Honda Motor - Q4 2022

Transcript

Speaker 0

I thank you very much for taking time out of your busy schedule to attend our briefing today. We would now like to start Honda Motor Co., Ltd. Financial Results briefing for Fiscal Year 2022. First of all, allow me to introduce the attendees today. Director, Executive Vice President, and Representative Executive Officer, Mr. Kohei Takeuchi. Thank you. Senior Managing Executive Officer, Mr. Yasuhide Mizuno. Thank you. Operating Executive and Head of Accounting and Finance Supervisory Unit, Mr. Eiji Fujimura. Thank you. First, Mr. Takeuchi will present the outline of our financial results for fiscal year 2022 and forecast for ending 2023, followed by Mr. Fujimura's explanation on details of our results and forecast. Over to you, Mr. Takeuchi.

Speaker 1

First of all, we would like to express our deepest apologies for the inconvenience caused to our customers looking forward to Honda products due to the current vehicle production delay. We will do our utmost to deliver vehicles to our customers as soon as possible. I'll now begin the summary of our financial results for FY 2022 and our forecast for FY 2023. First of all, regarding the FY 2022 results. Although demand stayed firm due to the semiconductor supply shortage along with the repeated spread of COVID-19, production faced severe challenges. In addition, there was significant cost increase due to raw material price hike, yet we increased both sales and profits year-on-year through efforts to improve profitability on all fronts. Regarding FY 2023 outlook, we expect semiconductor supply shortage and lockdown in China to continue, making the outlook uncertain, and the severe situation of procurement and production will continue.

Honda will continue its efforts to improve profitability. We are expecting some cost increase in logistics as well as some of the components, but we will continue our efforts to improve profitability on all fronts. Regarding semiconductors, parts in issue have been identified, and we are promoting development of alternative equivalent products and dual sourcing to ensure stable supply. Also, it is extremely difficult to offset the cost increase continuing from last year in a short period of time. We will consider recovery measures, taking into consideration our suppliers and customers. We will continue to make company-wide efforts to improve profitability, so as to achieve our ROS 7% target when supply returns to normal. Next, our main markets. The Japanese market was down year-on-year, mainly due to semiconductor supply shortages.

Honda's unit sales were also down from the previous year, but recovering faster than the market with strong sales of Vezel and other factors. N-BOX recorded number one new sale, car sales, including registered vehicles in FY 2022. Although market demand is expected to remain firm in FY 2023, the semiconductor supply shortage and resurgence of the COVID-19 are expected to continue to have an impact. Honda aims to increase unit sales by launching new models such as the Step WGN. Next, the U.S. market. Although demand recovered by economic stimulus measures, unit sales were down from the previous year due to the impact of semiconductor supply shortages and other factors. Honda maintained the same unit sales as the previous year due to strong sales of light truck models.

Sales for the three months of the fourth quarter were lower than the same period of the previous year, mainly due to the impact of semiconductor supply shortages. In FY 2023, the overall market is expected to remain affected by semiconductor shortages, while demand is forecast to remain strong. Honda aims to increase sales volume by introducing new models such as HR-V and CR-V. The Chinese market demand recovery attributable in part to the government's economic stimulus package. Sales volume despite this, sales volume declined from the previous year due to semiconductor shortages and some restrictions on economic activities caused by the resurgence of COVID-19. Honda also saw a year-on-year decline despite strong sales of XR-V and other models and the effect of new model launches.

The calendar year 2022, though demand is expected to remain firm, semiconductor supply shortages and the resurgence of new coronavirus infection is expected to continue. Regarding Honda, in April, we launched the e:NS1, the first Honda brand electric vehicle in China from Dongfeng Honda. In addition, GAC Honda will start accepting reservations for e:NP1 in May and will continue to further expand its lineup, our lineup of electrified vehicles. Moving on to motorcycle business. Market demand recovered in many countries despite the impact of COVID-19 infection.

Honda also saw year-on-year growth in many countries, but in the three months of the fourth quarter, our sales were down in some countries due to the impact of semiconductor supply shortages and other factors. As for FY 2023, while market demand is recovering, recovery in India is expected to take time. Honda is expected to outperform the previous year in many regions, despite the impact of semiconductor supply shortages. This slide summarizes our FY 2022 consolidated financial results. Despite the COVID-19 resurge and decrease in automobile unit sales due to semiconductor supply shortages and the impact of soaring raw material prices, operating profit increased by JPY 211 billion year-on-year to JPY 871.2 billion due to cost reduction, the effect of incentive control, and the favorable currency effects.

