本田技研 (HMC) 2010 Q2 法說會逐字稿

Good morning, everyone. Welcome to Honda financial result audio presentation.

On October 27 2009, Honda Motor announced its financial result for the fiscal second quarter ended September 30. Through this audio presentation, we'd like to summarize the result and highlight the Company's major business operation for the period. We'd also like to discuss the Company's new earning guidance for the fiscal year ending March 2010.

The presentation material can download from the same website address, just clicking the banner of the all new accurate ZDX model on the left side of the page. Did you see it? Okay, folks, let's start.

Thank you. 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.

Now I'd like to start with the financial summary for the quarter. Please have a look at the slide three.

In terms of economic environment during the quarter, US economy has deteriorated and expected to go long before its recovery. European economies also became worse. However, the downfall has stopped in certain countries. In Asia, China and India take back to recovery, and other counties in Asia demonstrated signs of a moderated recovery.

In Japan, unemployment rate has been deteriorated close to the record high level, but signs of a moderate recovery has been seen centered in individual spendings.

In connection with the currency environment during the period, Japanese yen appreciate against US dollar. Yen was JPY94 for dollars, JPY14 higher than the last year. Euro was JPY134 per euro, JPY27 higher from the same period last year.

Now I'd like to elaborate the business operation environment surrounding us. In Motorcycles, investor demand in Vietnam and India continue to expand from the previous quarter time, while demand in US, Brazil, Thailand were declined largely from the same period last year.

In term of the Automobile business, industry demand grew largely in China and India. US demand continued to shrink. However, with its Cash for Clunkers program, sales were boosted during the period and the sign of slight recovery was seen.

Under such business -- under such challenges business environment, Honda stayed in black for the second consecutive quarter thanks to the favorable business operation in Asian region, along with Company's cost reduction effort.

Motorcycle unit sales posted approximately 2.4 million units.

Automobile unit sales were 838,000 units. Down 10% from last year's, but up from our previous quarter time.

Power Products unit sales were 932,000 units.

Financial results for the second quarter period. Net income attributable to Honda's JPY54 billion; EPS for the quarter, JPY29.78; revenue was JPY2,056.6 billion; operating income was JPY65.5 billion; income before income tax, JPY66.1 billion; equity income of affiliates, JPY54 billion; corporate tax rate for the period was 15.1%.

Now I'd like to switch microphone to the Mr. Ito, further elaborate about analysis of sales and operating profit for the quarter. Mr. Ito, please go ahead.

I'd like to move to revenue and profit overview for the second quarter. Please turn to slide 10.

Revenue decreased JPY770.2 billion, 27.2% from last year, to JPY2,056.5 billion, due mainly to the decrease of Automobile sales units and impact of unfavorable currency translation effects.

Changing revenue from last year, ForEx-adjusted, as shown in the slide, we estimate the revenue was down 16.1%. Had the exchange rate remained unchanged from the same period last year, revenue for the six months is shown in the slide.

Next, I will elaborate each factor affecting operating profit and income before income taxes. Please turn to slide 12.

Operating profit for the second quarter of this fiscal year was JPY65.5 billion, which is a decline of JPY83.3 billion compared to the same period last year. And income before income taxes was JPY66.1 billion, which is a decrease in JPY83.3 billion from last year.

Decline in revenue due to decreased unit sales of Motorcycles, Automobile, Power Products, and a favorable model mix provided a negative impact of JPY126.3 billion.

Cost then was a negative impact of JPY23.9 billion, due mainly to an increase of a fix cost associated with production cut.

Cost reduction efforts and decreased material costs are positive driver. But it was not enough to convince [then another] increase of other cost increase factors.

Decreased SG&A expenses provided a positive impact JPY121.5 billion, due mainly to decreased expenses for advertizing, series promotion, logistics, and decreased quality-related expenses.

Decreased R&D expenses provided a positive impact of JPY25.1 billion.

The impact from foreign exchange was a negative JPY79.7 billion.

There was operational loss from derivative instrument agreements. It was a negative JPY23.4 billion.

And other non-operating income and expenses net was a positive JPY23.4 billion. Regarding the detailed breakdown of this positive JPY23.4 billion are shown in the slide.

The year-on-year impact from foreign exchange at [pre-tax rate] was negative JPY66.6 billion, which consists of negative JPY79.7 billion operating profit and positive JPY13 billion in non-operating. More detail about the currency effects and the re-evaluation of derivative instruments, please look at slide 40/41.

Operating profit and income before income taxes for the six months, please refer to the slide 13.

Next, business segment overview for the second quarter, [Miss. Hatori], please.

First of all, let me start with Honda's Motorcycle business operation for the fiscal second quarter that ended on September 30, 2009. Please have a look at the slide 15.

