本田技研 (HMC) 2011 Q2 法說會逐字稿

Good morning everyone. Welcome to Honda financial results audio presentation. On October 29, 2010, Honda Motor announced its financial results for the fiscal second-quarter ending September 30. Through this audio presentation, we would like to review the financial results and discuss the major drivers of Honda's business during the period.

Honda also revised up its full year earning guidance, so we would also like to discuss the new earning guidance for the fiscal year ending March 2011. The earning press release and slide presentation materials were posted on the same website, so please click the link on the FIT Hybrid model, downloading these materials.

Did you see it? 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 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 would like to start with the financial summary for the quarter. Please have a look at slide three.

In term of economic environment during the quarter in the US market, the economy has moderately recovered, although credit contraction and high unemployment ratio are still a concern.

The economy of Europe as a whole has gradually recovered, although concerns remain including the continued high unemployment rate.

Economies in China and India continue to expand and economies of other Asian countries have also recovered overall.

In Japan, high unemployment rate remained unchanged and downside risk of economy warmed as volatility in ForEx and stock markets went on, reflecting concerns about economic slowing down in overseas markets.

Now I would like to elaborate on business operation environment surrounding us.

In Motorcycles, industry demand in Indonesia, India, Thailand and Vietnam continued to expand significantly.

Looking at other than Asia markets, the demand in Brazil was expanded during the quarter. Nevertheless [leisure purpose] demand in developed countries, including the US, continued to decline.

In terms of Automobile business, industry demand in India and China continued to expand significantly. The Japan market also expanded. The Brazilian market is seeing uptick after a downturn. In the US, there was moderate recovery of demand, both fleet and retail, while the demand in Europe continued to decline largely

With regard to ForEx environment during the period, Japanese yen appreciated against the US dollar. The yen was JPY86 per dollar, JPY8 higher than last year. It was JPY111 per euro, JPY23 higher from the same period last year.

Despite such severe operating environment by reason of sharp appreciation of the yen, the expansion of Automobile business in North America, Japan and Asia, as well as expansion of Asian Motorcycle business contributed to an increase in operating income significantly.

Motorcycles unit sales posted 2.729m units, up 13.4% from the same period last year.

Automobile unit sales totaled 898,000 units, up 7.2% from the same period last year.

Power Products units sales were 1.166m units, up 23.6% from the same period last year.

Now financial summary for the second quarter are seen in the middle of the slide.

Net income attributable to Honda Motor totaled JPY135.9b, an increase of 151.5% from the same period last year and EPS was JPY75.24b, which is an increase of 152.7% from last year.

Revenue totaled JPY2,251.9b.

Operating income amounted to JPY163.4b, a significant increase of 149.4% from the same period last year.

Equity in income of affiliates totaled JPY35.6b, an increase of 59.3% from the same period last year.

Now I would like to discuss about analysis of sales and operating profit for the quarter. Please turn slide 10.

Revenue increased JPY195.2b, up 9.5% from the second quarter last year JPY2,251.9b, due mainly to increased revenue in the Automobile business.

Change in revenue in respective business, excluding currency translation impact are seen on the slide. Had the exchange rate remained unchanged, revenue would have been up 14.4%.

Revenue for the six months increased JPY554.5b, up 13.7% from the same period last year to JPY4,613.3b, primarily due to increased revenue in the Automobile business. Had the exchange rate remained unchanged from the same period last year, revenue would have been up 16.9%.

Now, let me elaborate on variance in factors that affected the operating profit in income before income taxes. Please turn to slide 12.

Operating income for the second quarter totaled JPY163.4b, as you can see at the bottom right-hand side of the slide, which was an increase of JPY97.9b compared to the operating profit of JPY65.5b in the same period last year.

Income before income taxes amounted to JPY166.2b, as shown at the bottom on the right-hand side, which was an increase of JPY100b from the same period last year, as seen on the top of the slide.

If you could have a look at the second box from the left-hand side, it shows how much gross profit was affected by the change in top line growth.

Increase of revenue due to higher unit sales of vehicles and positive model mix provided the positive impact of JPY93.8b this quarter. The third box from the left-hand side shows cost reduction that also contributed to gross profit changes. Cost reduction positively impacted this quarter by JPY55.5b, due mainly to reduction in fixed costs by increasing production.

The next box from the left-hand side demonstrates SG&A impact. Increased SG&A expenses provided negative impact of JPY7b this quarter. Increased R&D expenses provided negative impact of JPY9.8b. The ForEx had a negative impact of JPY34.4b, as yen appreciated toward major currencies.

