Earnings Call: Q3 2021

Feb 9, 2021

Thank you very much for joining us here at Honda Motors' announcement of financial results for FY 2021 fiscal Q3 ended December 31, 2020. I am Watanabe from Corporate Communications. I'll be serving as the MC. First of all, allow me to introduce the members of represented Executive Vice President, Eseiji Kuraishi. Saeji Kuraishi. Hariidu, I'm Kuraishi. And Senior Managing Director and CFO, Kohei Takeuchi. Hariidu, I'm Takeuchi. As a precautionary measure against COVID-nineteen, this announcement is being made live stream without any audience in this room. We seek for your understanding. First, Executive Vice President, Kuraishi, will be announcing our financial results. So let me explain our Q3 FY 2021 financial results and full year forecast over FY 2021. Regarding the cumulative weighted sales of Honda Group up to the 3rd quarter, Motorcycle businesses had 10,591,000 units sold and Automotives at 3,425,000 units and Life Creation Businesses at 3,855,000 units sold. With regard to the business situations in the main markets, unit sales that of total Japan market for the 9 months cumulative dropped below the same time last year due to the impact of the COVID-nineteen. However, since October, the market improved from the year before when the sales had dropped across the consumption tax hike. Although followed the total market trend after October, marking the results better than the last year, thanks to the fine sales of N box and effective launch of the new model N1. In FY 2021, N box series have made the top unit sales in full year running of new launch unit sales ranking. The total market in FY 2021 is expected to be below last year due to the impact of the COVID-nineteen and so on. Honda expects its results to be below the year before because of the market's deceleration impact and short supply of semiconductors. Regarding the total market in the U. S, due to the stepwise resumption of the economic activities since May, the market is on recovery trend slowly. However, the 9 months cumulative results stayed below the same time last year. Partner also is on recovery, mainly with CRV, Civic and Pilot. 9 months cumulative result was almost equivalent to that of the market. Regarding the whole market in FY 2021, with high level of new infections of COVID-nineteen still continuing, expectations of the total market is not clear. However, we'll try to expand sales mainly with the light trucks such as the launch of a new MTX model. Nevertheless, due to the impact of the semiconductor, short supplies and so on, our results will end below the level last year. In China, thanks to the stimulative measures to push the consumptions, the unit sales in total market marked higher than the same time last year. Breeze, CR V and Civic were selling well, plus the launch effect of new models such as Civic Hatchback, Fit and Life Honda enjoyed a growth better than that of the total market. For 6 months running, we have achieved the record highest monthly sales. In addition, we added EV lineups to the main automotive families. In November, we launched the MMV, mass production EV model, which was co developed with Dongfeng Honda. For the calendar year 2021, the total market will grow above the year before. Despite impact of the semiconductor supply shortage, Honda will try to perform better than the preceding year by incremental sales of the main models, further improvement of EV lineups and so on. Next, motorcycle businesses. In China and in the U. S, people tend to use motorcycles instead of the public transportation systems. Because of that and the strong demands for the outdoor use, the market has almost restored. Asia, the largest market, is showing gradual recovery. However, the cumulative results in 9 months still resulted below last year. Honda also stays below same time last year. But in India and in Thailand, solid recovery is observed, so is the gradual recovery in Indonesia since October. Expectations of the total margin in FY 'twenty, 'twenty one is still unclear due to the impact of the COVID-nineteen and so on. Honda is expecting sales drop in Brazil and elsewhere. However, reflecting incremental sales in India and Indonesia, we have revised our expectations from last time. Next, let me explain the summary of the cumulative results in 3 quarters of the year. Despite our increasing impact of the COVID-nineteen, which cut down the demands, we continuously and radically reviewed our business activities across the whole group. That resulted in the restrained SG and As and the reduced costs. The operating profit was 447,000,000,000 yen finally. The profit up to the 3rd quarters marked 444,100,000,000 yen which was also contributed by the incremental shares of our investment profits in Equity Med Dots. Unit sales and the PLs are also shown in this slide. Next, FY 2021 forecast. Speaking of the unit sales of Honda Group, motorcycles sales will increase from the previous forecast due to the sales growth in India and Indonesia. Automotive sales will