Honda Motor Co Ltd

TSE:7267

Earnings Call Transcript 2019-Q3

[Unknown Executive]

We would like to begin our fiscal year 2019 third quarter results presentation. We would like to first review the financial summary for the third quarter of fiscal year 2019.

Operating profit was JPY 684 billion. This represents a decline by JPY 22.7 billion compared to the same period last year, but if real-term currency effects, onetime issues and increased raw material prices are excluded, a real-term increase of JPY 87.4 billion was achieved mainly due to the positive impact of cost reduction initiatives, volume and model mix and other factors.

I would now like to review Honda's business results in some major markets around the world. First, for Automobile business operations, N-BOX series claimed the best-selling model in Japan in calendar year 2018 for the second year in a row. In December, the new Insight hybrid model was launched. For the car of the year awards in Japan, Clarity PHEV won the Best Innovation Award and N-VAN won the Steering Committee Special Achievement Award.

In the U.S. market, the best-ever annual light truck sales record for any calendar year was achieved, and CR-V, Pilot and Acura RDX rewrote calendar year unit sales records. In November, Passport, a brand-new light truck model, was unveiled with the start of sales planned for February. Honda Insight won the Green Car of the Year award.

In the Chinese market, record wholesale unit sales for any calendar year was achieved. Sales of Civic surpassed 200,000 units while 6 models, including Accord, XR-V and CR-V exceeded 100,000 units in sales, respectively. In November, Honda announced Everest VE-1, its first mass production EV jointly developed by Honda Motor China Technology and GAC Honda Automobile. Delivery of the new model is planned to gradually start in 2019.

In Asian countries, which comprise a major market for motorcycles overall, motorcycle sales increased 11.36 billion units, a rise by 6.6% compared to the same period last year, helped mainly by increases in sales of Scoopy in Indonesia, Activa in India and Vision in Vietnam. In October, Honda's cumulative motorcycle production in Vietnam reached 25 million units. In India, Honda accomplished 40 million cumulative 2-wheeler sales in December.

Regarding current conditions, the marketplace has been affected by a revision of the mandatory vehicle liability insurance system, increased insurance premiums and tightening loan screening criteria since September, and we are carefully monitoring the situation at present.

I would now like to touch on some of our most recent news topics. In November, PCX Electric, an electric scooter model, was launched in Japan. This is the first electric scooter in the 50cc to 125cc category launched by Honda and is powered by a newly developed compact electric power unit.

In Bangladesh, Honda inaugurated a new motorcycle factory. With an initial annual production capacity of 100,000 units, the factory plans to gradually increase its production capacity, which is expected to reach 200,000 units by 2021. In December, HondaJet Elite received type certification in Japan and marked its first customer delivery in Japan. Also, Honda Walking Assist device received clearance in the U.S. as a medical device.

Regarding the profit and loss situation, on a cumulative basis for the fiscal 9-month period, sales revenue came to JPY 11,839.5 billion. Operating profit was JPY 684 billion. The share of profit of investments accounted for using the equity method amounted to JPY 169.6 billion. Profit for the period attributable to owners of the parent was JPY 623.3 billion.

We will now take a look at our financial forecast for fiscal year 2019 on a consolidated basis. By incorporating the effects of ForEx fluctuations and other factors, we have revised our consolidated results forecast from our previous announcement as follows: we now expect sales revenue of JPY 15,850,000,000,000; we plan on an operating profit of JPY 790 billion, unchanged from 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 year attributable to owners of the parent, our target is JPY 695 billion. The exchange rate set for calculating these projections was JPY 110 to USD 1 for the fourth quarter, and the average full year exchange rate was set at JPY 111 to USD 1.

As for dividends, the expected annual dividend for fiscal year 2019 will be unchanged from our previous announcement at JPY 111 per share of common stock. The dividend for the third quarter would be JPY 28 per share of common stock.

We will now provide more detailed explanations on the financial results and outlook. First of all, I will review the Honda Group's unit sales for the third quarter.

