Honda Motor - Earnings Call - Q3 2020

Transcript

Operator (participant)

[Foeign language]

Thank you for waiting. Thank you very much, indeed, for coming up today for our press conference for our Third Quarter Financial Results. I'd like to introduce the participants today: Seiji Kuraishi, Executive Vice President; Kohei Takeuchi, Senior Managing Director and CFO.

Kohei Takeuchi (Senior Managing Director and CFO)

[Foreign language]

Nice to meet you.

Operator (participant)

[Foreign language]

And Jiro Morisawa, Chief Officer and Business Management Operations. So, let's start with the presentation for the financial results. Mr. Kuraishi, please?

Seiji Kuraishi (EVP)

[Foreign language]

To start with, I would first like to express my condolences for the families of the deceased due to the novel coronavirus outbreak, as well as my deepest sympathy for the patients and for those who feel concerned. I hope that things will be back to the normal status as quickly as possible. Honda has postponed restarting of the operations at our affiliated companies since February 3.

Currently, as per Japanese local government, we are closely [audio distortion] [monitoring safety of our employees and their families], and the status of the supply chain, and are considering our operations going forward. At the moment, it is difficult to estimate its impact on our financial performance. Therefore, the forecast we share today does not reflect it. Let me explain the financial results of the third quarter FY 2020. To start with, cumulative unit sales until third quarter this year of Honda Group is as follows: motorcycles 15.038 million units, automobiles 3.809 million units, life creations 3.63 million units. Next, regarding the situations of the main markets, total automotive market in Japan enjoyed effective launches of the new models by OEMs, but due to consumption tax hikes and other factors, the market declined year-on-year. Honda enjoyed good sales of N-BOX and so on.

However, due to parts supply restrictions for new N-WGN, our unit sales declined year-on-year. Total market for FY 2020 will end slightly lower than the year before. Based on good sales performance of N-BOX and Freed, Honda has up-revised unit sales forecast. Brand new Fit will be announced on the 13th of February and be launched in the market on the 14th. Please keep up with the high expectations. In the U.S., total market results are slightly below year on year. Despite the sedan market's shrinking trend and the decline of the Accord sales, Honda launched Passports effectively, and HR-V sales increased with the record highest monthly sales performance in October. Thus, we maintained flat sales results to that of the same time last year. Civic kept a top position in the segment consecutively for 10 months. CR-V renewed monthly sales record in October and November.

Total market in FY 2020 will result slightly below 17 million units. Honda will try to grow well-performing light trucks such as HR-V and CR-V so we can exceed the sales of last year. In China, total market dropped in all segments. Honda increased CR-V and Accord and so on with effective new model launches such as Envix, Inspire, and Breeze. We achieved better unit sales results year-on-year. Total market of calendar year 2020 would slightly be below the year before. Honda will continue monitoring the impact of the novel coronavirus outbreak. Meanwhile, we will aim to maximize sales results by incremental sales of leading models and new launches. Regarding motorcycle segments, in India, the largest market, the economy stagnates and the employment rate worsens, which slows down personal spending. Total market in Asia decreased year on year. Honda has had more sales in the Philippines.

However, due to slowing down in the market, our result was below the same time last year. Regarding total market in Asia in FY 2020 full year, since personal spending in the India market still remains at low level, quick recovery will be difficult, so our performance would end up below last year. In India, we launched Activa 125, which complies with the new regulations, as well as the new SP 125 and Activa 6G, aiming at further growth. In Brazil, total market is in recovery trend. We will strengthen our sales mainly with the commuter models. In December 2019, Honda marked the global cumulative unit sales of motorcycles of 400 million units. We will keep doing our best going forward to supply attractive products that are fulfilling for needs and dreams of customers in various parts of the world.

This is the summary of the cumulative results till third quarter this year. Operating profit was JPY 639.2 billion, down by JPY 44.7 billion year-on-year. Excluding foreign currency and temporary impacts, thanks to cost down effect and SG&A reductions, operating profit went up by JPY 68.2 billion. Unit sales and P&L are shown on this slide. With regard to the FY 2020 full year forecast, expected operating profit would be JPY 730 billion, with an additional JPY 40 billion to the last forecast update. Due to foreign currency impact, economic downturn in India, and limited parts supplies in Japan, unit sales would reduce from last year. Nevertheless, we will ensure to execute actions for profit improvement to keep the plans higher than the year before. Unit sales and P&L are on this slide. For FY 2020, expected annual dividends would be JPY 112 per share, as we announced last time.

Third quarter dividend is JPY 28 per share. Next, Mr. Takeuchi, Senior Managing Director and CFO, will present details of the financial performance and further expectations.

