Earnings Call Transcript - HMC Q4 2021

Noriko Okamoto, Corporate Communications

Thank you very much for sparing your time to join us here today at the announcement of Honda Motor Company's FY 2021 Financial Results. And I'd like to convene the meeting. I'll be serving as the emcee. My name is Okamoto from Corporate Communications. Thank you. First, allow me to introduce the Executives Attending, Executive Vice President, Seiji Kuraishi; Senior Managing Director, Kohei Takeuchi. First, Executive Vice President, Kuraishi, will give the outline of FY 2021 financial results and FY 2022 financial forecast, please.

Seiji Kuraishi, Executive Vice President

Let me explain the financial results for FY 2021. For that year, the Honda Group's unit sales were 15.132 million for motorcycles, 4.546 million for automobiles, and 5.623 million for the Life Creation business. Next, I will discuss the main market situations. The total market in Japan declined from the previous year due to the impact of the COVID-19 pandemic, although the N-BOX and other models reported strong sales. Despite this, Honda's overall sales experienced a year-on-year decline. The N-BOX series achieved the highest unit sales among new launches in the mini vehicle segment for six consecutive years. In March, we introduced a new Legend in Japan featuring Honda Sensing Elite, the world's first level 3 automated driving technology. Looking ahead to FY 2022, the total market remains uncertain due to concerns about recurring COVID-19, but Honda expects results to surpass the previous year, primarily driven by the effective launch of the new Vezel model. The U.S. market also saw a year-on-year decline, but with the gradual reopening of the economy since May, it has started to recover, although still below last year's figures. Honda's businesses rebounded with models like the CRV and Pilot, reaching close to the market results. In the fourth quarter, many light truck models set monthly sales records in March, exceeding market growth. The total market for FY 2022 is anticipated to improve year-on-year, thanks to rising COVID-19 vaccinations and effective economic policies. Honda expects strong results from the new Civic launch and increased sales, particularly in the light truck segment, thereby exceeding last year's performance. The total market in China surpassed last year's levels due to effective government measures stimulating consumption, with strong sales reported for Breeze, CRV, Vezel, and Saloon. Additionally, the extended EV lineup contributed to record-high sales units. Regarding the total market for calendar year 2021, we anticipate year-on-year growth alongside economic recovery, and Honda will launch annual models and enhance EV lineups, aiming for higher sales than the previous year. At the Shanghai Motor Show in April, Honda showcased the world premiere of the e:prototype SUV, marking the first Honda brand EV in China. Moving on to the motorcycle business, markets in China and the U.S. have shown signs of recovery, particularly in Asia; however, overall results were still below last year's levels. Sales in India rebounded to match last year's figures during the third quarter, while fourth-quarter sales in Indonesia recovered to 83% of the previous year. China and Pakistan experienced growth beyond last year's performance. Despite concerns about COVID-19, the total market for FY 2022 is expected to grow, with Honda forecasting increased sales year-on-year, particularly in Indonesia. In conclusion, despite a decline in demand due to the COVID-19 impact, we have revised our business activities to control SG&A expenses and reduce costs. Thanks to a positive effect from credit loss provisions, operating profit reached ¥660.2 billion, exceeding last year's figure. Profit attributable to the owners of the parent was ¥657.4 billion, bolstered by increased investment profits based on the equity method. This slide also shows unit sales and P&L information. Now regarding the FY 2022 forecast, we plan to enhance unit sales year-on-year across all Honda Group business areas. In terms of operating profit, while facing challenges such as rising raw material prices and semiconductor supply shortages, we will continue our efforts to improve sales and optimize production capabilities, aiming to achieve ¥660 billion, similar to this year. Currently, some production is being withheld at certain facilities due to semiconductor supply issues, which are evolving daily. However, Honda is coordinating global production activities to mitigate impacts throughout the year. For expected business performance, we aim to maintain an operating profit of ¥660 billion by aligning production with our corporate efforts. Speaking of dividends, the annual dividend for FY 2021 is ¥110 per share, an increase of ¥28 from our previous expectation, with a fourth-quarter dividend of ¥54 per share. The expected annual dividend for FY 2022 will remain at ¥110 per share, consistent with FY 2021. Our dividend policy aims to maintain a consolidated payout ratio of 30% despite shifting business conditions. We also plan to revise our secondary sales as shown, reinforcing our commitment to providing stable and continuous profit returns to shareholders. Now I would like to hand over to Mr. Takeuchi.

