Honda Motor - Q4 2023

Transcript

Operator (participant)

I thank you very much for taking time out of your busy schedule to attend our press conference. We would now like to start Honda Motor Company's press conference for financial results for fiscal year to March 2023. Though COVID-19's category has been changed to Class 5, we have decided to continue to hold this briefing online as well. First of all, allow me to introduce the attendees today. We have Mr. Shinji Aoyama, Director, Executive Vice President, and Representative Executive Officer, Chief Operating Officer.

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

This is Aoyama. Good to see you.

Operator (participant)

We also have Mr. Eiji Fujimura, Executive Officer, Chief Financial Officer.

Eiji Fujimura (Executive Officer and CFO)

This is Fujimura. Good to see you, everybody.

Operator (participant)

Now, Mr. Aoyama will first present an overview of the financial results of financial year to March 2023 and forecast for FY 2024. Mr. Fujimura will present the details. Over to you, Mr. Aoyama.

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

Good afternoon, everyone. Aoyama, I'm the Executive Vice President, starting April. Thank you very much for your participation today despite your busy schedule. Let me explain the financial results of the FY 2023 and a summary of FY 2024 forecast. Starting with the highlight of the financial results, I will explain the progress of the profitability structures and its reinforcement. According to the FY 2023 results, we sold 3.69 million cars, those the previous expectations was set at 3.85 million. Operating profit was JPY 839.3 billion, whereas the previous forecast was JPY 870 billion. The efforts on fixed cost reduction, pricing that reflects improved quality values of the product, and so on, helped us strengthen our operational structures.

As a result, we maintained the operating profit margin above 5%, which is the level of the previous forecast. As for the FY 2024 forecast, we will further improve the operational structures that we have built up until now, we will strengthen supply chains, such as the stable procurement of the semiconductors. We'll improve operating ratio of the factories. We will plan to sell 4.35 million cars, with expected operating profit of JPY 1 trillion, which will be the best profit ever. Cash generated will be invested to provide the resources for electrification going forward and will stay engaged in shareholder return programs. In specific, in FY 2024, we plan to increase the dividends to JPY 150 per share, which will be the highest ever.

In addition, in the board of directors meeting today, we have made a decision for share buybacks for the amount of JPY 200 billion. Toward FY 2026, we will continue to reinforce our operational structures altogether in unity, aiming to achieve the operating profit margin above 7%. Let me continue to explain the automobile businesses situations in main markets. In FY 2023, there had been a major impact of a COVID-19 pandemic in China and the supply shortages of semiconductors until after quarter, due to which, the unit sales dropped below the year before. During the three months of Q4, supply situations of the semiconductors gradually improved, thus the unit sales resulted better year-over-year in the United States.

In China, the tax production measures ended, which caused a negative impact on the unit sales, thus the results dropped significantly lower year-on-year. In terms of the unit sales of FY 2024, although the outlook in China is more than clear, in the global market, we can enjoy the favorable model cycles that continues from last year, and we'll aim to expand our unit sales based on the resumption of the supplies in the market, thanks to the improved operating ratio of the forecast. Regarding our actions to for electrification, we started our discussions with the POSCO for comprehensive partnership in order for achieving carbon neutrality.

In the Shanghai Motor Show in China, we exhibited the world premiere of the second set of the e:N Series called e:NP2 Prototype and e:NS2 Prototype, as well as the third set of the concept model, e:N SUV study. Moving on to the motorcycle business situations. For the FY 2023, the unit sales increased year-on-year in the main markets. During three months of the Q4, the unit sales dropped year-on-year in India and Vietnam. In Indonesia, although we had the supply shortages of the semiconductors, we replaced the model offerings and utilized the alternative parts, which then helped a significant increase of our unit sales. The total resulted in better than the last year-on-year.

As for the unit sales of FY 2024, we plan to achieve higher results year-on-year based on increasing unit sales in India and Indonesia. Next, I look at the overview of the consolidated financial results of FY 2023. In addition to the reduction in unit sales and the production of the mobiles due to the impact by semiconductor shortages and COVID-19 pandemic in China, we had incremental production costs caused by the soaring material prices and inflationary impact. Nevertheless, thanks to the pricing scheme that reflects commercial values of the products, increasing unit sales of motorcycles and the foreign currency exchange impact, we achieved the operating profit of JPY 839.3 billion. The profit for the year attributable to the owner of the parent was JPY 695.2 billion.

