Honda Motor - Q2 2023

Transcript

Operator (participant)

Thank you very much for attending. This is Honda Motor Co., Ltd. FY 2023 second quarter financial results announcement meeting. First, I'd like to introduce the executives represented, Director, Executive Vice President, and Representative Executive Officer, CFO Kohei Takeuchi.

Kohei Takeuchi (Director, Executive VP, Representative Executive Officer, and CFO)

This is Takeuchi speaking. Thank you.

Operator (participant)

Operating Executive and Head of Accounting, Finance Supervisor Unit, Eiji Fujimura.

Kohei Takeuchi (Director, Executive VP, Representative Executive Officer, and CFO)

How do you do? I am Fujimura.

Operator (participant)

We'd like to ask Takeuchi to first announce the FY 2023 second quarter financial results and FY 2023 forecast, followed by Fujimura, who will give the details on the above. Mr. Takeuchi, the floor is yours.

Kohei Takeuchi (Director, Executive VP, Representative Executive Officer, and CFO)

First of all, I'd like to thank all of you for your support towards Honda products and activities. I'd like to thank our customers and all stakeholders. Thank you.

We apologize that the delay in vehicle production is causing inconvenience to our customers who are awaiting Honda's products. We are working hard to deliver our products as soon as possible. We hope to gain your understanding. I'll now explain the financial results for the second quarter of FY 2023 and give a summary of the forecast for the fiscal year. First, FY 2023 results. Amidst a difficult business environment, including the semiconductor shortage driving down automotive production and unit sales, combined with soaring raw material prices, Honda has been making company-wide efforts to improve profitability. In addition, the increase in motorcycle unit sales and the impact of yen depreciation, sales revenue and operating profit for the first six months have increased year-on-year. In the second quarter, semiconductor shortage affected production of main models, mainly in North America.

We made worldwide production allocations, utilized substitute parts, and replaced models sold, resulting in a year-on-year increase in group unit sales of automobiles. In addition, sales revenue, operating profit and profit for the period all increased year on year due to price increases commensurate with improved product value and strong motorcycle business impact of the yen's depreciation. In the FY 2023 forecast, group unit sales of automobiles is lowered by 100,000 units to 4.1 million units, taking into account the impact of semiconductor supply shortages. In addition to the decline in unit sales, we expect to see continued inflationary pressure on costs. However, we have revised upward our previous forecast for sales revenue, operating profit and profit for the period reflecting profitability improvement efforts, motorcycle unit sales increase and recent weak yen.

Despite the challenging business environment, Honda will continue to accelerate initiatives for electrification and new growth in preparation for the future. Next, the status of our automobile business in major markets. First half sales decreased from the same period year-on-year due to semiconductor supply shortages and others, despite the positive effect of new model launches. In the second quarter, sales in Japan and China increased year-on-year, but in the U.S., shortage of certain semiconductors drove down production of mainstay models and inventories at dealers. Although demand is expected to remain firm, we have revised downward our previous forecast for FY 2023. In the second quarter, Honda announced its initiatives for electrification.

In the US, Honda has agreed with LG Energy Solution to establish a joint venture to produce EV batteries and to manufacture them in the state of Ohio. Honda has also decided to develop the three existing plants in Ohio as a home to EV production in North America. In China, Honda has established a new JV with Dongfeng Motor Group and also Guangzhou Automobile Group to procure EV batteries. In addition, we signed an MOU with CATL to further strengthen our partnership, aiming to establish a long-term stable procurement system in China and further enhance our competitiveness. Honda will continue to accelerate its efforts toward electrification. Next, the motorcycle business status.

Although there were some effects of semiconductor supply shortages, sales in many countries were higher than in the same period of the previous year due to replacement of models sold and the use of substitute parts, et cetera. In Vietnam, we recorded record high sales for the month of September. Although sales in Pakistan affected by flooding, as well as China and other countries dropped, sales in India, Vietnam and other countries were strong, leading to an upward revision of the previous forecast for consolidated FY 2023 unit sales. In September, Honda announced its launch. It will launch more than 10 electric motorcycle models globally by 2025 and at 3.5 million unit sales by 2030 to achieve carbon neutrality. Here is an overview of the first half of FY 2023.

