本田技研 (HMC) 2009 Q3 法說會逐字稿

Good morning, everyone. Welcome to Honda financial results audio presentation. On January 30, 2009 Honda Motor released its earnings press release and presentation material of the result of the fiscal third quarter ended December 30. Through this audio presentation we would like to review in summing up its financial result. We'd also like to discuss about the Company's revised guidance for the fiscal year 2009. PowerPoint presentation can be downloaded by clicking the picture of all-new Insight on the left side of this page.

This audio presentation contains forward-looking statements as defined in Section 27A of the Securities Act of 1933 as amended, and [Security] 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 this [forward-looking statement] 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.

For the third quarter, please see page six -- slide six. Business environment during the quarter are demand for the car (inaudible) market, demand in Asia and Brazil became soft, while Indonesian market continued to be robust as market. Sales in [Brazil and Russia] start to slowing down. Demand in India and China continued to be soft during the period. Under such business environment, Honda's unit sales for Motorcycles were 2.5 million units. Automobile unit sales were 940,000 units. Power Product unit sales were 1.115 million units.

Financial result for this quarter are top line revenue became JPY2,533.2 billion, down 16.8% from last year. Operating income was down 62.9% to JPY102.4 billion from last year. Income before income tax was JPY86.7 billion, a decrease of 66.7% from last year. Equity in income of affiliates was JPY30.7 billion, which was down 1.6%. And net income became JPY20.2 billion, down 89.9% from last year. EPS for the quarter was JPY11.15 (sic - see Presentation).

Currency environment during the quarter or average yen for the period was JPY96 against $1, which was JPY30 higher than last year. Average euro was JPY126 per EUR1, which is JPY30 higher than last year.

Now, I'd like to switch the microphone to Mr. Ito who will discuss about analysis of sales revenue and operating profit for the quarter.

Let me start with Honda's revenue for the third quarter. Please turn to slide 10. Revenue decreased JPY511.5 billion, 16.8% from the same period last year, to JPY2,533.2 billion, due mainly to the decrease of automobile service units and the negative impact of currency transaction effect, which offsets an increase of motorcycle sales units in Asia and other regions. Change factors from the fiscal third quarter, calculated at the same exchange and interest rate, we estimate the revenue went down 4.4%. If we use the exchange rate of the same period last year, revenue for the nine months is shown in the slide.

Next, I will elaborate each factor affecting operating profit line. Please turn to slide 12. Operating profit for the third quarter of this fiscal year was JPY102.4 billion, which is a decline of JPY173.7 billion compared to the same period last year. Change in revenue provided a positive impact of JPY14.8 billion, due primarily to the increase from ['09] model pricing adjustment, which has more than offset some negative impact of model mix in automobile business.

Cost [effects] and the increase of raw material cost net was a negative impact of JPY54.1 billion. Increases of raw material cost and increase of fixed cost per unit, as a result of reduced production cut, were more than offset positive impact of cost reduction efforts.

The impact of SG&A expenses was a negative JPY18 billion, due primarily to the increase of credit loss expense, [related to] residual losses and one-off expenses for restructuring measures, which offset the decrease of quality-related expenses and advertising, sales promotions.

R&D expenses were negative impact of JPY2.1 billion. The impact from foreign exchange was a negative JPY114.2 billion. Operating profit for the nine months, please refer to slide 13.

I'd like to move to business segment overview for the third quarter. First of all, (inaudible) operate Motorcycle business results. Please see the slide 15 on the presentation material. Unit sales for the quarter totaled 2,504,000 units, an increase of 138,000 units or a 5.8% increase from the same period last year. This increase was due to strong sales in Asia and in Brazil.

We are seeing a continuing decline of demand in the developed countries and the deterioration of consumer sentiment is gradually spreading to the emerging markets as well. Under such circumstances, overall Honda's unit sales of motorcycles grew in the quarter thanks to Asia and the Brazil market. Honda's models in Vietnam, Wave Series and Air Blade, have been selling well. Aviator and CBF Stunner are good sales in India. [125 FAN] and CG 150 TITAN are also strong sales in Brazil.

On slide 16, revenue for the quarter amounted to JPY342.8 billion, which has a decrease of 6% compared to the last year, due mainly to negative currency transaction effects, which offsets a positive impact of increase of sales units.

