Honda Motor - Earnings Call - Q1 2020

Transcript

Operator (participant)

Thank you for waiting, ladies and gentlemen. I thank you very much for spending your time to join us at the financial results presentation of Honda. Allow me to introduce the executives, Executive Vice President Seiji Kuraishi, Senior Managing Director, CFO Kohei Takeuchi.

Kohei Takeuchi (CFO)

my name is Takeuchi.

Seiji Kuraishi (EVP)

Chief Officer, Business Management Operation, Jiro Morisawa,

my name is Morisawa.

Operator (participant)

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

Seiji Kuraishi (EVP)

Allow me to start the FY 2020 first quarter financial results presentation. First, regarding FY 2020 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 and 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-Wagon and new models to be launched in the second half of the fiscal year are hoped to mitigate the impact of the tax increase. In the United States, the industry demand decreased for the same period last year due to a decline in the sedan market. Honda, despite increase in unit sales of Passport and others, their code decreased, pushing down unit sales from the same period last year.

FY 2020 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's CR-V, Accord, Inspire increased, plus launch of the new N-VAN led to the increase in sales unit compared to the same period last year. FY 2020 outlook: industry demand due to the impact of U.S.-China trade friction and others is expected to be slightly less than last year. Honda, thanks to the N-VAN launch and increase in Accord, Inspire units, we are aiming to achieve historical record unit sales. Next, motorcycles. Looking at the industry demand of the four main markets, India was down for the same period last year, mainly due to the national election and tightening of loan screening criteria.

Honda also saw a drop from the same period last year due to market slowdown. Outlook for FY 2020: industry demand and temporary decline is expected due to India's tightening of environmental regulations and the election results. Meanwhile, Honda, while 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 instructor products so as to realize further growth in the mid to long term. Next, FY 2020 first quarter results summary. Due to decline in automobile unit sales in the United States and India, operating profit is down. However, if we exclude currency effects and one-time issues, it is 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 PLR shows. Next, FY 2020 financial forecast. In addition to rising uncertainty in 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 can 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 PLR shows. Next, a first quarter end dividend is JPY 28 per share.

FY 2020 forecast of the annual dividend is to be one yen higher per share from FY 2019, reaching JPY 112. Now, Senior Managing Director and CFO Kohei Takeuchi will explain first quarter financial results and forecast.

Kohei Takeuchi (CFO)

Let me explain. Speaking of the performance of the first quarter, in spite of the increase in the financial service business segment, because of what motivates 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 production impact, nevertheless, due to the increase of SG&A. Profit declined relating to the impact of the revenue and model mix, as well as the foreign currency impact. Operating profit was JPY 252.4 billion. A share of the profit of investments accounted for using the equity method was JPY 44.2 billion due to incremental losses of the affiliated companies despite incremental profit in the 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 currency, excluding impact of the foreign currencies, operating profit was down by JPY 29.2 billion due to decline of the sales volume and incremental quality-related expenses despite a cost production effect. Let me explain the performance of my business segments. 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 Indian markets. Operating profit in automobile operations was JPY 120.3 billion due to incremental quality-related expenses despite a cost production effect. Operating profit in our financial services business was JPY 65.7 billion due to incremental sales revenue in operating lease business.

In our life creation and other business segments, we had operating losses of JPY 3.5 billion due to profit decline relating to the impact of the sales volume and model mix. This segment includes operating losses of the egg crafts and its 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 5.4 million units because of 15,000 units decline in India and etc.

For life creation segments, the estimate will be 6.39 billion units, no change from the previous forecast. The table in the slides shows the consolidated final financial estimate of FY 2020. Sales volume in automotive segments will decline; however, the volume in the motorcycle segments will grow. In addition, we will have an incremental profit of the financial service segments, furthermore to the improvement of the operational business structures. 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 just like the preceding year. Finally, the slides show the ROE forecast of my CapEx depreciation and R&D spending for FY 2020. That concludes my explanation. Thank you.

