Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Honda Motor (NYSE:HMC)
Q3 2021 Earnings Call
Feb 09, 2021, 1:15 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Matt Watanabe

Thank you very much for joining us here at Honda Motors announcement of financial results for FY 2021 fiscal third quarter ended December 31, 2020. I am Watanabe from corporate communications. I'll be serving as the emcee. First of all, allow me to introduce the members represented: executive vice president, Mr.

Seiji Kuraishi.

Seiji Kuraishi -- Executive Vice President

How do you do? I'm Kuraishi.

Matt Watanabe

Senior managing director and CFO, Kohei Takeuchi.

Kohei Takeuchi -- Senior Managing Director and Chief Financial Officer

How do you do? I'm Takeuchi.

Matt Watanabe

As a precautionary measure against COVID-19, this announcement is being made live stream without any audience in this room. We see clear understanding. First, executive vice president, Kuraishi, will be announcing our financial results.

Seiji Kuraishi -- Executive Vice President

So let me explain our third-quarter FY 2021 financial results and full-year forecast of FY 2021. Regarding the cumulative rated sales of Honda Group up to the third quarter, motorcycle businesses had 10.591 million units sold and automobile had 3.425 million units and life creation businesses had 3.855 million units sold. With regard to the business situations in the main markets, unit sales that -- of total Japan market for the nine months cumulative dropped below the same time last year due to the impact of the COVID-19. However, since October, the market improved from the year before when the sales had dropped post consumption tax hike.

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 N-ONE. In FY 2021, N-BOX series have made the top unit sales in four 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-19 and so on. Honda expects its results to be below the year before because of the market deceleration impact and the short supply of semiconductors.

Regarding the total market in the U.S., due to the statewide resumption of the economic activities since May, the market is on recovery trend slowly. However, the nine months cumulative results stayed below the same time last year. Honda also is on recovery, mainly with CR-V, Civic and Pilot. Nine 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-19 still continuing, expectations of the total market is not clear. Honda will try to expand our sales, mainly with the light trucks, such as the launch of a new MDX 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 boost consumptions, the unit sales in total markets 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 growth better than that of the total market. For six months running, we have achieved the record highest month sales. In addition, we added EV lineups to the main automotive families. In November, we launched M-NV, 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 the 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 demand for the outdoor use, the market has almost restored. This year, the largest market is showing gradual recovery. However, the cumulative results in nine months still resulted below last year. Honda also stays below the 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 market in FY 2021 is still under clear due to the impact of the COVID-19 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 for last time.

Next, let me explain the summary of the cumulative results inthree quarters of the year. Despite increasing impact of the COVID-19 which cut down the demand, we continuously and radically reviewed our business activities across the whole group. That resulted in the restrained SG&As and the reduced cost. The operating profit was 447 billion yen, finally.

The profit up to the third quarter marked 444.1 billion yen, which was also contributed by the incremental shares of our investment profits in equity metrics. Unit sales and the PLs are also shown in this slide. Next, FY 2021 forecast, stating of the unit sales 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 profit, despite the COVID-19 infections rising up again or impact of the semiconductors in short supply, we are up revising the forecast from last time with additional 100 billion yen to 520 billion yen. In terms of the current profit, due to the incremental shares of investment profit based on equity methods, we are adding 75 billion yen to the last forecast, up revising the figure to 465 billion yen which is higher than the year before. You can find -- you can also find unit sales and the P&L on the slide.

Dividends next. Regarding the expected dividends for FY 2021, though the business environment is unclear, we can improve the revenues by revisiting our business activities. We expect to provide 82 per share, 14 yen more to the previous announcement. For the third quarter, 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.

Kohei Takeuchi -- Senior Managing Director and Chief Financial Officer

Allow me to give the explanation. First, the third-quarter financial results, thethree months results. Honda Group unit sales. 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 3,771.5 billion yen. Operating profit, despite increase in SG&A and currency translation effects, due to the efficiency improvement in R&D and cost reduction effects, among others, operating profit was 277.7 billion yen. Due to reversal of impairment loss, profit increase in China, among others, share of profit of investments accounted for using the equity method was 102.2 billion yen. Next, I will explain change in profit before tax -- income taxes.

