本田技研 (HMC) 2023 Q4 法說會逐字稿

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.

The COVID-19 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.

This is Aoyama. Good to see you.

And then we also have Mr. Eiji Fujimura, Executive Officer, Chief Financial Officer.

This is Fujimura. Good to see you, everybody.

And now Mr. Aoyama will first present an overview of the financial results of financial year to March 2023 and forecast for FY '24. And then Mr. Fujimura will present the details.

Over to you, Mr. Aoyama.

Good afternoon, everyone. I am Aoyama, I'm the Executive Vice President, starting April. Thank you very much for your participation today despite your busy schedule. So 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, though the previous expectations were 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 and pricing that reflects the improved 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, and we will strengthen supply chains, such as the stable procurement of the semiconductors will improve operating ratio of the factories. And 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 we will stay engaged in shareholder return programs. In specific, in FY 2024, we plan to increase the dividend 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. Towards FY 2026, we will continue to reinforce our personal structures all together 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 COVID-19 pandemic in China, and the supply shortage of semiconductors until third quarter, due to which, the unit sales dropped below the year before. During the 3 months of our fourth quarter, supply situations of the semiconductors gradually improved, thus the unit sales resulted better year-on-year in the United States. In China, the tax protection 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 rather unclear, 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 for electrification, we set out discussions with POSCO for a 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:NSUV Xu.

Next, moving on to the motorcycle business situations. For the FY 2023, the unit sales increased year-on-year in the main markets. During 3 months of the fourth quarter, the unit sales dropped year-on-year in India and Vietnam. However, in Indonesia, although we had the supply shortages of the semiconductors, we were pleased the model offering and -- utilized alternative parts, which then helped to significantly increase of unit sales. Thus the total result in better than the last year, 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.

Let's look at the overview of the consolidated the financial results of FY 2023. In addition to the reduction in unit sales and the production of [automobiles] 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 net sales, PL, are described here.

With regard to the forecast of our consolidated performance of FY 2024, all the incremental production costs and the inflationary impact, unit depreciation impact and et cetera may exist. We have been working on the pricing scheme reflecting commercial values of the production and further strengthening of the operational structures, plus the increase of the production and unit sales of automobiles. 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 dollar for the full year basis. You can see the unit sales and the PL plans on this slide.

Let me explain about the dividend. Annual dividend 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 FY 2023, thus it will be JPY 150 per share, the highest dividend so far.

In the Board of Directors meeting today, we made a decision of share buybacks. For the purpose of improving capital efficiency of executing a flexible capital policy and so on, we will buy back our shares up to the total amount of the JPY 200 billion of acquisition values.

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

Allow me to start the explanation. To begin with Honda Group's unit sales for the fiscal year 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 a decline in China and in North America. In Power Products operations, unit sales came to 5.645 million units mainly due to a decline in North America.

Next, I'd like to explain the factor analysis of the pretax profit for the 4 quarters compared to the previous fiscal year. Pretax profit was JPY 938.1 billion, which was lower by JPY 131.9 billion compared to the previous fiscal year. Operating profit was JPY 839.3 billion, which is lower by JPY 31.8 billion in 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 a profit decline of JPY 58.5 billion, and currency effect resulted in positive impact of JPY 295.9 billion.

Next, to explain the sales revenues and operating profit by business segment. For motorcycles, operating profit was JPY 488.7 billion, and a record high. Automobiles operations profit was JPY 42.0 billion. Operating profit from financial services were JPY 285.8 billion. And for Power Products business and other businesses, operating profit came to JPY 22.8 billion.

Next, I will explain the cash flow. Free cash flow of operating entities for fiscal year 2023 came to JPY 685.8 billion, and the end-of-term balance of net cash came to JPY 2,750.8 billion.

Next, I'd like to talk about the consolidated financial forecast for fiscal year '24. Firstly, 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. And in Power Products, 4.75 million units in view of the declines in North America.

Next, I'd like to explain the factor analysis of pretax profit compared to the actual results from last year. Pretax profit is forecast at 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 the 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. And the currency effect is forecast a negative of JPY 268.0 billion.