Despite a decrease in automobile production and unit sales are due to semiconductor shortages and rising raw material prices, operating profit increased JPY 11.2 billion, reaching JPY 453.4 billion due to price increases commensurate with enhanced product value and reduced incentives, as well as increased motorcycle unit sales and currency impact. Earnings per share attributable to owners of the parent was JPY 338.5 billion, mainly attributable to share of profit on investments accounted for using the equity method of Japanese affiliates. The table shows unit sales and profit and loss. Next, consolidated FY 2023 forecast.

Although we expect to see continued pressure on costs in addition to the impact of lower automobile unit sales, we revised upward the forecast operating income by JPY 40 billion to JPY 870 billion, reflecting further efforts to improve profitability, including higher motorcycle unit sales in India, Vietnam, as well as other countries, U.S., and currency impact. Earnings per share attributable to owners of the parent is revised upward by JPY 15 billion to JPY 725 billion. Exchange rate assumptions are 135 yen to the dollar for the second half, and 135 yen to the dollar for the full year. Unit sales and profit/loss are shown in the table. As for dividends, interim dividend is JPY 60 per share. The annual dividend forecast remains unchanged and is JPY 120 per share.

Honda will continue to strive for stable and sustainable dividend payments, aiming for a consolidated dividend amount payout ratio of 30%. Regarding share buyback announced on August tenth, as of October thirty-first, the total number of shares repurchased was 15.33 million shares at a total cost of JPY 53 billion. Fujimura, Operating Executive and Head of Accounting, Finance Supervisor Unit, will give the details.

Eiji Fujimura (Operating Executive and Head of Accounting, Finance Supervisor Unit)

Let me explain. Honda Group's cumulative unit sales until the second quarter, FY 2023, were as follows: motorcycle businesses, 9.02 million units sold, mainly with incremental sales in Asian countries year on year. Automobile businesses, 1.785 million units due to the decline in sales in North America. Power products businesses, it was 2.935 million units due to decline in North America. Next, let me explain factors behind ups and downs of profit before income tax for the first two quarters year on year. The profit before taxes were JPY 515.8 billion, JPY 44.5 billion decline year on year.

Operating profit was 453.4 billion yen, up by JPY 11.2 billion year-on-year. Excluding factors of foreign currency impact, the profit was practically negative by JPY 141.9 billion. The breakdowns are as follows. Regarding impact on sales, profit declined by JPY 100.1 billion due to reduction in unit sales, changes in model mix, and profit decline in financial businesses. Regarding impact on retail prices and costs, there were impacts by soaring raw materials prices and product pricing, reflecting a product value improvement. However, the profit increased by JPY 8.2 billion. Regarding miscellaneous expenses, profit declined by JPY 41.9 billion due to quality-related costs.

Regarding research and development expenditures, profit declined by JPY 8.2 billion. In terms of sales revenues and operating profits in each of the business categories, operating profit in motorcycle business was JPY 224.7 billion. Of the automobile businesses, OP was JPY 63.5 billion, and of financial services businesses, it was JPY 153 billion. Out of the automobile and financial service businesses combined, the operating profit associated with automobile sales is estimated to be JPY 211.3 billion when aggregated together. Next, operating profit of the power products and other businesses was JPY 12 billion, which include operating losses of aircraft and the aircraft engine businesses being JPY 12 billion. Next, I'll explain about cash flow situations.

A free cash flow of the non-financial services businesses was JPY 153.3 billion. Net cash at the end of the second quarter was at JPY 2,560.9 billion. Let me talk about our forecast of a consolidated business performance for FY 2023. With regard to the Honda Group's unit sales in the motorcycle business as compared to the previous forecast, the expected unit sales will be 18.43 billion, mainly reflecting the flood in Pakistan and demand decline in China, and so on. When consolidated, we expect unit sales to be 120.2 million units, up by 360,000 units, reflecting a good sales performance in countries such as India and Vietnam.

