本田技研 (HMC) 2009 Q1 法說會逐字稿

Good morning, everyone. Welcome to Honda Financial Results audio presentation. On July 25, 2008, Honda Motor released its earnings press release and presentation material of the result of the fiscal first quarter ended June 30th. Through this audio presentation, we'd like to share the overview and briefly recap the financial results, as well as the Company's new guidance for fiscal 2009.

PowerPoint material is available on the website on the same page. So please check it out. 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 the management assumption and belief taking into account information currently available to it.

Therefore, please be advised that Honda's actual results could materially differ from those described in the forward-looking statements as a result of the numerous factors, including general economic condition in Honda's principal market, 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'd like to start with a financial summary for the first quarter. Please see the slide four. Business environment during the quarter, crude oil price continues to increase and the raw material costs were soared. And the pressure with the inflation has been intense. U.S. recession fear growth, consumer spending in Western Europe became slow.

Asian countries slightly slow with the economic expansion and Japan economies showed a sign of weakness. As to the Forex environment, yen appreciate against the U.S. dollar and depreciate against other currencies such as euro and the Brazilian Real. Regarding the motorcycle market, growth in Asia and South America continued and the declined market for ATV and also the motorcycle in North America.

As for the automobile market, in the U.S. industry demand declined and is shifting toward more fuel-efficient vehicle. Demand in the Western Europe market has been declined. Rickshaws continue to grow and Japan stays weak in automobile demand. Under such business environment, Honda's unit sales of motorcycle were 2.715 million unit. Automobile unit sales were 962,000 units. Power product unit sales were 1.339 million units.

In terms of the financial summary for the quarter, top-line revenue became JPY2,867 billion, which is down 2.2% from last year. Operating income was flat JPY221.3 billion from last year. The income before income tax were JPY235 billion, an increase of 7.7% from last year. Income and equity income was JPY381 billion, which was up 3.2% and net income became JPY179.6 billion, which is up 8.1% from last year.

EPS for the quarter was [JPY98.98]. The currency environment during the quarter was average yen for the period was JPY105 against the U.S. dollar, which was JPY60 higher than last year. Average euro was JPY164, which is JPY2 weaker than the last year's period.

Let me start with Honda's revenue for this quarter. Please have a look at slide ten. Revenue decreased JPY63.9 billion, 2.2% from the same period last year, to JPY2,867.2 billion, due mainly to negative impact of currency translation effect, which offset the increase of automobile sales units in Asia and other regions.

[Changing focus] from the fiscal first quarter, calculated at the same exchange rate as shown in the slide. Operating income decreased JPY300 million from the same period last year to JPY221.3 billion, over JPY300 million decrease compared to the same period last year. Revenue and model mix was plus JPY128.1 billion, due mainly to decreased sales incentives in automobile business in North America.

Price change for the new year model and higher revenue, due to increased unit sales of motorcycles and automobiles. Cost reduction, the effect of raw material cost fluctuations was minus JPY9.7 billion. Our continuing cost reduction efforts were not enough to compensate the increase in raw material costs and the depreciation expenses.

Increasing SG&A expenses was minus JPY41.8 billion, due mainly to negative impact of increase in provision for losses or residual values, and advertising and sales promotion costs, which offset the positive impact of the decrease in warranty-related expenses.

R&D expenses decreased for this quarter, therefore was plus JPY4.3 billion. Currency effect at operating income was minus JPY81.3 billion. Thank you very much. Now we'd like to move to business overview during this quarter. [Ms. Hatori], please go ahead.

Let us elaborate on our financial results for the fiscal first quarter by business segment. The figures of revenue that we will mention are total of revenue from external customers and inter-segment. First of all, let me start with motorcycle business results for the fiscal first quarter. Please see the slide 12 on the presentation material.

Unit sales for the quarter totaled [2.715 million] units, an increase of 462,000 units or 20.5% from the same period last year. This increase was due to favorable sales in Asia and Brazil and an increase in sales of motorcycle parts for local production that Asian affiliates accounted for under the equity methods in Indonesia and India.

Neither petrol price increase nor interest rate hike has affected our motorcycle unit sales in Asia. On slide 13, revenue for the quarter amounted to JPY393 billion, which was an increase of 6.7% compared to the corresponding period last year, due to increased revenue in Asia and other regions.

Operating income for the quarter amounted to JPY31.1 billion, approximately the same level of the same period last year due to increased unit sales, although the price of raw materials increased. Operating margin was 7.9%. [Mr. Mauri] is speaking about automobile business results for the quarter next. Thank you.

Thank you. This is Mauri. I would like to talk about the automobile segment. Please see slide 14. In the auto segment, our total unit sales of 962,000 grew by 1.7% from a year ago. The increase was due mainly to favorable sales in Asia and other regions, which absorbed a decrease of unit sales in Europe, Japan and North America.

