Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Honda Motor Co, Ltd (NYSE:HMC)
Q3 2020 Earnings Call
Feb 7, 2020, 1:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Thank you for waiting. Thank you very much indeed for coming up today for our press conference for our Third Quarter Financial Results. I'd like to introduce the participants today. Seiji Kuraishi, Executive Vice President; Kohei Takeuchi, Senior Managing Director and CFO.

Kohei Takeuchi -- Senior Managing Director and Chief Financial Officer

Nice to meet you.

Operator

And Jiro Morisawa, Chief Officer and Business Management Operations. So, let's start with the presentation for the financial results. Mr. Kuraishi, please?

Seiji Kuraishi -- Chief Operating Officer, Representative Director, Vice President and General Manager, Automobile

To start with, I would first like to express my condolences for the families of the deceased due to the novel coronavirus outbreak as well as my deepest sympathy for the patients and for those who feel concerned. I hope that things will be back to the normal status as quickly as possible.

Honda has postponed restarting of the operations at our affiliate companies since February 3. Currently, as per the guidelines given by the Chinese local government, we are closely monitoring safety of our employees and their families, and the status of the supply chain, and are considering our operations going forward. At the moment, it is difficult to estimate its impact on our financial performance. Therefore, the forecast we share today does not reflect it. Let me explain the financial results of the third quarter FY 2020.

To start with, cumulative unit sales until third quarter this year of Honda Group is as follows. Motorcycles, 15.038 million units; automobiles, 3.809 million units; Life Creation, 3.63 million units. Next, regarding the situations of the main markets. Total automotive market in Japan enjoyed effective launches of the new models by OEMs, but due to consumption tax hikes and other factors, the market declined year-on-year.

Honda enjoyed a good sales of N-Boxs, however, due to part supply restrictions for new N-WGN, our unit sales declined year-on-year. Total market for FY 2020 will end slightly lower than the year before, but based on good sales performance of N-BOX and Freed, Honda has up-revised unit sales forecast. Brand new Fit will be announced on the 13th of February and be launched in the market on the 14th of February. Please keep up with the expectations.

In the US, total market results are slightly below year-on-year. Despite the sedan market's shrinking trend and the decline of the Accord sales, Honda launched Passport effectively and HR-V sales increased with the record highest monthly sales performance in October, thus we maintained equivalent sales results to that of the same time last year. Civic kept a tough position in the segment consecutively for 10 months. CR-V renewed monthly sales record in October and November. Total market in FY 2020 will result slightly below 17 million units. Honda will try to grow well-performing light trucks such as HR-V and CR-V so we can exceed the sales of last year.

In China, total market dropped in all segments. Honda increased CR-V and Accord and so on with effective new model launches, such as Envix, Inspire and Breeze. We achieved better unit sales results year-on-year. Total market of calendar year 2020 would slightly be below the year before. Honda will continue monitoring the impact of novel coronavirus outbreak. Meanwhile, we will aim to maximize sales results by incremental sales of our leading models and new launches.

Regarding motorcycle segment, in India, the largest market, the economy stagnates, the employment rate worsens, which slows down personal spending. Total markets in Asia decreased year-on-year. Honda has had more sales in the Philippines. However, due to slowing down India market, our result was below the same time last year. Regarding total market in Asia in FY 2020 full year, since personal spending in India market still remains at low level, recovery will be difficult, so our performance would end up below last year. In India, we launched Activa 125, which complies the new regulations as well as the new SP 125 and Activa 6G, aiming at further growth.

In Brazil, total market is in recovery trend. We will strengthen our sales, mainly with the commuter models. In December 2019, Honda marked the global cumulative unit sales of motorcycles of 400 million units. We will keep doing our best going forward to supply attractive products that are fulfilling for needs and dreams of customers in various parts of the world.

This is the summary of the cumulative results until third quarter this year. Operating profit was JPY639.2 billion, down by JPY44.7 billion year-on-year. Excluding foreign currency and temporary impact, thanks to currency down effect and SGA reductions, operating profit went up by JPY68.2 billion. Unit sales and P&L are shown on this slide.

With regard to the FY 2020 full-year forecast, expected operating profit would be JPY730 billion, with additional JPY40 billion to the last forecast update. Due to foreign currency impact, economic downturn in India and the limited parts supplies in Japan, unit sales would reduce from last year. Nevertheless, we will ensure to execute actions for profit improvement to keep the plans higher than the year before.

Unit sales and PL are on this slide. For FY 2020, expected annual dividends would be JPY112 per share. As we announced last time, third quarter dividend is JPY28 per share.

