本田技研 (HMC) 2012 Q1 法說會逐字稿

Good morning, everyone.

Welcome to Honda's financial results audio presentation.

On August 1, 2011, Honda Motor announced its financial results for the fiscal first quarter ended June 30, 2011 and its earnings forecast for the fiscal year ending on March 31, 2012.

Through this audio presentation we would like to review the financial results and discuss the major drivers of Honda's business during the period.

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So please download the presentation material before listening further.

Please click the link on the Fit Shuttle Hybrid still photo to download the material.

If you have already got the material at hand, let's get started.

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 differ materially 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.

The various factors for increases and decreases in income have been classified in accordance with a method that Honda considers reasonable.

Now I would like to start with financial summary for the first quarter that ended on June 30, 2011.

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

In the US, the growth of consumer spending and capital expenditure was moderated and a high unemployment rate and sluggish housing market continued.

Although a slow recovery could be seen, concerns of economic deterioration remained.

In Europe, the economy has gradually recovered, although conditions varied widely by country.

Concerns remain including low confidence in the financial system and continued high unemployment.

In Asia, while the economy continued to expand in China, the pace of economic expansion moderated in India.

The economies of other Asian countries achieved overall recovery, although the pace of recovery slowed.

The economy in Japan has remained severe due to the impact of the earthquake, although signs of improvement such as steady capital spending and consumer spending could be seen.

Concerns remain due to limited electricity supply, nuclear power plant disasters and oil price hikes.

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

In Motorcycle business, industry demand in India, Indonesia, Vietnam, Thailand and Brazil expanded, while gradual decline of demand in the US was seen.

Automobile industry, demand in the US, Brazil, Russia and India expanded, while in China and Europe were slightly decreased and there was a significant decrease in Japan.

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

It was JPY82 per US dollar, JPY10 higher than the same period last year.

For euro, it was JPY118 per EUR1, which was the same level to the first quarter last year.

Despite the significant decline of unit sales in the Automobile business mainly caused by the Great East Japan earthquake that occurred on March 11, 2011 the Company posted operating profit of JPY22.5b due to the expansion of profit in Motorcycle business as well as strong performance of Financial Services business primarily for automobile purchases.

Motorcycles unit sales totaled 2,751,000 units down by 4.7% from the same period last year.

Automobiles unit sales totaled 547,000 units, decreased by 39.2% from the same period last year.

Power Product unit sales were 1,512,000 up by 5% from the same period last year.

Financial highlights for this first quarter are seen in the middle of the slide.

Net income attributable to Honda Motors totaled JPY31.7b, decreased by 88.3% from the same period last year.

EPS was JPY17.64, which was a decrease of JPY132.63, from the same period last year.

Revenue totaled JPY1,714.5b.

Operating income amounted to JPY22.5b, a decrease of 90.4% from the same period last year.

Equity in income of affiliates totaled JPY28.6b, a decrease of 19.8% from the same period last year.

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

Please turn to slide eight.

Revenue decreased by JPY646.8b, down by 27.4% from the first quarter last year to JPY1,714.5b, due mainly to decreased revenue in the Automobiles business mainly caused by the impact of the earthquake.

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

Had the exchange rate remained unchanged, revenue would have been a decrease of JPY536.1b.

That's equivalent to a decrease of 22.7%.

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

Please turn to slide ten.

Operating income for first quarter totaled JPY22.5b, as you could see at the bottom right hand side of the slide, which was a decrease of JPY211.8b compared to the operating profit of JPY234.4b in the same period last year.

Income before income taxes amounted to JPY29.2b, as shown at the bar on the right hand side, which was a decrease of JPY226.8b from the same period last year, as seen on the top of the slide.

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

Decline of unit sales mainly impacted by the earthquake brought a negative JPY134.8b this quarter.

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

Cost reduction negatively impacted this quarter by JPY83.1b, due mainly to an increase in fixed cost per unit as production output has been reduced.

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

Decreased SG&A expense is mainly due to decreases in logistics expenses along with declined sales.

Smaller quality related expenses and advertisements and sales promotion expenses provide a positive impact of JPY20.5b this quarter.

