本田技研 (HMC) 2011 Q1 法說會逐字稿

Honda Motor fiscal year 2011 first-quarter earning result audio presentation. Good morning, ladies and gentlemen. Welcome to Honda's financial result audio presentation. This is Oshima, Honda Japan, Investor Relation.

On July 30, 2010, Honda Motor announced its financial result for the fiscal first quarter ended June 30. Through this audio presentation, we would like to recap the financial result and discuss the major driver of the business for the period. Honda also upgraded its full-year earning guidance, so we would like to also discuss the revised guidance for the fiscal year ending March 2011.

I'd like to let you know that joining me today is Asako Suzuki, General Manager of Finance Division, and Honda Investor Relation Officers, [Naoshi Yazaki], [Yuki Hatori], Takumi Suzuki, Daisuke Kawasaki. They will be speaking for this audio presentation.

The slide presentation material has been posted on the Company's website, and please click the link on the all-new 2011 Odyssey pictures for downloading material. If you're all set, okay, folks, let's start.

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.

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

Starting with the global economic environment during this quarter period, in the US we have seen moderate economic recovery, while concern remained considering credit constraint, along with high unemployment ratio. In European countries, economic outlook remained unfavorable. In Asia, outside Japan, economic expansion in China accelerated, and the economy in Asian countries continued to grow. In Japan, high unemployment rate remained unchanged and economic slump was severe. However, moderate recovery in consumer spending, along with a bottoming out in private sector's CapEx, was seen.

In terms of ForEx for the quarter, Japanese yen was JPY92 against the US dollar, JPY5 higher compared to the same period last year, and the euro was JPY118, which was up JPY14 from the same period last year.

Now I'd like to talk about motorcycle demand in major market. Significant market growth continued in India, Indonesia and Thailand. On the other hand, continued deterioration of demand in US was seen.

With regard to the automobile, demand in Asia, especially in India and China, have grown. US demand also elevated during the period, led by the recovery of light truck sales, but partially supported by the increased fleet demand. In Europe, total demand has shrunk, reflecting declined sales in Germany because the government program has expired.

Under such circumstances, Honda achieved strong operating profit of JPY234.4b for the quarter, as Auto business in Japan and North America began recovery. In addition, growth of the Financial Services business and Asian market development for both Motorcycle and Automobile underpinned strong earning performance.

Motorcycle unit sales amounted approximately 2.8m unit for the quarter. Automobile unit sales was slightly below 900,000 unit. However, it's up 17.4% versus last year. Power Product unit sales was about 1.4m unit, up 22.9% from last year.

Now I'd like to talk about the financial result. The first-quarter financial result are seen in the middle of the slide. Net income attributable to Honda Motor was JPY272.4b, set a record high for the quarter. And EPS was JPY150.27, which is an increase of JPY146.10 from last year. Revenue totaled JPY2,361.4b.

Honda achieved a significant recovery in operating income, an increase of 831.7% from last year, to JPY234.4b. Income before income tax achieved JPY272.4b, which also showed a large increase from last year. Equity in income of affiliate was JPY35.6b.

During this quarter, the Company decreased provision on unrecognized tax benefit that led the consolidated corporate tax rate for the period to 4.5%. For the detail, please see the note in our financial result press release set.

Now, Kawasaki will elaborate revenue and operating profit walk. Thank you.

I'd like to discuss analysis of sales and operating profit for the quarter. Please turn to slide eight.

Revenue increased JPY359.2b, up 17.9% from the same period last year, to JPY2,361.4b, due mainly to increased unit sales of all business segments. Variance from last year, excluding currency impact, could be seen on the slide. Had the exchange rate remained unchanged, we assume that revenue would have been up 19.5% from last year.

Let me elaborate on each factor that affected the operating profit and income before income taxes. Please turn to slide 10.

Operating income for the first quarter totaled JPY234.4b, as you could see at the bottom of the right side of the slide, which was an increase of JPY209.2b versus to the same period last year. Income before income taxes amounted to JPY256.1b, as you could see on the right side, which was an increase of JPY250.6b from the same period last year.

This chart shows the variance how the operating profit was affected by each factor in detail. Let me explain on each driver, from left to right.