Kohei Takeuchi, Senior Managing Director

I will provide the details of the financial results and forecasts. Let me start with the fourth quarter results. For Honda Group unit sales, Motorcycles, despite a drop in Indonesia and other markets, saw an increase in sales in India, Pakistan, and China. In Automobiles, despite a decline in the U.S., sales increased in China. Life Creation experienced growth in China but a decrease in the United States. Moving on to the income statement, sales revenue rose across all business categories, reaching ¥3,623.8 billion, which is a 4.8% increase from the same period last year. The operating profit, influenced by a reduction in SG&A and an improved profit from the revenue model mix, was ¥213.2 billion. The share of profit from equity-method investments was ¥68.1 billion, attributed to increased sales revenue and better mix in China. Examining profit before income taxes, in FY '21, the fourth-quarter profit before income taxes amounted to ¥255.3 billion, an increase of ¥251.5 billion from the same quarter last year. Operating profit was ¥213.2 billion, up ¥218.8 billion from the same period last year, driven by lower SG&A costs and changes in revenue model mix. Please refer to Page 14 for a breakdown of sales revenue and operating profit by business segment. The operating profit from the Motorcycle business was ¥72.2 billion, benefitting from higher unit sales and cost reductions. The total operating profit related to Automobile sales, including Financial services, was ¥140.4 billion. The Automobile sector's operating profit reached ¥37.6 billion, while Financial Services generated an operating profit of ¥106.3 billion due to variations in credit loss provisions. Life Creation and other businesses recorded an operating loss of ¥3 billion, with an aircraft and engine loss of ¥7.8 billion. For FY '21, the total financial results are presented. On Page 16, you can see the profit before income taxes was ¥914 billion, an increase of ¥124.1 billion year-on-year. Although operating profit faced a decline due to the change in revenue model mix, it still reached ¥660.2 billion, which is an increase of ¥26.5 billion year-on-year. Free cash flow for non-financial services businesses stood at ¥303.8 billion, and cash and cash equivalents at the end of the period amounted to ¥2,528.3 billion, with net cash of ¥2,048.3 billion. For FY '22, we forecast Honda Group unit sales in Motorcycles to reach 18 million units, an increase of 2.86 million from last fiscal year, driven by growth in Asia. In Automobiles, while concerns remain about semiconductor shortages, we expect to sell 5 million units, an increase of 450,000. The Life Creation business is projected to grow to 5.9 million units, largely due to demand from North America. The financial forecast for FY '22 shows that despite some negative factors like an increase in SG&A and challenges in profit from cost reductions, we expect operating profit to remain at ¥660 billion. The cost reduction impact is estimated at minus ¥51 billion, mainly from rising raw material costs, but we aim to achieve over ¥200 billion in cost reductions along with planned price increases. Finally, the capital expenditures, depreciation, and R&D forecast for FY '22 are outlined in this presentation. That concludes my presentation. Thank you for your attention.

Noriko Okamoto, Corporate Communications

Thank you very much for your attention. I would now like to move on to the questions and answers portion of today's session. Thank you. The first question is from Mr. Abe from Nikkei Shimbun newspaper.

Unidentified Analyst, Analyst

Nice to meet you. First of all, the operating profit margin for the mobile businesses. Recently, profit margin has been coming down. And it is 1% down to in March 2021 in order to improve the operating profit margin of Automobile businesses, what is major action for that? The other question is purpose, the target of electrification. By 2040, zero emissions because will become 100%. And EV SUV, those are the zero emission vehicles. And when you switch over to those types of the vehicles, how much investment we do need? In case of Tesla, they say in order to start-up the 1 EV factory, they take about ¥100 million or so. What is your prospect for the investment in your case at Honda?