Operating income for the quarter totaled JPY25.2 billion, decreased by 16.9% from the same period last year due to increased raw material cost and the negative impact of currency effect caused by the appreciation of Japanese yen more than offsetting the positive impact of increased revenue, cost reduction efforts. Operating margin was 7.4%.

Now, I'd like to turn the microphone to Mr. Mori speaking about automobile business results. Thank you.

Thank you, Ito-san. This is Mori speaking. Please see slide 17. As for Auto segment, Honda's unit sales for third quarter amounted to 940,000 units, down by 5.1% from a year ago. The brand new City and Accord in Thailand, the flex-fuel Civic and CR-V in Brazil and knock-down parts to joint venture companies in China were the contributors for this quarter. The decrease in the sales was due mainly to weak demand for light trucks in North America and weak sales in Europe.

Please see next slide. Revenue for this quarter decreased 19.4% to JPY1,974.2 billion from a year ago, due mainly to the negative currency translation effects and decreased sales in North America.

Operating profit decreased 68% to JPY70.5 billion from last year, due mainly to increased raw material costs, decreased revenue, increased SG&A expenses and the impact of stronger yen more than offsetting continuing cost reduction efforts. Operating profit margin was 3.6%.

Let me move on to Power Products; slide number is 19. Third quarter's sale totaled 1,115,000 units contributed by water pumps, WB300 in Indonesia and general purpose engine GX series in China, the Middle East and Brazil. But decrease in unit sales by 5.3% from a year ago was caused by weaker sales of general purpose engines in Europe and generators in North America.

Please see next slide. This quarter's revenue of Power Products and other businesses decreased 20.6% from last year and totaled to JPY79.5 billion. The decrease was due mainly to weaker sales of Power Products and stronger yen.

The company reports an operating loss of JPY2.8 billion. The drop from a year ago was due to weaker revenue, weaker model mix, stronger yen and increased R&D expenses of other businesses, which were more than SG&A expenses savings. Operating profit margin was minus 3.5%.

Thank you. I would like to pass the mic back to Oshima-san.

Reviewing Financial Services Business for the quarter, please see the page 23. Revenue of Financial Services Business for the quarter increased 4.6% to JPY146 billion, due primarily to the operating resales increase in North America.

Operating income was declined 58.5% to JPY9.4 billion, due primarily to an increase in provision for credit losses and residual losses. The yen appreciation also provided a negative impact. Operating margin became 6.5% for the quarter.

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

Yes. Reflecting current softer demand in automobile market, used car price has been fluctuating so much and getting more pressure in most of the segments. For instance, when gas price increased last year customers were not interested in the trucks and SUV. So price of these trucks and SUVs were dropped in each country.

However, in the second half last year, as gas price dropped, used car buyers are more interested in trucks and the rest down to (inaudible) passenger cars. Then used passenger car price started to drop. Given that situation, recently [original buyer] of the used car in compact and mid-sized segment were dropping. In addition to this, as more lease of cars are [returned] than we expected.

These losses on [residual value] is impacting our financial Business because American Honda Finance, our wholly-owned subsidiaries, provides [auto] lease and loan for the convenience of the customers, need to book additional provisions, enough to cover these losses. We analyzed that the impact of the provision for [residual] losses during this quarter increased JPY25 billion compared to same period last year.

Thank you. Now I would like to speak about Honda's operation in Japan, North America and Europe on slide 23 starting from the third quarter results in Japan.

Revenue, which includes both domestic and export sales, amounted to JPY1,079.2 billion, which was a decrease of 13.4% from the same period last year. This was mainly due to decreasing sales of automobiles in Japan. Operating loss was JPY64.3 billion, decreased JPY120.5 billion from the third quarter last year.

Negative factors such as decreased revenue and change in model mix, increased raw material costs and the negative currency effects ,due to the appreciation of the Japanese yen, negatively impacted more than offsetting continuing cost reduction efforts and decreased SG&A expenses. Operating margin was minus 6%.

Competition in Japanese automobile market has long been very severe. On top of it, consumer spending in Japan has been even more sluggish since the economic turmoil spreading around the world from autumn last year. Although Honda sees registration vehicles were favorable for the nine months ended December 31, 2008, owing to the FIT and FREED that are two of Honda's well accepted models, unit sales of mini vehicles went down, resulting in declined unit sales compared to the same period last year.

