Honda Motor Co Ltd

TSE:7267

Earnings Call Transcript 2020-Q1

[Unknown Executive]

Thank you for waiting. Ladies and gentlemen, we thank you very much for sparing your time to join us at the financial results presentation of Honda. Allow me to introduce the executives. Executive Vice President, Seiji Kuraishi.

[Seiji Kuraishi, executive]

How do you do?

[Unknown Executive]

Senior Managing Director, CFO, Kohei Takeuchi.

[Kohei Takeuchi, executive]

How do you do? My name is Takeuchi.

[Unknown Executive]

Chief Officer, Business Management Operation, Jiro Morisawa.

[Jiro Morisawa, executive]

How do you do? My name is Morisawa.

[Unknown Executive]

Now I'd like to start the presentation. Mr. Kuraishi, please.

[Seiji Kuraishi, executive]

Allow me to start the FY '20 first quarter financial results presentation. At first, regarding FY '20 first quarter Honda Group unit sales. Motorcycles, despite increase in markets like Brazil, India and others, saw a decline resulting in 4,921,000 units. Automobile, despite decline in the U.S., India and other markets, China, Japan, saw an increase resulting in 1,321,000 units. Life creation was 1,280,000 units.

Next regarding the main markets. In Japan, industry demand increased from the same period last year due to launch of new models of each company. Regarding Honda, sales surpassed the pace of the overall market due to strong sales of N-VAN and N-BOX. Fiscal year 2020 industry demand outlook. Due to the impact of the consumption tax hike and others, a slight decline year-on-year is forecast. Honda, likewise, is expected to see a slight decrease year-on-year, but the new N-WGN and new models to be launched in the second half of the fiscal year hope to mitigate the impact of the tax increase.

In the United States, the industry demand decreased for the same period year last year due to a decline in the sedan market. Honda, despite increase in unit sales of Passport and others, the Accord decreased pushing down unit sales from the same period last year. FY '20 industry demand outlook is expected to be slightly less than 17 million units. Yet Honda plans to exceed last year's sales with higher light truck sales such as Passport.

Next, China. While the industry demand saw all vehicle segments volume decline, Honda CR-V, Accord, Inspire increased. Plus launch of the new Envix led to the increase in sales unit compared to the same period last year. FY '20 outlook. Industry demand due to the impact of the U.S.-China trade friction and others is expected to be slightly less than last year. Honda, thanks to the Envix launch and increase in Accord, Inspire units, we are able to achieve historical record unit sales.

Next motorcycles. Looking at the industry demand of the 4 main markets, India was down for the same period last year, mainly due to the national elections and tightening of loan screening criteria. Honda also saw a drop from the same period last year due to market slowdown. Outlook for FY '20. Industry demand, a temporary decline is expected due to India's tightening of environmental regulations and the election results. Meanwhile, Honda, well, India's unit sales is more or less in line with our previous forecast. To reflect sales in Vietnam, we have revised upward our forecast. In India, we announced BS6-compliant Activa 125. We will continue to offer compliant and attractive products so as to realize further growth in the mid to long term.

Next, FY '20 first quarter results summary. Due to decline in automobile unit sales in United States and India, operating profit is down. However, if we exclude currency effects and onetime issues, it is plus JPY 10.8 billion from the same quarter last year. The first quarter profit, in addition to the drop in operating profit, we also saw increase in tax expenses due to issuance of regulation relating to the U.S. Tax Cuts and Jobs Act. Honda Group unit sales and [ PL ] are as shown.

Next, FY '20 financial forecast. In addition to rising uncertainty in emergency -- rather emerging markets, the U.S.-China trade friction is feared to prolong. As for Honda, regarding our automobile unit sales, though we mainly anticipate a decline in India, Vietnam is seeing motorcycle unit sales increase. And by striving to further improve our business constitution, we believe we could achieve the JPY 770 billion operating profit, which was announced last time. Profit for the year reflects the increase in tax expenses I earlier explained. Unit sales [ and PL ] are as shown.

Next, our first quarter end dividend is JPY 28 per share. FY '20 forecast of the annual dividend is to be JPY 1 higher per share for FY -- from FY '19 reaching JPY 112.

Now our Senior Managing Director and CFO, Kohei Takeuchi, will explain first quarter financial results and forecasts.