Unidentified Company Representative, Unidentified Position

Thank you for your question. Let's discuss the operating profit margin for our mobile businesses. We have been focusing on strengthening our existing operations, and we have made progress in reviewing our businesses. As a result, we are enhancing our business structures. Regarding our automobile sector, we have previously communicated about changes in our development organization, which is affecting the number of models and variations we offer. We've also introduced Honda Active to improve efficiency. By 2025, we aim to reduce our development processes by 30%. We are also optimizing production. By the end of this fiscal term, we will close our factories in the UK and Turkey, and the Sayama factory will relocate, which will help us enhance efficiency and improve our operating profit margin. In response to your second question, President [indiscernible] recently discussed a ¥5 trillion R&D investment for electrification over the next five years. We will focus on key technology areas for our independent efforts while also improving the efficiency of our current development processes to enhance profit margins. We are open to potential alliances where efficiency can be maximized. To achieve this, we need to optimize our production systems and improve overall efficiency, including in development. Battery procurement is a significant concern for us, and we are already investing in GM in North America and CATL in China. We are monitoring technology trends and regional specifics to seek suitable partnerships. While I can't specify how much we'll need for electrification, our previous estimate stands at around ¥10 trillion over five years. Thank you very much. Thank you very much. And now, the next question, please.

Unidentified Analyst, Analyst

Can you hear me?

Unidentified Company Representative, Unidentified Position

Yes, we can hear you. Please?

Unidentified Analyst, Analyst

Thank you very much for this opportunity. I have several questions. First, you mentioned an increase in profit attributed to cost reductions, including sales, SG&A, and other areas. Could you provide more specifics on where the profit is coming from? Additionally, you're expecting further cost reductions for this fiscal year. Can you give more details about the next fiscal year, particularly regarding the expected ¥200 billion or more cost reduction, and the R&D expenditure? Recently, it's been ¥840 billion, which is higher than in the past. Also, regarding safety, electrification, and safety measures, can you elaborate on what you plan to do?

Noriko Okamoto, Corporate Communications

Mr. Takeuchi will answer these questions. Thank you.

Kohei Takeuchi, Senior Managing Director

About the SG&A and what cost reduction we have achieved and we'll be achieving. Well, last fiscal year, the SG&A was an area where we have the financial business. And well, compared to the previous year, when the U.S. employment rate compared to that, the provision at back then was increased for the credit losses. But last fiscal year, thanks to the U.S. government support. As well as the fact that the unemployment rate improved, we were able to reduce the provision. And also aside from that, our business activities had to be held down due to COVID-19. And given pandemic in the different countries, our workers, associates worked hard to reduce the cost. And thanks to that, we saw the SG&A reduced year-on-year for FY 2021. And about the provision for credit losses, aside from that, even if we were to exclude that, we believe that we were able to achieve SG&A reduction of ¥200 billion. And about cost reduction and also the effect of price increase, we're looking at both these and the automobiles, motorcycles and live creation products, and we want to focus on making our manufacturing efficient and together with their suppliers, workout where we can reduce the cost. And I think that these efforts as well as the price increase have produced this result. About R&D, we are expecting ¥840 billion. And as for R&D expenditure, well, it was ¥780 billion the year before. And therefore, a ¥840 billion is high. And before that, it was ¥820 billion. So it is the highest on record. That is true. But this is because the existing, the internal combustion engine is going to be electrified. We need money, and we're shifting towards electrification. I cannot give the breakdown of how much will be spent on what. But as a result of this shift and also connect, we are investing or spending ¥840 billion for R&D. But as Kuraishi said, it's not going to be purely used for R&D - for R&D alone, but we also want to rely on alliances. And that is the reason why we're planning for ¥840 billion R&D expenditure for FY 2022. Thank you.

