Honda Motor Co Ltd

TSE:7267

Earnings Call Transcript 2018-Q3

[Hideko Kunii, executive]

[Foreign Language]

[Seiji Kuraishi, executive]

[Foreign Language]

[Hideko Kunii, executive]

[Foreign Language]

[Kohei Takeuchi, executive]

[Foreign Language]

[Hideko Kunii, executive]

[Foreign Language]

[Jiro Morisawa, executive]

[Foreign Language]

[Hideko Kunii, executive]

[Foreign Language]

[Unknown Executive]

Welcome to the Honda Financial Results Presentation for the Third Quarter of Financial Year 2018. We would now like to begin our financial year 2018 third quarter results presentation. First, we will review the financial summary for the fiscal 9 months, which ended on December 31, 2017.

Financial summary. Operating profit for the fiscal 9 months was JPY 706.7 billion, a 0.6% increase compared to the same period last year. This was primarily due to robust motorcycle unit sales and cost reduction efforts, which more than offset the negative impact of the multi-district class action litigation settlement, the reverse effect of the pension accounting treatment during the same period last year and other factors.

Profit for the period attributable to owners of the parent increased to JPY 951.5 billion, an increase of JPY 430.9 billion compared to the same period a year ago. This was primarily due to an increase in share of profit of investments accounted for using the equity method as well as a JPY 346.1 billion positive impact resulting from a reduction in the U.S. federal corporate tax rate.

With respect to Honda Group unit sales for the fiscal 9-month period, motorcycle business operations totaled 14,807,000 units. Automobile business operations totaled 3,903,000 units. Power products totaled 3,785,000 units.

At this time, I would like to provide more details about developments in major automobile markets, such as Japan, the U.S. and China as well as an update on motorcycle sales in India. In Japan, automobile sales for the fiscal 9-month period totaled 506,000 units, a 2.9% increase compared to the same period a year ago.

The N-BOX series was the top-selling model in Japan for the 2017 calendar year, including sales of models in the registered vehicle category, with the sales total of 218,000 units. Further, the N-BOX became the first mini vehicle in history to receive the highest rating from Japan New Car Assessment Programs, JNCAP, Preventive Safety and Collision Safety Performance Evaluations.

Cumulative sales of the STEP WGN, renowned for its spacious interior cabin, accompanied by car-like driving dynamics, reached the 1.5 million unit milestone at the end of October 2017.

In the U.S. market, where industry sales declined, Honda achieved sales of 1,276,000 units for the fiscal 9-month period, virtually unchanged from the same period a year ago. The fully remodeled Accord, which was launched in October, was the winner of the North American Car of the Year Award. This was the third successive year that Honda has received either a Car of the Year or Truck of the Year award, following the Civic in 2016 and the Ridgeline in 2017. In addition, the Clarity series was the recipient of the 2018 Green Car of the Year award.

For the 2017 calendar year, Honda recorded an all-time record sales of 1,641,000 units. Honda's accumulated sales in the U.S. have now surpassed the 40 million unit milestone.

Sales in China for the fiscal 9-month period totaled 1,150,000 units, an increase of 15.7% compared to the same period a year ago. Further, 2017 calendar year sales totaled 1,458,000 units, an all-time record for Honda in China. Civic, Accord and Crider were just a few of the hot selling models, and in December, the Acura TLX-L was launched.

In India, motorcycle sales continued to surge behind key models such as the Activa scooter and CB Shine motorcycle, leading to 9-month sales of 4,379,000 units, a 20.1% increase compared to the same period last year. In addition, 2017 calendar year sales totaled 5,456,000 units, an all-time record. In October of last year, a new scooter named Grazia was launched.

News topics. Next, we would like to briefly touch upon some recent news topics. In November, Softbank and Honda announced that they would begin joint research on connected car technologies that utilize fifth-generation mobile communication system, 5G. Through this joint research project, the companies will seek to strengthen connected car technologies which will offer new experiences and value by connecting mobility products, primarily cars and various other devices.

In December, as part of its ongoing effort to realize a mobile society with 0 collisions, Honda announced a joint research and development project with SenseTime, a company known for advanced AI technologies for automated driving.