Status of the unit sales, BL, are described here. With regard to the forecast of our consolidated performance of FY 2024, all the incremental production costs and the inflationary impact, yen appreciation impact, and et cetera may exist. We have been working on the pricing scheme reflecting commercial values of the products and further strengthening of the operational structures, plus the increase of the production and unit sales of our mobiles. With altogether, we plan to hit JPY 1 trillion operating profit. That will be the highest ever. The profit for the year attributable to the owner of the parent is planned JPY 800 billion. Assumed exchange rate is JPY 125 for a dollar for the full year. You can see the unit sales and the PL plans on the slide.

Let me explain about the dividend. Annual dividend for the FY 2023 is JPY 120 per share, and the year-end dividend is JPY 60 per share. As for the expected annual dividend for FY 2024, we will add JPY 30 to the amount of the FY 2023, thus it will be JPY 150 per share, the highest dividend as so far. In the board of directors meeting today, we made a decision of share buybacks. For the purpose of improving the capital efficiency of executing a flexible capital policy and so on, we will buy back our shares up to the total amount of JPY 200 billion of acquisition values.

Operator (participant)

Next, Mr. Fujimura, CFO, will explain the details of the financial results and forecast.

Eiji Fujimura (Executive Officer and CFO)

Allow me to start the explanation. To begin with Honda Group's unit sales for FY 2023, in motorcycle operations, unit sales grew year-on-year, particularly in Asia, to 18.757 million units. Automobile sales came to 3.687 million units, mainly due to decline in China and in North America. In power products operations, unit sales came to 5.645 million units, mainly due to decline in North America. Next, I'd like to explain the factor analysis of the pre-tax profit for the four quarters compared to the previous fiscal year. Pre-tax profit was JPY 938.1 billion, which was lower by JPY 131.9 billion and compared to the previous fiscal year. Operating profit was 838.

JPY 9.3 billion, which is lower by JPY 31.8 billion on the year. To give you a factor analysis of the operating profit, impact from sales, though there was an increase in motorcycle unit sales, declines in automobile sales volume and lower profit and financial operations led to income decline of JPY 109.1 billion. Selling price and cost factors, while there was effect from pricing in line with the product value due to surging material prices as well as effect from inflation, it resulted in a decline in profit by JPY 27.4 billion. Expenses, due to increase in quality-related expenses and selling expenditures, this gave us a negative impact of JPY 132.5 billion.

R&D expenses led to profit decline of JPY 58.5 billion, and currency effect resulted in positive impact of JPY 295.9 billion. To explain the sales revenues in operating profit by business segment. For motorcycles, operating profit was JPY 488.7 billion, the record high. Automobiles operating profit was JPY 42.0 billion. Operating profit from financial services was JPY 285.8 billion. For power products business and other businesses, operating profit came to JPY 22.8 billion. I will explain the cash flow. Free cash flow of operating entities for FY 2023 came to JPY 685.8 billion, and the end of term balance of net cash came to JPY 2,750.8 billion.

I'd like to talk about the consolidated financial forecast for FY 2024. Speaking of Honda Group's unit sales compared to the previous fiscal year, in motorcycle business, considering the growth mainly in Asia, forecast is for 19,180,000 units. In automobiles, we are putting it at 4.35 million units considering the growth mainly in North America. In power products, 4.75 million units in view of the declines in North America. I'd like to explain the factor analysis of pre-tax profit compared to the actual results from last year. Pre-tax profit is forecasted JPY 1,185 billion, up JPY 246.8 billion from the previous year's results.

Operating profit is forecast at JPY 1 trillion, up JPY 160.6 billion from last year's results. To explain the factors behind operating income, impact from sales is forecast at positive JPY 440.6 billion due to growth in unit sales of automobiles and motorcycles. Selling price and cost impact is positive JPY 265.0 billion due to effect from our ongoing pricing in line with product value, though there has been some impact from inflation as well. Expenses impact is expected to be negative JPY 217.0 billion due to increases in selling expenses. R&D expense impact is negative JPY 60.0 billion. The currency effect is forecast at negative of JPY 268.0 billion.