Unit sales expected in our automobile business would be 4.1 million, mainly reflecting decline in North America. For power products businesses, we maintain the previous forecast of 5.56 million units. Next, I'll explain factors behind our ups and downs of our profit before income tax as compared to the results from last year. We expect the profit before tax to be JPY 1,080 billion, up by JPY 9 billion year on year, and operating profit to be around the same level from the results of the last fiscal year. Excluding foreign currency impacts, we expect a negative profits of JPY 287.2 billion, of which the breakdowns are as follows.

For the impact of the sales, our profit will be increasing by JPY 41.8 billion due to unit sales increase of motorcycles and automobiles. Regarding retail price and cost impact, our profit will decline by JPY 110 billion due to soaring raw materials prices and so on. Regarding miscellaneous expenses area, our profit would decline by JPY 152 billion due to incremental sales and quality-related cost. For research and development expenditures category, we expect the profit to drop by JPY 67 billion. Comparing our new expectations to the previous forecast, the differences are as follows. Profit before income taxes will be up revised by JPY 40 billion. Operating profit up revised by JPY 40 billion.

Excluding foreign currency impact, we expect a negative profit of JPY 80 billion, for which breakdowns are. Regarding our sales impact, down by JPY 128 billion, mainly due to unit sales decline in automobiles. In the area of the retail pricing, cost impact, although some cost increase is expected, due to inflation impact, we will manage pricing practices to reflect enhanced product values to add profits by JPY 36 billion. Regarding research and development expenditures, we expect the profit go up by JPY 16 billion. Finally, for CapEx, depreciation and amortization, as well as R&D spending for FY 2023, we revised the previous expectations to reflect the currency impact. That concludes my pre-explanation. Thank you very much. Thank you very much.

Operator (participant)

Thank you for the attention. Now I'd like to proceed to Q&A. We have informed the media beforehand, we will take questions through Zoom. In the interest of time, we kindly ask you to limit your questions to two per person. We seek your cooperation. Those of you who have questions, please press your Raise Hand button. I'd like to go to Nikkan Kogyo Shimbun. Mr. Mizutori, please.

Speaker 7

My name is Mizutori from Nikkan Kogyo Shimbun newspaper. Can you hear me?

Operator (participant)

Yes.

Speaker 7

I have two questions. First, well, currently we're seeing a depreciation of the yen, and this has boosted your profit. In order to maximize your benefit, when it comes to production and procurement, what kind of ideas will you come up with?

Honda localizes its production, but are you making any changes to your approach? The second question, worldwide, there is a concern over recession at your major markets, U.S. and China. How do you see the prospect of the economy?

Eiji Fujimura (Operating Executive and Head of Accounting, Finance Supervisor Unit)

All right. Mr. Mizutori. Well, first of all, in regards to your exchange rate question. Well, as you rightly mentioned, we have the policy of producing where the demand exists. This is our basic policy, that is how we have set up our production sites. It's locally produced and locally consumed, meaning that. Well, of course, given the major fluctuation in the currency rate, it does have an impact to a certain extent. Compared to other manufacturers exporting from Japan, compared to those manufacturers, I don't think that our impact is that big. Well, but having said that, still, as to explain our currency impact, the USD-denominated only, if there's 1 yen, there is a swing of JPY 10 billion.

It used to be JPY 12 billion, but it's now JPY 10 billion, of which half is the export of components or the royalty received from overseas. It's mainly cash flow. We generate profit overseas, and we convert this in Japanese yen. In that conversion, we have half of the difference. That is the impact of currency. As for the yearly forecast, we are estimating now 135 yen against the dollar. This would mean.

An impact of JPY 120 billion in profit. Still, the supply chain, and we have suppliers and others relationship. It's not the case that we can immediately shift our production to Japan. Our basic philosophy is to produce where the demand exists will remain in place. That's in regards to your currency question. About the U.S. and China's economy, well, the midterm election, the vote count is underway right now in the United States. Given the 8% inflation continuing towards the end of the year, as everyone says, there is likely to be an impact on the economy, so we also share that concern.

