本田技研 (HMC) 2010 Q1 法說會逐字稿

Good morning everyone and welcome to Honda financial result audio presentation. On July 29, 2009 Honda Motor announced its financial result for the fiscal first quarter ended June 30. Through this audio presentation, we would like to briefly recap these results and review and discuss our major business operations for the period.

We'd also like to update the Company's new earning guidance for the fiscal year ending March 2010. The presentation material can be downloaded from the website, same website, just clicking the banner of all new Insight model pictures. Did you find it? Okay folks, let's start. Crystal.

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 management's assumptions and beliefs taking into account information currently available to it. Therefore, please be advised that Honda's actual results could materially differ from those described in these forward looking statements as a result of numerous factors including general economic conditions in Honda's principal markets and foreign exchange rates between the Japanese yen and the US dollar, the euro and other major currencies, as well as other factors detailed from time to time.

Thank you Crystal. And now I'd like to start with the financial summary for the quarter. Please see slide three.

With regard to the economic environment during this April to June period, oil prices climbed globally and the price of the raw material were fluctuated. Economic recession in the US and Europe remained severe throughout the last first quarter period.

In the meantime, in Asia, economic growth in China and India have been continued. But growing pace became slow compared to the prior quarters.

In Japan capital expenditure declined and the economy remains sluggish. But decline in consumer confidence likely to be helped.

In terms of the currency environment during the period, Japanese yen appreciated against the US dollar. Yen was JPY97 per dollar, JPY8 higher than last year.

Euro was JPY132 per euro, JPY32 higher from the same period last year.

Now I'd like to elaborate business environment surrounding us.

In Motorcycle industry demand in the US declined significantly and the reflecting unfavorable impact of the financial crisis, demand in emerging market such as Thailand, Indonesia, Brazil also became soft during the period. On the other hand demand in Vietnam started to expand and the market in India turned to growth from the previous quarters.

In terms of the Automobile business, industry demand declined in Russia significantly. Demand in Japan and the US continued to shrink. However in emerging places such as China and India total demand grew on tax break during the period.

Under such business environment, Honda's unit sales for the Motorcycle were approximately 2m units. Automobile unit sales were 766,000 units. Power Product unit sales were 1.158m unit.

Financial result for this first quarter reported. Net income attributable to Honda was JPY7.5b.

EPS for the quarter was JPY4.17.

Revenue was JPY2,002.2b, down 32. -- down 30.2% from last year.

Operating income was JPY25.1b, a decline from JPY201.4b (sic - see presentation) a year ago.

Income before income tax was JPY5.4b.

Equity income of affiliate was JPY14.2b, a decline from JPY38.1b from last year.

Corporate tax rate for the period was 192.4% because the Company decided to make a valuation allowance for related deferred tax asset.

Currency environment during the quarter or average yen for the period was JPY97 against the US dollar which was up higher JPY8 last year, compared to last year.

Average euro as I have explained before, JPY132 which is JPY32 higher than last year.

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

This is Ito speaking. I would like to move to revenue and profit overview for the first quarter. Please turn to slide eight.

Revenue decreased JPY865b, 30.2% from last year to JPY2,002.2b due mainly to the decrease of Automobile sales units and unfavorable impact of currency translational effects. Change in revenue from last year, ForEx adjusted, are shown in the slide. We estimate the revenue was down 20.7% had the exchange rate remained unchanged from the same period last year.

Next, I will elaborate each factor affecting operating profit and income before income taxes. Please turn to slide 10.

Operating profit for the first quarter of this fiscal year was JPY25.1b, which is a decline of JPY185.3b compared to the same period last year. And income before income taxes was JPY5.4b which is a decrease in JPY218.7b from last year.

Decline in revenue due to decreased unit sales of Motorcycles and Automobiles and unfavorable model mix provided an impact of JPY205.9b.

Cost down was a negative impact of JPY61.6b due mainly to an increase of fixed costs associated with production cut. Cost reduction efforts and the decreased material costs were positive driver but it was not enough to compensate an increase of other cost increase factors.

Decreased SG&A expenses provided a positive impact of JPY112b, due mainly to decreased expenses for advertising, sales promotion, decreased logistics expenses, decreased allowance for losses on lease residual values

Thanks to the recovery of used car price environment, decreased R&D expenses provided a positive impact of JPY35.5b.

The impact from foreign exchange was a negative JPY65.3b.

