Honda Motor - Earnings Call - Q2 2020

Transcript

Operator (participant)

Thank you very much for waiting. Thank you very much for your coming today for our financial results announcement meeting. I'd like to first introduce our attendants: Mr. Kuraishi, Executive Vice President, and Mr. Takeuchi, Senior Managing Director in charge of Strategy, Business Operations, and Regional Operations. Excuse me. Accounting, Finance, HR, Corporate Governance, and IT. And Mr. Morisawa, the Corporate Chief Operating Officer, Business Management Operations. Excuse me. To start with, I'd like to extend my deepest sympathy for those people who have been affected by the typhoon Hagibis the other day. I wish the quick recovery as soon as possible. Now, I'd like to start our announcement of the second quarter results of FY2020. In terms of the Honda Group unit sales of the second quarter cumulative, motorcycle 10,019,000 units, automobiles 2,562,000 cars, life creation businesses 2,435,000 units. Let me talk about our main markets.

First of all, in Japan, in terms of the total market, due to the new car launch effect by the various OEMs as well as the last-minute demands before consumption tax hikes, we had made better results than the year before. Honda enjoyed good sales of N-Box and N-Van, and we have recorded better than the market unit sales. The total market for FY2020, our forecasts do not change, and we expect these signs will be a little bit below the last year. Our forecast, based on the effect by the parts supply limitations of new N-Wagons, we have now revised our forecast. The other day, we made announcement—excuse me—we made world premiere of the new Fit in the Toyota Motor Show.

In the United States, the total market had been a little bit down year-on-year despite a fleet sales increase and sedan market swing. In the shrinking sedan market, Honda had a reduced sales of their quote. However, we firmly maintained a leading position in the segment with a Civic seven months in a row, and we're expanding our shares in the sedan market. We had increased sales of—we had the effect of the launch of a CR-V and Passport, and we maintained the unit sales same as last year. In the last three months, we have recorded the record highest unit sales of the CR-V in August, and we have upgraded the monthly sales record in the United States alone in October. For the FY2020 total market, we're expecting the size a little bit below 17 million.

However, Honda will strengthen their competitiveness by a minor model change of the CR-V main SUV as well as the new launch of the CR-V Hybrid, plus we'll have the launch effect of the Passport. Therefore, we aim to hit better than the last year's unit sales despite a shrinking market overall. In China, total market has declined in all segments. However, Honda increased the unit sales of CR-V according to Crider, and thanks to the effect of the N-Box launch, a new model, we have made better than the last year's unit sales. The total market for FY2020, we're expecting the size a little bit below the last year. However, thanks to the launch effect of the Breeze new model and a new EV X and V, we will aim to hit the record highest unit sales.

Motorcycle businesses, the total market in main four countries, due to the tightening loan screening criteria in India and also economic downturn causing the individual consumption declines, the motorcycle total market in four countries was below the level last year. Therefore, in India, we had a massive slowdown, and we had results below last year. The total market in FY2020, because of the continued decline of the individual consumption in the India market, it is difficult to see the quick recovery. Therefore, we expect the level the results will be below the last year. We have done revised our forecast because of the deterioration of the markets. We launched Activa 125 in India, meeting new requirements, and that is popular. As a result, cumulative second quarter, excluding the currency effect and one-time issues, though we had a decline of the unit sales.

However, thanks to the cost-reduction results, we had an increased profit by JPY 50 billion operating profit year-on-year. Unit sales and financial results in the slides. The focus of FY2020, despite currency effect and economic downturn in India, and we have less unit sales due to the Japan parts supply limitations, we will make the steady efforts to improve the profit to keep the business capability as before. The profit and losses and unit sales on the slide. In FY2020, the annual dividend expected to be JPY 120 per share as we announced before. Second quarter, JPY 28 per share. In the board of directors meeting today, we resolved for the share buybacks.

With the purpose of capital efficiency improvements and to implement a flexible capital policy, we will buy the shares back from the market for as much as common stocks of 33 million or up to a total sum of JPY 100 billion, the acquisition cost between November 11th, 2019, through March 31st, 2020. Shareholders' returns are in this graph. Mr. Takeuchi is going to give us the details of the forecast and the results.

