本田技研 (HMC) 2011 Q3 法說會逐字稿

Good morning, everyone.

Welcome to Honda financial results audio presentation.

On January 31, 2011, Honda Motor announced its financial results for the fiscal third quarter ended December 31, 2010.

Through this audio presentation cast, 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 like to discuss the new earning guidance for the fiscal year ending March 2011.

The earning press release and slide presentation were posted on the same website.

And for downloading presentation materials, please click the link on the new 2012 Civic four-door photo.

Did you find it?

Okay.

Folks, let's start.

Now, I would like to start with financial highlight for the quarter.

Please have a look at the slide three, reviewing global economic environment during the quarter in the US market.

Although there were some signs of gradual economic recovery, such as consumer spending and capital spending continued to increase at a moderate rate, there are still concerns about US economy become stagnant due to the possibility of credit limit and the high unemployment rate will be prolonged.

Economies in China and India continued to expand.

And the economies of other Asian countries also achieved overall recovery at a somewhat slower pace.

In Europe, economy has bottomed as a whole, but concerns that recovery will slow remains, as high unemployment rate continue.

The weak economic environment in Japan remain unchanged.

Despite the fact that capital spending slightly improved, the sluggish recovery of consumer spending and prolonged high unemployment rate are considered a sign that the condition remains severe.

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

In Motorcycle business, industry demand in India, Vietnam, Brazil and Thailand continued to expand significantly.

The demand in Indonesia also continually expanded during the quarter.

However, leisure purpose demand in developed countries continued to decline.

In Automobile business, the industry demand in China and India experienced strong expansion, while in the US and Brazil the industry growth was boosted significantly by strong demand.

However, in Japan, demand decreased with adversely effects after the government [similar] program ended.

With regard to ForEx, during the period, Japanese yen appreciated against US dollar.

Yen was JPY83 per dollar, JPY6 higher than last year.

Euro was JPY112 per euro, JPY21 higher from the same period last year.

Despite a negative currency effect, along with declined Automobile unit sales in Japan, the overall results were largely exceeding the Company's forecasts announced in October, thanks to favorable Automobile business in North America and strong Motorcycle business in Asia and South America.

Motorcycles unit sales posted 2.895m units, up 21.7% from the same period last year.

Automobile unit sales totaled to 855,000 units, down 6.5% from the same period last year.

Power Product unit sales were 1.157m units, up 15.9% from the same period last year.

Financial highlight for this third quarter are seen in the middle of the slide.

Net income attributable to Honda Motor totaled JPY81.1b, a decrease of 39.7% from the same period last year.

And EPS was JPY45.01, which was a decrease of 39.3% from last year.

Revenue totaled JPY2,110.4b.

Operating income amounted to JPY125.6b, a decrease of 29% from the same period last year.

Equity in income of affiliates totaled JPY43.4b, an increase of 32.4% from the same period last year.

For your information, with regard to corporate income tax rate, due to the decrease in the amount of foreign tax credit expected to be utilized as of December 31, 2010, the Company has reduced related deferred tax assets.

As a result, the effective tax rate for the quarter differs from Honda's statutory income tax rate.

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

Please turn to slide nine.

Revenue decreased by JPY130.3b, down 5.8% from the third quarter last year to JPY2,110.4b, due mainly to decreased revenue in the Automobile business and the unfavorable currency translation effect.

Changes in revenue in respective businesses, without currency translation impact, are seen on this slide.

Had the exchange rate remained unchanged, revenue would have been down JPY18.4b.

That equivalents a decline of 0.8%.

Now, let me elaborate on variance and factors that affected the operating profit and income before income taxes.

Please turn to slide 11.

Operating income for the third quarter totaled JPY125.6b, as you could see at the bottom right-hand side of the slide, which was a decrease of JPY51.3b compared to the operating profit of JPY171.0b in the same period last year.