Kohei Takeuchi (Senior Managing Director and CFO)

[Foreign language]

Let me explain. First of all, for the FY 2020 third quarter financial results, as for the sales revenue, there was a sales of financial service business increase. However, due to the decrease of the sales in the Automobile business and due to the negative impact of the exchange, it turned out JPY 3,747.5 billion. As for operating profit, though there was a reduction in SG&A and effect from the cost reduction, but because of the sales decline and also the model mix changes, it came to JPY 166.6 billion. Next is the change in profit before income tax. As for the profit before tax for FY 2020 third quarter, it turned to JPY 206.7 billion. That is down by JPY 20.1 billion compared to the same period last year. The operating profit was JPY 166.6 billion. That is down by JPY 3.4 billion.

As for the operating profit, excluding the currency effect, owing to the reduction of the quality related expense, it was increased by JPY 36.5 billion. Next is our financial results by business segments. As for the operating profit for the motorcycle business, though slowdown of the Indian market pushed our unit sales down, owing to the cost reduction effort, it came at JPY 74.5 billion. As for the operating profit for the Automobile businesses, due to the unit sales reduction in Japan impacted by the supply restriction of components and parts, it came down to JPY 33.7 billion. As for the operating profit for the financial service business, increase of operating lease revenue contributed and came at JPY 64.5 billion. The operating loss from the life creation business and other businesses, due to the unit sales decline in the United States, came at JPY 6.1 billion.

As for the operating loss from the aircraft and aircraft engines included in the life creation and other businesses, it came at JPY 10 billion. Combined operating profit of the Automobile business and Automobile sales included in the financial service business is JPY 95.2 billion, according to our calculation. Next, fiscal year 2020 nine months consolidated financial results. To explain the factors that contributed to the change, the profit before income tax is JPY 786.1 billion. That is down by JPY 82 billion from the same period last year. Operating profit was JPY 639.2 billion. That's down by JPY 44.7 billion compared to the same period last year. As for the operating profit, excluding the exchange effect owing to the cost reduction effort and the decrease of the quality related expense, it came to positive JPY 46 billion. Next is the Honda Group consolidated financial forecast for FY 2020.

First, the Honda Group unit sales forecast. Motorcycle, no change from the previous forecast, that is 19.9 million units. Automobile, increased by 5,000 units to 4.98 million units. Life Creation business, decreased by 270,000, and that is 6 million units. FY 2020 consolidated financial forecast is shown on this slide. Next is the change in FY 2020 operating profit forecast from FY 2019 result. Due to the unit sales decline that changed the sales and model mix, and also the negative exchange impact, still, because of the cost down reduction and SG&A reduction, we are planning for the OP forecast of JPY 730 billion. Next is the change from the previous forecast. Due to the reduction of the SG&A and also exchange impact, our operating profit forecast this time is plus JPY 40 billion. Our FY 2020 forecast for capital expenditure, depreciation, and R&D expenditures are shown on the table.

In the Board of Director meeting today, in order to maintain the liquidity on hand and secure a fund for the future growth, we've decided to issue the straight corporate bond in Japan. The upper ceiling of the total amount of the corporate bond for subscription is JPY 100 billion. That is all for the explanation. Thank you very much.

[Foreign language]

Thank you. Continuing. Before we start the question and answer, we are going to explain Mr. Kuraishi will be explaining about when we can restart the production of the automobile plant in China.

Seiji Kuraishi (EVP)

[Foreign language]

As for Dongfeng Honda's operation, the current plan is to resume the production on February 14th. First, we will take one week to refurbish the production line, which was originally scheduled to do in Chinese New Year.

As for the resumption of the production, in parallel with the refurbishment of the production line, we will confirm the safety of the employees, condition of the facilities, and also the supply status of the parts and components, and proceed with the preparation so that we can start the production on the week of February 17th. Together with the speeding up of the refurbishment of the production line, we will try our best to restart our production. Next is Guangqi Honda. The current plan is to resume the production on February 10. Same as Donghu Honda, we will first check the current status and start the production as soon as possible. That is all. Thank you.

Operator (participant)

[Foreign language]

So now I'd like to move on to the Q&A. Please raise your hands if you have questions. As I always ask you, we will bring you the microphone.

Please tell us your name and which company you're from, and we will take the English questions, if you like. So please raise your hand if you have questions. So the gentleman at the front, please.

[Foreign language]

Freelancer Miao Qi. Earlier, you continuing from your explanation, according to the newspaper reports, the annual capacity of the Wuhan plant is about 600,000 cars, but what is the plan? Do you have any plans to compensate for the no-car production for the time being? Another question is, how many employees are working at the Wuhan plant, and how many Japanese working there? What is the ratio of the Japanese employee there?