Our forecast for capital expenditure, depreciation and amortization, and R&D expenditures for FY 2024 are as shown. This completes my explanation. Thank you very much for your attention.

Operator (participant)

Thank you very much for your attention. Now we'd like to proceed to the Q&A session. We would like to take questions through Zoom, which you have been informed in advance. Due to limited time, we would like to limit it to up to two questions per person. We ask for your cooperation. Now, if you have any questions, please use the Raise Your Hand button to let us know. To start with, first question from NHK. Mr. Toma, please go ahead with your question.

Toma from NHK. Can you hear me?

Yes, we can. Thank you. For your question please.

I have two questions. One is the Chinese businesses that is dropping quite a bit. That is my impression. For that, what is your analysis and the cause for that? For the recovery plans for going forward, what is the expectations this year in terms of the unit volumes and your plans for the production for the FY 2024 forecast? The second question is about the semiconductor. The supply is on the improvement now gradually, but this time or this year, including the semiconductor supply areas, I assume that you're going to recover the production volume, including semiconductor supply recovery. When do you expect to have that picked up? When do you think it will be normalized?

Thank you very much, Mr. Toma, for your question. Aoyama is going to answer your question. For the first question, in the Q4, the business is getting down in China in the Q4 and the forecast going forward. In our January March period, the Q4, actually, up until the Q3 of last year, the purchase tax, that is the acquisition tax, of purchasing a car, that particular measures ended in December last year. Together with that, we had a negative impact, in response to that measure being ended. That is the market situation there. Also together along with the environmental regulations, in order to make the sales out from the inventories completely, there are some discounts being done.

e end of the time period of the selling out plans of the products in stock, the consumers expected more discount. Then people waited to buy cars for some time. Because of that, the demand dropped. Such reactional situation will improve now. Also last year we had a lockdown, COVID-19, which also had a negative impact on the businesses. For the FY 2024 Honda going forward, we will have the full model change, new model to introduce in the market from Honda, which we expect 1.4 million cars to sell according to the plans in China. That is what we think as of now

NEVs and new energy vehicles portions will increase going forward gradually. As of now, we expect 1/3 of the demands will be of a new energy vehicle, we suppose. We are selling our ICE and HEV vehicles as a main product to sell as of yet. We need to make a good utilization of the intensives and so forth, so that we can continue to sell and keep the presence in China. In terms of the semiconductor, toward the end of the fiscal year or in the second half of the year specifically, the supplies of the semiconductors will improve finally.

We still have the so 404.35 million unit sales are forecast. It is not going to be the abrupt recovery, but it is going to be a gradual recovery from the mid of the year to the second half of the year. Full recovery is expected to be found in the FY 2025. Thank you very much.

Thank you very much, Mr. Toma. We'd like to proceed to the next question. Mr. Kondo from Asahi Newspaper, please.

Kōtarō Kondo (Journalist and Editorial Writer)

My name is Kondo from Asahi Shimbun Newspaper. Good to see you. Okay, thank you. I would also like to ask one question about Chinese market and a different question for the second one. Right now, Mr. Aoyama explained the situation that the NEV, NEVs percentages are getting higher, and also the ICE vehicles are shrinking down, and then there are some pricing competition. That for the time being, probably the feasibility, economics of the business in China, I would like to know how you view the Chinese market in terms of market, well, feasibility.

My second question is, you are going for the selling price hikes that should contribute to the profit of JPY 1 trillion for the first time. How you are making those price hikes for different regions? I believe for Japan, Japanese market, you announced a price hike for the N-BOX series, so please let us know what your price hike strategies are.

Operator (participant)

Thank you very much, Mr. Kondo, for your questions. First, about the profitability for Chinese business. NEV is really coming up, Honda has announced this e:N Series. That's something we will continue to strengthen. The second wave will come on the first of 2024, and the SUV called xù that will come at the end of 2024.

That's what we talked about. In terms of FY 2024, I believe as NEV expands, we will not really have any NEV products available for the time being. We would like to continue to maintain our presence, we might consider using the incentive and then try to maintain 1.4 million unit sales. If you think about FY 2024, yes, in terms of business feasibility, it will deteriorate. It will be challenging for us. The other question about the price hikes. For North America, for Asia, also Europe as well, for those markets or regions, we are seeing lot of increasing on the manufacturing and procurement costs. We have been reflecting those cost hikes increases to the price hikes.