In Motorcycle business operations, group unit sales totaled 5,013,000 units. In Automobile business operations, group unit sales totaled 1,408,000 units. In Power Product Business operations, group unit sales totaled 1,351,000 units.

Regarding the profit and loss situation, despite the negative impact of currency translation effects and other factors, sales revenue was JPY 3,973.6 billion, roughly equivalent to the level on the same period last year due mainly to increases in the motorcycle business operations and Financial Services business operations.

Operating profit came to JPY 170.1 billion, a decline by 40.2% compared to the same period last year. Despite positive effects of the cost reduction initiatives, a decrease in revenue associated with volume and model mix, an increase in SG&A expenses, the impact of ForEx fluctuations and other factors have led to the decline. The operating margin was 4.3%.

The share of profit of investments accounted for using the equity method was JPY 51.4 billion. Profit before income taxes totaled JPY 226.9 billion. Quarterly profit for the period attributable to owners of the parent totaled JPY 168.2 billion, a decrease by 70.5% compared to the same period last year, mainly because of effects of the tax reform in the U.S. in the same period last year, among other factors.

Regarding Honda Group unit sales for each segment, Motorcycle sales totaled 5,013,000 units, a 2.9% increase compared to the same period last year mainly due to the rise in sales in Vietnam, Indonesia and Brazil, among other countries. For Automobile operations, increases in sales of the Crider in China as well as the launch of N-VAN in Japan were among the primary drivers of unit growth to 1,408,000 units, a 4.8% increase compared to the same period last year.

For Power Product Business operations, an increase in sales of OEM engines used in construction equipment and lawnmowers in North America and the OEM engines used in pumps in Japan, among other factors, led to a total of 1,351,000 units, an increase by 13% compared to the same period last year. Shown here are Honda Group's unit sales for the fiscal 9-month period.

Now regarding sales revenue for the fiscal third quarter, despite the negative impact of currency translation effects, the increases in motorcycle business operations and Financial Services business operations contributed to the total sales revenue of JPY 3,973.6 billion. Shown here is the sales revenue on a cumulative basis for the fiscal 9-month period.

Next, I would like to provide explanations on the increase and decrease factors that impacted the profit before income taxes for the quarter. Profit before income taxes for the third quarter totaled JPY 226.9 billion, a decrease by JPY 119.9 billion compared to the same period last year. Operating profit came to JPY 170.1 billion, a decline by JPY 114.4 billion 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, the positive effects of cost reduction initiatives and other factors were more than offset by a decrease in revenue associated with volume and model mix as well as a rise in warranty expenses, among other factors, resulting in a negative impact of JPY 72.4 billion.

At the operating profit level, the negative impact from ForEx effects was JPY 42 billion. A decrease in the share of profit of investments accounted for using the equity method resulted in a negative impact of JPY 3.1 billion. Finance income and finance costs resulted in a negative impact of JPY 2.4 billion.

As for cumulative profit before income taxes for the fiscal 9-month period, despite the positive effects of cost reduction initiatives and an increase in revenue associated with volume and model mix, the negative impact of ForEx effect, an increase in SG&A expenses and other factors led to the cumulative profit before income taxes of JPY 868.2 billion, a decline by JPY 56.2 billion.

I would now like to discuss the results for each business area. In Motorcycle business operations, revenue associated with an increase in volume and model mix as well as other factors, led to the operating profit of JPY 69.5 billion, a 7.3% increase compared to the same period last year. In Automobile business operations, a decrease in revenue associated with volume and model mix, among other factors, led to the operating profit of JPY 41.2 billion, a decline by 75.4% compared to the same period last year.

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 0.9 billion, a deterioration of JPY 2.5 billion compared to the same period last year. The operating loss for aircraft and aircraft engine business operations, which are included in the Power Products and Other Businesses segment, totaled JPY 9.8 billion, a deterioration of JPY 1.7 billion compared to the same period last year.

In Financial Services business operations, the operating profits totaled JPY 60.3 billion, an increase by 19.1% compared to the same period last year due to an increase in profits associated with higher operating lease revenues, among other factors. Shown here are the results for each business area on a cumulative basis for the fiscal 9-month period.