Income before income taxes amounted to JPY131.5b, as shown at the bar on the right side, which was a decrease of JPY39.4b 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 the favorable mix impact; this time the mix means the geographical mix or business mix as well as simply a model mix that provided the positive impact of JPY17.4b this quarter.

The third box from the left-hand side shows cost reduction that also associates the changes in gross profit.

Cost reduction positively impacted this quarter by JPY3.0b, due mainly to continuing cost reduction efforts and decreased depreciation expenses, despite an increase in raw material cost.

The fourth box from the left-hand side demonstrates SG&A impact.

Increased SG&A expenses, mainly due to increased advertisement and promotional expenses, provided negative impact of JPY15.4b this quarter.

Losses related to Honda's trading subsidiary that was recorded in this third quarter SG&A expense.

Increased R&D expenses provided negative impact of JPY11.8b.

The ForEx had a negative impact of JPY44.5b.

Pre-tax profit variance from the third quarter last fiscal year are there was a valuation loss and gain from derivative instruments agreement that provided a positive impact of JPY5.0b for the quarter.

This mainly associates with ForEx forward agreement for export transactions.

Variance in other non-operating income and expenses net was a positive JPY6.7b.

This is mainly related to fair valuation on interest rate swap agreements that Honda's financial subsidiaries hold.

And others is partly caused by difference between hedge rate and market rate to book revenue that Honda conducts.

Detailed information on currency impact and revaluation of derivative instruments is available on slide 39 and 40.

Now, we would like to elaborate on Honda's business performance on each business segment.

To begin with, please be noted that we have treated the losses related to Honda's trading subsidiary should not reflect in business segment information, because it should be regarded as another adjustment, beside of Power Product and other businesses.

Okay.

Let me start with Honda's Motorcycle business operation for third quarter.

Please have a look at the slide 14.

Unit sales for the quarter totaled 2.895m units, increased by 517,000 units or 21.7% 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 for the quarter.

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 has been strong, and Honda's unit sales were also increased by favorable sales of CG150 series and BIZ125.

Unit sales in North America and Europe still remained weak for the quarter.

However, the PCX model which is produced and exported from Thailand has been very well accepted in North America and Europe.

Especially in Europe, favorable PCX sales in France, Spain and Italy contributed to increase of total unit sales for the quarter, which was increased by 2.6% compared to last year.

As for the revenue and operating profit of Motorcycle business, please have a look at the slide 15.

Revenue for the quarter amounted to JPY301.9b, increased by 10.4% from the corresponding quarter last year, due mainly to higher unit sales centered in Asia.

Operating income for the quarter totaled JPY29.1b, increased by 83.7%, 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 16 of the presentation material.

Unit sales for the quarter amounted to 855,000 units, a decrease of 59,000 units or 6.5% compared to last fiscal year.

This decreased unit sales was mainly due to weak sales in Japan.

In Japan, government incentive as subsidies for fuel-efficient vehicles ended in mid of September.

As a result, adversely effect of pull-forward sales provided significant impact to the market.

Honda's sales reported 118,000 units, which was decreased by 59,000 units or 33.3% down compared to last third quarter.

In North America, unit sales for the quarter amounted to 364,000 units, increased 20,000 units compared to last fiscal year.

This increase was due to favorable sales of light truck models such as Pilot, CR-V and Odyssey.

Especially Odyssey, which newly launched in October, was very well accepted in the market.

In Europe, the market began to show the slight recovery, but total market was still weak.

Honda's sales in Europe was 41,000 units, a decrease of 8,000 units from last year.

In Asia, we have enjoyed favorable sales growth, due mainly to increased sales of the City and CR-V in Thailand and India.

On the other hand, shipment of KD set to Honda's joint ventures in China that we regard as unit sales were declined during the quarter.

Total unit sales in Asia was 265,000 units.

Please turn to the slide 17.

Revenue for the quarter amounted to JPY1,621.0b for the quarter, which was a decrease of 7.3% compared with the third quarter last year.