Unidentified Company Representative, Unidentified Position

Thank you. Our next question, please. From Asahi Shimbun newspaper, Mr. Kamiyama, please.

Unidentified Analyst, Analyst

Kamiyama from Asahi newspaper. Can you hear me?

Unidentified Company Representative, Unidentified Position

Yes.

Unidentified Analyst, Analyst

I have two questions. For the FY 2021, I have a question about that. In terms of the sales unit, you're expecting to grow them in the U.S. and China in March 2022 period, FY 2020 next year. And I think that is maybe because of the rebounding or bound from last year and for China, how much growth or percentage growth are you expecting in China? And question two, so March 2022, sales is expecting to grow, but the profit level is down. Including the net profit. And of course, that includes the soaring material prices and the semiconductor effect and how much of effect included in those results?

Unidentified Company Representative, Unidentified Position

I can discuss sales while you focus on profits. We are anticipating ¥15 trillion in sales and ¥660 billion in operating profit for next year. To clarify, we are looking at a negative impact of ¥51 billion due to cost reductions, which we believe could result in over ¥200 billion in savings from our cost-cutting measures and price increases. This disparity reflects the impacts of rising raw material prices. Regarding semiconductors, we are currently adjusting our production operations and reducing the number of models we produce to mitigate sales impacts. Despite our efforts, the financial credit loss provisions recorded in previous years continue to have an effect, amounting to a negative impact of ¥110 billion, which also covers unemployment and government subsidies expected to be available until about that time. The expected operating profit of ¥660 billion factors in all these elements. In terms of unit sales, we are seeing a global elevation in the impacts of COVID-19 with demand decreasing. In the U.S., vaccination efforts are progressing well, and supportive economic measures from the Biden administration are driving higher demand, yielding a market growth of 111% year-on-year by the end of April. The semiconductor situation continues to add uncertainty as well. In China, while they managed their COVID-19 situation, there has been no recent impact, and business was stable in April. However, we still face challenges with semiconductors. The Chinese government predicts a total market of 2.1 billion cars, expecting an 8% growth over last year. We aim to align our business with this market growth while keeping a close watch on semiconductor availability and the ongoing global COVID-19 situation. Thank you. Next question. NHK, please.

Unidentified Analyst, Analyst

About the unit sales once again at an unspecified figure. You mentioned that it's ¥5 million. Given the rising raw material costs and semiconductor shortage, how have you assessed these impacts in determining this number? Can you provide a breakdown of the effects of raw material costs and the semiconductor shortage?

Unidentified Company Representative, Unidentified Position

For the automobiles, we are anticipating 5 million units, accounting for the effects of rising raw material costs and the semiconductor shortage. To elaborate on the semiconductor situation, we experienced production suspensions and logistics challenges due to COVID-19 at the end of last year. The entire industry faced a shortage of components, particularly semiconductors, driven by increased demand for gaming alongside limited supply. To ensure a stable supply, we have actively sought multiple sources both domestically and internationally to secure semiconductors and maintain appropriate inventory levels for each component. Initially, semiconductor manufacturers aimed to ramp up production, and we thought the impact would be manageable. However, the storm in Texas and a fire at one semiconductor facility disrupted this progress. As a result, we will continue to experience the effects of the semiconductor shortage during the first half of this fiscal year, although we are making every effort to mitigate the impact. The situation remains uncertain, but we expect to see recovery in the second half of the year, allowing us to reduce the overall impact by year-end. Even if there are challenges, we are prepared to manage our budget as previously stated, which forms the basis of our financial plans for FY 2022. Next question. Toyota Xi, Mr. Okema, please.

Unidentified Analyst, Analyst

I have a question about North America. The survey indicates that the number of days in stock is currently under pressure and quite tight. Is this situation due to the semiconductor issue, or is it a result of strong market performance and high sales causing constraints in stock levels? Could you clarify your perspective on this? Additionally, regarding battery procurement, you have your alliance partner in North America and China, as well as in Japan. Do you have strategies or plans for different regions, including Japan? Please share your thoughts on this.