There was a valuation gain from derivative instruments agreement. It was a positive JPY4.7b.

And other non-operating income and expenses net was a negative JPY38.2b. Regarding the detailed breakdown of this negative impact of JPY38.2b are shown in the slide.

At pretax line, the year on year changed impact of ForEx was negative JPY73.2b, which consists of negative JPY65.3b in operating profit and negative JPY7.8b in non-operating. For more detail about currency effect and re-evaluation of derivative instruments, please look at the slide 37, 38.

I'd like to elaborate business segment overview for the first quarter. First of all, Motorcycle business results. Please see the slide 12.

Unit sales for the quarter totaled, 2,252,000, a decrease of 463,000 units, or 17.1% down from the same period last year. This decrease came as a result of declined sales of motorcycle knock down parts for Asia affiliates and weak sales in other regions including South America.

Looking at major Motorcycle market during this period, Thailand, Brazil and Indonesia demands were dropped significantly. Yet Vietnam and India markets started to show its growth. Under such circumstances, Honda's models in India Shine, Activa and CBF Stunner had been selling so well. And despite slow moving market, CG100 Titan Mix which is equipped with its mixed fuel injection system showed strong sales in Brazil.

On slide 13, revenue for the quarter amounted to JPY256.3b which is a decrease of 34.8% compared to the last year.

Honda reported operating income of JPY5.6b, decreased by 81.9% from the same period last year. Decreased revenue and unfavorable currency effect were negative drivers despite a decreased SG&A and R&D expenses. Operating margin was 2.2%.

Please see slide 14. As for Auto business, Honda's unit sales for the first quarter totaled 766,000 units, down by 20.4% from a year ago. The decrease in sales units were mainly attributable to severe business environment along with weaker consumer confidence as global financial crisis continued to shadow over major auto markets.

Looking at the major Automotive market, although China auto demands are expanding, sales in North America were decreased significantly during this period. Scrappage incentives, or tax breaks provided by the governments, supported boosting the demand in Japan, Germany, Italy and India. Under such circumstances, Honda's fuel efficient models underpinned our sales.

In Japan, Honda enjoyed higher sales of all new hybrid Insight and Freed compact minivan. Jazz or Fit continued to boost sales in Germany, India and Taiwan.

Please see next slide. Revenue for this quarter decreased 31.6% to JPY1,523.4b from a year ago, due mainly to the decreased sales in North America.

Honda reported operating loss of JPY21.3b, decreased by JPY171.7b from the same period last year. Due mainly to decreased volumes, the increase in fixed costs due to production cut, offsetting decreased SG&A expenses and R&D expenses.

Operating profit margin was minus 1.4%.

Let me move on to Power Product. Slide number is 16.

First quarter sales totaled 1.158m units contributed by lawnmowers, engines and the generators and tillers in United States. The decrease in sales units by 13.5% from a year ago was caused by weaker sales of general purpose engines for OEM use in construction machinery in Europe and OEM sales in Japan.

Please see next slide. This quarter's revenue of Power Product and Other Businesses decreased 31.5% from last year and totaled to JPY73.2b.

Honda reported operating loss of JPY5.9b decreased by JPY6.1b from the same period last year. Due mainly to decreased sales in Power Product, more than offsetting SG&A expenses savings.

Operating profit margin was minus 8.1%.

Thank you very much.

Thank you, Mr. Ito. Regarding Financial Service businesses, please see slide 18.

The revenue was JPY159.2b, an increase of 6.5% which was due to increase in revenue for operating lease businesses.

Operating income increased to JPY46.8b. Lower residual loss and improving funding cost contributing to this increase.

Operating margin was 29.4%.

And now I'd like to turn the presentation to Mr. Takeuchi, General Manager of Finance Division. Mr. Takeuchi will elaborate on the Financial business more in detail.

Yes. The total losses on regional value of the leasing and credit decreased by about JPY11b, due to improved regional value from a year ago.

In June last year, fuel prices in the United States climbed to over $4 per gallon. Reflecting that situation, customers shift from the big sized vehicle and move to more fuel efficient vehicles, which causes further regional value on these vehicles, especially for light trucks. Then we had to increase provision related to regional losses.

Entering into the year 2009, fuel prices were down to about $2.5 per gallon and the price of the used vehicles such as SUV, minivan have been recovering accordingly. Given this situation, the provision related to the regional losses were decreased compared to last year.