We would now like to review Honda's business results for the third quarter by geographical region. In Japan, despite a rise in revenue associated with volume and model mix among other factors, the negative impact of ForEx effects, an increase in SG&A expenses and other factors resulted in an operating profit of JPY 43.3 billion, a decrease by 31.4% compared to the same period last year.

In North America, despite positive effects of cost reduction initiatives and other factors, a decline in revenue related to volume and model mix and other factors resulted in an operating profit of JPY 49.9 billion, a decrease by 52.9% compared to the same period last year.

For Europe, the effects of cost reduction initiatives and other factors were more than offset by the negative impact of ForEx effects and other factors, which resulted in an operating profit of JPY 1.3 billion, a decrease by 49.1% compared to the same period last year.

In Asia, despite the effects of cost reduction initiatives and other positive factors, the impact of ForEx effects, a decline in revenue related to volume and model mix and other factors led to an operating profit of JPY 93.1 billion, a 16.2% decrease compared to the same period last year.

In other regions, which includes South America, the Middle East, Africa, Oceania and other areas, the effects of cost reduction initiatives were more than offset by the impact of ForEx effects and other negative factors leading to an operating profit of JPY 2.1 billion, a decline by 72.6% compared to the same period last year.

Shown here are Honda's business results by geographical region on a cumulative basis for the fiscal 9-month period.

Regarding the share of profit of investments accounted for using the equity method, this amounted to JPY 51.4 billion, a 5.7% decline compared to the same period last year. Consolidated capital expenditures for the fiscal 9-month period amounted to JPY 282.3 billion, a decrease by JPY 2.6 billion compared to the same period last year.

We would now like to discuss Honda's consolidated results forecast for fiscal year 2019 beginning with group unit sales for each of the business areas. In Motorcycle business operations, a decline in sales in Asia has been incorporated for an expected decrease of 450,000 units compared to the previous forecast, bringing projected unit sales to 20,400,000 units. In Automobile business operations, there is no change in projected unit sales compared with the previous forecast at 5,285,000 units. In Power Product business operations, Honda's group sales forecast is now 6,240,000 units for an expected decrease of 105,000 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, minus JPY 43.5 billion; share of profit of investments accounted for using the equity method, minus JPY 32.6 billion; finance income and finance cost, minus JPY 28.7 billion.

Regarding the actual company performance derived by rearranging the order of the increase and decrease factors that impacted the operating profit, if real-term currency effects, onetime issues and increased raw material prices are excluded, a real-term increase of JPY 158.5 billion is projected. Compared to our previous financial forecast for the current fiscal year, the impact of ForEx effects and the differences in revenue associated with volume and model mix have been incorporated, but an operating profit of JPY 790 billion is still expected. This is unchanged from before. 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.

[Operator]

[Foreign Language]

[Unknown Attendee]

I am from [ Nikkei Shimbun Newspaper ]. My name is [ Okada ]. Now this third quarter, we see that the operating profit has declined as much as 40%. This is said to be primarily due to the model mix, SG&A expenses and quality related expenses. The increase in expenses has pushed down the profit, but can you elaborate on the reasons for the decline and increase in expenses? Also, regarding the 2 major automotive markets of United States and China, it's said that car market is reaching a turning point. But Honda, how has it tried to enhance sales in the third quarter? And what is the outlook of the 2019 world automotive market? And how Honda will try to address the market and secure profit?

[Unknown Executive]

Mr. Kuraishi, could you try to cover the global outlook? But before that, the third quarter.

