本田技研 (HMC) 2009 Q2 法說會逐字稿

Good morning, everyone. Welcome to Honda financial results audio presentation. On October 28, 2008, Honda Motor released its earnings press release and the presentation material for the results of the fiscal second quarter and the first half period ended September 30. Through this audio presentation, we'd like to share overview and have briefly recap the financial result, as well as Company's revised guidance for the fiscal year 2009. PowerPoint presentation can be downloadable from the website.

This audio presentation contains forward-looking statement 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 result could materially differ from these described in these forward-looking statements as a result of the numerous factors, including general economic condition in Honda's principal markets, and the foreign exchange rate between the Japanese yen and the US dollar, and 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 second quarter. Please see the slide three. Business environment during the quarter are oil price continue to volatile and the raw material costs stay high. A fear for the US recession accelerated. After the financial crisis, consumer spending in the Western Europe became weaker.

Looking at Asian countries, its economic expansion became slow. Japan economy showed a sign of the weakness.

As to the ForEx environment during the quarter, yen appreciated against both the US dollar and the euro and it depreciated against other currencies, such as Brazilian real.

Looking at the motorcycle market, demand in Indonesia, India and Brazil continued to be strong while in the US demand for the ATV and off-road motorcycles were declined.

As for the motor automobile market, industry demand in the US and Western Europe declined, particularly centered in light truck vehicle in America. On the other hand, in the emerging place, demand in Brazil and Russia continued to grow, but demand in India and China became soft. Under such a business environment, Honda's unit sales of motorcycle were 2,893 million units; automobile unit sales were 935,000 units; Power Products unit sales were 1,202 million units.

Financial result for the quarter are top line revenue became JPY2,826.8 billion, down 4.9% from last year. Operating income was down 48% to JPY148.8 billion from last year. Income before income tax was JPY149.4 billion, a decrease of 44.6% from last year. Income in equity income was JPY27.2 billion, which is up 4%, and the net income became JPY123.3 billion, is down 40.9% from last year. EPS for the quarter are JPY67.96.

Currency environment during the quarter was average yen for the period was JPY108 against the US dollar, which was JPY10 higher than last year. Average euro was JPY161, which is JPY1 higher last year.

Now, I'd like to switch the microphone to Mr. Ito for his discussion about analysis of the operating profit for the quarter.

Let me start with Honda's revenue for the second quarter. Please turn to slide 10. Revenue decreased JPY144.4 billion, 4.9% from the same period last year, to JPY2,826.8 billion due mainly to negative impact of currency transactional effect, which offset the increase of motorcycle sales units in India and other regions. Changed factors from the fiscal second quarter calculated at the same exchange rate as shown in the slide, revenue for the first half is shown in the slide.

Next, I will elaborate various factors affecting operating profit [rise]. Please turn to slide 12. Operating profit for the second quarter of this fiscal year was JPY148.8 billion, which is a decline of JPY137.4 billion compared to the same period last year. Volume and mix was a negative impact of JPY32.7 billion due, primarily, to the increase of sales incentives and a decline in sales units in North America auto business, which was more than offset some positive impact from '09 model pricing.

Concerning the net of cost down efforts, an increase of raw material cost was a negative impact of JPY10.7 billion. Increase of raw material costs and depreciation included in the production cost were more than offset a positive impact of continuing cost down effort.

The impact of SG&A expenses was a JPY50 billion negative due, primarily, to the increase of credit loss expense, provision for residual losses and advertising expenses. R&D expenses were positive impact of JPY3.1 billion.

Lastly, the impact from exchange rate fluctuation was a negative of JPY47.1 billion.

The detail about operating profit for the first half, please look at slide 13.

Next, I'd like to move to business overview for the second quarter. We have [Miss Hatori] here for the review.

Let us elaborate on our financial results for the fiscal second 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 speak of motorcycle business results for the fiscal second quarter. Please see the slide 15 on the presentation material.

Units for the quarter totaled 2,893,000 units, an increase of 560,000 units, or 24% increase from the same period last year. The increase was due to favorable sales in Asia and Brazil and increased sales of component parts for Asian affiliates in Indonesia and India.

Although interest rate hike and deterioration of consumer sentiment due to credit crunch being a concern in Asia, overall unit sales of Honda motorcycles has been growing year-over-year. Honda's models in Vietnam, Wave Series and Air Blade, have been selling well and contributed to Honda's favorable sales year-over-year. However, slowing momentum in the market could be a concern in the coming months.

On slide 16, revenue for the quarter amounted to JPY401 billion, which was an increase of 5.1% compared to the corresponding period last year due to increased revenue in Asia and other regions and cost reduction efforts. Operating income for the quarter amounted to JPY46.3 billion, increased by 25.4% from the same period last year due to increased unit sales, although the price of raw materials increased. Operating margin was 11.6%.

