Honda Motor Co Ltd

TSE:7267

Earnings Call Transcript 2019-Q1

[Unknown Executive]

Welcome to the Honda financial results presentation for the fiscal first quarter of fiscal year 2019. We would like to begin our fiscal year 2019 first quarter results presentation.

We would like to first review the financial summary for the first quarter of fiscal year 2019. Operating profit for the first quarter of fiscal year 2019 was JPY 299.3 billion, achieving an increase by 11.2% compared to the same period last fiscal year. Despite the effects of the flooding in Mexico and the negative impact of ForEx effects, the increases in automobile sales in North America and motorcycle sales in Asia, combined with a decrease in SG&A expenses and effects of the cost reduction initiatives, contributed to the rise in the operating profit. Profit for the period attributable to owners of the parent for the quarter was JPY 244.3 billion, an increase by 17.8% compared to the same period a year earlier.

We would now like to review Honda's business results for the quarter in some major markets around the world. In Japan, automobile sales totaled 167,000 units, a 5.8% increase compared to the same period last year. Cumulative sales of the N series models reached the 2 million unit milestone, with the N-BOX series successfully becoming the top-selling model for new car sales in Japan for the first half of calendar year 2018. In July, the N-VAN and the Clarity PHEV models were launched. In the U.S. market, Honda achieved automobile sales of 425,000 units, virtually unchanged from the same period last year. In June, the Acura RDX and Insight models were launched. In China, automobile sales totaled 321,000 units, a decline of 6.4% from the same period a year earlier. Cumulative sales in China reached the 10 million unit milestone. In May, the fully remodeled Accord was launched.

Turning now to motorcycle operations. Motorcycle sales totaled 1.69 million units in India, which is a key market, marking an increase by 14.3% compared to the same period last year. In June, the Dio and the CD 110 Dream Deluxe models were launched.

We would now like to touch on some of our most recent news topics. In June, Honda reached an agreement on a business partnership with General Motors for next-generation advanced battery components, including the battery cells and modules.

In July, Honda and Panasonic Corporation announced that they would start conducting a joint research experiment on battery sharing using detachable mobile batteries in electric motorcycles, among other electric-powered means of transportation. The joint research experiment is scheduled to begin in Indonesia in December of 2018.

The power product business announced that its general purpose GCV engine series underwent a full lineup change for launch in June. While retaining the series' outstanding fuel efficiency performance, further improvements in combustion technologies achieve the highest power output and torque levels in the class.

In May, the new HondaJet Elite was introduced, with the aircraft obtaining the highest levels in the class for its top speed, fuel efficiency performance and cruising range, among other features.

We will now take a look at our financial forecast for fiscal year 2019 on a consolidated basis. By incorporating the effects of the flooding in Mexico, the reductions in SG&A expenses and the impact of ForEx fluctuations, we have revised our consolidated results forecast from our previous announcement as follows: we now expect sales revenue of JPY 15,450,000,000,000; we plan on an operating profit of JPY 710 billion, an increase by JPY 10 billion compared to the previous forecast; we expect the share of profit of investments accounted for using the equity method to be JPY 215 billion. Regarding profit for the period attributable to owners of the parent, our target is JPY 615 billion. The exchange rates set for calculating these projections were at JPY 109 to USD 1 for the first half and JPY 105 to USD 1 for the second half. The average full year exchange rate was set at JPY 107 to USD 1. As for dividends, the annual expected dividend for fiscal year 2019 would be unchanged from our previous announcement, at JPY 118 per share of common stock. The dividend for the first quarter would be JPY 27 per share of common stock.

We will now provide more detailed explanations on the company's financial results and outlook. First of all, we will review the Honda Group's unit sales for the first quarter. In Motorcycle Business operations, group unit sales totaled 5,352,000 units. In Automobile Business operations, group unit sales totaled 1,305,000 units. In Power Product Business operations, group unit sales totaled 1,341,000.

Regarding the profit and loss situation, sales revenue increased in every business segment, resulting in a total of JPY 4,024,100,000,000, an increase by 8.4% compared to the same period a year ago. Operating profit amounted to JPY 299.3 billion, an increase of 11.2% compared to the same period last fiscal year, primarily due to an increase in profit associated with volume and model mix as well as a decrease in SG&A expenses, among other factors. The operating margin was 7.4%. The share of profit of investments accounted for using the equity method was JPY 54.3 billion. Profit before income taxes totaled JPY 358.2 billion. Quarterly profit for the period attributable to owners of the parent totaled JPY 244.3 billion, an increase by 17.8% compared to the same period a year earlier.

