Honda Motor - Q2 2025

Transcript

Operator (participant)

[Foreign language]

Thank you very much indeed for your participation in FY 2025. Let me introduce the participants today. Director, Executive Vice President, and Representative Executive Officer, Mr. Shinji Aoyama. Director and Managing Executive Officer, CFO, Mr. Eiji Fujimura. Mr. Aoyama is going to present the outline of the results of the second quarter FY 2025 and the full year outlook of the FY 2025, followed by Mr. Fujimura to present details of the financial results. Mr. Aoyama, the floor is yours.

Shinji Aoyama (Director, EVP, and Representative Executive Officer)

Thank you very much for your understanding of our business activities as usual. Let me present our second quarter results of FY 2025. Starting with the highlights. Operating profit of the first half of FY 2025 was JPY 742.6 billion, with the operating profit margin at 6.2%.

The unit sales on consolidated automobile businesses enjoyed steady sales of ICE and HEV models in North America, as well as the full-fledged start of the EV sales. We had additional sales of 64,000 units year-on-year. Total unit sales across the group declined by 155,000 units due to the reduction of the unit Motorcycle Business, we had favorable unit sales globally and had achieved a cumulative sales of two quarters, reaching 10 million units. Operating cash flow after R&D adjustment was JPY 1.2851 trillion, the same level last year. Regarding the full year consolidated forecast of FY 2025, despite the impact by strengthened incentives for EV sales in North America, with Motorcycle Business, we will keep the same forecast from the previous guidance, that is JPY 1.42 trillion.

As for the current profits, due to unit sales decline in China, a profit decline of domestic affiliates causing less investment profits based on the equity methods, we will change the previous forecast down to JPY 950 billion, less by JPY 50 billion. With regard to the shareholders' returns, we made a decision in the board of directors meeting today of interim dividend of JPY 34 and annual dividend of JPY 68, which will be maintained from the same amount from the previous forecast. As for the share buybacks, in addition to JPY 300 billion, which we made a decision on as of May 10, 2024, we have made a resolution to add up to JPY 100 billion of the further acquisitions. Let me explain the situation of the main market. For the automobile businesses, unit sales increased in Japan and the U.S.

However, due to the impact by the growing new energy vehicle market, intensifying price competition in China, and so on, the total unit sales declined below the level last Motorcycle Business, despite unit sales declining in Thailand due to economic slowdown, we had steady demands in India, incremental unit sales in Vietnam by economic recovery. Total unit sales exceeded year-on-year. This is the financial result of the first two quarters of FY 2025. Operating profit was JPY 742.6 billion, up by JPY 46 billion year-on-year. Investment profit and loss based on the equity method was negative JPY 20.7 billion, down by JPY 87.4 billion year-on-year. The profit attributable to the owners of the parents for the interim period was JPY 494.6 billion, down by JPY 121.6 billion. Next, regarding the consolidated financial outlook for FY 2025, we will maintain the forecast of operating profit of JPY 1.42 trillion. Previous guidance still stands.

The profit attributable to the owners of the parent for the year will be down by JPY 50 billion, that is to be JPY 950 billion. Forecast assumption will be set at JPY 143.4 for the second half of the year and for the full year JPY 148. Regarding the dividends, interim payout for FY 2025 is JPY 34 per share. Guidance for annual payout will stay the same at JPY 68, no change from the previous guidance. In the board of directors meeting held today, we made a decision of share buybacks. We will execute it with the upper limit of JPY 100 billion. Next, Mr. Fujimura will explain the financial details.

Eiji Fujimura (Director, Managing Executive Officer and CFO)

[Foreign language]

Next, I will explain the second quarter results details. First, the FY 2025 second quarter Honda Group six-month Motorcycle Business, 10,382,000 units, due mainly to year-on-year increase in Asia. Automobile business, 1,779,000 units, mainly due to drop in Asia, in particular China.