Pre-tax profit year-on-year variance for the second quarter are as follows. There was a valuation loss and gain from derivative instruments agreement that resulted in providing a negative impact of JPY26.8b for the quarter. This mainly associates with ForEx forward agreement for Honda Japan's export transactions.

Year-on-year variance in other non-operating income and expenses net was a positive JPY29b. This was caused by difference between hedge rate and market rate when booked revenue. Detailed information on currency impact and revaluation of derivative instruments is available on slide 41 and 42.

First six months, for factors that affected the operating profit and income before income taxes, please turn to slide 13.

Operating income for the six months totaled JPY397.9b, an increase of JPY307.2b. Income before income taxes amounted to JPY422.3b, an increase of JPY350.7b, due primarily to increased sales volume and model mix, the reduction in fixed costs per vehicle and continuing cost reduction, despite increase in SG&A and R&D expenses and the unfavorable ForEx effects.

Now we would like to elaborate on Honda's business performance on each business segment for the second quarter.

First of all, let me start with Honda's Motorcycle business operation for second quarter. Please have a look at slide 15. Unit sales for the quarter totaled 2.729m units, increased by 13.4% compared to last year. This was mainly due to increased sales in Asia and other regions, including South America.

Motorcycle demand in Asia outside Japan, such as Thailand, Indonesia, Vietnam, and India expanded. Honda's unit sales were also favorable, supported by Cub type models and scooters that are very well accepted throughout Asian countries.

In other regions, demand in Brazil was favorable compared to the same period last year. Honda's unit sales were also increased by favorable sales of CG150 TITAN MIX and BIZ125. Unit sales in North America and Europe still remained weak for the quarter. We have experienced increased sales of smaller engine ATV models in the US, but declined sales in large engine models.

As for the revenue and operating profit of Motorcycle business, please have a look at slide 16.

Revenue for the quarter amounted to JPY312.8b, increased by 13.6% from the corresponding quarter last year, due mainly to higher unit sales centered in Asia.

Operating income for the quarter totaled JPY30b, increased by JYP20.7b, primarily due to the positive impact of increased sales volume and model mix, despite unfavorable foreign currency effects. Operating margin for the quarter was 9.6%.

Now let me elaborate on Automobile business results. Please have a look at slide 17.

Unit sales for the quarter amounted to 898,000 units, an increase of 60,000 units or 7.2% compared to last fiscal year. This increased unit sales was mainly due to sales growth in North America and Japan, enough to compensate decreased unit sales in Europe.

In North America, sales of light truck, the PILOT, CR-V and ODYSSEY models were strong and we have enjoyed favorable model mix versus to a year ago. Total sales in North America were 368,000 units.

In Europe, the market continued to show signs of weakness and total demand deteriorated, in Germany, Spain and Italy stripped of scrappage incentives. Given these economic situations, Honda sales in Europe also decreased to 48,000 units, from 73,000 units last year.

On the other hand, we have enjoyed favorable sales in Japan, led by increase for STEPWGN and FREED SPIKE sales. Government incentives as tax breaks and subsidies for fuel-efficient vehicles helped to enhance customer traffic. Total sales in Japan was 177,000 units, which was up 19,000 units from last year.

In Asia, where we also have enjoyed favorable sales, in particular demands have expanded in Thailand and Indonesia thanks to economic recovery. Favorable sales of the CITY and CR-V in Southeast Asian countries contributed to this increase. Total sales during the period were 244,000 units.

Please turn to slide 18.

Revenue for the quarter amounted to JPY1,723.5b, which was an increase of 10.4% compared with last year. This increase in revenue was mainly due to increased unit sales despite the unfavorable foreign currency translation effects.

Operating income amounted to JPY86.3b, a significant increase of JPY72.6b from last year, thanks to the positive impact of volume and mix, cost reduction as production increased, despite increased SG&A and R&D expenses and the unfavorable ForEx effects.

Operating margin for the quarter was 5.0%.

As for the Power Product business, please have a look at slide 19.

Unit sales of Power Products totaled 1.166m units, increased by 223,000 units, or 23.6% from last year, due to an increase of unit sales in all the regions.

Sales in Asia were strong for the quarter. In particular, sales of general purpose engines for OEM use, brush cutters and water pumps have increased in Thailand.

In Japan, sales of general purpose engines for OEM use have increased. Sales of Power Products in North America and European markets have shown moderate recovery and in other regions, sales of general purpose engine in Middle East countries have increased.

Slide 20 shows the revenue and operating income of Power Product and other businesses.

Revenue for the quarter amounted to JPY81.7b, an increase of 12% from the corresponding period last year. This increase in revenue was mainly due to increased unit sales of Power Products, enough to offset unfavorable ForEx translation effects.