Seiji Kuraishi (EVP)

[Foreign language]

Our plant at Wuhan, we have a capacity of 600,000 cars per year. Last year, we had overtime production that went up to 750,000 cars produced.

As of now, Dongfeng Honda is actually the plant for the Chinese market only. At the moment, there is no option to compensate for the production problems from elsewhere at the moment.

Kohei Takeuchi (Senior Managing Director and CFO)

[Foreign language]

As for the questions about Wuhan, Dongfeng Honda Automobile Company, we have employees, about 12,700 as of the end of December, including, excuse me. I do not know how many Japanese are included in there. The Corporate Communications Department will let you know after confirmation. We do not necessarily separate, but we have, about expats, 430 expats from Japan and China. That is the total number of Japanese expats over there.

Operator (participant)

[Foreign language]

他に any other question? The gentleman who is wheeling the glass at the back.

[Foreign language]

Okada from Nikkei Newspaper. As for the revision of the information, I would like to ask you in detail about the full year outlook.

As for SG&A reduction, is that because of the U.S. payment of the incentive? And what are other factors that contributed to this? And also, the operating profit. You have one outlook that shows the increase in operating profit. But because of the coronavirus, you may have the stagnation in the production of China that may cause the negative impact. Do you think that will actually drive down the profit increase that you were planning? What's your plan?

Kohei Takeuchi (Senior Managing Director and CFO)

[Foreign language]

As for the operating profit, full year outlook, that was JPY 690 billion, but now it's JPY 730 billion. That's an increase by JPY 40 billion. Let me explain the breakdown. First is the exchange impact, that's JPY 15 billion. And the reason is, on the third quarter actual, originally in the budget, it was JPY 105 to the dollar.

Now it's JPY 109 to the dollar in actual, or JPY 108, no, JPY 109. In the third quarter, in full year, it's JPY 107, but that became JPY 108. That is why the JPY 15 billion plus. And others include, as Okada-san just explained, in SG&A, we have some positive. We have JPY 26 billion amount of the Latin America's social security burden. Also, the tax reimbursement was given. That contributed positive to the SG&A. Number three is in a vehicle, Automobile, we have some plus in Japan and plus in Motorcycle. But the biggest ones are the exchange impacts and also the SG&A and the tax reimbursement. That actually reduced the SG&A cost.

Seiji Kuraishi (EVP)

[Foreign language]

As for China's business, domestic business, and the impact to profit, and also the unit sales, we are not in the situation to be able to give you the information today. Based on the schedule that we explained earlier, if we can resume the production, then the impact will not be that big. Especially the operating profit, as you know, the impact in China is very small. We do not think that it will impact us. If this will prolong, that is a different story. There is nothing we can say today. Thank you.

どうもなる方。ではこちらの一番前の。TBSテレビの梅田と申します。中国コロナウイルスの関連でサプライチェーンの影響をお聞きしたいと思います。中国国内の生産に関して。[Foreign language]

I'd like to ask you about the coronavirus issues on the supply chain effect. In China, of course, parts will be, parts are produced in China, and then they're used elsewhere out of China. What is the impact by that?

[Foreign language]

In terms of the supply chain, we would be able to resume the production as planned. If that is the case, it would not stop the line elsewhere. At the moment, we are scrutinizing its impact closely now. Going forward, we will watch and monitor the situation, then they make a judgment about the production lines elsewhere.

Operator (participant)

[Foreign language]

Any other question? The gentleman in the front row.

Sean McLain (Analyst)

Sean McLain for The Wall Street Journal. Two questions. One, on China, you explained a little bit about, if you resume quickly, then it is not a problem. Given the supply that's your [joint ventures have in the] Chinese market, about how long do you think this could go on to have an impact on your business? [How many months of supply do you have before it starts to have an impact?]

Secondly, on the U.S. business, your sedan and truck balance is still fairly 50/50. Is it going to be, or are you contemplating any further changes to your production lineup to increase production of trucks [and SUVs] in the U.S.?

