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Fumihiko Ike - Senior Managing Officer and Director, Chief Financial Officer
Welcome to the Honda financial results audio presentation. On October 29, 2012, Honda Motor Company announced its financial results for the fiscal second quarter, which ended on September 30, 2012. Through this audio presentation, we would like to review the financial results, and highlight the major factors which influenced Honda's business operations during the period.
The presentation material, which will serve as the basis for today's program, is available on Honda's Investor Relations website at www.world.honda.com/investors. For those of you who have not yet downloaded the material, please do so now, as we will start immediately following a forward-looking statement.
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 which is currently available.
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, 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.
Before explaining the results, we would like to briefly review the global business environment during the past quarter. The automobile industry in the US continued its steady recovery from the sales slowdown in the same period last year, which resulted from supply constraints following the earthquake.
Eco-car incentives boosted sales in Japan, while Europe was down sharply, despite robust growth in Russia. Sales in Asia were led by a strong rebound in Thailand, while sales in China continued to rise, but at a more moderate pace.
In the Motorcycles segment, sales rose in Asia, led by increasing demand for scooters in India. Due to the introduction of stricter consumer credit regulations related to down-payment requirements, sales volume contracted in Indonesia. Demand was down sharply in Brazil and, to a lesser extent, in Vietnam, where the market is beginning to show signs of a gradual recovery.
We would now like to review the financial summary for the second quarter, which ended on September 30, 2012. Please refer to slide 4.
Honda realized a major recovery in automobile production and sales, predominantly in North America, Japan and Asia. In conjunction with slight growth in motorcycle sales and stable Financial Services operations for the quarter, consolidated revenue and operating income rose sharply, compared to the same period last year.
With respect to Group unit sales, a large increase in several Asian motorcycle markets was largely offset by a decline in the other regions markets, leading to a total of 3,879,000 units, up 1.8% compared to the same period last year.
Regarding the Automobiles segment, unit sales rose in every region. These gains led to a Group sales total of 996,000 units, an increase of 46.9% compared to the second quarter of last year.
Power Products operations recorded strong unit sales in Asia, as well as a gain in other regions markets, resulting in a slight rise to 1,288,000 units, up 0.9% from the same period the previous year.
Revenue totaled JPY2,271.2 billion, a rise of 20.4%. Operating income amounted to JPY100.8 billion, an increase of JPY48.3 billion, or a rise of 92.1% compared to the same period last year. This was mainly due to increased revenue from Automobile operations, and cost-down efforts, despite an increase in SG&A and R&D expenses, as well as the negative impact of currency fluctuation.
Income before taxes totaled JPY106.2 billion. Equity in income of affiliates totaled JPY27.4 billion, an increase of 76.7% from the same period last year.
Net income attributable to Honda Motor totaled JPY82.2 billion, an increase of 36.1% compared to the same period last year.
EPS was JPY45.63, which represents a JPY12.10 increase from the same period last year.
With respect to ForEx during the period, the Japanese yen depreciated against the US dollar, and appreciated against the euro. The average yen exchange rate was JPY79 to $1, JPY1 lower than the same period last year. The euro average was JPY98 per EUR1, JPY11 higher than the same period last year.
Next, we would like to provide you with more details related to our fiscal results. Please turn to slide 10.
Kohei Takeuchi - Operating Officer, General Manager of Accounting Division
Due predominantly to a sharp increase in Automobile operating revenues, as well as a rise in the Financial Services business operations, our total revenue reached JPY2,271.2 billion, despite the negative impact of currency fluctuation of JPY70.9 billion. In the chart adjacent to the graph, details of the fiscal quarter by business segment are highlighted.
Please refer to the next slide. I will now summarize our income before income taxes for the fiscal second quarter. Income before income taxes amounted to JPY106.2 billion, as shown in the bar on the right side of the graph. This represents an increase of JPY29.7 billion compared to the same period last year.
Operating income for the second quarter, shown at the bottom right, totaled JPY100.8 billion, an increase of JPY48.3 billion compared to the operating income of JPY52.5 billion in the same period last year, as shown in the bottom left corner.
Regarding the operating profit [walk], compared to the second quarter of last year, the most significant positive factor was a revenue increase of JPY70.1 billion due to a rise in Automobile operations sales volume, which was achieved despite the negative impact of an increase in incentives.
Cost-down efforts resulted in a positive contribution of JPY43.6 billion. This was achieved due to an increase in production volume, which resulted in lower fixed costs, as well as the positive effect of cost-cutting efforts.
An increase in SG&A costs had a negative impact of JPY38.5 billion due to an increase in sales promotion expenses, as well as a rise in quality-related claims.