If you have a look at the first floating box from the left side, it shows how much gross profit was affected by the change in top line growth. Increase of revenue due to increased unit sales of Motorcycles, Automobiles and Power Products provides a positive impact of JPY175.1b this quarter. Decreased incentive provision, together with royalty payment from affiliated company, were positive driver to this increase.

The second floating box shows cost reduction that also contributes to gross profit changes. Cost reduction positively affected this quarter by JPY70.7b. This positive impact is attributable to a reversal effect of one-time cost increase last year, when we adjusted production volume.

The next box demonstrates SG&A impact. Increased SG&A expenses grew by the negative impact of JPY5.4b this quarter. Increased R&D expenses provided negative impact of JPY16.6b. The currency had an unfavorable impact of JPY14.4b. These are the changing factors on the operating income of the first quarter, versus the same period last year.

From here, let me elaborate on pre-tax profit changes compared to the same period last year. The fair value and valuation gains/losses from derivative instruments agreement provide a positive impact of JPY18.6b for the quarter. This is mainly associated with foreign currency forward agreement and interest rate swap. Other non-operating income and expenses net was a positive JPY22.7b. This was mainly caused by variance between our hedge rate and market rate on booking revenue.

Variance of overall currency impact from last year at operating income and pre-tax line was negative JPY5.2b, which consists of negative JPY14.4b in operating profit and positive JPY9.2b in non-operating profit. Detailed information on currency impact and reevaluation of derivative instruments are available on slide 37 and 38.

Now I'd like to switch the microphone to Mr. Yazaki. He will discuss about Honda's business performance on each business segment for the quarter.

Thank you, Mr. Kawasaki. Now we'd like to elaborate on Honda's business performance on each business segment for the first quarter. Reviewing Motorcycle business, please turn to slide 12.

Unit sales for the first quarter totaled 2.887m, increased by 28.2% compared to the same period last year, mainly due to increased sales in Asia and other regions, including South America. Motorcycle demand in Asia expanded for the quarter, centered in South East Asian countries such as Thailand, Indonesia and Vietnam. We also reported remarkable increased sales in India, given that Honda's unit sales were also very favorable, propelled by 110cc Cub type series models and the competitive scooter models that are very much accepted throughout the region.

In other regions, especially demand in Brazil was strong, compared to the same period last year. Honda's unit sales were also increased, with favorable sales of the NXR150 and CG125 models. Just be noted that our Brazil sales result had three months run when we consolidate their fiscal sales results.

Despite signal of ATV wholesale recovery in US (inaudible), total demand in North America and Europe still remain weak since first quarter.

As for the revenue and operating profit of Motorcycle business, please have a look at slide 13.

Revenue for the quarter amounted to JPY320.2b, increased by 24.9% from the corresponding quarter last year, due mainly to increased unit sales and the favorable Brazilian currency translation effects against Japanese yen impact. Operating income for the quarter totaled JPY31.3b, increased by JPY25.6b, primarily due to the positive impact of increased sales volume and model mix, and the reduction in vehicle cost as a result of increased ATV model production. Operating margin for the quarter was 9.8%.

Now let me elaborate on Automobile business results. Please have a look at slide 14 of the presentation material.

Unit sales for the first quarter amounted to 899,000 units, an increase of 133,000 units, or 17.4%, compared to the first quarter last fiscal year. These increased unit sales was mainly due to sales growth in Asia, North America and Japan, more than offsetting decreased unit sales in Europe.

In North America, sales of light truck, the Pilot, CR-V and Odyssey models was strong, and we have enjoyed a favorable model mix versus to a year ago. Total sales in North America was 370,000 units.

In Europe, the market continued to show sign of weakness and total demand deteriorated, centered in Germany and Italy, as stimulus programs expired. Given this situation, Honda's sales in Europe also decreased to 53,000 units.

We have enjoyed favorable sales in Japan, led by increase unit sales of the all-new hybrid CR-V, Stepwgn and Fit models. Government incentives as tax breaks and subsidies for fuel-efficient vehicles helped to enhance customers' [traffic].