Decreased R&D expenses provide a positive impact of JPY8b.

The ForEx had a negative impact of JPY22.5b as the yen appreciated toward major currencies.

Pre-tax profit variances from the first quarter last fiscal year.

There were fair valuation losses and gains from derivative instruments agreements that provided an adverse impact of JPY24.3b, compared to last year.

This mainly associates with ForEx forward agreement for export transactions.

Variance in other non-operating income and expenses net was positive JPY9.3b.

This relates to fair valuation of interest rate swap agreements that Honda's financial subsidiaries holds and others are mainly affected by a difference between hedge rate and market rate to the booked revenue and interest received.

Detailed information on currency impact and revaluation of derivative instruments is available on slide 37 and 38.

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

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

Please have a look at the slide 12.

Unit sales for the quarter totaled 2,751,000 units, decreased by 136,000 units or 4.7% compared to last year.

This was mainly because of the exclusion of unit sales of certain models after the dissolution of the joint venture in India, our late shipment and decreased unit sales in North America, despite increased unit sales in other regions including South America.

Unit sales excluding knock-down sets for overseas production were increased approximately 200,000 units compared to last year.

Motorcycle demand in Asia, outside Japan, such as Thailand, Vietnam and India expanded for the quarter.

Honda's unit sales were also favorable, supported by 110cc Cub type models and scooters that are well accepted throughout the region.

In other regions, motorcycle demand in Brazil stayed very strong and Honda's unit sales were also increased propelled by favorable sales of CC150 series, BIZ125 and CB300R.

In the meantime, unit sales in North America and Europe remained weak for the quarter yet.

Honda's own CBR250R model following to the PCX125 which is also manufactured in Thailand was introduced in North America and European markets.

Honda also has plans to manufacture the CBR250R model in India and plans to ship to over 20 countries.

By increasing the number of Asian made affordable models, Honda will cultivate new segment in developed countries.

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

Revenue for the quarter amounted to JPY330.3b, increased by 3.2% from the corresponding quarter last year, due mainly to increased unit sales, excluding the sales of parts for overseas production.

Operating income for the quarter totaled JPY44.9, increased by 43.5%, primarily due to the increased revenue despite increased SG&A and unfavorable foreign currency effect.

Operating margin surged from last year to 13.6%.

Now let me elaborate on Automobile business results.

Please have a look at the slide 14 of the presentation material.

Unit sales for the quarter amounted to 547,000 units, a decrease of 352,000 or 39.2% compared to last year.

Production disruptions caused by the Japan earthquake have stretched in all regions during the quarter period.

As a result, Honda's unit sales in Japan were 91,000, which was decreased by 54,000 units compared to the same period last year.

In North America, unit sales amounted to 225,000, a decrease of 145,000 units compared to the last fiscal year.

Increased sales of Fit model and positive impact of the introduction of CR-Z were not enough to compensate declined sales.

Honda's sales in Europe were also weak.

Sales units for this quarter were 35,000 units, a decrease of 18,000 units from last year.

Together with the earthquake impact, especially decreased sales of Civic undermined total sales despite increased sales of all-new Jazz Hybrid models.

In Asia, despite introduction of all-new compact hatchback Brio in Thailand, total unit sales in Asia were 139,000, off 122,000 units compared to last year due to trimmed production attributable to supply chain disruption.

Please turn to the slide 15.

Revenue of Automobile business for the quarter amounted to JPY1,178.8b, a decrease of 35% compared to last year, due mainly to the decreased unit sales and unfavorable currency translation effects.

Honda reported JPY76.2b of operating loss, a decrease of JPY225.1b from the last year, mainly due to the impact of decreased sales and increase in fixed cost per unit as a result of production [trim], despite decrease in SG&A.

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

Unit sales of Power Product totaled 1,512,000 units, increased by 72,000 units or up 5% from a year ago, due to an increase of unit sales in Europe, Asia and Japan, despite decreased sales in North America.

Sales of Power Products in European markets have shown recovery.

In particular, sales of general purpose engines for OEM use have increased in Eastern Europe and Russia and elsewhere.

Sales in Asia were also strong for the quarter by favorable GX series, general purpose engines for OEM use in Indonesia and brush cutters sold in Thailand.