Regarding motorcycle business operations, Honda began construction of a new production plant in Bangladesh in preparation for further expansion of production and sales.

Financial highlights for the fiscal 9-month period are as follows: sales revenue was JPY 11,446,600,000,000; operating profit was JPY 706.7 billion; share of profit of investments accounted for using the equity method amounted to JPY 189.7 billion; profit before income taxes totaled JPY 924.5 billion; profit for the period attributable to owners of the parent was JPY 951.5 billion; EPS for the first 9 months of the fiscal year totaled JPY 529.39.

Financial forecast for fiscal year 2018. With respect to our forecast for the current fiscal year, an increase in revenue related to the positive impact of revenue and model mix, a decrease in incentives, ForEx impacts and other factors, have been reflected, resulting in the following revisions to our previously announced guidance: sales revenue, JPY 15,200,000,000,000; operating profit, JPY 775 billion, revised upwards by JPY 30 billion; share of profit of investments accounted for using the equity method, JPY 240 billion; profits before income taxes, JPY 1,045,000,000,000; profit for the year attributable to owners of the parent, JPY 1 trillion; EPS is forecast to be JPY 557.7. The ForEx assumption for the fourth quarter is JPY 105 to the dollar. The average exchange rate for the fiscal year is JPY 110 to the dollar.

Due primarily to an increase in operating profit as well as an increase in share of profit of investments accounted for using the equity method, the annual dividend for fiscal year 2018 is expected to be JPY 98 per share of common stock, an upward revision of JPY 2 per share from our previous announcement. The third quarter dividend is JPY 25 per share of common stock.

Next, we would like to discuss Honda's group unit sales for the third quarter. In motorcycle business operations, total group unit sales increased to 4.87 million units, a 7.7% increase compared to the same period a year ago. In automobile business operations, total group unit sales increased to 1,344,000 units, a 2.4% increase compared to the same period last year. In power product business operations, total group unit sales increased to 1,196,000 units, a 1.8% increase compared to the same period a year ago. For your reference, Honda consolidated unit sales for the first 9 months of this fiscal year are as shown.

Sales revenue and operating profit analysis. Next, we would like to discuss details of sales revenue and operating profit for the fiscal third quarter, which ended on December 31. For the fiscal third quarter, an increase in sales revenue was realized in all business operations, resulting in a total of JPY 3,957,100,000,000, a 13% increase over the same period a year ago.

With respect to operating profit, higher SG&A expenses were more than offset by an increase in revenue related to the positive impact of revenue and model mix as well as other factors, resulting in a total of JPY 284.5 billion, a 37% increase compared to the same period a year ago. The operating margin was 7.2%.

The share of profit of investments accounted for using the equity method was JPY 54.5 billion. Profit before income taxes totaled JPY 346.8 billion. Profit for the period attributable to owners of the parent was JPY 570.2 billion, an increase of JPY 401.4 billion compared to the same period last year. This was primarily due to an increase in share of profit of investments accounted for using the equity method as well as the positive impact resulting from a reduction in the U.S. federal corporate tax rate.

EPS for the quarter was JPY 318.50. The average exchange rate was JPY 113 to the dollar, down by JPY 4 compared to the same period a year ago.

Group unit sales summary. In motorcycle business operations during the fiscal third quarter, Honda group unit sales increased primarily in India, Vietnam and Thailand, resulting in total sales of 4.87 million units, a 7.7% increase compared to the same period a year ago. In automobile business operations during the fiscal third quarter, Honda Group unit sales totaled 1,344,000 units due to increased sales of the Avancier, CR-V and other models in China as well as higher sales of primarily the City model in Thailand. This was a 2.4% increase compared to the same period a year ago.

In power product business operations during the fiscal third quarter, Honda Group unit sales totaled 1,196,000 units, a 1.8% increase compared to the same period a year earlier. This increase was primarily due to an increase of OEM engines for construction-related applications in Japan as well as an increase in sales of lawnmowers and other products in Australia. For your reference, Honda Group unit sales for the first 9 months of this fiscal year by business segment are as shown.

