Earnings Call: Q4 2021

May 14, 2021

Thank you very much for sparing your time to join us here today at the announcement of Honda Motor Company's FY 'twenty one Financial Results. And I'd like to convene the meeting. I'll be serving as the MC. My name is Okamoto from Corporate Communications. Thank you. First, allow me to introduce the executives Attending, Executive Vice President, Seiji Kuraishi Senior Managing Director, Kohei Takeuchi. 1st, Executive Vice President, Kuraishi, will give the outline of FY 'twenty one financial results and FY 'twenty two Financial forecast, please. Let me explain A for 2021 financial results. First regarding for 2021 unit sales of Haader Group, for motorcycle businesses 15.1 32,000,000 units automobile businesses 4,546,000 units and Life Creation Businesses, it was 5,623,000 units. I'll explain main market situations next. Total market in Japan dropped from last year due to COVID-nineteen pandemic impact. N Box and others marked strong sales results. However, Honda's sales declined year on year. N Box Series won the top unit sales out of the new launches in mini vehicle segment for 6 years in a row. In March, we launched a new Legend in Japan equipped with the Honda Sensing Elite, which is the world's first automated driving technology level crane. Total market in FY 2022 It still remains uncertain going forward due to the concern of resurging COVID-nineteen. However, Honda expects The results will exceed the year before, thanks to the effective launch of a new model vessel. Total market in the U. S. Declined year on year. Nevertheless, as the gradual reopening of economic activities since May, the market slowly recovered, though it ended up still below the last year. Honda recovered their businesses mainly with RV and Pilot finally being close to the market results. During the Q4, Many of light truck models have upgraded those sales records of the month of the March, outperforming the market growth. Total market of FY 2022 is expected to be better year on year, thanks to increasing destinations for COVID-nineteen and efficient economic policies. Honda will enjoy the effective launch of a new model Civic as well as the sales expansions, mainly with the lighter trucks, so that Our results will exceed the level last year. The total market in China exceeded the level of last year with effective stimulative measures for consumptions by the government. Honda enjoyed strong sales of Breeze, CR V, bezel and so on. And thanks to the extended EV lineups across leading models, We have marked the record highest sales units so far. Regarding the total market calendar of Market of the calendar year 2021, we're expecting the growth from the year before along with the economic recovery. Honda will launch our new models and will further improve EV lineups, aiming for this higher sales results than the preceding year. In April, in Shanghai Motors Show, Honda made a world premier showing of SUV, e prototype or the first, Honda brand EV in China. Moving on to the motorcycle business, the markets have recovered in China, U. S. And so on. Its largest market of Asia is showing a moderate recovery. However, it resulted below the level last year. Honda's results declined year on year. In India, since 3rd quarter, the sales recovered to the level same period last year in Indonesia, the sales of the 4th quarter have recovered to 83% at the same time last year. China and Pakistan exceeded the level last year. Total market of FY 2022 is expected to grow from the year before despite the concern of the COVID-nineteen flare up, Honda expects the sales to exceed year on year, mainly in Indonesia. Let's conclude our financial performance of the FY 2021. Despite a declining demand due to COVID-nineteen impact, We have revisited our business activities to control SG and As and to reduce costs and with the positive effect of Credit loss provisions in this term for the financial businesses, the operating profit was JPY 660,200,000,000 outperforming the year before. Profit attributable to the owners of the parent was 657 point 4,000,000,000 yen also favored by the increased investment appropriate based on equity method. This slide also presents unit sales and P and L. And next, With regard to the FY 2022 forecast, we plan to increase unit sales year on year across all business areas of Honda Group. Regarding operating profit, albeit the impact By soaring raw material prices and concerns of supply shortages of semiconductors as well as the effect of our credit loss provisions, We will press forward the actions to increase unit sales, to optimize our production capabilities, to improve our efficiencies of our product manufacturing shrink and to fortify the existing businesses, expecting to achieve JPY 660,000,000,000 same as this year. Regarding the impact of the semiconductor supply shortages, as of now, we are withholding production at some facilities. Supply situations of those parts are changing day by day. However, Honda managed to coordinate the production activities globally so that we can minimize its impact on production throughout the year. For the expected business performance, we plan to defend JPY 660,000,000,000 operating profit by catching up with the production together with our corporate efforts and etcetera. Speaking of dividends, Annual dividends for FY 2021 is JPY 110 per share with yen more added to the previous expectation we announced and the dividends for the Q4 is JPY 54 per share. Expected annual dividend for FY 2022 will be JPY 100 per share, Same as