An increase in R&D expenses had a negative impact of JPY12.4 billion.
The influence of ForEx changes on operating income amounted to a negative impact of JPY14.4 billion.
Regarding pretax profit variances compared to the second quarter of last year, Honda hedged 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 the derivative instruments that resulted in a negative impact of JPY20.4 billion.
Other factors, which are mainly related to ForEx forward agreements, amounted to a positive impact of JPY1.7 billion.
Please turn to slide 13. Next, we would like to elaborate on Honda's business performance by business segment.
Let me start with Honda's Motorcycle business operations for the second quarter. Unit sales for the quarter totaled 3,879,000 units, an increase of 68,000 units, or an increase of 1.8% compared to the same period of last year.
Within Asia, strong growth was realized in the two-wheeler market in India, led by sales increases of the Activa scooter, as well as the CB Shine motorcycle and Dream Yuga commuter motorcycle model, which was introduced in the first quarter.
Strong sales of the Click125i and PCX150 models in Thailand also contributed to the strong sales results.
In the other regions category, a lack of credit in Brazil led to a drop in the overall market, as well as in sales of Honda motorcycles, including the CG FAN series and TITAN models.
The North American market was up slightly due to the positive impact of the NC700X introduction in the United States, as well as the Dio110 model introduction and increased sales of the CGL125 in Mexico, despite slower sales of the FourTrax Rancher ATV and the Gold Wing in the United States.
In Europe, the introduction of new models, such as the VFR1200X, New Mid Concept series and Vision generated positive sales momentum. But this was more than offset by a contraction of the market in Italy and decreased sales of the local SH125 and SH150 models, which are at the end of their product cycles.
The next slide shows that sales revenue from Motorcycle operations amounted to JPY309.7 billion, a decrease of 13.3%.
Operating income for the second quarter totaled JPY25.4 billion, a decrease of 34.8%. Negative influences included a decrease in sales volume of knock-down kits from Japan and the negative impact of currency fluctuation, which more than offset a reduction in SG&A expenses. The operating margin for the quarter was 8.2%.
Next, I would like to elaborate on our Automobile business results for the second quarter. Please refer to slide 15 of the presentation.
Unit sales for the quarter totaled 996,000, an increase of 318,000 units or a rise of 46.9% compared to the same period last year. The increase in unit sales was achieved on the strength of increased sales in all markets, especially the United States, Asia and Japan, following the recovery from last year's earthquake.
In North America, unit sales totaled 404,000, an increase of 135,000 units or a rise of 50%. This growth was achieved predominantly on strong sales of the Accord, Civic and CR-V Honda brand models, as well as gains achieved from the fully remodeled Acura RDX and popular MDX models.
In Asia, unit sales totaled 301,000 units, an increase of 111,000 units or a 58% rise compared to last year. This increase was due to strong sales in China of the CRV, as well as new model introductions, such as the 2.4 liter Crosstour and Elysion.
Further, sales of the City, Civic, Brio and Freed models increased in the ASEAN region.
In Japan, unit sales totaled 169,000 units, an increase of 27% or 36,000 units. This increase was due to strong sales of the recently introduced N-Box series, as well as increased sales of the step wagon.
In the other regions category, sales jumped to 78,000 units, an increase of 32,000 units or a rise of 70% compared to the same period last year, mainly due to an increase in sales in Brazil and Australia.
In Europe, sales were up slightly, due to increased sales of the Jazz in the UK and CR-V in Germany, despite large declines in Southern Europe.
Please turn to the next slide. Revenue for Automobile business operations for the quarter amounted to JPY1,769.7 billion, an increase of 32.4% compared to last year.
Operating profit was JPY37.1 billion. This was mainly due to a rise in income, as a result of gains from higher unit sales and the model mix. These gains more than offset the negative impact of increased selling expenses, R&D costs and unfavorable currency translation effects.
The operating margin for the quarter was 2.1%.
Next, I would like to summarize our results for Power Products business operations. Please refer to slide 17.
Unit sales of Power Products totaled 1,288,000 units, an increase of 12,000 units or 0.9% compared to the same period last year. This increase was predominantly due to higher sales of multi-purpose engines for agricultural applications in Thailand, as well as an expansion of the sales network in Indonesia, which led to an increase in GX160 engine sales to OEM customers, as well as higher WB20 and WB30 pump sales.
An increase in sales was also realized in the other regions, due to strong sales of pumps and OEM engines in the construction tool market in Saudi Arabia, despite a shrinking of the leisure market in Australia, which caused a decrease in demand for EU20 generators.
A large sales decline was recorded in Europe, due to the economic slowdown in Southern Europe. This stagnation also caused a decline in sales in Japan, as OEM sales to companies that export to Europe faced a decline in orders.