Next, Mr. Takeuchi, Senior Managing Director and CFO, will present details of the financial performance and further expectations.

Kohei Takeuchi -- Senior Managing Director and Chief Financial Officer

So let me explain, first of all, for the FY '20 third quarter financial results. As for the sales revenue, so there was a sense of Financial Service business increase. However, due to the decrease of the sales in the Automobile business and due to the negative impact of the exchange, it turned out to JPY3,747.5 billion. As for operating profit, though there was a reduction in SG&A and effect from the cost reduction but because of the sales decline and also the model mix changes, it came to JPY166.6 billion.

Next is the change in profit before income tax. As for the profit before tax for FY '20 third quarter, it turned to JPY206.7 billion. That is down by JPY20.1 billion compared to the same period last year. And the operating profit was JPY166.6 billion, that's down by JPY3.4 billion. So the operating profit, excluding the currency effect, owing to the reduction of the quality-related expense was increased by JPY36.5 billion.

Next is our financial results by business segments. As for the operating profit for the Motorcycle business, the slowdown of the India market pushed our unit sales down. Owing to the cost reduction effort, it came at JPY74.5 billion. As to the operating profit for the Automobile businesses, due to the unit sales reduction in Japan impacted by the supply restriction of components in plastic, came down to JPY33.7 billion. As for the operating profit for the Financial Service business, increase of operating lease revenue contributed and came as JPY64.5 billion. The operating loss from the Life Creation business and other businesses, due to the unit sales decline in the United States, came at JPY6.1 billion. As for the operating loss from the aircraft and aircraft engines included in the Life Creation and other businesses, came as JPY10 billion. Combined operating profit of the Automobile business and Automobile sales included in the Financial Service business is JPY95.2 billion, according to our calculation.

Next FY '20 and nine months consolidated financial results. To explain the factors that contributed to this change, the profit before income tax is JPY786.1 billion. That is down by JPY82 billion from the same period last year. Operating profit was JPY639.2 billion, that's down by JPY44.7 billion compared to the same period last year. As for the operating profit, excluding the exchange effect owing to the cost reduction effort and the decrease of the quality-related expense, it came to positive JPY46 billion.

Next is the Honda Group consolidated financial focus for FY '20. First, the Honda Group unit sales forecast. Motorcycle, no change from the previous forecast, that's 19.9 million units; Automobile, increased by 5,000 units to 4.98 million units; Life Creation business, decreased by 270,000, and that's 6 million units.

FY '20 consolidated financial forecast is shown on this slide. Next is the change in FY '20 operating profit forecast from FY '19 result. Due to the unit sales decline and the change in sales and model mix and also the negative exchange impact there is still because of the cost down reduction and SG&A reduction, we are planning for the OP forecast of the JPY730 billion. Next is the change from the previous forecast. Due to the reduction of the SG&A and also exchange impact, our operating profit forecast this time is plus JPY40 billion. Our FY '20 forecast for capital expenditure, depreciation and R&D expenditures are shown on the table.

In the Board of Director meeting today, in order to maintain the liquidity on hand and secure a fund for the future growth, we've decided to issue the straight corporate bond in Japan. The upper ceiling of the total amount of the corporate bond for subscription is JPY100 billion.

That is all for the explanation. Thank you very much.

Unidentified Speaker

Thank you. Continuing, before we start the question-and-answer, we are going to explain -- Mr. Kuraishi will be explaining about when we can restart the production of the automobile plant in China.

Seiji Kuraishi -- Chief Operating Officer, Representative Director, Vice President and General Manager, Automobile

As for Dongfeng Honda's operation, the current plan is to resume the production on February 14. First, we will take one week to refurbish the production line, which was originally scheduled to do in Chinese New Year. And as for the resumption of the production, in parallel with the refurbishment of the production line, we will confirm the safety of the employees, condition of the facilities and also the supply status of the parts and components, and proceed with the preparation so that we can start the production on the week of February 17. Together with the speeding up of the refurbishment of the production line, we will try our best to restart our production.

Next is Guangqi Honda. The current plan is to resume the production on February 10. Same as Donghu Honda, we will first check the current status and start the production as soon as possible. That is all. Thank you.

Questions and Answers:

Operator

So now I'd like to move on to the Q&A. Please raise your hands if you have questions. As I always ask you, we will bring you the microphone, please tell us your name and which company you're from, and we will take the English questions, if you like. So please raise your hand if you have questions. So the gentleman at the front, please.