If we look at the current situation, our car supply, well, for certain models, due to the shortage of semiconductors, we have lost some unit sales, but customers are waiting for our products. Looking at the current situation in regards to our customers, and we believe that the cars we produced will be purchased by our customers. Economically, as is being said, there is the interest rate increase and inflation occurring, and therefore there will be some impact to a certain extent, and keeping this in mind, we will continue with our operation. Likewise, in China, the Chinese GDP compared to a few years ago is declining. Automobiles annually, the passenger car is about 23 million units per annum.

In line with that, especially in the market, electrification. Well, last month also, or this month, we see 20% or 19% ratio, and therefore we have this EV car on the market, the first one, and we've announced a second. We are focused on electrification, and we want to meet our customers' demands also in China. This is how we want to market our products in China. Thank you.

Operator (participant)

Thank you very much, Mr. Mizutori. Next question. Yomiuri Shimbun. Mr. Nakamura, please.

Speaker 13

Nakamura from Yomiuri Shimbun newspaper. Can you hear me? Two questions. First of all, sales. The price increases in overseas and also potential price increases in Japan, please share with me the potential. Japan and Southeast Asia markets are good, and what is reason behind, and how long do you think it would continue going forward, the motorcycle business?

Eiji Fujimura (Operating Executive and Head of Accounting, Finance Supervisor Unit)

May I? Thank you for your question. Pricing, retail price situations and the pricing reflecting the product values, that's how we call it. In the U.S., including inflation situations, we are repricing that to reflect values of the product. Of course, raw materials prices soaring and also, safety equipment are rearranged as well.

Including all that, people buy the products. In the U.S., the stock level is quite low, including that situation. We try to price the products in appropriate level for them to buy. In Japan, when we have such a soaring raw material prices, of course, that has impact on the revenue. However, we also have a sort of relationship with like competitors, the peer companies in the same industries. We will look at how they are reacting, and then if necessary, we would do repricing, increasing the prices. At this moment in Japan, we do not have specific information as of today. As for the motorcycle situations, thankfully, in the second quarter, the motorcycle business performance was very good.

Specifically, the best area is Asian markets, specifically Vietnam, Thailand. Number of the units sold was very good, which gave us additional revenue. How long will that continue? Well, as of now, without any economic or turmoils or the kind, for this term, Thai and Vietnamese market will continue as it is, perhaps. Also for the motorcycle businesses, we have a EV electrification plans for India and the countries in Indonesia from 2030 and 2035, and including that, we will try to come up with appropriate pricing and so forth for the electrification plans with the motorcycle. Thank you.

Operator (participant)

Next question. Nikkei. Mr. Tanabe, please.

Ms. Tanabe, can you hear me? Yes.

Speaker 10

Well, about the automobile unit sales forecast. In North America, you said that it's been reduced. Well, I think there might be some differences in the semiconductor shortage depending on the region. So what about Japan and North America and Asia? Can you give some regional differences? And do you think that this is likely to continue? What is likely to happen the next fiscal year? That's the first question. The second question is about the way of thinking towards the exchange rate. Well, it's contributed to the profit to quite an extent, but if this continues longer, I think there might be some challenges ahead. So can you candidly share with us how you assess the currency forecast?

Kohei Takeuchi (Director, Executive VP, Representative Executive Officer, and CFO)

Thank you very much, Tanabe-san.

First, about the units, the automobile units. Due to the shortage of semiconductors, we have downward revised by 100,000 units, U.S., and we are trying to catch up here in Japan and Asia, but it's a 100,000 unit downward revision. As I already explained earlier, it is a specific type of semiconductor that has this issue with semiconductor, and it has an impact on our CR-V, Civic. For these specific models, we have seen this impact of the shortage. In the second quarter, this was the situation. In North America in the second half of the year, we think that it'll be difficult to increase the production, so therefore it's difficult for us to catch up.

