Honda Motor Co Ltd Q3 FY2024 Earnings Call

Thank you. I am Eiji Fujimura. To start with, first of all, I would like to extend my deepest sympathy to the victims of the very worst Reiwa 6 Noto Peninsula Earthquakes occurred on January 1, as well as to their families, and I wish for a quick recovery and the reconstruction, restoration of the affected areas. I will explain the financial results of the third quarter and forecast of the full year of the FY 2024. Starting with the summary of the results. With regards to the cumulative unit sales into the third quarter of FY 2024, the unit sales of the motorcycles businesses increased mainly in Brazil and Europe, achieving the highest-ever operating profits and operating margins. In the automobile businesses, despite the impact of the warranty expenses, the volume went up mainly in North America, significantly raising the operating profits year-on-year. As a result, operating profits of the whole company marked JPY 1,076.3 billion with the operating profit margin being 7.2%. Regarding the forecast of FY 2024, although some challenging market environments exist in Asia, reflecting additional strength of the earnings structures and the favorable currency impacts, we will revise the previous forecast. For the shareholder returns, in order to improve capital efficiency, we made a decision of our share buybacks in the board of directors meeting today for the amount of JPY 50 billion. Together with the already acquired JPY 200 billion, this term, it will add up to JPY 250 billion in total. Further to the share buybacks, we resolved the cancellation of the treasury stocks as many as 154 million shares. Honda will accelerate our efforts to improve capital efficiencies in order to enhance corporate values. Let me explain the current situation of automobile businesses in the main markets. Due to the solid demand in the United States and the production recovery in Japan leading to the incremental unit sales, the entire unit sales increased year-on-year. In terms of the sales forecast of the FY 2024, we are expecting the sales drop in Thailand and Indonesia. However, we expect the sales unit increase in China. There's no change of the previous forecast. Speaking of our initiatives for electrification. In CES, the world's largest tech exhibition in Las Vegas, the other day in the U.S., in that show, we made a world premiere presentation of the new global EV concept model of Honda Zero Series, the concept model named Saloon and Space-Hub. As the Fuel Cell System Manufacturing LLC, the joint venture company with General Motors, we have started the production of the air fuel cell systems. Next, moving on to the motorcycle businesses. In terms of the cumulative results until the third quarter, despite the unit sales falling in Vietnam vehicles because of the economic slowdown, we had stable demand growth in Indonesia and Brazil, thus the entire result ended up at the equivalent level last year. In the third quarter alone, we had increased unit sales in Brazil and India due to the reduction of units in Vietnam. The entire result was lower year-on-year. Speaking of the results forecast of FY 2024, we expect unit sales reduction in Vietnam and in Japan. However, sales in India and Thailand would grow. Therefore, the previous forecast still stands unchanged. In November 2023, Honda organized a briefing session on electric and motorcycle businesses. We updated our sales target of electric motorcycle in 2030 from the previous announcement of 3.5 million to 4 million units. We announced high money models to be launched, and we announced electrification strategies such as production and the procurement structures. Honda will accelerate the electrification of our motorcycles and our businesses as well toward the realization of carbon neutrality. Next, regarding the outline of the cumulative financial results up until the third quarter FY 2024. In spite of the negative impact of warranty expenses, we had incremental sales of automobiles and the pricing scheme that reflects the commercial value of the products and so on, due to which the operating profit increased by JPY 342.4 billion year-on-year to reach JPY 1.0763 trillion. The profit for the period attributable to owners of the parent is JPY 869.6 billion, up by JPY 206.4 billion. Moving on to the consolidated financial forecast of FY 2024. In spite of the challenging market environment in Asia and the higher warranty expenses with the reflection of additional fortification for profit improvements and current impact, we have revised the operating profit expectations to JPY 1.25 trillion, up by JPY 50 billion. The profit for the period attributable to owners of the parent is expected to be JPY 960 billion, up by JPY 30 billion. Forex assumption is JPY 144 for $1 in the second half and is JPY 142 for $1 for the full year projection. Unit sales and PL are shown in this slide. Regarding dividends, expected annual dividends for 2024 will be JPY 174 per share based on the condition before splitting the shares. Therefore, no change from the previous announcement. At today's board meeting, we passed a resolution regarding the acquisition and cancellation of our own shares. For the acquisition, we have set an upper limit of 34 million shares or JPY 50 billion. Regarding the cancellation, approximately 154 million shares will be canceled.