In Asia, sales of component parts of the Accord and CR-V contributed growth of sales, which was for Chinese equity method affiliates. The Accord in Thailand and Malaysia and the [flex] fuel vehicles of the Civic and Fit in Brazil made good sales.

Please see slide 15. For this quarter, revenue decreased 4.3% to JPY2,228 billion from a year ago, due mainly to the negative impact of currency translation effect, which was more than the positive impact of increased overseas unit sales. Operating income of JPY161.2 billion was up by 8.7% from last year. The increase benefited mainly from decreased sales incentives in North America.

The change in sales price for the new model year increased unit sales particularly in Asia and South America and continuing cost reduction efforts, which absorbed a negative currency effects caused by a stronger Japanese yen against the U.S. dollar, increased SG&A expenses and increased raw material costs.

Operating income margin improved to 7.2% compared to last year. I would like to move to Power Product business. Please see slide [15]. Unit sales totaled 1,339,000 units, down by 12.4% from a year ago. That decrease was due primarily to a decline in unit sales of general purpose engines for OEM production in North America and Europe, which were more than offsetting favorable unit sales on general purpose engines in Asia and South Africa.

Next is slide 17, in the Power Product and other businesses for this quarter, revenue of JPY100.3 billion was down by 8.6% from a year ago, which was due mainly to decreased unit sales of Power Products. Operating income of JPY200 million was down by 97.4% from last year. This was primarily due to increased R&D expenses of other businesses and decreased revenue. Operating income margin was 0.2%. Turning next to Financial Services businesses, I would like to pass the mic to [Osemo San]. Please go ahead.

Now let's talk about the Financial Services business. Reviewing the Financial Services business for the quarter, please see the page 18. Revenue of the Financial Services business for the quarter increased 5.2% to JPY149.5 billion thanks to the higher lease sales in North America. Operating income was up 15.9% to JPY287 billion due mainly to an increase in the provision for residual losses and net currency effect.

Operating margin [set] 19.2% for the quarter. Now we have [Mr. Takouschi]. He's General Manager of the Financial Division for this presentation. Mr. Takouschi, could you comment about this increase in these residual losses?

Yes, reflecting current gasoline price increase in the United States, that exceeding $4 per gallon. Demand for light truck includes family-size SUVs are declined. Given this situation, demand for the light truck and used car market also is getting worse. It is resulting in more than expected declining of seasonal buying of light trucks.

America Honda Finance, our wholly-owned subsidiaries, who had these sales programs, was a convenience of the customers and the declining of the (inaudible) light truck motors requires us to make additional provision enough to compensate these losses. Basically, we make this amount of the provision, [there are] big changes of this additional barrier in the marketplace.

However, the current decline of the result as well as the return date of the lease is of course became more than we estimated. These projections for losses are basically attributable to our capital lease program or direct finance lease program.

In terms of capital lease programs, additional (inaudible) insured to protect us from expansion of losses. So we are confident that this additional provision for SUV models in this past quarter will be enough to compensate if this now declined further. Besides this, we offer operating lease program since the end of 2006. Under the operating lease program, declining regional party of the leased car will impact us and an increase of depreciation cost during this past quarter.

An increase in depreciation cost due to expanding reserve loss was not significant. The total impact from the losses of this (inaudible) was about JPY21 billion during the quarter.

Thank you. Now I'd like to talk about Honda's operation in the first quarter by geographical segment. I'd like to start with Japan's segment. Please take a look at slide 20. During the first quarter of this fiscal year, revenue for domestic and export sales amounted to JPY1,149.6 billion, down 2.3% compared to the same period last year.

The down in the revenue was primarily due to decreased unit sales of motorcycles and automobiles in Japan, against the factor of Japan's declining total demand of motorcycles and automobiles. Operating income totaled JPY37.9 billion, down 37.5% from the same period last year. This was primarily because of the negative impact of the currency effects caused by the fall of the U.S. dollar and decreased revenue. These have more than offset the positive impact of decreased warranty-related expenses and R&D expenses.

Next please turn to slide 21. In North America, revenue totaled JPY1,493.1 billion, down by 5.7% from the same period last year. This was mainly due to the negative impact of the currency effects. Operating income was JPY94.5 billion down by 2.5% from the same period last year. There was negative impact from currency effects caused by the fall of the U.S. dollar, increased SG&A expenses related to allowance for losses on lease residual values and increased raw material costs.

The negative impact was more than the positive impact of decreasing sales incentives in the automobile business, changing sales price for the new model year and continuing cost reduction efforts. During first quarter of this fiscal year, U.S. automobile demand further deteriorated due primarily to the worsening consumer confidence and accelerating pace of gas price hike.

In such strong headwinds, Honda achieved strong retail sales results during the quarter, mainly in passenger car segment. It is particularly noting that Civic sales for the month of May exceeded 50,000 units for the first time ever and it became the best selling model, including light trucks.