In Asia, where we also have enjoyed favorable sales, market has expanded in Thailand and Indonesia in particular, thanks to economic recovery. Favorable sales of City and CR-V in South East Asia countries contributed to this increase. Total sales during the period were 261,000.

Please turn to the slide 15. Revenue for the quarter amounted to JPY1,814.4b for the quarter, which was an increase of 19.1% compared to the first quarter last year. This increase in revenue was mainly due to increased unit sales, despite the unfavorable currency translation effects.

Operating income for the quarter amounted to JPY148.9b, a significant increase of JPY170.3b from the first quarter last year, mainly due to the positive impact of increased sales volume and model mix, reduction in vehicle cost as a result of increased production and the continuing cost reduction efforts, despite the increased SG&A expense and R&D expense and the unfavorable impact of the currency effects. Operating margin for the quarter was 8.2%.

As for the Power Products business, please have a look at slide 16.

Unit sales of Power Products totaled 1.440m units, increased by 268,000 units or 22.9% from the first quarter last year, due to an increase of unit sales in all the regions.

Sales in Asia was strong for the quarter. Government subsidies for the agriculture industry in some countries helped to boost water pump sales. Demand for generator increased in India, to be used for blackouts. In Japan, sales of general purpose engine for OEM use have increased. Sales of Power Products in North American and European markets have showed moderate recovery. And in Brazil, sales of general purpose engine used in machinery equipment and generator increased, thanks to the recovery of construction machinery market.

On slide 17, shows the revenue and operating income of Power Product and Other business for the first quarter.

Revenue for the quarter amounted to JPY85.7b, an increase of 17.1% from the corresponding period last year. This increase in revenue was mainly due to increased unit sales of Power Products, despite the unfavorable currency translation effects. On the reported operating loss for the quarter was JPY0.4b, an improvement of JPY5.4b from the first quarter last year, primarily due to the positive impact of increased sales volume and model mix.

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

Thank you. Regarding Financial Services business, please see the slide 18.

Revenue for the Financial Services business decreased by 4.2% to JPY152.5b, due to unfavorable currency translation effects. Operating profit increased to JPY54.6b. Operating margin for Financial Services business rose to 35.8%.

Reviewing operations of our Financial Services business in North America, American Honda Finance has achieved another solid operating result, consistent with prior quarters, thanks to favorable Honda and Acura operations in US. On top of that, decreasing allowance for credit losses and the residual losses for off-lease cars helped to boost operating profit that contributed to a record high profit in the quarter.

Delinquency continues to be lower than last year for all product types. The expectation is still set higher through the end of the year, due to seasonality. However, delinquency is still expected to be lower than last year's level across all the products.

We expect that Honda's Financial Services business will continue to be solidly with its conservative operations. However, coming quarters' results may not be as high as this quarter's level, reflecting primarily an intensified competition and lower occurring of this quarter's favorable factors in rest of the year. We expect that margin of our Financial Services business will be gradually normalized, due to a decrease in financing rates and an increase in forecasted losses.

Now let me elaborate on Honda's business by each geographical segment, starting from Japan. Please turn to slide 20 of the presentation material.

In Japan, revenue increased by 25.7% from the corresponding period last fiscal year, to JPY926b. This increase in revenue came mainly from increased sales in Automobile business. Operating income amounted to JPY53.2b, which was a significant improvement of JPY57.9b compared to the first quarter last fiscal year. This improvement was primarily due to the positive volume and mix impact, as well as decrease in fixed cost per unit as a result of increased production that more than offset increased SG&A and R&D expenses, and the negative currency effects caused by the appreciation of the Japanese yen. Operating margin for the quarter was 5.8%.

In Japan, we have been enjoying favorable sales largely due to the government subsidies for environmentally friendly automobile purchases and scrappage incentive scheme. Honda's retail sales for the quarter was up 15% compared to the corresponding period last fiscal year. Sales of the Fit and Fleet, as well as Stepwgn, which was launched all new in October last year, were particularly favorable. The Stepwgn was the best selling minivan in the first six months of this calendar year, 2010.