Kohei Takeuchi (Senior Managing Director, Strategy and Business Operations)

Thank you. Starting with the financial results for the second quarter. In terms of sales revenue, we saw an increase in financial services business operations, but due to decreased sales revenue in automobile business and motorcycle business as well as negative foreign currency translation effects, we are at JPY 3,729.1 billion. In terms of operating profit, there was a decrease in profit attributable to decreased sales revenue in model mix. However, due to decreased sales, general and administrative, aka HG&A, expenses as well as our cost reduction efforts, it increased to JPY 220.1 billion. Next, I'd like to explain the causes of the change in profit before income taxes. The profit before income taxes for Q2 is at JPY 289.6 billion, which is a profit increase of JPY 6.5 billion from the same period last year.

The operating profit is at JPY 220.1 billion, which is a JPY 5.6 billion increase compared to last year. With the operating profit excluding foreign exchange effects, there was some impact of decreased sales units, but the reductions in quality-related expenses and others led to a JPY 38.5 billion increase. Next, I will explain the performance by business. The operating profit for the motorcycle business was, due to declining sales units caused by the slowdown in the Indian market, came to JPY 77.7 billion. Next, the operating profit for the automobile business was due to the decrease in the HG&A expenses as well as our cost reduction efforts. It came at JPY 74.9 billion. Next, the operating profit for the financial services businesses was that due to factors including an increase in operating lease revenues came at JPY 66.3 billion.

Also, the operating profit for life creation and other businesses was due to a decrease in the HG&A expenses came at JPY 1 billion. The operating loss from aircraft and aircraft engines included in this life creation and other businesses section came to JPY 9.2 billion. The combined operating profit related to automobile product sales included in the automotive business and financial services business is JPY 138.4 billion according to our calculations. The consolidated results for the second quarter are as shown here. To explain what led to the change, the profit before income taxes was at JPY 579.4 billion, which is a JPY 61.8 billion decrease from last year. The operating profit was at JPY 472.6 billion, a JPY 41.2 billion decrease from last year.

In terms of the operating profit excluding foreign currency effect, although there was an influence of sales unit decrease, we ended with a JPY 9.3 billion increase due to factors including cost reductions. Next, I would like to go over the Honda Group unit sales forecast for FY2020. First, the Honda Group unit sales forecast for the motorcycle businesses is a 45,000 unit decrease from our previous forecast that mainly comes from India at 1.99 million units. In the automobile business, due to the impact of parts supply restrictions in Japan and the worsening of Indian economy in Asia, it comes to 4.975 million units, a 135,000 unit decrease. In life creation business, our forecast is a 120,000 decrease at 6.27 million units. The combined sales forecast for FY2020 is as shown here. Next is on the factors of the change from last year's performance.

There was a decrease in profit attributable to decreased sales revenue and model mix as well as foreign currency effects. There was also an increase due to cost reduction effects and decrease in the SG&A expenses, which gave us the forecast of JPY 690 billion in operating profit. Next, after reflecting factors including foreign currency effects, we have revised our fiscal year 2020 forecast on operating profit at minus JPY 80 billion. Lastly, the forecast for the capital expenditure, depreciation, and R&D expenses are as shown here. That concludes the presentation. Thank you.

Operator (participant)

Today, I see an. Now we would like to take questions. Please show their hands if you have questions, and we will accept questions in English as well. The microphone will be brought to you, and please tell us your company name and your own name, please. Thank you, the gentleman. Second from the back.

Naotoshi Okada (Chairman and Group CEO)

Thank you. I'm Okada from Nikkei. The U.S. and China, in terms of what is your understanding in terms of the environment in these two nations? Also, Toyota is saying that they have gotten the highest level of profit at midterm, and you're saying that you're losing profit. Perhaps this is partially due to part issues, part failures, but maybe there are some other cost reduction efforts that you're still lacking in. I would like to hear more on that point.

