本田技研 (HMC) 2021 Q4 法說會逐字稿

[Interpreted] Thank you very much for sparing your time to join us here today at the announcement of Honda Motor Company's FY '21 Financial Results. And I'd like to convene the meeting. I'll be serving as the MC. My name is [Okamoto] [from Corporate Communications.

First, allow me to introduce the executives attending: Executive Vice President, Seiji Kuraishi; Senior Managing Director, Kohei Takeuchi. First, Executive Vice President, Kuraishi, will give the outline of FY '21 financial results and FY '22 financial forecast, please.

[Interpreted] Let me explain FY 2021 financial results. First, regarding for 2021, unit sales of Honda Group for Motorcycle businesses is 15.132 million units; Automobile businesses 4.546 million units; and Life Creation businesses it was 5.623 million units.

I'll explain main market situations next. Total market in Japan dropped from last year due to COVID-19 pandemic impact. N-BOX and others marked strong sales results. However, Honda's sales declined year-on-year. N-BOX series won the top unit sales out of the new launches in mini vehicle segment for 6 years in a row. In March, we launched a new legend in Japan equipped with Honda Sensing Elite, which is the world's first automated driving technology level 3.

Total market in FY 2022 still remains uncertain going forward due to the concern of resurging COVID-19. However, Honda expects the results will exceed the year before, thanks to the effective launch of new model Vezel. Total market in the U.S. declined year-on-year. Nevertheless, as the gradual reopening of economic activities since May. The market slowly recovered, though it ended up still below the last year. Honda recovered their businesses mainly with the CR-V and Pilot, finally, being close to the market results.

During the fourth quarter, many of light truck models have upgraded those sales records of the month of the March, outperforming the market growth. Total market by FY 2022 is expected to be better year-on-year, thanks to increasing vaccinations for COVID-19 and efficient economic policies. Honda will enjoy the effective launch of our new model Civic as well as the sales expansions, mainly with the light trucks, so that our results will exceed the level last year.

The total market in China exceeded the level of last year with effective stimulative measures for consumption by the government. Honda enjoyed strong sales of Breeze, CR-V, Vezel and so on. And thanks to the extended EV lineups across leading models, we have marked the record highest sales units so far.

Regarding the total market calendar offer -- market of the calendar year 2021, we're expecting the growth from the year before, along with economic recovery. Honda will launch annual models and will further improve EV lineups, aiming for these higher sales results than the preceding year.

In April, in Shanghai Motor Show (sic) [Auto Shanghai], Honda made a World Premier showing of SUV, e:prototype or the first Honda brand EV in China.

Moving on to the Motorcycle business. The markets have recovered in China, U.S. and so on. Its largest market of Asia, showing a moderate recovery. However, it resulted below the level last year. Honda's results declined year-on-year. In India, since third quarter, the sales recovered to the level same period last year. In Indonesia, the sales of the fourth quarter have recovered to 83% of the same time last year. China and Pakistan exceeded the level last year. Total market of FY 2022 is expected to grow from the year before despite the concern of the COVID-19 flare up. Honda expects the sales to exceed year-on-year, mainly in Indonesia.

Let's conclude our financial performance of the FY 2021. Despite declining demands due to COVID-19 impact, we have revisited our business activities to control SG&As and to reduce costs. And with the positive effect of credit loss provisions, in this term, for the financial businesses, the operating profit was JPY 660.2 billion, outperforming the year before. Profit attributable to the owners of the parent was JPY 657.4 billion, also favored by the increased investment profit based on equity method. This slide also presents unit sales and P&L.

And next, with regard to the FY 2022 forecast. We plan to increase unit sales year-on-year across all business areas of Honda Group. Regarding operating profit, albeit the impact by soaring raw material prices and concerns of supply shortages of semiconductors as well as the effect of our credit loss provisions, we will press forward the actions to increase unit sales to optimize our production capabilities to improve efficiencies of product manufacturing and to fortify the existing businesses, expecting to achieve JPY 660 billion, same as this year.

Regarding the impact of the semiconductor supply shortages, as of now, we are withholding production at some facilities. Supply situations of those parts are changing day by day. However, Honda managed to coordinate the production activities globally so that we can minimize its impact on production throughout the year. For the expected business performance, we plan to defend JPY 660 billion operating profit by catching up with the production, together with our corporate efforts and et cetera.