As for Motorcycle business in Japan, Honda introduced the PCX, the brand new 125cc global scooter model, which was developed and produced in Thailand. After three weeks from the launch of the model, we received more than 7,400 units of orders, which is more than 90% of our annual sales target.

Now let me move on to North America. Please turn to slide 21.

Revenue in North America increased 16.6%, to JPY1,137.8b for the quarter, mainly due to increased Automobile sales, although there was negative currency effect due to the appreciation of the Japanese yen. Operating income for the quarter amounted to JPY110.7b, a significant increase of JPY103.6b from the corresponding period last year, mainly due to the positive volume and mix impact and decreased cost per unit as a result of increased production. Operating margin for the quarter was 9.7%.

Now I would like to discuss more about the US automobile market situation during the quarter. During April to June quarter, we saw industry sales continuing to grow over last year's sales level for eight months in a row, from November last year. Seasonally adjusted, annual rate trended around 11.5m units level.

In this market environment, American Honda sales during the quarter was in line with its plan and the original guidance of April 28. Corporate average inventory level at the end of June was in the optimal range. But if we look at the light truck segment, we faced a low inventory situation thanks to strong sales in the segment, such as CR-V, Pilot and Acura MDX.

For calendar year 2010, our expectation of Honda's US unit sales is revised up by approximately 20,000 units to 1.27m units from the original plan of April 28, with our assumption of 2010 US [SAR] of about 11.3m to 11.5m, not much change from April forecast.

Behind these unit sales expectations are the strong 2011 year models coming into the market, starting from August. The Accord, already the number one mid-sized sedan in 2010 IQS, will have a refreshing on exterior and interior styling, as well as up to three miles per gallon improvement on its fuel economy. New category making sport hybrid model CR-Z will debut in full content for less than $20,000. And the all-new Odyssey debut this fall, with a full versatility of space arrangements and comes with a V6 engine, offering higher fuel economy than the rivals. These will support unit sales volume as well as the mix in the fiscal year 2011 March ending.

As for Europe, please turn to the slide 22.

Revenue for the quarter was JPY189.8b, a decrease of 13% from the first quarter last fiscal year. This decrease in revenue was mainly due to decreased sales of automobiles and unfavorable currency effects caused by the appreciation of the Japanese yen. Operating income for the quarter amounted to JPY4b. Operating margin was 2.1%.

In Western European countries, market shrank with government scrappage incentives being over or weakened in countries such as Italy, Germany and France, and also by the lower consumer sentiment for fear of economic deterioration. In Russia, however, demand increased by approximately 30%, due to scrappage incentives for Russian-produced automobile purchases. Amid this business environment, Honda's retail sales decreased by approximately 20% compared to the first quarter last fiscal year.

Concerning Asia outside Japan, please turn to the slide 23.

Revenue for the quarter amounted to JPY470.2b, which was an increase of 46.2% (sic - see presentation) from the corresponding period last year. This was mainly because of increased sales in Motorcycle and Automobile business. Operating income for the quarter set a record high and amounted to JPY44.4b, increased by 118.3% from the same period last year, mainly due to positive volume and mix impact and continuing cost reduction effort that more than offset an increase in SG&A expenses. Operating margin for the quarter was 9.4%.

Despite the political unrest that took place in Thailand, sales of Honda's automobiles and motorcycles steadily grew. The Wave series motorcycle sales significantly increased in both Thailand and Vietnam. In Indonesia, Honda's year-over-year sales growth was quite significant, partly due to market recovery, particularly in Automobile business, where we enjoyed more than doubled unit sales of automobiles for the quarter compared to the corresponding period last year. Sales of our locally produced Jazz, CR-V and Fleet models were particularly favorable.

In India, where market has been expanding at a rapid pace, particularly in small car segment, competition has also become quite severe. As a result, Honda's unit sales were slightly better compared to the same period last year. Sales of our compact sedan model City contributed. As for our Motorcycle business in India, sales of newly launched CB Twister has been quite favorable, as well as the Activa, Shine, Aviator and Dio models in particular.

In Motorcycle business in South East Asian countries, automatic transmission models have been increasingly popular in countries like Thailand, Vietnam and Indonesia, and market for automatic transmission models is expected to grow going forward.

