Earnings Call: Q1 2021

Aug 5, 2020

Ladies and gentlemen, we thank you for joining us here at Honda Motor Company Limited FY 'twenty one First Quarter Financial Results Announcement. I'll be serving as the MC. My name is Iwatanabe from Corporate Communications. First, allow me to introduce the members on stage, Executive Vice President, Representative Director, Esuji Kuraishi. Haridu? Senior Managing Director, Kohei Takeuchi. Haridu? As for today's announcement and due to COVID-nineteen pandemic, there are no audience inside this room. Instead, we are live streaming this session. We seek for your understanding. First, I'd like to call upon Executive Vice President, Kuraishi, to talk about the FY 2021 Q1 financial results, please. Allow me to begin my presentation. From the end of FY 2020, the COVID-nineteen pandemic has brought about global change impacting people's lifestyle in many ways. Honda also, in response to the lockdown and other restrictions and halt in economic activities, had to stop its production and marketing activities in many countries throughout the Q1. In Automobile Operations as of the end of April, when we saw a significant impact of the pandemic, we had suspended production in 12 out of 17 countries. However, currently, all factories' plants have resumed operation, and we are working to quickly supply products to the market from the Q2 and beyond. The stagnant global economy has resulted in a major drop in demand. Business environment is extremely difficult, yet Honda will make all out effort to overcome this crisis and will aim for further growth. Let me move on to explaining about FY 2021 Q1 results and the outline of the outlook we have for the whole fiscal year. FY 'twenty one Q1 Honda Group's unit sales saw a drop in demand globally. This, combined with temporary suspension of production and marketing activities, resulted in a decline across business all business segments: motorcycle, 1,855,000 units automobile, 792,000 units life creation, 1,083 1,000 units. I'll next talk about our major markets. First, Japan. The industry demand was badly hit by the pandemic. In addition, there was a rush purchase prior to last year's consumption tax hike, resulting in a significant year on year decline for the quarter. Honda also saw a major decline in the cumulative 3 months results, though the new fit sales were high. N box series ranked top in the new car unit sales category in the first half of the year. FY 'twenty one results for the Japanese market is expected to dip below last fiscal year due to the impact of COVID-nineteen. The market slowdown is expected to bring down Honda's unit sales below last fiscal year. However, current sales are recovering and with the new fit and end box and other key models, plus the effect of new model introduction, we will aim to expand sales. The U. S. Industry demand is showing a significant downturn from last fiscal year due to the new coronavirus pandemic. The fleet market is especially hard hit. Honda likewise saw a downturn from the same quarter last year, but we secured top position in unit sales for the 3 cumulative month sales in the passenger market. Honda is recovering at a faster pace than the market. The U. S. Market this fiscal year is forecast to finish below last fiscal year due to the research in the number of infections from mid June and the major uncertainty ahead. Given the market conditions, Honda is also estimating a year on year decline, but we will continue to offer attractive products like the CR V Hybrid launched last March. Next, China. Though we see the impact of the pandemic, economic activities have resumed along with a number of government pump priming measures. And the Chinese market has outperformed the Q1 of last year. As for Honda, though the launch of Breeze and Civic brought about good results, the supply shortage caused by temporary suspension of production had a negative impact and retail sales was down from last fiscal year Q1, though wholesales was up from the Q1 last year. In calendar year 2020, the overall Chinese market, though the market shrank during the 1st 3 months, in the second half, sales expected to recover to a level equal to that of last year. Leveraging the new model launch effect and full factory operation, plus supply recovery to the market, Honda is planning to outperform last fiscal year's unit sales. Moving on to motorcycles. The industry demand experienced a major downturn from Q1 of last fiscal year due to the pandemic. Asia was especially hard hit. Regarding Honda, those sales were good in China and the United States due mostly to production and marketing suspension in Asia and Brazil. Unit sales was much lower than the same quarter last year. Currently, due to lifting of restrictions in the largest market, I. E, Asia, and thanks to the resumption of production and marketing activities, along with stimulus packages, global wholesale is 38% year on year. Retail is 52% year on year. The recovery level is slightly above the market average. At this fiscal year, the overall market is expected to finish below last fiscal year due to the continuing impact of the pandemic in major markets such as India and Indonesia. Regarding Honda, though we are likely to see a drop in