This is the downward revision for U.S. What about China? When it comes to China, naturally, in the first half there was impact, but in the second half, the production system is such that we think that we can catch up, and therefore we think that we can catch up. Meanwhile, Asia. You mentioned about Asia, Indonesia, et cetera. The numbers are growing and therefore, as I said, it's not. Well, the cars in Asia are relatively small. So for the smaller cars, there are the semiconductors available, so we can catch up there. About the supply of semiconductors, this fiscal year, we have inconvenienced our customers to quite an extent. We apologize.

The old semiconductors sometimes experience a shortage, so we have to try to observe carefully, and we need to monitor carefully the situation because there are some abrupt incidents occurring in the supply. Now, about the currency situation, as I've already explained, we believe that we should be producing where the demand exists. Therefore, the currency impact is limited, but given the fluctuation occurring in such a short period of time, this volatility, it does have an impact and we cannot hedge against this. We need to have a currency where there is long-term stability. That is all. Thank you.

Operator (participant)

Thank you, Mr. Tanabe. Next, question. NewsPicks, Mr. Oka, please. Ms. Oka, please.

Speaker 6

Thank you very much. NewsPicks, Oka speaking.

Kohei Takeuchi (Director, Executive VP, Representative Executive Officer, and CFO)

Thank you.

Speaker 6

Two questions. First one, operating profit of the automobile businesses as compared to last year, and OP was a bit lower. As you said before, of course, do you have any additional explanations on top of the presentation about this? In what situation can you expect the OP to go up? The second question is about electrification. The Ohio plant will be the hub for EV production, and it is. Yes, there are IRA, Inflation Reduction Act, there, but how do you take benefits of the Ohio electrification production hub?

Eiji Fujimura (Operating Executive and Head of Accounting, Finance Supervisor Unit)

Operating profit automobile was rather lower as compared to last year, and as you said, one is semiconductor supplies.

Because of that, a number of the units had to be constrained. That is the big factor. Also, OP of automobile have to be improved. In the last two, three years, we've been making efforts to push it up, for instance, reducing fixed cost, closure of the plants in Europe and Japan and so forth, and those are materializing. It's affected. We have our Honda Architecture, specific designs and so on, or specification to make better efficiency. The numbers are reflecting those efforts. However, in terms of the unit cells, it's not yet there because of the semiconductor constraints. We are still in the process of improvements. The numbers still be restrained.

Of course, there are hypothetical situations as well, and we are on track, in fact, toward the unit cells improvements. Ohio electrification hub, you mentioned the IRA and $7,500 and $3,750, and so on, according to IRA. There are still details to be decided, but we will produce batteries with LG, and we have two plants, Marysville and East Liberty, Anna plants and so on in Ohio, and those places will be a hub for the EV products.

Of course, the principle is to make a production where the demands exist, and this is working well. Also, we have to take the benefits from the IRA incentive plans. Thank you.

Operator (participant)

Next question, please. NHK, Mr. Toma. Toma-san, can you hear?

Speaker 5

Excuse me. This is Toma from NHK. Can you hear me?

Operator (participant)

Yes.

Speaker 5

Thank you. First, I'm looking at the numbers announced. The sales revenue, I thought it was record high, and there was a record high. If any, can you elaborate on which part was the record high in terms of the record sales revenue? About the profit, operating profit, I don't think it's a record high, but what are the reasons? Cost-wise? And what cost was increased? Can you explain? That's the first part. Second question, about support to suppliers and can you elaborate on what you're thinking about giving support to the suppliers?

Kohei Takeuchi (Director, Executive VP, Representative Executive Officer, and CFO)

Mr. Toma, thank you for the question. First, in regards to the sales revenue this time, the FY 2023 forecast and the second quarter, three months, and the first half, six months, all recorded a record high. I...

It was mainly attributable to the currency. In terms of unit volume, it was not a record high. We really did not say proudly that this was a record high. The unit sales was not high. It was mainly attributable to the currency and therefore the operating profit was not a record high. In the two second quarter, three months, the motorcycle profit margin was 17% or more, operating margin 17% or more, this is a very high number. About the supplier support, yes. We also in this FY 2023 forecast, compared to last fiscal year, there is a rise in the raw material price and also the logistics inflation, et cetera.

