本田技研 (HMC) 2012 Q3 法說會逐字稿

Welcome to the Honda results audio presentation. On January 31, 2012 Honda Motor announced its financial results for the fiscal third quarter ended December 31, 2011. Through this audio presentation, we would like to review the financial results, and discuss the major factors in Honda's business during the period.

We have posted presentation materials at Honda Investor Relations website at http.//world.honda.com/investors/, so please download the presentation materials by clicking the link on the Acura NSX Concept photo. If you have got the material ready, let's get started.

This audio presentation contains forward-looking statements, as defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements are based on management's assumptions and beliefs, taking into account information currently available to it.

Therefore, please be advised that Honda's actual results could differ materially from those described in these forward-looking statements as a result of numerous factors, including general economic conditions in Honda's principal markets, and foreign exchange rates between the Japanese yen and the US dollar and the euro, and other major currencies, as well as other factors detailed from time to time.

The various factors for increases and decreases in income have been classified in accordance with a method that Honda considers reasonable.

Now, I would like to start with the financial summary for the third quarter that ended on December 31, 2011. Please have a look at slide 3.

Honda again showed resilience in this quarter. The severe impacts from the flooding in Thailand, as well as unfavorable ForEx, were partly absorbed by the steady recovery of Automobile business in major markets, strong return by the Motorcycle business, and the Company-wide efforts to reduce fixed costs. Moreover, despite a reversal of deferred tax assets, due to the change in income tax laws in Japan, Honda achieved a bottom line of JPY47.6 billion.

Motorcycle unit sales totaled 3,076,000 units, up by 6.3% from the same period last year.

Automobile unit sales totaled 830,000 units, a decrease of 2.9% from the same period last year.

Power Product unit sales were 1,021,000 units, down by 11.8% from the same period last year.

Financial highlights for this third quarter are seen in the middle of the slide. Net income attributable to Honda Motor totaled JPY47.6 billion, a decrease of 41.2% from the same period last year. EPS was JPY26.45, which was a decrease of JPY18.56 from the same period last year.

Revenue totaled to JPY1,942.5 billion. Operating income amounted to JPY44.2 billion, a decrease of 64.7% from the same period last year. Equity in income of affiliates totaled JPY22.9 billion, a decrease of 47.3% from the same period last year.

Now I would like to analyze sales and operating profit for the quarter. Please turn to slide 9.

Revenue decreased by JPY167.8 billion, down by 8% from last year to JPY1,942.5 billion, due to the ForEx impact, and decreased revenue in the Automobile and Power Products businesses, attributable to the impact of flooding in Thailand.

Changes in revenue in the respective businesses, without the ForEx translating impact, are seen on the slide. Had the exchange rate remained unchanged, revenue would have decreased by JPY36.5 billion, which is equivalent to a decrease of 1.7%.

Now, let me elaborate on the factors that affected operating profit and income before income taxes. Please turn to slide 10.

Here is the year-on-year variance. Operating income for the third quarter totaled JPY44.2 billion, as you can see at the bottom of the right-hand slide, which was a decrease of JPY81.3 billion, compared to the operating income of JPY125.6 billion in the same period last year.

Income before income taxes amounted to JPY58.4 billion, as shown at the bar on the right side, which was a decrease of JPY73 billion from the same period last year.

If you have a look at the first box from the left-hand side, which shows how much gross profit was affected by the change in top line sales and volume, decreased unit sales, mainly caused by a production slash, as a result of the Thai flooding, brought a negative JPY32.9 billion.

The second box from the left-hand side shows cost reduction, which also belongs to changes in gross profit. Cost reduction negatively impacted this quarter by JPY16.1 billion, due mainly to a raw material price increase, and an increase in fixed costs as the volume of production was reduced.

The third box from the left-hand side demonstrates the SG&A impact. Decreased SG&A, mainly due to fewer quality related expenses, led to a positive impact of JPY11.6 billion. Increased R&D expense was JPY10.3 billion. ForEx had a negative impact of JPY33.6 billion, as the yen appreciated toward major currencies.