mainly our major markets of India and Indonesia, Vietnam and Thailand have currently recovered to last year's level, while China and the United States are above last fiscal year. Honda will work to expand its market share by continuing to launch attractive products so as to maintain its world number one position. Next, summary of FY 'twenty one first quarter results. Despite significant drop in demand attributable to the pandemic, combined with production and marketing suspension in many countries, thanks to Honda's company wide cost saving efficiency measures, operating operating loss was 113,600,000,000 yen Though there was a contribution from the share of profit of investments accounted for using the equity method, loss before income tax was JPY 73,400,000,000. Though compared to last fiscal year, profit dropped JPY 363,200,000,000 If we were to exclude the pandemic impact amount of around 440,000,000,000 yen as well as the currency effects of 10,800,000,000 yen the numbers improved resulting in a profit of approximately 88,000,000,000 yen Unit sales and financial results are as shown. And next, FY 'twenty one forecast. Amidst uncertainty deriving from the COVID-nineteen pandemic, Honda will make every effort to improve profitability. The forecasted operating profit is 200,000,000,000 yen Contribution from the share profit of investments accounted for using the equity method will bring the planned profit before income tax to JPY 365,000,000,000. This is a drop of JPY 424,900,000,000 year on year. But if we were to exclude the COVID-nineteen impact difference from last fiscal year amounting to approximately 500,000,000,000 yen and currency effects of 80,000,000,000 yen profit would be approximately 150,000,000,000 yen higher than last year. Honda will continue to make effort to make steady business structure improvement and bring about improvement in earnings structure. The unit sales and financial results are as shown. Next, regarding dividend. The dividend for this current Q1 is 11 yen per common share. The annual dividend for FY 'twenty one is forecast to be 44 yen per common share. This is a drop of 68 yen annually, but payout ratio is 46% at par with last fiscal year. Next, I'd like to call upon CFO, Senior Managing Director, Kohei Takeuchi, to give you the details. So let me start. Regarding a financial summary of the Q1 3 months, the group unit sales of the motorcycle business increased in China and so on and fell in India and Indonesia and so on. That of automobile business increased in China and so on, and it fell in the United States, Japan and in India. With regard to the profit and loss situations, the sales revenue was 2 point 1,237,000,000,000,000 yen due to the decline in all business segments. We had a reduction in SG and A's costs and so on. However, because of the revenue decline associated with the volume and model mix, resulted in the operating losses of JPY 130,600,000,000 Let me explain the factors behind ups and downs of the profit before tax. Despite the decrease of the SG and A or the effect of cost reduction efforts because of the impact of the COVID-nineteen on the decline of the unit sales and so on, profit before tax fell by 300 and 63,200,000,000 yen from last year. If we exclude the impact by COVID-nineteen, around JPY 440,000,000,000 and the negative impact of the foreign exchanges, JPY 10,800,000,000 that are included in the profit before tax, we would have about JPY 88,000,000,000 higher profit year on year. Further, the pandemic impact also is found in the volume and model mix factors, SG and As and in equity income. Then let me move on to our performance by business segments. In Motorcycle Businesses, unit sales declined. However, with reduced SG and A and R and D expenses, we managed to have operating profit of 11,200,000,000 yen In Automobile Businesses, SG and A expenses reduced. However, due to unit sales decline in the U. S. And Japan, we resulted in operating loss of 195,800,000,000 yen In Financial Services Businesses, due to the credit loss provisions booked differently, the operating profit was 71,500,000,000 yen In addition, in the Life Creation Others business segments, we had operating losses of 500,000,000 yen due to reduced SG and A and R and D expenses. This segment includes operating loss of 7 point 1,000,000,000 yen for the aircraft and aircraft engines. With regard to the cash flow, cash flows of our businesses during the first quarter. For 2021, it turned to be the negative of JPY 442,200,000,000. Cash and cash equivalents at the end of the Q1 period was JPY 2 point 2509,000,000,000,000 yen In addition, the net cash amounts to JPY 1,419,000,000,000,000, which equals to 1.4 months' worth of our sales revenue as we estimate. As of now, there are no major concerns in terms of the liquidity on hand. We will try to restrict cash spending such as investments and expenses across operations worldwide whilst obtaining financing as necessary in order to ensure our liquidity on hand going forward. Then as for the consolidated forecast for FY 2021, we expect the group unit sales of the motorcycle business to be 14,800,000,000 units, automobiles, 4,500,000 units and 5,310,000 units for Life Creation Businesses. This is the forecast of FY 