drop from the previous forecast because of short supply of the semiconductors and so on. In regard to the operating profits, despite the COVID-nineteen infections rising up again or impact of the semiconductors in short supply, we are up revising the forecast from last time with additional 100,000,000,000 yen to 520,000,000,000 yen In terms of the current profit, due to the incremental shares of investment profit based on liquid methods, we are adding a 75,000,000,000 yen to the last focus after providing the PQR 465,000,000,000 yen which is higher than the year before. You can find you can also find unit sales and the PL on the slide. Dividends next. Regarding the expected dividends for FY 2021, though the business environment isn't clear, we can improve the revenues by revisiting our business activities. We expect to provide 82 yen per share and 14 yen more to the previous announcement. For the Q3, we provide 26 yen 7 yen more to the share. Now Mr. Takeuchi, Senior Managing Director and CFO, will talk about the details of our financial results and forecast. And allow me to give the explanation. First, the 3rd quarter financial results, the 3 months results. Honda Group unit sales in motorcycle business increased in markets such as Pakistan and India, while decreased in markets such as Indonesia and Vietnam. Automobile business increased in markets like China, U. S. And Japan. Life Creation business increased sales in OEM engines in mainly North America and Europe. And next, income statement. Sales revenue. Despite drop in motorcycle unit sales and negative foreign currency translation effects, increase in Automobile and Financial Service Businesses resulted in sales revenue of JPY 3,771,500,000,000. Operating profit despite increase in SG and A and currency translation effects due to the efficiency improvements in R and D and cost reduction effects, amongst others, operating profit was JPY 277,700,000,000. Due to reversal of impairment loss, profit increase in China, amongst others, share of profit of investments accounted for using the equity method was JPY 102,200,000,000. Next, I will explain change in profit before tax income taxes. The 3rd quarter report 3rd quarter profit before income taxes was JPY 386,400,000,000, up JPY 179,600,000,000 from the same period last year. Operating profit was JPY 277,700,000,000, up JPY 111,000,000,000 from the same period last year. Operating profit, excluding currency effects, was JPY 136,500,000,000 due to improved efficiency in R and D expenditure and cost reduction effects. Regarding R and D expenditure, due to development efficiency improvement and the fact that last fiscal year, we saw a significant increase in electrification costs. So it is lower, but R and D activities will be carried out as scheduled. Next is by business segment information. Motorcycle business segment operating profit was JPY 72,700,000,000 despite cost reduction effects and lower SG and A. These were partially offset by decreased profit attributable to decreased sales revenue and mobile mix. Regarding Automobile Business segment and Financial Services business related to automobile sales, the combined operating profit is estimated to be JPY 205,400,000,000. Automobile operating profit, though SG and A increased due to profit increase attributable to sales revenue and model mix as well as cost reduction effects, automobile operating profit was JPY 123,100,000,000. Financial Services operating profit was JPY 85,700,000,000 due to accounting difference in the provision for credit loss, etcetera. Regarding Life Creation and Other Businesses, there was operating loss of 3,800,000,000 yen Operating loss of aircrafts and aircraft engines included in Life Creation and Other Businesses was JPY 9,100,000,000. And next fiscal year 2021, 9 months financial results are as shown. Regarding changes in profit before income taxes, profit before tax was JPY658,700,000,000, down JPY 127,400,000,000 from the same period last year. Operating profit despite reduction in SG and A and cost reduction effects, Decline in sales revenue and product mix, amongst others, resulted in operating profit of JPY 447,000,000,000, down JPY 192,200,000,000 from the same period last year. Let me proceed to explaining the 9 month cash flows of non financial service businesses. Free cash flow was 104,000,000,000 yen Cash and cash equivalents at the end of 3rd quarter was JPY 2,520,200,000,000. Net cash was JPY 1,884,800,000,000. And next is the FY 'twenty one forecasted consolidated unit sales. Honda Group unit sales of motorcycles due to upward revision of sales plan in markets such as India and Indonesia, Unit sales forecast is 15,000,000,000 units, up 200,000 units from the previous forecast. Automobiles due to impact of semiconductor supply shortage, amongst others, unit sales forecast is 4,500,000,000 units, down 100,000 units. Light Creation business remains unchanged at 5,500,000 units. Next, FY 'twenty one consolidated financial forecast is as shown. As for FY 2021 forecasted change