Regarding Honda Group unit sales for each segment. Motorcycle sales totaled 5,352,000 units, a 13.9% increase compared to the same period last year, thanks mainly to the rise in sales in Indonesia, India and Vietnam, among other countries.

For automobile operations, increases in sales of the Pilot in the U.S. as well as N-BOX in Japan were among the primary drivers of unit growth to 1,305,000, a 3% increase compared to the same period last year.

For the power products business operations, a decrease in sales of OEM engines in the U.S. market was more than offset by an increase in the sales of generators in the U.S. as well as an increase in sales of OEM engines in China, among other factors, leading to a total of 1,341,000, an increase by 0.8% compared to the same period a year earlier.

Now regarding sales revenue for the fiscal first quarter. Despite the negative impact of foreign currency translation effects, every business segment realized an increase in revenue, resulting in total sales revenue of JPY 4,024,100,000,000.

Next, we would like to provide explanations on the increase and decrease factors that impacted profit before income taxes for the quarter. Profit before income taxes totaled JPY 358.2 billion, an increase by JPY 23.2 billion compared to the same period a year earlier. Operating profit totaled JPY 299.3 billion, a JPY 30.1 billion increase compared to the same period last year. A look at the increase and decrease factors shows that for the operating profit with ForEx effects excluded, despite negative effects of the flooding in Mexico, an increase in profit associated with volume and model mix as well as a decrease in SG&A expenses, among other factors, resulted in a positive impact of JPY 55.8 billion. At the operating profit level, the negative impact from ForEx effects was JPY 25.6 billion. An increase in the share of profit of investments accounted for using the equity method resulted in a positive impact of JPY 1.3 billion. Finance income and finance costs resulted in a negative impact of JPY 8.2 billion.

We would now like to discuss the results for each business area. In Motorcycle Business operations, an increase in profit associated with volume and model mix as well as other factors led to the operating profit of JPY 92.1 billion, a 16.9% increase compared to the same period a year earlier. In Automobile Business operations, a decrease in SG&A expenses combined with an increase in profit associated with volume and model mix, among other factors, resulted in the operating profit of JPY 151.6 billion, an increase by 8.1% compared to the same period a year earlier. Regarding the operating loss for Power Product and Other Businesses, a rise in expenses involving the other businesses led to a total loss of JPY 1.6 billion, a deterioration of JPY 1.7 billion compared to the same period a year ago. The operating loss for aircraft and aircraft engine business operations, which are included in the Power Product and Other Businesses segment, totaled JPY 10 billion, a deterioration of JPY 1.4 billion compared to the same period last year. In Financial Services Business operations, the operating profits totaled JPY 57.1 billion, an increase by 14.7% compared to the same period a year ago, thanks mainly to an increase in profits associated with higher operating lease revenues.

We would now like to review Honda's business results for the first quarter by geographical region. In Japan, despite a rise in profit related to an increase in volume and model mix, among other factors, the negative impact of ForEx effects, an increase in R&D expenses and other factors resulted in an operating profit of JPY 14.7 billion, a decrease by 31.7% compared to the same period a year earlier.

In North America, the negative effects of flooding in Mexico were more than offset by a rise in profit resulting from an increase in automobile unit sales, among other factors, leading to the operating profit of JPY 110.3 billion, an 8.6% increase compared to the same period last year.

For Europe, the effects of cost reduction initiatives and other factors resulted in an operating profit of JPY 7.0 billion, an increase by 5.7% compared to the same period a year earlier.

In Asia, an increase in profit thanks to increases in unit sales for motorcycles and automobiles and positive effects of the cost reduction efforts, among other factors, led to an operating profit of JPY 122.5 billion, a 25.2% increase compared to the same period last year.

In other regions, which includes South America, the Middle East, Africa, Oceania and other areas, an increase in profit related to volume and model mix and other factors resulted in an operating profit of JPY 22.6 billion, an increase by 53.7% compared to the same period a year ago.

Now regarding the share of profit of investments accounted for using the equity method, this amounted to JPY 54.3 billion for the quarter, a 2.6% increase compared to the same period last year. This was mainly because of the recognition of impairment losses on investments for certain affiliated companies in Japan during the same period a year ago.

Consolidated capital expenditures for the fiscal first quarter amounted to JPY 96.5 billion, an increase of JPY 18.6 billion compared to the same period a year ago, mainly due to an increase in expenditures associated with new model introductions and automobile business operations.