Lastly, our forecast for capital expenditure, depreciation and amortization and R&D expenditures for FY '24 are as shown.

This completes my explanation. Thank you very much for your attention.

(Operator Instructions) To start with first question from NHK, [Mr. Toma].

Toma from NHK. Can you hear me?

Yes, we can.

So I have 2 questions. One is the Chinese businesses that is dropping quite a bit, that is my impression. But for that, what is your analysis and cause for that? And for the recovery plans going forward, what is your expectations this year in terms of the unit volumes and your plans for the production and so forth for the FY 2024 forecast?

And the second question is about semiconductor. The supply is on the improvement now gradually. But this time -- well, this year, including the semiconductor supply areas, I assume that you're going to recover the production volume, including in semiconductor supply recovery. And when do we expect to have that picked up? When do you think it will be normalized?

Aoyama is going to answer your question.

For the first question, in the fourth quarter, the businesses getting down in China in the fourth quarter and the forecast going forward. And in our January, March period, the fourth quarter -- actually, up until the third quarter 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 added, that is the market situation there.

And also to get along with the environmental regulations, in order to make the sales out from the inventories completely, there are some discounts being done. And then towards the end of the time period of the selling out plans of the products in stock, the consumers expected more discount, and then people waited to buy cars for some time. Because of that, the demand dropped.

Such reactional situation will improve now. And also last year, we had lockdown, COVID-19, which also had a negative impact on the businesses. But for the FY '24 for Honda going forward, we will have the full model change, a new model to introduce in the market from Honda, which we expect a 1.4 million cars to sell according to the plans in China.

That is what we think as of now, but NEVs and -- new energy vehicles portions will increase going forward gradually. So as of now, we expect 1/3 of the demand will be of a new energy vehicle, we suppose. And we are selling our ICE and have vehicles as the main product to sell as yet. But we need to make a good utilization of the [incentives] and so forth so that we can continue to sell and keep the presence in China.

And 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. And we still have the 4.35 million unit sales forecast. And it is not going to be abrupt recovery, but it is going to be a gradual recovery from the mid of the year till the second half of the year. And full recovery is expected to be found in the fiscal year '25.

We'd like to proceed to the next question, [Mr. Kondo] from Asahi Newspaper, please.

My name is Kondo from Asahi Shimbun Newspaper. I would also like to ask one question about the Chinese market and a different question for the second one.

Right now, Mr. Aoyama explained the situation that the NEV, NEV's percentages are getting higher, and also the ICE vehicles are shrinking down and then there are some pricing competition. So 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 to -- going for the selling price hikes that should contribute to the profit of JPY 1 trillion for the first time. So in what -- how you are making those price hikes for different regions? I believe for Japanese market, you announced the price hike for the N-BOX series. So please let us know what your price hike strategies are.

Okay. Thank you very much, Mr. Kondo, for your questions. Okay. First, about the profitability for Chinese business, NEV is really coming up. And then so Honda has announced this e:N series, so that's something we will continue to strengthen.

The second wave will come on the first of '24. And the SUV called Xu, that will come at the end of '24. That's what we talked about. So therefore, in terms of fiscal year '24, I believe, as NEV expands, we will not really have any NEV products available for the time being. So we would like to continue to maintain our presence. So we might consider using the incentive and then try to maintain 1.4 million unit sales. So if you think about FY '24, yes, in terms of our business feasibility, it will deteriorate, will be challenging for us.

And then the other question about the price hikes for North America and then for Asia and then also Europe as well. For those markets or regions, we are seeing a lot of increasing on the manufacturing and procurement cost. So we have been reflecting those cost hikes increases to the price hike. So Mr. Fujimura will give you more detailed specific numbers.

But when it comes to 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. So we want to go through another review. So 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. And then, of course, what we need to do first is to try to reduce our costs, trying to absorb cost price hikes. However, with the raw material procurement costs and with inflation, our cost has been going up a lot. So over 2 years, we have like a JPY 600 billion cost increases over the past 2 years.

