Mr. Yoshida, for your questions. Next from Mizuho Securities, please. I'm in at the Michael. Please turn on the video and microphone.

This is Isiyama from Mizuho Securities. Can you hear me?

Yes. We can. Please go ahead.

Thank you. First question, I'm looking at Page 17 of the material, there are business-by-business profit results. As for the sales price, for motorcycle and automobile business, could you comment on this? According to the earlier presentation, it seems that the price level is also more or less in line with your expectations, but results are quite strong. So what is happening in more detail? That is the first question. And the second question, motorcycle demand, generally speaking, how do you foresee the demand for motorcycle going forward for automobile 4.35 million units as the overall target? Although the breakdown might change, but for motorcycle business, could you elaborate on that?

Thank you, Mr. Isiyama for your questions. As for the sales price and costs, Mr. Kawaguchi will explain. As for the motorcycle business, basically, the same applies. The target, we have to ensure the targets are achieved. And as for that, likelihood regarding India, as I mentioned earlier, there was a semiconductor shortage. However, we are making sure that we are able to take responses, and we have increased visibility. As for the Vietnam situation, it is somewhat more difficult. However, from the beginning and I always say this regarding motorcycle business, Asia, and Brazil. Our markets were very, very strong in terms of sales unit and profit. They account for the majority of sales unit and profit. However, these are also markets with higher volatilities. Last year, in comparison to last year, ROS number is 19% this quarter. Given high volatilities, we expect further volatilities. So around 15% or so is the target for ROS constantly and that is as far as profitability is concerned. Regarding profitability, although Vietnam is somewhat down, we would like to make up for that in other markets such as Thailand and Europe and North America, where per unit profitability is higher. It's not that we have given up on Vietnam. We would also like to continue to make an effort in Vietnam. On pricing cost, thank you for the question. With regards to the impact of pricing cost, if I want to start from the company-wide total. So first of all, in Q1, if you look at the total comparison to last year, the selling price was actually positive, ¥65.9 billion. This includes material cost and different inflation and cost increases. Against that, we have pricing based on the company's efforts. This is the net effect. Up until last year, there was a significant inflation impact and raw material cost increase. In order to absorb that, we have tried to reflect that in the pricing. But as I said at the beginning of the year, starting from this fiscal year, inflation is starting to come down. If you look at the precious metals and materials, you must be pressing as also calm down. So whatever we have tried to respond in terms of the cost effects, this has been actually reflected in our full-year basis. In the first quarter, whatever we planned at the beginning of the year, we are beginning to see that effect.

Thank you very much. Quickly second question, the first quarter was more or less in line and probably the forecast is kept unchanged. So do you think that there are opportunities for upside labor costs and regarding inflation?

In comparison to our expectation, we believe our costs are generally somewhat higher, but as for materials cost, they were lower than our expectations. Offset these, it is more or less in line with the beginning of the year's forecast. As for precious metals, this is affected by the commodity market, and we cannot foresee. But for the moment, it is in line with our forecast. Thank you.

Isiyama, thank you. Next from Bank of America Securities, please. Could you turn your camera on and the microphone on as well?

Thank you for the opportunity to ask a question. I have two questions. First, regarding fixed costs domestically and sustainability in Q1, could you elaborate? Initially, it seemed that the fixed cost structure was not sustainable, but based on the numbers we've seen, excluding claim fees, there appears to be an increase of about ¥25 billion year-on-year. Meanwhile, profitability in Japan stands at 8.9%, which is an unprecedented margin and seems too good to be true. It appears that your various initiatives are positively impacting this, and I hope that will continue. Could you comment on the sustainability of this situation? My second question concerns free cash flows. Can you provide an update on your perspective for Q1? Excluding financial services, it was a positive ¥290 billion. Although there is a foreign exchange impact on the balance sheet, inventories remain high. If production recovers and unit production increases, internal inventory might decrease. Could this year's free cash flow be significant? If you have any numerical targets or a ballpark figure, please share that with us.