2021 consolidated business performance. Let me explain the factors for ups and downs of the profit before tax. We will push forward our efforts to improve revenues by reducing costs and SG and As and so on. Profit before tax will be down by the year 424,900,000,000 yen year on year due to the impact of the foreign exchanges as well as the profit squeeze associated with the volume and the motor mix. The COVID-nineteen impact on PBT for the last fiscal year was about JPY 165,000,000,000 and we anticipate that it will diminish toward the end of this fiscal year. We estimate it around a JPY 665,000,000,000 finally. And if we exclude COVID-nineteen impact of JPY 500,000,000,000, its variance from last year and the negative impact of the foreign exchanges of JPY 80,000,000,000 we would have about JPY 150,000,000,000 profit increase year on year according to our estimate. The COVID-nineteen impacts are included in volume and model mix, SG and As and Equity income, respectively. This shows our expectations of CapEx, depreciation, amortization as well as the R and D expenditures in FY 2021. Thank you very much indeed for your attention. Thank you very much. This concludes our presentation for the Q1 financial results, FY 2021. Then we will start entertaining the questions from the media participants. And we have already announced the web meeting system to the media participants prior to this meeting and we will accept the questions through that system. And we will resume our session at 3:40. So please wait for more while. And now we'd like to proceed to Q and A. We have arranged for a media dedicated web conference system. Please raise your hand and wait until you're recognized. The first question is from Nikkei Shimbu Newspaper, Mr. Hanada? I'm Hanada from Nikkei Shimbun newspaper. Can you hear me? Yes, we can. Hello. Can you hear me? I have two questions. First is about the investment for this fiscal year. Well, capital investment, R and D expenditure, you've already given me the total amount, but can you explain more about how you are going to try to nuance the investment? For example, telework and security, it might be that you have to increase your IT budget and also R and D case investment might have to be increased or due to the COVID-nineteen, you might have to cut down some of the investments you're planning for this fiscal year. Next about the future outlook of your motorcycle business. In your report, you said that in India and Indonesia, due to the pandemic and also due to the expected prolonged economic downturn, how are you estimating the future demand for motorcycle? And also, there are other factors of such environmental regulations and competitors in India. So how are you going to try to improve your profitability given all these conditions? Thank you very much, Mr. Haneda. This is a summary of the question. The first question was in regards to capital investment, R and D expenditure for this fiscal year. How are you going to try to nuance your budget? And the second is in regards to motorcycle business. Given the situation in India and Indonesia, how do you see the recovery of the motorcycle business, please? First about investment, R and D expenditure. We in order to further grow our business, we believe that we need to continue to invest. This will remain unchanged. Meanwhile, due to the COVID-nineteen pandemic, the work style is going to change. So we have to try to build the environment for telework and strengthen our security. So we need to invest in ICT and at the same time, work on case for the future. So we need to invest in particularly these areas. As we've been saying, we have to solidify our existing business and also prepare new businesses for the future. Given the changes taking place due to COVID-nineteen, we have to accommodate these changes. In regards to investment, R and D expenditure, it might be that we will have to review our plan, but we want to keep this to a minimum. And also, we want to collaborate with others so as to make efficient our R and D and expedite our business speed. Next, about the motorcycle business. Globally, motorcycles are in our major markets of Asia, India, Indonesia, badly hit due to the COVID-nineteen pandemic. We have yet to see the situation be contained. But we do not want to engage in discount rates. Instead, we want to continue with the measures that we've already put in place, enhance our presence in these markets. Once the market recovers, we want to make more efficient our business. Meanwhile, in Vietnam and Thailand, where we have high profitability, we have already seen the situation normalize. We want to keep an eye on the developments in different countries, areas and respond in line with the local situation. That's all. Thank you. Next question from NHJ. Mr. Oei, please start your question. Please turn on your microphone on the Teams system. My name is Oi from NHK. Can you hear me? Yes, it's fine. Thank you. So I have two questions. First one, automobiles full year sales expectations 4,500,000 units, 6.5 percent down. And in major market in China, it is going to be higher than last year, but not in the U. S. And Japan. And what is the details of the ups and downs of those figures and preconditions? And then what is