Next we would like to discuss changes in sales revenue for the fiscal third quarter. Due to increases in sales in all business segments as well as positive ForEx translation effects, sales revenue totaled JPY 3,957,100,000,000. The increases in sales revenue for the respective business segments, excluding the positive ForEx translation effect of JPY 148.5 billion, are as shown. Changes in cumulative sales revenue for the first 9 months of this fiscal year are as shown.

Next we would like to examine the positive and negative factors that impacted profit before income taxes for the quarter. Profit before income taxes for the fiscal third quarter was JPY 346.8 billion, an increase of JPY 85.9 billion compared to the same period a year ago. Operating profit amounted to JPY 284.5 billion, a JPY 76.8 billion increase compared to the same period a year earlier. With respect to sales revenue and model mix, a positive impact of JPY 73.7 billion was realized.

Regarding cost reduction, the negative impact of higher raw material costs was more than offset by cost reduction efforts and other factors, resulting in a positive impact of JPY 11.6 billion. An increase in SG&A expenses led to a negative impact of JPY 27.9 billion. An increase in R&D expenses led to a negative impact of JPY 8.5 billion. At the operating profit level, ForEx effects had a positive impact of JPY 28.0 billion. Share of profit of investments accounted for using the equity method resulted in a positive impact of JPY 5.3 billion. Finance income and finance costs resulted in a positive impact of JPY 3.6 billion.

With respect to cumulative profit before income taxes for the first fiscal 9 months, the reverse effect of the pension accounting treatment during the same period a year earlier as well as the negative impact of the multi-district class action litigation settlement earlier this fiscal year were incurred. However, these factors were more than offset by an increase in revenue related to the positive impact of revenue and model mix as well as an increase in share of profit of investments accounted for using the equity method, resulting in a total of JPY 924.5 billion, a JPY 104.5 billion increase compared to the same period a year earlier.

Next we would like to discuss the results for each business area. In motorcycle business operations, an increase in consolidated sales units and other factors led to an increase in sales revenue to JPY 499.1 billion, an 18.7% increase compared to the same period a year ago. With respect to operating profit, revenue related to a positive increase in revenue and model mix as well as other factors led to a total of JPY 64.8 billion, a 54.8% increase compared to the same period a year earlier. The operating margin was 13%.

In automobile business operations, an increase in sales, primarily in Asia, led to sales revenue of JPY 2,901,400,000,000, an 11.7% increase compared to the same period a year ago. With respect to operating profit, the negative impact of a rise in SG&A expenses and other factors was more than offset by the positive impact of an increase in revenue related to revenue and model mix as well as other factors, resulting in a total of JPY 167.4 billion, an increase of 29% compared to the same period a year earlier. The operating margin was 5.8%.

In power product and other businesses, an increase in consolidated sales units and other factors led to total sales revenue of JPY 93.4 billion, a 16.4% increase compared to the same period a year ago. With respect to operating profit, the positive impact of an increase in revenue related to revenue and model mix as well as other factors, led to a total of JPY 1.5 billion, an improvement of JPY 7.9 billion compared to the same period a year earlier.

Operating loss for aircraft and aircraft engine business operations, which are included in the power products and other businesses segment, totaled JPY 8 billion, an improvement of JPY 4.2 billion compared to the same period last year.

In the financial services business segment, the total assets of finance subsidiaries at the end of the third quarter totaled JPY 9,867,100,000,000. Sales revenue totaled JPY 527.1 billion, an increase of 15.7% compared to the same period a year ago, primarily due to the positive impact of a rise in operating lease revenues.

Operating profits totaled JPY 50.7 billion, an increase of 19.7% compared to the same period a year ago, primarily due to an increase in profits associated with higher sales revenue. Operating margin was 9.6%. The accumulated sales results by business segment for the fiscal 9 months are as shown.

Geographical regions. Next, we would like to review Honda's business results for the quarter by geographical region. In Japan, a positive impact from ForEx effects was realized. However, this was more than offset by an increase in SG&A expenses as well as other factors, resulting in operating profit of JPY 63.2 billion, a decrease of 21.3% compared to the same period a year ago.

In North America, an increase in SG&A expenses and other factors was more than offset by the positive impact of an increase in revenue related to revenue and model mix as well as other factors, resulting in operating profit of JPY 106 billion, a 26.6% increase.