Thank you very much. With regards to domestic Japan, every time I know that this is a little bit difficult to understand because it's by site by - and we submit this number by segment. As you know, very well, we have the business we produce in Japan and sell in Japan. We have a business where we do knock down exports from Japan, and then we have R&D, and we have businesses where we're able to collect on a loyalty basis. So there are three different types of businesses that exist, and we're trying to present this altogether. That is why it's very difficult to understand. In Japan, the fixed cost reductions benefit that's being realized here in Japan. This is more or less, this is the impact on the increasing loyalty from overseas and also foreign exchange. I think those comprise a very large portion. With regards to the reductions in fixed costs in North America, Europe, and Asia, we have implemented different measures to do that. Of course, we are also trying to improve our debt situation in Japan as well, but I think the growth this comes from mostly from foreign exchange and loyalty royalties. I think those are the two large effects. With regards to free cash flows, it's true ¥290 billion that's right. This was the case last year, but there's about ¥700 billion or so on an annual free cash flow. So with regards to this year, we're eyeing at the same level. So as I have said, profit is about 40% right now. In terms of investment, it will be, and of course, we happen to invest taking equity stakes in companies, but investment is more leaning toward the second half of the year. So between ¥600 billion to ¥700 billion in free cash flows, we should be able to generate for this full year. That's our plan. Regarding the inventory, this is compared to our peers, our inventory management against sales, revenue tends itself. It tends to be a little bit on the larger side, because we're trying to supplement on a global basis, but reversely put. We have some challenges on the distribution logistics side. I have mentioned before that we would like to, entrust this to okay, but as you point out, this is an area where we would like to improve. We do have foreign change impact, but inventory is of that situation. It is slightly high. We do agree with you. Hope that answers your question.

Thank you very much. So, for each point, first the question. So in Japan, it is lacking behind, in terms of when it is accounted for, in this current fiscal year or the next quarter. But what is the situation? And as for towards the end of the fiscal year, inventory will decline and the free cash flow. Of course, there may be more investment but declining inventory will contribute to free cash flow?

As for the first question, the answer is yes. Your understanding is correct. As for inventory, naturally, if our products are sold, inventory should come down. Right now, production, as soon as we produce a car, it is sold, especially in North America. I believe the inventory level at the current level may continue where it is slightly higher. It may come down, contributing to free cash flow. But, overall, what we envision is around ¥700 billion in free cash flow.

Thank you very much.

Thank you. Next from Daiwa Securities, please. Please turn on your video and microphone.

Hello. I'm Hakomori from Daiwa Securities. Thank you for taking my questions. I have two questions. First, according to the presentation material, Page 17, detailed breakdown of increases and decreases are given for both motorcycle and automobile business as for the unit for automobile, the sales unit, it is at ¥130 billion and I understand that there was an increase of 130,000 in the, in North America, where there's a higher profitability. But in an event, increasing profit is very large. Could you comment on this? And as for the operating profit ratio of automobile, it was mentioned that it is not sustainable, but the 5.8% is in comparison to the competitors is not especially high. With the unit sales recovery, could you comment on the mechanism where you do not expect much recovery in operating profit margin? And the question is a very simple question in the United States. What is the latest in terms of your demand forecast for North America - for the United States?

Thank you, Hakomori san for your questions. As for the breakdown, I would like to ask Kawaguchi san to discuss later. In comparison to a unit, it might appear larger. Profitability by model and cost reduction efforts have been providing a positive impact. Marginal profit per unit, although this is not disclosed in North America has increased substantially. There is also an impact from currency effects on the positive side, but a very high level is realized from Accord, CRV, and Pilot, these new models that we added, and I see strong positive impacts from these models. As for 5.8% in comparison to the peers, it is not necessarily high and that is true. But in any event, ROS of 7% or above by 2025 is our target. In the pursuit of such a target for the automobile business, it is not 7% or more with the help from motorcycle, but it is 7%. It may be around 5% to 5.5% in automobile for ROS. Steadily, 5.8% of whether it is sustainable or not, I'm only looking at this year. I mentioned that it may not be sustainable, but we would like to make sure to raise ROS and in what ways can we increase ROS by region or globally. We have a production capacity of 5.14 million, but we are producing only about 4 million also. We should increase our production and price per unit. We will continue to examine the unit price. We have been making efforts to reduce costs. We have been supporting our suppliers. After the COVID pandemic, unit number declined and there were also some issues with our operations. Based on the premise that we have sufficient semiconductor, we have production plans. However, because of a shortage of supply, we have to stop in some places, and we have the inconvenience to some of our suppliers. We have to stabilize the production and make sure that we do that. There is no magic wand because we're dealing with production. We have to steadily improve the production and thereby achieve the target. As for the U.S. business, before that, could you give the breakdown?