At the end of first quarter, inventory level for the entire Honda line up came down to 46 days, and due to its record high sales, inventory level of Civic became extremely low. It is only 16 days at the end of June. Although we started taking various actions to try to increase the production volume for Civic, since this shift from larger SUV models to passenger cars happened so rapidly, it may take a while to resolve this supply shortage situation.

For light truck models, even Honda cannot be immune from market's drastic shift to more fuel efficient vehicles. As we announced, we are planning to shift production originating from Canadian plants to Alabama plant in early next year, and we are going to make production adjustment at Alabama plant for the next several months to optimize the inventory level Pilot and Odyssey so that we do not have to further strengthen our incentive program for these models.

There is no easy solution to remedy these tough market conditions, but as we have always been done in the past Honda will try to respond to customers ever-changing demand flexibly and swiftly as much as possible.

Next, please turn to slide 22. As for the operations in Europe, revenue totaled JPY364.5 billion, down by 8.9% from the same period in 2007 due to the decreased unit sales of motorcycles, automobiles and power products. Operating income amounted JPY11.2 billion, up by 9.5% from the same period last year. This was mainly due to continuing cost reduction efforts and a change in model mix, which has more than offset decreased revenue and the increasing SG&A expenses.

I would also like to touch on the updates of the European automobile operation. Now we face the weaker demand in UK and Continental Europe. Slower housing market and inflation is putting downward pressure on the consumer confidence in the United Kingdom. Spain is also facing similar downward pressure. And also we see the decreasing demand of diesel model in most of the European countries. This is primarily because of the rising diesel fuel price.

On the other hand, in Russia and Ukraine, the market is growing and Honda's sales is almost doubling on year-on-year basis. Next, I will turn to Ms. Hatori for information on Asia and other regions of operation.

Concerning our business results for the fiscal first quarter in Asia, please have a look at the slide number 23. As you can see, revenue increased 10.9% to JPY436.2 billion due to increased unit sales in every business segment. Operating income for the quarter totaled JPY48.3 billion, an increase of 30.7%. The increase of revenue in Asia more than offset the increased SG&A expenses and negative currency effect caused by the appreciation of the Japanese yen.

Operating margin was 11.1% in Asia for the quarter. For our equity and income of affiliates in Asia, please have a look at slide number 24. I would like to add for your reference operating income of affiliates in Asia for the quarter amounted JPY65.4 billion, which was an increase of 6.9%. This increase was mainly attributable to increased profit in China.

Now let me elaborate on our business results for the quarter in other regions but includes South America, Middle East, Africa and Oceania. Please have a look at the slide 25. Revenue for the quarter increased 29.8% from the same period last year to JPY293.7 billion due to increased unit sales in all business segments. Operating income for the quarter amounted to JPY36.3 billion. Although SG&A expenses for the quarter increased, higher revenue and the positive currency effects caused by the appreciation of the Brazilian Real against Japanese yen more than offset the negative impact and resulted in a 67.1% increase compared to the same period last year.

Operating margins was 12.4% for the quarter. Now [Mr. Atola] will speaking about change factors in income before income taxes compared to the results on the same period last year. Thank you.

Let me start with income before income tax. We have already explained the operating income changing point, so that I will start to explain the other income and expenses. Please have a look at the slide 27. (inaudible) was plus JPY17.8 billion and others were JPY600 million. Totaling other income and expenses were minus JPY17.1 billion. A detail of other minus JPY600 million were currency effect due to the difference between transaction rate and hedge rate was JPY11.7 billion. Swap cost was minus JPY12.4 billion.

Now I'd like to discuss the Company's new earning guidance for the fiscal year ending March 2009. Please see the page 34. Revenue will be JPY12, 130 billion, which is up 1.1% from last year.

Operating income will be JPY630 billion, which is down 33.9% from last year. Income before income tax will be [JPY660 million], which is down 26.3% from last year. Equity income of affiliates will be JPY117 billion, which is down 1.6% from last year.

Net income will be JPY490 billion, which is down 18.3% from last year. Net income per share will be JPY270.04. Currency assumption for the year will be JPY101 against the U.S. dollar and JPY162 yen against the euro. Guidance has been devised reflecting business environment changes. So [Mr. Takouschi] could you comment how earnings outlook has been changed from this [record]?

Yes please see page 35. We expect strong demand for Honda motorcycle and automotive and emerging market will continue to grow. In addition, we increased our new online model price in our second half budget. And our incentive spending will continue to be well controlled in the second half thanks to higher demand for our fuel efficient models.

We expect all these measures together will bring JYP265 billion positive driver for this year. On the flip side, impact of the raw material cost increase was reviewed concerning recent metal market trend and we expect it will be JPY179 billion negative driver compared to last year. Given this situation, also Forex impact is by a weaker yen environment compared to our previous forecast. Operating income is expected to be depressed to JPY630 billion.

Thank you, Mr. Takouschi. This concludes Honda's Fiscal First Quarter Earning audio presentation. Thank you again for listening to our web program. This is (inaudible), Investor Relations, and have a wonderful day. Bye bye.