Third-quarter profit before income taxes was 386.4 billion yen, up 179.6 billion yen from the same period last year. Operating profit was 277.7 billion yen, up 111 billion yen from the same period last year. Operating profit excluding currency effects was 136.5 billion yen due to improved efficiency in R&D expenditure and cost reduction effects. Regarding R&D expenditure, due to development, efficiency improvement and the fact that last fiscal year saw a significant increase in electrification costs, so it is lower, but R&D activities will be carried out as scheduled.

Next is by business segment information. Motorcycle business segment operating profit was 72.7 billion yen despite cost reduction effects and lower SG&A. These were partially offset by decreased profit attributable to decreased sales revenue and model mix. Regarding automobile business segment and Financial Services business related to automobile sales, the combined operating profit is estimated to be 205.4 billion yen.

automobile operating profit -- though SG&A increased due to profit increase attributable to sales revenue and model mix as well as cost reduction effects, automobile operating profit was 123.1 billion yen. Financial services operating profit was 85.7 billion yen due to accounting difference in the provision for credit loss, etc. Regarding life creation and other businesses, there was operating loss of 3.8 billion yen. Operating loss of aircraft and aircraft engines included in life creation and other businesses was 9.1 billion yen.

And next fiscal year '21, nine months financial results are shown. Regarding changes in profit before income taxes, profit before tax was 658.7 billion yen, down 127.4 billion yen from the same period last year. Operating profit despite reduction in SG&A and cost reduction effects, decline in sales revenue and product mix, among others, resulted in operating profit of 447 billion yen, down 192.2 billion yen from the same period last year. Let me proceed to explain the nine-month cash flows of nonfinancial service businesses.

Free cash flow was 104 billion yen. Cash and cash equivalents at the end of third quarter was 2,521.2 billion yen. Net cash was 1,884.8 billion yen. And next is the FY '21 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 billion units, up 200,000 units from the previous forecast. Automobiles due to impact of semiconductor supply shortage, among others, unit sales forecast is 4.5 billion yen units, down 100,000 units. life creation business remains unchanged at 5.5 million units. Next, FY '21 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&A and cost reduction effects. We're planning operating profit of 520 billion yen. Operating profit has been revised upward by 100 billion yen compared to the full-year forecast last despite declining in sales revenue and model mix due to cost reduction effects and cost in mainly SG&A.

Sales revenue and base mix include the profit decline attributable to semiconductor supply shortage. Lastly, these are the FY '21 forecast, capital expenditures, depreciation and R&D. This concludes my presentation. I thank you for your attention.

Matt Watanabe

Thank you very much. That was the results and presentation for the FY 2021 and third quarter of this year. I now would like to entertain the questions from the media. And in advance, we have already shared the way we proceed with this conference.

We're going to use Zoom system, and we are going to resume the Q&A session at 3:45. Please wait for the moment. Thank you.

Now, we'd like to start to Q&A session. In advance, we have already introduced the media, journalist, we are going to accept questions through the Zoom systems. [Operator instructions] Please start. Raise your hand if you have questions, please.

Question from Mr. Shimosato from Yomiuri Newspaper, please.

Unknown speaker

Shimosato from Yomiuri. Can you hear me?

Matt Watanabe

Yes, I can hear you.

Unknown speaker

Question one, you revised the forecast. And could you share with us the plus factors and minus factors for the revision factors? And then that you have reduced from 100,000 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 100,000, 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.

Kohei Takeuchi -- Senior Managing Director and Chief Financial Officer

Thank you. So question one, with regards to the revision of the forecast, the plus or minus factors and then the 100,000 units down due to the semiconductor shortage and how long would that continue? Will the impact continue? So the revision of the forecast, we have the impact due to COVID-19 and also semiconductor supply shortage. We do have the impact. However, we have reduced cost, and we also revisited our business activities across the company.

SG&A, R&D cost expenses have been restricted, and then we're now are able to add 100 billion yen to make 150 billion yen finally -- for the profit finally. Without the semiconductor shortage, without the exchange rate fluctuations, we will be able to absorb the impact by the coronavirus, COVID-19, 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 -- the production have to be adjusted with a less of 100,000. 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 the impact on our business. Then semiconductor companies, suppliers trying to add the production to alleviate situation. The 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 -- next fiscal year.

Matt Watanabe

The next question from Nikki Shimbum. Mr. from Nikki.

Unknown speaker

Mr. Asayama from Nikki. Asayama from Nikki, can you hear me?

Yes, please.

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 the -- well, 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? And this year, it is 104 billion yen.