Slide 17 shows the revenue and operating income of Power Product and other businesses for the quarter.

Revenue for the quarter amounted to JPY76.4b, a decrease of 5.9% from the corresponding period last year.

This drop in revenue was mainly because of decreased sales related to other businesses and unfavorable currency translation effect, despite volume gain of Power Product business.

Operating income for the quarter posted JPY0.2b, an increase of JPY0.8b, due mainly to the positive impact of increased sales in Power Product business.

With regard to Financial Services business, please see the slide 18.

Total assets of Financial Services business totaled JPY5,445.7b, while operating profit decreased by 1.9% to JPY53.6b because of unfavorable impact of currency effects.

Decreased allowance for credit losses and higher residual values of Honda products continued to underpin the profit of the Financial Services business.

Operating income stayed at a healthy level and operating margin for Financial Services business was 38.7%.

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 20, starting from Japan.

In Japan, revenue for the quarter amounted to JPY625.3b, decreased by 32.1% from the first quarter last fiscal year, mainly due to decreased revenue largely in Automobile business as a result of the negative impacts brought by the earthquake.

Operating loss was JPY45.8b, a decrease of JPY99b from the first quarter last fiscal year.

Although SG&A expenses decreased, changes in revenue and model mix increased cost per unit as a result of production decline, negative currency impact and so forth negatively affected the operating income.

Operating margin was minus 7.3%.

In Japan, due to the earthquake that occurred on March 11, 2011, production declined sharply due to component supply constraints.

As a result for the first quarter this fiscal year, 92,000 units of automobiles were produced in Japan, which meant approximately 60% decline from the first quarter last fiscal year.

However, from the end of June production has normalized and in the latter half of the fiscal year, when we will have ample component supply, we are increasing our production volume as much as possible.

With the support of various suppliers, production increase will be earlier than we initially anticipated.

Automobile retail sales in Japan compared to the same period last fiscal year was down approximately 40%.

This was brought partly by the reversal impact of the government subsidy that ended in September last year.

Although sales of all models declined, sales performance of Fit Hybrid has been relatively favorable.

Honda introduced Fit Shuttle but also has hybrid version of the model in the middle of June.

Within two weeks after the introduction we have received more than 12,000 units of orders.

Even after the scrappage incentive scheme ended, tax reduction for purchases of our environmentally friendly vehicle line-up such as Fit, Fit Hybrid, Fit Shuttle Hybrid and Stepwgn is still ongoing.

Therefore, together with the recovery of production in the latter half of the fiscal year, Honda intends to increase its automobile sales.

As for Motorcycles in Japan, sales increased with our new scooter model Giorno introduction together with also new CBR250R.

Orders of Giorno has already exceeded annual sales target of 15,000 units since its introduction at the end of January.

With new models to be introduced in the second half of the year, we would like to increase the sales volume.

On the next slide 21, North America.

Revenue for the quarter amounted to JPY733.9b, a 35.5% decrease from the corresponding period last fiscal year.

Again this was brought by the earthquake impact that limited the supply of components, therefore much less production volume and negative currency translation effect.

Operating income was JPY18.5b, 83.3% decrease from the first quarter last fiscal year, mainly due to changes in revenue and model mix and increased costs per unit as a result of reduced production that more than offset decreased SG&A expenses.

Operating margin was 2.5%.

Now I would like to discuss more about the US automobile market during the quarter.

During April to June quarter, we saw US industry sales increase by 7% year over year and seasonally adjusted annual rate came down to around 11.5m units level from 13m level during the previous quarter.

This reflects the impacts from the production cuts among OEMs such as Honda, due to power shortages from the earthquake in Japan.

Honda started this quarter with good sales in April, especially among fuel-efficient models when the gasoline price was still high.

But from May as reduced production due to power shortages started to impact the US dealer inventory level, sales started to decline and we finished this quarter with unit sales 25% lower than the previous year.

This very, very tight dealer inventory level continued throughout July.

However, thanks to the efforts among suppliers, OEMs and the governments alike, automobile production has recovered quite earlier than originally expected.