Unidentified Participant

Earlier, you -- continuing from your explanation, according to the newspaper reports, the annual capacity of the Wuhan plant is about 600,000 cars, but what is the plan? Do you have any plans to compensate for the no car production for the time being? And another question is how many employees are working at the Wuhan plant and how many are Japanese working there? What is the ratio of the Japanese employee there?

Seiji Kuraishi -- Chief Operating Officer, Representative Director, Vice President and General Manager, Automobile

So our plant at Wuhan, we have a capacity of 600,000 cars per year. And last year, we had, overtime, a production that went up to 750,000 cars produced. And as of now, the Dongfeng Honda is actually the plant for the Chinese market only. At the moment, there is no option to compensate for the production problems from elsewhere at the moment.

Kohei Takeuchi -- Senior Managing Director and Chief Financial Officer

And as for the questions about Wuhan, Dongfeng Honda Automobile Company, we have our employees, about 12,700 as of the end of December, including -- excuse me. I don't know how many Japanese included in there. The Corporate Communications Department will let you know after confirmation. We don't necessarily separate, but we have about expats -- 430 expats from Japan in China. That's the total number of Japanese expats over there.

Unidentified Speaker

Yeah. Any other questions? So gentlemen who is holding the glass at the back.

Okada -- Nikkei -- Analyst

Okada [Phonetic] from Nikkei newspaper. As for the revision of the information, I would like to ask you in detail about the full year outlook. As for SG&A reduction, so is that because of the US payment of the incentive? And what are other factors that contributed to this? And also, the operating profit, so you have one outlook that shows the increase in operating profit. But because of the coronavirus, you may have the stagnation in the production of China that may cause a negative impact. Do you think that will actually drive down the profit increase that you were planning? What's your plan?

Kohei Takeuchi -- Senior Managing Director and Chief Financial Officer

So as for the operating profit full year outlook, that was at JPY690 billion, but now it's JPY730 billion. That's increased by JPY40 billion. And let me explain the breakdown. First, is the exchange impact, that's JPY15 billion. And the reason is, in the third quarter actual, originally, in the budget, it was JPY105 to the dollar, but now it's JPY109 to the dollar in actual or JPY108, no, JPY109 in the third quarter. In full year, it's JPY107, but that became to JPY108. So that is why the JPY15 billion plus. And others include, as Okada [indecipherable] just explained, in SG&A, we have some positive. And we have JPY26 billion amount of the Latin America's social security burden. And also, the tax reimbursement was given, and that contributed positive to the SG&A.

And number three is in a vehicle -- in Automobile, we have some plus in Japan and plus in the Motorcycle, but the biggest one are the exchange impacts and also the SG&A and the tax reimbursement, so that actually reduced SG&A cost.

Seiji Kuraishi -- Chief Operating Officer, Representative Director, Vice President and General Manager, Automobile

As for China's business, domestic business and the impact to profit and also the unit sales. We are not in the situation to be able to give you the information today. But based on the schedule that we explained earlier, if we can resume the production, then the impact will not be that big, especially the operating profit. As you know, the impact in China is very small. So we don't think this will impact us. But if this will prolong, that is a different story. So there's nothing we can say today. Thank you.

Unidentified Participant

I'd like to ask about the coronavirus issues on the supply chain effect in China of course, parts will be -- parts produced in China and then they are used elsewhere out of China. What is the impact by that?

Seiji Kuraishi -- Chief Operating Officer, Representative Director, Vice President and General Manager, Automobile

So in terms of the supply chain we will -- we would be able to resume the production as planned. If that is the case, it would not stop the line elsewhere. At the moment, we are scrutinizing its impact closely now. But going forward, we will watch and monitor the situations and then make a judgment about the production line elsewhere.

Unidentified Speaker

Any other question? The gentleman in the front row.

Sean McLain -- Wall Street Journal -- Analyst

Sean McLain for the Wall Street Journal. Two questions, one on China, you explained a little bit about, if you resume quickly, then this is not a problem. Given the supply that's [Technical Issues] Chinese market, about how long do you think this will go on [Technical Issues] to have an impact on your business? How many months of supply do you have before it would start to have an impact? And secondly, on the US business, your sedan and truck balance, still barely 50-50. Is there going to be -- are you contemplating any further changes to your production lineup to increase production of trucks and SUVs in the US?

Seiji Kuraishi -- Chief Operating Officer, Representative Director, Vice President and General Manager, Automobile

As for the pause from China, actually, because of the lead time, the supply situation may differ. However, in any case, there is a certain amount of inventory for each parts and the level differ by the parts and components. We are doing the close investigation and confirmation, so we do not have the -- we cannot say when the production stops.

