Earnings Call Transcript - HMC Q2 2025

Operator, Operator

Thank you very much indeed for your participation today. I'd like to now make a start of the financial results, the press conference for the second quarter of FY’2025. Let me introduce the participants today, Director, Executive Vice President, and the Representative Executive Officer, Mr. Shinji Aoyama; Director and Managing Executive Officer, CFO, Mr. Eiji Fujimura. Mr. Aoyama is going to present the outline of the results of the second quarter of FY’2025 and the full year outlook of the FY’2025, followed by Mr. Fujimura to present details of the financial results. Mr. Aoyama, the floor is yours.

Shinji Aoyama, Director, Executive Vice President, Representative Executive Officer

Thank you very much for your understanding of our business activities as usual. Let me present our second quarter results of FY’2025. Starting with the highlights. Operating profit of the first half of FY’2025 was 742.6 billion yen with an operating profit margin of 6.2%. The unit sales on a consolidated automobile business enjoyed steady sales of ICE and HEV models in North America, as well as the full-fledged start of EV sales. We had additional sales of 64,000 units year on year. Total unit sales across the group declined by 155,000 units due to the reduction of the unit sales in China. Regarding motorcycle businesses, we had favorable unit sales globally and achieved cumulative sales over two quarters reaching 10 million units. Operating cash flow after R&D adjustment was 1.2851 trillion yen, the same level as last year. Regarding the full year consolidated forecast of FY’2025, despite the impact of strengthened incentives for EV sales in North America alongside the recovery of motorcycle businesses, we will maintain the same forecast from the previous guidance. That is, operating profits will be 1.42 trillion yen while due to the sales decline in China, we will change the previous forecast down to 950 billion yen, a reduction of 50 billion yen. Regarding shareholder returns, we made a decision at the board of directors meeting today for an interim dividend of 34 yen and an annual dividend of 68 yen, which will be maintained from the same amount in the previous forecast. As for share buybacks, in addition to the 300 billion yen decision made on May 10th, 2024, we have made a resolution to add up to 100 billion yen in further acquisitions. Let me explain the situations of the main markets. For the automobile businesses, unit sales increased in Japan and the U.S. However, due to the impact of the growing new energy vehicle market and intensifying price competition in China, total unit sales declined below last year's level. As for the motorcycle businesses, despite unit sales declining in Thailand due to the economic slowdown, we had steady demand in India, with incremental unit sales in Vietnam. Overall, by economic recovery, total unit sales exceeded year on year. This summarizes the financial result of the first two quarters of FY’2025. Operating profit was 742.6 billion yen, up 46 billion yen year on year. Investment profit and loss based on the equity method was negative 20.7 billion yen, a decline of 87.4 billion yen year on year. The profit attributable to the owners of the parent for the interim period was 494.6 billion yen, down by 121.6 billion yen. Next, regarding the consolidated financial outlook for FY’2025, we will maintain the forecast of operating profit at 1.42 trillion yen. Previous guidance still stands. The profit attributable to the owners of the parent for the year will be down by 50 billion yen, to 950 billion yen. The forex assumption will be set at 143 yen to 1 dollar for the second half of the year and 148 yen for the full year. Regarding the division's dividends, interim payouts for FY’2025 are set at 34 yen per share. The guidance for annual payout will remain unchanged at 68 yen, with no change from the previous guidance. In the board of directors meeting held today, we made a decision on share buybacks, with an upper limit of 100 billion yen. Now, I will turn it over to Mr. Fujimura for details on the financials.