We would now like to discuss Honda's consolidated results forecast for fiscal year 2019, beginning with Honda Group unit sales for each of the business areas.

In Motorcycle Business operations, a rise in sales, mainly in Asia, has been incorporated for an expected increase by 305,000 units compared to the previous forecast, bringing projected unit sales to 20,850,000 units.

In Automobile Business operations, the effects of the flooding in Mexico and other factors have been incorporated for a projected decrease of 90,000 units, bringing the forecast to a total of 5,285,000 units.

In Power Product Business operations, Honda Group unit sales forecast is 6,345,000 units, reflecting an expected increase of 55,000 units.

The consolidated unit sales forecast for each business segment is as shown here.

The consolidated full year earnings forecast, which we explained earlier, is as shown here.

The increase and decrease factors for this consolidated fiscal year forecast compared to the results of the previous fiscal year are as follows: operating profit, JPY 123.5 billion minus; share of profit on investments accounted for using the equity method, JPY 32.6 billion minus; finance income and finance costs, JPY 28.7 billion minus. The weak Argentina peso included in currency effects reflects expected inflationary effects, so it is excluded from real-term currency effects, and the projected real-term currency effect for this fiscal year is JPY 178.0 billion.

The next slide helps to illustrate actual company performance by rearranging the order of the increase and decrease factors impacting operating profit. Excluding real-term currency effects, onetime issues and raw material price increases, a real-term profit increase of JPY 140.5 billion is projected. Compared to our previous financial forecast for the current fiscal year, we have reflected an increase in operating profit of plus JPY 10 billion. If the impact of Mexico plant flooding, raw material price increases and real-term currency effects are excluded, this would result in a plus JPY 61.0 billion increase.

Finally, our projected capital expenditures, depreciation and R&D expenditures for fiscal year 2019 are as shown here.

This concludes our financial results presentation. Thank you very much for your continued interest in Honda's activities.

[Unknown Executive]

And thank you very much. I'd now like to proceed to Q&A. Those of you who have questions, please raise your hand. Please wait until the microphone is brought to you. Please state your name and affiliation before asking your question. If anyone have any questions, please raise your hand.

The person in the front here, please.

[Unknown Attendee]

[ Okada ] from Nikkei newspaper. Can I ask all the questions at once?

[Unknown Executive]

Yes.

[Unknown Analyst]

About Mexico, the flooding and the impact of the flooding. What is the situation? And how this has impacted your profit? And cost reduction and SG&A reduction, you say, is the biggest factor for you making the revision in the full year forecast. Well, there are production reforms and common chassis being introduced after Mr. Hachigo has become President. Are these the contributors? Or are there anything specific to this fiscal year? Did you take any special cost reduction measures considering the decline in profit? And also, this morning, and Denso has then said that the tariffs have had impact, but United States, if they were to increase the tariff by 25%, this would have this much impact and the trade friction impact. Do you have any specific numbers or -- that you can reveal here?

[Seiji Kuraishi, executive]

Well, first, about the impact of the Mexico flooding -- about the impact of the flooding in Mexico. Due to heavy rain, our Celaya factory experienced flooding and, as a result, had to suspend production. Currently at Celaya, we are producing HR-V and Fit. And after we decided to suspend production, we investigated the damage and we judged that it will require about 4 months to reconstruct. Currently, we are planning to resume production at mid-November. At our U.S. Indiana plant, the new Insight is being produced. They are receiving engines from Celaya, but the supply will be delayed by 1 month. About the transmission production at Celaya, which is globally supplied, we are able to resume production. It resumed at -- on July 9 and production is at Guadalajara and therefore HR-V, Fit at Celaya. And Insight at Indiana will be impacted by 55,000 units. The impact of the full year is believed to be some JPY 50 billion, and this is reflected in our revision of our forecast. Now there were no fatalities, injuries, and we are targeting towards the mid-November resumption of production. That's all about Mexico. About next, cost reduction.