The inflation part is having an impact significantly on the cost. Suppliers likewise are experiencing the same pressure. Well, in line with the situation of the different suppliers, we consult with them and think about what needs to be done. It's not the case where for all the suppliers we'll be providing the same support, but we have to tailor to the different situations of the suppliers. We consult with them and provide, if necessary, support or take other measures. We have to decide for each case. That is all. Thank you.

Operator (participant)

Thank you very much, Mr. Toma. Next one, Wall Street Journal. Mr. Davies, please.

Speaker 12

Hello. Thank you very much for taking my question. I have one follow-up on semiconductors. We're hearing from some other automakers that they feel like they've made it past the worst of the shortages. Is that similar in Honda's view at the moment? My second question is on electrification. A few weeks ago, we heard from General Motors that they're pushing back some of their EV timelines because they're having trouble ramping up battery capacity. Is Honda seeing any impact from that issue, especially with regard to jointly developed vehicles and timelines around those? Thank you.

Eiji Fujimura (Operating Executive and Head of Accounting, Finance Supervisor Unit)

A semiconductor question whether or not the worst time has been over. I think from the bird's-eye viewpoint, high level, the worst shortage period of the semiconductor at large has gone for general use of a semiconductor. However, we have different types of the semiconductors and there's different applications in the vehicles and so on. Where the matching are well supported, the worst time has been over. Still, some specific area we still have the shortage. I don't think we have passed the worst time for the specific application area of the semiconductors.

We try to address the situation so that we can make a delivery of the products to the customers as soon as we can, and of course, to optimize our production and delivery situations. We are working on that. Also electrification with GM and EV timeline delays. At this moment, we have a program with GM after 2025. We have two vehicle plants with GM with their suppliers. For that particular one, battery production capacity is not going to affect. We haven't heard of that yet. Well, all of the GM vehicles be electrified. I don't know if that is the case. They might need batteries, so but as many as those.

We haven't heard and I don't know how they're gonna say that, but that is our response. Thank you.

Operator (participant)

Thank you very much, Ms. Davis. Next, Asahi Shimbun, Kondo-san, please.

Speaker 4

Asahi Shimbun, Kondo

Operator (participant)

Kondo from Asahi Shimbun. Can you hear me? Yes.

Ah.

Speaker 4

Thank you. About the raw material cost. That's my first question. The raw material cost and inflation you mentioned. Well, what is the outlook? What do you think the situation will be? Is it going to stop, the rise will stop, or is it likely to continue to rise into next fiscal year? I think this will have an impact on your profitability for automobiles. What is your outlook forecast for inflation going forward? The second about some numbers, a very detailed question. Well, looking at the end of September, I think that you have a positive for the operating profit, but the net profit is a negative. What is the cause of this negative?

Kohei Takeuchi (Director, Executive VP, Representative Executive Officer, and CFO)

Yes, let me explain about the raw material part.

Also the logistics, cost inflation, what is the outlook? Well, yes. It depends on the material, but, well, for example, the rare metal, et cetera, for the past few years, a few months, it is not rising, but it's showing a slight downturn. I think that this is reflected partially in our forecast. But is it going to dramatically decline? Well, it depends on the material, the raw material you're talking about. But those raw materials for batteries. I think the supply is not sufficient, and I cannot say anything about that, but other raw materials, if the current situation would continue, I think the rise will be more gradual. But still, will we see a dramatic decrease in near future?

Well, depending on the material as electrification progresses, I think that the production balance, et cetera, the demand and supply balance, prices are different. At this point in time, there might be some changes, but we have to capture those changes early on, so that we can provide good products to our customers. That is how we want to address this issue. About the operating profit. About the first six months, I think you were asking about the first six months about the operating profit. Well, mainly, it is a positive, but the reason for the negative is the non-operating profit and also the share of profit and investments accounted for using equity method.

Now, as for the first time, I think, the interest rate and exchange rate is volatile. Honda Finance, they are doing the procurement of funding. The derivative, we have a hedge. The assessment of the hedge, et cetera, is one of the negative factors. This is a non-operating profit. As for the share profit of investment accounted for using the equity method. Well, in China, well, the business, it's rather than the business per se, positive or negative. Recently, the share prices are declining and, therefore, we have the balance sheet based on the equity method.