in profit compared to last year, despite negative impacts such as sales revenue, model mix and currency translation, these will be partially offset by decreased SG and A and cost reduction effects. We're planning operating profit of 520,000,000,000 yen Operating profit has been revised upward by 100,000,000,000 yen compared to the full year forecast last announced despite declining in sales revenue and model mix due to cost reduction effects and cost curbing in mainly SG and A. Sales revenue and model mix include the profit decline attributable to semiconductor supply shortage. Lastly, these are the FY 2021 forecast, capital expenditures, depreciation and R and D. This concludes my presentation. I thank you for your attention. Thank you very much. And that was the results and the presentation for the FY 2021 Q3 of this year. And I would like to entertain the questions from the media. And in advance, we have already shared the way we proceed with this conference. We are going to use the Zoom system and we are going to resume the Q and A session at 3:45. Please wait for the moment. Thank you. Now we'd like to start 2 A session. In advance, we have already introduced to the media journalists. We are going to accept questions through the Zoom systems. And if you have questions, please press the button. Raise your hand for the questions. And please limit your questions to 2 questions per person because of the time constraints. So please start. Raise your hand if you have questions, please. Question from Mr. Shimozato from Yomiuri Newspaper. Please. Shimozato from Yomiuri. Can you hear me? Yes, I can hear you. Thank you. Question 1, you revised the forecast. And could you share with us the plus factors and minus factors for the revisions and factors? And then you said that you have reduced 100 and 1,000 units because of the semiconductor shortage. It is a big impact. However, even after the recovery of the supply, you still have to reduce the number by 200,000. Is that right? And also, up until when do you expect the impact of the semiconductor shortage to continue? Would that continue until the next fiscal year again? And are there any impact on the operations of the factory? If you have additional impact on the factory operations, please let us know. Thank you. So question 1, with regards to the revision of the IR forecast, plus or minus factors. And then the 100 and 1,000 units are down due to the semiconductor shortage. And how long would that continue? Would the impact continue? So the revision of the forecast, we have the impact due to the COVID-nineteen and also semiconductor supply shortage. We do have the impact. However, we have reduced our cost and we also revisited our business activities across the company. SG and A, R and D cost, expenses have been restricted. And then we're now able to add JPY 100,000,000,000 to make JPY 150,000,000,000 finally for the profit finally. Without the semiconductor shortage, without the exchange rate fluctuations, we would be able to absorb the impacts by the coronavirus COVID-nineteen. And then we would have been able to report you the better results than last year. However, the impact by the semiconductor will resolve in the first half this year, and it will resolve completely in the next fiscal year. And we have adjusted our production models in different locations. However, due to the shortage of the semiconductors, the forecast for the full year will be production have to be adjusted with less of 100 and 1000. And then the impact on the values, I'm afraid I cannot tell you. However, we have already factored in the impact in the financial results this year. And also, we're going to continue to address the situations to minimize its impact on our business. And then the semiconductor companies' suppliers are trying to add the production to alleviate the situation. Situation is getting better. Therefore, its impact will be resumed resolved in the first half this year. And of course, we will adjust the calendar the production calendars and also the model mix in the production. Therefore, however, we can resolve the issues in the first half, not up to the FY at next fiscal year. And next question from Nikkei Shimbun. Mr. Asayama from Nikkei. Can you hear me? Yes, please. Thank you. You talked about the impact of the semiconductor short supply, and you said that you will not be able to quote any numbers as to the impact. But you believe that you have factored in the impact into your sales and operating profit estimate and also about free cash flow. Compared to the same period last year, you say that I think that the cash flow is in the negative compared to last year. So can you explain about the details? And how do you assess this? This year, it is JPY 104,000,000,000. First of all, a question is in regards to the impact of the semiconductor in terms of revenue as well as the operating profit. Is this factored in? And next is about the free cash flow, the positioning of the free cash flow and how it is assessed. Yes. Thank you. In