But 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. But we say 90%, but in Asian markets, we have been able to recover almost 100% in Asia in motorcycle market. But speaking of automobile market, still, we have not been able to recover all the cost increases.

And of course, in North America, there has been a lot of cost increase, which contributes a lot. But 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. And then 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 in the chart, drives up to JPY 1 trillion.

So 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. And then also, we are doing better at our pricing strategy. So 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.

Next, from Nikkei Shimbun Newspaper, [Mr. Tanabe].

Tanabe from Nikkei. I have 2 questions. First one regarding R&D cost JPY 980 billion planned this year, and this is the largest, highest ever, I think. And please tell me why it is increasing? Maybe that includes electrification? As far as you could tell us, please explain. And you're going to invest on the electrification and the softwares next year and other companies are saying about additional investment on the electrification. And do you have any plans to change that expenses plan?

And in the past fiscal year, Automobile businesses, January through March, you had operating losses in fact. And what is the reasons for that? Please share with us.

Thank you very much, Tanabe-san. So Aoyama speaking to respond to your question as much as I can. And then my colleague, Mr. Fujimura, will give us further explanation.

So R&D expenses, JPY 980 billion. That is the largest ever. And of course, battery EV R&D cost is on the increase. That is the main part of these expenses. And also ICE and HEV as well, which will be also to be developed for the next-generation ones. The R&D expenses, that includes there is a ICE, HEV, plus battery EV development now coming to the full fledged effort. So that is why. And then I said JPY 5 trillion in 10 years.

As of today, we do not have any new plans now, but I think in April last year, I shared with you the number like that. However, we have been updating the numbers like that very now and then, and actually the trend is going up more to invest. And some time later, we can share with you more. Please wait for that.

And Automobile business' operating losses in January through March. And finally, annual unit sales was 3.69 million. And then we had 160,000 less sales finally. And in terms of the operating profit, regarding that, out of 160,000, about 110,000 are Chinese one, losses in China. And they remained -- remains the negative situation for the consolidated business figures. But those 50,000 part is going to be -- is actually causing impact on the gross margin numbers.

Please.

I have nothing much to add to this, but in the fourth quarter, we usually have this kind of a trend every year, but it is a kind of a step like changes of the expenses. R&D expenses tend to occur toward the fourth quarter period. That happens every year almost. And 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 0.9% level of the total turnover. But in this fourth quarter, it was up to 1.7% of the total turnover because of the quality-related campaigns, which are like recalls.

So it doesn't mean that we had a new incidents happening, but we reestimated the number of the vehicles in scope for that. And then we had to have the reserve allowances for that. And in fact, we have about a 5% level of R&D to the turnover. That is the usual one. But now this year, we had a 6.4% instead.

And it is about 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. And then we finally came to the agreement after a year. And then we are going to return back to them for the year a portion of their businesses together, and that is put up in the fourth quarter accounting. And that is why the Automobile business is like that.

I would like to take the next question from Weekly Toyo Keizai, Mr. Yokoyama.

This is Yokoyama from Toyo Keizai.

Yes, we can hear you.

I have 2 questions as well. First one is concerning Automobile business. This 0.4%, Mr. Aoyama, how do you view this? How do you evaluate this? And then also this fiscal year, quantities numbers will improve, I believe, but where would be the focal point in your 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 are taking care of the electricity bills or pay expenses in line with the production. But I believe Mr. Aoyama mentioned it briefly, but what kind of range of support you are giving this fiscal year? That's what I'd like to know.

Okay. Thank you very much for your questions, Mr. Yokoyama. Okay, so for 99th business year, yes, well, this 0.4%, I'm not satisfied at all. But when it comes to issues -- so as Mr. Fujimura explained, recently, there have been many factors that have been pushing up the cost. And then so how much of that we can reflect that, the cost increases, in either in the form of cost reduction or price hikes? So to what extent we can recover? We don't know.