Regarding pretax profit variances from last year, Honda is hedging ForEx and interest rate risk by using derivative financial instruments in order to reduce the substantial effects of currency fluctuations and interest rate exposure.

There were fair valuation losses and gains from derivative instruments that resulted in a positive impact of JPY3.5 billion. This is mainly associated with ForEx forward agreements for export transactions. Variance in other non-operating income and expenses net was a positive JPY4.7 billion. This relates to fair valuation on interest rate swap agreements that Honda's financial subsidiaries hold, and others, mainly affected by the difference between the hedge rate and market rate to book revenue and interest received.

Detailed information on the currency impact, and reevaluation of derivative instruments, is available on slides 33 and 34.

Regarding the result of nine months of operating profit and income before income taxes, and the individual factors of increase and decrease, please turn to slide 11.

Operating income for the nine months totaled JPY119.3 billion, a decrease of JPY404.1 billion, due primarily to a decrease in sales volume and mix; an increase in fixed costs per unit, as a result of decreased production; increased raw material costs; and unfavorable foreign currency effects, despite decreased SG&A expenses.

Income before income taxes amounted to JPY164.3 billion, a decrease of JPY389.5 billion.

Now, we would like to elaborate on Honda's business performance for each business segment. Let me start with Honda's Motorcycle business operations for this quarter. Please have a look at slide 12.

Unit sales for the quarter totaled 3,076,000, an increase of 181,000 units, or 6.3%, compared to the same period last year. Unit sales were increased mainly in Asia and the Other region, including South America.

Due to the flooding in Thailand, production in Thailand was suspended for about one month. However, supply chain disruption did not severely spread into other countries.

Motorcycle sales, outside of Thailand, such as in India, Vietnam and Indonesia, continued to expand, and Honda enjoyed higher sales, driven by the 110cc [Cub Tec] models and scooters.

In Brazil, which has the biggest market in South American countries, and where Honda has the top market share, our strong product pipeline, such as the CG150 and CG125 series, contributed to high growth.

As for revenue and operating profit in the Motorcycle business, please have a look at slide 13.

Revenue for the quarter amounted to JPY302.5 billion, up 0.2% on the corresponding quarter last year, due mainly to increased unit sales, despite an unfavorable foreign currency translation effect.

Operating income totaled JPY25.8 billion, a decrease of 11.2% from the same period last year, due primarily to increased SG&A expenses, and an unfavorable foreign currency effect.

Next, let me elaborate on the Automobile business results. Please have a look at slide 14 of the presentation materials.

Unit sales for the quarter amounted to 830,000 units, a decrease of 25,000 units compared to the last year, due to the impact of worldwide production adjustment caused by the flooding in Thailand.

Honda was actually in the startup phase of ramping up to full production to regain the losses in the first half period caused by the Japan earthquake.

In Japan, unit sales amounted to 134,000, up 16,000 compared to last year, due mainly to newly introduced models such as the FIT Shuttle Hybrid, FREED Hybrid and N-BOX.

In North America, unit sales amounted to 366,000 units, up by 2,000 units compared to the same period last year. Increased sales of the Civic and Odyssey are the main contributor of this increase.

Sales in Europe were soft; unit sales for the quarter were 38,000 units, down by 3,000 units from the same period last year.

In Asia, unit sales were 244,000 units, down 21,000 units compared to the last year, due mainly to the Thai flooding issue.

In the Other region, unit sales were 48,000 units, down 19,000 units due to decreased sales in Brazil and Australia.

Please turn to slide 15. Revenue in the Automobile business for the quarter amounted to JPY1,455.6 billion, a decrease of 9.9% compared to last year, due mainly to the decreased unit sales, and an unfavorable currency translation effect.

Honda reported an operating loss of JPY16.9 billion, a decrease of JPY85.3 billion from last year, due mainly to decreased unit sales, increased raw material costs, increased R&D expenses, and an unfavorable currency effect, despite a decrease in SG&A.

As for the Power Products business, please have a look at slide 16. Unit sales of Power Products declined in all regions, totaling 1,021,000 units a decrease of 136,000 units, or 11.8%, compared to last year.