In Europe, the positive impact of an increase in revenue related to revenue and model mix as well as other factors resulted in operating profit of JPY 2.5 billion, an increase of JPY 7.2 billion compared to the same period a year earlier.

In Asia, the positive impact of an increase in revenue related to revenue and model mix, cost reduction efforts as well as other factors resulted in operating profit of JPY 111.1 billion, a 35.4% increase compared to the same period a year earlier.

In other regions, which include South America, the Middle East, Africa, Oceania and other countries, the positive impact of an increase in revenue related to revenue and model mix as well as other factors resulted in operating profit of JPY 7.7 billion, an JPY 8.5 billion improvement from the same period a year ago. For your reference, the cumulative fiscal 9-month results by geographic region are as shown.

Share of profit of investments accounted for using the equity method. Share of profit of investments accounted for using the equity method amounted to JPY 54.5 billion, an 11% increase compared to the same period a year ago, primarily due to an increase in unit sales in China as well as other factors. Share of profit of investments accounted for using the equity method in Asia totaled JPY 47 billion.

Capital expenditures. Consolidated capital expenditures for the fiscal 9 months amounted to JPY 284.9 billion, a decrease of JPY 83.7 billion compared to the same period a year earlier. This was primarily due to a decrease in expenses associated with new model introductions within automobile business operations. For your reference, increases and decreases in capital expenditures by business segment, excluding the impact of currency translation effects, are shown in the attached chart.

We would now like to review the consolidated forecast for the fiscal year. Group unit sales forecast. The Honda Group unit sales forecast is as follows: in motorcycle business operations, total unit sales are expected to rise to 19,410,000 units, primarily due to an increase in sales in India. This is a 230,000-unit increase compared to our previous forecast. In automobile business operations, total sales are expected to increase to 5,225,000 units, an increase of 95,000 units. This is primarily due to an increase in sales in China. For power product business operations, the forecast is 6,165,000 units. This is unchanged from our previous forecast.

With respect to consolidated unit sales, changes in sales units have been reflected in the forecast for each business segment as follows: motorcycle business operations, 12,820,000 units; automobile business operations, 3,695,000 units.

We would now like to highlight the 2018 fiscal year consolidated financial forecast. Operating profit, JPY 775 billion; profit before income taxes, JPY 1,045,000,000,000; profit for the year attributable to owners of the parent, JPY 1 trillion. Please refer to Slide 37 for the increase and decrease factors impacting operating profit and profit before income taxes for fiscal year 2018 versus the result from the previous fiscal year.

Operating profit, minus JPY 65.7 billion; share of profit of investments accounted for using the equity method, plus JPY 75.2 billion; finance income and finance costs, plus JPY 28.5 billion. The increase and decrease factors impacting operating profit have been rearranged using the previous year's results as a starting point, but excluding ForEx effects and the pension accounting treatment. Working backwards from the 2018 fiscal year forecast and excluding the multi-district class action litigation settlement, a JPY 62 billion increase is forecast.

In comparison to our previous fiscal year forecast, revenue model mix, et cetera, plus JPY 33 billion; cost reduction, et cetera, minus JPY 11 billion; increase in SG&A expenses, minus JPY 20 billion; decrease in R&D expenses, plus JPY 7 billion; ForEx effects and operating income level, plus JPY 21 billion; share of profit of investments accounted for using the equity method, plus JPY 35 billion; finance income and finance costs, plus JPY 25 billion.

Finally, we would like to highlight our forecast for capital expenditures, depreciation and R&D expenditures for fiscal 2018. The forecast for capital expenditures is JPY 505 billion, unchanged from our previous forecast. The forecast for depreciation is JPY 465 billion, unchanged from our previous forecast. The forecast for R&D expenditures is JPY 740 billion, a downward revision of JPY 10 billion from our previous forecast.

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

[Hideko Kunii, executive]

We'd now like to start the Q&A session. If you have a question, please raise your hand, we'll bring the microphone to you. Please state your name and affiliation before asking your question. First person, please. Yes, the person at the front.