Eiji Fujimura, CFO, Director, Managing Executive Officer

Next, I will explain the second-quarter results details. First, the FY’2025 second quarter Honda Group six-month unit sales. Motorcycle business at 10,382,000 units, primarily due to a year-on-year increase in Asia. The automobile business saw 1,779,000 units mainly due to a drop in Asia, particularly China. The power products business achieved 1,653,000 units mainly due to a drop in North America and Europe. The consolidated six-month financial results have already been explained. Now, let’s look at the profit before income taxes for the six months compared to the same period last fiscal year. Operating profit increased by 46 billion yen. The change factors are as follows. The positive impact saw a rise in profit mainly due to increased unit sales. However, increased incentives resulted in a 28 billion yen decline in profit. The price and cost impacts were positive, with pricing commensurate with product value leading to a 268.6 billion yen profit increase. Expense increases, particularly personnel and outsourcing costs, had a negative impact of 105.5 billion yen. Research and development expenses rose by 80 billion yen, negatively affecting profit. Currency effects had a negative impact of 9 billion yen. Profit before income taxes declined by 137.3 billion yen due to a decrease in unit sales in China, dropping equity method profits owing to domestic-related companies, along with appraisal losses of foreign currency-denominated assets due to a stronger yen than last year-end. When outlining operating profit by business segment, we saw 325.8 billion yen in the motorcycle business, 258 billion yen in automobiles, and 162.7 billion yen in financial services. Power products and others saw a loss of 3.9 billion yen. Regarding cash flow, the FY’2025 six-month free cash flow of operating companies, excluding financial business operations, was 372.3 billion yen. The net cash balance at the end of the second quarter was 3,492.3 trillion yen, with R&D adjusted operating cash flows being 1,285.1 trillion. The FY’2025 full-year consolidated financial forecast was reiterated. We forecast Honda Group motorcycle unit sales will reach 20.2 million units, an increase compared to previous forecasts mainly due to an uptick in Asia. The automobile forecast remains at 3.8 million units reflecting the downturn in Asia. The power products business forecast remains unchanged at 3.66 million units. The consolidated financial forecast for FY’2025 has already been explained. Regarding profit before income tax projections, we anticipate operating profit will rise by 39 billion yen from last fiscal year. Factors influencing change include sales impacts, a decline in profit due to increased incentives totaling 170.5 billion yen. Pricing reflecting product value will boost profits by 550 billion yen. Expenses will negatively influence profits by 68.5 billion yen. R&D costs are projected to increase by 125 billion yen while currency impacts might reduce profits by 148 billion yen. Profit before income taxes is expected to decrease due to declining unit sales in China and domestic-related companies' equity method profit. As exchange rates indicate an appreciation of the yen against the end of the last fiscal year, we can expect appraisal losses on foreign currency-denominated assets, resulting in a 207.3 billion yen reduction in profit. In terms of changes from previous forecasts, the operating profit forecast remains unchanged. The breakdown includes sales impacts due to increased incentives amounting to a negative 99.5 billion yen. Price and cost impacts are expected to result in a positive 48 billion yen owing to pricing reflecting product value. Expenses will see a positive shift of 2.5 billion yen. R&D expenses will increase by 4 billion yen, with currency effects increasing by 53 billion yen. Profit before income taxes is projected to decline by 45 billion yen due to falling unit sales in China, resulting in negative equity method profit. Lastly, the forecast for capital expenditures, depreciation, and R&D expenditures for FY’2025 are as follows. This concludes my explanation. Thank you.

Operator, Operator

First question from Yomiuri newspaper, Mr. Nakamura. Please ask your question.

Unidentified Analyst, Analyst

I have two questions. The first one is regarding the North America market. The Prologue and FX models have already started on sale, but the incentives are affecting your performance. Compared to the beginning of the year, what is the incremental incentives as of now? In this situation, do you still plan to strengthen the EV sales there? My second question pertains to your outlook. You are changing the forex assumptions to reflect a depreciation of the yen. Please explain the context behind this, considering that the presidential election and other political situations may influence the forex landscape. How do you tackle that?

Shinji Aoyama, Director, Executive Vice President, Representative Executive Officer

Thank you very much, Mr. Nakamura, for your question. Regarding North America EV net sales in recent quarters, we recorded about 20,000 unit sales less in North America during the first half, with plans for 60,000 more units in the second half, amounting to about 80,000 unit sales total for the year. In terms of incentives, while I cannot provide detailed figures, we have about $7,000 per unit more spending compared to original assumptions. For the second half, we plan to budget the same level of incentives. As for strengthening EV sales in this environment, starting from the 2026 model year, we plan to offer Honda-designed and manufactured EVs in North America to maintain momentum for our existing models. However, we need to evaluate market conditions, incentives, and regulations to adapt our strategy flexibly. Now, regarding forex, I'll allow Fujimura-san to address that.