Speaking of dividends, annual dividends for FY 2021 is JPY 110 per share with a JPY 28 more added to the previous expectation we announced. And the dividends for the fourth quarter is JPY 54 per share. Expected annual dividend for FY 2022 will be JPY 110 per share, same as for FY 2021.

Our dividend policy is to keep the consolidated payout which we are aiming 30% despite a changing business environment going forward. We decided to revise them as shown here, making efforts to provide a stable and continuing profit returns to shareholders.

Now I'd like to hand over to Mr. Takeuchi.

[Interpreted] (inaudible) giving you the details of the financial results and financial forecasts. Allow me to begin my presentation. First, the fourth quarter results. Honda Group unit sales Motorcycles, despite drop in Indonesia and others, unit sales was up in markets such as India, Pakistan and China.

Automobiles, despite decline in markets such as U.S. there was increase in markets like China. Life Creation saw increase in such markets like China but decrease in the United States.

And next, income statement. Sales revenue was up in all business categories, reaching JPY 3,623.8 billion, up 4.8% from the same period last year. Operating profit due to drop in SG&A and increase in profit attributable to increase in revenue model mix operating profit was JPY 213.2 billion. Share of profit of investments accounted for using the equity method was JPY 68.1 billion due to profit increase derived from increase in sales revenue, model mix in China.

And moving on to change in profit before income taxes. FY '21 fourth quarter profit before income tax was JPY 255.3 billion, up JPY 251.5 billion from the same quarter last year. Operating profit due to lower SG&A expenses, profit increase coming from a difference in the provision for credit losses and change in revenue model mix, amongst others, operating profit was JPY 213.2 billion, up JPY 218.8 billion from the same period last year.

And please look at Page 14. Sales revenue, operating profit by business segment. Motorcycle business operating profit due to profit increase from increase in unit sales and model mix combined with cost reduction effect, it was JPY 72.2 billion. Next, Automobile sales related operating profit included an Automobile and Financial service business was JPY 140.4 billion combined. Automobile business operating profit due to profit in SG&A and as well as profit increase from unit sales model mix change reached JPY 37.6 billion.

Financial Services business operating profit mainly due to difference in the provision for credit losses was JPY 106.3 billion.

And next, Life Creation and other businesses recorded operating loss of JPY 3 billion, of which aircraft and aircraft engine operating loss was JPY 7.8 billion.

And next, FY '21, 12 months financial results are as shown. Please look at Page 16, change in profit before income taxes, profit before income taxes was JPY 914 billion, up JPY 124.1 billion year-on-year. Operating profit, though there was a decline in profit due to drop in revenue model mix thanks to cut SG&A difference in the provision for credit losses, cost reduction effect, amongst others, operating profit reached JPY 660.2 billion, up JPY 26.5 billion year-on-year.

And next, cash flows of non-financial services businesses. Free cash flow was JPY 303.8 billion. Cash and cash equivalents at the end-of-period was JPY 2,528.3 billion. Also, net cash was JPY 2,048.3 billion.

Next, FY '22 consolidated forecast. And beginning with Honda Group unit sales. Motorcycles due to increase in Asia, a major market, we are forecasting 18 million units, up 2.86 million from last fiscal year. Automobiles, though there is concern over semiconductor supply shortage due to market recovery and introduction of new models, we are forecasting 5 million units, up 450,000.

Life Creation business, we are forecasting 5.9 million units, up 270,000 units, mainly coming from North America.

FY '22 consolidated financial forecast are shown as on this slide. FY '22 forecast change in profit before income tax. Despite a decrease factors such as increase in SG&A, including a difference in the provision for credit losses and lesser cost reduction effect due to increase in profit coming from revenue model mix exchange, we are forecasting the operating profit to be the same as FY '21, JPY 660 billion. Cost reduction effect is minus JPY 51 billion, but this is mainly due to sharp rise in raw material costs. Meanwhile, we are planning for cost reduction of more than JPY 200 billion and price increase.

Lastly, FY '22 capital expenditures, depreciation and R&D forecast are shown on this slide. And this concludes my presentation. Thank you for your attention.

[Interpreted] Thank you very much indeed for your attention. And I'd like to now move on to the questions and answers part of the session today. (Operator Instructions)

Question 1 from [Mr. Abe] from Nikkei Shimbun newspaper.

[Interpreted] First of all, the operating profit margin for the mobile businesses. Recently, profit margin has been coming down. And it is 1% down too in March 2021. In order to improve the operating profit margin of Automobile businesses, what is major action for that?

