Honda Motor Co Ltd Q3 FY2025 Earnings Call

Thank you very much for spending your time to join us here today. We'd now like to begin Honda Motor Company Ltd. FY 2025 third-quarter financial results briefing. Allow me first to introduce the executives in attendance. Director, Executive Vice President, and Representative Executive Officer Shinji Aoyama.

How do you do?

The Director and Managing Executive Officer, CFO Eiji Fujimura.

Thank you very much.

Now, first, Mr. Aoyama will overview the FY '25 third-quarter financial results and FY '25 full-year consolidated forecasts, followed by Mr. Fujimura's explanation on the details. Mr. Aoyama, the floor is yours.

Thank you for your continuous support for Honda's business activities. Thank you very much. And let me explain the financial results for the FY 2025 third quarter. First, let me highlight the key points. The FY 2025 third-quarter cumulative operating profit was 1,139.9 trillion yen with an operating profit margin of 7%. In the motorcycle business, sales volume remained strong globally and third-quarter cumulative total was 15.5 million units. In the automobile business, consolidated unit sales volume decreased by 297,000 units year on year despite solid sales in North America due to a drop in Asia, mainly China. Operating cash flow after R&D adjustment, representing funding for future investments, remained at the same level year on year at 1,945 trillion yen. The FY '25 consolidated financial forecasts are unchanged, operating profit, 1,420 trillion yen; profit for the year, 950 billion yen. Motorcycle unit sales have been revised upward to a record high due to strong global sales. Automobile operations, mainly due to decline in Japan, are revised downward to 3.75 million units. However, due to a rise in motorcycle sales and exchange rate, operating profit and profit for the year, forecasts remain unchanged. A resolution was made on December 23rd, 2024, to repurchase 1.1 trillion yen worth of company shares, 184.9 billion has been acquired as of January 31st, 2025. We will work to complete the repurchase of 1.1 trillion yen in shares. Next, the situation in the major markets. Regarding motorcycle operations due to strong demand in India and Brazil combined with economic recovery in Vietnam, sales exceeded the same period last year. Automobile business saw an increase in Japan and the United States, but due to the severe market environment in China, total sales dropped year on year. In Japan, sales volume in the third quarter was lower than the same period last year due to fierce competition among others. The cumulative consolidated financial results for FY '25 third quarter are as follows: Operating profit increased by 63.5 billion yen year on year, totaling 1,139.9 trillion yen. Equity method investment profit decreased by 94.5 billion yen, a loss of 27.2 billion yen. Profit for the period attributable to owners of the parent company was 805.2 billion yen, down 64.3 billion yen. Consolidated financial forecasts for the fiscal year ending March 2025. We maintain our previous forecast for both operating profit at 1,420 trillion yen and current profit attributable to owner of the parent company, 950 billion yen. Exchange rate assumption is 152 yen against the dollar for the fourth quarter and full year. The forecast for the annual dividend remains at 68 yen unchanged from the previous announcement. Additionally, a resolution was made on December 23rd, 2024, to repurchase 1.1 trillion yen worth of company shares. As of January 31st, 2025, 184.9 billion yen has been acquired. Cumulative FY 2025 total of acquired shares is 472 billion yen. Mr. Fujimura will present the details of the financial.