Honda has the largest production facilities in Thailand for Power Product production, located in the same province where its motorcycle factory operates. This time, the factory itself was not flooded, but Honda stopped the production for one month for the purposes of ensuring the safety of the workplace.

Slide 17 shows revenue and operating income for the Power Products and Other businesses for the quarter. Revenue for the quarter amounted to JPY68.0 billion, a decrease of 5.7% on the same period last year. This decrease in revenue was mainly due to decreased unit sales, and an unfavorable currency translation effect.

Honda reported an operating loss of JPY2.1 billion, an improvement of JPY1 billion due mainly to the operating loss in the Other business, decreased sales in the Power Products business, and an unfavorable ForEx impact.

With regard to the Financial Services business, please see slide 18. Total assets in the Financial Services business came to JPY5,290.5 billion, while operating profit decreased by 15.7% to JPY37.5 billion because of an unfavorable ForEx translation effect.

Operating income stayed at a healthy level, and the operating margin for the Financial Services business was 29.5%. Honda expects its Financial Services business to continue to be solid, with consistent conservative operation.

Now, let me elaborate on Honda's business results by each geographical segment for the quarter. Please turn to slide 19, starting from Japan.

In Japan, revenue for the quarter amounted to JPY863.1 billion, down by 0.5% from the third quarter of last fiscal year.

Operating income was minus JPY41.2 billion, a decrease of JPY55.8 billion. The main factors that caused this decrease were increased R&D expenses, increased raw material prices, and an increased ForEx effect caused by the appreciation of the Japanese yen which more than offset decreased SG&A expenses. The operating margin was minus 4.8%.

In Japan, Honda experienced a temporary automobile production adjustment in November, due to supply chain disruption caused by the flooding in Thailand. However, this issue has been solved, and we've already brought our production back up to normal levels.

We introduced the N-BOX mini vehicle in December last year to stimulate our mini vehicle model lineup. The Mini Vehicle segment became more popular in Japan, and demand for this N-BOX has been remarkably good. We've already had more than 27,000 units of orders, three times as many as our monthly sales target volume.

We are introducing two more mini vehicle models shortly, and we are confident that they will also be well received.

On top of the N-BOX, we also added a hybrid version to the FREED and FREED Spike models at the end of October. With the popularity of hybrid models in Japan, customers' acceptance for this model is quite good. The sales mix of hybrid models for Honda in 2011 was 67% in Japan; the FIT Shuttle Hybrid sold very well for the quarter, too.

On the next slide, 20, is North America. Revenue for the quarter amounted to JPY986.2 billion, a decrease of 2.5% from the corresponding period last fiscal year, as a result of a negative currency impact.

Operating income was JPY74.8 billion for the quarter, which was a decrease of 16.5% from the third quarter last year, primarily due to increased raw material costs and a negative currency impact. The operating margin for the quarter was 7.6%.

Now, I would like to discuss more about the US Automobile market during the quarter.

Despite supply constraints of Japanese brand vehicles caused by the March earthquake in Japan, and the October flooding in Thailand, total US Auto industry annual sales grew in 2011, with 12.8 million units, or 10% growth over 2010.

We expect total demand to continue to grow in 2012, reaching at least the 13.5 million unit level. In the October to December quarter, the seasonally adjusted selling pace was actually already showing more than the 13.5 million unit level.

The Truck segment especially continued to show good sales, and reached a pace of 7 million annualized sales.

Regarding Honda sales in the US market during the quarter, Honda unfortunately faced another supply constraint, due to flooding in Thailand, just after it had recovered from the impact of the earthquake in Japan.

We quickly recovered at the beginning of December with all North American Honda factory production normalized. However, we still were not able to make it up, and finished December with retail sales of a 19% decline year over year.

The inventory level at dealerships was extremely tight and, for example, popular models, such as the CR-V, had only 17 selling days of inventory at the end of December.