Honda reported operating loss for the quarter of JPY0.3b, an improvement of JPY4.3b from losses of JPY4.6b last year, primarily due to the positive impact of increased volume and mix.

With regard to the Financial Services business, please see slide 21.

Revenue for the Financial Services business decreased by 8.8% to JPY144.2b, due to unfavorable currency translation effects.

Despite unfavorable impact of ForEx translation effects, operating profit increased by 0.5% to JPY47.4b, due mainly to the decrease in provision for credit losses along with the residual losses on operating lease cars.

Operating margin for Financial Services business rose to 32.9%.

Reviewing the operations of our Financial Services Business in North America, American Honda Finance has recorded another solid operating result for this quarter, consistent with prior quarters, thanks to favorable Honda and Acura operation in the US.

Honda's Financial Services business will continue to be solid with its consistent and conservative operation.

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

In Japan, revenue for the quarter increased 16.1% to JPY933.5b, mainly due to increased revenue of Automobile sales.

Operating income amounted to JPY20.2b, an increase of JPY45.9b from losses of JPY25.7b last year. Favorable revenue, model mix and so forth decreased fixed cost per unit. As a result of increased production and continuing cost reduction efforts [all] contributed to this increased operating profits, although increased SG&A and R&D as well as negative ForEx were adversely affected.

Operating margin was minus 2.2%. The scrappage incentive scheme has expired in early September, and we enjoyed favorable sales of automobiles until then. Sales of our STEPWGN, FREED, SPIKE and FIT were particularly favorable, and sales of CR-Z which was newly launched in February this year led to strong sales results.

Certain reversal impact after the end of the scrappage incentive scheme is inevitable. However Honda has applied minor model change on FIT and added hybrid version in early October. And in less than three weeks after the launch, we have received orders of more than 15,000 units FIT Hybrid. With this new model, along with other solid and attractive model lineup, like STEPWGN and FREED, we expect to reduce the negative impact of these pull-forward effects.

Please have a look at slide 24.

Regarding North America, revenue for the quarter resulted to be JPY1,021.6b, an increase of 13.6% as a result of increased sales in Automobile business, despite unfavorable ForEx translation effect.

Operating income increased by 59.1%, to JPY75.8b, due to favorable revenue and model mix and so forth, and decreased fixed cost, that were more than enough to offset increased SG&A expenses and unfavorable currency impact.

Operating margins for the quarter was 7.4%. In the United States [SAR] level has risen to 11.8m units in September, a significant increase from the 9.2m in September last year when we experienced a pull forward effect of the cash forward 'Clunkers' program. We expect this gradual recovery of demand will continue.

Also with the gasoline price remaining stable, sales of our light truck models such as ODYSSEY, PILOT AND CR-V are particularly favorable now.

Honda introduced all-new ODYSSEY at the end of September, with greater interior functionality, a more distinctive style and higher fuel economy, and customer's acceptance of this ODYSSEY has been very favorable. This all-new ODYSSEY is truly an American-made vehicle designed, engineered and assembled in the United States, and is produced exclusively at Alabama factory.

Moving into Europe on slide 25.

Revenue decreased 25.6% to JPY161.3b. This decrease in revenue was caused by declined automobile sales and unfavorable currency translation effect.

Operating income for the quarter decreased to minus JPY3b due to decreased revenue and unfavorable model mix, negative currency impact that will more than offset decreased SG&A expenses.

Operating margin was minus 1.9%.

In Western Europe, industry demand for automobiles fell by approximately 14% versus to the same period last year. Honda's Western European sales for the period declined 30%. Under such challenging operating circumstances, in order to enhance sales and operations, Honda increased supply of long awaited diesel CR-V model, and introduced the all-new CR-Z Sport hybrid model in June.

Now please have a look at slide 26 on Asia.

Revenue for the quarter was JPY452.9b, an increase of 22.2% from last year. This was mainly because of increased revenue in Automobile and Motorcycle businesses in Southeast Asia, which more than offset unfavorable ForEx impact.

Operating income in Asia for the quarter was JPY38.3b, increased by 39%.

Operating margin was 8.5%.

Concerning Motorcycle business in Asia, overall market increased. Market growth in the year in Thailand and Indonesia was quite significant, which was more than 20% compared with the same period last year. Along with the market growth Hondas unit sales grew also, particularly in Indonesia where we enjoyed more than 25% growth of sales.

We developed our 125 cc scooter model PCX in Thailand, and sales of this model has been very favorable, not only in neighboring countries but all the other regions where we sell the model. We aim to make this model from Southeast Asia a global model for the next generation and beyond.