Kohei Takeuchi (Senior Managing Director, Strategy and Business Operations)

Yes, the first question was about the business environments in the U.S. and China. Is that correct? Let's start with that. First with the U.S. I would like to share with you my understanding. The overall market in the U.S. is that from July to September, it was 4.318 million, which is 101%.

This year, we think that we're at the phase of making adjustments. Also, because of the trade friction between the U.S. and China, we think that the—and there's also the—we're missing the advantage that we can get from the tax benefits. That is why we will probably go slightly under $117 million. In terms of light truck, we expect the sales to be at high levels. On the other hand, we at Honda, in that period, we posted 102% growth. Light duty was 50%, 56% plus. So 90% compared to the same period last year. Overall is 103%. We're being very successful in the U.S. market. Civic is at 110% compared to last year. Segment 85%, that segment is going very strong. CV is 106%, CR-V, excuse me.

As the market shrinks, our CR-V, the new Passport, light truck models are going very strong, and we will continue to grow our business to post even better results than last year. That is our situation in North America. Next, on the question about China, the overall market in China is that in Q2, 1.03 million units. Jana has said that they reduced their expectations for overall sales volume, 26.88 million total unit sales. Overall, the market is expected to be shrinking. Given that environment, Honda in this Q2, we posted 106% compared to last year at 378,000 units. We think that we are at a turning point in China. The market situation is looking quite difficult, but we think that we continue to be a brand that people choose.

With the electrification, the various technologies that we are implementing in China, we will leverage our brand strength to further enhance our lineup to have at least the same level of success in China, if not better. The other sales in China in most recent month in October, we are being quite successful, especially with the hybrid models. We sold over 15,000 units of our hybrid models. The consolidated sales in October was 15.2% plus compared to the same period last year. We think that if we continue this, that we'll be able to comfortably reach a level higher than what we seen last year. Overall, looking at the first half this year, our main markets ofU.S. and Japan and China, all these three, we're going quite well in all three of these key markets.

However, unfortunately, because of the other supplier, the situation that we have in Japan, we could not hope to increase the supply amount, the supply volume, and that is why for N-Wagon and ultimately for Fit, the sales of these two models had to be delayed. We will start seeing the impact of that in the second half. On the other hand, though, and I think this goes for all the other competitors too, especially in the Asian region, especially India, the other market is quickly contracting. It is very stagnating at a very rapid pace. In terms of motorcycle, in the southwestern part, there was flooding in India. That is one factor. We are struggling in India, I must say. On the other hand, BS6 models, we just launched Activa, as mentioned earlier, but more than we expected, the sales are going quite well.

Either way, these environmental restrictions are still going to be our strength, and we can hope to grow our sales further. Anything on top of that? Thank you. I hope we were able to answer your two questions. Let's take another question.

Operator (participant)

Yeah, it's about my eyes. Gentlemen at the front, with their eyeglasses, please.

I have a question to Mr. Kuraishi about spending of R&D expenditures. According to your forecast, there was no change to that. However, CapEx is less with the amount. What is the difference about? Still, you keep the higher level of the spending, though. Of course, many models are quite well doing. However, the situation is difficult in the second half. I would like to know if the same level of the spending can continue going forward.

Seiji Kuraishi (EVP)

This year, in terms of the model development cycles, especially in the second half this year, we have quite a few of those projects overlapping with each other, and we are getting more coming in the second half, including a case we need to do the investment for the future. That is important. And then, as we said before, we aim to keep the 5% level of R&D spending going forward.

Operator (participant)

Other questions? [Foreign language]

Akio Morita (Analyst)

Morita from Asahi Shimbun. New N-Wagon question. You say that the production will resume in early 2020 calendar year, and if you have a more specific schedule planned, please tell us about it. N-Wagon, you said that in the beginning, you said that production will resume sometime within October. However, the problem prolongs, as I see. In terms of the suppliers, perhaps the issues of the suppliers may be more than expected. However, how do you analyze the reasons why the air problem still stands?