[Kohei Takeuchi, executive]

Mr. [ Ogata ], I think you were talking about the JPY 50 billion impact. We were able to correct the numbers but -- so operating profit is expected to increase by JPY 10 billion and -- from JPY 700 billion to JPY 710 billion. The first quarter and second quarter impact of ForEx, we were considering JPY 105 against the dollar. And we had produced our numbers. But actuality is about JPY 109 against the dollar. And also, the emerging economies' currency, yes, we were putting the budget assuming that it will be difficult, but the U.S. has increased its interest rate and the emerging economies' currency is appreciating, but I think it's more or less online. But Argentina peso is fluctuating more than expected. As for the Argentina peso, this also accompanies inflation. And though there is currency impact, we don't believe that this will have a major impact on the revenue and we're thinking of a plus JPY 19 billion impact, excluding Argentina peso. And motorcycle sales is doing well. And our finance business in the United States, we believe that it is more positive, the residual value that we thought. And the cost reduction was not something that came up suddenly, but instead, we've examined our cost reduction efforts. And as a result, including the raw material cost, JPY 60 billion, and therefore, we have this projection of a JPY 10 billion increase in profit.

[Seiji Kuraishi, executive]

About the trade impact, I believe the third question was. Well, Honda, ever since its inception, has had this policy to produce where the demand exists. We have been promoting local production. At this point in time, Section 301 impact is yet to be seen and therefore, at this point in time, we have no plans to transfer our offices or any other organization. No change. But we would like to set the situation carefully. Yes, we -- in the United States, I think there is enough to impact when we talk about North America, but I think that we have to think how we would globally respond to this considering our global complementary system. But at this point in time, I have nothing to say. Is it right? Yes. The next question, please.

[Unknown Executive]

So, a lady over there, please?

[Unknown Attendee]

[ Monica ] from [ Toyokedaya ]. I have 3 points. First, about the sales in China. Recently, I know that sales have been weak. Japanese companies, cumulatively from January to June, you are the only one who is facing declining sales. How do you think recover such sales? Would you please give us your progress and current situation? And for automotive sales unit, it was negative by 90,000, or partially because of Mexican flooding, but how about China and other regions? Would you please specify these breakdowns? And the second point, I ask about the China-U.S. trade friction. Local procurement ratio is high, we understand. However, imported raw materials, aluminum and steel from China, what sort of impact did you foresee? Would you please share that with us? And actually, raw material prices are going up. So would you please give us your view on that? And the third point is about Sayama. And I know that partially, you're going to keep the production. So would you please elaborate that part also?

[Seiji Kuraishi, executive]

First about the China situation. As you know, in China, there's a problem of dilution, CR-V, May 22; and Civic, July 16. We started to address and started a recall. In March and April, we suspended the sales and therefore, the orders dropped temporarily and we wanted to recover with other models. However, over the previous year, there is a negative sales units. And as recall has proceeded, now order is recovered, like 600 units. That is 20,000 units per month. It's a sort of a level of order we've recovered. And as for the Civic, even though we announced the recall, but we haven't seen any impact on Civic so far. So in China, from now on, new Accord and a new model will be introduced. So I hope that China will be recovered from now on. And we're not revising any forecast. And the third question, about the sales unit volumes. Well, as a whole, yes, there's a decline by 90,000. But among them, 75,000 is attributable to the Mexican flooding impact. And the other units, well not only because of China, but the Europe or EMEA, we faced some decreases.

[Kohei Takeuchi, executive]

Okay. About this import tariff impact. Well, for the part and component tariffs, in reality, what is happening now is that steel, aluminum imported from Canada to America, there will be -- it's already tariff is raised to 25% and 10%. And of course, we try to produce the things where the demand is; however, 90% is procured in America locally and little from Canada. And it's all up to the negotiation, so we cannot disclose that specific numbers. But this time, we haven't received any significant impact. And other related things from China, power product outboard engine, that has some tariff. And from the United States to China, there are some parts and components transmissions, and that has some impact. However, they are not really significant material impact on our profit. So raw materials as a whole, well of course, we revised downward by JPY 20 billion from the previous announcement. And the prices cannot be disclosed because of the negotiation. However, steel, aluminum and plastics, resins and precious-grade metals, these might have some impact to some extent. That's our forecast.

[Seiji Kuraishi, executive]

And about Sayama, July 30, there was an article entitled that the announcement was returned to be back to the -- state that Sayama will be continued. However, our policy was already announced in October 4 that we're going to continue producing some core part in Sayama, so it is a wrong report that if we revised or changed our stance about the production of the Sayama. And so of course, all the components cannot be shifted and transferred at that time. And therefore, our completed vehicles could -- production could be shifted. But afterwards, in a phased manner, parts, production will be shifted from Sayama. So as I -- we already announced in the very beginning, first the full model production, and then the parts and components would be following in a phased manner, and we're following our original plan. Thank you very much. Any other questions?

[Unknown Executive]

The person over there, and up front.