I'll explain the results of the third quarter regarding the cumulative unit sales until the third quarter, FY March 2025 of the group. For the motorcycle segment due to the year-on-year increase mainly in Asia, 15,508,000 units were sold for the automobile segments, due to a decrease in Asia, mainly China 2,817,000 units sold. And for power products segments, due to a decrease mainly in Europe, 2,516,000 units were sold. Consolidated financial results of the cumulative three quarters were explained already. Next, I will explain factors of ups and downs of profit before income taxes of accumulative nine months year on year. Operating profit increased by 63.5 billion yen year on year because of the following factors. Regarding our sales impact, profit increased due to the rise in sales unit. However, incentives went up and thus, the profit was squeezed by 104.3 billion yen. Regarding price cost impact, thanks to pricing that commensurate, they improved the product values. Profit increased by 376 billion yen. Regarding expenses, due to incremental labor and subcontractor costs, profit was squeezed by 54.3 billion yen. R&D cost increased, 97.5 billion downward impact on profit. And the currency effects squeezed profit by 56.3 billion yen. Profit before income taxes was down by 38.9 billion yen because of the profit of equity method declined due to a drop of the unit sales in China and so on although operating profit itself increased. Regarding the operating profit by segment, 501.6 billion yen for motorcycle business and 402.6 billion for automotive and 244.9 billion yen for financial service businesses. Power products and other businesses made losses of 9.3 billion yen. Next, the cash flows. Free cash flows from the businesses excluding the financial services businesses were 693.7 billion yen during the first nine months, cumulative of the FY March '25. Net cash at the end of the quarter was 3.789 trillion. Operating cash flows after R&D adjustment were 1.945 trillion yen. Next, I'll explain consolidated business forecast of FY March 2025. Regarding the projection of the group's unit sales versus the previous forecast, unit sales of motorcycles will be at 20.6 million, mainly reflecting the increase in Asia. And the units of the automobiles will be 3.75 billion, mainly reflecting the decline in Japan. And those of power products businesses will stay at 3.66 million, same as the last forecast. I've covered the forecast of the consolidated performance of FY March 2025. Next, let me explain factors behind the changes in profits before income taxes, year-on-year basis. Operating profit will be up by 38 billion yen year on year. The breakdown of the differences will be regarding the sales impact, although the incremental unit sales will push up the profit, however, the higher incentives and so forth will squeeze the profit by 198 billion. Regarding price cost impact, pricing reflecting a product value improvement and so on will add a profit by 535 billion yen. Expenses will increase by 73.5 billion, squeezing the profit and R&D cost will increase by 125 billion yen, squeezing the profit, too. And the currency effects will impact negatively on profit by 100.5 billion yen. Although operating profit itself increased, the profit before income taxes will drop by 177.3 billion, reflecting a decline in profit of equity method because of the reduction in unit sales in China. Next, let me explain the differences in comparison to the previous forecast. We will keep the same operating profit of the previous guidance, of which the breakdowns will be motorcycle sales will increase. However, the unit of automobiles will reduce, thus the sales impact will squeeze the profit by 27.5 billion yen. Price cost will squeeze the profit by 15 billion yen. Expenses will increase by 5 billion yen, reducing the profit and the currency effects will push up the profit by 47.5 billion yen. Profit before income taxes will be expected to be higher by 30 billion yen, reflecting yen depreciation causing forex gains. Lastly, this is a forecast for capital expenditures, depreciation, and R&D spending. And that concludes my presentation. Thank you very much.

So the first question comes from Toyo Keizai, Mr. Yokoyama, please.

This is Yokoyama from Toyo Keizai. Can you hear me now?

Yes.

Thank you. I have two questions. First, about the full year, the four-quarters plan. The question is about operating profit, 410 billion yen, and you deduct the 280 billion yen for the fourth quarter. So what is the reason for the decline? And I'm asking the same question, I think it's related to the expenses. But compared to the past plans, please talk about the risks and opportunities. And so that is my question. And I'd like to proceed to the next question. But in the interim announcement, you talked about the EV incentives to quite an extent. And I think it was a 100 billion increase from the original plan. After the third quarter as of February right now, North American incentive, how much increase are you seeing? And are you seeing that the incentive costs are increasing? And I think of that, the consolidated for automotive is declining. So please explain about the incentives in North America. Thank you.