[Unknown Attendee]

My name is [ Hoshi ] from Nihon Keizai Shimbun, the newspaper. I have 2 questions, the first question is the impact of tax -- the reduction in U.S. and NAFTA negotiation. With regards to the deferred tax liability, there is going to be a onetime benefit. But if you could explain in the breakdown of the reduction in tax. And the cash flow is likely to improve going forward. So how do you consider this going forward? And the second is the NAFTA negotiation, which is coming close to conclusion. The -- Canada, Mexico, U.S., I think the allocation has completed. There is a potential of the negotiation breaking down. How are you looking at this? If the negotiation breaks down, how are you going to deal with the risk associated with that? That's the first question. And I will also ask the second question at the same time. The second question is with regards to North America. And the operating margin for the automobiles in the third quarter has improved. But for North America, it has deteriorated by 0.7%. But if you actually look at December and January sales, it seems that you seem to be losing there, a little bit CR-V and Civic. Despite the fact that you have changed to a new model, it seems that it hasn't really grown very much. What's the trend for the sales situation with the 3 major -- the models? And what's the interest rate? And if you could also explain the situation in that respect, please?

[Kohei Takeuchi, executive]

So I will respond to the tax issue, with regards to the tax reform bill, the impact to us on this occasion. As you know, in North America, the tax reform bill was finally signed by their president in December and so the law was established. And your interest is that the tax rate has come down, 35% to 21%, a reduction of 14% for the tax rate, so that's one point. And apart from that, so they need to actually make up for the reduction in tax rate, and so there are other -- the tax bills. So the transfer pricing enhancement and the -- if there is a -- the return on the tax for the overseas subsidiaries. And so for the third quarter, as Mr. Hoshi has indicated, we have quite a significant -- the finance services in North America, and we have deferred tax liability, DTL, which is quite large, and that was calculated based on the 35% tax rate, which has now changed to 21%. So there is a significant impact of that. So that recalculation impact is JPY 346.1 billion, so that was reflected into our numbers. Apart from other items, apart from that, for other items, there will be impact towards our tax calculation for this fiscal year, next fiscal year onwards. And so that will be reflected into our forecast going forward, and we should be able to give a more detailed explanation at that point in time. But it's not just simply that the tax will come down, but there are new tax bills that will be introduced, that will also mean that we will be additionally taxed. So I can't say this point in time that the tax will be lower overall, if there is a possibility of the tax being increased.

[Seiji Kuraishi, executive]

Now in respect to NAFTA, the negotiation is still ongoing. So I don't want to respond without knowing the outcome. But NAFTA is the precondition, if you like, for Honda to conduct business in North America. And for us, it's more desirable for the current framework to be retained. But at this point in time, nothing has been finalized. And with regards to our business in North America, for 2017, or the overall market is slightly more than 17 million, the increase on year-on-year basis. So it was actually -- it seems that the market have entered into an adjustment phase or correction phase. But last year, there was a hurricane. Based on the replacement demand and the companies have actually implemented various sales measures out towards the end of the year. Last year was a negative, but the market grew more than what we had anticipated. At Honda, we saw a decline. The Civic is 120%, CR-V is [ 105.8% ], and we were able to achieve a result in excess of last year. So 3 years consecutively, we're able to achieve records. But more recently, in January, the CR-V and Accord was slightly lower than last year. For CR-V, at the end of the last year, we have promoted the registration, so the inventory is now less than 30 days, and that is probably the biggest factor. So the actual order taken for CR-V remains to be strong still. For Accord, as you know, for 2017, for full year, we are at the 64.4%. So D category, the Accord category, the competition is extremely tough. And so I'm not saying who the competitors are, but the competitor has built up on the incentive. For Accord, we only launched that vehicle last year. And since this is a new car and we don't want to be following to a pricing competition, so we have not enhanced incentive and there could be some influence of that. But we obtained the Car of the Year and the customers have -- they evaluated the vehicle favorably, so we have the 2.0 and hybrid that will be launched in the market going forward. And so we will grow and nurture this new vehicle carefully and deploy the vehicle going forward.

[Hideko Kunii, executive]

Other questions?