The other question is purpose the target of electrification. By 2040, zero emissions because will become 100%. And EV SUV those are the zero emission vehicles. And when you switch over to those types of the vehicles, how much investment we do need.

In case of Tesla, they say in order to start-up the 1 EV factory, they take about JPY 100 million or so. What is your prospect for the investment in your case at Honda?

[Interpreted] Thank you for your question. So let's talk about operating profit margin for the mobile businesses. For long, we have been trying to solidify the existing businesses. We have actions for that. And last year, across all Honda, we have been pushing forward reviewing of the businesses. And because of that, we are improving our business structures today. And for automobile businesses, we have communicated before. Due to the development organization changes the number of the models and the number of the derivatives are changing. And also we have introduced Honda Active for better efficiency.

By 2025, the number of the processes for the development will be down by 30%. That's the actions we are taking now. And in terms of the production, we are trying to optimize them too. And by the end of this fiscal term, we are going to close down the factories in U.K. and Turkey and Sayama factories will move to (inaudible). Thanks to that, we can improve our business efficiency for better operating profit margin.

And in terms of the second question, the development expenses for the electrification of the Vehicles President, (inaudible), the other day talked about JPY 5 trillion R&D investments in the next 5 years. And in the area of the R&D, we will, of course, define the core technology areas where we are going to be pursuing our independent efforts. And we also try to make more improved efficiency for the current development processes for the models, that way we can get more investment margins.

And then if we find some areas which is efficiently pursued by the alliance, of course, alliance with other companies could be a choice. And in order to make that possible, we need to optimize the production system and make improvements for the efficient production this way, we can improve the efficiency of all, including the developments.

And in terms of the investments, battery procurement is one of the issues that we believe to be a major one. And GM in the North American and CATL in China. Those are the areas that we are investing with already. And for other kind of technologies, we were looking to the technology trends and particularities of the regions and so on so that we can pursue the appropriate alliances. And I cannot share with you how much we're going to need for the electrification processes. However, 6 -- or JPY 10 trillion in 5 years, those will be the basic idea, as we shared before.

[Interpreted] And next question (inaudible)

[Interpreted] Katagiri from (inaudible) newspaper. I have several questions. First, so you say that there's increase in profit and you attribute this to the cost reduction of sales, amongst others, SG&A and others. And can you be more specific as to where the profit is coming. And also, you are expecting a further cost reduction for next fiscal year. Can you be more specific about next fiscal year? And where you say that you're expecting JPY 200 billion or more cost reduction and also about R&D expenditure. And compared to recently, it's 140 -- so it's higher than the past, JPY 840 billion and also for safety purposes, electrification and safety. Can you be more specific as to what you'll be doing?

[Interpreted] Mr. Takeuchi will answer these questions.

About the SG&A and what cost reduction we have achieved and will be achieving. Well, last fiscal year, the SG&A was an area where we have the financial business. And well, compared to the previous year, when the U.S. unemployment rate compared to that, the provision back then was increased for the credit losses. But last fiscal year, thanks to the U.S. government support. As well as the fact that the unemployment rate improved, we were able to reduce the provision. And also aside from that, our business activities had to be held down due to COVID-19. And given pandemic in the different countries, our workers, associates worked hard to reduce the cost. And thanks to that, we saw the SG&A reduced year-on-year for FY '21.

And about the provision for credit losses, aside from that, even if we were to exclude that we believe that we were able to achieve SG&A reduction of JPY 200 billion. And about cost reduction and also the effect of price increase, we're looking at both these and the automobiles, motorcycles and live creation products, and we want to focus on making our manufacturing efficient and together with their suppliers, workout where we can reduce the cost. And I think that these efforts as well as the price increase have produced this result.

About R&D, we are expecting JPY 840 billion. And as for R&D expenditure, it was JPY 780 billion the year before. And therefore, a JPY 840 billion is high. And before that, it was JPY 820 billion. So it is the highest on record. That is true. But this is because the existing -- the internal combustion engine is going to be electrified. We need money, and we're shifting towards electrification. I cannot give the breakdown of how much will be spent on what. But as a result of this shift and also connect, we are investing or spending JPY 840 billion for R&D. But as Kuraishi said, it's not going to be purely used for R&D for alone, but we also want to rely on alliances. And that is the reason why we're are planning for JPY 840 billion R&D expenditure for FY '22. Thank you.