Automobile sales in Southeast Asian countries were also quite favorable. We enjoyed more than 25% growth of automobile sales. Our CITY model has been selling particularly well.

Concerning other regions that include South America, the Middle East, Africa and Oceania, please have a look at slide 27.

Revenue for the quarter amounted to JPY242.5b, increased by 6.1% compared to the corresponding period in 2009, as a result of increased revenue in the Motorcycle business and favorable ForEx impacts.

Operating income rose to JPY20.4b, and operating margin for the quarter was 8.4%.

Automobile sales in Brazil, we have three months lag when the results were consolidated. During the April to June period, we have suffered from the slowdowns of sales due to the pull forward effects after the tax reduction scheme ended at the end of March. Amidst such circumstances, our CITY model which was introduced in Brazil in July 2009 remained strong.

Looking at the July to September quarter, we are seeing month-to-month recovery. However, compared to last year the sales momentum were soft.

On the other hand, Motorcycle sales have been quite strong in South America, based on economic recovery during the period. In Brazil, credit availability has been improved and Honda sales growth outperformed with our particularly well accepted CG150 type mix model.

In Argentina also, Honda's Wave and Storm models showed a very strong growth.

Concerning the July to September quarter, favorable business environment continued and sales kept growing in every country where we do business in South America.

Now I would like to move to equity in income of affiliated companies. Please see slide 29.

Equity in income of affiliated companies was JPY35.6b, up JPY13.2b from last year. Out of this, JPY29.5b was contributed by Asian affiliated companies. For your reference, we put a chart that shows combined operating income of Asian affiliated companies. Please see slide 30.

During quarter period, operating profit and net profit of Asian affiliated companies were JPY78b and JPY64.1b respectively. Major contributing companies are mentioned in the bottom of the slide.

Well, with regard to CapEx for the quarter, please see slide 32. Total CapEx for the quarter became JPY132.5b.

Now I would like to discuss the Company's [upwarded] new earnings guidance for the fiscal year ending March 2011. Please see page 35.

Net income will be JPY500b, an increase of JPY231.6b from last year, and revised up JPY45b from the Company's previous guidance as of July 30.

Earnings per share will be JPY276.80, an increase of JPY128.89 from last year. Revenue will be JPY9 trillion, which will be an increase of JPY420.8b from last year, but a decline of JPY100b from the previous guidance.

Operating income will be JPY500b, an increase of JPY136.2b from last year, and also an increase of JPY50b from the previous guidance.

Income before income tax will be JPY535.0b, an increase of JPY198.8b from last year, and also up JPY65b from the previous guidance.

Equity in income of affiliates will be JPY117b, an increase of JPY23.7b from last year, and an increase of JPY19b from the previous guidance, thanks to increased sales in Asia.

Currency assumption that the full year will be JPY84 against the US dollar, and JPY113 against the euro. We are now using JPY80 against the US dollar and JPY110 against the euro for the second half.

Now I would like to shift to top gear, business outlook for new earnings guidance. Please see page 34.

With regard to unit sales guidance for the fiscal year ending March 2011, we expect market demand for Motorcycle in Asia continues to grow, centered in India and Indonesia.

On top of that, we forecast Motorcycle unit sales will be 11.490m units, which is an increase of 1.851m units from the same period last year, and also an increase of 670,000 units from the previous guidance at July 30.

Total Automobile unit sales will be 3.615m units, an increase of 223,000 units from the last fiscal year, but slashed 25,000 units from the previous guidance, due mainly to decreased sales forecast in Europe.

Sales in Power Products will be 5.565m units, an increase of 821,000 units from last fiscal year, and an increase of 20,000 units from the previous guidance.

In terms of variance of year-on-year operating profit, please see slide 37.

In gross profit, we expect that growth of net sales will bring a positive impact of JPY299.9b, and cost reduction efforts will stay as positive drivers for this fiscal year, an increase of JPY120b from last year.

However, we expect SG&A expenses will increase by JPY85b, due mainly to growth of sales and R&D expense will increase by JPY36.7b, especially for the development of environmentally friendly technology.

We estimate ForEx impact will bring a negative impact of JPY162b.

As for CapEx, depreciation and R&D expenses, please see slide 38.

CapEx for the year will be JPY360b, up JPY30.3b from last year.

Depreciation will be JPY340b, down JPY26.6b from last year.

R&D expenses will be JPY500b, up JPY36.7b from last year.

With regard to cash dividend, please see slide seven. The second quarter dividend is JPY12 and we project annual dividend will be JPY48, an increase of JPY10 from last year.

Okay, that's about it. This concludes Honda's fiscal second 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.