Profit attributable to owners of the parent was up JPY 49.6 billion-JPY 707 billion. The table below shows unit sales and profit and loss.

Speaker 0

Next, I will cover the consolidated financial forecast for FY 2023. While we have positive factors such as unit sales growth and currency effect, we estimate that further cost increases and other challenges in our business environment will continue. Honda will continue its all-around initiatives to enhance its profitability, and we plan for operating profit of JPY 810.1 billion. The net profit for the year attributable to the owner of the parent with increased investment profit due to equity method is JPY 710.0 billion.

Even under the demanding business environment, Honda is committed to ensuring preparedness for the future and will accelerate its shift to electromotive products and initiatives toward new growth. Unit sales and income statements are as shown. Next, about dividend. The full-year dividend for the fiscal year ended March 2022 is increased from the previously published forecast by JPY 10, so JPY 120 per share. The end of term dividend is JPY 65 per share. Forecast for the full-year dividend for the FY 2023 is JPY 120 per share, the same as for FY 2022. Next, Mr. Eiji Fujimura, Operating Executive and Head of Accounting and Finance, will explain the details of financial results and forecast. Allow me to start the explanation.

To begin with, Honda Group sales volume to FY 2022, in motorcycle operations, volume grew year-on-year, particularly in Asia, and it came to 17 million+ 27,000 units. In automobiles, mainly due to decline in China and North America, it came to 4 million and 74,000 units. In Life Creation segment, thanks mainly to growth in Europe and North America, the sales units came to 6.2 million units. Next, I would like to explain the factor analysis year-on-year comparison of pre-tax profit cumulative to the fourth quarter. Pre-tax profit was JPY 1,070.1 billion, which was higher by JPY 56.1 billion on the year.

Operating profit was JPY 872.1 billion, which was higher by JPY 211.0 billion on the year. To give you a breakdown of the substantive increase of JPY 42.1 billion, net of the currency effect, impact from sales, although there was decline in automotive sales volume, curbing incentive led to income increase of JPY 77.7 billion. Selling price and cost factors. While we strove to reduce cost and raise prices, this factor led to a decline in profit by JPY 56.9 billion due to material price hike and other impact. Expenses. Expenses including quality-related expenditures occurred and gave us positive impact of JPY 56.0 billion. Next, to explain the sales revenues and operating profit per business segment.

For motorcycles, operating profit was JPY 311.4 billion. Automotive segment profit was JPY 236.2 billion. Operating profit for financial services was JPY 333.0 billion. The sum of the automobile business' operating profit and that associated with automobile sales included in financial services is added together, estimated to be JPY 557.2 billion. Next, for Life Creation and other businesses, operating loss came to JPY 9.4 billion. Of this amount, the operating loss from aircraft and aircraft engines was JPY 33.7 billion. Next, I will explain the cash flow situation. For the free cash flow from non-financial services for FY 2022 came to JPY 678.1 billion.

The end of term balance of net cash came to JPY 2,481.2 billion. Now I'd like to talk about the consolidated financial forecast for FY 2023. Firstly, speaking of Honda Group's unit sales, in motorcycle business, based on the sales expansion, mainly in Asia, we have set our forecast at 18,560,000 units, up 1,533,000 units. In automobile business, while the impact from semiconductor shortage lingers, we expect favorable effect from new model launches, and we set our forecast at 4.2 million units, up 126,000 units on the year.

For power products, we are forecasting 5,665,000 units, reflecting decline mainly in North America. Next, I'd like to explain the waterfall chart of pre-tax profit compared to the actual results from last year. Pre-tax profit is forecast at JPY 1,035 billion, down JPY 35.1 billion on the year. Operating profit is forecast at JPY 810.0 billion, down JPY 61.2 billion on the year. I will explain the substantive difference of JPY 147.2 billion, net of the currency effect. First, impact from sales was +JPY 169.8 billion due to recovery in motorcycle and automobile unit sales.