Power Products business, 1,653,000 units, mainly due to drop in North America and Europe. The consolidated six-month financial results have already been explained. Next, the changes in profit before income taxes for the six months compared to the same period last fiscal year. Operating profit increased JPY 46 billion. The change factors are as follows. Though sales impacts saw a positive impact on profit due mainly to increase in unit sales, increase in incentives led to a JPY 28 billion decline in profit. Price and cost impacts were positive due to pricing commensurate with product value, resulting in a JPY 268.6 billion profit increase. Expenses, increase in personnel and outsourcing costs, had a negative impact of JPY 105.5 billion. R&D expenses increased JPY 80 billion, negatively impacting profit. Currency effects were negative impact of JPY 9 billion.

Profit before income taxes declined by JPY 137.3 billion due to a decline in unit sales in China, decrease in equity method profit due to drop in domestic-related companies' profit, and appraisal loss of foreign currency-denominated assets due to stronger yen compared to last year-end. Next, operating profit by business segment. JPY 325.8 Motorcycle Business, jpy 162.7 billion in financial services business. Power Products business and others saw a loss of JPY 3.9 billion. Next, cash flow. The FY 2025 six-month free cash flow of operating companies excluding financial business operation was JPY 372.3 billion. Net cash balance at the end of the second quarter was JPY 3,492.3 billion. R&D adjusted operating cash flows were JPY 1,285.1 billion. Next, the FY 2025 full year consolidated financial forecast. Honda Group motorcycle unit sales forecast is 20.2 million units, an increase compared to previous forecast due to increase in mainly Asia.

Automobiles is JPY 3.8 million units, reflecting drop in Asia. Power Products business, though we have reviewed the forecast by region, the last forecast of JPY 3.66 million units remains unchanged. FY 2025 consolidated financial forecast has already been explained. Next, the change factors behind forecasted profit before income taxes. Operating profit, up JPY 39 billion from last fiscal year. The change factors are the following. Sales impacts, though there is increase in profit due to increase in unit sales, increased incentives and other factors will result in a JPY 170.5 billion profit decline. Price and cost impacts, positive effect of pricing reflecting increased product value will increase profit by JPY 550 billion. Expenses, negative JPY 68.5 billion. R&D expenses will increase by JPY 125 billion. Currency impacts will have a JPY 148 billion negative impact. Profit before income taxes will fall due to drop in unit sales in China and domestic-related companies' profit, equity method profit.

Since the exchange rate is assumed to see the yen appreciate against the end of last fiscal year, there is appraisal loss of foreign currency-denominated assets resulting in JPY 207.3 billion drop in profit. Next, changes from previous forecast. Operating profit forecast remains unchanged. Breakdown is as follows. Sales impacts due to increase in incentives among others, negative JPY 99.5 billion. Price and cost impacts, positive JPY 48 billion due to pricing commensurate to the product value increase. Expenses, positive due to a JPY 2.5 billion cut. R&D expenses negative due to JPY 4 billion increase. Currency effects, an increase of JPY 53 billion. Profit before income taxes down JPY 45 billion due to decline in unit sales in China resulting in a negative equity method profit. Lastly, the forecast for capital expenditures, depreciation, and R&D expenditures for FY 2025 are as shown. This concludes my explanation. Thank you.

Operator (participant)

[Foreign language]

Thank you for your attention. So now, we would like to take questions from the floor. As we have explained beforehand, we are going to take questions on the Zoom. In the interest of time, please limit your questions to two questions per person. And if you want to ask questions, please turn on your microphone and the camera on the system. So please raise your hand button on the system if you have questions. First question. From Yomiuri Shimbun. Mr. Nakamura, please ask questions. 。

[Foreign language]

Can you hear me? Thank you. Thank you. So I have two questions. First one。 I have a question about EVs in North America. The Prologue and the ZDX have already started on sale. And then the incentives are dragging your performance. And as compared to the beginning of the year, what is the incremental incentives as of now?

In this situation, do you still plan to strengthen EV sales over there? And the question two. So it is about outlook. You are changing the forex assumptions to the yen depreciation direction. Please explain me the backdrop. Of course, the presidential election, other situations might, and other political situations might change the forex situation. How do you address that?