I mean, are we really doing enough? Maybe not enough. So we need to do a little bit more. And then also, this can be -- well, comes down to the semiconductor. But because the volume is below what we aimed for, so for the previous year, that was the biggest factor that we could not meet the volume that we were aiming for. So we want to reach this 4.35 million units right now. So that's what we are aiming for.

When it comes to issues and focus. So 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. So 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. But well, just taking on the electricity cost, that's only part of it. And then we had some impact from a semiconductor shortage. And then of course there will be some excessive fixed costs and all that. That would be another big item for the suppliers as well. So Mr. Fujimura will provide some additional information, including some specific numbers.

Okay. Thank you very much for the questions. Concerning the supplier support, 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, one after another. Our suppliers have had a lot of factors that increased their costs as well.

So on 1-to-1 basis, with each individual supplier in different regions, we have engaged in discussions and made some decisions. So last year, globally, we made about JPY 100 billion as cost increase support. So for that cost, without really reducing this cost, we want to -- we believe that cost level will continue at that level.

But as I said, per region, because of the pressure from inflation is working -- started to come 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.

But last year, business year, we saw main cost increases in North America last business year. And then in Japan -- sorry, for Japan, we have incorporated a bit of budget to support. And in North America, there was some cost increase. And then we have accepted the part prices in line with the part cost. And also, we had some volume expansion. And 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. So 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. So this is just an image, but this is how we are including our ideas and work together into our budget for this 100th business year.

Next question, from [Yomiuri], Newspaper, [Mr. Nakamura], please.

Can you hear me?

Yes.

Nakamura from [Yomiuri] Newspaper. I have 2 questions. Earlier, there was a mention to it, about Chinese, the discount situation. So it is like your discount competition. And how long do you think it will continue? In extreme cases, other companies offer another car, if I buy a car. And what is the extent of the discount in practice today?

And also second question is about forecast of operating profit, the highest-ever operating profit in the fiscal year 2024. Are there any other ever-highest numbers expected?

Thank you for your question, Mr. Nakamura. So for the question one, I'll address the part. And the second question will be supported by my colleague.

And then in terms of the discount, how long will it 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 country 6 -- or Stage 6b, and that is to ban certain types of models by a certain time.

So after the end of June, it is ended. And then from the July 1, we need to sell the product that satisfies Stage 6b type regulations. Other cars have to be sold out by the end of June because of that. And then, it was actually -- the deadline was end of December, they switched over timing. And then it was pushed upon until the end of June recently, and it is very difficult to tell how long it will continue because of such changes.

And Honda's perspective, we will not do extreme discounts such as buy one and then give you another car or extra discount. We are not going to do it. And for us, in the second half this year, we plan to launch new models. And it will refresh the models altogether, and I would 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 of JPY 480 billion or above. The operating profit in that segment that is going to be the highest-ever motorcycles.

And in terms of the net profit, JPY 1,000 billion. Before, there was a tax system change under the Trump administration. And then there was a release of some 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-high. I will get back to you with the more precise numbers later on. But in terms of the sales turnover revenue, it is also related to the exchange rate, about [JPY 18 trillion]. That is actually trending upwards.

Next, we would like to take the question from [Mr. Oribe] from Nikon -- sorry, The Daily Automotive Newspaper. Sorry.

This is Oribe from Daily Automotive Newspaper. I have 2 questions as well. First of all, about the factors for pushing up the operating profit, I believe that one comes from selling prices. But can we get more, a little bit, details about the negative factors, like the raw materials impact? So I believe there are some questions asked about support to supplier, how much of that is included in here.

And then sorry that I'm getting into different -- the details, but -- so you are expecting JPY 120 to $1 for '24. But probably this is more accurate. But when you do the -- if there was any background story you can share in consideration of the ForEx exchange rate as well.

Okay. So about the -- thank you very much. So your first question related to the past results as well as for outlook?

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, raw material cost down, reduction. So Mr. Fujimura can give you the details.