Operator (participant)

Thank you very much. We would like to proceed to Q&A. Those of you who have questions, please raise your hand. As 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?

About the U.S. business environment. 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? I understand from August, you are reducing the production volume at one of your plants. You are downsizing your sedan and trying to strengthen SUV. I think that I would also like to know about your sales strategy to try to improve profit. About the United States, Mr. Kuraishi, please?

Seiji Kuraishi (EVP)

About the U.S. situation in 2020, we see that the January to June results are worse than the year-on-year, 2% less. I do understand that the 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. In addition, there is the impact of the trade impact. In 2019, there was a tax reform which boosted the market, but this year we do not have that. 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. About the market, light trucks are still good, and July, 70% was the ratio.

As for Honda, the passenger car market is shrinking, and the new Passport and the new RDF that we launched last year. These light truck models will be our core for promoting sales. In Sierra in Mexico, there was a flooding. Thanks to the recovery, Fit HR-V production increase is expected. As for car, though we are having a hard time, Civic is doing well. Therefore, for we at Honda, as I said, take the measures I have explained, and we would like to reach sales beyond last year's. About the MAP one line, one shift, yes, from August 1st, we have shifted to one shift. The MAP one line, Accord Civic, production is cut on this line.

We believe that with a low incentive, we did not want to get caught up in a price war, so we do have slightly high inventory. Therefore, with this one shift change at the MAP, we would like to reduce the inventory to normal level. Anyway, because of Mr. Trump, 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. Thank you. If I may add, MAP is Marysville Automobile Plant, MAP. Any other questions? Yeah, [audio distortion]

Operator (participant)

The lady at the front seat, please.

Molli (Analyst)

Hello, Molly from Auto Inclines. I have two questions. One is the impact of the yen depreciation. You did not factor it in for your downgrade or downward revisions, but Toyota is actually changing their anticipations. How do you see that situation for Honda? In addition to that, for the vehicles cost for wheels, you anticipated new cost sales volume, JPY 5.16 billion down to JPY 4 billion, and that is actually expecting 50,000 units a decline, mainly in India and so on. What is the automobile sales situation in our market in India at the moment? Why 50,000 or less? Because it is quite a bit. Why is that? What is the reason for that? In North America, for instance, you kept the forecast of the sales units as no change. Same? Why is that?

Kohei Takeuchi (CFO)

The foreign currencies, Toyota have said that after July, they're going to have some sort of JPY 160 instead of JPY 110. What we see, the situation is like there was an interest rate down before, and then we had JPY 107 back to JPY 108, and then Toyota is actually making it downward to JPY 160 in response to those movements. We had JPY 110 assumptions when we put together the forecast. We believe there will be no changes of the situation dramatically. That is why we keep the same assumption of JPY 110 for us as for now. What is the forecast of the automobile unit sales in India? Like, the situation over there is actually a transparency of the economic outlook is still not clear, and the economy is rather weak.

The reason one is their financial contraction, and that impact of the tight leg finance is actually impacting the automobile situation as well. We had already anticipated this number of the cost over there right at the beginning of the fiscal year. We did not 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 on the industry as a whole. We tried to support our businesses with a new launch of the cars or new model changes and support. However, the situation is quite serious. Therefore, we decided to change downward the global outlook of the sales volume. However, mainly that is the Indian situation. If you look at the global situation of the automobiles, China, Japan is very good.

In Asian countries, for instance, India specifically have difficult situations. After the election in Asian countries, such as Indonesia and so forth, the foreign currency situation is not favorable to us. Also, the U.S. as planned, so to speak. In that context, of course, we have both good places and not good places, but most impacted area is here. We decided to change the forecast of the Indian sales. In other markets, China, the whole economy is not very good, but we are sustaining the businesses quite nicely. Of course, U.S.-China trade conflicts. We need to keep an eye on what is going on in that area so that we can manage our businesses. Thank you very much.

Operator (participant)

Any other questions? The person in the very back?