First of all, question in regards to the impact of the semiconductor in terms of revenue as well as the operating profit is is factored in. And next is about the free cash flow. The positioning of the free cash flow and how it is assessed?

Seiji Kuraishi -- Executive Vice President

Yes. In regards to your first question, yes, it is factored in. So about cash flow, please?

Kohei Takeuchi -- Senior Managing Director and Chief Financial Officer

This is Takeuchi. I'd like to talk about the cash flow. Well, until last fiscal year, we were seeing that the free cash flow had a positive impact. But this fiscal year, in the first quarter, due to COVID-19, 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 fourth 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-19, and therefore, it is lower than the last year.

Matt Watanabe

Next question, please, from Asahi Newspaper, Mr. Inagaki please.

Unknown speaker

Inagaki from Asahi, can you hear me?

Matt Watanabe

Yes, please.

Unknown speaker

So semiconductor business again, 100,000 units from January to March reduction of that much in the 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? On Page 13, you have the reversal of the impairment of 56 billion yen reversal.

What does it mean? Could you elaborate on that, please, loss reversals. So 100,000 due to semiconductor short supplies, and that is -- the question is if that is an impact on the first quarter and January to March? And the next question is, if the impact is greater in your company rather than others and also the reversion of losses -- reversal of the impairment losses, what is the impact of that? That's the question.

Seiji Kuraishi -- Executive Vice President

So the semiconductor businesses, that is the reduction applied in the fourth quarter, January to March. And in terms of the units, production number, production volume is hit harder. And the semiconductor affected related to the Fit and in Japan and the Civic for the U.S. market.

And those are the well-selling popular models so well for Honda. Those were hit hard by the semiconductor. Therefore, we needed to swap around or adjust or coordinate the production plants 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 supplies, this is how we -- 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 now.

So we keep addressing the situation, so that we can minimize this impact on our businesses.

Kohei Takeuchi -- Senior Managing Director and Chief Financial Officer

And back to the reversal of impairment losses. In equity methods, we have . We havethree companies in the line, then we have Hitachi and . We have a major companies .

And then we have pure appraisal of the assets. And then we had their participation based on the equity method in the past. And then of course every company has a 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 TOB completed, and then we have -- we can now reverse the impaired amount in the past, and that was 106.8 billion yen much reversed back.

Matt Watanabe

Next question from Nikkan Jidosha. Mr. Jidorisan, please?

Unknown speaker

My name is Mr. Dori, Nikkan 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? This might be for the midterm, not just in the near term, but I think that what are the causes for this problem, is over dependence on mega suppliers? So can you explain about this as well?

Seiji Kuraishi -- Executive Vice President

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 will 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 plan to reduce production. Well excluding 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 stable procurement including overseas, we are sourcing procuring for multiple sources and trying to ensure as sufficient inventory. So we're trying to do risk distribution and yet we are faced with the shortage. So in regards to the 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 and suppliers too much. Well, in regards to procurement, we are doing based on QCD. And so it's not intentionally that we are relying on overseas suppliers.

Matt Watanabe

Next question, Automotive News, Mr. Hans Grimel. Please ask your question.

Unknown speaker

May I ask in English, please? Thank you for taking my questions. I have two questions. One is about the earthquake anniversary. It's the tenth 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.

Seiji Kuraishi -- Executive Vice President

As I said, with regard to the supply chain, in the earthquakes in Tohoku, and we of course have experiences flat in Mexico. Various disasters we have experienced. And then 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 consume some inventory levels for that purpose.

However, now, we have hit very hard by 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 two, and there are things we cannot control in this system. And for the semiconductor businesses, we probably will have to address such as keeping 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 and maybe driving.

We have a broad range of the collaborations. And last year, 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 to more powerful and solid. And to do that, we are having a very aggressive discussion, so that we can strike up the win relationship with the GM finally. And practically speaking, we do not have deadline for the discussions at the moment. We simply have a broad range of the discussions, and I cannot really tell you when we do report the results back to you.

However, whenever that is ready, we will of course share with you the results with the -- of our collaboration. Thank you very much.

Matt Watanabe

Thank you. The next question, NHK, it's Mr. Taboi.

Unknown speaker

Taboi from NHK. Thank you. A very detailed question, but on Page 13. About the increase in the investment profit.

And also you talked about the increase in profit in China. Can you explain about what are talking about when you say profit increase in China on Page 13? On Page 13, it talks about the current profit. And here, we talk about the increase in profit in China. So can you elaborate on this?