Shinji Aoyama (Director, EVP, and Representative Executive Officer)

[Foreign language]

Thank you very much, Mr. Nakamura, for your question. The North America EV unit sales recently. In those two quarters, first half, performance of the unit sales, we had about 20,000 unit sales less, fewer in the United States, U.S., in North America. In the second half, 60,000 more units planned. And it will be about a little bit less than 80,000 unit sales to be included for the full year. And in terms of the incentives, I cannot give you the detailed numbers of those incentives.

However, as compared to the original assumptions, we have about $7,000 per unit more spent on the incentives. And for this one, for the second half this year, we are going to budget the same level of the incentives, basically. And the question of strengthening of the sales in these situations, from the 2026 model year, we are going to have the Honda EV designed and manufactured by Honda. Those will be on sale in North America. And in order to have good connections to that model, for this model currently sold, we are going to keep the momentum of the sales of the current EV models. That is the basic idea. Of course, we have to look at the basic market situation, incentives situation, plus how we address the regulations. Those factors have to be considered in order to have flexible activities.

And then Forex, Fujimura-san is going to address this question. Thank you for your question, Nakamura-san. In the previous session, in summer, we said JPY 140 for the full year. That was the assumption we had. And then we didn't change from the beginning of the year. We said that it is going to be steady. But at that time, there were like a JPY 20 ups and downs, fluctuations of the forex levels at the time. And the assumption of a JPY 140 assumption, actually, second half, JPY 135. That was the assumption we had in the first half period. But now, JPY 130, JPY 145 for the third quarter and JPY 140 for the fourth quarter. It will be about JPY 142.5 or so for the second half. So yen depreciation direction.

And then as compared to the time last time, we had a number of those policy rates down in the U.S. and Japan as well. Those policy interest rates are coming down. And also, actually, those reductions of the rates are a little bit squeezed over time. And we have no idea what could happen for the presidential election. It is now being counted. And we have not factored in the presidential election matter in our forecast. However, those are the assumptions we have put up for this term. Thank you.

Operator (participant)

[Foreign language]

Thank you very much. Thank you very much, Mr. Nakamura. Next question. Okina, please.

[Foreign language]

This is Okina From Nikkei, can you hear me?

Eiji Fujimura (Director, Managing Executive Officer and CFO)

[Foreign language]

Yes, we can hear you. Thank you.

[Foreign language]

Thank you. I have two questions. First, about automobile operating income, the fact that it's declining.

The North American business, hybrid, is still, even though it's doing well, you have inventory piling up. So including EV, what do you see in regards to automobile consumption, including inflation? So what is the outlook of demand, consumption in North America? That's the first question, and the second question is about the downward revision. So you have the negative for the equity method profit. So can you talk about the background? I think the major factor is China, but gasoline cars and also EVs, the current sales, and also the forecasted sales.

Shinji Aoyama (Director, EVP, and Representative Executive Officer)

Yes, Mr. Okina, thank you very much for the question. Thank you. Well, about North America, even with the half, the inventory is increasing, you say. Well, it's not necessarily the case.

I think that looking at the current situation, and also because various measures have been taken for the market, it may appear as if the inventory is slightly increasing, but this is a one-time phenomenon. In regards to HEV, I think we are doing very well in terms of sales. Well, the overall market, well, the U.S. market, it's about 60 million units per annum. This is the total market that we see. And so we think that this will remain unchanged. But again, well, depending on what happens with the presidential election, we have to see what will be happening. So we have to keep an eye on the market developments. But currently, hybrid is doing well, we think. And I hope you'll understand that to be the case. And we also, in the second half, will be mainly promoting our sales of hybrid.

Now, about the profit of equity method at the negative number that you see here, as I explained earlier, in addition to the decline in sales in China, our related companies in Japan, there has been a decline. So these two combined, we are seeing this negative profit of equity method. If Fujimura has something to add, I'll ask him.

Eiji Fujimura (Director, Managing Executive Officer and CFO)

[Foreign language]

Well, about the downward revision, and well, it has been changed. We downward revised the operating profit to JPY 950 billion in the second quarter. If you look at the second quarter, well, it was JPY 1.42 trillion. And we think that we can maintain this. But if you look at the others, below that, about the profit equity method, as Aoyama has already explained, there is the impact of China. Well, from the beginning of the fiscal year, we have seen a decline of some 300,000 units or more.