Asahi Shimbun, Kimura, I have two 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, is dropping. The current motorcycle business, the profit and environment, how do you see it? The second question is a related question. 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 thought that the profit margin continued to decline. The operating margin has started to decline. Are you going to maintain it? In order to maintain our operating margin, what measures are you going to take, please?

Seiji Kuraishi (EVP)

First, about the overall motorcycle business environment.

Talking about the motorcycle business in the first quarter, looking at the global market, it is about 95% from last year. Honda is 92%. I think the biggest reason is because of India. China, from July, there is a new regulation in place, and the old models had to be sold out. There was a shift in this plan. That is the impact. Overall, excluding India, the motorcycle business is expected to pick up from the second half of the year. We think that we can achieve more or less as planned in India compared to our forecast. The first quarter had momentum, and we made an upward revision. Rather, in Vietnam, it is doing well. In Asia, for the motorcycle, we have made an upward revision. The biggest reason is India.

I think that the impact on the motorcycle business was less than compared to the automobile impact. 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, Takeuchi?

Kohei Takeuchi (CFO)

In terms of comparison, motorcycle, automobile, both, compared to the last quarter, it's 16%, 13%, 16% to 13%. Last fiscal year, there was a one-time additional factor. This fiscal year, there's this factor of India. That is the reason why we see this drop in operating margin. As Kuraishi has said, motorcycles in India were expected to decline because of fiscal financial tightening, which had started last year. I think in terms of our plan, it's in line. Compared to last fiscal year, it is a decline.

Compared to our outlook, it is more or less in line with what we have been forecasting. In Vietnam, we're seeing an increase in unit volume, and there's likely to be more investment in India. I think that it will be more of a positive compared to the forecasted profit. Automobile, because of the impact of Forex, we look at the quality expenses per quarter and look at the complaints that have been filed. On an annual basis, it was about 1.44% last fiscal year, and now it's returned to the normal standard of 1.1%. This has not changed very much. It was 0.6% complaint in the first quarter of last fiscal year. That's the reason why it shows a negative.

If you just look at the first quarter year on year, you do see that's a negative, but we think that still things are going as planned. Therefore, we believe that we can maintain our original plan of JPY 770 billion.

Any other questions? Other questions?

Operator (participant)

The gentleman in the second row, Kuraichi, please.

Thank you. Full car from the Honda Shimbun. Two questions. One is profit in China. On page 13, you have the equity method one less globally. However, you have more in China. Last year, you had the profitability of the impact of this. What is the current profitability situation in China? That's question one. Kuraichi said earlier, you are going to target the highest number of sales in China for a year, but profitability is kind of like that. I just wonder if you have kind of a difficulty trying to achieve that target.

Kohei Takeuchi (CFO)

Recent profitability situations in China, please. In terms of the forecast outlook of the sales for FY 2020, January to June, 12.4% down from the previous term.

The Chinese Automotive Industry Association had to make the downward revision, and that could be the impact due to the China-U.S. trade frictions. That probably caused rather psychological impact on the consumers. Honda in this context, our sales is quite well doing, and we are still targeting to hit the better than last year's situation results. That is no change to our target. We have 133% of the same quarter last year at the moment. That's where we are. That of course gets a dilution effect in there. However, not just the CR-V, but the Accord and Inspire and those main models are doing very well. 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 because we have EVs, electric vehicles are already there. Profitability per unit is a little bit squeezed because of that model mix. That is the factor behind. Basically, sales profitability, we are trying to achieve the last year levels. That is what we are working on at the moment.

Thank you.

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

Seiji Kuraishi (EVP)

Honda's strength is our operations, manufacturing rooted down deeply in the local economy and local market. Of course, we see trade frictions like that today, and we do have a pretty big impact like that. However, we have those localization well-prepared like other companies. We have 90% North America. The cars over there are produced over there in local markets. We have a good localization process in Asia countries too, and 100% production in China as well as the Chinese market. Therefore, we have a good localization, a progress, and a local content percentage in each of the countries is higher than other companies, I believe. Because of that, we are quite resistant to those changes there.