Selling price and cost impact is negative JPY 86.0 billion, hit by material price and logistic cost increases, though the efforts to reduce cost and raise prices will continue. For expenses impact, it is expected to be negative JPY 148.0 billion due to increase of quality-related expenses and selling expenses rise. Lastly, the forecast for capital expenditure, depreciation, and amortization on the expenditures for FY 2023 is as shown. This completes my explanation. I thank you very much for your attention.

Speaker 1

Thank you for listening. Now we would like to proceed to Q&A. We have informed members of the media to connect to Zoom. In the interest of time, we ask you to limit your questions to two per person. We seek for your cooperation.

Now, those of you who have questions, please press the Raise Hand button, please. We'll begin. The Asahi Shimbun, Mr. Kamiyama, please. Kamiyama from The Asahi Shimbun. Can you hear me? Yes. Please. Thank you. The first question. FY 2022, how do you see the results? Well, it seems that the cheaper, weaker yen and also the semiconductor supply shortage has had an impact. Do you see that the exchange rate was favorable to you, and it was due to these outside factors? I believe that you have said JPY 120 as your forecast as exchange rate. It currently is JPY 130.

If the yen depreciation were to continue, do you think that this will be a positive for your business? Can you answer these two questions? Well, this is my first question, rather. The second, about FY 2023 operating profit. You say that you're expecting a negative decline. Of course, the raw material prices are increasing on the one hand, but that included semiconductor shortage. Because there is that impact continuing, you are not going to be able to produce as many cars as you want. That is the reason why you believe that the operating profit will go down. These are my two questions.

Mr. Kamiyama, first of all, thank you very much for your question.

About FY 2022 and how we see the results, well, as you said, FY 2022, what happened was that, semiconductor components supply stalled, and we inconvenienced our customers. Our production volume unit sales was not as high as we expected, so this is the result that we see. Well, we're faced with the challenge at that, in addition to that, the raw material prices for last year, precious metal prices skyrocketed. It accounts for some JPY 270 billion of the negative increasing our cost for our profit. As you mentioned, there is the effect of the weaker yen.

In addition to that, we had less unit sales, but still our products were strong, and we were able to control our incentives, and the prices were slightly increased. I think that the measures that we have taken in all directions to reduce costs and also enhance our foundation for enhancing profitability and the global model, trim model number reduction and also warranty costs reduction, these efforts all combined, I think, were positives for us. Though there were this shortage of semiconductor supply, and we were not able to deliver all the products that we wanted to to our customers, and yet we were able to see this increase in profit. Now what about the exchange rate?

I believe that you're asking about, specifically about the exchange rate, so let me talk about that. Well, our thinking to begin with is to produce where the demand exists. We have been producing in such a way. Because of that, for example, U.S. dollar, supposing that there is a change in one yen against the dollar, it has an impact of about JPY 12 billion in terms of our operating profit throughout the year. But we are producing where the demand exists. The finished car and components and royalty impact is about half of that, and the remaining half would be it U.S. or others, we are generating profit overseas.

If it's calculated into Japanese yen, as a calculation, difference, we have this gain of some JPY 12 billion. Given all these circumstances, if we have a weaker yen, simply put, we'll see that the profit has increased. The exchange rate, the fluctuation of the exchange rate. Well, for example, there's a difference in the interest rate between U.S. and Japan. Also recently, we see, for example, the Russian-Ukrainian issue, the geopolitical issues, and this has an impact on the exchange rate as well. This has an impact on the economy. It's not something that we can just simply welcome. Furthermore, the response to exchange rate changes, it takes time to transfer production.

In a short period of time, if fluctuations were to occur, then as a company, it will be difficult for us to cope with that. Long run, we want to see a stable exchange rate. This is our desire. That is our thinking toward the exchange rate. I'm sorry, I've talked too much. About FY 2023, the profit outlook, yes. This fiscal year, we are anticipating 4.2 million units from 4.07 million. How do we see this 4.2 million? Yes, we think that we had to set it at 4.2 million because of the shortage of semiconductor supply.