[Kohei Takeuchi, executive]

So let me explain. So speaking of the performance of the first quarter, in spite of the increase in the financial service business segment because of automotive and the motorcycle business operations resulting in the revenue decrease as well as the impact of the foreign currencies, the sales revenue resulted with JPY 3,996.2 billion.

Regarding operating profit, we had effective cost reduction impact. Nevertheless due to the increase of SG&A, a profit decline relating to the impact of the revenue and model mix as well as the foreign currency impact, operating profit was JPY 252.4 billion. Share of the profit of investment accounted for using the equity method was JPY 44.2 billion due to impairment losses of the affiliated companies despite incremental profit in this Chinese operation.

Let me talk about factors of profit before tax next. Profit before income tax in the first quarter was JPY 289.8 billion, down by JPY 68.4 billion year-on-year. Operating profit was JPY 252.4 billion, down by JPY 46.9 billion year-on-year. Excluding the foreign -- excluding impact of the foreign currencies, operating profit was down by JPY 29.2 billion due to decline of the sales volume and the incremental quality-related expenses despite a cost reduction effect.

Let me explain the performance by business segment. The operating profit in motorcycle operations was JPY 69.8 billion due to the decline of the sales volume along with the slowing down economy in India market. Operating profit in automobile operations was JPY 120.3 billion due to incremental quality-related expenses despite a cost reduction effect. Operating profit in our financial services business was JPY 65.7 billion due to incremental sales revenue in operating lease business.

In life creation and other business segment, we had operating losses of JPY 3.5 billion due to profit decline relating to the impact of the sales volume and the model mix. This segment includes operating losses of the aircraft and its engine businesses, which was JPY 9.1 billion. Further combined operating profits of the automobiles and the financial services businesses, therefore, was estimated to be JPY 183.6 billion.

Let me move on to the consolidated full year forecast of FY 2020 regarding the Honda Group sales volume in total. We anticipate the volume of the motorcycles to be 20.35 million units, which will be 100,000 more than the previous forecast, mainly in Vietnam and so on. The volume of the automobiles will be 5.11 million units because of 50,000 units decline in India and et cetera. And for life creation segment, the estimate will be 6.39 million units. No change from the previous forecast.

The table in the slide shows the consolidated financial estimate of the FY 2020. Sales volume in automotive segments will decline. However, the volume in the motorcycle segment will grow. In addition, we will have incremental profit of the financial service segments furthermore to the improvement of the operational business structure. Thus the operating profit was planned to be JPY 770 billion.

In comparison to the results from the year before, there are no changes to the previous explanations. We aim to keep the same operational business structures as that to precedent year. Finally, the slide shows our forecast of CapEx, depreciation and R&D spending for FY 2020.

That concludes my explanation. Thank you.

[Unknown Executive]

Thank you very much. And now I'd like to proceed to Q&A. Those of you have questions, please raise your hand. And as with usual, we ask you to state your name and affiliation before asking your question. Anyone? The person in the middle. The gentleman in the middle.

[Unknown Attendee]

[ Okada ] from Nippon Keizai Nikkei. About the U.S. business environment. And there was the cut in the interest rate. And also it seems that the U.S.-China trade friction will accelerate. How do you see the sales business environment? And I understand from August you are reducing the production volume at one of your plants. You are downsizing your sedan and are trying to strengthen SUV. So I think that I would also like to know about your sales strategy to try to improve profit.

[Unknown Executive]

About the United States, Mr. Kuraishi, please.

[Seiji Kuraishi, executive]

About the U.S. situation. In 2020, we see that the January to June results versus the year-on-year 2% less. And so I do understand that U.S. business environment is tough. Now FY 2020, the market outlook is thought to be bad, but in the long run, I think we should look at this as an adjustment phase. And in addition, there is impact of the trade impact. In 2019, there was a tax reform, which boosted the market. But this year, we don't have that. And the economy itself is good. But I believe that, for this year, it will be less than year-on-year. And it will be slightly less than 17 million units. That is our forecast.

And about the market, light trucks are still good, and July 70% was the ratio. As for Honda, the passenger car market is tricky, and new Passport and the new RDX that we launched last year. So these light truck models will be our core for promoting sales. And next area, in Mexico, there was a flooding. And thanks to the recovery, Fit, HR-V, production increase is expected. And as for car, though we are having a hard time, Civic is doing well. And therefore, we, at Honda, as I said, the issues I've explained. We would like to reach sales beyond last year's.