Moving on to other regions, including Latin America, the Middle East, Africa and Oceania, please have a look at the slide 24.

Revenue for the quarter amounted to JPY236.3b, increased by 34.7% from the corresponding period last fiscal year, mainly due to increased sales in Motorcycle and Automobile business and positive currency impact of ForEx, including Brazilian real. Operating income amounted to JPY20.2b, which is quite an improvement, of JPY20.7b, from the corresponding period last fiscal year, primarily due to positive revenue and mix impact and positive ForEx effect. Operating margin was 8.6%.

In Brazil, we had enjoyed favorable unit sales, partly due to government's industrialized products tax cut plan until the end of March. We have three months [lack] when consolidating fiscal quarter period in Brazil.

Looking at market situations in Brazil from April to June, growth of demand for automobile once slowed, right after the end of the tax cut plan. However, growth continued soon afterwards, as auto manufacturers tried to stimulate demand, offering attractive sales campaigns. As a result, from April to June quarter, overall automobile demand remained the level of the corresponding period last fiscal year, although competition became quite severe. Amid these circumstances, Honda's automobile unit sales for the quarter decreased.

On the other hand, Motorcycle demand is showing strong recovery in Brazil, based on the economic recovery. Credit availability has been improved, and we expect this market growth to continue for the year. Honda sales for the April to June quarter was favorable, with a contribution of robust sales of newly introduced NXR150 and CZ150, together with CZ125 and BIZ125.

That is all for the geographical segment information from me. Thank you very much.

With regard to income in equity of affiliated companies, please see the slide 26.

Income in equity of affiliated companies for the quarter was JPY35.6b, up by JPY21.4b from the same period last year. Out of this, JPY27.5b was contributed by Asia affiliated companies. For your reference, we put a chart that shows operating income and the net income of Asia affiliated companies. Please see the slide 27.

During quarter period, operating profit and net profit of Asia affiliated companies were JPY82.5b and JPY71.1b, respectively. Major contributing companies are listed in the bottom of the slide.

With regard to CapEx for the quarter, please see the slide 29. Due mainly to decrease in Automobile CapEx, total CapEx for the quarter became JPY42.8b.

Now I'd like to discuss the Company's new guidance for the fiscal year ending March 2011. Please see the slide 32.

Net income will be JPY455b, an increase of JPY186.6b from last year and revised up JPY115b from April guidance. Earnings per share will be JPY251.23, an increase of JPY103.32 from last year. Revenue will be JPY9,100b, an increase of JPY520.8b from last year and a decline of JPY240b from the Company's April guidance, due mainly to ForEx impact.

Operating income will be JPY450b, an increase of JPY86.2b from last year and up JPY50b from April guidance, due mainly to the positive impact of increased revenue and model mix and continuing cost reduction efforts. Income before income tax will be JPY470b, an increase of JPY133.8b from last year and up JPY60b from previous guidance. Income in equity of affiliates will be JPY98b, an increase of JPY4.7b from last year and an increase of JPY3b from previous guidance.

Currency assumption for the year will be JPY87 against the US dollar and JPY112 against the euro. We estimate JPY85 against the US dollar and JPY110 against the euro for second quarter onward.

With regard to CapEx, please see the slide 35. CapEx for the year will be JPY380b, up JPY50.2b from last year. Depreciation will be JPY350b, down JPY16.6b from last year.

With regard to cash dividend, please see the slide five. The Company decided a first-quarter cash dividend of JPY12, which is up JPY4 from the same period last year. The Company announced that the cash dividend for the fiscal year ending March 2011 will be JPY48, an increase of JPY10 from last year.

The Company also resolved to acquire its own shares and retire the treasury stock, for the purpose of enhancing its capital efficiency. Detailed information of the acquisition and the retirement are available on the bottom of slide five.

Okay. That's about this. This concludes Honda's fiscal first-quarter earning results audio presentation. Thank you again for listening to our web program. This is Honda Investor Relations, and have a wonderful day.

Speaker statements on this transcript were Interpreted on the conference call by an Interpreter present on the live call. The Interpreter was provided by the Company sponsoring this Event.