Unidentified Company Representative, Unidentified Position

Regarding the inventory situation in North America, last year’s adjustments in production days due to COVID-19 have impacted current inventory levels. Each company is affected differently based on their regions. The semiconductor shortage has also contributed to this situation. Fortunately, we had some semiconductor stocks that helped us avoid immediate impacts. However, if the shortage persists, we may continue to face tight stock levels. The average inventory days in North America is around 33 days, while ours is approximately 50 days. The semiconductor situation is currently being adjusted in the market, and we will monitor inventory levels and supplies to help improve the situation. We aim to recover in the second half of the year to meet our ¥5 billion target. For battery sourcing, we are collaborating with GM North America and CATL in China and are exploring options for different sourcing in various regions, though specific partnerships have not been defined yet. Next question. From Reuters, Ms. Shiraki, excuse me.

Unidentified Analyst, Analyst

This is Shiraki from Reuters. About India production. Let me confirm the situation, including the outlook. But currently, the 4 motorcycle factories are closed down until tomorrow. And also, the automobile factories are also been suspended. And with the spread of the pandemic, how are you going to try to secure the production of motorcycles, automobile production in India? And how do you see the impact on the unit that can be produced? Well, it's very difficult to predict, but what is your premise and doing production in India. Well, about the situation in India?

Unidentified Company Representative, Unidentified Position

Well, our motorcycle plant plants due to the second wave of COVID-19 and also the lock down that was introduced domestically. Our dealers also. About 80% of our dealers in India closed down. And from May 1, 4 factories have been closed and suspend production until May 18. That is our current situation. Well, to be candid with you, we really don't know what will happen. And we cannot predict, but we have to observe what happens to the pandemic, and we have to ensure the safety of our associates. And with that in mind, we need to consider when to resume production about the impact on production units, we really do not know for sure at this point in time. But for India, actually, last year, there was a big impact. But in the second half. We saw the recovery was even better than we expected. And thanks to partially the government's imprimis measures. But from the end of March, the second wave hit and currently, the medical system has been totally overwhelmed. And therefore, we have to keep an eye on what is happening in India. And carefully consider what needs to be done. Wall Street Journal, Mr. please.

Unidentified Analyst, Analyst

I'm from the Wall Street Journal. I'm going to ask in English, if that's okay.

Unidentified Company Representative, Unidentified Position

Yes, please.

Unidentified Analyst, Analyst

Two questions. One, if you could give us a number in terms of lost production from last year as a result of the semiconductor shortage. And if you could try to give us a number for how much production you think will be lost in this current fiscal year as a result of the shortage? And secondly, if you could give us a high-level sort of idea of where you think your alliance with General Motors is headed. You seem to be cooperating on more and more areas and how close should we expect GM and Honda to become in the future?

Unidentified Company Representative, Unidentified Position

Could you provide a figure regarding the lost production from last year due to the semiconductor shortage? Also, it would be helpful to know your estimate for the production that may be lost in the current fiscal year because of the shortage. Additionally, could you share your thoughts on the direction of your partnership with General Motors? It appears that you are collaborating on more initiatives, so how closely can we expect GM and Honda to work together in the future? So in terms of semiconductor effect, we had 100,000 units affected last year. And in the current year, as I said before, the effect it continues in the first half and in the second half, we are going to catch up. And as of now, I expect that all those loss effect on the production will be as trade or set off in the end of the year. And with the GM, actually, 2 companies are taking actions for the PFC and other areas automated driving support. And we have announced collaborations in North America last year, and we are continuing our discussions together. And electrification strategy is supported by the GM alliance that is one of the pillars supporting that strategy. And for that purpose, we are going to try to find out efficient collaboration going forward. And in specific, I cannot give you an idea as yet. And going forward, when we are ready to share with us more specifics, we will, of course, do that. Any other questions. Thank you. If not, so with this, we would like to conclude today's presentation on our financial results. As for the materials, they will be posted on our web page. So please access our web page. Once again, we thank you for your attendance.