Seiji Kuraishi (EVP)

Question about, problem of the air and N-Wagon because it travels to customers, and we do apologize for that. In terms of how we see that situation, rather than the quality issue, it was in the first place the production line variabilities. It was rather big in terms of the variabilities, and then it was difficult to forecast the long-term delivery plans. Then because of the trouble causing for the customer, we needed to be sure we would not have the same problem again. We decided to resume the production until we are very sure of the supplies be back without a problem. In the first place, when we were developing the model, the production line, let's say the confirmation of the production line was supposed to be done perfectly. However, it wasn't the case apparently, and I need to reflect on what happened, and then we need to review closely what happened for the future. Other questions, please.

Keiji Kishimoto (Repoter)

Thank you. I'm Kishimoto from Toyo Keizai Paper. About the other part failure for N-Wagon and Fit. Fit is going to be delayed, and also N-Wagon is—the production is being halted. I was wondering about this loss of opportunity. Perhaps that is going to have some impact on your overall financial forecast. I would like to have an understanding on if you have any figures in your mind. Another part of this question is that the other day you have announced about that merger of the suppliers. I imagine for the future you will want to especially enhance the competitiveness of your suppliers. What about the other suppliers that are not in the merger? What about your other related companies? Will you continue doing this restructuring, reorganizing? If you are going to continue with that, what is at the core of this whole concept? Mr. Takeuchi.

Kohei Takeuchi (Senior Managing Director, Strategy and Business Operations)

Yes, I will start with the N-Wagon and Fit. My apologies once again to our customers. The financial impact, that of course has an impact on the other profits. I cannot really give you details, but the image is that in Japan, compared to the last forecast, we have decreased the volume as we show here. There is going to be impact on our sales as well. The other limit profit. You can probably make a guess based on that. I hope that serves as answer. Okay. About the other suppliers? Yes, about the four suppliers' merger. I would like to talk a little bit about that. The electrification technologies and advanced safety technologies, it is about these next-generation technologies. These are becoming more complex, diverse, and advancing very quickly.

It is difficult to do development of these technologies and products by one company alone. That is the reality. In the world of suppliers, this is not just limited to Honda, but many suppliers are becoming more system suppliers and mega suppliers as a result. For Honda too, the existing suppliers already have their existing strength. We want to take leverage them to create a new formation of team, if you will. We have been looking into how we can take it to the next step. The motor joint venture and the ECU joint development.

Through these projects, we have worked with Hitachi AMS, and we were expanding the collaboration with Hitachi AMS in that the other system related to the safety and advanced technologies, we realized that we could take a leverage, we could leverage the strengths that we Honda have and what Hitachi have. We also took the other three suppliers and to have a multiplier effect to create a new winning strategy in the market. That is what led to this decision. To answer your question of could more of this happen? Yes, it could, but we cannot share with you anything more beyond that. I hope that's okay. Any other questions?

Operator (participant)

The gentlemen at front, please.

Owen (Analyst)

Owen from NHK, I have a question to Mr. Kuraishi about the Indian market. The economic situation downturn continuing, although Honda has launched a new product, and the market itself there may be difficult for the market to recover quickly. However, do you think that expectation of the recovery and when will that be?

Seiji Kuraishi (EVP)

Let me explain about the Indian markets now. For automobile, the July-September, it is 785,000. That was 68% of last year. The untransparent outlook of the economy, of course, that is in place. Of course, financial funding difficulties and also the screening criteria is also getting strengthened. In August, the GDP was at 5%, still low. It is difficult for the economy to have a quick recovery. In motorcycles as well, same story.

In fact, furthermore to that, for motorcycle, serious ABS Brakes regulation was in place in January 2019, and also BS6 model April 2020. Those will be out for the new regulations then. That means more cost required to respond and satisfy the regulations. That means the tough situation in the Indian market will continue going forward. Honda actually is very strong for the motorcycles' environmental regulation areas. It is the time for us to take advantage of the situations to launch new models and then try to get the more sales unit like before. [Foreign language]

Furukawa (Analyst)

Thank you. I'm Furukawa from Nikkei. The automotive sales forecast was beyond 5 million units. I would like to hear more about what led to that.

Seiji Kuraishi (EVP)

Of course, we want to say we want to go beyond 5 million. It will sound good. About sales, of course, we're at the very important timing right now. It just happens to be that we had the part quality issues. That is why we have to recover swiftly and go back to our original production plans.