That is one factor. Plus, one-time, this factor is the domestic related companies. And again, this is derived from partially China. So there are some one-time factors involved here. And as a result, we have a JPY 25 billion negative profit of equity method. And other than that, because of the currency fluctuation that we're seeing right now, well, for Honda Motor and also our subsidiaries overseas, they have, for example, the debts and bonds and also the foreign currency deposits. And the appraisal, we have to do the appraisal of these foreign currency denominated assets. And so there have been the loss pertaining to non-sales factors. And therefore, the operating profit will remain the same. But we are seeing JPY 50 billion, these two together, resulting in JPY 50 billion or so.

And also, there is a difference in tax systems in different countries. But I think that these two combined have led to a drop of JPY 50 billion in profit, net profit. Is that okay? Thank you very much. Mr. Okina.

Operator (participant)

[Foreign language]

Next question from NHK. Mr. Nishizono, please.

[Foreign language]

Hello?

Shinji Aoyama (Director, EVP, and Representative Executive Officer)

[Foreign language]

We can hear you.

[Foreign language]

Thank you. Thank you for your explanation. I have a question to Mr. Aoyama. So in these financial results, how do you conclude the results? What is your taking? And then Chinese market impact and your action to that. Could you explain all that, please?

[Foreign language]

Thank you very much. Mr. Nishizono. Well, it is difficult to say in one word how to take the situation now.

But as compared to the numbers that we had expected, it is a little bit short of what we were expecting, to be honest. However, forex. Not dollars. Not against the dollar. But the forex against emerging currencies or Canada, Mexico, Argentina, Turkey. The currencies of those countries are kind of involved here. That sort of had a negative JPY 30 billion or so because of the forex fluctuation. And then it wasn't expected in the beginning. It caused some fluctuation. And we would say this is a transient matter for the full year sort of basis. But in the immediate three months for the second quarter, we had a quality cost, warranty cost, which was rather high. Warranty, JPY 110 billion negative impact by the warranty expenses. And this is how I take it. And then actually, it was away from our expectations.

And battery EV incentives increased, as discussed earlier. And of course, we have factored in some of them to the negative side. However, we had a certain possibility and we had anticipated to a certain extent for those matters. And it wasn't really a surprise to me, in fact. And then the unit sales reduction in China, for instance, it was actually greater than we were expecting. The reduction rate was quite fast against our expectation. And then also the business structure around the fixed cost area, we have been working to reduce them at a high speed as well. So although those, because of those actions, that downward sort of trend for the performance is sort of alleviated. And then in North America, we have incentives. And in fact, actually, we don't spend as much as we were expecting for the incentives in North America.

Plus, we had a good tailwind Motorcycle Business recovery. and that is good too. And the Chinese market, as I said earlier, NAVs, BEVs, PHEVs, new energy vehicles, those types of the cars are increasing very fast. And at the moment, we do not have a competitive product in this end, in this area. Therefore, we had to try to reduce the fixed cost because of that. Thank you.

Operator (participant)

[Foreign language]

Thank you very much. Thank you very much, Mr. Nishizono. Next. Mr. Yokoyama, please.

This is Yokoyama from Toyo Keizai Weekly Magazine. Can you hear me? I have two questions. Thank you. First, it's the balance between the first half and second half. Well, according to your revision, the second half, I think, well, Mr. Fujimura has talked about the expenses increase, the decrease in the second half.

With this revision, you have, I think, made some changes. Mr. Aoyama talked about the recall expense. You're thinking towards the balance between the second, first half and second half, and also the sales cost. I want to hear about this balance. That's the first thing. Second question about China. In the beginning of the fiscal year, both of you, you were talking about restructuring and optimizing production and also personnel. What is the progress you're seeing so far? Currently, I believe that the pace of decline in sales is quite quick. Therefore, do you have any plans to rationalize? How do you think about the production balance between Guangzhou and Dongfeng

Yes, thank you very much.