the key for you to have the recovery of the market? And how what is your outlook on the market now? And the second question, if I continue, the forecast of the revenue full year is going to be 25,000,000,000 yen profit. And would that be driven by the motorcycle businesses like in the first quarter? How do you how can you say that you can ensure the profit for the full year expectations? The question is the forecast of automobiles 4,500,000 units that is 6% down from last year. And then what is the increase or decrease from last year in China? What is the key for the recovery? Those are the questions. And second question is the revenue forecast full year, JPY 200,000,000,000 operating profit for the full year expected will that be driven by the modern cycle businesses like the Q1? What is the factor behind profit expectations? So let's start with the automobile forecast and then that you just saw will follow me later about profit. So the our forecast of automobiles businesses, we look at the infection situations, pandemic situations and the sales situations in different places now and the things are uncertain still today. And as of now, major market for automobiles are China, that's ours and the U. S. And Japan as well. Those are our major markets for automobiles for us and those are the recovering market as of today. And major ones are China. The Chinese government have decided to extend the preference policy for the cars of those kinds and also the number plates, they are also well supported so that we can now see those reduction being less and less today. And it was 390,000,000 before, but it is going up. And then AWD HAC and G HAC in both of the facilities we have, have marked the record highest production so far. And for instance, Guangzhou of 125%, 40,000 or so. And the Tongfu Honda, 60,000 units of production and so on. That's also the record and we have seen the recovery now. And we have a plan to launch new models. And I think in this calendar year, we will try to hit the same level last year and a higher level next year. And in China, in April, because of the COVID-nineteen, many dealers had restricted activities in the plant. We had a lock down situation from the end of March through the early May. All of the plants were shut down, and we had more than well, 50% or less activities in the Q1. However, now we have resumed a the operations, and then now we have come to the level of 80% of the last year level. And from end of May and so on, we are now seeing the COVID-nineteen situations coming up again. And there are some restrictions in the different provinces because of that. And we need to keep an eye on the pandemic situation so that we can regulate our resumption of the plant operations. And in the Japan, immediate period, I would say this recovery trend. However, looking at the COVID-nineteen impact on the economy, we expect the level below the last year to be, for instance, 4,500,000 yen actually is supported mainly by U. S, Japan and Asia, though the number of the units are not many. However, in India, Indonesia, for instance, we don't see the COVID-nineteen impact, not certainly yet in those countries. So we have to keep an eye on those smaller countries as well. But anyway we need to keep an eye on the pandemic situations at the same time to try to do activities to ensure ourselves in different markets. Thank you. And Q1, we had a €11,000,000,000 negative and then we had €200,000,000,000, that's a profit to expect. I think in the Q1 in the unit sales, we have less 60% fewer unit sales. However, even that, we have a structure to ensure the same level of profit. And in the Q2 onward, if the COVID-nineteen impact diminishes, I think we can drive the profit. And for the automobiles, we have a 40% less unit sales to expect and then because of that negative situations. But even that, from the Q2 onwards, we expect some recovery, which will help the profit as well. And because of asset situations, actually some of the segments are categorized as the finance services and then that is to help the consumers to be able to buy the cars easily based on the captive finance mechanism. And those are the financial services based profits, which will be, of course, will be the part of the profits in the Q2 and so on. And then at 20,000,000 yen expectation is to include all of that. Of course, the motorcycles are strong, but automobiles recovery will be included in our expectations of 200,000,000,000 yen Thank you. Next question please. Asahi Shimbun Newspaper, Kamizawa san, please. Hari de, about the impact of COVID-nineteen pandemic. As a premise, the impact of the 2nd wave, what is the assumption that you're making in terms of the 2nd wave impact? In addition? Sorry? SG and A, there is an add on. Can you talk about the reason why you think SG and A is a positive, including teleworking? Now about Q1, the operating profit compared to motorcycles, automobiles are in a very tough situation. What's the current situation? And in order to improve this, what measures are you taking that is to improve the operating margin of the automobile business? Well, in regards to your first question, it was about the COVID-nineteen impact. What is the assumption you're making for the impact of the 