This decrease in revenue was mainly due to decreased unit sales in Japan and unfavorable foreign currency translation effects.

Operating income for the quarter amounted to JPY68.4b, a decrease by 38.1% from last year, mainly due to the unfavorable impact of decreased sales, increased R&D and unfavorable ForEx, despite ongoing cost-reduction efforts.

Operating margin for the quarter was 4.2%.

As for the Power Product business, please have a look at slide 18.

Unit sales of Power Products totaled 1.157m units, increased by 159,000 units or 15.9% 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 and brush cutters have increased in Thailand.

In Japan, sales of general purpose engines for OEM use have increased.

Sales of Power Product in North America and European markets have shown moderate recovery.

And in other region, sales of general purpose engine in South Africa and Australia have increased.

On slide 19 shows the revenue and operating income of Power Product and other businesses for the quarter.

Revenue for the quarter amounted to JPY75.1b, an increase of 1.7% from the corresponding period last year.

This increase in revenue was mainly due to volume increase of Power Product sales, despite the unfavorable currency translation effects.

Honda experienced operating loss of JPY2b for the quarter in Power Product and other businesses, which nevertheless improved from the same period last year, primarily due to the positive impact of increased sales volume and model mix.

With regard to Financial Services business, please see the slide 20.

Revenue for the Financial Services business decreased by 9.6% to JPY139.2b, due to unfavorable currency translation effects.

Operating profit decreased by 16.9% to JPY44.6b, due mainly to unfavorable impact of currency effects.

Operating margin for Financial Services business was 32.0%.

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

On top of that, business condition for financial business is very favorable.

US vehicle price continued to climb and remained strong towards end of the year.

As a result, we could manage residual loss for the returned lease vehicles to health level.

Honda's Financial Services business continued to get benefit as US auto markets show moderate recovery.

Honda expects its Financial Services business to continue to be solid, with consistent conservative operation.

Now, let me elaborate on Honda's business results by each geographical segment for the quarter.

Please turn to slide 22, starting from Japan.

In Japan, revenue for the quarter amounted to JPY867.5b, decreased by 0.3% from the corresponding quarter last fiscal year.

Although revenue in Motorcycle business increased, decline of the revenue in Automobile business more than offset the positive impact.

Operating income for the quarter increased by 45.8% to JPY14.6b, mainly due to decreased SG&A expenses and continuing cost-reduction effort, which more than offset negative revenue and model mix, increased R&D expenses and currency effect.

Operating margin was 1.7%.

After the scrappage incentive scheme ended in early September, sales backlash is quite evident in Automobile business, particularly in regular car segment.

Amid these circumstances, sales of FIT hybrid that was newly launched in early October remained quite strong, more so than we initially expected.

For Motorcycle operation, PCX, a 125-cc class scooter that was launched at the end of March, has been selling remarkably well.

Moving on to slide 23, North America.

Revenue for the quarter amounted to JPY1,011.8b, decreased by 1.7% from the corresponding period last year, due mainly to currency effect, although revenue in Automobile business increased.

Operating income for the quarter decreased 19% to JPY89.6b from the third quarter last fiscal year, due to increased SG&A expenses and negative currency effect, which more than offset positive revenue and model mix.

Operating margin was 8.9%.

I would like to give you a brief update on the United States automobile market.

Calendar year 2010 was marked from the beginning by the recovery of fleet sales, and later the growth of the light truck segment.

The light truck segment reached 55% share in December, close to the pre-crisis peak level, but the passenger car segment did not see much of year-on-year growth.

For example, small car segment, which our Civic model categorized in, grew only by 3% in 2010.

Under this market environment, American Honda, including both Honda and Acura brand, finished 2010 with the total sales of 1.23m units in the US, which is 7% growth, year on year.

Light truck segment was particularly good with the popular model, such as Honda CR-V and Pilot and Odyssey, Acura 1510 and RDX.