Eiji Fujimura, CFO, Director, Managing Executive Officer

Thank you for your question, Nakamura-san. Earlier this summer, we mentioned an assumption of 140 yen for the full year, and we have not changed that from earlier this year as we believe it will remain steady. However, during that time, we faced fluctuation rates of about 20 yen. The assumption we provided previously, a 140 yen assumption for the full year, translated to approximately 135 yen for the second quarter. Now, we project 145 yen for the third quarter and 140 yen for the fourth quarter, estimating an average of about 142.5 yen for the second half. This indicates a trend towards yen depreciation. Compared to earlier positions, we observed declines in interest rates in both the U.S. and Japan, though predictions regarding the presidential election remain uncertain, as we haven't factored those developments into our forecast. Thank you.

Operator, Operator

Thank you very much, Mr. Nakamura. Next question, Nikkei, Mr. Okinaga, please.

Unidentified Analyst, Analyst

This is Okinaga from Nikkei. I have two questions. Firstly, about the declining automobile operating income, particularly in the North American market. Although hybrids are performing well, inventory is building up while considering consumption based on inflation. What is your outlook on demand in North America? The second question pertains to the downward revision—specifically the negative equity method profit linked to China, but how are gasoline and EV sales impacting the current outlook?

Shinji Aoyama, Director, Executive Vice President, Representative Executive Officer

Thank you very much for your question, Mr. Okinaga. Regarding North America, while inventory may seem to be increasing, it may not be as significant as perceived. Various market measures may give that impression. I believe this is a temporary situation. Although hybrids are performing well in the current market, with the U.S. market cap at around 60 million units annually, we expect this overall to remain stable. However, uncertainties related to the presidential election may require us to monitor market developments closely. We're primarily focusing on promoting hybrids in the second half. As for the negative numbers related to equity method profits, I explained earlier that the decline in sales in China contributes to this, alongside related companies in Japan. Both factors are combining to create this negative profit from the equity method. If I may, I'll ask Fujimura-san to elaborate.

Eiji Fujimura, CFO, Director, Managing Executive Officer

Regarding the downward revision, we've adjusted our operating profit forecast to 950 billion yen. Looking at the second quarter, operating profit was 11.42 trillion, and we believe we can maintain that. About equity method profit factors, as Aoyama stated, there’s been a significant decline in sales in China, estimated at over 300,000 units. This drop, coupled with one-time influences from domestic-related companies partly tied to China, culminates in negative equity profit. We also face currency fluctuations impacting both Honda Motor and subsidiaries, dealing with debts, bonds, and foreign currency deposits. While operating profit levels remain unaffected, the combination of these factors contributes to a 50 billion yen decline. Furthermore, discrepancies in tax systems in different countries also contribute to this situation.

Operator, Operator

Thank you very much, Mr. Okinaga. Next question from NHK, Mr. Nishizono, please.

Unidentified Analyst, Analyst

Thank you for the explanation. My question is for Mr. Aoyama. Considering the current financial results, what is your overall assessment? Additionally, how do you perceive the impact of the Chinese market and your response to that?

Shinji Aoyama, Director, Executive Vice President, Representative Executive Officer

Thank you very much, Mr. Nishizono. It’s difficult to provide a single-word conclusion about the current situation. Compared to our expectations, the results have slightly underperformed. Fluctuations against emerging currencies such as Canadian, Mexican, and several others led to a negative impact of approximately 30 billion yen, which was unexpected. While I believe such fluctuations may be transient on a full-year basis, the immediate second quarter revealed higher warranty costs that negatively impacted results by about 110 billion yen, contributing to the downturn from our expectations. Additionally, increasing incentives for battery EVs factor into this overall analysis. The notable reduction of unit sales in China exceeded our forecasts, creating faster-than-expected declines. In North America, while we experienced incentives, we did not spend as much as originally anticipated. Meanwhile, the motorcycle businesses have shown recovery, which is positive. In the Chinese market, there’s rapid growth of NEVs, battery EVs, and PHEVs, while we currently lack competitive products in this area, making the need for continued cost reductions imperative.

Operator, Operator

Thank you very much, Mr. Nishizono. Next, Toyo Keizai, Mr. Yokoyama, please.

Unidentified Analyst, Analyst

This is Yokoyama from Toyo Keizai Weekly magazine. Can you hear me? I have two questions. Firstly, about the balance between the first half and second half, Mr. Fujimura discussed expense increases. With this revision, I believe there have been some changes. Additionally, Mr. Aoyama mentioned recall expenses. What are your thoughts concerning the balance between the two halves? The second question pertains to China; at the beginning of the fiscal year, you mentioned restructuring, optimization, and production personnel. Could you share the current status, particularly the pace of sales decline and any cutting plans within production between Guangzhou and Dongfeng?