[Interpreted] From Asahi Shimbun newspaper, [Mr. Kamiyama], please.

[Interpreted] [Kamiyama] from Asahi newspaper. I have 2 questions. For the FY '21, I have a question about that. In terms of the sales unit, you're expecting to grow them in the U.S. and China in March 2022 period, FY '20 next year. And I think that is maybe because of the rebounding or bound from last year and for China, how much growth or percentage growth are you expecting in China?

And question two, so March 2022, sales is expecting to grow, but the profit level is down. Including the net profit. And of course, that includes the soaring raw material prices and the semiconductor effect and how much of effect included in those results?

[Interpreted] So I can talk about sales, and you can talk about the profits. So JPY 15 trillion expectations for next year and JPY 660 billion operating profit expectations next year. So let me explain about it. As I said earlier, cost reduction area, negative JPY 51 billion. That is a difference, as we said earlier. More than JPY 200 billion can be reduced by the cost reduction efforts as well as the price increases and then with that all included, actually, you can find out the effect by the raw material price increases as much as the gap between the 2.

And in terms of the semiconductor effect, as of now, in the first quarter, as of now, today, we are changing number of days in operations, and we are trying to reduce the type of the models. We're producing this way we can try to contain its effect in terms of the sales. And of course, as much as we are trying as much as we can do, but we can also cover that by like for instance well, but also JPY 660 billion, as I said earlier.

Financial credit loss provisions. So it was booked up in previous years, and then it was written off, and then that is causing effect and unemployment rate is involved in this factor and also the subsidies by the governments are going to be provided until Autumn, sometime like that. And for those ones, JPY 110 billion is going to be included for the negative effect and then it is not just the raw material prices, but JPY 660 billion is results based on the combination of all those efforts.

And in terms of unit sales, the COVID-19 impact is getting elevated globally today, and demand is coming down, thanks to that today. And in the United States, in April, the vaccinations going on smoothly and Biden administration is providing a good economic measures causing higher demands. And we have 111% of the market growth. Today year-on-year in the end of April. And of course, semiconductor effect still continues in this stage too. And perhaps the growth rate still uncertain because of that. And in China, COVID-19 actually was started in China. However, they have no impact whatsoever nowadays.

And in April, they had a good business. However, they also are hit by the semiconductor situations. And we do have the impact in out factories as well. And depending on how it goes going forward, its effect on the business will change. However, as of now, Chinese government says that the total market will be 2.1 billion cars. And this -- they're expecting to have the growth by 8% -- 108% of the last year. And we tried to do our business to be in line with the market growth. And of course, we have to pay attention to the semiconductor situation as well as the COVID-19 in the global business situations. Thank you.

[Interpreted] Next question. (inaudible), please.

[Interpreted] (inaudible), about the unit sales once again at (inaudible). You say -- well, I'm sorry, it's JPY 5 million. And because of the soaring raw material costs and semiconductor shortage, to what extent have you measured these impacts in coming up with this number? Can you give the breakdown of the impact of raw material and semiconductor shortage?

[Interpreted] So basically, for the Automobiles, 5 million units, we have factored in the impact of the rise in raw material cost and semiconductor shortage. Let me explain about semiconductors more in detail. From the end of last year, due to COVID-19, we have been suspending our production, had problems with logistics and the industry on the whole had a shortage of components procurement, especially semiconductors, because there was a growing demand for games. And there was a shortage in supply of semiconductors. We, for a stable supply, we, including overseas with multiple sources have tried to secure source the semiconductor, so as to have appropriate inventory.

And for each of the components, we tried to secure optimum inventory. Initially, the semiconductor manufacturers tried to increase production and we tried to accommodate. And so -- and we thought that there would not be a major impact. But then Texas was hit by a storm. And then the semiconductor -- 1 semiconductor was hit by a fire outbreak. And unfortunately, in the first half for this fiscal year, we will still continue to see an impact of semiconductor shortage. But we'll try to minimize the impact, we're continuing to make effort towards this end. And currently, we don't know what the situation will be. It's fluid.

But in the second half, we think we can recover. And therefore, we can minimize the impact throughout the -- at the end of the year. And even if there is an impact, we from our corporate effort, as explained, we will be able to defend the budget that we explained. And it's based on that premise that we have put together this budget for FY '22.

[Interpreted] Next question. (inaudible) Xi, [Mr. Okema], please.