[Unknown Attendee]

My name is [ Morikawa ] from Toyo Keizai. Two questions. First of all, with regards to financial results, the others regards to China, you made upward revision, but I think it seems as though it's quite conservative. If you calculate the fourth quarter, it is JPY 48 billion or so -- JPY 48.2 billion, so I think it's somewhat conservative. And I know that you said that in the second half, you have explained in the past there's a lot of cost. But if you look at the consensus or compared to consensus, I think it's still quite low or conservative. So why do you say it's this number? And with regards to China, as I look at it, I think the performance continues to be strong. But with regards to unit sales, do you think -- do you assume that it will exceed the U.S.? And if not, when do you think you can get a general idea about when it would exceed U.S.? And also, last November, December, there was some initiatives on connected and EV initiatives. You have worked with Chinese partners like SenseTimes. So is it a coincidence that there's a lot of Chinese partners or is it intentional? Is there any significance? So can you tell me about that as well?

[Seiji Kuraishi, executive]

So first of all, Mr. Takeuchi will answer about the results. So third quarter was good, but people say it is conservative. So Mr. Takeuchi will explain about that.

[Kohei Takeuchi, executive]

You are right. If you look at -- exclude the 9 months out of full year, fourth quarter is about JPY 68 billion. In -- as we try to forecast Q4, one thing we struggled about is foreign exchange. But now we are seeing yen strengthening. We see a different news today, but given the interest rate is trying -- they're trying to raise interest rates, the long-term interest rates are not going up, so Q4 is JPY 105. So we are actually keeping the rate unchanged. So compared to Q3 and Q4, this foreign exchange element. So it's JPY 113 for Q3, so there's about JPY 30 billion negative. And as you correctly point out, SG&A, R&D tend to occur more in Q4, and this is a trend we see each year. And if you include quality control, it's about JPY 140 billion, I would say it's most of it all. And quality control -- quality management costs in the 9 months, we usually spend about 1.0% to 1.1% per -- of the entire yearly cost. But on a quarterly basis, there's a lot of identification of quality management cost, so that is why there's that gap between the quarters. And also, compared to third quarter and fourth quarter -- and this is also with regards to accounting treatment, but accrual of incentives, there's timing issues, and there's about JPY 30 billion. So if you add all that up, it's not really that conservative. So the quarter -- fourth quarter budget is about JPY 70 billion.

[Seiji Kuraishi, executive]

Also with regards to China, Honda's China result was JPY 1.45 million (sic) [ JPY 1.45 billion ], so it's performing very nicely, strongly. And of course, there are tax reduction models, but CR-V, Civic, Fit and [ Vessel ] and the -- with 7 models, it has -- exceeding [ 70,000 ], so we are seeing many models are exceeding 10,000 per month. But the -- your question about whether it will exceed the United States or not, actually, we are actually struggling this year too, especially WD at Wuhan, Dongfeng Honda, we don't really have any more capacity. Number 3 plant will be the beginning of 2019. So up until then, we are being creative with the way people form shifts, so that we can increase the number of units we produce. But in any case, it is not up to the level of North America and United States. But if you look at the overall market trend, in the near future, I believe China will exceed the United States. But in terms of strategy, we do not have anything in place yet. And in -- with regards to China, there are many measures. I guess, you are saying that there's a lot of measures that are biased to China. Do you have a lot of passion for it? Well, it's not that I'm the one that's seeing the China business. But I think China is speeding in many ways, even with regards to electrification, the government is taking leadership. So even with regards to electrification, I know that China will take initiative. And also, if you know China, you know this well. But with regards to shared services, so whether it's bicycle or automobile, shared cars, they are growing very rapidly. So as Honda, with regards to new services, we want to be sure we're not behind. We need to be prepared. So that is why we are forming alliances, and that's not just limited to China, but we would like to deploy this around the world. So it just so happened that because China is very speedy and we have to catch up with the speed in China. So in that sense and in many ways, include -- we are promoting businesses in China, both from soft and hard elements. Next question, please.

[Unknown Attendee]

[ Nakajima ] from Kyodo, the news. I want to confirm the numbers. March 2018, the full year numbers, you have made the upward adjustment. For the sales revenue, operating profit and the net income attributable to the owners of parents, is there any that you have achieved the highest sales number on record amongst those items?