Please turn to the next slide. Revenue for Power Product operations totaled JPY67.2 billion, a decrease of 6.7% from the same period last year.
Operating profit was JPY50 million , an increase of JPY150 million from the same period last year, due mainly to an increase in sales volume and model mix, despite an increase in SG&A expenses and a negative ForEx impact.
The operating margin for the quarter was 0.1%.
Next, I would like to address our Financial Services business operations. Please refer to slide 19.
Revenue for Financial Services was JPY133.1 billion, an increase of 3.1%. Operating profit was JPY38.2 billion, a 10.6% decrease, mainly due to an increase in residual losses on lease vehicles.
The operating margin for the Financial Services business was 28.7%.
Reviewing the operations of our Financial Services business in North America, American Honda Finance recorded solid operating results for the quarter, due to strong market demand for new vehicles, as well as continued healthy used car prices.
Now, I would like to review Honda's business results by geographical region for the quarter. Please refer to slide 20 for information on Japan.
In Japan, revenue for the quarter amounted to JPY925 billion, a JPY119.7 billion increase or 14.9% higher than the corresponding quarter last fiscal year.
Operating profit was JPY30 billion, an increase of JPY65.3 billion from the corresponding period last year, due mainly to a strong recovery in Automobile unit sales and income, as well as cost-down efforts, despite an increase in SG&A expenses and R&D costs.
The operating margin was 3.2%.
Now, I would like to review Honda's business results for North America. Please refer to the next slide.
In North America, revenue for the quarter amounted to JPY1,054.7 billion up 32.8% from the corresponding quarter last fiscal year.
Operating profit was JPY26.7 billion, a decrease of JPY210 billion or 43.9% lower than the corresponding period last year. The major reason for the decrease was a rise in sales incentives and SG&A expenses, which served to undermine the increase in revenue from higher sales volume and the model mix.
The operating margin was 2.5%.
Now, I would like to specifically discuss the business environment in the US Automobile market during the quarter. During the July through September quarter, industry sales maintained a seasonally annual rate above 14 million units.
Consistently strong sales were realized in the midst of rising gasoline prices, which may have helped to spur vehicle sales in the mid-size and compact-size car segments.
High trading values bolstered by consistently high used car prices also contributed to retail sales during the quarter. Honda expects a seasonally adjusted annual rate of 14.3 million units for the calendar year, which is unchanged from our previous assumption.
Regarding Honda's sales in the United States during the quarter, a strong rebound in sales was realized as the inventory balance improved for models like the Civic and Accord, which was in the midst of a sell-down to prepare for the fully remodeled version introduced in mid-September.
The fully remodeled CR-V, which was launched in December, continues to set all-time high monthly sales records, despite less than optimum inventory levels.
Acura sales remain strong led by increased sales of the fully remodeled RDX, which recorded its fifth consecutive month of record sales. The MDX remained the top-selling Acura model.
To meet our sales goals for this fiscal year as well as the midterm, Honda has begun expanding its North America production capability. Currently, we have nine assembly lines at seven plant sites in North America, which are being fully utilized.
Last quarter, we announced that our Indiana plant will increase production capacity by 50,000 units by early 2013 and we'll also add production of the Civic hybrid model.
We are also in the process of expanding and introducing new production capabilities and upgrades to our production operations in Alabama and Ohio, which will add production of the Acura MDX and NSX models respectively. Our Alabama plant will increase production capacity by 40,000 units in early 2013 to accommodate the MDX.
In addition, this spring, we broke ground for a new plant in Mexico, which will build FIT series sub-compact models from 2014. These changes will bring our annual production capacity in North America to 1.92 million in 2014 from the current capacity of 1.63 million units.
This expansion will also serve to increase the percentage of our sales produced in North America from more than 85% last year to well above 90% in the near future.
Now I would like to review Honda's business results for Europe, which are shown on slide 22. In Europe, revenue for the quarter amounted to JPY144.5 billion, which was flat compared to the corresponding quarter last fiscal year.
The operating profit was negative JPY8.7 billion, a decrease of JPY4.7 billion from the corresponding period last year, mainly due to an increase in SG&A expenses, as well as negative currency translation effects.
The operating margin was negative 6.0%.
Now I would like to review Honda's business results for Asia. Please refer to slide 23. In Asia, revenue for the quarter amounted to JPY539.4 billion, an increase of 32.3% from the corresponding quarter last fiscal year.
Operating profit was JPY36.4 billion, an increase of 66.5% from the corresponding period last year. This was mainly due to higher revenue from increased sales volume and the model mix, despite the negative impact of currency fluctuation.
The operating margin was 6.7%.
