本田技研 (HMC) 2008 Q4 法說會逐字稿

Good morning, everyone. Welcome to Honda's financial result audio presentation. On April 25, Honda Motor released earnings result for the fiscal fourth quarter ended March 2008, and also announced fiscal year ending March 2009 earning forecast.

Taking this opportunity, we'd like to share the overview of the financial and the business result, and also the new guidance for the fiscal 2009 over the next 30 to 40 minutes. Slide presentation material are also downloadable on this website.

This audio presentation contain 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 the management assumption and the belief, taking into account information currently available to it.

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

Now, I like to start with outline of the fourth quarter financial result. Please see slide three. Business environment during the fourth quarter are the United States have seen economic slowdown across all region, Asian market continued to grow, Japan's economy is likely to slow with weak consumer demand, crude oil price at record high and the commodity price also stay high. Yen appreciated against U.S. dollars, whilst depreciated against other major currencies.

Under such economic background, unit sales of Honda Motorcycles business during the quarter were 2.368 million unit, which was down 1.7% from last year. Sales in other regions, [centered in Brazil], were strong, while decreased sales of knockdown components to Indonesia undermined total unit sales.

Unit sales of Automobiles became 1.051 million unit, which were up 9.8% from the corresponding period last year. All sales in all region were increased. Sales in Latin America and North America were increased, supported by the higher demand of fuel-efficient vehicle. Unit sales of Power Products were 2.092 million unit; down 1.7% from last year. Increase in sales in Europe, Asia and other region were not enough to compensate for the decline sales in North America.

Regarding the fourth quarter financial result, please see the table in the middle. Top line revenue was JPY3,055.5 billion; a decrease of 1% from last year. Operating income became JPY168.8b; a decrease of 32.5% from last year. Income before income tax became JPY146.8b; a decrease of 38.6% from last year. Equity income was JPY24.3b, which is up 22.1% from last year. Equity income set a record high for the fourth quarter. Net income became JPY25.4b, down 85.6% due to a tax provision that is attributable to the adoption of FIN48, accounting for uncertainty in income tax. Earnings per share became JPY14.01.

ForEx during the quarter. Average yen for the quarter was JPY106 against the U.S. dollar, and JPY158 for euro.

For the full-year fiscal earning result, please see the page six (sic - see presentation) right-side table.

Net sales and other revenue was JPY12,002.8 billion. Operating income was JPY953.1b, which was up 11.9%. Income before income tax became JPY895.8b, which is up 13%. Income and equity was JPY118.9b; up 15% from last year. And net income because JPY600m, which is up 1.3% from last year. Sales and profit for the full fiscal year renewed record high. Earnings per share became JPY330.54.

We have [Kohed Takiochi] here, and he is General Manager of the Finance division, for this Web presentation. So, Mr. Takiochi, thank you for joining this program.

First of all, looking at fourth quarter financial result, higher sales of both Automobiles and the Motorcycle business boosted operating income JPY168b beating Company's January forecast. [Income in equity] also increased JPY24.3b. It also beat previous guidance. These result indicate that the business fundamental stays strong, despite of the tough business environment.

However, given the FIN48 option of our new accounting standard, Honda had a tax provision for income tax that's resulted in increasing effect of tax rate. So can you comment on this provision related to the FIN48?

Yes. First, I'd like to discuss the FIN48 and how it impacted to our financial statement. On April 1, 2007 Honda adopted FIN48. This interpretation clarifies the accounting for uncertainty in income taxes, recognizing financial statement in accordance with [SFAS 119] accounting for income taxes. Due to the adoption of FIN48, Honda had made a tax provision for unrecognized tax benefit.

So what reason behind this FIN48 impact?

As it is stated in the note of our financial Press Release, Honda has been under examination by Tokyo Regional Taxation Bureau with regard to transfer pricing taxation for the five fiscal year period ended March 31, 2006. In accordance with our (inaudible) examination, in the fiscal year ended March 31, 2008 Honda had made adequate provision for the income taxes uncertainties. This examination is related to our transaction between China old joint venture company.