However, in any case, we will try to minimize the impact. And in each region, we may change the order of the production so that we can continue the operation of the production line, but nothing has been decided yet, so it is very difficult for us to explain today. And as for the light truck situation in the US, as you know already, in the United States, the ratio of light truck at December is 74%. Each OEM have been launching the new models and the incentive is at the highest level, so that is why the light truck is increasing.

In case of Honda, the light truck ratio is 60%, thanks to everyone's effort. And last year, the total market was down. However, as for Honda, both sedan and Civic and Accord were in a very favorable situation, and we have the new Passport and CR-V. And in last year, we were able to exceed the last year's figure. So currently, we don't have any plan to change the lineup drastically. However, we will see the market trend, so that we can provide a product that is enjoyed by the customer. Okay.

Unidentified Speaker

Next, gentlemen behind the table please. Wait a second. I will bring the microphone.

Unidentified Participant

Speaking about Chinese plant. Two questions, one is Wuhan plant, these modification plans. Is that perhaps the plans already in place? And what is the kind of the modification, how much modification is still left? You have two plants in Wuhan. And do you have that modification plan in two of the plants?

Seiji Kuraishi -- Chief Operating Officer, Representative Director, Vice President and General Manager, Automobile

Well, I cannot share with you the details of the modification plan of the plants, but it is about a new model-related work, plus the maintenance-related works at the plant. And it is not necessarily to be done in all of the plants. It is to be done as per different processes and we have plans which we pursue. In fact, after the holidays started, we had some works already started. However, it was suspended halfway through. And apparently, the processes of the work is kind of variably completed. But going forward, I'd like to resume the work as soon as possible so that we can accelerate the process going forward. We are, at the moment, coordinating for that.

Unidentified Participant

And I have another question about quantity. Honda, you say that you're going to resume the production on the 10th of February. But on the 10th, on the day of the start of the resumption of the operation, do you start production right away?

Seiji Kuraishi -- Chief Operating Officer, Representative Director, Vice President and General Manager, Automobile

Well, as I said earlier, in our Guangqi Honda, we need to confirm the safety of the employees as well as the parts, component supplies from the suppliers. First of all, we need to check them. Therefore, it may be difficult to get into the full scale production right away. But when we are ready with the employees and everything else, we will be able to start the production in full on the day 1. However, at the moment, it is difficult to say that.

Unidentified Speaker

Okay. Any other question? So the gentlemen at the second row.

Hara -- Nikkei -- Analyst

Hara [Phonetic] from Nikkei Newspaper. Two questions. Number one, as for Wuhan factory, you mentioned that you are starting to recover the 17th. But with it, you go back to the full production from 17th or will you be actually trying to increase gradually? You mentioned that you are closely investigating, but the inventory differ by model, as you said. So in your close investigation, what will be the shortest one? And in the long run, including the stock price, currently, the situation is very difficult. However, we heard that there is no equity story, so called. But since this fiscal year has not ended, so in FY '20, how you can actually -- you can show the growth strategy? And can you explain more in detail about your growth strategy?

Seiji Kuraishi -- Chief Operating Officer, Representative Director, Vice President and General Manager, Automobile

First of all, so the production in China, as you may know already, even if one component is missing, you cannot produce the car. So unless we confirm, we cannot say anything right now. As for the inventory, usually, we have three days inventory, that's the usual level in average. Depending on the parts, we actually get this spread a lot. But for the components, it's usually on a three days inventory.

Unidentified Speaker

So was your question about the growth strategy? How we draw the growth strategy in the long-term beyond 2020?

Seiji Kuraishi -- Chief Operating Officer, Representative Director, Vice President and General Manager, Automobile

For us, we have the 2030 vision, which we've drawn. And in order to achieve this, we are proceeding. So toward this 2030 vision, we have to achieve this vision for sure. So Hachigo, our President, has explained about our strategy such as the electrification that is we are targeting 2030 to actually electrify the vehicle of two-third of our total product. And toward all the strategies, we would like to proceed further. Thank you.

Unidentified Speaker

Other questions please. If not, excuse me, last question there.

Kubo -- Asahi Newspaper -- Analyst

Kubo [Phonetic] from Asahi Newspaper. Again, questions about China, sorry. In Guangzhou, it is awkward to say, but I thought you kind of resumed the production earlier than expected. Toyota, for instance, they said they're going to postpone the resumption of the production another week. And in China, current environment of the businesses, for instance, how do you view that? According to the suppliers, in Guangzhou, it is difficult to get laborers, people because quite a few of those laborers come from outside of the province, other than Guangzhou. And the production capacity -- operation utilization is rather lower because of that. But how do you judge the environment outside and then how did you come to make that judgment?