Unit sales for the quarter totaled 2.407 million units, 16.8% decline from the second quarter in last fiscal year. This decrease was mainly due to weaker sales in Southeast Asian countries, such as Indonesia, Thailand, and also in other regions, including Latin America.

On the other hand, motorcycle demand has shown strong recovery in India, where Honda's favorable unit sales has been supported by models such as Activa, Shine, and Unicorn.

In Brazil, market conditions haven't improved significantly yet as credit criteria for motorcycle customers remains to be strict. However, Honda's relatively strong unit sales has been supported by favorable sales of 125cc FAN and 150cc TITAN mix.

Concerning revenue and operating income of Honda's Motorcycles business, please see the next slide, 16. Revenue for the quarter resulted to be JPY275.3 billion. Comparing with the revenue of the second quarter last year, it decreased 31.4%. This drop was mainly attributable to decreased unit sales, along with negative currency translation effects.

Operating income declined 79.9% to JPY9.3 billion. As the revenue decreased, and also with the unfavorable currency impacts, despite SG&A expenses and R&D expenses were compressed, operating margin was 3.4%.

Looking at the Automobile business, please look at the slide 17. Unit sales for the quarter was 838,000 units, a decrease of 10.4% from the corresponding period last year. This was mainly due to sales decline in North America, despite increases in unit sales in Japan and Asia.

In China, where market continues to expand significantly, particularly CR-V and Civic have been very well accepted. And, therefore, sales of these models have been very favorable.

Economic recoveries in India and Thailand are boosting sales of Honda's Jazz and City compact cars. Sales in Thailand during the period were favorable, and calendar year sales is expected to be back to last year's level, compared with a forecast for a 20% decline. Whilst sales in India are expected to be far better than the estimated 20% to 30% drop.

Compared to Europe and the US, recovery of these Asian economies has been slightly faster and banks started loosening credit relatively early, which has helped because a high ratio of people buy cars on credit.

Moving on to slide 18, revenue of the Automobile business for the quarter was JPY1,560.5 billion, which was a decrease of 28.1% on the year-on-year basis. This decrease was due mainly to unit sales decline and negative ForEx translation effects caused by the appreciated Japanese yen.

Operating income decreased 82.7% to JPY13.7 billion, caused by declined sales and negative currency impact from the appreciated Japanese yen and increased cost per unit as a result of the decreased production, partially offset by decreased SG&A and R&D expenses and continuing cost reduction effort.

Operating margin for the quarter was 0.9%.

On slide 19, concerning Power Products business, unit sales of Power Products resulted to be 932,000 units, a decrease of 22.5% from last year. Unit sales declined in all regions.

Declined sales of general purpose engines, particularly in Japan, North America, and Europe has undermined total Power Products unit sales, although sales of tillers and lawnmowers were favorable in North America and Europe.

Concerning revenue, please turn to slide 20. Revenue of the Power Products and Other Businesses for the quarter decreased 29.2% to JPY73 billion, due mainly to decreased unit sales in the Power Products business and negative ForEx translation effect.

Honda reported an operating loss of JPY4.6 billion, minus JPY3.7 billion from the corresponding period last year, as a result of decreased revenue despite decreased SG&A expenses.

Mr. Takeuchi will be speaking of Honda's Financial Services business operation for the quarter next. Thank you.

Thank you, Miss. Hatori. With regard to the Financial Services business, please see the slide 21.

Revenue for the Financial Services business declined 2.8% to JPY158.1 billion, due mainly to unfavorable currency translation effect.

Operating income increased to JPY47.1 billion, due mainly to the decreased provision for the residual losses of leased assets, as well as decrease in funding costs.

Operating margin was 29.8% for the quarter.

Now I'd like to invite Mr. Takeuchi, our General Manager of the Honda Japan Finance Division, who will elaborate detail of our Financial Services operation during the period.

Yes, reviewing our Financial Service operation in North America, we are pleased to inform that our Financial Service experienced better than expected result thank you to favorable funding environment, together with significant recovery of used car market pricing. That help us reduce provision of the regional losses on this asset year-on-year base.

As we discussed at the time of the first quarter announcement, we had experienced soaring fuel price in the United States, over $4 per barrel last year. Given that situation, customer accelerated shifting from their large size vehicle to more fuel-efficient vehicle, which causes deterioration demand supply balance of the used light truck market, which also result in necessity to increase provision of these regional losses, especially for light truck models.

In this year, during spring to summertime, fuel price stayed at around $2.5 per barrel, and the pricing of the used vehicle, such as SUV minivan has been recovered. Consequently, [reflecting] to this situation, the provision related to regional losses was compressed compared to last year.