Mr. Yokoyama, you've raised two questions. First, regarding our plans for the fourth quarter, you asked how it compares to the actual results from the third quarter. Essentially, the fourth quarter marks the end of our fiscal year, which leads to increases particularly in R&D and SGA. As we close out the year, several expenses are settled, resulting in higher expenditures. Typically, both SGA and R&D costs rise during this period. In the third quarter, our operating profit was approximately 390 billion yen, primarily driven by SGA and R&D. When discussing North American incentives, there has indeed been a slight increase, though procurement costs are also on the rise. This reflects broader trends in our finance operations. Overall, the increase in costs remains marginal. However, focusing on EV incentives specifically, I previously mentioned an anticipated impact of 100 billion yen for the full year. That number has slightly decreased as we managed to lower the incentives. Adjustments in production at GM have influenced supply, necessitating discussions around potential compensation payments. Consequently, these factors might lead to negative implications in the fourth quarter, although we currently lack specific figures to reflect this. In terms of your request for additional information, let me clarify the fourth quarter's outlook. Compared to our original plan, we've updated the exchange rate to 152 yen. Despite this, we still expect an operating profit of 1 trillion, 420 billion yen, alongside some coverage from our motorcycle segment, which hasn't entirely compensated for the automotive segment. As a result, the overall projection indicates a negative outlook for the full year, diverging from previous forecasts. The motorcycle business helped balance automotive losses during the third quarter, with the yen's depreciation contributing an additional 30 billion yen compared to our budget. Consequently, the anticipated negativity for the full year has shifted more towards the fourth quarter, which highlights the evolution of our financial forecast. That summarizes my response. Thank you.

Thank you very much. Mr. Yokoyama. Next question, Asahi Shimbun newspaper. Mr. Nishiyama, please.

Hi. I'm Nishiyama from Asahi Shimbun. Can you hear me?

Yes, please.

So thank you for the explanation. And I have two questions. The first one, earlier, the question was already covering this point, which is automobile business profitability as compared to motorcycles. In a way, a motorcycle business is very good. That is the factor behind. However, in order to improve the profitability of the automobile businesses, of course, there could be another separate discussion about business integration, so on, so forth. But what are your measures for improving the profitability of the cars? And then in the last presentation and that time around, there was Trump's administration, topics talked about a lot and then a tariff for Canada and Mexico is said to be risen. Of course, it is frozen for a month, but we don't know when it will be coming back again. And what is your measure against that? And once the tariff is in place, what is the impact on your businesses?

Thank you very much, Mr. Nishiyama. So the profitability of the automobile businesses, to start with a recent situation, the revenue for this year, looking at that revenue, of course, that may look a little lower, especially in comparison to that of a motorcycle business. However, in order to give you the precise answer, for instance, battery EV development cost and battery EV sales volume is not so high in North America and in China. However, if battery EV businesses and those investments in the development for that are deducted from that, the remainder will be the ICE and hybrid businesses. And for that part alone, actually, the situation for that part is not so different from the previous term. The profitability is about 8% for that part. Therefore, hybrid and then gasoline-based engine cars have profitability that is far improved from the previous situation. That is a kind of overall picture. And battery EVs, we are preparing for the business of battery EVs now, for instance, GM production. That was the starting point for North America. And then right next fiscal year, we are going to produce and launch the cars that we developed by ourselves in North America and U.S. And as of today, I wouldn't say that that will be making a very good business right at the start. However, including the preparation for the next-gen cars, we are going to improve the businesses of the upcoming models, and we will spend the development efforts with investment which will improve the situation furthermore. And then profitability of that will be businesses from this model year '27 onwards. We already explained that in December last year, a next-generation hybrid starting around model year '26 or '27. And the hybrids are in those years, will be of a much higher profitability. And also, commercial values of those will be much better. And with them in place, it will improve the profitability of the entire businesses, including ICE cars and hybrids. And then Trump administration after March 1st, the question is still hypothetical, I should say. However, if I want to try to answer your question squarely, thank you for your question, of course. So suppose in March 1st, 25% tariff is started if that comes in place. So the impact on the business, up until March this year, there could be perhaps a 20 billion plus impact. That is the assumption as of today. However, it is a super short-term impact, right? Production in Mexico or Canada, we have those productions in there, and we will try to bring over those products from those two areas to the U.S. earlier, perhaps in February. And that is our actions in the short term. And in terms of the tariff increase, again, in the big picture, of course, every year, the situation is rather different. However, about one-third or higher than one-third of the businesses are using the airport components or products brought down from Canada and Mexico. The remainder of the two quarters, two-thirds are produced in the U.S. Therefore, our second highest local content of the production of the vehicles next to Ford in the United States. And the question is how effective would that policy become? In fact, it is very difficult to visualize it. So at this moment, what we can do is to do something in the short term, which is about current production based on the current model mix and production in Mexico and Canadian factories. We could reorganize the mix, product mix of the production as well there. This is something we can do short term. But in a mid-term perspective, we could change the allocation of the multiple mix in different ways. We are preparing for that, too. However, we have possible actions and considerations for short term, mid-term, long-term, and so forth, but we don't really give a go at this moment for any of the actions on the table today. So Fujimura-san, anything to add, please?