Shinji Aoyama, Director, Executive Vice President, Representative Executive Officer

Thank you very much. Initially, concerning the balance between the first and second halves of the fiscal year, as you pointed out, there tends to be skewed costs affecting the second half. This fiscal year 2025 is no exception, especially R&D expenses, which often see increases in the second half. This trend continues again this year. Earlier, during other questions, I partially answered your inquiry regarding recalls; we view this as a one-time expense. In the context of costs, we expect the second half interactions to enhance profitability despite some challenges. The currency set between the first and second half indicates a negative difference of approximately 100 billion yen between the two periods. In terms of sales impact, there’s a positive outlook, but currency fluctuations will negatively sway performance by around 100 billion yen. Now regarding the situation in China, I’ve previously mentioned that we have two joint ventures there, both of which are establishing new production capacities, including dedicated EV factories. One has already commenced production while the other is set to start. During FY’2025, the combined production capacity of the two joint ventures will reduce from 1.49 million units to 960,000 units. Discussions with our partners regarding these reductions have been ongoing. On personnel cuts, we've made progress, mainly voluntary resignations resulting in reductions of several thousand personnel across both Guangzhou and Dongfeng. So, that captures the current situation there. Thank you.

Operator, Operator

Thank you very much, Mr. Yokoyama. Next question from Kyodo Tsushin, Mr. Okuda, please.

Unidentified Analyst, Analyst

The ballot is being counted now in the presidential election. There was a mention regarding forex assumptions. Mr. Trump would raise tariffs, and EV promotion could be subjected to review. Going forward, the election results will matter. What is your potential impact on business, and how do you foresee addressing this situation? For example, regarding future investments in EV plans, would they be impacted by the election outcome? Furthermore, regarding collaboration programs with Nissan and Mitsubishi, what is their current standing? Mr. Kato from Mitsubishi mentioned that they would consolidate plans by March next year. What is the situation regarding them providing PHEVs or options?

Shinji Aoyama, Director, Executive Vice President, Representative Executive Officer

Thank you very much, Mr. Okuda. We are closely monitoring the ongoing electoral process as you are. Regardless of the outcome, it is crucial to maintain a longer-term perspective on the investment strategy. Regardless of who becomes president, we should not let short- to mid-term influences dictate our business strategy. Our automotive segment, particularly small passenger cars and EV electrification, will continuously expand in the long run. In Ohio, we have ventures involving LGES for battery production, and in Canada, we are developing comprehensive value chain initiatives. These projects will progress independently of election outcomes. However, we will adapt to market developments and make investment decisions correspondingly. The presidential election will not directly influence our plans. Conversely, potential tariffs affecting production in Mexico remain a concern as it affects numerous automakers, including Honda, GM, and Ford. Any imposed tariffs would significantly impact operations. However, we foresee that unless there is considerable discourse, immediate implementation might not occur. If long-term tariffs are set, we may need to reevaluate production locations to avoid tariffs. Regarding collaborations with Nissan and Mitsubishi, specific timelines remain undefined as discussions continue. We have no clear specifics regarding PHEV provisions at this stage, but discussions are active. Thank you very much.

Operator, Operator

Thank you very much, Mr. Okuda. Next question, Bloomberg, Mr. Inajima, please.

Unidentified Analyst, Analyst

I have two questions. First, regarding operating profit for the second quarter, what were the main factors impacting negatively? You mentioned 96.9 billion yen in expenses; could you provide the breakdown of these expenses?

Shinji Aoyama, Director, Executive Vice President, Representative Executive Officer

Thank you very much, Mr. Inajima. You’re asking about the second quarter specifically, correct? Let's focus on last year’s comparisons.

Eiji Fujimura, CFO, Director, Managing Executive Officer

Thank you very much, Mr. Inajima. Yes, regarding the year-on-year comparison for July to September, you are asking about expenses including R&D?

Unidentified Analyst, Analyst

Yes, I mean overall key items.