We estimated that provision for regional losses for the quarter declined over JPY10 billion from the same period last year.

On top of that, another good sign is the credit losses on 12 month rolling basis have been stabilized during the period, and we expect it will be small for coming quarters.

Moreover, as financial market is recovering, spread of the debt and corporate bonds were narrowed. That helped the Company funding cost decrease. This change in business condition has positive effect on American Honda Finance, our wholly-owned subsidiary.

I would now like to elaborate on Honda's business results of the second quarter by geographical segment. Please turn to slide 23.

In Japan, revenue for the quarter decreased 32.6% to JPY804.3 billion, mainly due to decreased revenue of Automobile export sales. Honda reported an operating loss of JPY25.7 billion, as a result of decreased revenue, unfavorable ForEx impacts, and increase in fixed costs as production volumes [smashed], despite a decrease in SG&A and R&D expenses.

Operating margin was minus 3.2%.

Sales of the hybrid model, Insight, has been favorable in Japan since its introduction in February. As a result of this popularity, cumulative sales of the Insight in Japan has exceeded 60,000 units.

In Japan, the government has implemented subsidies and tax reduction for environmentally-friendly vehicles. This has supported Honda's fuel-efficient model line-ups, especially the before-mentioned Insight, and Fit and Freed have boosted sales also.

Honda announced its all-new [step wagon] in minivan segment in October. And on top of this, a hybrid sport vehicle, CR-Z, will be introduced in February 2010. We expect these new model launches will attract new car buyers.

Please have a look at slide 24 regarding North America. Revenue for the quarter resulted to be JPY899.4 billion, a decrease of 34.3% as a result of decreased sales in Automobiles and the unfavorable ForEx translation effect.

However, operating income increased to JPY47.6 billion, thanks to the decreased SG&A expenses that associates with improvement of vehicle leased residual losses, a decrease of funding costs at the captive finance arms in North America, and Honda's continuing cost reduction effort.

Despite decreased revenue, and increase in fixed costs as production volume decreased, and unfavorable ForEx effect, operating margin for the quarter was 5.3%.

Now I would like to discuss more about United States Automobile sales situation during the quarter. Thanks to the so-called Cash for Clunkers scheme during the quarter, we saw strong sales occurred in July and August and relatively weak sales in September, but although it has been a better quarter than the previous quarter.

Cash for Clunker has been positive to the industry by taking out the old car from the system, thus the positive impact for used car price, which is positive for the new car sales. It also brought down the inventory level at the dealerships so much that they were short of inventory, which might have caused the slow sales result in the following month in September.

Honda has been implementing production adjustment globally. And as for the North American factories, we had non-production days up to July. But from August on, we're now back to normal working days. And for the September production, we even added one more extra day shift to replenish the inventory.

For the coming quarters, Honda will add two new models for our line-up in North America. One is called Crosstour, which will feature upscale [a] five passenger interior with plenty of real storage area, equipped with 3.5 liter V6 engine, with all-wheel drive. The other model will be Acura ZDX; upscale four-door sport coupe with 3.7 liter V6 engine, 300 horse-power, super heightening all-wheel drive. Both models will be built in our North American factory.

Moving on to Europe on slide 25, revenue decreased 38.1% to JPY216.9 billion. This decrease in revenue was caused by declined revenue in all business segments and an unfavorable ForEx effect.

Operating income for the quarter decreased to JPY1.8 billion, due to decreased revenue, increase in fixed costs, and an unfavorable ForEx effects, despite the fact that SG&A expenses were decreased.

In Western Europe, Automobile demand increased by approximately 4%, supported by governments' scrappage incentive programs in certain countries, such as in Germany, UK, France, and Italy. Honda's unit sales also was favorable in Western Europe, propelled by favorable sales of Jazz and Insight.

On the other side, Honda's unit sales in Russia has decreased significantly during the period. In September, Russian industry demand fell by 48% compared to the same month last year. Honda's sales in Russia has decreased by 85% in September. That resulted in pulling down Honda's total sales in Europe.

Now, please have a look at the slide 26 on Asia. Revenue for the quarter was JPY370.8 billion, a decrease of 17.9% from the second quarter last year. This was mainly because of unfavorable ForEx translation effects and decreased revenue in Automobile business centered in Southeast Asia.

Operating income in Asia for the quarter was JPY27.5 billion, decreased by 24.8% (sic - see press release). This decrease was mainly a result of negative currency effects caused by the appreciated Japanese yen and decreased revenue, although SG&A expenses declined.

Regarding Motorcycle business, overall market was approximately the same level of the previous fiscal year. Indian market has shown a strong growth during the period. And as a result, Honda's unit sales in India were very encouraged, being supported by strong demands.