Thank you very much. I'd like to move to the business overview during the quarter. We have Mr. [Yoichi Hojo] here for the revenue. Mr. Yoichi Hojo, please go ahead.

I'd like to talk about business overview over the last quarter and last fiscal year by going through unit sales result of each business segment. I'd like to go through from slide 10 to slide 13.

First, please take a look at slide 10, unit sales of Motorcycle. Total unit sales for the fourth quarter was 2.36 million units, decrease of 40,000 units, down by 1.7% from the same period last year. This was partly due to the decline in sales of component parts for assembly to our Joint Venture company in Indonesia.

On the other hand, we continue to see favorable sales results in countries like Brazil and Vietnam. For the 12-month result, unit sales was 9.32 million, decrease of about 1 million units, down by 10.1% decrease from the last year. But if we include unit sales of Honda Brand Motorcycle, which was manufactured for our overseas affiliates without any component parts supplied by Honda and Honda subsidiaries, we indicated in the grey column in the slide presentation, total sales has actually increased by approximately 600,000.

Next, please turn to slide 11. Automobile unit sales for the fourth quarter totaled 1.05 million, an increase of 94,000 units; up by 9.8% from the same period last year. Unit sales has increased in all of the regions, despite the difficult market situation in the countries, such as Japan and the U.S. Overseas sales of Civic and CR-V, and increase of component parts to China for assembly, sales of new Accord in the Middle East has contributed to the increase.

Next, please turn to slide 12. In our Power Products business, unit sales result for the fourth quarter was 2.09 million, decrease of 36,000 units; down by 1.7% from the same period last year. This was mainly due to the decrease of sales in the U.S. market. Sales of general purpose engines for OEM manufacturing, and sales of generators, was decreased in the United States, compared to the same period last year.

In other regions, unit sales has increased, such as general purpose engines for OEM in Europe, lawnmower in Australian, generators in South Africa. That was for the quick review of the unit sales result of the three business segments.

With that, please see the slide 13 for the net sales result. The slide shows the change of revenue from the same period last year by business segment, and the revenue was shown with the assumption of no currency effect. Total revenue for the fourth quarter amounted to JPY3,055b; a decrease of 1.0% from the same period last year. We estimate, if calculated at the same exchange rate as the same period last year, revenue for that quarter would have increased by approximately 4.4%.

This is it from me, and I'd like to turn to Mr. Oshima.

Thank you very much. U.S. [wholesales] increased with strong demand for the Accord and CR-V. In Motorcycle operation, we see the strong sales momentum in Brazil. In Power Products, sales declined, due mainly to soft demand in North America. Now I'd like to gear shift to the increase and decrease factor in operating profit. [Mr. Taka Siggiyema] will explain the detail of the operating profit. So let me turn to microphone to him. Mr. Siggiyema, please go head.

I'd like to explain the increase and the decrease factors of the operating income for the fourth quarter. Please see slide 15. The revenue and the model mix has decreased about JPY28.3b, due mainly to the negative impact of increased sales incentives in North America and change in model mix, which offset the positive impact of the increased profit from increased unit sales in Automobile business segment, and change in sales prices.

Cost reduction, the affect of raw materials cost fluctuations was plus JPY31.6b, due to the increased continuing cost reduction effects, which offset increased the (inaudible) country increasing raw material prices, and the increase of depreciation expenses.

Increase in SG&A was minus JPY46.2b, due mainly to increase in provision for the allowance for credit losses, increase in quality-related expenses and sales expenses and logistic fee due to the increase in unit sales. Decrease in research and development expenses was plus JPY44b (sic - see presentation), and for the currency impact was minus JPY42.8b, due mainly to depreciation of U.S. dollar. As a result, the operating income for the fourth quarter totaled JPY168.8b (sic - see presentation); a decrease of 32.5% passing from the same period in 2007.

Thank you, Siggiyema. Shifting gear to the currency impact of the quarter, please see page 17 and 18 slide. The transaction between region-to-region will provide a currency gain and loss to the revenue and the profit. In this quarter, as is seen on page 17, we have negative JPY42.8b, the currency impact in our operating income. This negative JPY42.8b consists of negative JPY32.3b foreign exchange, and a negative JPY10.4b of currency translation impact when falling currencies stated financial statement consolidated. This impact will appear within the operating income.