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 such new step technologies. We need to make sure that we have a steady investment and work on there not to be behind the companies. Last time, you probably had participated in the Honda meeting. If you did that, you probably understood. Currently, we have our existing business reformation. We are trying to change the structures, and we are trying to prepare the upcoming future businesses as well. We need to have some more time to get to the results emerging from those efforts. Of course, we like to keep doing our businesses, trying to differentiate from other companies by all means. Thank you very much. Any questions?

Operator (participant)

Yeah, Soshihara, the person in the middle, the gentleman there.

[Foreign language]

I'm a matter from Nikkan Asia Newspaper. I have two questions. To Mr. Kuraishi, I want to ask you about your assessment of the financial results of the first quarter. You're aiming for 5% operating margin annually, but already it's declining to quite an extent. How do you see this? How do you assess the first quarter results? The second, on an annual basis, I think that development cost is flat, but in the first quarter only, compared to the previous years, decline. Looking at your competitors, I think that related to CASE, they're increasing R&D investment. What's your strategy? Where is your priority in regards to R&D?

Seiji Kuraishi (EVP)

The first quarter, talking about the first quarter, our assessment is that things proceeded as planned.

Compared to last year, as Takeuchi has said, last year we had the one-time expenses, and also there was a high one-quarter quality-related expenses. If you look at apple to apple compared to last year, I do believe that we do have some changes, but we are on an annual basis online. About India in Asia, the unit volume has declined, but the profit from Indian automobile business was not that big to begin with. Therefore, North America and China, how much the trade friction will impact our business and how much this will 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. By the first quarter, it's declined. 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 is our impression. We have to be efficient in spending our R&D budget. As I said last time, we are taking measures to reduce our R&D expenditure. For new areas, there are things which Honda should do on its own and others where we have to enter into the alliance. We have to differentiate the two and try to strengthen our business constitution. Looking at the quarters, R&D depends on the timing of the model development and launch date. Just looking quarter by quarter, yes, it does seem that it has gone down. On an annual basis, it was JPY 820 billion last year, JPY 860 billion this year. I think that there is this difference of JPY 40 billion. R&D, yes, we are planning to spend sufficient budget on R&D.

Operator (participant)

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

Sunkei Newspaper. My name is Ima Mura. Today, the government has decided for the export management for Korea. They decided to exclude them from the list. Although the number of units involved is not that large, however, the parts, components, raw materials, including all of those for the overall psychology of the market, for instance, how would you estimate the impact of the Korea and what is going on over there now?

Seiji Kuraishi (EVP)

Currently, what is going on over there isn't really impacted by that. There's 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. Maybe after the decision by the cabinet today, what would be the next move by the Korean government, depending on how it rolls out. Of course, there will be the situations we need to address. However, at the moment, there's no big issues to address at the moment.

Thank you.

[Foreign language]

Operator (participant)

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

Sean McLain (Analyst)

From Wall Street Journal, Sean McLain. In appendix, page 14, you talk about the quality-related expenses, etc. Can you be more specific? What is included here? Please.

Seiji Kuraishi (EVP)

What we mean here is, it is SG&A, but when we sell a car, the customer files complaints, and we have to do repair. That expense plus, it might be half and half, but there are cases in which we have to conduct recalls. In case of recalls, we have to assure the quality of those that we have sold in the past. It is the general complaints and also recall expenses. These two combined comprise this item. It is included in our SG&A. Okay.

[Foreign language]

Sean McLain (Analyst)

I need some more details, please. Because for instance, claims will be coming quite a lot, I think, but you have a warranty for those recall issues. How many of those do you have to handle? If you have a major one, you could tell us. Could you share with us, please?

Seiji Kuraishi (EVP)

At the moment, I do not have the detailed information right at my hand at the moment. I do not have the information right here, but in the first quarter period. Of course, when we have 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 announcements. Maybe you could speak to the PR individual later on.

Sean McLain (Analyst)

Thank you.

Operator (participant)

This now concludes our financial summary presentation. Thank you very much for your participation, indeed. Thank you.

This is the end of the meeting.