Okay. Okay. Then starting with the financial results. So the selling cost, if you can show those boxes showing the factors, it was -- we had a JPY 12.7 billion, minus. So what this is -- sorry, this minus JPY 27.4 billion. So the negative was about -- sorry, [JPY 180 billion] or so. And then we have logistics and labor costs, and those are included in there. So those -- we actually did a pricing that negated, that canceled, those factors enough. And then we have this [JPY 330 billion].

So for the outlook, we have a plus JPY 265 billion, then -- so this includes a positive effect from raw materials of JPY 50 billion, and then also minus JPY 40 billion. So the difference will be the cost increase and then that will be the net offset results of the selling price and the cost increase. But as mentioned earlier, for cost factors, sorry, this is something that we negotiate individually so I cannot talk -- really talk about it. But anyway, offset, there is about JPY 250 billion or so -- JPY 260 billion to JPY 250 billion or so.

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. And then maybe JPY 130 to $1 during the first half, JPY 120 during the second half. So that's what we -- that's where our JPY 125 average came through. That concludes my answer.

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 the reasons behind. And the chart says that JPY 56.5 billion for quality. And as you said, that is related to the recalls in the United States. And in the same box, you have a JPY 60 billion on the same box. And next one [JPY 800 billion] so forth, that is a negative impact. And what is the breakdown inside of the box?

And the second question. In the United States market, financial instability so forth are now happening today. But 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. So the operating profit from the past year, quality-related one is connected to the recall cost in the United States. That is your question. But actually, this is not limited to the U.S. But globally, there are other regions also connected to it. Main part is the U.S., but as a fact, however, other regions or countries are connected to the recall as well. But in terms of the numbers, Fujimura is going to answer.

But in terms of the U.S. market and financial instability, outlook of the economy and its impact on the automobile businesses, according to question. And I would say that market itself is quite solid as of now, recently. And FY 2023, toward the end of the fiscal year, the U.S. OEMs actually resuming their stock levels for the market. And then in 2020 FY, in the middle of the COVID pandemic, if you compared a situation to that, the stock level in the market is not that high as yet. It's not that much of the recovery, but also the market of the mid-term 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.

And then this is more of the macroeconomic perspective, but including a stable financial situation, but that part should be the area where we should pay close attention to, we shouldn't have pre-judgment on that. And 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. And 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. And then you say that other box is quite big. And then, I'm sorry that we couldn't give you a good explanation for that. In terms of the gross margin, it is JPY 6.4 billion. In the second quarter, a part of these said areas, entities had recognized the impairment of the fixed assets. That is up as much as JPY 300 million or so. And also we had the impact of the reduced unit sales, that is included in the a breakdown of the units of sold.

And Chinese ones actually are in a different box, about [340,000] units were down, reduced amount in China. And we have KD parts profits for Honda, and we had a royalty payment, less made from Chinese joint ventures, and we have consolidated subsidiaries in China where they had reduced profit level too. So as of those impairments of the subsidiaries, we have impact by the reduced volume situation in China that is in that.

And also JPY 80 billion expenses -- excuse me, JPY 60 billion expenses. The largest part out of that is the impact by the inflation of various countries. And most of that is actually for that reason. And then practically, maybe new models are starting up quite a bit. And then we do spend some advertisement of course, for the new models. But still, we try to maintain our lean structures that we achieved so far.

Next, [Mr. Hiraoka from News Fix].

This is Hiraoka from News Fix. Can you hear me?

Yes.

So as a total as your company, how do you generate the cash that goes into investment? And going forward, in your Automobile business, you will be spending a lot of our 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. So I'm thinking, just as a -- maybe this is an issue for the -- all across automotive companies. So how does -- how do you gain the cash? So for you, maybe motorcycle business is good and profitable. You can earn cash there. So 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 the automotive -- sorry, PBR across all Japanese companies tend to be low, rather, below 1. And then there are voices saying what give us the -- be accountable for this? In your case, in the medium- to long-term perspective, how do you propose to increase PBR?