On the other hand, credit losses on 12 months rolling base were increased during the period. But we believe it is still at controllable level.

Besides of this, financial market is recovering. Spread of debt were squeezed and helped the Company's funding costs decrease. These changes in business conditions also have an effect on American Honda Finance fully owned subsidiaries and thus maintained variety of the funding sources such as commercial paper, mid-term note and ABS.

Thank you. Now I would like to talk about Honda's operation by region, starting from Japan. Please see slide 20.

Revenue for the first quarter which includes both domestic and export sales amounted to JPY736.5b, down by 35.9% from a year earlier. This was mainly due to decrease in sales of export automobiles.

Honda reported operating loss of JPY4.6b. The loss was attributable to lower unit sales, unfavorable model mix and negative currency effects due to the stronger Japanese yen which were more than offsetting decreased SG&A and R&D expenses.

Operating margin was minus 0.6%.

With respect to the Japanese automobile market, demand for automobiles declined by 19% during three months ended June 2009 from last year. Japanese government started subsidies and tax cuts for eight eco cars, which stimulated consumer consumption particularly on eco-friendly models. Honda's own new Insight contributed dealer traffic.

Honda's fuel efficient models such as the hybrid model Insight, hatchback Fit, minivan Freed and Odyssey were the contributors to auto sales. Honda's retail sales slowed their pace of decline of 4% which outperformed the market.

With respect to production, production for the first quarter was down by 37% from a year earlier. The decrease was mainly due to weak export which was 62% drop. Honda announced additional working days from July reflecting strong sales in Japan. Honda will launch the CR-Z sports hybrid model in February 2010 and Fit hybrid by the end of 2010 in Japan.

Now I would like to move on to North America. Please see slide 21.

Revenue decreased 34.6% to JPY975.7b, which was caused by decreased unit sales in Automobile business.

Operating income decreased to JPY7.1b mainly due to higher fixed costs per unit caused by a production cut and lower unit sales which were more than offsetting decreased SG&A expenses and continuing cost reduction efforts.

Operating margin was 0.7%.

I would like to elaborate on the United States automobile business environment during the first quarter. We continued to see the increase of the unemployment rate and people yet to come back to new car market. As a result we saw six consecutive months of SAAR level below 10m units since January.

Honda's retail sales experience [are hard] due to strong sales contributed by Honda's fuel efficient models during the same period last year in the midst of gasoline price hike.

Honda has been implemented production adjustments globally. In North America the production level during the first quarter came down close to 70% level of last year. These adjustments enabled Honda to curtail the inventory level in the United States to 64 days at the end of June, which was mostly close to our optimal level. Honda continues to have non-production days in July but we plan to raise production level thereafter to synchronize with our retail sales.

On the positive side on the first quarter, we continued to see the price of the used cars improving. This should eventually bring the new car sales upward as it will raise the value of trade in vehicles. Furthermore, we will see the so-called cash for clunkers scheme implemented from the end of July. This should have positive impact on showroom traffic.

Honda recently announced the launch of three models for United States. We will launch Honda Accord Crosstour, an all new crossover vehicle based on Accord in fall of 2009 and Acura ZD-X four door sports coupe this winter. And lastly we will launch Honda CR-Z two door hybrid sports model after sales in Japan to start in February 2010.

Let me move on to Europe. Please see slide 22.

Our revenue decreased 40.1% to JPY218.1b caused mainly by the decreased unit sales in all the segments.

Operating profit decreased to JPY1.7b for the quarter. The decrease mainly came from lower unit sales and higher fixed costs per unit due to production cut which were more than offsetting decreased SG&A expenses.

The five main European car market expanded by 2% on a year on year base during the quarter ended June '09 as the demand was driven by the scrappage incentives in Germany, France and Italy while the pace of decline slowed in the UK and Spain. And in Russia the total market shrunk significantly more than 50% on a year on year base as weak consumer sentiments caused by increasing unemployment and bank's strict credit criteria. Sales of local Russian brands outperformed foreign brands.

However, under severe market conditions, Honda launched the all new Insight, an affordable hybrid car in April in Europe. The Insight offers numerous running costs savings and great fuel economy. Insight customers will also benefit from exemption from London congestion charge. The two fuel models such as the Insight and Jazz were the contributors during the first quarter.

Also the production in UK was halted for four months until May. Honda resumed the production from June by one shift for each line.