Let me begin. For the Honda Group's fiscal year 2024, covering April to December, the unit sales for the nine-month period by business area are as follows: Motorcycles experienced a decline to 13,961 million units compared to the same time last year, mainly due to a decrease in Asia. Automobile sales stood at 3,114,000 units, driven by an increase in North America. The power products business saw total sales of 2,548,000 units, also led by a decrease in North America. Now, regarding the change in profit before income tax for the nine months compared to the same period last fiscal year: operating profit has increased by JPY 342.4 billion. The factors affecting this change are as follows: Sales impact had a positive effect on profit of JPY 282.4 billion mainly attributable to increased automobile sales, along with pricing and cost impacts. Pricing, which reflects heightened product value, combined with a decrease in precious metal prices and other raw material costs, contributed positively with JPY 359.8 billion. On the expense side, an increase in warranty expenses and other factors resulted in a negative impact of JPY 366.6 billion. R&D expenses negatively impacted profits by JPY 28.5 billion. Currency effects had a positive impact of JPY 95.4 billion. Despite a decrease in equity method profit mainly from China, profit before income taxes rose by JPY 405.1 billion due to an increase in operating profit, interest income, and other profits. Moving on to sales revenue and operating profit by business segment: operating profit reached a record high of JPY 411.5 billion in the motorcycle sector; for automobiles, it was JPY 460.5 billion; financial services generated JPY 204.8 billion, while the power products business and others showed a negative profit of JPY 400 million. Now regarding cash flow, the fiscal 2024 nine-month free cash flow of the operating companies, excluding financials, was JPY 926.5 billion, with a net cash balance at the end of the third quarter of JPY 3,183.3 billion. Looking ahead, Honda group unit sales for each business operation by region remain unchanged from our prior forecast. Examining the expected changes in profit before income taxes year-on-year, we anticipate an increase in operating profit of JPY 469.2 billion. The breakdown is as follows: Sales impacts indicate a positive profit of JPY 360.6 billion, thanks to higher automobile unit sales. Price and cost impacts are complicated by rising labor costs, but positive pricing effects and reduced raw material costs, including precious metals, lead to a net decrease of JPY 434 billion. Expenses are expected to amount to a negative JPY 353.4 billion due to higher warranty expenses and others. R&D expenses are forecasted to negatively impact profits by JPY 51 billion. Currency effects are projected to have a positive impact of JPY 79 billion. Overall, profit before income tax is projected to rise by JPY 565.4 billion, even with a decrease in equity method profit mainly from China, offset by an increase in interest income among other factors. Regarding changes from the previous forecast, the operating profit and profit before tax forecasts have been increased by JPY 50 billion. The breakdown for this adjustment is as follows: Sales impacts are a negative JPY 11 billion, primarily due to a decline in consolidated unit sales along with price and cost considerations. Although labor costs are rising, pricing related to increased product value and decreased costs for raw materials will result in an increase of JPY 40 billion in profit. The forecast for expenses is a decrease of JPY 32 billion, mainly owing to higher warranty expenses. Currency effects are projected to yield an increase of JPY 53 billion. Lastly, the forecast for capital expenditures, depreciation, amortization, and R&D expenditures for fiscal year 2024 remains consistent with prior forecasts. This concludes my explanation. Thank you for your attention.

Wakai speaking from Asahi Shimbun. Can you hear me? I have two questions. Question one is Daihatsu homologation problems. You have many Kei cars by yourself. And what is the impact of sales because of that? And those are fraud in the homologation and development stage. What sort of actions do you take to prevent those compliances? And the second question is the Noto earthquakes; there should be some reduction of production ongoing today. What is your perspective going forward as a business? How do you address the situations, especially with the suppliers involved?