If we could compare this to the share prices and those that we assess using the equity method, if the share price if there is a gap, we have to write it off. Therefore, and that is the reason why we have a negative for the net profit.

Thank you very much, Mr. Kondo. Next question, Automotive News. Hans Greimel, please.

Hans Greimel (Asia Editor)

Hi. Konnichiwa.

Eiji Fujimura (Operating Executive and Head of Accounting, Finance Supervisor Unit)

Can you hear me? Hello.

Hans Greimel (Asia Editor)

Thank you. I'll ask a question in English. Can I?

Eiji Fujimura (Operating Executive and Head of Accounting, Finance Supervisor Unit)

Sure.

Hans Greimel (Asia Editor)

My question is about the EV strategy in the United States, specifically with regard to the EV partnership with Sony. Can you give us any new guidance on how Honda plans to approach the retailing of those EVs in the United States? Will Honda use its existing retail network to support the sales of those Sony-Honda EVs, or I should say sales and servicing of those EVs? Or will it need some kind of different and independent servicing network? Thank you very much.

Kohei Takeuchi (Director, Executive VP, Representative Executive Officer, and CFO)

The Sony and Honda joint venture has been established in September. The other day, Mizuno and Kawanishi-san made a joint announcement together. How we're gonna sell the products, of course, with that framework, we have established a new joint venture company, new mobility, that will be not Honda, not Sony, but it will be a new mobility. That is why we established a new company. Then how we are going to sell, it is not defined as yet, clearly, so I can't share with you at the moment. Using the existing network may not be the case. However, service network, we have 1,000 Honda and 300 Acura service network.

Of course, US, we could make use of that. However, the way to sell may be, you know, in line with the new kind of mobility, new world, completely new things. Personally, I think it is going to be something new, but all those things are still under contemplation, so I don't think I can refer to that today. It is going to be non-conventional, no Sony, no Honda, something totally new. That is how we have started up with this joint venture company. Please expect us for the next move.

Operator (participant)

Thank you, Hans-san. Next question. Nikkan Kogyo Shimbun. Egami-san, please. Ms. Egami, can you hear?

Speaker 8

Can you hear me? Yes. Excuse me. My name is Egami from Nikkan Kogyo Shimbun newspaper. Now, looking at the current situation, you said that you would replace some of the models to be sold. But, in what regions, what kind of models did you replace? Can you elaborate on that? The second, well, you mentioned that about the operating margin of automobiles, but, the unit volume, et cetera. But, the motorcycles were not that much impacted, and that is the reason why the operating margin for motorcycles is good. Can I interpret it that way?

Kohei Takeuchi (Director, Executive VP, Representative Executive Officer, and CFO)

Well, in what regions, what kind of models have been replaced, et cetera, I cannot make any specific reference. In the first half of the first six months or three months, for Civic, CR-V, we had a shortage of semiconductors. In the second half, we think in the United States, we given the current production situation, will be difficult to catch up. Instead, the small models, Japan and Asia, we these are those for which we do not have a shortage of semiconductors. Therefore, we replace them with these models. On a weekly and also a regional basis, we are doing such things so that we can deliver products to our customers as soon as possible. Such replacements are taking place.

About the automobile profit margin. Well, yes, because of the shortage of semiconductors, we are not achieving the unit sales that we intended to, so we cannot achieve the margin that we wanted to. Motorcycles likewise are impacted by semiconductors. Depending on the country, the market, I believe, motorcycles which motorcycles sell are different. Therefore, we are able to cover with that difference. Those which have high margin in those countries, the unit volume has increased. Therefore, in Thailand and Vietnam, and that is the reason for the positive. It's not the case that we do not have any problem.

Fortunately, those markets which, where we have high margin were the areas in which we saw growth in the unit sales. Thank you.

Operator (participant)

Thank you, Ms. Egami. Next question. Toyo Keizai. Weekly Toyo Keizai. Yokoyama-san, please.