Now I would like to review Honda's business results for the other regions such as South America, the Middle East, Africa and Oceania. Please refer to slide 24.
Revenue for the quarter amounted to JPY229.6 billion, a decrease of 6.0% from the corresponding quarter last fiscal year.
The operating result for the quarter was operating profit of JPY10.5 billion, a decrease of 54.3% from the corresponding period last year mainly due to increased SG&A expenses as well as unfavorable currency translation effects.
The operating margin was 4.6%.
Honda's Brazilian operation, which is one of the significant markets in the other regions category, adopts a calendar year based fiscal schedule. As such, please note that the April through June quarterly results for the country have been reflected in this quarter's consolidated results. This concludes the geographical region portion of our explanation.
With regard to equity and income of affiliated companies, please refer to slide 25. Equity in income of affiliates totaled JPY27.4 billion, up JPY11.9 billion or a 76.7% increase from the same period last year. Please note that equity in income of affiliated countries in Asia is included in this total.
With regard to CapEx for the quarter, please refer to the next slide. Total CapEx was JPY250.7 billion, an increase of JPY118.5 billion or 89.7% higher compared to the same period last year.
Please note that the respective increases in capital expenditure for each business area exclude the impact of unfavorable currency translation effects.
Based on our first half results and presumptions for the second half, we are making adjustments to both our unit sales forecasts and our revenue and income forecasts for the current fiscal year. Please turn to slide 28 for details on our Group unit sales forecasts.
For the Motorcycle business operations, we are reducing our Group unit sales forecast to 15.56 million units from 16.6 million units, a reduction of 1.04 million or a decrease of 6.3%. This is primarily due to declines in Indonesia and Brazil.
Regarding the Automobile business operations, we are reducing our Group unit sales forecast to 4.12 million, a reduction of 180,000 units or a decrease of 4.2%. This is mainly due to lower sales projections for China, India and Europe.
We will also be making a downward adjustment to our Power Product Group unit sales outlook to 6.22 million units, a reduction of 80,000 units or a decrease of 1.3%. This change is mainly due to lower sales in Southern Europe, as well as a decline in Japan due to lower OEM exports of Power Products from Japan to Europe.
For your reference, the corresponding and consolidated unit sales forecasts are shown on slide 29.
Next, please turn to slide 30 for details regarding the changes in our financial forecast. Our revenue forecast has been changed to JPY9,800 billion, a 23.3% rise from last fiscal year, but a JPY500 billion decrease from our previous forecast.
Operating income is forecast to be JPY520 billion, up 124.8% compared to last year, but a JPY100 billion decrease from our original estimate.
Income before taxes is forecast to be JPY540 billion, a decrease of JPY95 billion.
Our forecast for equity in income of affiliated companies has been revised to JPY80 billion, down 20.3% compared to last year and a decrease of JPY40 billion compared to our previous forecast.
Net income attributable to Honda Motor is forecast to be JPY375 billion, an increase of 77.3% compared to last fiscal year, but a decrease of JPY95 billion compared to our original outlook.
EPS is expected to be JPY208.07 for the fiscal year, an increase of JPY90.73.
With respect to ForEx for the fiscal year, there is no change to our original Japanese yen exchange rate forecast of JPY80 to the $1. The euro is now forecast to be JPY103 per EUR1 for the fiscal year, JPY2 higher than our original assumption.
Regarding the operating profit [walk] forecast compared to our original plan, please refer to slide 32. We expect positive contributions of JPY15 billion from cost-cutting efforts and a reduction of JPY24 billion in SG&A costs. But expect these to be offset by a JPY94 billion decrease from lower volume and model mix.
This is expected to be due mainly to a decrease in Automobile sales in China, India and Europe, as well as a decline in Motorcycle sales in Indonesia and Brazil. A decline in Power Product sales to Europe as well as Japan is also expected to have a negative impact.
R&D expense forecasts are unchanged.
ForEx is expected to have a negative impact of JPY45 billion on operating income compared to our original forecast. Regarding Honda's hedging of ForEx and interest rate risk, by using derivative financial instruments, we expect fair valuation losses and gains to have a positive impact of JPY17 billion on pretax profit variances compared to our original forecast.
Other factors, which are mainly related to ForEx forward agreements, are expected to have a negative impact of JPY12 billion compared to our original forecast.
Please note that despite the changes in our revenue and operating income for the 2012 fiscal year ending March 2013, we still project an annual dividend of JPY76 per share, an increase of JPY16 compared to the previous fiscal year. This is unchanged from our original forecast.
This concludes our financial results presentation. We hope that you found this audio explanation helpful and would like to thank you for your continued interest in Honda's activities.
Editor
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.