Thank you very much for your question, Mr. Wakai. Thank you for those two questions. And let's start with the Daihatsu fraud. These are other company matters, and we do not fully understand what actually had happened. Therefore, speaking of the financial status, and also what we do to prevent such things, that's the thing we can explain perhaps. And in terms of the results, Daihatsu may have a less number of the sales and then the sales of those Kei cars, whether that will be added to our sales of budget cars. In fact, we do not have any reflections as such effect of additional sales in our financial results at this time. However, of course, there should be some impact on the sales to a certain extent. However, their cars and our Kei cars are priced differently, different price range. And also, our Kei cars are not really shipped to the general dealers, different sales dealers. Therefore, the impact should be restricted, I believe. And also, in terms of our actions to prevent such fraud. At Honda, we have those homologation testing, and we have those homologation department who does the testing and the application of those matters. Actually, this department is separately organized away from the development and the production. And in order for that department to conduct test and process for homologation, they already have well-documented processes as to, for instance, how many days it should take until the acquisition of those certificates. And of course, those certification has to be given in order to make the process to go on to the next development process. We have the clear rules for that. Therefore, we do not have the system such that we can prevent the very tight development stage, which might induce the fraud of that kind. And starting from April 1, new homologation department and quality improvement departments are to be a part of the functional department so that they can have improved and fortifying their quality governance going forward. And in the EV area coming up now, digital as well, maybe in those areas of electrifications or digital things, we would have additional checks, including cybersecurity, I suppose. Therefore, we should make sure we would have a good hands on that. And as a head office, we have a good organization to ensure those controls. In terms of the Noto Peninsula earthquakes. As we said, right at the beginning, we would like to wish for a quick restoration of the affected areas and people there. And our situation is that Tier 1, 2, 3 suppliers, those have very tight lifeline situations and the possibility of the recovery of the production, the stock levels and so on, in fact, every day, we are checking out the level of the stocks, their situation of the recovery of those suppliers. And every day, the situation is progressing. And in fact, our financial statements at this time do not reflect the impact by the Noto Peninsula earthquakes. However, every day the situation progresses. And as for the recent production conditions, specifically with the Kei cars, mini cars, so-called shaving reduction of the production unit per day is actually conducted now. And we had the operations planned on Saturdays, Sundays, holidays too, but we had to cancel those holiday operations in order to adjust production. And we have about 20,000 units affected due to that reason. And in terms of the recovery and so forth, we will continue to look into the situation so that we can explain when the situation is clear. And in terms of the BCP and supply air condition, how do we control that? Specifically, the suppliers operating in the affected areas, of course, making the greatest efforts to recover. And thanks to them, we try to get information of what they do, stock levels, and the potential production of alternative manufacturing in other areas globally. In fact, we've had quite a good know-how since the last earthquake events. Therefore, at an earlier stage, we could grasp the situation earlier. So, this is the situation today. Semiconductor included as well.

Thank you for the presentation. I have two questions. Well, we have seen a number of recalls in this fiscal year. And I think it's reached to some tens of thousands. And you say that the warranty is JPY 353.4 billion. And does this include all the costs of the recalls? Or is it the case that the warranty expense will increase further from what you have already stated?

Yes, thank you. And yes, in the third quarter, the warranty costs expenses have increased. I did explain that. So, there was a fuel pump incident. So, this has been added to the fuel pipe. First of all, I'd like to express my condolences to the person who has passed away. But this, in terms of the accounting, the financial statement, is this reflected in the numbers? Well, in terms of the units, as you mentioned, it has increased to some few million units, and we will respond to this situation. And in terms of the financial statement, we believe that this is a failure coming from the supplier side, and therefore, we will have them compensate for the recall expense. And this is how we've handled it in our financial statement. In regards to this case, the warranty expense is not that large, and that is our understanding. And the reason why it's large, on February 1, the U.S. authority and we've already filed notification of a recall, there's a seat weight sensor. And there was a failure with the seat weight sensor. And we have added some JPY 55 billion for that recall. And I think that this is a reason that can be attributed to the increase in warranty cost. Thank you.

May I ask another about your buyback of shares? Why did you decide to acquire your own shares? Well, yes, I think there's still room for increase in shares given the weak Yen. And I think that impact of the interest rate hike in the U.S. and China. But is that the reason behind this decision, the resolution?

Well, about the acquisition of our own shares, we want to improve the capital efficiency. And recently, the issue is the PBR, one fold. Given this, I'd like to start talking from there. We, the management, we are aware of this PBR issue, and we take it seriously. And therefore, we are thinking of what we need to do. We believe that it is a responsibility for us to take further steps. It's about JPY 1,700. It's about 0.7 folds right now, and it's less than one fold, 1.0. And I think there are three reasons for this. Well, the three are: those accumulated from the past and the current and the future. So these are the three folds. First, from the past. Over the past decade, our capital has increased from JPY 6 trillion to JPY 12 trillion. And so, it's 45% in terms of the ratio. And we have to deal with this past that we have. And the current situation is that for a long time, the automobile revenue had dropped and therefore, the share prices were not increasing because of this situation. But in regards to this, I'm looking at the financial results here. As we've been saying for the past, we are trying to reduce the fixed cost and also improve the revenue of new models, and incorporating these measures, plus the shortage, we are starting to recover from the shortage of semiconductors, and therefore, the revenue of the automobile business is improving. And so, this is the current situation. And what's more important is the future, the auto sector as a whole, their share prices are not picking up. This is because in this age of the XEV, we really don't know who the winner will be, and therefore, there is this lack of transparency, uncertainty. And I think that this is having an impact on our business. But we believe that given the age of zero emissions, we have to come up with our own strategy and try to improve our resolution, so to say, and try to make investments in the growth sectors and try to reap the profit from those investments. So, in order to improve this so-called resolution, the other day at CES, we communicated that we have a brand strategy in place. Plus, we have technology investments and other strategies to reap the fruit from our efforts in place. And next fiscal year, we are going to have a press meeting. And so, the way we communicate will be changed so that we can gain more understanding from the market. And we will also try to change our way of communicating our technology to the public. So, this is something that we are thinking of right now. So, among these three and going back to the first one, so in regards to our capital here, we want to return to investment. And for the beginning, we have had JPY 200 billion acquisition of own shares, and this program has ended in December last year. So, just like that, we are going to maintain that pace. And by the end of this fiscal year, we want to complete this process. And given this, we believe that this time, the JPY 50 billion decision was made, and we've just made this announcement here. We want to be actively investing in the future. And so, while we do that, and also, we have to try to continue to earn with the profitability of ICE, internal combustion engine, and we have to invest in growth and have a balanced way and at the same time, improve our capital efficiency. This is the management message that we want to communicate to you by announcing that we will acquire our own shares. That is all. Thank you.