Shinji Aoyama (Director, EVP, and Representative Executive Officer)

Well, first of all, about the balance between the first half and the second half of the fiscal year and the difference between the two. Well, as you pointed out, in terms of the cost, it does tend to be that there will be; it will be skewed more towards the second half. And this fiscal year, 2025, again, we think that the same is happening. And especially the R&D part, it does tend to increase towards the second half of the year. This happens every year. And this year again, we are seeing this happening. Now, earlier, in the other questions, I partially answered what you've asked. But in terms of warranty, well, in the second quarter, we think that this is a one-time expense. But yes, we will try to make this more positive in the second half, dealing with the warranty issue.

And about the currency setting, the second, first half and second half, there is a JPY 100 billion negative difference between the first and second half. And in terms of sales impact, it's positive. That is our understanding. So sales and also selling price, and well, selling the price, which is commensurate to the value of the product, it will be a positive. So in the second half, this will be an add-on. The negative will be the currency, JPY 100 billion or so. And other expenses, R&D included, that will be the negative part. I hope you understand it to be that way. Now, about China. Well, in regards to China, well, I have talked about this in different occasions. But at this point in time, well, as you know, in China, we have two joint ventures.

Both will have new production capacity, dedicated EV factory with a capacity of 120,000 units per annum. One has already started. The other is to be started. This will be an add-on to our conventional capacity. At the same time, we had some 1.49 million production capacity, the two joint ventures combined. In the last year, a little less than a year, together with our joint venture partners, we have been discussing what needs to be done. 1.49 million, this will be reduced to 960,000. Yes, including the lines which have yet to be suspended. During this FY 2025, it will be dropped, cut to 960,000. Including the battery EV dedicated, we are assuming that there will be 1.2 million capacity. Of course, 1.2 million units is more than the demand.

And so there will have to be some cuts made in the future. And internally and with our partners, we are discussing what needs to be done. Well, about personnel cut, well, yes, we are making some progress there. I won't give any specific numbers. But both for Guangzhou as well as Dongfeng, for both, we have some several thousands of personnel cut, mainly voluntary resignation. And so that is the current status. Thank you.

Operator (participant)

[Foreign language]

Thank you. Thank you very much, Mr. Yokoyama. So next question from Kyodo Tsushin, Mr. Okuda, please.

[Foreign language]

Okuda speaking from Kyodo. Can you hear me? Yes. So the ballot is being counted now in the presidential election. And there was a mention to the forex assumptions on Mr. Trump would raise the tariff. And EV promotion can be reviewed and so on, possibly.

Going forward, of course, who will win would matter. But what do you think is the potential impact on the businesses? And how would you address such a situation in that case? For instance, investment plans on EVs in the future, would that be impacted by the results of the election? And the other question. Nissan and Mitsubishi and yourself have collaboration programs. And what is the situation of the alliance? Mr. Kato from Mitsubishi said that they're going to sort of put together their ideas or plans by March next year. And then what is the situation? And also Mitsubishi, would they provide you the PHEVs to you? What are the options with them at the moment? Could you share with us as much as you can, please?

Thank you very much, Mr. Okuda. So counting, we are casting a very keen eye on them like yourself.

And then who is going to win? Whichever the case, no matter the case, we are not necessarily taking the situation in a short or midterm perspective. We have a long-short perspective as well, especially with regard to the investments. Whoever the president could be, we should not be too much swayed around by them. We have our automobiles, small car, passenger car areas of the businesses. For that area, the EV electrification will be on the increase in the long run. And in Ohio, in the state of Ohio, we had LGES, joint venture, EV batteries. And in Canada, we have comprehensive value chain programs in Canada. So those programs will be pushed forward, basically. However, away from the presidential election, we have to look at the EVs market. Of course, we would have, for instance, investments on those equipments and so on used in EVs.

And investment can be looked at. And then, of course, we will have flexible investment plans and executions as per the situations of the market. Therefore, the impact on the investment plans, the presidential election will have no impact on us. However, in terms of the influence by and large, for instance, production in Mexico, quite a few moved or transported from Mexico to the U.S., which will be subjected to the tariff for a certain period of time, which will be the area that is necessary, requiring some actions because we cannot relocate the production sites all of a sudden. So we have to see what happens and what we can do. And collaboration with Nissan and Mitsubishi. So we don't have any specifics like by when and what. However, PHEV, so on, system supply or the equipment supply, actually, we have nothing defined as yet.