We expect to have good sales in 2012; first of all, supply has been normalized and capacity added. Honda added or reinstated a second shift to the lines at its Indiana factory, Ohio factory, and Canada factory for the first time since the recession in 2008. North American Automobile production in December, for example, was at an all time high for the month, and was up 18% over the last year.

Secondly, our pillar models have been, or will be, refreshed. The new Civic came out in April last year and regained number one sales in the segment during the last quarter with the supply recovery. The new CR-V was just introduced in December last year, and the new Accord will come out in autumn.

Thirdly, the Acura brand will also go through a complete lineup change. The compact luxury utility vehicle, RDX, will also go through a full model change this spring and, at the same time, the new compact luxury sedan, ILX, will be introduced.

We are targeting Honda and Acura combined sales of 1.43 million units in the United States this year, which is more than 20% growth over 2011.

As for Europe, please turn to slide 21. Revenue in Europe amounted to JPY119.4 billion, which was a decrease of 20.7% from the third quarter of last fiscal year, due mainly to decreased revenue in the automobile business, as a result of the impact of the flooding in Thailand, and a negative currency translation effect.

Operating income for the quarter was minus JPY3.8 billion, which was an improvement of JPY5.6 billion as a result of decreased SG&A expenses. The operating margin was minus 3.2%.

In Europe, also, we have had a temporary production adjustment through the quarterly period. However, this has been back to normal levels since December 19, and we've started to produce the all new Civic.

Honda's automobile sales in Europe decreased, due to weak market demand, particularly in southern European countries, and production disruption, as I mentioned before.

The business environment continues to be quite challenging. However, with the new Civics we are now producing in the UK, and the all new CRV to be introduced in autumn this year, as well as a vehicle equipped with our own small diesel engines that is also to be launched in autumn this year, Honda intends to expand its sales volume.

Let us move on to Asia on slide 22. Revenue in Asia for the quarter amounted to JPY317.6 billion, a decrease of 28.7% from the corresponding period last year. A decrease in Automobile business, due to the flooding in Thailand, as well as a negative currency translation effect, more than offset increased revenue in the Motorcycle business.

Operating income for the quarter was JPY13.3 billion, a decrease of 62.7% from the third quarter of last fiscal year, mainly due to a decrease in revenue, changes in model mix etc., and an unfavorable currency effect. Operating [income] for the quarter was 4.2%.

The flooding in Thailand had a very large impact on our operations worldwide. For regions such as North America and Japan, the supply chain of certain electronic parts prepared from Thailand was temporarily disrupted, and we reduced production in step with the available inventory of the component. However, the issue has been solved, and our production in the two regions has already been normalized.

Another issue that we experienced was that the factory in Thailand sustained physical damage, due to the flooding. We have examined all the damaged facilities and the equipment so that we can resume automobile production in Thailand in April.

As for production other than in Thailand in the Asian region, production normalization schedules differ for each country. For example, in Indonesia, production will be normalized in March, and the Philippines in February, with the all new City model. And India will be normalized in March.

For Motorcycle operations, on the other hand, the impact has not been as large. Fortunately, Honda's motorcycle factory in Thailand was not flooded. Sales volumes certainly decreased in Thailand, due to the flooding. However, it increased very steadily and rapidly in other countries in the region, and particularly in India, Indonesia, and Vietnam, Honda has enjoyed robust growth in sales.

Now onto the Other region on slide 23. In the Other region, which includes South America, mainly Brazil, and Oceania, the Middle East, and Africa, revenue amounted to JPY206.1 billion, a decrease of 13.7% from the corresponding period last year. This was caused mainly by a decline in revenue in the Automobile business in Oceania and Middle Eastern countries, as they got shipments from Thailand in part, and an unfavorable currency translation effect that more than offset increased revenue in the Motorcycle business in Brazil.

Operating income for the quarter was JPY12.5 billion, a decrease of 20.2% from the third quarter of last fiscal year, mainly due to negative revenue, changes in model mix, and a negative currency impact. The operating margin was 6.1%.

Please note that the biggest contributor in the Other region, which is Brazil, has a fiscal year period that is from January to December, unlike the rest of the regions. Therefore, the third quarter results reflect the performance of the July to September quarter in Brazil.