[Seiji Kuraishi, executive]

In regards to your third quarter question, looking at the third quarter in summary, we see in terms of the automotive in China, there has been a sudden decline in sales, but Honda's Accord, Crider, Inspire has boosted up our sales, recording a year-on-year increase. Regarding North America, our Celaya plant in Mexico, which was hit by flooding, resumed full operation in November. On a wholesale basis, we recorded a year-on-year increase. And we added 6,400 units, totaling 1.48 million units. Motorcycle sales, we increased sales in Vietnam, Indonesia. And the group sales increased by 143,000 totaling 5,013,000 units, an increase in revenue and profit for 8 straight quarters. However, the third quarter operating profit was JPY 170.1 billion, excluding the ForEx impact, JPY 72.4 billion decline in profit. The major reasons are the following: we increased motorcycle profit with volume whereas from automobiles, due to incentives and quality-related expenses, increase in raw material cost and flooding in Mexico, we saw our profit drop. However, when it comes to incentives, this is mainly due to change in method applied in accounting for incentives in the United States. In addition, there was a support needed to sell out the old CR-V models and these, we believe, are onetime expenses. If we were to exclude these full year, operating profit is proceeding as expected and we believe the -- remains unchanged at JPY 790 billion as announced last time. Now in regards to the major markets, beginning with China. At the beginning of last year in China, we experienced the CR-V dilution issue. But thanks to the new Accord, Crider, in the second half, these new models helped us recover and the annual shipment exceeded the previous year and registration unit sales. Though we aim to have an increase over the previous year, it turned out to be 1.43 million, almost as planned. Currently, it is quite cold in China. However, we have yet to see any dilution problems. And the December CR-V registration unit sales exceeded 30,000 units. And January also are seeing a year-on-year increase. We believe that we are seeing steady recovery. China is forecast to undergo an economic slowdown. This year, we will strengthen our model line up so as to aim towards achieving sales greater than last year. United States, likewise, in 2018, we ended more or less the same as previous year. 2019, due to the trade issue, interest hike, overall, the market is expected to fall slightly below 17 million units. Light truck ratio has remained and is likely to remain high. Honda sales in 2018, due to the supply constraint at Celaya, we were not able to exceed the previous year. But despite the passenger car market being tough, our major models, the new Insight, despite the cheap gasoline prices, did well, and Honda has increased its share in the passenger market. Meanwhile, the light truck market, RDX, Pilot, CR-V has seen an increase in volume, and this was the result we see in 2018. Now when it comes to 2019, we will have Fit, HR-V production increase, thanks to the recovery at Celaya. And from last August at Marysville, we can produce more of CR-Vs and therefore, we think that the flexible production will be affected throughout the year and the new Passport will be introduced and the RDX will be sold for a full year and thereby, we expect the volume will increase, even more than last year. Now these are the situation, our strategies for our major markets, both China and U.S.

[Unknown Attendee]

[ TV Tokyo ]. My name is [indiscernible]. As of today, finally Japan EPA has come into force, and together with the cost competitiveness, you probably has a good level of expectation. Please tell us about it. And if you could share with us some values and numbers or percentage, please tell us. Along with that, do you have a plan to change the production plans or any expected measures in place?

[Unknown Executive]

With regard to EU-Japan EPA, especially for the Automobile businesses in Europe, it is important when it comes down to the supply of the CBU over there. And we will welcome that irrelevant customers to reduce and to go away finally. And it is not happening right now, and we don't have any numbers to share with you. However, in the future, the customers for the parts and CBUs from Japan will reduce or to go away, and it is good for us. And we will take advantage of that in our strategy in the future. But there is nothing -- that is the starting right now, I have nothing else to share and I have no plans to change this scheme dramatically. Any other questions?

[Unknown Attendee]

Toyo Keizai. My name is [ Morikawa ]. I have 2 questions. With regard to the cost reduction and its effectiveness, your plan is much better than the expectations in the beginning of the fiscal year and I felt the same way last time. However, are there anything that you can manage better or enjoying some effectiveness, thanks to your efforts? If there's anything, please tell us. The other question is about EV battery procurement. We have been hearing about many reports and I actually sought out them. Toyota and Panasonic are going to come up with a new joint venture company and in that context, what is the position of Honda? And how do you see this situation in terms of the whole industry? And what is your strategy of Honda? How do you procure them? And I heard that you are going to have a partnership with a supplier in China. What is the direction in this area?