Okay. Thank you very much for your questions, Mr. Hiraoka. I will leave all the details to Mr. Fujimura. But so are we, first of all to answer, if we are earning cash from a motorcycle business? Okay. Even for battery -- sorry, even for motorcycles, we need to convert to e-battery, electrify them in the future. But there is a bit of a time lag between motorcycles and automobiles. So in medium-term perspective, I think for the -- I think it's all fair to say that we can earn cash to put into automobiles.

So for BEV, you said that raw materials prices are really staying high. But when it comes to raw materials, you're talking about the batteries and cells, I guess that's what you are talking about. But this is something you cannot really say that the cost is staying up high across the board. You can't say that. This is something -- I mean, because it's a market, it moves up and down.

So I wouldn't really say -- the material cost does not hit only an individual company. So we hope to be, for those that moves up and down in terms of price/cost, 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. So 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. So 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. But when it comes to the specific KPI, we like to set up a road map and we'll communicate what our KPIs will be for going forward.

Okay then, well, just addition -- 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. But for automobiles, even though the operating margin, due to the fixed cost because the operating time is only 80% or less, so we hope to be able to earn 0.3% or higher.

So even though that's a situation in terms of earning in automobiles, but for operating cash flow, within the operating, we -- the depreciation that we can -- we are able to get this back. But also the equity earnings, the -- maybe 20% of the net profit comes from that. And then of course dividend from there is contributing as well.

And then in addition, there are some investment related to ICE we need to wisely manage in our operations. But as you have pointed out, going forward, we will be making a lot of investment in BEV, is that what you expected.

But what we are thinking of is that we need to maintain the current level of the investment. But just as a shift, we want to shift away from ICE, to spend more in R&D and investment for the new areas. So that's what we are thinking of. So 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.

Because 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.

I have 2 questions. One, about United States. The interest rate hikes and also the economy have a risk for the depression. But 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 support? And then 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 for your question, Mr. Uehara. So in this year, in the fiscal year 2024, how do we see the economies impact on the sales?

So in terms of the finance businesses, we have a basic revenues of our 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. And also the lease businesses, the residual values of the lease fleet vehicles, let's say. And so-called net charge-off. We take that net charge of quite severely because of the inflation and economic pressures. We have included our forecast quite severely for that part.

And also the fleet vehicles residual values, in the previous 2 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, better.

In terms of the residual values of those cars, actually in the past 2 years, it was quite favorable to us. However, in the upcoming fiscal year 2024, that is not going to stay positive, and that is our assumptions now.

And for the China situation, the FY 2024, it will stay with a bit of the difficulty in China. But after FY '25, we are going to strengthen the e:N series with the battery vehicles and so forth. More and more to add. And then for our businesses along, from the FY '25 onwards, we will expand the battery EV equals more, along with the revenues to enjoy as well.

And in terms of the details, in fact, in the last few years, as Mr. Aoyama said now, financial businesses were like we had losses of those residual value related to used car ones and also the bad debt things. And in fact, the used car prices were very high. And also, the government provided support for the individual consumers. And after the pandemic, there was not much of the loss cost. And we had about JPY 360 billion to JPY 380 billion, also. And then it went [on back that] until now.

But in fact, the cost as such is actually abnormal in the last 2 years. So I think we should say that we are coming 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. And in fact, after that is over, it will be turning to the appropriate level. But actually, when the lease period is over, the customers' cars will be returned back to us, and then we'll put that in the market of the used cars again. And we used to have 60,000 cars like that before pandemic. And now we have about 200, 300 cars, that kind of level.

In terms of the bad debt, we had -- we have about 0.3% of the bad debt impact, and we've been doing the assessment of the credit score, like 70%, 80% of score -- A, B score. And we try to be prudent in terms of the customers like that, and we try to control the asset side of the chart.

And when we had the financial crisis, we had a similar situation about procurement. The idea is how diverse -- how well we can diversify the procurement. And we [shouldn't] be optimistic, of course, but we will try like that. And we will stay operating with the procurement, and we have a policy as such.

Okay. Then with this, we 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.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]