Concerning other regions that include South America, the Middle East, Africa, and Oceania, please have a look at the slide 27. Revenue for the quarter amounted to JPY228.6 billion, decreased by 34.6% compared to the corresponding period in 2008.

As a result of unfavorable ForEx impacts and decreased sales in Automobile and Motorcycle businesses, operating income decreased to JPY9.9 billion.

In Brazil, Automobile market continued to expand by approximately 8% for the quarter, compared to the same period last year, together with industrialized products [tax-cut plan].

Honda's Automobile sales for the period outperformed the market growth, an increase of 13.3%.

With regard to incoming equity of affiliated companies, please see the slide 29. Income in equity of affiliated companies was JPY22.3 billion, down JPY4.9 billion from last year. Out of this, JPY24.1 billion was contributed by Asian affiliated companies.

For your reference, we put a chart that shows operating income and net income of Asian affiliated companies. Please see the slide 30. During quarter period, operating profit and net profit of Asian affiliated companies were JPY63.1 billion and JPY55.2 billion respectively. Major contributing companies are listed in the bottom of the slide.

With this, I will hand the microphone to Mr. Takeuchi. Thank you.

Now I'd like to discuss Company's [upwarded] new earning guidance for the fiscal year ending March 2010. Please see the slide page 35.

Net income will be JPY155 billion, an increase of JPY17.9 billion from last year, and revised up JPY100 billion from July guidance.

Earnings per share will be JPY85.42, an increase of JPY9.92 from last year.

Revenue will be JPY8,450 billion, a decline of JPY1,561.2 billion from last year, but an increase of JPY170 billion from the Company's July guidance, due mainly to increased unit sales in Automobile, Motorcycle, and the Power Products business.

Operating income will be JPY190 billion, expecting to recover the operating profit to the same level of last year. And that also represents as much as increase of JPY120 billion from July guidance.

Income before income tax will be JPY170 billion, an increase of JPY8.2 billion from last year, and also up JPY125 billion from the previous guidance.

Income and equity of affiliates will be JPY78 billion, a decrease of JPY21 billion from last year, but an increase of JPY13 billion from the previous guidance, thanks to the increased sales in Asian countries.

Currency assumption for the year will be JPY90 against the US dollar and JPY929 (sic - see press release) against the euro.

With that, I'd like to turn the microphone to Mr. Takeuchi who will elaborate the business outlook for the second half and comment on upward new earning guidance. So, Mr. Takeuchi, please go ahead.

Yes, please see the page 34; internal unit sales guidance. We expect total demand of the Motorcycle in Asian market will recover up to the same level of the 2008 because demand centralized in Vietnam and India are seeing much stronger than we expected.

Automobile sales will be still declined from last year's level, but we expect it will attain 3.4 million units. That is about 100,000 units higher than previous guidance. Especially in Japan, Honda's [fear ifs] and [compact range right now put in mind] competitiveness with the Insight hybrid model, together with Fit and Freed.

Also in China, our sales are expected to grow further, supported by the recent [raise] of the industry demand growth.

Sales of Power Products will be 4.455 million units, down 732,000 units from the last year. But it increased by 100,000 units from the Company's July guidance, due to increased sales in Asia and North America.

In terms of year-on-year operating profit growth and its analysis, please see the slide 36.

Gross profit will be pressured by JPY241.7 billion year-on-year, due mainly a decrease in sales volume, unfavorable model mix, as well as increase in fixed costs. However, the Company is further streamlining operating, together with saving in the SG&A and R&D, will make favorable contribution of JPY371 billion, and [JPY61.1 billion] each to the operating profit. That will be enough to compensate downward pressure, even with increased negative currency impact.

Added to the ForEx, as seen in the chart, higher yen has [weakened the base] currency assumption to JPY91 for US dollar and JPY127 for euro is expected to provide unfavorable impact of JPY209 billion to operating income.

With regard to major drivers that changed the Company July earnings guidance, please see the slide 37.

Strong Automobile sales in Japan and in China, along with strong Motorcycle sales in Asia, will be positive drivers in the term of the increase in volume and mix. That will provide an increase of JPY68 billion compared to Company's July assumption.

Honda will accelerate cost reduction efforts, as well as saving SG&A and R&D expenses. That will generate favorable JPY30 billion, JPY7 billion and JPY15 billion each, thus making an increase of JPY120 billion in operating profit from the Company's previous guidance.

As for CapEx and depreciation, and R&D, please see the slide 38. CapEx for the year will be JPY380 billion, down JPY219.1 billion from the previous year. Depreciation will be JPY380 billion, down JPY28.2 billion from the previous year.

In terms of second quarter cash dividend, please see the slide seven. Second quarter dividend is JPY8, and we project annual dividend will be JPY32.

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