[Seiji Kuraishi, executive]

Well, in any case, we have changed our accounting standard. So we can't make an apple-to-apple comparison vis-à-vis the past. But numerically speaking...

[Jiro Morisawa, executive]

Well, allow me to respond. Like Mr. Kuraishi has said before, we have changed from the U.S. GAAP to IFRS. So it's difficult to talk about the absolute numbers. But if we only look at the surface -- the level, the sales revenue, profit before income taxes and net income attributable to owners of parent, they are all record numbers in the past.

[Unknown Attendee]

And the impact of the reduction in the corporate tax on U.S. of JPY 346.1 billion, I think this was being reflected into the third quarter. This was also reflected the full year number?

[Kohei Takeuchi, executive]

Yes.

[Unknown Attendee]

And because these numbers were reflected, you have made the upward adjustment, is that the case?

[Kohei Takeuchi, executive]

Yes.

[Unknown Attendee]

And lastly, the calendar year, the global unit sales for automobiles from January to December of 2017, what is the unit sales for automobiles on a retail basis?

[Seiji Kuraishi, executive]

We will investigate and we'll get back to you.

[Hideko Kunii, executive]

Then the individual in the front.

[Unknown Attendee]

Then the individual in the front.

[Hideko Kunii, executive]

We'll give you the number later on. We're investigating right now.

[Unknown Attendee]

[ Kimura ] from Asahi newspaper. With regards to U.S. tax reform, so you have built up JPY 300 billion. But according to earlier explanation, you have other items. So next year, there will be elements which will be on the cost side. But if you net off, is it more positive towards profit? Is that the right thinking? And if that's the case, the profit you gain from there will be used for new investment. What is your purpose? What's your intention? And the second question is regards to spring wage negotiations. I know this is yet to be -- take place, but even if you deduct the U.S. tax reform effect, your results, I believe, will be good. So please tell me what you think about spring wage negotiation.

[Kohei Takeuchi, executive]

So let me explain about tax. So JPY 341.6 billion -- JPY 346.1 billion, so that's the flash calculation. And we have changed the percentage from 35% to 21% on the balance sheet. Depending on the other items, it could be positive or negative, but it also depends on the term, the duration. So we can't really say on a net basis whether it's positive or negative, with the current calculation and the deduction. But in the third quarter, there are some accounting differences, so we are currently looking at impact without cash. So it's JPY 346.1 billion without cash impact, so -- because there's no cash coming in yet. And the auto industry, in different phases, we need to continue to do R&D investment and we also need to retain some of the earnings as well, so we are taking all of these into account.

[Seiji Kuraishi, executive]

With regards to spring wage negotiation, actually, we have not received the official demand from the labor union yet. Therefore, I would like to refrain from making any comments in this place. But just to give you the way of thinking, Mr. Abe is saying and referring to -- about this. But based on the direction of the government, we would take into account the management situation of good company, intensifying global competition, and I know that many things will change in the industrial structure. So we will carefully discuss with the labor union about the future outlooks.

[Hideko Kunii, executive]

And the January to December, the 2017 sale is 5.03 million units, which is a 107% growth year-on-year. That's for retail, and that's the last year, last year calendar retail automobile unit sales number.

[Unknown Attendee]

[ Takahashi ] from Sankei Shimbun, the newspaper. I'd like to ask about the China market in 2 questions. Against the total demand, it seems that you have achieved significant growth. You talked about the models, but the competition, the environment and the market, the condition, if you can explain a little bit more in depth please? Second question is also again with regards to China. And the issues for the future, how to respond to the NEV regulations, how do you intend to respond to that?

[Seiji Kuraishi, executive]

The first question, could you be a little more specific about what you want to know?

[Unknown Attendee]

The Chinese market, you've done well in terms of sales. What was the reasons or factors? You talked about the models that performed well, but what were the areas where your strength was leveraged to achieve these results?