Kohei Takeuchi -- Senior Managing Director and Chief Financial Officer

Well, in China, we have two production companies in China and these joint venture companies. The profit, this is based on the equity method. I talked about thethree companies in Japan. But what I'm talking about is the two 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.

Matt Watanabe

From GG Press, Mr. Hirano, please.

Unknown speaker

GG Press, Hirano. Thank you very much. You talked about profit forecast that is higher. You provided -- you said that cost reduction effect and the SG&A reduction are both reflecting on that.

And could you specify what sort of efforts in place for that? And to end, the reasons for the provision this time, the reduced SG&A and cost, what are the contents of those efforts?

Kohei Takeuchi -- Senior Managing Director and Chief Financial Officer

So 100 billion yen profit added, that's the provision. And of course, had a -- said that negatively impacted by the semiconductor short supply included. And in the third quarter, because of the COVID-19 of course there was some restraints on the activities of businesses. Then in different regions, we've worked on the SG&A, and we had did all cost reductions and R&D being revisited to.

And then together with the performance in the third quarter and of course we need to continue those activities onto the fourth quarter too. And that means that 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's 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 models. Now this made online instead of the real and the cumulative efforts like that is now realized.

Of course, we would like continue this sort of our effort 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 we're going to do those new launches then, will have to be thought out. So we'll try to maintain those efforts going forward.

So the effect is going to be enjoyed going forward. Next question.

Matt Watanabe

Wallstreet Journal, Mr. Sinayoka.

Unknown speaker

Sinayoka from Wallstreet Journal. Can you hear me?

Matt Watanabe

Yes. We can you hear you, please.

Unknown speaker

Thank you. Well, Honda in China or 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, there is some report that you are talking to Apple car production. So have you been approached?

Seiji Kuraishi -- Executive Vice President

Your first question was about our EV strategy. We've already launched the battery EVs in China, Europe, 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? Climate and sustainable development, sustainable society is a requirement. And therefore, we cannot afford to lose any time when in comes to EVs.

Well, Honda, we mainly focus on HEV, and so we have been trying to introduce such EVs in 2030 globally. We want to electrify two-thirds of the models that we'll be selling. But meanwhile, to accelerate electrification into the different regions, we have to deliver Honda like products which carry identity. And therefore, in North America, we collaborate with GM.

In China, we are -- have an alliance with CATL. And also including our own EVs, where appropriate, we will choose the best approach there we believe is needed. And so last year,radio said that Honda will enter climate neutral in 2050. And we need to accelerate these efforts to achieve this goal.

And including our organization, we want to strengthen our R&D in energy-related topics, and we are concentrating our efforts and resources on. 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.

Unknown speaker

That is all. Thank you.

Matt Watanabe

Due to the interest of time, next question is going to be the last one. From [Inaudible] Mr. Yokoyama, please.

Unknown speaker

Yokoyama from [Inaudible] Thank you. Two questions. As for the semiconductor supply shortage, including the supply chain perspective, what is the reasons for that program? And you said that that 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 2030 -- in 2050, that is something.

And then at the moment, you have N-BOX, but you have not much EVs available at the moment. How do you approach for that?

Seiji Kuraishi -- Executive Vice President

So the -- 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 both. And then the -- in the Japanese market, the government is now saying the electric vehicles, 100% achieved by 2035. And the idea of the mini cash and EV. So semiconductor, as I said earlier, we do not buy semiconductors directly from the manufacturers of the semiconductor.

However, supplier told us that -- well, because of the COVID-19, the demand would come down, and that was the perspective. Therefore, they reduced the production of the semiconductor at that time. And then, in fact, people played games or used computers more because of the COVID-19. Therefore, there was increasing demand for the semiconductors, not for the car but for others.

And that was why they had a higher demand. 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 toward the next fiscal year. And also the electrification of the Kei 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, Kei cars, one of those cars, we should work on. And I'm not able to give you which model or which car is going to be the refined. Of course, Kei cars will be of EV system going forward some time.

Unknown speaker

Thank you.

Matt Watanabe

Thank you very much. We apologize, but we have ran out of time. And therefore, for those questions we were unable to answer, the corporate communications will 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.

Duration: 62 minutes

Call participants:

Matt Watanabe

Seiji Kuraishi -- Executive Vice President

Kohei Takeuchi -- Senior Managing Director and Chief Financial Officer

Unknown speaker

More HMC analysis

All earnings call transcripts

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.