Next, [Mr. Mori] is speaking about automobile business results for the quarter. Thank you.

Thank you. This is Mori speaking. Please see slide 17. In auto segment, our unit sales totaled 935,000, slightly down from a year ago. There was a decrease due mainly to weak demand for light trucks in North America and decreased unit sales of the CR-V and Civic in Western Europe. The decrease of said favorable sales of knock-down parts of the Accord and CR-V for our equity method affiliates in China, and increased sales of the Flex Fuel Vehicles of the Civic and Fit in Brazil.

Please see slide 18. For this quarter, revenue decreased 7.9% to JPY2,170.6 billion from a year ago due mainly to the negative impact of currency translation effect. Operating income of JPY79 billion was down by 62.9% from last year. The decrease was mainly from the negative impact of decreased revenue, model mix, the negative currency effects caused by stronger yen, increased SG&A expenses, and increased raw material cost. These decreases were more than continuing cost reduction efforts. Operating income margin decreased to 3.6% from a year ago.

Reviewing the financial businesses for the quarter, please see page 21. Revenue of the financial services business for the quarter increased 18% to JPY162.6 billion due, primarily, to the operating resales in North America. Operating income was declined 17.1% to JPY24.3 billion due mainly to an increase in provision for the credit losses and the residual losses. Yen appreciation also provide a negative impact. Operating margin became 14.9% for the quarter.

We have Mr. Takeuchi, General Manager of the Finance Division for this presentation, and I like to ask him to comment about the increase of these provisions.

Yes. Reflecting price hike of gasoline and weak demand for light truck model increasing SUV, the general losses on all these sales have been increasing for this quarter. On top of that, losses on [auto] loan has been (inaudible) too.

America Honda Finance, our wholly-owned subsidiaries, provide [auto] lease end of loan for convenience of the customers. Expansion of losses on auto lease end of loan (inaudible) making additional provision enough to compensate these losses. We analyzed that impact of these provision during the quarter amounted to [JPY20 billion]. With this, we expect total provision for the losses with regard to credit under this division for the fiscal year will become JPY49 billion.

Thank you, Mr. Takeuchi. Now, I'd like to switch the microphone to [Mr. Okayama] who will elaborate our regional operation, Japan, North America and Europe. So Mr. Okayama, please go ahead.

I'd like to talk about Honda's operation in the second quarter by geographical segment. I'd like to start with the Japan segment. Please take a look at slide 23.

During the second quarter of fiscal year '09, revenue for Japan's domestic sales and export sales was JPY1,193 billion, down 1.8% compared to the same period last year. This was due, primarily, to decreased export sales in automobile business.

Operating income was JPY40.9 billion, down 44.2% from the same period last year, primarily due to the negative impact of the currency effects caused by the appreciation of the Japanese yen, together with the negative impact of decreased revenue and model mix, and increased raw material cost and depreciation expenses. These factors more than offset our continuing cost reduction efforts and decreased SG&A expenses.

Next, please turn to slide 22. I'd like to start with touching on the updates of the Honda's sales in the United States. In late September, we saw further deterioration of US market after the turmoil of the financial crisis.

In such strong headwinds, Honda continued to maintain its relative strengths in the industry thanks to its model line-up, which is less dependent on large trucks. For example, September sales of the all new Fit was almost 50% higher compared to the same month of last year. Also, the demand for Civic, another popular model, is still very consistent but, due to the constraint in production capacity, year-over-year sales for that model slightly declined in the second quarter.

Sales incentives for passenger cars maintained lower level than last year but more than optimum level of inventory for light truck models is dragging Honda's overall incentive level. And I should note that Honda is not immune from the effects from the credit crisis. The dealer traffic after the Labor Day weekend started to become much slower. Considering the recent development in the market, as we have just announced today, we plan to lower the sales volume target for this fiscal year, and planning to further enhancing the manufacturing flexibility at its Alabama plant to weather these headwinds.

In addition to the already announced [original] production shift from Canada, we will start producing Accord V-6 engine model in Alabama plant in the middle of 2009. By this change, Honda's renowned manufacturing flexibility in North America will be further bolstered.

With this background, Honda's revenue last quarter decreased by 12% from the same period last year, totaling JPY1,370 billion due to the negative impact of the currency effects, which was on top of the decreased unit sales in all of the business segments. Operating income also decreased by 80.6% from the same period last year. This was due, primarily, to increased SG&A expenses, the negative impact of yen appreciation, together with the increased raw material costs, and the increased provision related to credit losses and lease residual values.

Next, I would like to talk about Europe. Please see the slide 25. This second quarter, we saw revenue decrease by 10.3% from the same period last year. This was primarily because of the negative impact of currency translation effects and the decreased revenue in automobile business. Operating income decreased by 50.5% from the same period last year. This was due, primarily, to the negative impact of decreased revenue, model mix etc.