And about the MAP 1 line, 1 shift? Yes. So from August 1, we have shifted to 1 shift. The MAP 1 line, Accord, Civic production is cut on this line. And we believe that with the low incentive, we didn't want to get caught up in a price war, so we do have slightly high inventory. And therefore, with this 1 shift change at the MAP, we would like to reduce the inventory to normal level. At any rate, because of this truck and others, there is a lot of uncertainty in the market. We have to keep an eye on the market developments in putting together our sales strategy. If I may add MAP is Marysville Automobile Plant, MAP.

[Unknown Executive]

Any other questions? So the lady at the front seat, please.

[Unknown Attendee]

[ Mori from Autocase ]. I have 2 questions. One is impact of the yen depreciation. You didn't factor it in full year downgrade or downward revisions, but Toyota is actually changing the anticipations. But how do you see that situation for Honda? And in addition to that for the vehicles cost for wheels, your anticipated new car sales volume, 5.16 million down to 4 million, that is actually expected -- you're expecting 50,000 units decline, mainly in India and so on. But what is the automobile sales situations in market in India at the moment? Why 50,000 less? Because it is quite a bit, why is that -- what is the reason for that? And in North America, for instance, you kept the forecast of the sales unit as no change, same, why is that?

[Kohei Takeuchi, executive]

There are foreign currencies, Toyota have said that after April -- after July, they're going to have the assumption of JPY 106 instead of JPY 110. And what we see the situation is like -- there was interest rate down before. And then we were -- had JPY 106, JPY 107, back to JPY 108. And then Toyota is actually -- well, making it downward to JPY 106. It was close to those movement. And we had a JPY 110 assumptions when we put together the forecast. And then we believe there would be no changes of the situations dramatically. That is why we keep the same assumption of our JPY 110 for us as for now.

[Unknown Attendee]

And what is the forecast of the automobile unit sales in India?

[Seiji Kuraishi, executive]

Like, well, the situation over there is actually transparency of the -- economic outlook is still not clear, and their economy is rather weak. And the reason one is their financial construction. That impacts of the tightening finance is actually impacting the automobile situation as well. And we had already anticipated less number of the cars over there right at the beginning of their fiscal year. And we didn't anticipate that much of the impact. However, due to the market situation not very favorable as well as other factors such as the weather, climate, actually that is causing the impact to all the industry as a whole.

And we try to support our businesses with a new launch of the cars or new model changes and so forth. But however, the situation is quite serious. Therefore, we decided to change downward the global outlook of the sales volume. However, mainly that is Indian situation. And if you look at the global situation of the automobiles, China, Japan is very good. And in Asian countries, for instance, India specifically, have difficult situations. And after the election in these countries such as Indonesia, so forth, the foreign currency situation is not favorable to us and also the U.S. as planned.

So speaking then, in the context, of course, we have both good places and -- not good places, but mostly impacted area this year. We decided to change the focus of the Indian sales. And then in other markets, China, the whole economy is not very good but we are sustaining the businesses quite nicely. And of course, U.S.-China trade conflict, we need to keep an eye on what is going on in that area, so that we can manage our businesses.

[Unknown Executive]

Any other questions? The person in the very back.

[Unknown Attendee]

[ Asahi Shimbun, Nikimura ]. I have 2 questions. The first about motorcycle business. The outlook says that you have made an upward revision. But currently, the volume, because of India and others, it's dropping. But the current motorcycle business, the profit and the environment, how do you see it? And the second question is a related question. But both the motorcycle and automobile business, the operating profit year-on-year is declining. The operating profit margin is flat. But according to last year first quarter, you saw that the profit margin continue to decline. The operating margin has had a decline. Are you going to be -- maintain it? And in order to maintain our operating margin, what measures are you going to take?

[Seiji Kuraishi, executive]

First about the overall motorcycle business environment. Well, talking about the motorcycle business, in the first quarter, looking at the global market, it's about 95% from last year. And Honda is 92%. Well I think the biggest reason is because of India. And China, well, from July, there is a new regulation in place, and the old models had to be sold out. So there was a shift in this plan. So that's the impact. But overall, excluding India, the motorcycle business is expected to pick up from the second half of the year. So we think that we can achieve more or less as planned. India compared to our forecast, the first quarter had momentum, and so we made an upward revision. Rather in Vietnam is doing well. So in Asia, for the motorcycle, we have made an upward revision. So the biggest reason is India. But I think that the impact of the motorcycle business was less than compared to the automobile impact.