regards to your first question, yes, it is factored in. So about cash flow, please, Usu Takeuchi. I'd like to talk about the cash flow. Well, until last fiscal year, we were saying that the free cash flow had a positive impact. But this fiscal year, in the Q1, due to COVID-nineteen, because of the unit sales decline, this has had an impact. As for this fiscal year's forecast, well, we have made again another revision. And looking at this, we think that the cash flow will be a positive. And I said that the 4th quarter will see an impact of the semiconductor on the unit sales and sales, and this is also factored in. But the decline from last year is due to COVID-nineteen. And therefore, it is lower than this last year. Next question, please. From Asahi Newspaper, Mr. Nagaki, please. Nagaki from Asahi. Can you hear me? Yes, please. So semiconductor business again, 100,000 units from January to March, a reduction of that March in that period, is that right? And also the forecast, would that impact on the production amount? For instance, how many units have to be reduced in the production because of that? And you said that you have less of 100,000 units and that is a greater impact than other companies. How do you analyze the situations yourself? Yes. On Page 13, you have the reversal of the impairment, JPY 56,000,000,000 reversal. What does it mean? Could you elaborate on that, please? Impairment loss reversal. So 100,000 units due to semiconductor short supplies, and that is the question is if that is an impact on the Q1 and January to March. And the next question is if the impact is greater in your company rather than others and also the reversal of the impairment losses. The reversal of the reversal of the impairment losses. What is the impact of that? That's the question. So the semiconductor businesses, that is the reduction applied in the So the semiconductor businesses, that is the reduction applied in the Q4 January to March. And in terms of the unit production unit number, production volume, Honda is hit harder. And the semiconductor affected are related to the FATE N series in Japan and the Kodon DC Civics for the U. S. Market. And those are the well selling popular models that sell well for Honda, those were hit hard by the semiconductor. Therefore, we needed to swap around or adjust or coordinate the production plans to alleviate the situation, but it wasn't enough. And other companies, I don't know. I can't really say about it. However, for the semiconductor short supply, this is how it goes. And we, of course, tried hard. However, we ended up having this 100,000 unit losses. However, the situation changes every day even yet now. So we keep addressing the situation so that we can minimize its impact on our businesses. And back to the reversal of impairment losses, in equity methods, we have Keishin, Nishin, Showa. We have 3 aligned companies in the line. So then we have Istachi and Asimo. We have major companies together. And then we have pure appraisal of the assets. And then we had their participation based on liquidity method in the past. And then of course, every company had different situations. And then the share prices were down for some time. And then we needed to pick up the lower share prices in the accounting practice because that is practice to take the lower prices for the impairment calculations. And that is now taken up. And then now we have a TOB completed. And then we have we can now reverse the impaired amount in the past, and that was JPY 106,800,000,000 much reversed back. Next question from Nikan Jidosha, Mizudori san, please. My name is Mizudori from Nikan Jidosha, Daily Automotive News. Yes. Well, I think you didn't answer the previous question. But in regards to this downward revision of 100,000 units, does this lead to a reduction in production? And also, the shortage of semiconductors based on this, are you planning to review or change your procurement strategy? Well, this might be for the midterm, not just in near term. But I think that one of the causes for this problem is that over dependence on mega suppliers. So can you explain about this as well? Thank you. Thank you very much. Well, in regards to your first question about this impact of 100,000 units and whether this will impact production, whether there'll be a decline in production. And also, based on this shortage, does Honda plan to review its procurement strategy? These are the two questions. Yes. About the impact on production, whether we intend to reduce production, Well, including the breakdown of 100,000 units, whether this will directly lead to a reduction in production, I really don't have the information at hand. So I cannot respond to that question. And in regards to your other question about reviewing procurement strategy, well, currently, for a stable procurement, including overseas, we are sourcing, procuring from multiple sources and trying to ensure sufficient inventory. So we're trying to do risk distribution, and yet we are faced with this shortage. So