Honda's global automobile production started to increase from Japan factory in July and will be followed by overseas factories.

This increased production will bring up US dealer inventory resulting in normalized retail sales starting sometime in the October to December quarter and the sales will be supported from our refreshed models.

New Civic has been already launched and new CRV will be launched late 2011, this year.

As for North America, production schedule Honda produced during April to June quarter with 45% down from last year.

However, as we start to ramp up production from August for North American factories we will add shifts to previously under-utilized factories such as the Indiana factory.

We expect to finish this fiscal year with production almost close to the last year's level.

As for Europe, please turn to slide 22.

Revenue in Europe for the quarter amounted to JPY150.9b, decreased 20.5% from the corresponding period last fiscal year.

In Europe too, automobile sales have declined due to the earthquake impact and there was also a negative currency translation effect, despite an increase in sales of Power Products and other businesses.

Operating loss was JPY6.1b, a decline of JPY10.1b from the first quarter last fiscal year, mainly due to changes in revenue, model mix and so forth, increased cost per unit as a result of production decline and negative currency effects that more than offset decreased SG&A expenses.

Operating margin was minus 4%.

Retail demand in Western European countries has been very severe.

Although market demand for the quarter was in the similar level to that of the first quarter last year it was supported by [fleet] demand.

Honda's retail sales decreased by 35% mainly as a result of the earthquake impact.

Although demand in Russia has been increasing rapidly, Honda has a supply issue again due to the earthquake.

However, due to the better production recovery output Honda has already planned to increase sales volume in Russia at the end of June.

Let me elaborate on Asia, excluding Japan now on slide 23.

Revenue decreased 20.6% to JPY373.4b from the first quarter last fiscal year, mainly due to the negative earthquake impact to the automobile sales and negative currency translation effect, despite increased revenue in Motorcycle business.

Operating income amounted to JPY25.1b, decreased by 43.5% from the first quarter last fiscal year, primarily due to changes in revenue, model mix and so forth, increased cost per unit as a result of decreased production and negative currency impact.

Operating margin was 6.7%.

Automobile sales in Asia significantly decreased as a result of the earthquake impact.

We did introduce a brand new hatchback Brio as planned in the month of May.

However, due to supply issue, some deliveries are delayed till October or later due to the shortage of parts.

Production will be fully recovered in September or October, depending on each country.

As for the Motorcycle business in Asia, demand continued to increase and so did Honda's sales.

Wave series sales in Thailand has been particularly strong.

Please note that Honda's unit sales results of Motorcycles in financial statement has been significantly declined year over year.

But the main two reasons are after the dissolution of the joint venture in India, we have excluded unit sales of knock-down parts for Hero Motors.

And another reason is a late shipment to Indonesia.

Actual demand and Honda's sales of motorcycles particularly in South East Asian countries have been very strong.

Now on other regions on slide 24, revenue amounted to JPY229.9b for the quarter, decreased by 2.7% from the corresponding quarter last fiscal year.

Although Motorcycle sales increased, Automobile sales declined as a result of the earthquake impact and currency impact negatively affected the revenue.

Operating income was JPY15.7b, a decline of 23.3% (sic -- see presentation) from the first quarter last fiscal year, mainly due to increased SG&A expenses that more than offset positive changes in revenue mix and so forth.

Operating margin was 6.8%.

In Brazil which is the biggest market in other regions, automobile demand increased by approximately 15% in April to June quarter this year from the same period last year, although this increase was partly brought by unfavorable sales last year, after the government subsidy expired in March 2011.

However, with rising interest rate as well as financial constraints expected there is a possibility of market slowdown going forward.

Honda's unit sales declined significantly for the same period partly due to negative earthquake impacts, however also because of the competition being more severe in the market.

For motorcycles in Brazil, demand increased by 13% to 480,000 units for the same quarter year over year.

Honda's unit sales also increased by 18% to 403,000 units with very competitive main models such as CC150, BIZ125 and NXR150, Honda's market share for the quarter was 79%.

Please be careful when you see the financial results of the other regions.

Fiscal year period in Brazil is January to December, unlike the rest of the region.

So there is three months lag when we consolidate financial results of Brazil.