for FY 2021, our dividend policy is to keep the consolidated payout ratio aiming 30% despite a changing business environment going forward. We decided to revise them as shown here, making efforts to provides a stable and continuing profit returns to shareholders. Now I'd like to hand over to Mr. Tageuchi. He will be giving you the details of the financial results and financial forecast. Allow me to begin my presentation. First, the 4th quarter results, Honda Group Unit Sales. Motorcycles, despite drop In Indonesia and others, unit sales was up in markets such as India, Pakistan and China. Automobiles, despite decline in Markets such as U. S, there was increase in markets like China. Life creation saw increase in such markets like China but decrease in the United States. And next, income statements. Sales revenue was up in all business categories, reaching 3,000,000,000 JPY 623,800,000,000, up 4.8 percent from the same period last year. Operating profit due to drop in SG and A and increase in profit, attributable to increase in revenue model mix, operating profit was JPY 213,200,000,000. Share of profit of investments accounted for using the equity method was JPY 68,100,000,000 due to profit increase derived from income from increase in sales revenue model mix in China. And moving on to change in profit before income taxes. FY 'twenty one 4th profit before income tax was JPY 255,300,000,000, up JPY251,500,000,000 from the same quarter last year. Operating profit due to lower SG and A expenses, profit increase coming from difference in the provision for credit losses and change in revenue model mix, amongst others, operating profit was 213,200,000,000 yen up 218,800,000,000 yen from the same period last year. And please look at Page 14, sales revenue operating profit by business segment. Motorcycle business operating profit due to profit increase from increase in unit sales and model mix, Combined with cost reduction effect, it was JPY 72,200,000,000. Next, automobile sales related operating profit. Included in Automobile and Financial Services Business was JPY 140,400,000,000 combined. Automobile Business operating profit due to profit in SG and A and as well as profit increase from unit sales model mix exchange reached JPY 37,600,000,000 Financial Services business operating profit, mainly due to difference in the provision for credit losses, was JPY 106,300,000,000. And next, Life Creation and Other Businesses recorded Operating loss of 3,000,000,000 yen, of which aircraft and aircraft engine operating loss was 7,800,000,000 yen. And next, FY 'twenty one, 12 months financial results are as shown. Please Look at Page 16, change in profit before income taxes. Profit before income taxes was JPY 914,000,000,000, up 124,100,000,000 year on year. Operating profit, though there was decline in profit due to drop in revenue model mix, Thanks to a cut in SG and A, difference in the provision for credit losses, cost reduction effect, amongst others, operating profit reached 660,200,000,000 yen up 26,500,000,000 yen year on year. And next, cash flows Of non financial services businesses, free cash flow was 300000000,000,000. Cash and cash equivalents at the end of period was 2,528,300,000,000 yen Also, net cash was 2,000,000,000,000 yen Next, FY 'twenty two consolidated forecast. Beginning with Honda Group unit sales, Motorcycles, due to increase in Asia, our major market, we are forecasting 18,000,000 units, up 2,860,000 from last fiscal year. Automobiles, though there is concern over semiconductor Supply shortage due to market recovery and introduction of new models, we are forecasting 5,000,000 units, up 450,000. Life Creation Business, we are forecasting 5,900,000 units, up 270,000 units, mainly coming from North America. FY 'twenty two consolidated financial forecasts are shown as on this slide. FY 'twenty two forecast change in profit before income tax. Despite a decrease, factors, such as increase in SG and A, including A difference in the provision for credit losses and lesser cost reduction effect. Due to increase in profit coming from revenue, model mix change, we are forecasting the operating profit to be Same as FY 'twenty one, JPY 660,000,000,000. Cost reduction effect is minus JPY 51,000,000,000, but This is mainly due to sharp rise in raw material cost. Meanwhile, we are planning for cost reduction of more than 200,000,000,000 yen and price increase. Lastly, FY 'twenty two capital expenditures, depreciation and R and D forecast are as shown on this slide. And this concludes my presentation. Thank you for your attention. Thank you very much indeed for your attention. And I'd like to now move on to the questions and answers part of the session today. And we have already Welcome to the those in media. We are going to accept questions through Zoom functions. And due to the interest of time, please limit your number of questions to 2. Two questions per person, please. Thank you very much for your Question 1 from Mr. Abe from Nikkei Shimbun Newspaper. Abe from Nikkei, nice to meet you. First of all, the operating profit margin for the automobile business is recently The profit margin has been coming down and it is 1% down too in March 2021. In to improve the operating profit margin of those multiple businesses, what is your major action for that? And the other question is purpose the target of electrification by 2,040, 0 emissions vehicles will become 100 and EV, FCV, those are the 0 emission vehicles. And when you switch over to those types So the vehicles, how much investment