Concerning Honda's operation in North America, please have a look at the slide 24. Revenue decreased 24.9% to JPY1,231.6 billion for this quarter compared to the same quarter in 2007. Decreased unit sales in automobile business and currency translation effects negatively affected.

Operating income was JPY70 billion, which was a decrease of 55.2%. This decrease was mainly due to decreased revenue, increased raw material costs, increased fixed costs per unit as a result of reduced production and the negative impact of the currency effects caused by the appreciation of the Japanese yen. Although SG&A expenses decreased, operating margin was 5.7%.

Since the Lehman shock, the situation of Wall Street has now widely spread to become the problem of the main street. With the backdrop of tightening credit markets or de-leveraging, many businesses have started to feel the pinch; housing price continued to fall, [jobless client] continued to climb.

Under these circumstances, the US auto market has deteriorated significantly. Back in the second quarter when the gas price peaked people shied away from gas consuming big pick-up trucks and SUVs. However, now low consumer confidence, out of this bleak economic outlook made them shy away from any big ticket items and showroom traffic went down.

Honda was not immune to this tidal change, although FIT was faring comparatively well, monthly sales of Honda (inaudible) models in the third quarter showed approximately 30% decrease from the previous year.

Honda was already in the process of reducing its production level of Alabama plant for its V6 engine [light] truck models. Now Honda needs to respond to accumulating inventory level of passenger cars as well. The adjustment has taken place and it will be continued into the fourth quarter by reducing its production level in other plants, such as Ohio and Canada.

As the macro figures such as housing and jobless [client] rate do not seem to recover any time soon, we may have to continue to face this weak market situation for some time. But at the same time, the new administration is considering a stimulus package plan. We need to see the impact of these support measures but hope this will bring more people back to the dealership.

Honda is not just sitting and waiting for people to come by. We will launch its own new Insight to use in Canada this spring. This all new dedicated hybrid model has achieved its development mission of making hybrid technology affordable for everyone to enjoy good fuel economy in the environmentally responsible driving yet uncompromising the fun to drive aspect.

This was made possible through Honda's packaging innovation by making the vehicle lighter, battery smaller and control unit system more compact. Insight will also be introduced in Japan and the European market. In Japan it will soon be available from February 5.

Let me now move on to Europe, to slide 25. Honda's revenue for the quarter was JPY299.4 billion, decreased by 17.2% from the same period last year, mainly due to negative currency translation effects and decreased sales in all business segments. Operating income totaled JPY1.1 billion, which was a decrease of 80.5%. This decrease was primarily due to increased SG&A expenses and raw material costs. Operating margin was 0.4%.

Total demand for the last quarter in the five major markets in Western Europe declined by 22% on a year-on-year basis and the worst decline was in Spain. Car production has also fallen in line with declining demand. For example, in the UK total car production decreased by 34% in the last quarter. And demand in emerging markets such as Russia and Middle East has been slower since autumn, in line with the falling oil price and the financial situation.

Although car demand is likely to remain weak, there are still nice packages in some European countries such as incentives to scrap old vehicles in Germany and France. Honda's sales environment has been very tough and we're seeking to achieve appropriate levels of inventories by cutting production in our UK factory.

We're looking forward to launching the all-new Insight at the end of March. This new model has a reputation for outstanding real world fuel economy as well as being enjoyable to drive.

Now that's all and I would like to give the microphone to Mr. Suzuki who is describing Honda's business operation in Asia and other regions. Thank you.

Thank you. Now I would like to talk about Honda's results and the operation in Asia. Please turn to slide 26. Revenue decreased by 6.8% in Asia to JPY385.2 billion from the same period last year. This decrease was mainly due to the negative currency translation effects, although revenue increased in motorcycle and the automobile businesses.

Operating income was JPY24.9 billion, which was a decrease of 34.8%. Major factors of this decrease are negative currency effects caused by the appreciation of the Japanese yen, increased raw material costs and SG&A expenses. Operating margin was 6.5%.

Asia economy is not immune from the economic turmoil that had spread throughout the world since autumn last year either. The economy in Asia has continued to grow over the nine months ended December 31, 2008. However, the pace of the growth has slowed down. Honda's unit sales increased in all business segments in Asia.