Thank you for the question with regards to automobile. Truck sales are not much trick to it. As Fujimura said at the beginning, last year, we invested in highly profitable sort of architecture effect in our models, so highly profitable models we have launched, and that is why we have seen an increase of 125,000 units. Excuse me. Meanwhile, in Asia, especially in India, we have seen a slowdown in units. On an average basis, we need, I think it has helped increase the unit price for automobiles. And in North America, the fact that the production volume is beginning to ramp up on a supplier basis, there are some that will be included in the consolidated basis, so there's improvement in profitability there as well. There's a little bit of that, but I would say the majority is contributed from the North American increasing units. So that is all from me.

Thank you. And that's the situation in North America. So Q1, as we have described, sales are solid, demand is good. Civic, HRV, CRV, Pilot, Accord, all of these model cycles have been leveraged, and I think we've been able to make good use of that. In terms of dealer's inventory at the end of last fiscal year, so end of March, we had 60,000 in big dealer inventory. While we are increasing production, our inventory level is only 62,000, so that's only an addition of 2,000 units. That's why wholesale production and sales, I mean, this is all continuing in a good cycle. As I have been saying, we would like to work with the suppliers to focus on ramp up. There will be some challenges, of course, but we want to ensure that we're able to wrap up our production in North America. So we're working on that. For this fiscal year, there may be some concerns of recessions and maybe in terms of the used car market impact. There is a little bit of uncertainty, maybe within terms of certainties, but on the recession side, we're starting to see some anticipation of that. We want to maximize our sales opportunity and to leverage that we need to make sure that we are able to complete our production plan. With regards to finance, financial services, there was a time when we had reduced incentives, and that's why the penetration was less than 50%. U.S. Honda units were slow. Financial receivables have decreased, but finally, penetration has recovered to more than 60%. As a result of that, in terms of the reductions in receivables has hit bottom in terms. We look at KPI, of an ROA in order to operate our financial services. In terms of operating profit, it's somewhat inevitable that there's a little bit of decline here, but we have hit the bottom. Compared to last year, receivable is low. So there's reductions on the profit side, but that's the situation with the gross profit. Now in terms of used car, if you were looking at the Anaheim Index as well, we see some result there. But against that, residual contract amount, there's about $4000 per unit on average. We're still on the gain side. So I don't think it will turn into losses right away. Even if it does, turning to losses, you can say that this is heading towards normalization. In terms of the residue of value, the fact that it is on the gains side means that we're not able to return the cars to us. Before COVID, it was like 60,000 that was returned, and we were able to auction it, and that was a residual loss. But that's only about 200 units right now. There will be a negative impact on the used car side, but it's not that we will be impacted by that immediately, at least not so much. So with regards to charge-offs, we are now beginning to see this come back to pre-COVID situation. During the days of Mr. Trump and onward, there was support for households during COVID. So there are hardly any charge-off credit losses at that time. But now they can go back to the pre-COVID level. There's about 0.6% in terms of a credit loss allowance rate, but this is on a normalized basis. I think we're going back to the normal state. So in the United States, the finance basis, we will manage ROA based on pricing. We do not have any large concerns over financial services at this point in time. I hope that answers your question.

Yes. Thank you for that very thorough detailed response.

Thank you. Next from Goldman Sachs, please.

This is Yousawa from Goldman. Thank you for taking my question. I have two questions. First, appropriate evaluation. You have announced a buyback and you have also announced a stock split this time. I believe you will continue with these actions, but what are other measures and actions that you plan to take going forward? At the same time, you had these results this time, but how do you plan to change the structure of the group companies? What are your thoughts? And the second question, about China, you've mentioned that you need to make much effort. Could you comment in more detail? The EV market, it is very difficult. At the price level, it seems difficult to improve the situation in China. So what are plans for the countermeasures in China?