That is all for the elaboration of Honda's business on each geographical segment.

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

Equity in income of affiliated companies was JPY28.6b, down by JPY7b from the same period last year.

Decreased profit in equity in income was mainly affected by the declines in production outputs and sales in affiliated companies in Japan caused by the earthquake.

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

Please see the slide 27.

During the first quarter net profit of Asian affiliated companies posted JPY29.3b.

The major contributing companies are mentioned at the bottom of the slide.

With regard to CapEx for the quarter, please see the slide 29.

Total CapEx for the quarter was JPY59.3b, an increase of JPY16.4b from the same period last year.

The major factor of this increase is for the CapEx associated to new model related in Automobile and Motorcycle businesses.

That is about all for the results.

Now I would like to discuss the Company's upward new earnings guidance for the fiscal year ending March 2012.

Please see the slide 32.

Net income will be JPY230b, a decrease of JPY304b from the last fiscal year and revised up JPY35b from the Company's previous guidance as of June 14.

Earnings per share will be JPY127.61, a decrease of JPY168.06 from last year.

Revenue will be JPY8.7 trillion, which will be a decrease of JPY236.8b from the last year, but an increase of JPY400b from the previous guidance.

Operating income will be JPY270b, a decrease of JPY299.7b from the last year, but an increase of JPY70b from the previous guidance.

Income before income taxes will be JPY285b, a decrease of JPY345.5b from last year, but up JPY70b from the previous guidance.

Equity in income of affiliates will be JPY100b, a decrease of JPY39.7b from the last year, which will be at the same level to the previous guidance.

Currency assumption for the full year will be JPY80 against the US dollar and JPY112 against euro.

Now I would like to discuss an analysis of the upward and new earnings guidance.

Please see the page 31.

With regard to unit sales guidance for the fiscal year ending March 2012, we expect industry demand for motorcycle in Asia continues to grow.

We have revised our forecast of Motorcycle unit sales to 12,705,000 which is an increase of 1,260,000 from the same period last year and also an increase of 60,000 units from the previous guidance as of June 14.

In Automobiles, total unit sales will be 3,435,000 an increase of 135,000 units from the previous guidance, taking into consideration of the earlier than expected recovery from supply chain disruption.

Sales of Power Products will be 6,075,000, an increase of 566,000 units from last fiscal year and the same level to the previous guidance.

With regard to the variance of operating profits from the previous guidance, please see the slide 33.

We expect an increase in revenue to bring a positive effect of JPY32b, mainly due to the upwardly revised unit sales in Automobile business and a decrease in fixed cost per unit due to upward production volume that brings a positive effect of JPY12b.

We estimate decreased SG&A expenses will bring a positive effect of JPY6b and R&D expenses will be unchanged.

As for ForEx impact, we estimate that they bring a positive JPY20b as a result of weaker than expected yen to the US dollar in the first quarter and effects of other currencies.

Regarding variance of year-on-year operating profit, please see the slide 34.

In gross profit, despite negative ForEx effect, we expect that decline of revenue will bring a negative impact of JPY87.2b and increase in cost will bring a negative impact of JPY590b (sic -- see presentation), mainly due to increased raw material cost together with an increased fixed cost per unit as the production has been reduced.

We expect SG&A expenses will increase by JPY15b and R&D expenses will increase by JPY67.5b, especially for the development of environmentally friendly technologies.

We estimate ForEx impacts will bring a negative impact of JPY71b.

As for CapEx, depreciation and R&D expenses, please see the slide 35.

CapEx for the year will be JPY430b, up by JPY118.7b from the last year.

Depreciation will be JPY315b, down JPY10.2b from last year.

R&D expenses will be JPY555b, up JPY67.5b from last year.

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

The Board of Directors of Honda Motors resolved distribution of JPY15 dividends per share for the first quarter, as the second -- as the record date of which is June 30, 2011.

We project annual dividend will be JPY60, an increase of JPY6 from last year.

That's about all.

This concludes Honda's fiscal first quarter earnings results audio presentation.

Thank you so much again for listening to our program.

This is Honda Investor Relations and have a wonderful day.

Thank you.

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.