So again, the tariff is significant. What is the approximate estimate of the impact based on a simple calculation of the complementary supplies for completely built units (CBU)? In the United States, we have a local content level next to Ford, meaning that 60% of the products are produced domestically. We do have some imports from Japan, but 40% of those are supported by production in Mexico and Canada, both of which also depend on the U.S. right now. We're discussing sales in the U.S. that pertain to production in Mexico and Canada. Last year, this was about 550,000 units, with Canada depending on the U.S. for 40,000 and Mexico for 20,000. This totals 610,000 units. The impact varies by model type, but if we assume a cost of $30,000 per vehicle and add a 25% tariff, you can calculate the impact for the vehicles, in addition to considering other costs like steel, aluminum, and various materials. That could amount to several thousand dollars on the high end, as I would expect as an impact. My colleague Aoyama-san mentioned our short-term, mid-term, and long-term measures and when we should initiate those actions. We need to monitor the situation closely and determine the right time to begin. Thank you.

Thank you very much, Mr. Nishiyama. And next question, please. Yomiuri Shimbun, Narahashi, please.

Narahashi, Yomiuri Shimbun newspaper. Thank you. About the motorcycle sales in Thailand is declining again from the last quarter. I think it's due to market conditions. And what impact does this have on your automobile business? That's my first question. And the second question about repurchasing your shares. Well, as of December, yes, there was the talk of the business integration with Nissan and based on that, well now that this has been scrapped. And what is the reason for continuing to do the repurchase?

Thank you, Mr. Narahashi. Regarding your first question about the impact on the automotive business, I understand. Motorcycle sales in Thailand this year are significantly lower than last year, primarily due to challenges in financing. While we saw some improvement for low-income earners towards the end of last year with income tax refunds, overall motorcycle sales remain considerably low year on year. The automobile market is also facing difficulties due to tough loan screening processes, contributing to a decline in both the motorcycle and automobile markets in Thailand for the past year. However, we hold an 80% market share in the Thai motorcycle market and aim to maintain that position while awaiting market recovery. In the automotive sector, we face challenges with securing loans, and the introduction of EVs by Chinese OEMs has had an impact. Currently, about 20% of the passenger vehicles in the market are battery EVs, but growth has been sluggish. We are committed to increasing our efforts in BEV sales in the next fiscal year. Now, regarding your second question about our share repurchases, we announced on December 23rd the start of consultations for potential business integration. While these discussions continue, we are careful to avoid insider trading concerns. The decision to repurchase shares was based on optimizing our equity ratio and occurred at a time aligned with the start of our business integration talks with Nissan. We believe this was the right time to proceed with the buybacks, and we will continue this strategy moving forward without any changes. Mr. Fujimura?

Let me provide some figures. By the end of December, our net cash stood at 3.8 trillion yen, which represents about 2.5 months of cash based on the beginning of the month. In light of the Lehman crisis and other factors we've encountered, we typically aim to hold one month's worth of cash. However, our current position was at 1.5 months. We intend to improve our equity ratio, targeting a price-to-book ratio of one. Instead of retaining cash, we prefer to return value to our shareholders, which is why we have decided on a buyback program totaling 1.1 trillion yen. As Mr. Aoyama mentioned, this decision was not linked to the ongoing business integration discussions with Nissan. Once this 1.1 trillion yen program is completed, we will maintain cash levels equivalent to one month's worth. We believe this is a suitable balance. Thank you.