Thank you, Mr. Yousawa, for your questions. Regarding the buyback, as we've noted since the start of the year, our future free cash flow and net cash amount to ¥2.9 trillion, which is around 2.3 months' worth, and we are accumulating cash. The equity ratio stands at approximately 46% in terms of our capital policy. As we look ahead to a major transformative period, we must be mindful of our investment capacity and evaluate our capital policy. Concerning PBR, while it's a trending topic, we've been aware of it and have been making efforts to address it long before it gained popularity. Moving forward, it's challenging to provide specific comments. With respect to dividends, we aim to maintain a payout ratio of 30%. We will continue to carefully monitor and plan our share buybacks based on the situation. As for the stock split, we have been contemplating this for a while. Other companies have been taking actions recently. I may not have the most accurate numbers, but to my knowledge, there are ¥2,000 trillion in individual assets and about ¥1,000 trillion in bank deposits, contributing significantly to the total market capitalization parked in these deposits. The government is encouraging investments, including in Nissan. Eight percent of our investor base consists of individual investors. We hope to attract more individual shareholders who are interested in supporting Honda and becoming more involved in our business. This desire is part of why we decided to proceed with the stock split at this time, especially since it aligns with a rising stock price right before the launch of the new NISA program next fiscal year. However, we understand that the stock split alone isn't enough; we intend to enhance our investor relations for both individual and retail investors. We want to remain a youthful company and draw young investors' interest. We aim to focus on this in light of the reorganization of Yachiyo and the electrification strategy across our group companies. Identifying core technologies and components is crucial as we shape our group's structure, especially in the context of electrification. While I can't comment in detail on our future plans, the foundation lies in technology and understanding the implications of electrification. By consolidating efforts, as we did with Yachiyo, we believe we will improve our enterprise value. We have received support from mothers and are seeking a win-win outcome in our structural reform. Regarding the situation in China, there are a few key points to consider. We are currently working towards establishing a new factory in collaboration with two joint venture companies, aiming for completion in 2024. If achieving the current target of 1.4 million is challenging, we need to reassess fixed costs as part of our short-term strategy. In the medium to long term, we are placing our focus on electric vehicles, with plans to launch attractive new products. As previously mentioned, in fiscal 2025, we will introduce the third and fourth phases of our EVs, targeting a lineup of 10 models by fiscal 2028. We may need to revisit whether this timeline is sufficient. This initiative is being carried out through our joint venture, and it’s essential for us to have thorough discussions with our partners to determine our objectives. While I cannot provide specific details on our actions, I believe there is mutual understanding among our joint venture partners on the challenges we face. We aim to establish strategies for the short, medium, and long term, and will implement those accordingly. I apologize for not being able to provide concrete details, but this encapsulates our approach to addressing the situation in China.

Thank you for the explanation. Mr. Yousawa, thank you. I need to apologize. The next question will be the last question.

Thank you. I'm from Okasan Securities. Can you hear me?

Yes, we can hear you.

Thank you. I just have one last question. About your battery strategy, if you could explain once again, not to give an example from other companies, but Toyota has made different announcements about battery. Some OEMs have announced about Yen investment. You are starting a business on battery with GS Yuasa. So what sort of battery are you planning to develop? I know you have all solid state, but what is the situation today? And also, overseas, you are now tying up with LG. But domestically, who's going to produce the batteries? You have announced the development, but what about production, including sourcing raw materials? I know this is going to be a right topic, but if you could give us a progress update on battery?

Thank you, Mr. Naruse. In April 2026, we announced our technology strategy, which I believe you are referring to in your question. In terms of battery production, we expect to start local manufacturing soon. Our main markets for electric vehicles are projected to grow rapidly, particularly in North America and China. In China, we will source from CDATL. While there are challenges regarding speed and other factors, that is our current plan. In North America, we have successfully developed an electrified EV model in collaboration with GM, which will be launched this year. This will allow us to source vehicles from GM. Additionally, we have a joint venture with LG, established in Ohio, where we will manufacture batteries for our vehicles. We are also in discussions with GS Yuasa, a battery development company, regarding manufacturing processes and resource circulation from raw materials to recycling. We are exploring circular activities with GS Yuasa, as previously announced, and have initiated those efforts. We will be collaborating with GS Yuasa and Blue Energy to produce batteries in a three-party structure involving Honda. These discussions are ongoing in Japan. That summarizes our current status. I hope this answers your question.

So I understand the direction. Meanwhile, what about battery performance? Are you going to look for something that's innovative, or is it something to be considered on all solid-state batteries maybe for this initiative? This is more on the recycling, more sustainable and more practical basis. So what is the type of batteries you plan to segment or break down? If you could give us some of your thoughts on that?

In principle, mainstream technology focuses on lithium, particularly liquid lithium-ion, but we are exploring that further. It's risky to concentrate solely on one direction when considering technology trends. In terms of batteries, we are collaborating with GM for semi-solid state solutions. We have seen promising lab results for all-solid state batteries and are working on establishing a production pilot line. The manufacturing method will be crucial for all-solid state batteries, and we are aiming for a breakthrough in that area. Looking ahead to 2025 to 2029, we plan to focus on commercialization. We believe in pursuing various strategies and technologies simultaneously as we move forward. Thank you very much.

Thank you for your questions. Thank you, Mr. Naruse. With this, we would like to bring to a close financial results meeting for Q1 fiscal 2024. Presentation materials are uploaded on our website for your reference. Thank you very much for joining the meeting.