Mr. Fujimura will give you more detailed specific numbers. When it comes to the Japanese domestic market, well, yes, we did raise our prices. However, when it comes to prices, we believe we still do have pricing in line with our product value. We want to go through another review. I cannot give you any specific numbers right now, but we will continue to consider further price hikes. Mr. Fujimura, if you have anything to add? Okay, about price hikes. Of course, what we need to do first is to try to reduce our costs, trying to absorb our cost hikes, price hikes. However, with the raw material procurement costs and with inflation, our cost has been going up a lot.

Over two years, we have, like, a JPY 600 billion cost increases over the past two years. When it comes to price hikes or when it comes to our pricing strategy, we have been able to recover, like, about JPY 540 billion, so about 90% of the cost increases. We say 90%, but, in Asian markets, we have been able to recover almost 100% in Asia in motorcycle market. Speaking of automobile market, still we have not been able to recover all the cost increases. Of course, in North America, there has been a lot of cost increase, which contributes a lot. For Japan, because we have been trying to gain understanding from our customers and improve our services and products values, and that's what we have been doing our best at.

In this fiscal year, now the cost, if you can look at this graph here, we, I believe the number was shown, this plus benefits from cost increases when we show the chart that drives up to JPY 1 trillion. We have been addressing the issue of cost increase towards our suppliers, so that issue still exists. However, we have been seeing good benefits, at least as far as raw materials go. Also, we are doing better at our pricing strategy so that this box, I believe this has, after a few years, has gotten to be in the positive impact. That's what I can say for now. Thank you very much. Thank you very much, Mr. Kondo. Next, from Nikkei Shimbun, Mr. Tanabe.

Shizuka Tanabe (Journalist)

Tanabe from Nikkei. I have two questions. First one, regarding R&D cost, JPY 980 billion planned this year. This is the largest, highest ever I think. Please tell me why it is increasing? Maybe that includes electrification? As far as you could tell us, please explain. Are you going to invest on the electrification and the softwares next year? Other companies are saying about additional investment on the electrification, do you have any plans to change that expenses plan? In the past fiscal year, automobile businesses, January through March, you had operating losses in fact. What is the reasons for that? Please share with us.

Operator (participant)

Thank you very much, Tanabe-san.

Aoyama must speak to respond to your question as much as I can. My colleague Mr. Fujimura will give us further explanation. R&D expenses, JPY 980 billion, that is the largest ever. Of course, battery EV R&D cost is on the increase. That is the main part of these expenses. Also ICE and HEV as well, which will be also to be developed for the next generation ones. The R&D expenses that includes those conventional ICE, EV, plus battery EV development now coming to the full pledge, therefore. That is why. I said JPY 5 trillion in 10 years.

As of today, we do not have any new plans now. I think in April last year, I shared with you the number like that. However, we have been updating the numbers like that every now and then. Actually, the trend is going up more to invest. Sometime later, we can share with you more. Please wait for that. Automobile businesses operating losses in January through March. Finally, the annual unit sales was at 3.69 million. Then, we had 160,000 less sales finally.

In terms of the operating profit regarding that, out of JPY 160,000, about JPY 110.000 are Chinese losses in China, and the remaining are the negative situations for the consolidated business figures. Those JPY 50,000 part is actually causing impact on the gross margin numbers. Please. I have nothing much to add to this, but in the Q4, we usually have this kind of a trend every year. It is a kind of a step like changes of the expenses. R&D expenses tend to occur toward the Q4 period. That happens every year almost.

This year, especially, we have a quality-related cost included in that portion. In this fiscal year, the quality cost actually that is rather low ratio to the sales turnover. It was a 0.9% level of the total turnover, but in this Q4, it was up to 1.7% of the total turnover because of the quality-related campaigns, which are like recalls. It doesn't mean that we had a new incidences happening, but we estimated the number of the vehicles in scope for that. Then we had to have the reserve allowances for that. In fact, we have about 5% level of R&D to the turnover.