On the other hand, we also had a currency impact in other income and expenses. That is attributable to the difference between the market rate and our hedging rate. In this quarter, the hedging impact were positive JPY28.1b. All the details are seen in page 18 slide (sic - see presentation).

Regarding gain and loss on derivative installment that impact to other income and expenses, please see the slide 19 (sic - see presentation). Honda has entered into the currency exchange agreement and interest rate agreement to manage currency and interest rate exposures.

This installment include foreign currency hoard, currency swap, currency option, and interest rate swap agreements. Change in the fair value of these derivative financial installment in this quarter are positive JPY21.8b for currency exchange contract, negative JPY41b for interest rate swap agreement and a negative JPY10m (sic - see presentation) for others, totaling negative JPY22.2b (sic - see presentation).

Now, I'd like to turn the microphone to Mr. [Takwe Morie] and [Miss. Hitori] for business segment and geographical information. Mr. Morie, please go ahead.

I would like to elaborate respective businesses for this quarter. At the outset, I would like to begin with Motorcycle business. Please see page 20.

Revenue for the fourth quarter totaled JPY444b, increased by 5.3% from last year, primarily attributed to increased sales in Asia and other regions. Operating income was JPY52.7b; up by 19.3% from a year ago. This increase was mainly due to continuing efforts to reduce costs and favorable model mix changes, which has more than offset increased SG&A expenses. Operating margin was 11.9%.

Let's move on to the next segment, Automobile business. The slide number is 21. Revenue for the fourth quarter decreased 3% to JPY2,356.6 billion. The decrease was attributable to the negative impact of currency translation effect, which compressed increased unit sales gains. Operating income was JPY79.5b, decreased 49.6% from a year earlier. The decrease was primarily due to increased sales incentives in North America, and the negative currency effects caused by a stronger Japanese yen against U.S. dollar, which was more than increase in its sales. Operating margin was 3.4%.

I would like to update North American and Russian Automobile business. For the first, in North America industry demand is getting soft these months and the gas price continues to hike. Segment shift have been accelerating toward fuel-efficient vehicles. Under such severe environment, the Honda product, [Fortaforeal] is adapting well to such current direction of the marketplace. In March, sales of fuel-efficient models, such as the Civic and the CR-V, leaded the Honda division, which was up 2.8% year to date.

As all our analysts aware, all the data shows average incentives for Honda and Acura models were under $1,200, quite below the industry average. As for inventory, Honda and Acura reduced inventories to 60 days in March. We believe it is important to maintain flexibility within our North American production operations to supply vehicles in order to match customer demand.

We decided to transfer production of the (inaudible) from Canada to Alabama. The (inaudible) model production in Alabama is expected to begin in early 2009. We will enable to further increase production of fuel-efficient Honda Civic by this transfer, and new India plant, which will start production of the Civic this autumn.

We could have an alternative to transfer the CR-V from Japan to the United States. Honda will try to absorb such market change with our fuel-efficient models, and the forthcoming all-new redesigned models, such as the Acura TSX, the Pilot, the [Acuratiel], and the Honda Fit.

For Russian business, from January to March this year, total Automobile demand in Russia significantly increased from last year, in line with the strong economic performance. Honda's retail sales in Russia in March period grew by 241%. The sales increase was due to the increasing number of dealerships, and the strong demand for the Civic and the CR-V. Moreover, Honda's Turkish plants started to supply the Civic this January.

Next is Power Products and other businesses. Please see slide number 22. Revenue decreased 2.4% to JPY122.3b from a year ago. The decrease was mainly owed to decreased unit sales of Power Products in North America and the negative impact of currency translation effects.

Operating income was JPY5.1b; down by 29.2% from a year earlier. The decrease was primarily due to the increased SG&A and R&D expenses, and the negative currency effects caused by a stronger Japanese yen against U.S. dollar. Operating margin was 4.2%.

With regard to our Financial Services business, please see slide 23. Revenue increased 19.6% to JPY141.7b from a year ago. The increase was mainly due to the increase in leased car sales. Operating income decreased 23.4% to JPY31.3b from a year earlier. The decrease was primarily due to the increased SG&A expenses. Operating margin was 22.1%.