would you need? In case of Atesso, they say in order To start up the 1 EV factory, they take about JPY 100,000,000,000 or so. What is your prospect for the investment in your case at Honda. Thank you for your question. So let's talk about operating profit margin for that mobile businesses. For long, we have been trying to solidify the existing businesses. We have actions for that. And last year, across all Honda, We have been pushing forward reviewing of the Air businesses and because of that, we are improving our business structures today. And for automobile businesses, we have communicated that before due to the development organization changes, the number of the models and the number of the derivatives are changing and also we have introduced the Honda architecture for better efficiency. By 2025, the number of the processes for the development will be down by 30%. That's the actions we are taking now. And in terms of the production, we are trying to optimize them, too. And by the end of this fiscal term, we are going to closed down the factories in the U. K. And Turkey and Soeama factories will move to yearly. Thanks to that we can improve our business efficiency for better operating profit margin. And in terms of the second question, The development expenses for the electrification of the vehicles. President, Mibei, The other day, he talked about JPY 5,000,000,000,000 R and D investments in the next 5 years. And in the area of the R and D, we will, of course, define the core technology areas where we are going to be pursuing our independent efforts. And we also try to make more improved efficiency for the current development processes for the models, so that way we can get more investment margins. And then if we find some areas which is efficiently pursued by the alliance. Of course, alliance with other companies would be a choice. And in order to make that possible, we need to optimize the production system and make improvements for the efficient production. This way, we can improve the efficiency of all, including the developments. And in terms of the investments, battery procurement is one of the issues that we believe to be a major one and GM in the North America and CATL in China. Those are the areas that we are investing with already. And for other kind of technologies, we will look into the technology trends and activities of the regions and so on, so that we can pursue the appropriate alliances. And I cannot share with you how much we are going to need for the The electrification process is, however, 6,000,000,000 or 10,000,000,000 yen in 5 years, those will be the basic idea as we shared before. Thank you very much. Thank you very much. And next question? Can you hear me? Yes, we can hear you, please. Thank you very much. Katagiri from Yumi Shimpu Newspaper. Thank you for this opportunity. I have several questions. First, So you say that there's an increase in profit. And you attribute this to the cost reduction of sales, amongst others, SG and A and others. Can you be more specific as to where The profit is coming. And also, you are expecting further cost reduction for next fiscal year. Can you be more specific about next fiscal year, where you say that you're expecting 200,000,000,000 or more, cost reduction and also about R and D expenditure. And compared to recently, it's 140. So it's higher than the past, JPY 840,000,000,000. And also, for safety purposes, Electrification and Safety. Can you be more specific as to what you'll be doing? Mr. Takechi will answer these questions. Thank you. About the SG and A and what cost reduction we have achieved and will be achieving. Well, last fiscal year, the SG and A was an area where We have the financial business and well compared to the previous year and when the U. S. Unemployment rate compared to that, the provision back then was increased for the credit losses. But last fiscal year, Thanks to the U. S. Government support as well as the fact that the unemployment rate improved, we were able to reduce the provision. And also aside from that, our business activities had to be held down due to COVID-nineteen. And given The pandemic in the different countries, our workers, associates worked hard to reduce the cost. And thanks to that, last We saw the SG and A reduced year on year for FY 'twenty one. And About the provision for credit losses, aside from that, even if we were to exclude that, we believe that we were able to achieve SG and A reduction of billion. And about cost reduction and also the effect of price increase, we're looking at both these. And the automobiles, motorcycles and life creation products. And we want to focus on to make making our manufacturing efficient and together with their suppliers, work out where we can reduce the cost. And I think that these efforts as well as the price increase have produced this result. About R and D, we are And as for R and D expenditure, well, it was 780,000,000,000 the year before, and therefore, JPY 840,000,000,000 is high. And before that, it was JPY 820,000,000,000. So it is the highest on record. That is true. But this is because The existing the internal combustion engine is going to be electrified. We need money, and we're shifting towards electrification. I cannot give the breakdown of how much will be spent on what, but as a result of this shift and also Connect, we are investing or spending JPY 840,000,000,000 for R and D. But as Kureishi said, it's not going to be purely used for R and D for Aranda alone, but we also want to rely on alliances. And that is