[Interpreted] (inaudible) from (inaudible) Xi . Question 1 about North America. So according to the survey I have, the number of days in stocks kind of pressured at the moment, very tight. And is that because of the semiconductor situation? Or is that because of the market going so well and you're selling so well and these stocks are really tight. Is that the situation? So please let me understand how you take this now.

And in terms of the battery procurement, you have your alliance partner in North America and China too and including Japan, you probably have a plan or idea about a different markets in different regions, including Japan, for instance, please tell your ideas about it.

[Interpreted] So in terms of the inventory situations in North America, in the first place, since last year due to the COVID-19, every company, OEMs needed to do the adjustment of the production days. And because of that, of course, we have the effect by that on the inventory level today. And of course, every company has a different reason for that. And semiconductor insufficiency, of course, cause that as well. And we had some stocks of semiconductors, thankfully, and we didn't have the immediate impact by that.

However, going forward, if the semiconductor shortage continues on and on then the tight stock situation may continue too. And 33 days, that is the average stock days that is the average in the North American ours is about 50 days. And semiconductor situation is now being adjusted in the market. And then we will look at the inventory levels and supplies as well to try to alleviate the situation. But in the second half, we will try to recover, then -- so this way, we can achieve a JPY 5 billion target finally.

In the terms of the battery are sourcing, GM in North America and CTL -- CATL in China, those are the partners to try to get the batteries. And of course, batteries are one of those components, and we need to work on to CD of those, meaning that we might have a different sourcing in different regions, though we have not defined who as yet. But of course, we do have such ideas, as you said.

[Interpreted] Next question. From Reuters, Mr. Shiraki -- Ms. Shiraki, excuse me.

[Interpreted] This is Shiraki from Reuters. About India's production. Let me confirm the situation, including the outlook. But currently, the 4 motorcycle factories are closed down until tomorrow. And also, the automobile factories are also been suspended. And with the spread of the pandemic, how are you going to try to secure the production of motorcycles, automobile production in India. And how do you see the impact on the units that can be produced? Well, it's very difficult to predict, but what is your premise on doing production in India.

[Interpreted] Well, about the situation in India. Well, our motorcycle plant -- plants due to the second wave of COVID-19 and also the lock down that was introduced domestically. Our dealers also. About 80% of our dealers in India closed down. And from May 1, 4 factories have been closed and we'll suspend production until May 18. That is our current situation. Well, to be candid with you, we really don't know what will happen. And we cannot predict, but we have to observe what happens to the pandemic, and we have to ensure the safety of our associates.

And with that in mind, we need to consider when to resume production. About the impact on production units, we really do not know for sure at this point in time. But for India, actually, last year, there was a big impact. But in the second half. We saw the recovery was even better than we expected. And thanks to partially the government's (inaudible) farming measures.

But from the end of March, the second wave hit and currently, the medical system has been totally overwhelmed. And therefore, we have to keep an eye on what is happening in India. And carefully consider what needs to be done.

[Interpreted] Wall Street Journal, Mr. Sean McLain, please.

Sean McLain from Wall Street Journal. I'm going to ask in English, if that's okay.

Yes, please.

Two questions. One, if you could give us a number in terms of lost production, from last year as a result of the semiconductor shortage. And if you could try to give us a number for how much production you think will be lost in this current fiscal year as a result of the shortage?

And secondly, if you could give us a high-level sort of idea of where you think your alliance with General Motors is headed. You seem to be cooperating on more and more areas and how close should we expect GM and Honda to become in the future?

(foreign language)

[Interpreted] So in terms of semiconductor effect, we had 100,000 units affected last year. And in the current year, as I said before, the effect it continues in the first half and in the second half, we are going to catch up. And as of now, I expect that all those loss effect on the production will be as traded off or set off in the end of the year. And with the GM, actually, 2 companies are taking actions for the [FC] and other areas automated driving support. And we have announced collaborations in North America last year, and we are continuing our discussions together.

And electrification strategy is supported by the GM alliance that is one of the pillars supporting that strategy. And for that purpose, we are going to try to find out efficient collaboration going forward. And in specific, I cannot give you an idea as yet. And going forward, when we are ready to share with us more specifics, we will, of course, do that.

[Interpreted] Any other questions. Thank you. If not, and with this, we would like to conclude today's presentation on our financial results. As for the materials, they will be posted on our web page. So please access our web page. Once again, we thank you for your attendance.

[Portions of this transcript that are marked Interpreted were spoken by an interpreter present on the live call.]