We simply keep our discussions at the moment. Sorry, I cannot give you the specifics as of now.

[Foreign language]

Thank you very much.

[Foreign language]

Thank you very much, Mr. Okuda. Next question, please. Bloomberg. please.

[Foreign language]

Inajima speaking. Can you hear me? Yes. Thank you. Two questions. This has already been asked, but So about the operating profit, the second quarter, what are the major factors of negative impact? So you talked about JPY 96.9 billion expenses. Can you give the breakdown of the expenses, please? Mr. Inajima, thank you very much. About the second quarter only, the three months, right? And year-on-year comparison. Fujimura has talked about the full year forecast, but let's have him talk about the likelihood of the forecast included.

Shinji Aoyama (Director, EVP, and Representative Executive Officer)

[Foreign language]

Thank you very much, Mr. Inajima. Yes. So year-on-year, your question is about the July-September.

You were asking about expenses, R&D expenses or just expenses? Well, that included. Well, the big items. Yes, the big items compared to the previous year. Can you give us the big items? Well, about the expenses. Well, this is included in an annual, but yes. So PR and also personnel cost. Well, these are all included in the three months. And so I think we are at cruising speed, so to say, right now. And earlier, there was the question about the impact on the annual. And we did, and I wanted to talk more about that. Well, this three months, looking at this three months that's just ended, well, as Aoyama has said, the warranty is about JPY 80 billion. And annually, well, at the time of this announcement, I cannot give any specifics as to which supplier, but still.

We have not reflected this since we did not sign the memorandum of understanding, but it's supposed as JPY 30 billion. But I think that we can set this. And so this is not included in the forecast. And also, annually, there is a negative listed here. But I think, as I said at the outset, because of the yen-dollar currency effect, since we reviewed this significantly, this will disappear. And therefore, this JPY 250 billion plus result, we think that JPY 360 billion or so should be the actual instead of 250. Then RS will be 6.6%. And the negative battery EV, well, yes, we are going to sell it. And in China and Asia, the drop in automobile sales with ICE and motorcycles, we want to offset that. So we think that we can do this throughout the year.

And so based on that, we have some, the unchanged JPY 1.4 trillion. So the three months, as I said, number-wise, I think our actual would be some JPY 100 billion added on to what you see here. It's due to various factors that it's lower. Thank you.

Operator (participant)

Next question, Daniel from Reuters, please.

[Foreign language]

Hello, Daniel from Reuters. Can you hear me?

Shinji Aoyama (Director, EVP, and Representative Executive Officer)

[Foreign language]

Yes.

My question is also about the North America market. And some of the questions have already been raised. And I'd like to continue from there. Mr. Trump, in the election, in the last few months, he mentioned about cars imported from Mexico and plans to raise the tariff there. So he mentioned that a number of times. And then if he wins the election and realizes his plan, what is its impact on the businesses?

And how would you address that in order to prevent the negative impact by that? Could you add some more comments on that point, please?

Thank you very much, Daniel, for your question. And again, the tariff on the Mexico import from Mexico. So the automobile production in Mexico, we have about 200,000 units over there in production. And 80% of those are exported to the U.S., about 160,000 units or so. That's the export to the U.S. And the impact could be their business of 160,000, which will be subjected to the tariff. And that is a big impact, I think. And then it is not just Honda, GM, Ford, and other Japanese companies, Japanese OEMs. All of their companies are subjected to the same situation. And in short, I wouldn't think that the tariff would be imposed right soon. After a certain discussion, it will be done.

And will those companies be able to stop the production in Mexico right away? No, I don't think so. So I wouldn't say the tariff will not be realized. However, there will be lobbying activities and so on to that point. And of course, if the tariff is a permanent one, I suppose it could be not permanent. Maybe we would go for the production elsewhere, which is not subjected to the U.S. tariff. But we could do it.

Thank you very much.

Operator (participant)

Thank you very much, Daniel. And next question. Nikkan Jidosha Shimbun. Mr. Mizutori, please.

Can you hear me?