Seiji Kuraishi -- Chief Operating Officer, Representative Director, Vice President and General Manager, Automobile

Well, my understanding might be a little different. On the 10th of February, we are going to assume the operation, as I said earlier. As I said, safety of the employees, suppliers' situation in terms of the safety and quality, we need to confirm everything around here before we resume. And I wouldn't say that we're going to start a full-scale production on the 10th right away, but we would have to confirm along with a resumption to get started. But in the Guangqi Honda, they probably -- or they do get the parts and components from Hubei province. And we need to confirm the supply chain, first of all, before we start our production.

Unidentified Speaker

Thank you very much. Well, we still have some time. The two gentleman raising their hands, we can address your questions.

Maki Shiraki -- Reuters -- Analyst

Shiraki from Reuters. A question again about China. So by listening to your answers, as of today, you said that -- my impression is that there's not much impact. However, how do you see the impact to the sales? As of today, including Wuhan, the customers are not working around outside. So from the consumer sentiment's point of view, how do you see the impact to the sales of automobile in China? That's number one. And the second is, you mentioned about the factory, just a confirmation of what you said. Wuhan's production line, I think, NHK's person asked about the refurbishment of the production line. Is this the one that was originally planned? And it didn't plan for the refurbishment because the production is also stopped. So was this the one that was planned from before, like in the annual plan?

Seiji Kuraishi -- Chief Operating Officer, Representative Director, Vice President and General Manager, Automobile

For the factory, first. So during the Chinese New Year, we were planning to refurbish the production line, but we had to hold this, stop this. For example, on 14th, when the employees and parts are all ready, however, we still have to do this refurbishment of the production line. Please understand this. So as for the impact of the sales, at the current state, it is very difficult to answer. I was in China and I asked the Chinese people, and as for the Hubei province and other provinces, the situations are totally different. So in that environment, the sales dealers -- some dealers have opened their businesses already.

And sales in China is very strong. In January, the calendar -- though the calendar is shorter than before, we've achieved a 1.15 million units of sales, and we have a big backlog, 150,000 units, correction. If the situation prolongs, of course, that may cause impact to the consumer sentiment. However, as of today, we have to closely look at the situation. Looking from the opposite manner, because our sales was in a really favorable situation, we did not have that much inventory. So if the production delayed, that may cause the sales. But as for the motorcycles and power products, we have very high level of inventory. So even if the production stops, we -- the sales will not stop. So that is, in this sense, the impact to the Automobile business is much higher.

Unidentified Speaker

Last question, please.

Hans Greimel -- Automotive News -- Analyst

Hans from Automotive News. I'd like to ask a question in English. I have a question about the United States and the market there. There's a discussion going on in the United States now about California emissions rules. And on one side, you have the group that's supporting California emissions, and Honda is a member of that coalition. On the other side, you have, I think, General Motors and Honda, which are supporting kind of the Trump administration's rules. Why is Honda supporting the California emissions rules? Why do you see value in doing that? What's in it for your company? And why take side in this discussion?

Seiji Kuraishi -- Chief Operating Officer, Representative Director, Vice President and General Manager, Automobile

So, well, we are not necessarily go on either side of the litigating parties or those partnership of the litigations. One is the consistent long-term rules, that's what we want to have. And if there are two rules, that means we need to adapt to that with the two sets of the [indecipherable], that is not efficient at all. And together with the California -- State of California, of course, we'd like to come up with the integrated, consistent single rule that is good for the environment as well, and that is the proposition that we make. And then to that proposition, the government is in a way, litigating. And we're not necessarily -- we don't necessarily like to go either side of that. Nevertheless, what we want to see is a single rule, not one side or the other. Thank you.

Operator

[Operator Closing Remarks]

Duration: 37 minutes

Call participants:

Kohei Takeuchi -- Senior Managing Director and Chief Financial Officer

Seiji Kuraishi -- Chief Operating Officer, Representative Director, Vice President and General Manager, Automobile

Unidentified Speaker

Unidentified Participant

Okada -- Nikkei -- Analyst

Sean McLain -- Wall Street Journal -- Analyst

Hara -- Nikkei -- Analyst

Kubo -- Asahi Newspaper -- Analyst

Maki Shiraki -- Reuters -- Analyst

Hans Greimel -- Automotive News -- Analyst

More HMC analysis

All earnings call transcripts

AlphaStreet Logo