So thank you, Mr. Narahashi. Next question from Mr. Noguchi, please.

Noguchi from Nikkei. Can you hear me?

Yes.

Thank you. So motorcycle and automobile businesses are going forward. What is the concept or ideas for the operating profit for them? For the time being, EV development and SG&A cost is so prioritized, and automobile profitability is not growing, maybe suppressed a bit. And also, with the motorcycle businesses, you have electrification going on. So how much would that grow given the good marketplace, too? However, overall, if you have a mixture of the two businesses, do you think we can grow them together continually going forward? Or would that be suppressed a bit? Or are there any opportunities to grow, too? So that is the question.

Thank you, Mr. Noguchi. To begin with the motorcycle businesses, similar to the automobile sector, we need to consider the pace of battery electric vehicle (EV) development. However, predicting that pace is challenging at this moment due to the uncertain policy situation in North America. Focusing on motorcycle businesses, the electrification of motorcycles has received less investment compared to automobiles. Despite this, we are effectively electrifying motorcycles by leveraging our existing engine and frame technologies, and we are approaching battery EV development in a similar manner. By integrating our technologies, we can ensure effective and successful development. While battery EV costs for cars are significant, they are relatively lower for motorcycles. Analyzing the global motorcycle market, there remain opportunities for growth in countries like India and Brazil, as well as in markets like the Philippines, Pakistan, and Bangladesh. This suggests that even with internal combustion engine (ICE) vehicles, we can sustain high profitability in the motorcycle sector for some time. Regarding automobiles, as mentioned earlier, gasoline engines, including hybrids, currently have an 8% profitability. With the introduction of next-generation hybrids around 2029 or 2027, this profitability is expected to rise into the double digits, exceeding 10%. As for the profitability of battery EVs, we will be launching new models moving forward, and we anticipate improvements compared to our current situation in the United States. However, visibility remains limited currently. For example, we initially anticipated using the $7,500 tax deduction under the Inflation Reduction Act for our LGES battery plants, but the outcome of this situation is still unclear. Therefore, it is difficult to provide a definitive business outlook. Nonetheless, we aim to maintain high profitability with our ICE and current gasoline vehicles. At the same time, we will be adaptable with our battery EVs to respond to any circumstances as they arise. Thank you very much.

Thank you very much Mr. Noguchi. Next question, please. From Mr. Mizutori from Japan Automotive Daily, please.

Mizutori speaking. Can you hear me?

Yes.

Thank you. The first question about China. So we see that there is a 40% year-on-year decline from April to December, and the year series, and that was thought to be promising. But there has been a bit longer time required for ensuring the quality. And therefore, locally, the HEV market seems to be developing. But how are you trying to make a recovery in China? That's my first question. And about the number, I want to make some confirmation. The full year, the capital expenditure is 70 billion yen or so less, I think. So is this due to the revisiting of the exchange rate? Is there anything that you postponed in terms of your capex?