That is usual one, but now this year, we had 6.4% instead. It is about our U.S. situation in the area of the cost. With the suppliers, we've been working together, negotiating for the cost related issues with them. We finally came to the agreement after a year. We are going to return back to them for the year portion of their businesses together. That is put up in the Q4 accounting. That is why for the automobile businesses are like that. Thank you.

Mr. Tanabe, thank you very much. We'd like to take the next question from a weekly Toyo Keizai, Mr. Yokoyama, please.

This is Yokoyama from Toyo Keizai. Yes, we can hear you. Thank you. I have two questions as well. First one is concerning automobile business. This 0.4%, Mr. Aoyama, how do you view this? How do you evaluate this? Also this fiscal year, quantities and numbers will improve, I believe. Where will be the focal point in the automobile business for you to earn, make better earnings? That's my first question. Second question is concerning supplier support. Other OEMs, there are some of them, they're taking care of the electricity bills or pay expenses in line with the production. I believe Mr. Aoyama mentioned it briefly, but what kind of range of support if you're giving this fiscal year, that's what I'd like to know. Thank you.

Thank you very much for your questions, Mr. Yokoyama. For 99 business year, yes, well, this 0.4%, I'm not satisfied at all. When it comes to issues, as Mr. Fujimura explained, recently there have been many factors that have been pushing up the cost. How much of that we can reflect that, the cost increases in either in the form of cost reduction or price hike. To what extent we can recover, we don't know. I mean, well, are we really doing enough? Maybe not enough, so we need to do a little bit more. This can be, well, comes down to the semiconductor, but because the volume is below what we aimed for.

For the previous year, that was the biggest factor that we could not meet the volume that we were aiming for. We want to reach this 4.35 million units right now. That's what we're aiming for. When it comes to issues and focus, as you've seen in these numbers, in North America, we want to grow our volume, particularly in North America, as you're seeing here. The total if you look at the total market trend, we need to monitor closely how that develops. Is it going to go into recession due to inflation? We need to monitor how that trends into the future. That's something we really need to follow closely. That's what we believe for North America.

For supplier support, to what degree, the support is given, that will be answered by Mr. Fujimura. You know, well, you know, just taking on the electricity cost, that's only part of it. Then, we had some impact from a semiconductor shortage. Then, of course, there will be some excessive, fixed costs and all that. That would be another big item for the suppliers as well. Mr. Fujimura will provide some additional information, including some specific numbers. Okay, thank you very much for the questions. Concerning the supplier, support to suppliers, particularly in the past fiscal year, due to the inflation and the logistics cost, and then also particularly the energy utilities cost, particularly electricity, labor cost, after one after another, suppliers have had a lot of factors that increase their cost as well.

One, one-to-one basis with each individual supplier in different regions, we have engaged in discussions and made some decisions. Last year, globally, we made about JPY 100 billion cost supply cost increase support. For that cost, without really reducing this cost, we believe that cost level will continue at that level. As I said, per region, because of the pressure from inflation, is working, started to come then into effect in North America by region. Sorry, for this business year, I cannot tell you the detailed numbers, because it's summed up to individual negotiations. Last year, business year, we saw main cost increases in North America last business year.

In Japan, sorry, for Japan, we have incorporated a bit of budget to support. In North America, there was some cost increase, and then we have accepted the part prices in line with the part cost. Also, we had some volume expansion. Also, in order to ensure stable production, that's which we aim to do, to some extent, those suppliers who are very capable, and then who have the room for expansion, we have been working together closely with the suppliers to work out some cost reduction measures. We have been engaging, and then we will be engaging in those discussions. The same applies to Asia as well. With several suppliers, we have decided to work on cost reduction together.

You know, this is just an image, but this is how we are including our ideas and work together into a budget for this 100th business year. Thank you. Thank you, Mr. Yokoyama. Next, question from The Yomiuri Shimbun, Mr. Nakamura, please. Can you hear me? Yes.

Nakamura from NewsPicks. I have two questions. Earlier, there was a mention to it about Chinese the discount situation. It is like a discount competition. How long do you think it will continue? In extreme cases, other companies offer another car if one buy a car. What is the extent of the discount in practice today? Second question is about forecast of operating profits, the highest ever operating profit in FY 2024. Are there any other ever highest numbers expected? Thank you for your question, Mr. Nakamura. For the question one, I will address that part, and the second question will be supported by my colleague.