[Unknown Attendee]

The next question was about the -- in order to maintain operating margin for both the motorcycle and automobile, what are the measures that you have?

[Unknown Executive]

Takeuchi-san.

[Kohei Takeuchi, executive]

Well, in terms of comparison, motorcycle, automobile, both, compared to the last quarter, it's 16%, 13% -- 16% to 13%. And so last fiscal year, there was a onetime additional factor. And this fiscal year, there is this factor of India. And that is the reason why we see this drop in operating margin. But as Kuraishi has said, motorcycles in India were expected to decline, because of fiscal financial tightening, which has started last year. So I think in terms of plan, it's in line. But compared to last fiscal year, it is a decline. But compared to our outlook, it is more or less in line with what we have been forecasting.

And in Vietnam, we're seeing an increase in unit volume and say it's likely to be more investment than in India. So I think that it will be more of a positive compared to the forecasted profit. And on automobile, because of the impact of ForEx -- well, we look at the quality expenses per quarter and look at the complaints that have been filed annual basis. It was about 1.4% last fiscal year. And now it's returned to the new standard, 1.1%. And this has not changed very much. So it was 0.6% complaint in the first quarter of last fiscal year. That's the reason why it shows a negative. So if you just look at the first quarter year-on-year, you'll just see that's a negative. But we think that still things are going as planned. And therefore, we believe that we can retain our original plan of JPY 770 billion.

[Unknown Executive]

Any other questions? Other questions? The gentleman in the second row right here, please.

[Unknown Attendee]

[ Furukawa ] from Nihon Keizai Shimbun. 2 questions, one is profit in China. On the Page 13, you have the equity method run less globally. However, you have more in China. And then last year, you had probably CR-V impact causing this. And then what is the current profitability situation in China? That's the question one. And Kuraishi-san said earlier going to target the highest number of the sales in China for year, but profitability is kind of like that. And I just wonder you have kind of difficulty trying to achieve that target. So recent profitability situations in China please.

[Seiji Kuraishi, executive]

So in terms of the forecast, outlook of the sales for FY 2020, January to June, 12.4%, down from the previous term, and then Chinese automotive industry association have to make the downward revision. And there could be the impact due to the China-U.S. trade frictions, and they probably caused rather a psychological impact on the consumers. And then Honda in this context, we ourselves is quite well doing, and we are still targeting to hit better than last year situation results. That is no change to the target. And then we have 133% of the same quarter last year at the moment. That's where we are. Of course, there is a dilution effect in there.

However, it's not just CR-V, but Accord and Inspire and those main models are doing very well. And in terms of the profitability, it is growing. However, model mix impact and also we have a hybrid that is growing quite a bit at the moment because of the model mix situation today. Plus we have EVs, electric vehicles, out already there. And profitability per unit is a little bit squeezed because of that model mix. That is the factor behind. And basically, sales, profitability, we are trying to achieve the last year levels. That is what we are working on at the moment.

[Unknown Attendee]

One more question, please, additional question. The global economy is rather unclear especially just like right after the financial crisis of 2018 to have a higher manufacturing ratio in the local market, local production. And then what is the strength of Honda? What is the issues you have in this global economic context today?

[Seiji Kuraishi, executive]

Well, Honda's strength is our operations. Manufacturing are rooted down deeply in the local economy -- local market. Of course, we see trade fictions like that today, and we do have a pretty big impact like that. However, we have those localization well progressed out, unlike other companies, and that we have 90% North America. The cars over there are produced over there in local markets. And also, we have a good localization process in Asia countries too, and the 100% production in China as well for the Chinese market.

Therefore, we have a good localization progress. And our local content percentage in each of the countries is higher than other companies, I believe. Because of that, we're quite resistant to those changes out there. And of course, it is not just our company. As you know of CASE and connected, and we have those new things that we need to invest and develop for the -- such a new step technologies. And we need to make sure that we have a steady investment and work on there, not to be behind other companies.

And last time, you probably had participated in Honda meeting. And if you do that -- if you did that, you probably understood. But currently, we have our existing business. We make sure we are trying to change the structures, and we are working to prepare the upcoming future businesses as well. But we need to have some more time to get the results emerging from those efforts. And of course, we like to keep doing our businesses trying to differentiate from other companies by all means.