Can you hear me? This is Yokohama from Toyo Keizai. Thank you. I also have two questions. The first is about the full year forecast. Well, until the third quarter, I think that you are making good progress about the third quarter. I think the fourth quarter will be showing a slowdown in your operating profit increase. What's the upside and downside? You know, automobile and motorcycle power products, I think the situation will be different, but can you share with us your perspective toward the full year forecast?

Thank you, Mr. Yokohama. Instead of discussing the first quarter outlook, I would like to summarize our financial results for this period. In the third quarter, covering October to December, we achieved an operating profit of JPY 380 billion, with both the automobile and motorcycle segments contributing JPY 160 billion each. This translates to an operating profit margin of 20.1%, marking a record high for the motorcycle sector. As I previously mentioned, we're experiencing a downturn in Vietnam, coupled with increased scrutiny on quality. However, in Brazil, Turkey, and Europe, we are seeing growth in unit volume and profitability in Asia, although some areas are facing declines in unit volume. We believe our pricing strategies and other efforts are starting to yield positive results. For the automobile sector, last fiscal year posed challenges due to semiconductor shortages. In North America, we report an increase of 120,000 units, primarily in hybrid models. While we faced logistics disruptions in the second quarter, these have now been resolved, allowing us to maintain a dealer inventory level of 30 days. We have reached our standard of 330 days. In Japan, we saw an increase of 20,000 units, attributed to semiconductor supply improvements. In China, we experience positive growth as well, but it’s essential to note that last year's third quarter was impacted by lockdowns and semiconductor issues, leading to lower numbers. Thus, year-over-year comparisons show improvement. However, we continue to face a challenging environment, particularly with the decline in the internal combustion engine market, necessitating the use of incentives to stay competitive.

Mr. Yokohama, thank you for the question. The third quarter versus fourth quarter, the fluctuation in the profit, as Fujimura has already explained. Yes, just as well to give you some numbers. As was said, the third quarter, just the three months, we have some JPY 380 billion operating profit. And the full-year forecast if you deduct this, according to our current plan for the fourth quarter, we are expecting some JPY 170 billion. So, there is a drop of some JPY 200 billion. But the reason is because the assumption is that foreign exchange. So, this is different. In the fourth quarter, we are estimating JPY 140 against the dollar. The third quarter, the average was about JPY 146 against the dollar. And therefore because of this difference, according to our plan, the premises was JPY 140. So, there is minus 80 billion or so. Meanwhile, the third quarter, as was said, the supplier, there was impairment of some JPY 50 billion. Therefore, this part will be knitted. And what we based is the fourth quarter, skewed a cost and also, R&D. These are going down in the fourth quarter. Please, Mr. Kawaguchi.

Mr. Yokohama, regarding China and our production capacity, I want to address that part of your question. Last time we announced our financials, I mentioned that we have a capacity of 1.2 billion units, which is about double our annual output. We have two dedicated factories, and this will increase our capacity to 1.7 million units. Currently, we stand at 1.49 million units, and we believe that 1.2 million is a reasonable target to aim for. We still need to make adjustments for the remaining 0.5 billion units. We are in discussions with our partners concerning this matter, and I believe they share our perspective. However, employment levels in China are very sensitive, so I can't provide specific details. That said, in the second quarter, our views align with our partner's as we progress together. We need to address the 0.5 million unit adjustment and continue the conversation about how to implement this change.