[Seiji Kuraishi, executive]

Well, as for China, well -- in China, we engage in R&D operations in China, and we are developing -- or we're introducing a product that meet the needs of the Chinese customers. And we are adjusting the global models to the spec that meets the needs of the Chinese customers. And as for the China-dedicated model, we have Avancier UR-V, which is a China-dedicated model, the large-size SUV. Avancier, we are now selling about 10,000 units per month. And so it's really the SUVs that's growing strongly right now and the C category, where there are tax benefits. And we intend to have strong models in those parts of the market, and I think it's probably the biggest reason. And also, within our R&D center, we are commonizing platforms for the joint ventures to improve efficiency and also to reduce costs. These were also quite significant factors. And what was...

[Unknown Attendee]

The -- responding to the challenges associated with NEV.

[Seiji Kuraishi, executive]

Well, we still don't know the course of direction for China going forward at this point in time. So in any case, the NEV regulation will be implemented from next year, so we need to respond to that. And in responding to that, we will be launching battery EV dedicated for the Chinese market to meet the requirement at REV (sic) [ NEV ]. But Chinese government will also address CAFE going forward as well. So for electrification, we don't know the speed, but we feel that China will lead the world. And in order to respond to that, we need to make various types of preparations. And in that respect, Honda so far had the biggest strength in the area of engine. But if we go to electrification, motors and batteries will be key for success. Honda, in one sense, have strength in those areas as well, so we want to leverage that strength. And in China, we want to further expand our business.

[Hideko Kunii, executive]

And the global -- the unit sale, I'd like to make correction, the unit sales were 5.31 million units, not 5.03 million.

[Unknown Attendee]

[ Okamura ] from Automotive News. With regards to incentives in United States, if you look at it today, it's about USD 3,600. At Honda, how much are giving out as incentives? Also, earlier, you mentioned about Accord, how you don't want to be involved in the price competition, trying to keep the incentives down, so you don't have to do much discounting. But what is your sales projections for Accord?

[Seiji Kuraishi, executive]

With regards to Honda, I think it's about $2,000, slightly over $2,000, that's the average for Honda. That's the image. The industry is close to $4,000, so I think we're probably giving minimum or smallest amount. Now as for Accord and Acura model, we gave quite a bit of incentives and we need to switch to a new model. We try to keep the incentives down. But competitors are really take -- doing a lot of initiatives with incentives. And during the Christmas season, holidays business, it is challenging. But Accord is just newly launched, and we need to continue to compete. So going forward, like I said earlier, originally, it was 1.5 turbo, we launched that first, and then we did 2-liter turbo at the end of the year, and both are -- have -- received very favorably and we're planning to launch hybrid next. So in that sense, we are going to increase the variation of the models and continue to compete. But when -- in any case, when the car is just newly launched and if we give a lot of incentives, it becomes quite challenging. And of course, this is all about competition, so we have to see the entire industry to make the decision going forward. But we think we can sufficiently compete. Thank you.

[Hideko Kunii, executive]

Any other question? Any other question? Yes, the gentleman at the front.

[Unknown Attendee]

[ Furukawa ] from Nihon Keizai Shimbun, the newspaper. And one question with regards to China and another question on top of that. Now with regards to China, and not only for China, if we look at the 2017, Malaysia or Asia, the countries in Asia ended up achieving the highest sales on record. It seems that Asia is quite strong overall. But you have always been strong in North America. And so within your company, it seems that the Asia's importance is becoming stronger. Or is that the case for your company? And with regards to R&D expenses, you have actually reduced this by JPY 10 billion against the initial -- the assumptions. Were there any reasons for that?

[Seiji Kuraishi, executive]

The positioning of Asia, in any case, if we look at Asia right now, the market itself is growing, in particular, Indonesia, India and Thailand. And Honda has always been strong in Asia with regards to motorcycles. And so Thailand and Malaysia, I think we're #1 in the market. And we intend to further grow our business in those markets.

[Kohei Takeuchi, executive]

And with regards to R&D, we have the change from JPY 750 billion to JPY 740 billion, various items there, and so the development expenses for new cars, they're also research type. So it actually comprises various factors. So it's not the case that we have actually removed an item, but it's more rather a timing of payments. There was just a slip in the timing, so it's just a more accurate figure now. It's not really that something has been removed from the R&D item.

[Hideko Kunii, executive]

Any other questions? If not, we're finishing up early, but we would like to end today's meeting. Thank you very much for coming.