Speaker 11

Yokoyama, Toyo Keizai. Hello. Thank you. I have 2 questions. First question is a confirmation. In the PowerPoint, the factors behind the profit before tax, you had JPY 36 billion of the retail price factor for the ups and downs. You had raw materials situation, plus, you had managed repricing successfully to make this number. Is that how it went? Please share with us your strategy as well. You talked about the pricing and also in mini vehicles, kei cars. They're produced in Japan, consumed in Japan. In fact, the soaring raw prices are directly impacting the mini vehicles. What is the impact on that?

Eiji Fujimura (Operating Executive and Head of Accounting, Finance Supervisor Unit)

Because pricing is difficult on that. Let me explain the first part. For the first half, like this time we say JPY 36 billion+. Despite raw material price hike, we managed. That was about the question. Throughout the year, annually speaking, for this fiscal year as compared to last one, raw material prices from the previous forecast, because of inflation situation, the distribution, labor cost and supplier, of course, suffer the same issues. Cost up pressure is JPY 390 billion. The cost pressure upward total up to that much. Our approach is to try to provide a pricing that reflects values.

Of course, throughout the year, inflation and supplier situation, specifically, the price negotiation. Actually those events are happening in the second half, rather. When we do pricing, we actually take up in first half already anticipating what's gonna happen next. Actually that is a positive impact on the first half. Throughout the year, I don't think we can absorb all of those cost increase factors. Then we have a differences of the impact in second half and first half, and that is how those ups and down factors are sort of allocated over the period.

Pricing in Japan, as Yokoyama-san said, speaking of the domestic market, of course, we are looking at the competitors as well, and those mini cars, mini vehicles. We have the OEMs for supply that too. We of course watch out the prices of those products of other companies. It is kind of difficult to reflect the raw material price hike situations to the price of the products directly. We have to make a decision thinking of over the competitor's product. When we have the new model, new specification, we may pass it on the price hike part for the price of the products.

We would try to do that as we go, going forward. Thank you very much, Yokoyama-san.

Operator (participant)

The next question will be the last question. Nikkei Business, Iyama-san, please. Iyama-san, can you hear? Yes.

Speaker 9

Can you hear me? Thank you. About motorcycle sales. Well, it's a detailed question, but Indonesia.Compared to others, I think, the growth is not that fast. There is a reason. What is the reason? You talked about EV motorcycles. In Asia, the competitors, do you see that there's pressure coming from your competitors to try to push EV motorcycles, electrified motorcycles?

Kohei Takeuchi (Director, Executive VP, Representative Executive Officer, and CFO)

Iyama-san, thank you very much. Indonesia is more than 100%, but the growth is slower than other regions. Where did this come from? Can you elaborate on your question?

Excuse me. In the second quarter, the Indonesian sales, it says 101.9%. In the fourth quarter it's 90%, I think. That ratio I'm talking about.

I'm sorry, I'll look it up. Well, in regards to Indonesia, there is an impact of the recession, the slowdown of the economy, especially last year.

When it comes to Thailand and Vietnam, there was a lockdown in Asia, as you recall. Because of that impact, at that point in time, Vietnam and Thailand grew. This is in comparison. I hope that you'll understand that to be the case. About the electrification of motorcycles in Asia. Well, in India, there is this new manufacturer which has started up, and they have a very forward-looking plan, sales plan, and it seems to be working. In Indonesia, again, competitors are putting pressure on us in terms of electrified motorcycles. We also, as I explained the other day, heading towards 2030 and 2035, we want to aim for a large unit sales in Asia.

When it comes to EV motorcycles, it is true that competitors are putting pressure on us because of their growth, but Mobile Power Pack battery, we're using battery. The rickshaw in India, we installed battery and doing demonstration tests there. I think in Asia, mainly in the motorcycle sector, we're trying to electrify, put together a strategy in this market going forward. Thank you.

Operator (participant)

Thank you very much, Iyama-san. This concludes our presentation session today, our financial results presentations. Of course, those materials and the presentation package are available on our website. Thank you very much indeed for your participation.