ではまず、質問を日本語に訳させていただきますので、少々お待ちください。

はい。ウォールストリートジャーナルのショーン・マックレイと申します。まず、2つ質問がございます。中国のご説明で再開が問題なく行われればとおっしゃっていましたが、ただ今、ジョイントベンチャーで持っている供給量、またその中国市場において今ある供給量というのは、実際の生産の何か月分ぐらい持つものなのでしょうか。2番目がアメリカ、米国のビジネスに関してです。セダンとトラックのバランスについては、今のところ50/50だとおっしゃっていたと思います。それについては実行されていらっしゃるのか、生産ラインを増強してトラックとSUVの比率を増やすという計画はおありでしょうか。

Seiji Kuraishi (EVP)

[Foreign language]

As for the parts from China, actually, because of the lead time, the supply situation may differ. However, in any case,

それなりの在庫は。

[Foreign language]

there is a certain amount of inventory for each part, and the level differs by the parts and components. We are doing the close investigation and confirmation, so we do not have the, we cannot say when the production stops. However, in any case, we will try to minimize the impact. And in each region, we may change the order of the production so that we can continue the operation of the production line.

Nothing has been decided yet, so it is very difficult for us to explain today. And as for the light truck situation in the U.S., as you know already, in the United States, the ratio of light truck at December is 74%. Each OEM have been launching the new models, and the incentive is at the highest level, so that is why the light truck is increasing. In the case of Honda, the light truck ratio is 60%, but thanks to everyone's effort. Last year, the total market was down. However, as for Honda, both sedan and Civic and Accord were in a very favorable situation, and we have the new Passport and CR-V. And in last year, we were able to exceed the last year's figure. Currently, we do not have any plan to change the lineup drastically.

However, we will see the market trend so that we can provide a product that is enjoyed by the customer. Okay?

ではその斜め後ろの方。

Operator (participant)

[Foreign language]

Next, gentleman behind the table, please. Wait a second. I'll bring you the microphone.

[Foreign language]

In HA OA, speaking about Chinese plant. Two questions. One is, Wuhan plant and its modification plans. Is that perhaps the plans already in place, and what is the kind of the modification? How much modification is still left? You have two plants in Wuhan. Do you have that modification planning two of the plants?

Seiji Kuraishi (EVP)

[Foreign language]

I cannot share with you the details of the modification plan of the plants, but it is about new model-related work, plus the maintenance-related works at the plant. It is not necessarily to be done in all of the plants. It is to be done as per different processes. We have plans which we pursue.

In fact, after the holidays started, we had some works already started. However, it was suspended halfway through, and apparently, the processes of the work is kind of variably completed. Going forward, I'd like to resume the work as soon as possible so that we can accelerate the process going forward. We are at the moment coordinating for that area.

[Foreign language]

I have another question about Guangqi Honda. You said that you're going to resume the production on the 10th of February, but on the 10th, on the day of the start of the resumption of the production operation, do you start production right away?

[Foreign language]

As I said earlier, in Guangqi Honda, we need to confirm the safety of the employees as well as the parts components supplied from the suppliers. First of all, we need to check them.

Therefore, it may be difficult to get into the full-scale production right away, but when we are ready with the employees and everything else, we will be able to start the production in full on day one. However, at the moment, it is difficult to say that.

Operator (participant)

他にご質問はありますか。 [Foreign language]

Any other question? The gentleman at the second row,

[Foreign language]

Hara from Nikkei Newspaper. Two questions. Number one, as for Wuhan factory, you mentioned that you're starting the week of the 17th, but will you go back to the full production from the 17th, or will you be actually trying to increase gradually? You mentioned you are closely investigating, but the inventory differs by model, as you said. In your close investigation, what will be the shortest one? And in the long run, including the stock price, currently, the situation is very difficult.

However, we heard that there is no equity story, so called. But since this fiscal year has not ended, so in FY 2020, I got it. How you can actually, you can show the growth strategy, and can you explain more in detail about your growth strategy?

Seiji Kuraishi (EVP)

[Foreign language]

First of all, so the production in China, as you may know already, even if one component is missing, you cannot produce the car. Unless we confirm, we cannot say anything right now. As for the inventory, usually, we have three days inventory. That is the usual level in average. Depending on the parts, we actually get this by a lot. As for the components, it is usually three days inventory.

[Foreign language]

Was your question about the growth strategy? How we draw the growth strategy in the long-term beyond 2020?

[Foreign language]

For us, we have the 2030 vision, which we've drawn. And in order to achieve this, we are proceeding. Toward this 2030 vision, we have to achieve this vision for sure. So Hachigo, our President, has explained about our strategy, such as the electrification that we are targeting 2030 to actually electrify the vehicle of two-thirds of total product. Toward all the strategies, we would like to proceed further. Thank you.

Operator (participant)

ありがとうございます. [ Foreign language]

Other questions, please. If not, excuse me. Last question.

[Foreign language]

Kubo from Asahi Newspaper. Again, questions about China. In Guangzhou, it is awkward to say, but I thought you kind of resumed the production earlier than expected. Toyota, for instance, they said they're going to postpone the resumption of production another week. In China, the current environment of the businesses, for instance, how do you view that?