Furukawa (Analyst)

Thank you. One more question. I asked this question at the time of the previous period. The sales in China, you're aiming to achieve the highest ever. What is the profitability, the profit situation in China?

Seiji Kuraishi (EVP)

Yes, profit in China. In terms of the sales units, we're pretty much on track. The Honda plan is going well. We're probably one of the only ones in line with our schedule. The negative that we see is the foreign currency, the foreign exchange effect. That is really the main reason why we're in the negative. In terms of business, we are on target in terms of sales volume as well. Thank you. Any other questions?

Operator (participant)

[Foreign language] The gentleman at the front, please.

Kayoko Takeuchi (President and CEO)

Takeuchi from Sankei Newspaper. I have two questions. One, this morning, the impact may be small. However, the sales in Korea is declining because of the poor diplomatic relations today. How do you see the situation today, and what is the contribution for that? The other question is about the Japan market. There is a kind of a retrofit device to prevent the wrong pressing of the pedals for the L3 drivers, for instance. What do you think about it? Development plans in response to the government request. What is going on with that? Please share with me the status today.

Kohei Takeuchi (Senior Managing Director, Strategy and Business Operations)

Korea, there actually is a significant effect on our sales. In the first place, the volume or unit sales over there is not that much. Therefore, it does not affect our business plans overall. However, the motorcycle businesses, there is no stronger motorcycle manufacturers in Korea. In fact, there is almost no impact by that on our businesses. A Honda representative in Korea, I spoke to him the other day. Apparently, the intergovernmental relationship is getting improved little by little. In terms of our sales activities, our colleagues had a campaign over there, and they actually had sold all of the stocks in the inventory apparently. If we offer those good deals with the products in the market, they sell quite well. That shows the improvements, I believe. Also, the device to prevent the pedal mistakes, Honda Sensing has a model. We would like the people to use the cars with the Honda Sensing technology more and more. Of course, at the same time, we are developing the retrofit device for the existing cars.

For the retrofit system, actually, that retrofit device still is very different from the Honda Sensing technology level. The technology level is quite different. In fact, I would urge the customers to drive newer Honda Sensing technology cars. I am working with the dealers to promote that. Thank you. Other questions, please.

Operator (participant)

[Foreign language] The gentleman second from the back.

My apologies to ask in English. As you see that there were merger talks going on between Fiat Chrysler and the French PSA Group, what would that mean for Honda? Do you see an urgent need to look for further partners for Honda to get more sales size?

[Foreign language]

Seiji Kuraishi (EVP)

In terms of other companies, I will refrain from commenting on other companies' matters. Either way, partnering with other corporations, there are really no talks of that. However, as we have been sharing with you, there may be some other technical alliances because we have our own technical strength. If there is any potential for partnering up with others who have their own strength that would benefit both of us, we may look into that. Thank you. Any other questions?

Operator (participant)

[Foreign language]

Nikkan Asier's (Analyst)

Nikkan Asier's Shinbun Narumoto, two questions. You have down-revised unit sales in Japan by 5,000 due to the brakes issues and so on. And then Fiat and then Wagon. What is the impact levels for those two models when you down-revise your forecast? What is the number of units factored in there? Also, you spoke about the production. You had production difficulties. What was the reason why you had difficulty in producing them? Perhaps you could share with us the status there. Yesterday, Toyota announced their operating profit margin was 9%. That was quite good. Also, of course, your margin is going up in the second quarter, but there's still a gap to them. How do you evaluate that situation? Do you have specific measures or actions in order to improve the situation?

Seiji Kuraishi (EVP)

Not 5,000, 50,000 was factored in for our new forecast. That is the number of units for all models. In order to, of course, catch up with the situation, we have sort of adjusted or coordinated the allocations. I cannot really tell which models are how many. However, the late fate is one of the reasons here as well. We did not notice the production issues as we were supposed to do. That was because of the suppliers' supply issues. It was later. Of course, we were together when we made the decision to start production together with the supplier at that time. However, we were not good enough to have a definitive decision back then in retrospect. The same parts were also supplied to other companies in a way. We trusted the situation. We decided to give a go for the production too.