In terms of the discount and how long it will continue, it is difficult to foresee how long it will continue, practically speaking, because the discount at this time is in association with the response to the environmental measures, the China 6B, the country 6 or state 6B, one, and that is to ban certain types of models by a certain time. After the end of June 6th, it is ended. From the July 1st, we need to sell the product that satisfies state 6b type of regulations. Other cars have to be sold out by the end of June because of that.

It was, actually, the deadline was end of December, the switch over timing, and it was postponed until the end of June recently. It is very difficult to tell how long it will continue because of such changes. Honda's perspective, we will not do extreme discounts such as buy one and then give you another car or extreme discount. We are not going to do it. For us, in the second half this year, we plan to launch new models and it will refresh the models altogether. We like to make sure that those fresh new models will be sold in the market. Fujimura-san, please.

I do not have the data with me right here. However, I mentioned a bit earlier in my presentation about the motorcycle operating profit, JPY 480 billion or above the operating profit in that segment. That is going to be the highest ever motorcycles. In terms of the net profit, JPY 1,000. Before there was a tax system change under the Trump administration, and then there was release of some the tax debt, and then it kind of pushed up the numbers a little bit higher transiently. And including that, it might change. However, still, I believe it is going to be the record highs. I'll get back to you with the pre-precise numbers later on.

In terms of the sales to NEV revenue, it is also related to the exchange rate, but JPY 18 trillion, that is actually trending upward. Thank you.

Thank you very much, Mr. Nakamura. Next, I would like to take the question from Mr. Oribe from Nikkan. Nikkan, sorry, the Daily Automotive Newspaper. Sorry. Yes, this is Oribe from Daily Automotive Newspaper. I have two questions as well. First of all, about the factors for pushing up the operating profit. I believe that one comes from selling prices. Can we get more a little bit details about the negative factors like the raw materials impact? I believe there are some questions asked about support to supplier. How much of that is included in here? Sorry that I'm getting into different details, you are expecting JPY 120 to $1 for 2024. Probably this is more accurate, when you do the.

If there is any background story you can share, in consideration of the Forex exchange rate as well. Okay. Thank you very much. Your first question relate to the past results as well as for outlook? Both. Both, please. Yes, both of the financial results and the outlook. About the outlook, I think I can answer that. I believe this is, there's about JPY 50 billion increase in the material cost increase. I believe Mr. Fujimura. Sorry, a raw material cost down reduction. Mr. Fujimura can give you the details. Okay. Okay, starting with the financial results. In the selling cost, if you can show those boxes showing the factors. It was, we had a JPY 12.7 billion minus. What this is.

Sorry, this minus 27.4. The negative was about JPY 180 billion or so. We have the logistics and labor costs, and those are included in there. Those we actually did a pricing that negated, that canceled those factors enough, we have this JPY 330 billion. For the outlook, we have a +JPY 265 billion. This includes a positive effect from raw materials of JPY 50 billion, and also -JPY 40 billion. The difference would be the cost increase, and that will be the net offset results of the selling price and the cost increase. As mentioned earlier, for cost factors.

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

Sorry, this is something that we negotiate individually, so I cannot talk, really talk about it. Anyway, offset, there is about JPY 250 billion or so, JPY 260-250 billion or so. About the exchange rate, just to give you the background, because the interest rate hikes in the States might settle down in the second half, that's what we are expecting. Then maybe JPY 130 to a dollar during the first half and JPY 120 during the second half. That's what we, that's where we, our 125 average came to that. I concludes my answer. Thank you.

Operator (participant)

Thank you, Mr. Oribe. Next question from JIJI Press, Mr. Toyoda. Toyoda speaking from JIJI Press. Can you hear me? Yes. I have a question regarding the past fiscal year, the details of the ups and downs of the profits and its reasons behind. The charts is that 56.5 are for quality, and as you said, that is related to the recalls in the United States. In the same box, you have JPY 60 billion in the same box. Next one, 800 so forth, that is a negative factor. What is the breakdown inside of the box? The second question, in the United States market, financial instabilities are now happening today.

What is your macro perspective of the U.S. economy going forward and its potential impact on the automotive industry? What is your thought about it?