Thank you very much for the question. Regarding the ES series, we experienced a slight delay in preparation for mass production, around a month or two behind schedule, but there were no significant issues. We plan to launch from March to April, but we haven't finalized the Manufacturer's Suggested Retail Price. The market conditions, including incentives, are challenging, and we are currently evaluating our pricing strategy. As for competitiveness, we are receiving positive feedback on the styling, appearance, and interior design of our models, and we have high expectations. We will begin with the ES7 model in the ES series, followed by the sedan GT, and then introduce a three-row large SUV. We aim to establish and expand the ES series as part of our battery electric vehicle strategy. In terms of the new energy vehicle ratio for the calendar year 2024, we expect it to exceed 46%, and we are targeting over 55% for the following year. There are varying opinions on this, but we still anticipate an increase in new energy vehicles. For the hybrid segment, we plan to utilize the current Accord and CR-V models, along with plug-in hybrids. Although sales are currently slow due to a tough incentive environment, we expect to begin mass production of our next-generation hybrid in China by fiscal year 2027. With the NEV ratio increasing, we recognize that a 10% increase in NEVs will likely lead to a decline in non-NEV gasoline vehicles. As we approach the next fiscal year, we will have to assess unit sales and market changes to develop our business plan. With the rising NEV ratio, we want to capitalize on that opportunity. Regarding capital expenditure, the reduction of 70 billion yen is not a delay but rather a slight adjustment. We will carry over our planned expenditures from the end of this fiscal year into the beginning of the next. There haven't been significant delays in our battery EV-related investments in Canada; we are simply adjusting the timing.

Thank you very much, Mr. Mizutori. Next question from Nikkei Asia. Mr. Takei, please.

Hello. Takei from Nikkei Asia. Can you hear me?

Yes, yes.

Thank you. I have two questions. The first one is about the U.S. automobile market. The Trump administration has initiated measures regarding upcoming BEV sales. What is your outlook on this? Additionally, while hybrid demand is strong right now, how do you view the current situation for EV and hybrid sales? What steps will you take to address this? The second question pertains to the Southeast Asian region, where hybrids and plug-in hybrids seem to be very popular. Do you have plans to become more involved in that market? Please share your insights and strategies regarding your business in that area.

Thank you for your question. The current administration under Trump has introduced many changes. Our approach is to remain flexible and quick in responding to these changes. Right now, the focus is primarily on the tariff situation involving Canada and Mexico. The 25% tariffs on aluminum and steel could certainly have an impact, but sourcing these materials domestically in the U.S. allows us to manage the situation effectively. We can also procure some supplies from Canada and Japan without much difficulty. However, if these tariffs persist for two to three years on our CBU from Mexico and Canada, it could pose challenges. Our response will depend on how we assess future developments. Regarding the $7,500 question and California's ZEV regulations, these rules require us to sell more battery electric vehicles. Given the current landscape, meeting these demands is quite challenging. While this is not directly tied to the intentions of the Trump administration, the ZEV regulations may require adjustments. For hybrids, we are expanding our affordable options to give consumers more choices. This fiscal year, we anticipate selling about 400,000 hybrid cars, with expectations of slightly fewer than 500,000 next year. This means hybrids will comprise around 25% of our total offerings this year, and we expect to see more than 1 million hybrids sold globally next year. In Southeast Asia, demand for hybrids in Thailand and Indonesia is increasing, with hybrids making up about 30% of sales in Thailand. While we're trailing competitors in Indonesia, hybrids there account for about 8% of the market, and we plan to take a more aggressive stance in launching hybrid vehicles in Indonesia next year. Thank you.

Thank you. I apologize for the unclear question, but when I talked about benefit, I was saying that we are seeing an increase in demand for HEV hybrid. And therefore, I thought that there might be an opportunity for Honda to sell more hybrids. So in that context, well, you said that there will be an increase in the United States of some 100,000 units. So I think that you have answered my question. Thank you. And one clarification, if I may. About the North America market, you said the ZEV regulation will become reality, but what is the realistic number? And also, the hybrid ratio, well, this fiscal year is 25%, I think. But next fiscal year, if it were to increase, what will be the ratio for next fiscal year? Can you add that explanation, please?

Yes. About the hybrid ratio, well, this year, it's about 25%. Next fiscal year, there will be an increase of 100,000 in North America, but I think the ratio will be 35%, a little more maybe, about 35%, I guess. And about the ZEV regulation, I was talking about the industry on the whole, I think it will be difficult to achieve that regulation standard. But currently looking at the situation, the regulation itself might become something more realistic. That was what I was trying to say here. So I really don't have any specifics to talk about here. We're just thinking that the regulation might be loosened to a more realistic number. Thank you.