in regards to semiconductor, Honda also will try to review what needs to be done, including how to hold inventory. So we are currently in the process of reviewing. You might ask, we are relying on overseas suppliers too much. Well, I mean, in regards to procurement, we are doing based on QCD. And so it's not intentionally that we are relying on overseas suppliers. Next question, automotive news. Mr. Hans, Grumel. Please ask your question. May I ask a question in English, please? Thank you for taking my question. I have two questions. One is about the earthquake anniversary. It's the 10th anniversary of the earthquake, the Tohoku earthquake next month. What lessons did Honda learn about supply chain management from that disaster? And how are you applying those lessons in the current supply chain problems of COVID and semiconductors? And second question is, can you please give us an update on your cooperation and your agreement to align with General Motors in the United States and North America? When can we see some results from that? Thank you. Please? As I said, with regard to the supply chain, in the earthquakes in Tohoku and we, of course, had experiences in our of our flood in Mexico. Various disasters, we experienced them. And in order to make the stable supplies, including other countries, we always try to get supplies from several suppliers. And of course, we need to keep some inventory levels too for that purpose. However, now we have hit very hard by the semiconductor shortage. And we don't actually buy the semiconductors from the manufacturer of the semiconductors directly, but we have the secondary or tertiary manufacturers. We buy from 2, and there are things we cannot control in this system. And for the semiconductor businesses, we probably will have to address, such as keeping a certain level of inventories going forward to better manage that. And in terms of GM and how the relationship with them, actually, we have already implemented our businesses together for the FC, fuel cell and automated driving. We have a broad range of the collaborations. And lastly, we have announced collaborations in North America. The discussion is going on at the moment. And for Honda, we need to have a powerful manufacturing, powerful product. We need to solidify and then make the businesses today more powerful and solid. And to do that, we are having a very aggressive discussion so that we can strike up the win win relationship with the GM finally. And practically speaking, we do not have a deadline for the discussions at the moment. We simply have a broad range of the discussions, and I cannot really tell you when we can report the results back to you. However, whenever that is ready, we will, of course, share with you the results of our collaboration. Thank you very much. Thank you. The next question? N. H. K. Mitsubuki, Mr. Tsuboi. Tsuboi from NHK. Thank you. A very detailed question, but on Page 13, about the increase in the investment profit. And also, you talk about the increase in profit in China. Can you explain about what you are talking about when you say profit increase in China on Page 13? On Page 13, it talks about the current profits. And here, we talk about the increase in profit in China. So can you elaborate on this? Yes. And this? Well, in China, we have 2 production companies in China and at least joint venture companies. And the profit, this is based on the equity method. I talked about the 3 companies in Japan, but what I'm talking about are the 2 joint venture companies that we have in China. And we have assessed this, and it is incorporated based on the equity method. Thank you. Next question, please. From JJ Tsushin, Mr. Hirano, please. Did you press Hirano? Thank you very much. You talked about profit forecast that is of higher. You are privized that you said that cost reduction effect and the SG and A reductions and so forth are affecting on that. And could you specify what sort of effort in place for that? In QN, the reasons for the provision this time, the reduced SG and A and cost. What are the contents of those airports? So JPY 100,000,000,000 profits added. That's the revision. And of course, I had said that negative impact by the semiconductor soft supply liquid. And in the Q3, because of the COVID-nineteen, of course, there was some restraints on our activities of businesses. And then in different regions, we've worked on the SG and A and we had all cost reductions and R and D being revisited too. And then together with the performance in the Q3 and of course, we need to continue those activities onto the Q4 too. And that means every day level, we need to revisit how we spend. And then the aggregation of those efforts are now reflected in this forecast. And then of course, there is no single thing that make a good contribution. However, that is the cumulative efforts. I think I should say, motor show was not in place. Those events were canceled. So that was a good part of the reductions. And also the new launch of the new models, now it is