[Unknown Executive]

So let's start with the cost reduction and its effectiveness. Cost reduction is actually to be achieved, thanks to the down to earth solid activities, then we can get results. Usually, we have our conversation with the suppliers to improve how to manufacture more efficiently and how to use less expensive facilities, equipments and with a fewer number of people. And usually, we see a JPY 100 billion per year cost reduction effect and then we have seen JPY 50 billion each in the third quarter, just like the same time last year and it is in the cruising speed, let's say. And there is nothing we did especially and it is thanks to the day-to-day cost reduction activities. And EV battery and the strategy. Toyota and Panasonic are going to come up with a new company for the EV on-board batteries. And Honda, for longer, has assumed the principle of a QCD, quality, cost and stable deliveries, and we prefer the goods where they have the competitiveness in those regards. And if the new company of Panasonic and Toyota can offer the same level of the QCD, competitive QCD, we will consider procurement. And Honda has a principle, for long, that is to produce where the demands exist. And we have our same principle for the supply as well. For instance in North America, we have a partnership alliance with GM for stable battery procurement and we'd like to do the same in other regions.

[Naoto Okamura]

Automotive News, Okamura. I have 2 questions. The first question might be redundant but looking at one of your sites here, you talk about the declining operating profit and you attribute this to SG&A. In the English version, it says under SG&A, increase in warranty. Can you explain more in detail about this warranty increase? That's my first question. My second question is in regards to North America and the major decline in operating profit year-on-year. We see there is a significant decline in operating profit starting from last year. Can you explain the reason?

[Unknown Executive]

I'd like to first address the first question in regards to warranty. Well, in Japanese, it is described as quality-related expenses. For example, if there is a new recall, then we file reports to the government. It is at that point in time we post the expenses. So in the third quarter, there were several of such cases and this is the reason why we see an increase, whereas last year there were not that many in this quarter. But on an annual basis, the warranty rate is 1.1% at a cruising rate. Year -- quarter-by-quarter, there is this difference. Now about your second question, North American automotive profit, as I said, there was an increase in incentive as earlier explained. And compared to last year, there has been an increase in incentive. The first reason is due to the method applied for accounting for incentives. In the past, we have had a targeted volume for each incentive and this volume was used for accounting. But now we have changed the basis to wholesale volume. So there is this onetime increase in expenses. The other reason is the need to sell out our 2018 CR-V models, and there are incentives designated for this purpose. And these are the reasons for the negative result.

[Unknown Attendee]

[ Kinichi Hayakawa ]. I have a question to Mr. Kuraishi. I have 2 questions. One, in China, finally after 28 years, unit sales reduced last year. And I'd like to know the recent sales situation and the market situation in a little bit more detail. And in the materials, you mentioned that unit sales in China resulted in 98.4%, a little bit lower than the previous year, because of the CR-V. And how much of the negative effect does it cause for the present term performance? Second question is about Brexit. The other day you announced the 6-day production stoppage in the factories. And if you have other production plan revisions or changes, please let us know.

[Seiji Kuraishi, executive]

As for China, last year, the toughest I think was the dilution of the CR-V started in the beginning of the fiscal year and it extended longer than we expected. And for China as a whole, nowadays they have economic issues significantly and the market there has been on a decline since September or so and the hardest hit category is the Chinese local brand cars. At the moment, we would expect they would have a little bit less than 40% level. They struggle hardest. And the other thing is the U.S.-China trade issues. Japan had a boycott campaign years ago and in China, there is a similar boycott campaigns going on. Therefore, U.S.-made cars are losing their market in China, and that is the largest factor. In addition, Korean cars are struggling. On the other hand, Japanese and German, European cars are growing. Thankfully, against our concerns in September -- excuse me, in December, we made the highest record. And in January 2, our Chinese counterpart will make their official announcement later, but we are expecting we are more than 5% growth from the same time last year and we have started quite nicely as we expected in China. In China, actually I stayed in China before and over there, they have a very strong mindset of so-called a step-up idea. First, people buy the Chinese local brand cars. And then in the next stage, they buy joint-venture company's automobiles. And then when they become rich, they would like to buy Mercedes or BMW. And thanks to the economic growth, a rapid economic growth in China, people became richer, they can now afford our joint venture manufacturer's cars. In this context, Honda's global models, CR-V, Civic, Accord are well accepted over there. Plus the Crider, developed locally for the Chinese customers, are also well accepted. In a way, we expect that we can grow the Chinese market for us much more going forward. That's our expectations. [Foreign Language] In China, there's a very tough competition in the sales. In that context, we might have to increase the incentives over there that may have the greater impact on profit. In terms of the Brexit, we do not know what is going to happen going forward. And as I said before, we simply keep an eye on the situations over there. If anything happens by the end of March, as we said before, we will try to avoid confusion by adjusting the production calendars or we might have the situation where the logistics distributions and customers' clearance practices might stop for some time. And then in that case, we could produce earlier and then ship the vehicles to the continent earlier or have a high stock levels in order to avoid confusion. We are preparing for that at the moment.