Eiji Fujimura, CFO, Director, Managing Executive Officer

Regarding expenses, it’s all included in the annual breakdown, however, we were operating at a cruising speed. Previous inquiries focused on the significant annual impacts. Within these past three months that just ended, warranty costs increased by about 80 billion yen. While we haven’t signed memorandums for some suppliers yet, those figures aren’t reflected in the forecast. We can clarify that since we suspect they should be within a range of approximately 30 billion yen. Although there is an annual negative influence noted, we believe several factors should counterbalance this effectively resulting in an actual profit closer to 360 billion than 250 billion; with the increase in profits it should be an increase in our earnings. The decline in motorcycle sales and certain electric vehicle sales in regions like China will be considered. Despite these challenges, we maintain a target of 1.4 trillion yen operating profit for the year, projecting positive adjustments leveraging observations from these past three months.

Operator, Operator

Next question, Daniel-san from Reuters, please.

Unidentified Analyst, Analyst

Hello. Daniel from Reuters. My question pertains to the North American market, where several previous inquiries emerged, particularly about tariffs mentioned by Mr. Trump regarding vehicles imported from Mexico. If those plans materialize, what would be the potential impacts on your business and what steps would you take to mitigate such impacts?

Shinji Aoyama, Director, Executive Vice President, Representative Executive Officer

Thank you very much, Daniel, for your question. The proposed tariffs on vehicles imported from Mexico, where we have production for approximately 200,000 units—80% of which are exported to the U.S. constituting about 160,000 units—present a significant risk to our business. Collectively, over 160,000 units would be subject to tariffs, which would substantially impact our operations. I don’t foresee tariffs being imposed immediately, as discussions would be needed to address this. It’s not feasible for manufacturers like Honda, along with GM and Ford, to abruptly cease production in Mexico. Tariffs will likely not be permanent, but as they apply, companies may consider relocating production in response to mitigate tariff impacts.

Operator, Operator

Thank you very much, Daniel-san. Next question, Nikkan Jidosha, Mr. Mizutori, please.

Unidentified Analyst, Analyst

It was discussed earlier that EV incentives in the United States increased by $7,000 more than expected. However, the situation where higher sales result in increased deficits for EVs raises concerns. Is it correct to understand that as of the model year 2026, profitability can still be expected from EVs? How will CO2 credit payment revenues be impacted in states like California with rising EV sales?

Shinji Aoyama, Director, Executive Vice President, Representative Executive Officer

Mr. Mizutori, thank you for the question. Indeed, we noted that incentives surpassed expectations, and for fiscal year 2025, we expect an increase of about 100 billion yen due to these extra costs. So, presently, the situation stands that from fiscal year 2026 onward, our response to environmental regulations—while taking profitability into consideration—will require balancing the regulation aspects and incentives we extend. There is a strong need to ensure profitability in FY 2026. To summarize, we aim to work diligently toward generating profit with new models introduced then. Also regarding CO2 credits, the U.S. landscape is complex, particularly with states like California adhering to stricter GHG guidelines and transitioning to the ZEV initiative. By model year 2026, the sales volume of battery EVs must align with stricter regulations, presenting challenges for all manufacturers. We anticipate buying credits where necessary if we cannot meet these regulations. All factors, including unit sales, incentives, regulations, and credit purchases need careful weighing on our part, and I will provide more details in future discussions on our regulatory strategies.

Operator, Operator

Thank you very much, Mr. Mizutori. Due to time constraints, this will be the last question. Nakajima, Minami Jimusho. Mr. Nakajima, please.

Unidentified Analyst, Analyst

Nakajima speaking. While your operating profit is largely bolstered by motorcycle businesses, the Japanese motorcycle segment is struggling. Additionally, with certain 50 cc motorcycles being phased out, can we forecast short-term profit stability in this domain?

Shinji Aoyama, Director, Executive Vice President, Representative Executive Officer

Thank you for the question. Let's discuss the phase-out concerning 50 cc motorcycles. We are partially responsible for the socio-economic context tied to this category. The density regulations surrounding the 50 cc segment will see a shift away from constraints towards categories like 25 ccs or less, which will also carry a four-kilowatt power limit, allowing drivers with full automotive licenses to operate them comfortably. While a decline in this segment appears inevitable, our business remains productive in mid-size and larger categories, such as the 155 cc motorcycles, which show sturdiness. We've experienced some gains during the COVID-19 pandemic with individuals pursuing motorcycle tours, although that trend is stabilizing now. Nonetheless, we aim to achieve sustained profitability in motorcycle business segments within developed markets like Japan.

Operator, Operator

Thank you very much, Mr. Nakajima. With that, we would like to conclude our briefing session. The documents are posted on our website.