Next, I will elaborate on segment information by each geographical area. I will use slides 25 through 30.

First, Japan segment, which is a combination of Japan domestic business and exporting business. Net sales for Japan segment was down 1.1% to JPY1,251 billion. Slowing down of the U.S. economy negatively affected export business. Operating income was JPY2.3b; down 96.5%.

Appreciation of the Japanese yen against the U.S. dollar, increasing material costs and higher depreciation expenses more than offset positive impact of decreased research and development costs and SG&A expenses. Operating margin was 0.2%.

Next, North American segment. Please turn to slide 26. Net sales in North American region was JPY1,484.1 billion, down 11.2% compared to the same period last year, due primarily to the negative translation effects of depreciated U.S. dollar. Operating income was JPY63.1b; down 50.8%.

This decrease is mainly attributable to the increase in provision for sales incentives in Automobile business, increase in SG&A expenses, negative currency impacts of appreciated Japanese yen against the U.S. dollar and increased raw material costs. Operating margin was 4.3%.

Concerning European segment, please turn to slide 27. Net sales for European region was JPY441.3b, increased by 0.3% from the same period last year. Unit sales growth in both Automobile and Power Products business contributed to this increase of revenue.

Operating income was JPY18.6b; up 47.0% from the same period last year. Positive impact of continuing cost reduction efforts, and increased profit from higher revenue, more than offset increased SG&A expenses. Operating margin was 4.2%.

As of Asia, please turn to slide 28. Net sales in Asia was JPY415.9b; up 13.4% from the same period last year. Unit sales growth in every business was more than offset the negative translation effects of appreciation in Japanese yen. Operating income was JPY21.9b; up 14.6%. Increased profit from higher revenue contributed and more than offset the increase in SG&A expenses.

Concerning the equity income of affiliates in Asian region, please have a look at slide 29. Because of increased profit of affiliates in Asia, fourth quarter's equity income of affiliates in Asian region was JPY14.3b; more than double compared to the same period last year.

Lastly, please turn to slide 30. Net sales of other region, including South America, Middle East, Africa, and Oceania were up because of the unit sales growth in every business segment, resulting in JPY313.9b of revenue, increased by 35.7%. Positive impact of currency translation effects also contributed to this increase.

Operating income for other regions was JPY32.7b; up 67.8%. Positive impact of depreciated yen against the Brazilian real increased profit from higher revenue and our cost reduction efforts more than offset the increase of SG&A expenses. Operating margin was 10.4%.

With that, I will turn microphone back to you.

Thank you very much. Now, I'd like to discuss fiscal year 2009 Company's earning guidance. Please see slide 40. Consolidated net sales will be JPY12,140 billion, which is up 1.1% from last year. Operating income will be JPY650b.

Income before income tax will be JPY675b. Income in equity will be JPY106b. Net income will be JPY490b. Earnings per share will be JPY270.04. Regarding currency assumption for the year, we expect the yen will be JPY100 against the U.S. dollar, and JPY155 against the euro.

Turning to the key driver for the fiscal year '09, operating income, I'd like to invite Mr. Takiochi for some additional comment. So, Mr. Takiochi, could you comment on expected key drivers for this fiscal year?

Major drive for the year will be volume growth in Asia and Latin American market. We expect total Automobile sales will increase over 200,000 unit in this fiscal year. On top of that year's higher sales, we expect the price increase and year-on-year incentive decline will support boosting our revenue.

Mr. Takiochi, could you comment on our Financial business too?

Our Financial business continued to grow in line with growth of [old] sales in U.S. Basically, our Financial business offered very conservative and we have very cautious credit policy. Due to our conservative policy, finance (inaudible) for rolling 12 month remained at around 58 basis point at the end of the month 2008.

Given that circumstance, despite of the increase, increasing in the provision for retail losses and the credit losses, [FAD] interest rate cut could ease the rising of CP spread on cost side, so we expect that we can maintain healthy margin level for this fiscal year.

Let me add some regarding our dividend plan. For --