During the October/December quarter in 2010, we were encouraged to see the continued recovery of the US automobile market, especially by the fact that retail customers are coming back to the new car market.

To start the calendar year 2011, we assume the total US market size of over 12.6m units for the calendar year, and the sales of Honda and Acura is targeting 13.7m units or a growth of 12%.

This calendar year, our sales will be supported by the full model changes of volume cars, including Odyssey minivan, which was fully remodeled in October last year, and Civic, which is coming out this spring.

On top of these favorable product cadence, North American factories will be ramping up the production, especially to catch up with the brisk sales of light truck models.

On top of the already full capacity utilization at Ohio East Liberty plant and Mexico plant, Alabama factory will be back to full capacity from February this year, to meet the demand of Odyssey and Pilot.

Canada factory is also ramping up their production by adding the second shift to the number two plant from the beginning of this year, to meet the demand of 1510 and prepare for the new Civic launch.

Concerning Europe, please have a look at slide 24.

Revenue for the quarter was JPY150.7b, a decrease of 17.3% from the corresponding period last year.

This decrease is mainly due to a decline of revenue in both Automobile and Motorcycle business and negative currency effect.

Honda made an operating loss of JPY9.4b for the quarter, down JPY2.5b from the third quarter last year, primarily due to negative revenue and model mix and currency effect, despite decreased SG&A expenses.

Operating margin was minus 6.3%.

Reversal effect of scrappage incentive remains in some Western European countries, such as in UK, Italy and Spain.

In some countries, however, signs of gradual recovery are visible.

Amid these severe market circumstances, our CR-V model has sold well.

With all-new Civic to be launched some time after autumn, we expect to enhance our operation and sales going forward.

Please turn to slide 25, on Asia.

Revenue for the quarter increased 12.2% to JPY445.5b, due mainly to increased sales of automobiles and motorcycles, despite negative currency effect.

Operating income increased 2.2% to JPY35.7b for the quarter, due to positive revenue and mix, which more than offset increased SG&A expenses and negative currency effect.

Operating margin was 8%.

Motorcycle demand has kept growing, along with economic growth.

In Thailand, Honda's latest market growth, year over year, has been approximately 20%, outpacing the total motorcycle market growth.

Sales of PCX has been particularly increasing, as well as overall Wave series motorcycles and Scoopy-i.

Market growth in India has also been quite significant, more than 30% growth.

Sales of Honda Motorcycle Scooter India, HMSI, models has been expanding even more.

On top of it, CB Twister was chosen to be the Bike of the Year in India.

In Vietnam also, motorcycle demand has been strong, and sales growth of Honda's models of Wave series, as well as Future Neo and Click, showed above market increase.

Automobile market growth has also been quite healthy and stable in South East Asian countries, particularly in Thailand and Indonesia, supported by solid economic recovery.

Market growth in India has also been quite stable.

Along with market growth, Honda's automobile sales was also favorable.

Speaking of models, sales of City and CR-V increased, particularly in Thailand.

With the attractive priced brand new Brio to be launched in April this year in Thailand, later in India, we would like to capture more market demand.

Moving on to other regions that include South America, the Middle East, Africa and Oceania, please have a look at slide 26.

Revenue for the quarter was JPY238.8b, down 0.9% from the corresponding period last year.

Although revenue increased in Motorcycle business, decrease of revenue in Automobile business and currency translation effect negatively affected the revenue.

Operating income was JPY15.6b, decreased by 10% from the same period last year, mainly due to increased SG&A expenses that more than offset positive revenue and mix.

Operating margin was 6.6%.

Honda's Brazilian operation, which is the biggest contributor to Honda's business performance in other regions, is adopting fiscal year term as January to December.

So please be noted that for the third-quarter period we have consolidated the July to September period a three months' lag.

During July to September period in Brazil, we still had to suffer from the reversal effect of the tax break scheme that ended in March last year.

However, sales of our City and CR-V models remained strong.