the reason why we are planning for JPY 840,000,000,000 expenditure for FY 'twenty two. Thank you. Thank you. Next question, please. From Asahi Shimbu Newspaper, Mr. Kamiyama, please. Kamiyama from Asahi Newspaper. Can you hear me? Yes. I have two questions. For the FY 2021, I have a question about that. In terms of the sales unit, you're expecting to grow them in the U. S. And China in March 2022 period, FY 20 next year. And I think that is may be because of the rebounding or rebound from last year. And for China, How much growth or percentage growth are you expecting in China? And question 2, So March 2022, sales is expecting to grow, but the profit level is down, including the net profit. And of course, that includes The soaring raw material prices and the semiconductor effect and how much of effect included in those results. So I can talk about unit sales, and you can talk about the profits. For next year and JPY 660,000,000,000 operating profit expectations next year. So let me explain about it. As I said earlier, Cost reduction every year, negative JPY 51,000,000,000 That is As we said earlier, more than JPY 200,000,000,000 can be reduced by the cost reduction efforts as well as the price increases. And then with that all included, actually, You can find out the effect by the raw material price increases as much as the gap between the 2. And in terms of the semiconductor effect, As of now, in the Q1, as of now today, we are changing our number of days in operations, and we are trying to reduce the type of the models we're producing this way, we can try to contain its effect in terms of the unit sales. And of course, as much as we're trying as much as can do, but we can also cover that by the efforts as well. But also, JPY 660,000,000,000 as I said earlier, Financial credit loss provisions. So it was Booked up in previous years, and then it was written off, and then that is causing effect. And unemployment rates until autumn sometime like that. And for those ones, JPY 110,000,000,000 is going to be included for the negative effect. And then it is not just the raw material price But JPY 660,000,000,000 is results based on the combination of all those efforts. And in terms of the net sales, the COVID-nineteen impact is getting alleviated globally today and demand is coming down, thanks to that today. And in the United States, in April, The vaccinations going on smoothly and Biden administration's providing good economic measures, causing higher demands. And we have 111% of the market growth today year on year in the end of April and of course, semiconductor effect still continues in the States too. And perhaps the growth rate is still uncertain because of that. And in China, COVID-nineteen actually was started in China. However, they have no impact whatsoever nowadays. And In April, they had a good business. However, they also are hit by the semiconductor situations, and we do have the impact in our factories as well. And depending on how it goes going forward, its effect on the business will change. However, as of now, Chinese government says that the total market will be 2,100,000,000 cars, And this they're expecting to have the growth by 8% 108% of the last year. And we're trying to Do our business to be in line with the market growth, and of course, we have to pay attention to the semiconductor situation as well as the COVID-nineteen in the global business situations. Thank you. Thank you very much. The next question? In HK, Ms. Tsuboi san, please? Thank you. Can you hear me? Yes, please. And educate Tsuburin about the unit sales Once again, at Yori, you say well, I'm sorry, it's 5,000,000. And because of the soaring raw material cost and semiconductor shortage, What to what extent have you measured these impacts in coming up with this number? Can you give the breakdown of the impact of raw material and semiconductor shortage? So basically, For the automobiles, 5,000,000 units, we have factored in the impact of the rise in raw cost and semiconductor shortage. Let me explain about semiconductors more in detail. From the end of last year, due to COVID-nineteen, We have been suspending our production, had problems with logistics and the industry on the whole had a shortage of components of procurement, especially for semiconductors, because there was a growing demand for games, there was a shortage in supply of semiconductors. We For a stable supply, we, including overseas with multiple sources, have tried to secure source the semiconductor so as to have appropriate inventory. And for each of the components, we tried to secure optimum inventory. Initially, the semiconductor manufacturers tried to increase production And we tried to accommodate. And so and we thought that there would not be a major impact. But then Texas was hit by a storm, And then the semiconductor when semiconductor was hit by a fire outbreak, and unfortunately, in the first half for this fiscal year, we will still continue to see an impact of semiconductor shortage. But we will try to minimize the impact. We're continuing to make effort towards this end. And currently, we don't know what the situation will be. It's fluid. But in the second half, we think we can recover, and therefore, We can minimize the impact throughout the at the end of the year. And even if there is an impact, we from our corporate effort, as explained, we will be able to defend the budget that we explained. And it is based on that premise that we have put together this budget for FY 'twenty two. Thank you. Thank you. Next