[Industrial] demand of motorcycles has shrunk in India. However, Honda enjoyed favorable unit sales in India, also in Vietnam. Motorcycle market has grown in Indonesia and Honda's unit sales increased accordingly. Demand for automobiles has decreased in India and China. Honda's automobile unit sales were also favorable, mainly in Thailand. Sales of automobile knocked down parts to China also increased.

On slide 27 shows the earning performance of our affiliates in Asia. Operating income of these affiliates for the quarter amounted to JPY73.6 billion, increased by 17.9% from the same period in 2007.

Now let me speak of our business in other regions, including Latin America, the Middle East, Africa and Oceania. Please look at slide 28. Revenue increased 7.1% to JPY304.7 billion from the same period in 2007. Revenue increased in all the business segments, although currency translation effects were negative.

Operating income was JPY41.8 billion, increased by 31.8%. This increase was mainly due to increased sales. The operating margin was 13.8% for the quarter.

The economic crisis that was started in the United States last autumn has affected Honda's business in other regions also. Both the motorcycle and the automobile industry demand has dropped in Brazil where the market had been expanded at a rapid pace until the financial crisis.

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

Regarding the factors of -- affecting income before income taxes, please turn to slide 30. Valuation gain from derivative instrument agreement was a positive JPY19.5 billion and the other non-operating income under expenses net was a negative JPY19.7 billion.

Regarding the detailed breakdown of this negative impact of JPY19.7 billion are shown in the slide. At pre-tax line, the total impact of ForEx was negative JPY95.3 billion, which consists of negative JPY114.2 billion at the operating profit line and a positive JPY18.9 billion in non-operating line.

More detail about the currency effect and the reevaluation of derivative instruments, please look at slide 41/42. Thank you very much.

Now I'd like to discuss the Company's new earning guidance for the fiscal year ending March 2009. Please see the page 38. Revenue will be JYP10,100 billion, which is 15.9% down from last year. Operating income will be JPY140 billion, which is down 85.3% from last year. Income before income tax will be JPY135 billion, down 84.9% from last year. Income in equity of affiliates will be JPY105 billion, a decrease of 11.7% from last year. Net income will be JPY80 billion, down 86.7% from last year. EPS will be JPY44.08 (sic - see Presentation).

Currency assumption for the fourth quarter will be JPY85 against $1 and JPY110 against EUR1. Company sales and earning guidance have been revised, taking into account the automobile production cap, reflecting to global softer demand for automobile in the fourth quarter period.

With regard to the CapEx, please see page 39. The revised CapEx plan will be JPY610 billion, down JPY40 billion from previous guidance, due mainly to the decline in investment in Japan and North America. Depreciation will be JPY410 billion, down JPY5 billion from previous plan.

Again, Mr. Takeuchi, could you comment how the sales and earning outlook have been changed from the previous guidance which you provide at December 17 last year?

Yes, please see page 37. We continued to see solid demand for Honda motorcycle in emerging markets. Together with our joint venture Company in Asia, we expect motorcycle operations can generate stable profitability, even global economy slowdown. How able, after financial crisis took place, economic slow down in North America and Europe in -- depending on the global automobile business are severely impacted.

Now we [urge] to reduce the inventory over the car (inaudible) up to the appropriate level as quick as possible. Given this circumstance, Honda decided to cut additional 100,000 units of global automobile sales in fourth quarter period from our previous announced sales plan. The revised sales plan, weak mix and the cost reduction that will impact to operate profit in this fourth quarter despite of the less incentive spending in the market and saving SG&A expenses.

We expect the sales volume change will bring negative JPY64 billion compared to our December estimate. And also, at net profit level it will be impacted as corporate tax rates are to be revised because the Company decided not to book the further tax asset against this drop of the parent Company losses.

As to ForEx, with JPY85 per dollar and JPY110 against EUR1, we expect total ForEx impact to be a JPY10 billion increase from our previous guidance. Despite this severe business environment, we will continue to offer new models. Our new Honda Insight hybrid vehicle will debut very soon in the Japanese market and it's used to greatest generation of Honda's IMA hybrid technology. More cost efficient and the new level of affordability and the EPA city hybrid fuel economy rating of 40 miles per gallon and 43 miles per gallon.

Automobile market face challenging business environment. However, we are very much excited about the Insight, hoping to stimulate market demand with our new technologies.

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

Statements in English on this transcript were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.