The N-Wagon sales was quite good at that time. The number of the units out of that model was also good. Therefore, we did not want to stop the production too. Including the production line situation of the suppliers, we need to reflect on what happened. We should have been more prudent in that regard.

Operator (participant)

[Foreign language]

Kohei Takeuchi (Senior Managing Director, Strategy and Business Operations)

Compared to Toyota. We really should not be commenting on others. Toyota had good financial results reported. Looking at our automotive profit, that was 4%. Toyota's figures include financial matters as well. If we do that, ours also go up. The difference there is that it probably goes up to about 5%. With electrification and such, we are using about 5% compared to from our overall sales. As Kuraishi explained, that always varies by launch timings of these new models. Are we going to pursue sheer volume? I think that is one way of looking at it as different. Of course, we are continuing to work on cost reductions and optimizing for better business characteristics. I hope you understand our efforts.

Thank you. We can take one or two questions.

Operator (participant)

One or two last questions. The gentleman at the second row, please.

Nihon Keizashibu Tomihiro about Indian market motorcycles. Earlier, you talked about flood and its impact. As compared to other manufacturers, your level of the decline was not that good. Could you elaborate on that and how do you assess the situation? Please tell us about it. The other thing is how you address the environmental regulations going forward and what are the issues for the Indian market going forward.

Seiji Kuraishi (EVP)

As for the high-level overall situation, this may sound funny, but we had a lack of the water draft, meaning agricultural situation too bad. There was a sales drop because of that. Honda share was high, especially mainly around scooter. We had a high share market in the state in India where the water problem happened. The scooter customers were hit, impacted by the flood situation badly.

That was why the decline of the business there was worse than the other companies. However, we had grown 1 million units of sales from last year. That means we had very good sales in the first place. Of course, percentage-wise, the drop, the decline of the sales for the unit was bad, though we had higher sales before. Also, we have an expanding customer base. Now we are advertising the scooter businesses for urban sophisticated customers. At the same time, we try to expand the sales to the scooter market other than those areas. We have Diwali events. That is the Indian particular event. In Diwali weeks, we tend to have good sales. It was successful this year too. The BS6 model, a new one, that was good. The model that satisfied the BS6, that was pretty good as well.

I think we should take this opportunity so that we can launch the better product that satisfies the regulations better so we can improve the shares. [Foreign language]

Operator (participant)

[Foreign language]

Noah (Freelance Writer)

Thank you. I'm Noah, a freelance writer. It relates to a previous question. Honda's automotive business profitability. In your case, you have motorcycle, so the situation is quite different. We can't do apples-to-apples comparison with Toyota. In terms of R&D investment, Toyota is doing JPY 1.1 trillion, and you're about JPY 886 million. There seems to be a very different % of R&D investment. I think that perhaps you need to optimize that, and you have to streamline how you use your R&D expenses, perhaps. What is your understanding on that point? The other question is that this spring, you have said that you have done many organizational restructuring at the R&D sides. Once you have transferred the Kei Car development team to Suzuka and such to make sure that the R&D teams and the manufacturing side work side by side.

You have done that in the past. Is there such a plan in the future? Profitability first?

Seiji Kuraishi (EVP)

Yes. Yes. The R&D expenses are high. I believe I can agree on that. However, as I said earlier, especially for this quarter, this period, because of the motorcycle, we do have many model development projects. Compared to what Toyota is doing, our level does seem to be high. I will have to agree. We have a very wide portfolio of business areas. On the other hand, we have been doing as much as possible by ourselves. That is our policy. We are trying to change things there. Either way, the R&D costs will have to be normalized. Also, I will not be able to share details about specific details on what reformations will take place internally. The profitability, yes, may be suffering.

Because continuing the way we've been doing will not work in the future. That is why we are doing many things internally. As we have already announced, we are doing some restructuring, reorganizing on the production side. We will continue these efforts. When the right time comes, I believe I should be able to share more with you. I will end at that. Thank you. Thank you for attention. It is time. Thank you for attendance.