For Motorcycles in Brazil, market kept growing along with economic recovery.

Honda's sales was also strong, centered in CG150 models.

That is all for the elaboration on business performance for the quarter.

Now, switching gear to the performance of equity in income of affiliated companies, please see the slide 28.

Equity in income of affiliated companies was JPY43.4b, up by JPY10.6b from last year.

Increased profit in equity in income were mainly driven by the affiliated companies in Asia that contributed JPY34.4b for this quarter.

Please be noted that there was a positive accounting adjustment impact in this quarter, when affiliated companies financial statement consolidated, and then it will reversely effect when it comes to fourth-quarter results.

For your reference, we put a chart that shows combined operating income and net income of Asian affiliated companies.

Please see the slide 29.

With regard to CapEx for the quarter, please see the slide 31.

Total CapEx for the quarter became JPY190.4b, a decrease of JPY71.3b from the same period last year.

CapEx for Automobile was major reason for the declining.

However, we expect that CapEx for Automobile in the next quarter will be revamped.

Now, I would like to discuss Company's upwarded new earnings guidance for the fiscal year ending March 2011.

Please see the page 34.

Net income will be JPY530.0b, an increase of JPY261.6b from last year and revised up JPY30.0b from the Company's previous guidance as of October 29.

Earnings per share will be JPY293.41, an increase of JPY145.50 from last year.

Revenue will be JPY8.9 trillion, which will be an increase of JPY320.8b from last year, but decline of JPY100b from the previous guidance.

Operating income will be JPY620.0b, an increase of JPY256.2b from last year and also an increase of JPY120b from the previous guidance.

Income before income tax will be JPY665b, an increase of JPY328.8b from last year and also up JPY130b from the previous guidance.

Equity in income of affiliates will be JPY130b, an increase of JPY36.7b from last year and an increase of JPY13b from the previous guidance, thanks to increased sales in Asia.

Currency assumption for the full year will be JPY85 against US dollar and JPY112 against euro.

For this January to March quarter, we are using JPY80 against the US dollar and JPY105 against euro.

That is more conservative than current market level.

Now, I'd like to discuss and analyze the upwarded new earnings guidance.

Please see the page 33.

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

We have revised up our forecast of Motorcycle unit sales to 11.535m units, which is an increase of 1.896m units from the same period last year, and also an increase of 45,000 units from the previous guidance at October 29.

In Automobile, total unit sales will 3.580m, an increase of 188,000 units from last fiscal year, but slashed by 35,000 units from the previous guidance due to declined demand in Japan concern.

Sales of Power Products will be 5.610m units, an increase of 866,000 units from last fiscal year and an increase of 45,000 units from the previous guidance.

Regarding variance of year-on-year operating profit, please see the slide 36.

In gross profit, we expect that growth of revenue will bring a positive impact of JPY342.9b.

And cost-reduction efforts continue to be positive driver for this fiscal year, an increase of JPY148b from last year.

SG&A will be disciplined.

However, we expect it will increase by JPY44b, due mainly to growth of sales.

And R&D expense will increase by JPY36.7b.

We estimate ForEx impact will bring a negative impact of JPY154b.

As for CapEx, depreciation and R&D expenses, please see the slide 37.

CapEx for the year will be JPY330.0b, up by JPY0.2b (sic - see presentation) from last year.

Depreciation will be JPY330.0b, down JPY36.6b from last year.

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

With regard to cash dividend, please see the slide six.

The Board of Directors of Honda Motor resolved a distribution of third-quarter dividends and revised the amount of the projected year-end dividend per share of common stock.

Third-quarter dividend is JPY15.

And we project that total annual dividend will be JPY54, an increase of JPY16 from last year and an increase of JPY6 from the previous guidance.

Okay.

That's about this.

This concludes Honda's fiscal third-quarter earning results audio presentation cast.

Thank you again for listening to our web program.

Forward-looking statement.

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.

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.