[Unknown Attendee]

Asahi Shimbun newspaper, [ Kimura ]. I'm sorry, another China-related question. Dongfeng Honda's third plant will be completed in the first half of 2019, I believe. I'd like to ask you how this plan is progressing. And can you describe whether you will consider producing electrified vehicles at this plant? And given the slowdown in China, what kind of cars are you planning to sell in China? Another question. Well, this might be something that is asked every time, but the automotive operating profit is not picking up. Again, this time, it has declined. Honda continues to be dependent on its Motorcycle business. What measures do you have to try to change this situation?

[Unknown Executive]

First, about Dongfeng Honda's third plant. Currently, we plan to start operation in April 2019. The initial production capacity will be 120,000. As itself, Honda's production capacity in China will increase from its current 1.13 million to 1.25 million. Last year, we sold 1.45 million, so capacity-wise, we are still short but we want to carefully think about what needs to be done. We'll consider the work style and other measures in order to cope with the situation. But if there is need to further increase production capacity, well, we can try to accommodate by introducing more people. But for the time being, we are only considering adding 120,000 units. The third plant does comply with electrified vehicles. So electrified models will also be produced. But right now, I cannot disclose what specific models will be produced at the plant.

[Unknown Attendee]

Does that mean that you'll produce EV vehicles?

[Unknown Executive]

When we say electrified, it includes HEV, PHEV and EV.

[Unknown Attendee]

And about the automotive profit?

[Unknown Executive]

Well, this is something that is often asked, and we are taking various measures to try to address this issue. One thing that we're already doing is to try to increase the utilization rate of production capacity. We've already announced Sayama, Thailand and Brazil. We are trying to increase the utilization rate of our production capacity. Furthermore, we've already started this but we are trying to modularize our development. Starting from 2021 Civic, we will have common platforms, which will also be applied to eventually CR-V, Accord to reduce development cost and have more common parts. We believe that automotive profit is our top priority issue and therefore, we would continue to consider what measures can be taken.

[Unknown Attendee]

Nikkei Shimbun Newspaper, [ Furukawa ]. Again, I have 2 questions in regards to China. Last year, for the full year, Honda recorded 1.43 million units. You fell behind Toyota and ranked third amongst the Japanese manufacturers. The market is unlikely to grow significantly and, I believe, there'll be fierce competition. What is your estimate of the competition? And what is Honda's strongest point in China? And second, about the decline in profit in China. You look at the profit under the equity method. This is larger -- the drop is larger than the operating profit. Does this not suggest you have a drop in profit in China?

[Unknown Executive]

We are not so concerned about our ranking. Last year, we had the CR-V issue at the beginning of the year and as a result, we underachieved slightly our plan. Fortunately, both our global models and the models we have developed in China are popular amongst the Chinese, and we would like to continue to sell products which are welcomed by the Chinese. We believe ultimately this will satisfy our customers in China. In regards to your second question, China does account for a large part of the share profit of investment accounting for using the equity method. But here, the method includes the pluses and minuses of our affiliates. Compared to last year where there was a profit, the number has gone down, but not all is attributable to China. [Foreign Language]