[Unknown Executive]

Any questions? The person in the middle, the gentleman there.

[Unknown Attendee]

[ Nomoto ] from [ Nikon Asia Newspaper ]. I have 2 questions and to Mr. Kuraishi. Well, I would ask you about your assessment of the financial results the first quarter. Well, the -- well, you're aiming for 5% operating margin annually, but already it's declining to quite an extent. So how do you see this? In the first -- well, how do you assess the first quarter results? And the second, well, on an annual basis, I think the development cost is flat. But in the first quarter only compared to the previous year, it's declined. Looking at your competitors, I think that related to CASE, they are increasing R&D investment. So what's your strategy? And where is your priority in regards to R&D?

[Seiji Kuraishi, executive]

Well, the first quarter -- I'm talking about the first quarter. Well, our assessment is that things proceeded as planned. Compared to last year, as Takeuchi said, last year, we had the onetime expenses, and also there was high one quarter quality-related expenses. And -- so, well, if you look at apple-to-apple compared to last year, I do believe that we are -- we do have some changes, but we are on annual basis online. And -- but India in Asia, the unit volume has declined, but the profit from Indian automobile business was not that big to begin with, and therefore, North America and China. Well, how much the trade friction will impact our business and how much this have an impact on achieving the plan will be important for us.

The second question about R&D expenses -- expenditure throughout the year, it's flat. The first quarter it's declined. Well, just let me talk about the overall situation. R&D, we don't think that it's low. We have to reduce it further. That's our impression, but we have to be efficient in spending our R&D budget. And as I said last time, we are taking measures to reduce our R&D expenditure. And for new areas, Honda -- there are things which Honda should do on its own and others where we have to enter into an alliance. You have to differentiate the 2 and try to strengthen our business constitution.

[Kohei Takeuchi, executive]

Well, looking at the quarter's R&D, there are -- it depends on the timing of the model development and launch date. So just looking quarter-by-quarter, yes, it does seem that it's going down. But on an annual basis, it was JPY 820 billion last year, JPY 860 billion this year. So I think that there is this difference of JPY 40 billion. R&D, yes, we are planning to spend sufficient budget on R&D.

[Unknown Executive]

Other questions, please. The gentleman over there, please.

[Unknown Attendee]

[indiscernible] newspaper. My name is [ Imamura ]. Today, the government has decided for the export management for Korea. They decided to exclude them from the list and then, though the number of the units involved is not that large. However, the parts, components, raw materials, including all of those or the overall psychology of the market, for instance, how would you estimate the impact of the Korea and what is going over there now?

[Seiji Kuraishi, executive]

So currently, what is going on over there isn't really impacted by that. There is no big issues at the moment. However, in terms of the number of the customers visiting the dealers or shops, we are getting a fewer number of people today. In fact, then maybe after the decision by the cabinet today, what would be the next move by the Korean government, depending how it rolls out, then, of course, there will be the situation so we need to address. However, at the moment, there is no big issues that you address at the momentum.

[Unknown Executive]

The next will be the last. Anyone? The person over there?

[Sean McLain;Wall Street Journal]

From Wall Street Journal, Sean McLain. In Appendix, Page 14, you talk about the quality-related expenses, et cetera. So can you be more specific what is included here?

[Kohei Takeuchi, executive]

What we mean here is for is SG&A, but where we sell cars, the customer files complaints, and we have to do repair. That expense plus, but it might be half and half. But -- and there are cases in which you have to conduct recalls. In case of recalls, then we have to assure the quality of those that we've sold in the past. So it's a general complaints and also recall expenses. So these 2 combined comprise this item. And it's included in our SG&A.

[Sean McLain;Wall Street Journal]

Well, I needed some more details, please. Because, for instance, claims will be or coming are quite a lot, I think, but you have a warranty for those recall issues. How many of those do you have to handle? And if you have major ones that you could tell us, could you share with us, please?

[Kohei Takeuchi, executive]

Well, at the moment, I do not have the detailed information right at my hand at the moment. I don't have the information right here but -- in the first quarter period, well, of course, when we have the recall items, we will announce them out there. However, we do not disclose the expenses associated to each one of those, but you could look at those announcement. So maybe you could just speak to the PR division later on.

[Unknown Executive]

This now concludes our financial summary presentation. So thank you very much for your participation indeed. Thank you. This is the end of the -- our meeting.