Had it been that we had a good balance between demand and supply for semiconductors, I think that we still have room to increase our production and sales. In terms of operating profit, it's a negative from JPY 870 billion to JPY 810 billion. The raw material cost, and plus this fiscal year, the shipping cost. This is a negative for us. The freight and costs are increasing, and including the raw material cost, I think it comes to about an increase of JPY 300 billion, including inflation. Over the two years, we have seen a cost increase of JPY 300 billion or so.

Well, through the cost reduction first, and also the incentive control, et cetera, we have tried to cope with this and somehow overcome. The fact that we have this for two years in a row, it is very challenging for us. Therefore, I think it's not the situation that we are wanting to see. Of course, going forward, we have to consult our suppliers to address this challenge, so that we can collaborate and try to reduce the cost, raw material cost, as much as possible. Currently, we have not been able to 100% offset this, and that is the reason why we are saying this minus operating profit of JPY 810 billion. That is all. Thank you.

Speaker 0

Thank you very much, Mr. Kamiyama. We'd like to take the next question. From Nikkei, Mr. Tanabe.

Ms. Tanabe. This is Tanabe from Nikkei. Yes, I can. We can hear you. Thank you. Looking at the investment for this year, yeah, capital expenditure, if we look at the, you have a higher one, and then also you have a higher R&D cost as well. For electromotive products, you announced some investment plans as well. But of this investment, I would like to know how much, like a percentage, if you cannot give me a number, but if you can just give me a general idea, how much of that is going to electromotive? That's my first question. The second one, concerning the impact of lockdown in Shanghai. Of course, looking at the operation in Japan, I think the margin of reduction in production is getting bigger.

If you have any issues with the supply chain, and also prospects for the future. From when do you think you will see a recovery? If you could let me know those things, that would be helpful. Thank you.

Okay, thank you, Ms. Tanabe. First, about the investment for the capital expenditure for electrification. This year, we have JPY 500 billion continuing on from last year. This is quite a bit, quite a big number compared to last year. This year, in North America, we will launch new models, CR-V, Pilot, and Accord. They will go through model changes. For that, we have a lot of capital expenditure, so that is why you see a bigger number.

If you ask me if we can split it between electromotive and others. Well, if you say electromotive including hybrid, investment in hybrid, it's quite a big amount included in there. Sorry, we cannot really separate them out. Basically, the capital expenditure, this will be all the investment for all the models that we'll be starting up this fiscal year. Concerning Shanghai lockdown. This is Mizuno. Thank you very much for your question. For the lockdown in Shanghai, compared to earlier, things are getting slightly better, so the suppliers' operation and logistics, I would say 60%-80% back to normal. However, we cannot really go into full swing all of a sudden. Right now, Honda, the production line, there's only one line, domestic, that's stopped.

For the rest of it, we are managing to operate all our production lines. How we look at the recovery, probably until the end of May, this current situation will continue. Then from June, we will probably bring things back to normal recovery trend, including parts for which we have stocks of parts. Thank you very much, Mr. Tanabe.

Speaker 1

Next question, please. Jiji Press, Hirano. Mr. Hirano. Hirano from Jiji Press. Please.

For the FY 2022, the results. Automobile, the profit margin I think has improved compared to the previous year. Your company, you have been saying that the profit margin is a challenge for the automobiles. How do you see this? The second, about the forecast and the factors for the operating profit. You talked about expenses and warranty. It was minus. Can you elaborate on what is meant by that?

Yes. First, about the automotive business and the recovery and the profitability and how we see this, Mizuno will answer that.

Well, first, we are 4.0 million units. Compared to the past production, it's about 80%. At 80% we can generate profit. I think that profitability has improved thanks to improvements in the existing business. In addition to that, as Takeuchi just mentioned, we have narrowed down the number of model types. I think that these are proving to be effective. However, at this time, we're seeing the raw material cost increase and, therefore, we have to increase the price to a certain extent, and also, we have to reduce the cost. We have seen improvements, but next fiscal year, that might not be enough to offset.

Therefore, against our production capability, we are saying that 80% utilization, we can generate profit. We believe that this is an improvement. About the warranty cost. Well, our warranty cost. When we say warranty cost, there are two different types that are included here. First, generally speaking, our customers, we receive complaints and we have to respond to that, and that is one warranty expense. Also, we have to work with authorities of different countries to recall or campaign, as we call it. There are these special claims that we have to cope with. These are the two categories. These are costs, expenses that occur to products that we have sold in the past. This, it's difficult to predict.