Thank you, Ms. Toyoda, for your question. The operating profit from the past year, quality related one is connected to the recall cost in the United States. That is your question. Actually, it is not limited to the US, but globally there are other regions also connected to it. Main part is the US, but as a fact, however, other regions or countries are connected to the recall as well. In terms of the numbers, Fujimura is going to answer.

In terms of the U.S. market and financial instability, outlook of the economy and its impact on the automobile businesses, according to your question, I would say that market itself is quite solid as of now, recently. For 2023, toward the end of that fiscal year, the U.S. OEMs actually are resuming their stock levels for the market. Then, in FY 2020, in the middle of the COVID-19 pandemic, is, you compared situation to that, the stock level in the market is not that high as of yet. It's not that much of the recovery. Also the market of the midterm perspective, it is a little bit coming to be weak, perhaps in the midterm perspective.

However, as of now, it is trending quite solidly, I should say. This is more of the macroeconomic perspective that, including stable financial situation. That part should be the area which, where we should pay close attention to. We shouldn't have a prejudgment on that. Practically speaking, this year, we will have the fresh product out. The product, fresh product will be there, so it is a good situation for us. In the industry like that, I'd like to make sure that we will sell those fresh new products in the market in the coming year. Thank you for your question. You see that other box is quite big.

I'm sorry that we couldn't give you a good explanation for that. In terms of the gross margin, it's at six, four, it is JPY 6.4 billion. In the Q2, a part of the subsidiaries, entities, had recognized the impairment of the fixed asset, that is up as much as JPY 200 million or so. We had an impact of the reduced unit sales that is included in the breakdown of the units of sold. Chinese ones actually are in a different box. About 304,000, 40,000 units were down, reduced amount in the China.

We had the KD parts profits for Honda. We had a royalty payment less made from Chinese joint ventures. We have consolidated subsidiaries in China where they had a reduced profit level too. Out of those impairments of the subsidiaries, we have impact by the reduced volume situation in China. That is in that. JPY 80 billion expenses. Excuse me, JPY 60 billion expenses. Largest part out of that is the impact by the inflation of various countries. Most of that is actually for that reason. Practically, maybe new models are starting up quite a bit. We do spend some advertisement, of course, for the new models.

Still we try to maintain our lean structures that we achieved so far.

Thank you very much, Mr. Toyoda. Next, Mr. Hiraoka from NewsPicks.

This is Hiraoka from NewsPicks. Can you hear me? Yes. As a total, as your company, how do you generate the cash that goes into investment? In going forward in your automobiles business, you will be spending a lot of R&D and also capital expenditure, which would increase. This will be reflected in the depreciation. Probably in NEV, probably the raw material price will probably stay high. I'm thinking just as maybe this is an issue for the auto, all across automotive companies. How does, how do you gain the cash? You know, for you, maybe motorcycle business is good and profitable. You can earn cash there, you can probably pour a lot of investment in automobile.

Let me know if that's really a strength you feel. The second question is, talking about PBR across all Japanese companies tend to be low, rather below one. There are voices saying, "What give us the account, be accountable for this." In your case, in the medium to long term perspective, how do you propose to increase PBR?

Thank you very much for your questions, Mr. Hiraoka. I will leave all the details to Mr. Fujimura. Are we, first of all, to answer if you're earning cash from a motorcycle business. Even for motorcycles, we need to convert to e-battery, electrify them in the future. There is a bit of a time lag between motorcycles and automobiles. In medium-term perspective, I think we are further, I think it's all fair to say that we can earn cash to put into automobiles. For BEV, you said the raw materials prices are really staying high. When it comes to raw materials, you're talking about the batteries and cells. I guess that's what you are talking about.

This is something you cannot really say that the cost is staying up high across the board. You can't say that. It is something, I mean, because it's a market, it moves up and down. I wouldn't really say, you know, the material cost does not hit only an individual company. We hope to be for those that moves up and down in terms of prices, costs, we would like to accommodate ourselves. At the Shanghai Motor Show as well, there are some relatively low-priced battery EVs are coming out. We see that for sure. We would continue to monitor the situation for EV. For the PBR, the second question, this is one of the critical issues in our management operations, of course.