I should also briefly comment on the European auto business operation. We saw further decline in total demand in the UK and Spain during second quarter. Weaker consumer confidence with uncertainty in the UK, and the increasing auto-loan rejection in Spain was the reason behind it. We foresee this trend to continue in those countries which suffers the effects of the financial crisis of the United States. Honda decided, and already announced, a production cut in the UK factory which produces Civic and CR-V.

On the other hand, strong demand in Russia has been moderating since the conflict started in Georgia and the Russian stock market collapse. However, we expect positive impact in the second half by the introduction of all new Accord tourer and second generation Jazz.

And, with that, I will turn to Mr. Ito for the information about Asia and other regions.

Concerning our business result for the second quarter in Asia, please look at slide 26. Motorcycle sales units increased in Indonesia, India and Vietnam, and automobile sales units increased in China and sales of Jazz were strong in Indonesia and Thailand.

As a result, revenue increased 8.7% to JPY451.8 billion. Operating income for the quarter totaled JPY36.6 billion, an increase of 9.6%. Increase of revenue in Asia more than offset increased SG&A expenses and the negative currency effect caused by the appreciation of the Japanese yen. Operating margin was 8.1%.

For your reference, I'd like to talk about operating income of our affiliates in Asia for the quarter amounted to JPY65.4 billion which was an increase of 16.1%. For the earning performance of our equity in income of affiliates in Asia, please look at the slide 27.

Now let me elaborate on our business results for the quarter in other regions, that includes South America, Middle East, Africa and [Australia]. Please look at the slide 28.

Motorcycle sales unit increased in Brazil such as CG125 FAN, 150 TITAN and so on. And automobile sales unit increased in Brazil supported by Civic FFV and Fit. As a result, revenue for the quarter increased 30.5% from the same period of last year, to JPY349.5 billion.

Operating income for the quarter amounted to JPY48.7 billion. Also SG&A expenses for the quarter increased. Higher revenue and a positive currency effect caused by the appreciation of the Brazilian real against Japanese yen was offset the negative impact and resulted a 61.7% increase compared to the same period last year. Operating margin was 14% for the quarter.

That is all for the operation by each geographical area. Thank you.

Regarding the factors affecting income before income taxes, please turn to slide 30. Re-evaluation of derivative instruments was a positive impact of JPY56 billion. And other non-operating income and expenses was a negative impact of JPY39 billion. The contents of the negative impact of JPY39 billion are [Others].

This JPY39 billion consists of JPY10 billion of negative impact generated by the difference between transaction rate versus hedge rates. And the other JPY29 billion negative impact was coming from the increase in the cost of interest rate swap transactions.

The total impact of ForEx was JPY57.1 billion which is a combination of JPY47.1 billion through operating profit line. And the before mentioned JPY10 billion is non-operating line. More details about the currency effect and the re-evaluation of derivative instruments, please look at slide 31, 32. Thank you very much.

Now I'd like to discuss Company's new earning guidance for the fiscal year ending March 2009. Please see the page 41. Revenue will be JPY11,600 billion, which is 3.4% down from last year. Operating income will be JPY550 billion which is down 42.3% from last year. Income before income tax will be JPY580 billion, down 35.3% from last year. Equity in income of affiliated companies will be JPY125 billion, an increase of 5.1% from last year.

Net income will be JPY485 billion, down 19.2% from last year. EPS will be JPY267.29. Currency assumption for the second half period will be JPY100 against the US dollar and JPY135 against the euro.

Company's guidance has been revised expecting further deterioration of auto demand in major auto market. Mr. Takeuchi, could you comment how the earning outlook has been changed from our previous guidance in July?

Yes, please see page 43. We expect strong demand for Honda motorcycle in emerging markets will continue to grow. Together with our joint venture company in Asia, we expect motorcycle operation can generate solid profit even under such severe business environment.

On top of that, thanks to Fit, CIVIC and CR-V we expect that these [fair] Accent models will continue to beat the competiveness in global marketplace. However we revised our auto production and sales (inaudible) in North America in Europe as well as weaker model mix it will impact larger in our revenue. Despite of less incentive spendings in US market, we expect these factors will bring JPY124 billion negative driver compared to our July estimate.

On the flipside, impact of raw material costs was (inaudible) concerning recent global metal market and we expect JPY36 billion cost saving compared to our July estimate.

SG&A expenses are also expected to save JPY41 billion from our previous estimate. As to ForEx, we expect ForEx impact became large about JPY48 billion compared to our previous forecast and the operating income depressed to JPY580 billion.

Thank you Mr. Takeuchi. This concludes Honda's fiscal second quarter earnings audio presentation. Thank you again for listening to our web programs. This is Oshima, Honda Investor Relations and have a wonderful day.