question? Question 1 about North America. So according to the survey I have, The number of days in stocks kind of pressured at the moment, very tight. And is that because of the semiconductor situation? Or is that because of the market going so well and you're selling so well and these stockings are being tied? Is that the situation? So please let me understand how you take this now. And in terms of the battery procurement, You have your alliance partner in Ultomaker and China, too. And including Japan, you probably have a plan or idea about Different partners in different regions, including Japan, for instance. Please tell me your ideas about it. So In terms of the inventory situations in North America, in the first place since last year due to the COVID-nineteen, Every company OEMs needed to do the adjustment of the production days. And because of that, Of course, we have the effect by that on the inventory level today. And of course, Every company has a different reasons for that. And semiconductor insufficiency, of course, caused that as well. And we had some stocks of semiconductors, Thankfully, and we didn't have the immediate impact by that. However, going forward, if the semiconductor shortage continues On and on then, the tight stock situation may continue, too. And 33 days, that is the Average stock days, that is the average in the North American hours is about 50 days. And The semiconductor situation is now being adjusted in the market, and then we will look at the inventory levels and supplies as well to try to alleviate the situation. But in the second half, we will try to recover Then so this way, we can achieve a JPY 5,000,000,000 target finally. And in terms of the battery So Sync, GMA North America and CTL in China, those are the partners to try to get the batteries. And of course, batteries are one of those components, and we need to work on a Q CD of those, meaning that we might have a different sourcing in different regions, though we have not defined who as yet. But of course, we do have such ideas, as you said. Thank you very much. Next question About India's production, let me confirm the situation, including the outlook. Well, currently, The 4 motorcycle factories are closed down until tomorrow. And also, the automobile factories are also been suspended. And with the spread of the pandemic, how are you going to and tried to secure the production of motorcycles, automobile production in India. And How do you see the impact on the units that can be produced? Well, it's very difficult to predict, but what is your premise Undoing production in India. Well, about the situation in India, well, our motorcycle Due to the second wave of COVID-nineteen and also the lockdown that was introduced domestically. Our dealers also, about 80% of our dealers in India closed down. And from May 1, 4 factories have been closed and will suspend production until May 18. That is our current situation. Well, to be candid with you, we really don't know what will happen. We cannot predict, but We have to observe what happens to the pandemic, and we have to ensure the safety of our associates. And with that in mind, we need to consider when to resume production. About the impact on production units, we really do not know for Sure, as at this point in time. But for India, actually last year, there was a big impact. By the second half, We saw the recovery was even better than we expected, thanks to partially the government's pump priming measures. But from the end of March, The second wave hit and currently, the medical system has been totally overwhelmed. And therefore, we have to keep an eye on what is happening in India and carefully consider what needs to be done. That is all. Thank you. So next question, please. Wall Street Journal, Mr. Sean McLean, please. I'm going to ask in English, if that's okay. Two questions. 1, if you could give us a number In terms of lost production from last year as a result of the semiconductor shortage. And if you could try to give us a number for how much production you think will be lost in this current fiscal year as a result of the shortage? And secondly, if you could give us a high level sort of idea of where you think your alliance with General Motors is headed? You seem to be cooperating on more and more areas. And how close should we expect GM and Honda to become in the future? So in terms of semiconductor effect, we had 100,000 units affected last year. And in the current year, as I said before, The effecting continues in the first half. And in the second half, we are going to catch up. And as of now, I expect that all those loss effect on the production will be as traded off or set off in the end of the year. And with the GM, actually, 2 companies are taking actions for the and other areas, automated driving, so forth. And we have announced collaborations in North America last year, and we are continuing our discussions together. And electrification strategy is supported by the GM alliance. That is one of the pillars supporting that strategy. And for that purpose, we are going to try to find out efficient going forward. And in specific, I cannot give you an idea as yet. And going forward, When we are ready to share with us more specifics, we will, of course, do that. Thank you very much. Any other questions? Thank you. If not and with this, we would like to conclude today's presentation on our financial results. As for the materials, they will be posted on our web page. So please access our web page. Once again, we thank you for your attendance.