Normally, looking at the past trends, it's about 1.1% of sales revenue. This is compared to the previous fiscal year. There weren't that many such cases. It was about 0.6%. As for our forecast for FY 2023, we have adopted a number of 1%. As you see probably on the screen, this, at the bottom, we have this warranty expense, and it's -JPY 75 billion. That is behind that number. Thank you.

Speaker 0

Thank you very much, Mr. Hirano. Next question from NHK, Mr. Taruno.

This is Taruno from NHK. I hope you can hear me.

Yes, we can hear you.

One question. I have one question. For this year, the forecast you are expecting increased earnings. Other manufacturers, because of the raw material price hike, many are forecasting decline, reduced earnings. What's the reason why you are forecasting the net income actually increase? What's the reason? Like, do you think the semiconductor shortage will be resolved? Okay. The operating profit is still negative compared to previous year, but net profit is plus. This comes from the earnings in the equity method. What we've seen is that we have our operation in China, the joint venture.

For that, for the profit and loss in China, we have a temporary plus additional income. If we exclude that, it's been flat. It's flat on the year. For China, in the previous year, we have this impairment impact negative for the subsidiaries, so that would be plus this year because that was resolved after last year. Now we have about almost equivalent number of prospects of after-tax profit. Yes. Because of the equity method earnings, the temporary ones and negative factors are gone. That's what's happened. Okay, thank you. Mr. Taruno.

Speaker 1

The next question, please. Toyo Keizai. Mr. Yokoyama, please.

Toyo Keizai, Yokoyama speaking. Can you hear me?

Yes, please.

Thank you. I have two questions again. First, page three of your PowerPoint. Your suppliers and, well, considering the suppliers and customers you will consider, but I think that this talks about the supply chain and also the increase in price of U.S. models that I probably think is included. Can you elaborate on this comment on page three? The second question about production and the semiconductor shortage, the suppliers. They would not like to see a sudden change upward or downward suddenly. In order to improve the accuracy of your forecast, what are the specific measures that you are taking in order not to inconvenience the suppliers with a sudden increase or decrease in production?

First about our consideration towards our suppliers and customers, let me explain about that comment. Well, so, we have had the impact of from last fiscal year, the JPY 270 billion cost increase, and we have tried to reduce our cost and also leverage our the strength of our products and to control our incentive and increase our price. By doing so, that we have tried to offset the increase in raw material costs. For this fiscal year, as explained, we believe that the raw material price increase and also the logistics cost is increasing and also personnel cost. Therefore, we think that it will be a cost increase of JPY 290 billion.

For two straight years, we cannot have our suppliers only try to bear this, and because our suppliers are also faced with this cost increase. Therefore, we have to jointly work and collaborate to reduce cost. We do not think that a significant cost down, as we've seen in the past, it could take place, and that is what is meant here. About the price increase of our models in the United States, we will have a full model change, a very powerful product, and we want to provide our customers with good products, which will be well-received. As for the pricing, this is something that we have to decide, but including that possibility, we would like to run our business.

With this in mind, we have tried to use this expression here. About the shortage of semiconductors of our suppliers. Yes, Mizuno would like to explain about the shortage of the semiconductors and the suppliers not wanting to see a sudden increase or decrease in production. Well, yes, I think that we've been able to identify what exists and what not. For those that can be easily procured, we try to hold inventory to a certain extent and consider how to make use of this so as to avoid fluctuation in production volume. On the part of the suppliers, the semiconductor suppliers, we want to enter into a long-term contract so that we can ensure stable supply, and not fluctuating, but stable supply of semiconductors.

Within our company, we have changed the specification of semiconductors and also done dual sourcing, so as to as it says we want to avoid. Because we have in the past inconvenienced our suppliers with sudden production reduction, we want to avoid such things going forward.

Speaker 0

Thank you very much, Mr. Yokoyama. The next question is from Reuters. Shiraki, Mr. Shiraki San, please.

This is Shiraki. I hope you can hear me. Yes. I have two questions as well. The first one is, Mr. Kohei Takeuchi responded to this already, in response to Asahi Shimbun's question. About the impact of the raw material prices cost increase of JPY 300 billion. I just want to understand this properly. Well, you talked about transportation costs by ship. I just want to know, so maybe this amount includes not only the raw material prices, but also transportation and labor cost increases? Or are you referring purely on the raw material prices? And if those are not included, please let me know per item. If you have any item of impact, if you could let me know.