Basically, last year, with the reporting, this is something we touched upon a little bit. The capital cost, we want to stay keenly aware, and then we will continue to consider introducing ROIC. When it comes to the specific KPI, we would like to set up a roadmap, and we'll communicate what our KPIs will be for going forward. Okay. Well, just additional, I don't know if this means additional information for you, but as you've pointed out, the cash from that we earn from motorcycle operation is considerable.

ven though the operating margin is low due to fixed costs (because the operating time is only 80% or less), we hope to be able to earn 0.3% or higher. Even though that's the situation in terms of earning in automobiles, for operating cash flow, within the operating, the depreciation that we are able to get back, also the equity earnings, maybe 20% of the net profit comes from that. Of course, dividend from there is contributing as well. In addition, there are some investment related to ICE

We need to wisely manage in our operations, as you've pointed out, going forward, we will be making a lot of investment in BEV, is that what you expected? What we are thinking of is that we need to maintain the current level of the investment, just as a shift, we want to shift away from ICE to spend more in R&D and investment for the new areas. That's what we are thinking of. We want to have a comprehensive control, and then we would probably keep in mind this cash generation capability from automobile operations as well. That's what we'll continue to do. Thank you very much, Mr. Hiraoka.

Of the interest of time, the next question is going to be the last one from Nikkei newspaper. Mr. Uehara, please. Uehara from Nikkei newspaper. Can you hear me? Yes. Thank you. I have two questions. About United States, the interest rate hikes and also the economy have a risk for the depression. What is your judgment about the outlook as of now? Do you have, how do you see the situation for businesses and also the cash finance? What is the impact on your the financing situation of cash supports? Also the outlook for China, midterm perspective, specifically, its impact on the upcoming fiscal year revenue. Mr. Uehara, did you complete your question? Yes. Thank you.

Thank you for your question, Mr. Uehara. In this year, in the fiscal year 2024, how do we see the economy's impact on the sales? In terms of the finance businesses, we have a basic revenues of financing operations, and we have so-called penetration, how much we should acquire from that. That is one part. Whereas we have some the rate of delinquencies and the bad debts and allowances reserves for that, should we go about it. Also, the lease businesses, the residual values of the lease fleet vehicles, let's say. So-called net charge-off, we take that net charge-off quite severely because of the inflation and economic pressures.

We have included our forecast quite severely for that part. On also the fleet vehicles, residual values. In the previous two years of our businesses, we had a shortage of the supplies, and because of that, the trade in markets, used car market was quite booming in a way. In terms of the residual values of those cars, actually in the past two years, it was quite favorable to us. However, in the upcoming FY 2024, that is not going to stay positive. That is our assumptions now. For the China situation, the for 2024, it will stay with a bit of the difficulty in China.

After FY 2025, we are going to strengthen e:N Series, with the battery, vehicles and so forth more and more.

To add, and then for our businesses along, from the FY 2025 onwards, we will expand the battery EV vehicles more along with the revenues to enjoy as well. Thank you. In terms of the details, in fact, in the last few years, as Mr. Uehara said now, financial businesses were like we had losses of those residual value related to used car ones and also the bad debts things. In fact, the used car prices were very high and also the government provided supports for the individual consumers. After the pandemic, there was not much of the loss cost and we had about JPY 360 billion-JPY 380 billion or so.

Then it went one like that until now. In fact, the cost as such is actually abnormal in the last two years. I think we should say that we are coming to back to the normalized status as we speak now. It's coming back like that. However, still the used car prices are still high, so the losses due to the residual values still exist. In fact, after that is over, it will be turning to the appropriate level. Actually, when the lease period is over, the customer's cars will be returned back to us and then we'll put that in the market of used cars again.

We used to have 60,000 cars like that in before pandemic, and now we have about 200, 300 cars, that kind of level. In terms of the bad debts, we had, we have about 0.3% of the bad debts impact. We've been doing the assessment of the creditor score, like 70%, 80% of A, B score. We try to be prudent in terms of the customers like that, and we try to control the asset side of the chart. When we had a financial crisis, we had a similar situation about procurement. The idea is how well we can diversify the procurement.

We shouldn't be optimistic, of course, but we will try like that. We will stay operating with the procurement, and we have a policy as such. Thank you very much. Thank you, Mr. Uehara.

With this, I would like to finish our financial results press conference. The press release information, the materials for financial results are listed on our website. Thank you very much for participation.