Thank you very much for the presentation. I have two questions. One about semiconductor procurement status now. The production situation is very well good now. But do you think that semiconductor supply situations have been recovered fully before the COVID? And the second question was, you said about pre-tax profits. And you talked about the precious metal prices. And what is the current status of those prices, including the forex situation, too? You mentioned the reduction of the precious metal prices.

So, in terms of the semiconductor supply procurements this year or from February, March periods, in 2023, the situation have been on the recovery, we've done a lot of measures and those actions are getting some fruitful results. And nowadays, it is not a concern at all. Once in a while, we might face some situation. However, we recovered now. And we have a full-scale production in place after a long while until the second quarter or so. In the U.S. or the places like that, there were a shortage of the laborers at the supplier and equipment problem because the equipment were not running for quite a long time. And we had some situations like that. However, those issues have been resolved. And in North America, full-scale production continues after a long stretch of not having one, but we have a stable condition. And in terms of the precious metal conditions, actually those utilized mufflers or catalysts in the mufflers that is to purify the air emissions. A few years ago, the precious metal prices were soaring really. But in the last several years, prices have fallen because in China, they have progressed the electrification. That may be the main reason for the precious metal prices dropping down. And in addition to that, in the electrification efforts, not just automobiles, but when the economy is booming, precious metals, steel, copper, resin, those material prices are to fluctuate a bit. We have to, of course, look at forex currency rates as well. We would like to keep watching out all those factors as we go. Thank you very much.

Next question, please. Toyo Keizai magazine, Mr. Yokohama, please. Can you hear me? This is Yokohama from Toyo Keizai. Thank you. I also have two questions. The first is about the full year forecast. Well, until the third quarter, I think that you are making good progress about the third quarter. I think the fourth quarter will be showing a slowdown in your operating profit increase. What's the upside and downside? You know, automobile and motorcycle power products, I think the situation will be different, but can you share with us your perspective toward the full year forecast? Can I continue the second question about China? Well, currently, I think the unit volume is increasing, as you said, but at the last presentation, I think that there is a severe competition. There's a discount race in China. I understand that it's a situation, but how do you see the Chinese market environment? I think Mr. Fujimura talked about the need to cut production capacity. So, what are your thoughts on China?

Mr. Yokohama, thank you very much. Instead of discussing the first quarter outlook, which I wasn't asked about, I would like to provide an overview of this quarter's financial results. In the third quarter, covering October to December, we achieved an operating profit of JPY 380 billion. The automobile and motorcycle segments contributed JPY 160 billion each, resulting in a return on sales of 20.1%. This marks the highest quarterly result for our motorcycle business. As I mentioned earlier, we are facing a downturn in Vietnam and increased quality scrutiny. However, we are experiencing growth in unit volume and profitability in Brazil, Turkey, and Europe, as well as in Asia, despite some areas showing a decrease in unit volume. I believe our pricing strategy and additional efforts are effectively yielding results. For automobile, last fiscal year, there was the semiconductor issue, and so this was a major challenge. But in North America it’s a plus, 120,000 units. This is mostly hybrid. The second quarter, there was a logistics disruption, but this has been cleared already. And thanks to this, we have dealer inventory of 30 days. So, this is the standard that we have in place. So, 330 days. So, we reached this standard now. And in Japan, it's a plus 20,000. This is because of the semiconductor, the unit sales is in a positive range. Now China, it's plus. And this leads me into the second question, but it is a positive.

Mr. Yokohama, thank you for the question. The third quarter versus fourth quarter, the fluctuation in the profit, as Fujimura has already explained. Yes, just as well to give you some numbers. As was said, the third quarter, just the three months, we have some JPY 380 billion operating profit. And the full-year forecast if you deduct this, according to our current plan for the fourth quarter, we are expecting some JPY 170 billion. So, there is a drop of some JPY 200 billion. But the reason is because the assumption is that foreign exchange. So, this is different.

So, among these three and going back to the first one, so in regards to our capital here, we want to return to investment. And for the beginning, we have had JPY 200 billion acquisition of own shares and this program has ended in December last year. So, just like that, we are going to maintain that pace. And by the end of this fiscal year, we want to complete this process. And given this, we believe that this time, the JPY 50 billion decision was made, and we've just made this announcement here. We want to be actively investing in the future. And so, while we do that, and also, we have to try to continue to earn with the profitability of ICE, internal combustion engine, and we have to invest in growth and have a balanced way and at the same time, improve our capital efficiency.

That is all. Thank you.

This concludes my explanation. Thank you for your attention.

Thank you very much for your participation. Thank you.