That's one thing. My second question is the earlier reporter asked about this, but at the very beginning, you talked about these, you said, "Consider the customers and the suppliers." So as actions to your suppliers, do you have any plans to Honda taking on the cost increase portion to a certain extent or like, or make payments to suppliers in early stage or something like that? Because this is an emergency. If you are doing something to bear some of the cost for, on behalf of the suppliers, please let me know if you're taking actions like those. Thank you very much, Ms. Shiraki.

Yes, I talk about JPY 290 billion or JPY 300 billion yen, but this, the amount that's close to JPY 300 billion yen, this is not only the raw material cost increase. This includes all the surging of the transportation cost and the labor cost, and it's very difficult to hire people. All of those are included, approximately JPY 300 billion yen. Sorry, but no breakdown. Concerning the our action towards suppliers, depending on the suppliers, of course, what we need to do is different from one supplier to another. Does Honda take on all the cost for all the suppliers? No. I cannot give you a general answer about what we do for them.

However, we are trying to create together with the cost the suppliers, and then try to decide like the kilograms, and then we try to reduce the materials required or try to replace certain material with other materials. We continue this joint efforts together. We want to make it a win-win situation. Well, these cost reduction efforts will be continued while ensuring win-win situation for both parties. This is something we've been doing already, but we will continue to do so. Thank you, Mr. Shiraki.

Speaker 1

Next question. Nikkan Kogyo Shimbun, Ms. Egami. Can you hear us, Ms. Egami? Yes. Can you hear me now? Yes. Thank you. I have one question about the green business. Well, the semiconductor shortage, compared to cars, I believe that I'm sorry, a motorcycle business is less impacted, I think.

If you look at the current sales situation, I think that there is an impact on a motorcycle business. I'm sorry, this is a very vague question. In the last fiscal year, from about when did you feel that the semiconductor shortage had the impact on your motorcycle business? This fiscal year, again, just like automobiles, you do think that a motorcycle business will be impacted by the shortage of semiconductors? Ms. Egami, thank you for the question about the motorcycle business. The shortage of semiconductors, the impact of the shortage, yes, we do see an impact on our motorcycle business. As you have just mentioned, the impact is smaller than automobile business. There is that impact on our motorcycle business.

Well, last fiscal year to this fiscal year and this fiscal year to next fiscal year, in terms of the unit sales, rather than saying semiconductors, I think that in India, we have the largest number of units, and here. Though they have recovered from COVID-19, I think there is a slowdown of the economy. Because of that, we have some stock there. So, to give you more details. Other than that, Vietnam and Thailand, which is proving to be very profitable for us, there is that positive impact that is behind the unit sales of our motorcycles. That is all. Thank you.

Speaker 0

Thank you very much, Ms. Egami.

Next question, will be the last one that we would like to take. The next question is from, Nikkei, Ms. Masuda. This is Masuda from Nikkei. I have one question. You said that you cannot absorb all the cost, even with your efforts, even at the price hikes. Going forward, for profitability improvement of the automobile business, do you have any actions to medium- to long-term, how you might want to absorb and cover some of the costs? If you have any additional actions, please let me know. Okay. Okay, for the automobile business profitability improvement, we were still halfway last year. As I mentioned, because platform layout and the commonized parts layout, those. This is something we started this series last year.

Now with this, efforts to commonize will continue going forward. The commonization of parts and the Honda Architecture adoption, those will make further progress. Also the number of variations based on a global model, we will reduce that. Then, the U.K. factory and Sayama plant and Turkey plant, we have the closure in line. Also we have been doing some organizational change for Monozukuri efforts, we will be reaping the benefits from those drives. With those, we would like to, I mean, just remove all the impact from the cost increases.

We would like to come up with new ideas and then also reinforce the activities we have been doing so that we can start receiving the benefits early. Okay. Thank you, Ms. Masuda. With this, we'd like to close the financial results briefing. Then the material will be listed on our website. Once again, thank you very much for viewing this program. Once again, thank you very much.