2nd wave? And you say that SG and A was a positive, but what are the positive factors? And then the second about the automobile, operating margin is being challenged. Why is that? And what are the initiatives you're trying to take to improve this? Please. About the 2nd wave, well, it's very hard for us to predict what will happen. But the budget in the budget, we have assumed that we will see in the different regions. We will observe what is happening in the different regions and based on that, assume what will be happening. And with regards to China, I think that we will see the results to be equal to or better than last fiscal year. U. S, 80% to 90% recovery is the assumption that we made for the budget compilation, Japan. Also, we are assuming a 90% recovery, more or less. These are the preconditions for the budget. Meanwhile, Asia. Well, Asia, the COVID-nineteen situation is very hard to read. And therefore, we have to look at what is happening now and try to be on the safe side in forecasting the unit sales. Well, it's very hard for us to predict what will happen regarding COVID-nineteen, but the biggest impact we saw in the Q1 was due to the lockdown. Production marketing was totally suspended and that was the most difficult thing that we had to cope with. We saw as a result the drop in sales and unit sales In this lifestyle with the coronavirus, we have to think about what will happen. But if the current situation were to continue, we think that the situation will not get that worse. But it will at the same time take time to recover to what we saw in the past. And that is the premise based on which we've compiled our budget. About the automobile profit and how we have made the SG and A positive, well, within SG and A, in line with the unit sales, the money changes, how much we spend changes and the drop in unit sales and we have seen some of the costs go down. And the money that we were spending on production and R and D was spent to try to make a recovery from the COVID-nineteen. So as a result of all these steps that we tried to take, we have seen a reduction in cost. Now about the initiatives taken to improve automobile profit, nothing really is going to change drastically, but instead we are going to try to continue to improve production efficiency. Also, we will try to improve R and D efficiency. All these things that we've been doing in the past will continue to be implemented. Now for April, automobile operations, our organization has been strengthened. R and D also has been strengthened. But it's only 6 months or so. And therefore, speed wise, because of the impact partially of COVID-nineteen, we understood that we need to reform, change things. And so this has been a driver to try to bring about change. And therefore, by doing the things we've been doing in the past, we believe for sure that we'll be able to improve. Thank you. Thank you. Next question from Toyo Keizai, Mr. Kishimoto, please. My name is Kishimoto from Toyo Keizai. Can you hear me? Thank you. First question about motorcycle businesses in India and Indonesia in our emerging markets. Motorcycle business is in the light of COVID-nineteen and infection situations, there may be a greater concern about the recovery of the sales. And how do you see that situation? 2nd question, as of now you're pushing forward the reorganization of the production structures for the automobiles and for the improvement of the profit. And are there any impact on that schedule by the COVID-nineteen? Thank you for your question. The repeat of the question. There may be a concern about sales recovery due to the COVID-nineteen in emerging market for the motorcycle businesses. How do we see the situation? That's the first question. And second question about automobile production system and its restructuring. Are there any impact by the pandemic in terms of the schedule? So for the motorcycle business season and in India and in Indonesia, there are sales slowing down because of some factors. One is COVID-nineteen infection still going on, not resumed at all. And also specifically in India and in Indonesia, their financial system is like such that the government, for instance, have the term for their financial returns being delayed by the government schemes. And because of that, there are some serious delays about those payments. And quite a few customers for motorcycles may use the financing schemes. And in some cases, those customers are not able to get financed enough to buy the motorcycles. And coronaviruses, it is difficult to predict. However, looking at the worldwide situations now, there will be recovery, the containment sometime. However, in the financial scheme areas, we are trying to come up with the financing scheme that's suitable for the emerging markets going forward that will help the recovery someday. But in India, for instance, as I said, OEMs, other companies also offer the discount and we are a top manufacturer of the motorcycles and we don't want to be involved in the discounting competition. Rather than that, we like to offer new financing skills for them in order to maximize the sales over there. On one hand, Vietnam, Thailand, those are quite good countries with good profits. And there are less impact of