Shinji Aoyama (Director, EVP, and Representative Executive Officer)

Yes.

[Foreign language]

Thank you. Well, I think it was mentioned in the first question about the EV incentives in the United States. Well, Mr. Aoyama, you said that incentives were $7,000 higher than expected, I think you said.

But the current situation, if you look at the EV only, well, the more you sell, the more the deficit, I think. With the 2026-year model, you can generate profit even with EVs. Is that the correct understanding? Because it's a Honda car. Also in the U.S., the CO2 credit, like in California, the revenue and payment, what will happen if there is an increase in the number of EVs?

Mr. Mizutori, thank you very much for the question. Well, yes, the incentive was higher than expected. That is a fact. So this fiscal year, 2025, against the original assumption, we think that it will be JPY 100 billion or so incentive increase. So that is what we're assuming right now. That is the current situation vis-à-vis FY 2025.

Now, as for next year and beyond, well, as I said earlier, basically, there will be the environmental regulations. So we have to respond to those regulations and also profitability. The more you use incentives, this will aggravate the profitability. So we have to think about how to respond to the regulation versus incentives. And we have to think of these two together. But from FY 2026, we are expecting unit sales to increase. And there will be sales momentum to a certain extent. So we have to think about the unit and also the incentives and how to respond to the regulations. So overall, we have to balance all these three. But with the FY 2026, well, the model year 2026, a new model, whether we can generate profit, we'll work hard to generate profit with our new model.

As for the specifics, I cannot spell them out right now. Still, from model year 2026, we want to work hard on that. As for the CO2 credit, well, in the U.S., it's a bit complicated because the overall GHG, a greenhouse gas emission, that's on one hand. Meanwhile, there are states like California, which are ZEV states, zero-emission vehicle states. There are these two. Now, for the model year 2025, California, according to the ZEV Act, ACC I is the stage. From the model year 2026, it'll be ACC II. Transition to the next stage, which is more stringent. Therefore, for the GHG, Honda meets compliance with the requirement ACC I regulation, which will continue until model year 2025. We are already selling the 2025 model year. Up until ACC I, we are complying right now.

But ACC II, well, we have to sell a lot of battery EVs to meet this ACC II. And so we have to sell. And that will start from model year 2026. And all automobile OEMs are facing the same situation. So for this, of course, we will increase our battery EV sales. But as of now, if we do it as is, this will increase our deficit. So what are we going to do? We could buy credits. So keeping this possibility in mind, as I said, if we do that, then the unit sales and incentive and also regulation compliance plus credit, the selling and buying of credits also have to be taken into consideration. So there'll be a lot of factors that we have to work on.

As for the details, I would like to talk about this at a separate occasion when I talk about how we'll respond to these different regulations. Thank you.

Thank you for the detailed answer.

Eiji Fujimura (Director, Managing Executive Officer and CFO)

Operating profit of your company is supported Motorcycle Business is not doing well. And sometime very soon, 50cc small vehicles, small motorcycles will be gone. Can we expect the profit in the short while in the near future? Thank you for the question. Let's talk about those 50cc motorcycles. And we may be a little bit responsible for the society with regard to the 50cc. And actually, this 50cc category, so-called light category, actually for this category, it will be revived away from the 50cc constraints in specific 50cc or less with 4 kilowatt or less sort of power.

With that kind of the motorcycle, the drivers with that category license would continue to drive. With the automotive license, regular one would allow them to drive the motorcycle below 125cc. That is going to be the same category going forward. As for the business of that, well, we have a so-called Dream 10. The mid-size, large-size, or 155cc categories. We have those areas of businesses which is very steady and good. Because of the COVID-19, we had a bit of an increase because of that for people who would take a tour riding the motorcycles. Such kind of boom had kind of settled now. But we can do a good business. We want to take a profit from the business of motorcycles like that in this area. In advanced or developed countries, including Japan, the profitability of the motorcycles is high.

And I would like to see the continuous continuity of the profits.

Thank you.

Operator (participant)

[Foreign language]

Thank you very much, Mr. Nakajima. And with this, we would like to conclude our briefing session. And as for the documents, they are posted on our website. We thank you for your participation.