According to the suppliers in Guangzhou, it is difficult to get laborers, the people, because quite a few of those laborers come from outside of the province other than Guangzhou. The production operation utilization is rather low because of that. How do you judge the environment outside, and then how did you come to make that judgment?

Seiji Kuraishi (EVP)

[Foreign language]

My understanding might be a little different. On the 10th of February, we are going to resume the operation, as I said earlier. As I said, safety of the employees, suppliers, the situation in terms of the safety and the quality. We need to confirm everything around here before we resume. I would not say that we are going to start a full-scale production on the 10th right away, but we would perhaps confirm along with the resumption to get started.

In Guangqi Honda, they probably or they do get the parts and components from Hubei Province, and we need to confirm the supply chain, first of all, before we start our production.

Operator (participant)

[Foreign language]

Thank you very much. We still have some time. The two gentlemen raising their hands, so we can address your questions.

[Foreign language]

Hiroki from Reuters. I have a question again about China. By listening to your answers as of today, you said that, my impression is that, there is not much impact. However, how do you see the impact to the sales? As of today, including Wuhan, the customers are not walking around or not outside. From the consumer sentiments' point of view, how do you see the impact to the sales of automobile in China? That is number one. The second is, you mentioned about the factory. Just confirmation of what you said. Wuhan's production line,

I think, NHK's person asked about the refurbishment of the production line. Is this the one that was originally planned? It did not plan for the refurbishment because the production is stopped. So was this the one that was planned from before, like in the annual plan?

Seiji Kuraishi (EVP)

[Foreign language]

For the factory first. So during the Chinese New Year, we were planning to refurbish the production line, but we had to hold this, stop this. For example, on 14th, when the employees and parts are all ready, however, we still have to do this refurbishment of the production line. Please understand this. As for the impact of the sales, at the current stage, it is very difficult to answer. I was in China, and I asked the Chinese people, and as for the Hubei Province and other provinces, the situations are totally different.

So in that environment, the sales dealers, some dealers have opened their businesses already. And sales in China is very strong. In January, though the calendar is shorter than before, we have achieved 1.15 million units of sales, and we have a big backlog, excuse me, 150,000 units. Correction. If the situation prolongs, of course, that may cause an impact to the consumer sentiment. However, as of today, we have to closely look at the situation. Looking from the opposite manner, because our sales was in a really favorable situation, we did not have that much inventory. If the production may delay, that may cause the sales. As for the motorcycles and power products, we have a very high level of inventory. Even if the production stops, the sales will not stop.

That is, in this sense, the impact to the Automobile business is much higher.

Operator (participant)

最後ということで。[Foreign language]

Last question, please.

ありがとうございます。オートモーティブ・ニュースのハンスです。[Foreign language]

Thank you very much. Hans from Automotive News. I'd like to ask a question in English.

Question about the United States and the market there. There's a discussion going on in the United States now about California emissions rules. On one side, you have the group that's supporting California emissions, and Honda is a member of that coalition. On the other side, you have, I think, General Motors and Honda, which are supporting kind of the Trump administration's rules. Why is Honda supporting the California emissions rules? Why do you see value in doing that? What's in it for your company? Why take sides in this discussion?

ではまず日本語に直させていただきます。はい。米国の質に関しての質問なんですけれども、米国のマーケットで今いろいろディスカッションが行われてますのは、カリフォルニア州の廃棄規制、エミッション分離のことなわけです。それに関して2つのグループがありまして、1つのグループはカリフォルニアのこの廃棄ガス規制を支援していこうとサポートするグループで、ホンダさんもそのコアリション、いわゆるその連合のメンバーであると言えます。それから逆にGMとホンダさん、また別のところでトランプ政権がやろうとしていること、そちらの考えをサポートするということもあります。その中でですね、このカリフォルニアの廃棄規制をホンダさんがサポートすることの意味合い、その価値は何なのか、どんなメリットがあるのかということをちょっと教えてください。ホンダとしてその訴訟に対して、[Foreign language]

Seiji Kuraishi (EVP)

[Foreign language]

We are not necessarily on either side of the litigating parties or those parties involved in the litigations. One is the consistent long-term rules. That's what we want to have. If there are two rules, that means we need to adapt to that with the two sets of developments. That is not efficient at all. Together with the state of California, of course, we'd like to come up with the integrated, consistent single rule that is good for the environment as well. That is the proposition that we make. To that proposition, the government is, in a way, litigating. And we don't necessarily like to go either side of that. Nevertheless, what we want to see is a single rule, not one side or the other. Thank you.

Operator (participant)

[Foreign language]

This ends the press conference today. Thank you very much.