made online basis instead of the wheel and the cumulative efforts like that. Cumulative efforts like that is now realized like that. And of course, we need to continue this sort of efforts going forward. And of course, events will happen, of course. We will do that for the new launch and so on. But how are we going to hold? How are we going to do the those new launch events will have to be thought out. So we will try to maintain those efforts going forward. So the effect is going to be enjoyed going forward. Next question. Ms. Suneoka, please. Suneoka from Wall Street Journal. Can you hear me? Yes. I can hear you, please. Thank you. And Honda, in China last year in Europe and Japan, EV were sold. So what is your reaction to that? And also about your future EV strategy, is there anything new that you can disclose to us? And another? Well, recently, Well, recently, there is some report that you are talking about Apple Car Production. So have you been approached? [SPEAKER UNIDENTIFIED COMPANY REPRESENTATIVE:] Well, your first question was about our EV strategy. We've already launched battery EVs in China, Europe and Japan. So what is our reaction to the EV that's already in the market and also our future EV strategy? And about Apple Car Production, has Honda been approached? Well, climate change and sustainable and development sustainable society is a requirement. And therefore, we cannot afford to lose any time when it comes to EVs. Well, Honda, we have been mainly focused on head. And so we have been trying to introduce such EVs. In 2030, globally, we want to electrify twothree of the models that we'll be selling. But meanwhile, to accelerate electrification in the different regions, we have to deliver Honda like products, models which carry identity. And therefore, in North America, we are collaborating with GM. In China, we are having alliance with CHAL. And also, including our own EVs, where appropriate, we will choose the best approach that we believe is needed. And also last year, our President Kachigoro said that Honda will endorse carbon neutral in 2,050, and we need to accelerate these efforts to achieve this goal. And including our organization, we want to strengthen our R and D in energy related topics, and we are concentrating our efforts and resources on this research. About Apple Car, well, we have seen and heard about this both on TV and newspapers. We don't know what kind of car it is to begin with. And therefore, we cannot make any comment in regards to Apple Car Production. That is all. Thank you. Due to the interest of time, next question is going to be the last one from Toyokeizai. Ms. Toyokoyama, please. And so on shortage including the supply chain perspective, so what is the reasons for that program? And you said that it is going to be resolved and it will not cause impact on the next fiscal year. Is that right? And in the end of the year, the government talked about 100% EV cars by 2,030,030 something. And then at the moment, you have inbox, but you have not much EVs available at the moment. How do you approach for that? [SPEAKER UNIDENTIFIED COMPANY REPRESENTATIVE:] So speaking of the semiconductor shortage, what is the cause of that, including the implication in the supply chain and impact on the next fiscal year, so forth. And then in the Japanese market, the government is now saying the electric vehicles 100% achieved by 2,000 and 35 and the idea of the RMK Mini cars and the EV. So semiconductor, as I said earlier, we do not buy semiconductors directly from the manufacturers of the semiconductor. However, the supplier told us that, well, because of the COVID-nineteen, the demands would come down and that was the perspective or prospector. Therefore, they reduced the production of the semiconductors in time and time. And then, in fact, people played games or used computers more because of the COVID-nineteen. Therefore, there was increasing demands for the semiconductors, not for the cars, but for others. And that was why they had higher demands practically. And then at the moment, we are asking them to produce more, and suppliers are also planning to increase their production volume. And I think the situation will resolve towards the next next fiscal year. And also the electrification of the cake cars, I can't really share with you with the specific ideas at the moment. However, of course, the direction of our company is to progress more electrification on and on. And of course, Keik cars, one of those cars we should work on, too. And I'm not able to give you which model or which car is going to be refined. Of course, K Cars will be of an EV system going forward some time. Thank you. Thank you very much. We apologize, but we have run out of time. And therefore, for those questions, we were unable to answer the corporate communications. We'll give you the answer later on. With this, we would like to conclude today's announcement of financial results. And please refer to our website for the IR documents. Once again, thank you for your attendance.