[Naoto Okamura]

Okamura from Automotive News. I'd like to confirm one point. The Mexican flooding impact, you say that there'll be a reduction of a unit sales projection by 75,000 units. And you are saying that there will be a negative impact of some JPY 50 billion due to the delay and suspension of production in Mexico. Is that correct?

[Unknown Executive]

Yes. That is correct.

[Unknown Executive]

Any other questions? Yes, please.

[Unknown Analyst]

Nihon Keizai Shimbun newspaper, [ Furukekawa]. I have 2 questions. First, in the North America, you revised the forecast. So 1.94 million units throughout the year. But in the past, it was 2.01 million, the record high. So you revised downward. And it's true that you would attain the record high, 2.01 million, and it's because of the Mexican flooding impact. So I'd like to confirm whether there is no negative impact from the U.S. market. And about Sayama, you said that the parts and components would be shifted in a phased manner, but when do you think you're going to finish that? And when are you going to close or stop producing in Sayama?

[Seiji Kuraishi, executive]

First, about the sales units. In North America, due to the Mexican flood negative impact, there was a negative of 75,000 units. And did we give up attaining the record-high production? Well, in the sales people, they haven't given up yet. They are doing their best. However, due to the supply issue, we have to think about the production for the coming months because salespeople are very much motivated. But as of today's number's concerned, that part is very hard to be recovered. However, it's not due to the decline of the sales and about Sayama factory -- Sayama plant, as you asked. First full model vehicle -- completed vehicle -- finished vehicles be transferred. And then afterwards, parts and components in a step manner, but within 1, 2 years, we believe. And afterwards, there will be a complete closure, as we already originally announced. However, how are we going to utilize that site? Well, we are still discussing about that and we have nothing to announce today.

[Unknown Executive]

Is it all right? Okay. Please, other questions? Since there are no questions. Just one more.

[Unknown Attendee]

[ Takahashi ] from Asahi Shimbun newspaper. [ A meeting] last week held at the Automotive Strategic Conference, and they came out with a midterm proposal. But as for the targets that the company has set, what are your comments on these targets?

[Seiji Kuraishi, executive]

Well, this meeting itself -- well this is -- as for team Japan, well, there was impression that Japan is lagging behind and therefore, there was a need to demonstrate Japan's technical power, and Honda included. We think that we are top class, but including our electrification technology, [indiscernible] and manufacturing skills, the company believes there is a need to demonstrate this to the outside. And we believe automotive sector is at the center and therefore, I believe the company wanted to include automotive sector as one of the demonstrators. Well, we have the 2030 vision at Honda. And in 2030, 2/3 of our sales will be [ electricified ]. So I think that we, in terms of the direction, are consistent with what many are saying towards 2050. But Honda, in addition to what we've been doing in Japan, we are doing global business. And the key is, depending on the market or country, customers have diverse needs, and we have to satisfy these variety of needs. We believe that this is of utmost importance. And no matter how much we say our products are good, it's useless if our customers do not buy them. So we have to first focus on the gasoline engine models, recognize the needs of our customers and continue to produce such models along with electrification. The key for electrification will be batteries. And in Japan, I think there are areas where we have to collaborate with others, and others where we have the compete with others. In China, the Chinese government procures the materials so there's a difference there. But I think the Japanese government is currently considering what it can do and try to reach a consensus. And therefore, I think this is a good conference to discuss those issues.

[Unknown Executive]

Okay. This is the last question.

[Maki Shiraki]

Reuters, Shiraki. Relating to the previous question, I have one point about the battery you talked about. So about the new Automotive Strategy Conference hosted by [indiscernible], within this year, government will take initiative. So all the rare metals like cobalt would be jointly procured and there will be organization established for that procurement, I heard. Are you going to participate in joining this procurement team? And if not, you talked about China. So for 2/3 will be EV in 2030, you said. So how are you going to achieve that, by securing limited resources or raw materials?

[Seiji Kuraishi, executive]

Well, within that strategic conference, there were many things said. But there wasn't any specific commitments expressed. It was just a place for discussion. And they are all disclosed to the public. So as Honda, if necessary, we would like to join such a scheme. However, batteries, there are some issues. And we -- together with electric battery manufacturers, we are still already having discussion with them, not to be behind when we think about the trend as a whole. So if necessary, we are going to join. Well, that new organization has not been formulated, not established. So as of today, it's not the place to say we're going to participate or not. However, we do believe that it is a very important point.

[Unknown Executive]

Okay. Thank you very much. Well, here we would like to adjourn the [Audio Gap]