COVID-nineteen on those countries. Therefore, if you look at the Asian areas on the whole, it may take time, but it will recover some time. And to be honest, we don't want to be too hasty trying to get a recovery over there. And in terms of the automobile manufacturing structures, SEMA in Japan and HUM, Turkey, HUM of the European area in those plant have been a part of the restructuring of the automobile production system and there will be no changes, no major changes to them, no schedule changes too. Next question, Imamura san from Sankei Shinbu Can you hear me? My name is Imamura from Sankei Shimbun Newspaper. Well, in regards to the tie up with China's CLD, can you explain about the aim? And are you going to hold a stake in CATL? Are you going to mutually hold stakes? No. So what is the reason why you've entered into this alliance, strategic alliance? And in regards to China, the political situation is changing. And though this is a different sector, the United States, they are taking strict measures against companies which are using Chinese products. And I think that the approach to China is being questioned. In the mid- to long term, how are you going to approach the Chinese market? Thank you very much. Now about your first question, we made the announcement the other day that we are going to have a capital tie up with China CATL. And it's only Honda that is investing in CATL. It's not a mutual investment. So what is the reason for this was the first question. And second is in regards to this Chinese political situation. Things are changing politically in China. And therefore, in Honda, in the mid- to long term, how are you going to approach the Chinese market? Please answer these questions. About CATL, the relationship with CATL, we originally in China had a long relationship in terms of battery supply. CATL has a high level of technology and competitiveness and is the top supplier of battery. They're the largest battery supplier for us. And therefore, I think that they're an important partner for the electrification of Honda. We regard CATL as such a strong partner and that is the reason why we decided to invest in CATL. In promoting electrification, we want to create synergy with CATL and that is the reason why we decided on this tie up. And in many ways, we want to continue to collaborate with CATL, so as to promote electrification and try to achieve our electrification goal. And we believe the CATL is a very strong partner to make this happen. And next about the political situation in China. Well, I worked in China in the past. Back then it was not U. S, China, but Japan, China had a lot of problems. And this is not something that's just started today. Instead, in the past, China has been and will be the largest market in the world and it's a growing market. And therefore, we will work with China just as we've been doing in the past. Well, I think that there will be a number of things happening in the future and we want to keep an eye on what is happening and act on a timely basis. Currently, when I was in China, because we had soured bilateral relations compared to now, it was difficult for Honda to do business in China. But nowadays, well, politically speaking, Japan and China are in a very good situation. And therefore, I think that I think compared to the past at least, so far at this point in time, things are heading towards a good direction for Japan. But including the political situation, things change day in, day out. And we have to act on a timely basis. I think that's important in doing business in China. That is all. Thank you. Because of the interest of time, the next question is going to be the last one. Mr. Shimon Sato from Yumi Ui Newspaper, please. Shimosato from Yomiuri Newspaper. So change of the topic in a way because of the coronaviruses, now people are are paying attention to more or to the Internet based sales. And do you have any idea or any engagement of those areas as per different regions? So region based Internet sales, that was the question what we do today and our policy going forward. That was the question. In the respective regions, we have a variety of the actions in place. For instance, in the U. S, from last year, the Internet based sales have been put up. We now have a model to push. And then in April this year, because of the lockout situations, customers were not able to come to the dealer shop. Because of that, we had quite a good Internet based sales. It increased. And we like to put more efforts on that too. Same story in China. Internet based sales will expand going forward, and we will be getting ready for that as well. And in Japan, well, some dealers have that system in place. However, as Honda, we haven't studied really about our Internet based sales system in Japan, but we will consider for that because of the coronavirus situations of the day. Thank you. Thank you very much. So I apologize the limitation of time and for the questions we are not able to answer today. We will get back to you later by our corporate communications department. Now we would like to conclude our press conference for the financial results and data and information are available on the Honda website. And thank you very much indeed for your participation.