Now I would like to move on to Asia. Please see slide 23.

Our revenue in Asia for the first quarter was JPY321.3b, a decrease of 26.3% from a year earlier. This was mainly due to the decrease in unit sales in all business segments.

Operating income decreased to JPY20.3b. The decrease was due to lower revenue and negative currency effects due to stronger Japanese yen against other currencies, which are more than offsetting decreased SG&A expenses.

With respect to Automobile markets, India and China contributed to the unit sales in Asia. In India, Honda Siel Cars India Limited introduced all new Honda Jazz with a newly developed 1.2 liter engine. The Jazz meets the requirements for the excise duty cut for cars under four meters and with a petrol engine capacity less than 1.2 liter engine. We are confident that the Jazz will be well accepted in the country.

In China the Fit and City contributed unit sales due to benefits of professional and purchase tax cuts for a small sized car with an engine with 1.6 liter.

Regarding Motorcycle business, Honda Motor Scooter India, a wholly owned subsidiary launched all new scooter Activa with 110 cc engine which increased mileage by 15%. Motorcycle sales in India and Vietnam increased from a year earlier. Also the pace of decline of sales moderated in Thailand and Indonesia.

Let me move on to other regions, including South America, the Middle East, Africa and Oceania. Please see slide 24.

Revenue decreased 40.3% to JPY175.4b, primarily due to decrease in unit sales in all business segments.

Honda posted an operating loss of JPY100m. This was mainly due to lower revenue, negative currency effects due to stronger Japanese yen against other currencies more than offsetting decreased SG&A expenses.

In Brazil Honda's unit sales of motorcycles during the period were declined due to an adjustment of inventory. In Automobile business, reduction of IPI tax on industrialized goods supported to boosted automobile demand. This tax break was extended toward end of September. Amid such circumstances, Honda's all new Fit sales were strong in Brazil. Honda commenced to produce and launch the all new City FFV this July.

On the other hand, in Australia, the pace of decline in sales became moderated and Honda's sales during the period were weak.

That's all for the earnings performance on geographical areas.

In terms of the equity income of affiliated company, please see the slide 26.

During the first quarter equity income of affiliated company were JPY14.2b, which is down 23.9b from last year. Out of that, JPY17.5b was contributed by Asian affiliated companies. For your references, we put the slide of the operating profit and net profit of Asian affiliated company. Please see slide 27.

As can be seen, during the first quarter operating profit generated by the Asian affiliated company were JPY50.9b. Net profit from these company were JPY45.7b.

The major contributing companies were stated in the bottom of the slide 27.

Yes, please see the page 36. In terms of unit sales guidance, we expect the total demand for Motorcycle in emerging market will be declined compared to 2008. However, it is expected to increase from the Company's April guidance numbers as total demand in Asia centralized in Vietnam and India seems stronger than expected.

Automobile sales will be declined by 222,000 units to 3.295m units. But it will boost by 85,000 from our April guidance.

In Japan Honda's fuel efficient compact model remained competitive with the stronger Insight sales compact hybrid model. Also in China, our sales are expected to grow in conjunction with growth of the market.

Sales of the Power Product will be 4.355m, down 832,000 units from the last fiscal year and also down 325,000 units from the Company's April guidance, due mainly to softening demand in Europe and Japan.

About year over year operating profit work, please see the slide 33.

Year over year gross profit change will be compressed by JPY309.7b due mainly to decline in sales volume and unfavorable model mix as well as impact of the production cut. However, Company's further streamlining effort as well as saving in SG&A and R&D can make favorable contribution of JPY364b and JPY41.1b respectively to operating income.

As to ForEx higher yen because previous revised currency assumption to JPY91 for US dollar and JPY127 for euro is expected to provide unfavorable JPY209b impact to operating income.

With regard to change drivers, from the Company's previous earnings guidance in April please see slide 34. Strong automobile sales in Japan and China will be positive drivers in terms of the increase in volume and mix. That will provide an increase of JPY25b compared to Company's April assumption.

Honda will accelerate cost reduction effort as well as saving SG&A expenses. That will generate favorable JPY51b, thus making an increase of JPY60b in operating profit from the Company's previous guidance.

As for CapEx and depreciation and R&D please see the slide 35. There are no changes from the previous guidance for this.

In terms of the first quarter cash dividend, please see the slide five. The first quarter dividend is JPY80 and we project annual dividend will be JPY32.

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