In Brazil, in the July to September quarter, growth in automobile demand slowed down to slightly more than 1%, due to a credit squeeze policy. Under such circumstances, Honda's unit sales declined by more than 20%, compared to the same period of last year. For the October to December period, the market environment worsened, and declined by 6.5% year over year.

Honda's sales for the quarter declined, due to the weak market, but also due to a production slash as a result of supply chain disruption caused by the flooding in Thailand. The motorcycle market was expanding in the July to September quarter, however, in December, it slowed down, due to a tightening of credit.

Honda's sales have been slowing as well in recent months. However, sales of the CG150 fan and BIZ125 has still been strong.

That is all for the breakdown of Honda's business in each geographical segment.

With regard to equity in income of affiliated companies, please see slide 24.

Equity in income of affiliated companies in the third quarter was JPY22.9 billion, down by JPY20.5 billion from the same period last year. This decrease in equity in income was due to a decline in income in joint ventures in China during the period, [there] July to September, mainly due to decreased production triggered by Japan's earthquake. Please note that the fiscal term of these joint ventures in China is January to December, which differs from Honda Motor Company.

A decrease in sales of our motorcycle affiliated company in Thailand, due to the flooding, also had an impact. For your reference, there is a chart that shows operating income and net income of Asian affiliated companies combined. Please see slide 25.

During the third quarter, net profit for Asian affiliated companies amounted to JPY45.4 billion. Major contributing companies are mentioned at the bottom of the slide.

With regard to CapEx for the quarter, please see slide 26. Total CapEx for the third quarter was JPY239.7 billion, which was an increase of JPY49.3 billion. CapEx related to new model production in the automobile business increased in North America, as well as in Japan. CapEx related to expanding capacity in Asian motorcycle production also increased.

Now, I would like to discuss the Company's new earnings guidance for the fiscal year ending March 2012. Please see page 27.

Our forecast of motorcycle unit sales for fiscal 2012 is 12,660,000 units. Automobile unit sales are expected to be 3,150,000 units. We've revised this down by 285,000 units from the forecast we announced on August 1.

The Power Product unit sales forecast for fiscal 2012 is 5,850,000 units. As for revenue and profit, please turn to slide 28.

Net income is expected to be JPY215.0 billion, a decrease of JPY319.0 billion from the last fiscal year. Earnings per share are estimated to be JPY119.29, a decrease JPY176.38 from last year.

Revenue is expected to be JPY7.85 trillion, which will be a decrease of JPY1,086.8 billion from last year. Operating income is estimated to be JPY200 billion, a decrease of JPY369.7 billion from last year. Income before income taxes is expected to be JPY250.0 billion, a decrease of JPY380.5 billion from last year.

Equity in income of affiliates is estimated to be JPY95.0 billion, a decrease of JPY44.7 billion from last year. Our currency assumption for the full year will be JYP78 against $1, and JPY106 against EUR1.

With regard to the changes in guidance from August 1, please see slide 30.

The flooding in Thailand has given us a negative impact of approximately JPY110 billion. However, this was absorbed by our company-wide efforts to reduce fixed costs, and the sole remaining negative impact would be from ForEx, due to the higher yen.

As for the guidance for CapEx, depreciation, and R&D expenses, please see slide 31.

CapEx for the year is estimated to be JPY410.0 billion, up by JPY98.7 billion from last year. Depreciation is expected to be JPY295.0 billion, down JPY30.2 billion from last year. R&D expenses are estimated at JPY525.0 billion, up JPY37.5 billion from last year.

With regard to cash dividends, please see slide 7. The Board of Directors of Honda Motor resolved to distribute dividends per share of JPY15 for the third quarter, as of the record date, which is December 31, 2011. We project an annual dividend of JPY60, an increase of JPY6 from last year.

This concludes Honda's fiscal third quarter earnings results audio presentation. Thank you again for listening to our web program. This is Honda investor relations; have a wonderful day.

Statements in English on this transcript were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.