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Honda Motor (NYSE:HMC)
Q4 2021 Earnings Call
May 14, 2021, 4:10 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Noriko Okamoto

Thank you very much for sparing your time to join us here today at the announcement of Honda Motor Company's FY '21 financial results. And I'd like to convene the meetings. I'll be serving as the emcee. 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. First, Executive Vice President Kuraishi will give you the outline of FY '21 financial results and FY '22 financial forecasts.

Please.

Seiji Kuraishi -- Executive Vice President and Chief Operating Officer

Let me explain FY 2021 financial results. First, regarding growth for 2021, unit sales of Honda Group. For motorcycle businesses, 15.132 million units, automobile businesses are 4.546 million units, and life creation businesses was 5.623 million units. I'll explain our main market situations next.

Total market in Japan dropped from last year due to COVID-19 pandemic impact. N-BOX and others marked a 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 six years in a row. In March, we launched new Legend in Japan equipped with Honda SENSING Elite, which is the world's first automated driving technology Level 3.

Total market in FY 2022 still remains uncertain going forward due to the concern of resurging COVID-19. However, Honda expects the results will exit the year before thanks to the effective launch of a new model, Vezel. 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 the businesses mainly with the CR-V and Pilot finally being close to the market results. During the fourth quarter, many of light truck models have upgraded those sales records of the month of March, outperforming the market growth. Total market in FY 2022 is expected to be better year on year thanks to increasing vaccinations for COVID-19 and efficient economic policies.

Honda will enjoy the effective launch of our new model, Civic, as well as the sales expansions mainly with our light trucks so that our results will exceed the level last year. The total market in China exceeded the level of our last year with effective stimulative measures for consumptions by the government. Honda enjoyed a strong sales of Breeze, CR-V, Vezel, and so on. And thanks to the extended EV lineups across leading models, we have a monthly record highest-sales units so far.

Regarding the total market calendar of our -- market of the calendar year 2021, we're expecting the growth from the year before along with the economic recovery, Honda will launch new models and will further improve EV lineups, aiming for this highest-sales results than the preceding year. In April, in Shanghai Motor Show, Honda made a world premiere showing of SUV e:prototype or the first Honda-brand EV in China. Moving onto the motorcycle business. The markets have recovered in China, U.S., and so on.

Its largest market of Asia is showing much greater recovery. However, it resulted to below the level last year. Honda's results declined year on year. In India since third quarter, the sales recovered to the levels same period last year.

In Indonesia, the sales of the fourth quarter have recovered to 83% of the same time last year. China and Pakistan exceeded their level last year. Total market of FY 2022 is expected to grow from the year before despite the concern of the COVID-19 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 decline in great demands due to COVID-19 impact, we have revisited our business activities to control SG&As and to reduce costs. And with the positive effect of our credit loss provisions in this term for the financial businesses, the operating profit was 660.2 billion yen, outperforming the year before. Profit attributable to the owners of the parent was 657.4 billion yen, also favored by the increased investment of profit based on equity method.

This slide also presents unit sales and P&L. And next, with regard to the -- our 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 over 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 efficiencies of our product manufacturing, and to fortify the existing businesses, expecting to achieve 660 billion yen 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. And for the expected business performance, we plan to defend 660 billion yen operating profit by catching up with the production together with our corporate efforts, and etc.

Speaking of dividends, annual dividends for 2021 is 110 yen per share with 28 yen more added to the previous expectation we announced, and the dividends for the fourth quarter is 54 yen per share. Expected annual dividend for FY 2022 will be 110 yen per share, same as for FY 2021. Our dividend policy is to keep the consolidated payout ratio aiming 30% despite our changing business environment going forward. We decided to revise them as shown here making efforts to provide stable and continuing profit returns to shareholders.

Now, I'd like to hand it over to Mr. Takeuchi.

Kohei Takeuchi -- Senior Managing Director, Head-Finance and Administration

We will be giving you the details of the financial results and financial forecasts. Allow me to begin my presentation. First, the fourth-quarter results. Honda Group unit sales.

Motorcycles, despite the 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 creations 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 3,623,800 yen, up 4.8% from the same period last year. Operating profit, due to drop in SG&A and increase in profit attributable to increase in revenue model mix, operating profit was 213.2 billion yen. Share profit of investments accounted for using the equity method was 68.1 billion yen due to profit increase derived from income in -- and the -- from increase in sales revenue model mix in China. And moving on to change in profit before income taxes.

FY '21 fourth-quarter profit before income tax was 255.3 billion yen, up 251.5 billion yen from the same quarter last year. Operating profit, due to lower SG&A expenses, profit increase coming from difference in the provision for credit losses, and change in revenue model mix, among others. Operating profit was 213.2 billion yen, up 218.8 billion 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 72.2 billion yen. Next, automobile sales-related operating profit, including automobile and financial services business, was 140.4 billion yen combined. Automobile business operating profit due to profit in SG&A and -- as well as profit increase from unit sales, model mix change reached 37.6 billion yen.

Financial services business operating profit mainly due to difference in the provision for credit losses was 106.3 billion yen. And next, life creation and other businesses recorded operating loss of 3 billion yen, which aircraft and aircraft engine operating loss was 7.8 billion yen. And next FY '21 12 months financial results are as shown. And please look at Page 16, change in profit before income taxes.

The profit before income taxes was 914 billion yen, up 124.1 billion yen year on year. Operating profit, though there was decline in profit due to drop in revenue model mix, thanks to a cut in SG&A difference in the provision for credit losses, cost reduction effect among others, operating profit reached 660.2 billion yen, up 26.5 billion yen year on year. And next, cash flows of nonfinancial services businesses. Free cash flow was 303.8 billion yen.

Cash and cash equivalents at the end of period was 2,528.3 billion yen. Also, net cash was 2,048.3 billion yen. Next, FY '22 consolidated forecast. The beginning of Honda Group unit sales.

Motorcycles due to increase in Asia, our major market, we are forecasting 18 million units, up 2.86 million 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 million units, up 450,000. Life creation business, we are forecasting 5.9 million units, 270,000 units mainly coming from North America. FY '22 consolidated financial forecasts are shown on this slide. FY '22 forecast change in profit before income tax.

Despite a decrease factors such as increase in SG&A, including a difference in the provision for credit losses and lesser cost reduction effect due to increase in profit coming from revenue model exchange, we are forecasting the operating profit to be the same as FY '21, 660 billion yen. Cost reduction effect is minus 51 billion yen. But this is mainly due to sharp rise in raw material cost. Meanwhile, we are planning for cost reduction of more than 200 billion yen and price increase.

Lastly, FY '22 capital expenditures, depreciation, and R&D forecast are as shown on this slide. And this concludes my presentation. Thank you for your attention.

Noriko Okamoto

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 spoken to those in media. We going to accept questions through Zoom functions.

And due to the interest of time, please limit your lump of the questions to two. Two questions per person, please. Thank you very much for your cooperation. So please raise your hand should you have any questions.

Thank you. Question one from Mr. Abe from Nikkei Shimbun newspaper.

Unknown speaker

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 to -- in March 2021. In order to improve the operating profit margin of the automobile business.

What do you see a major action for that? And the other question is the purpose -- the target of electrification by 2040 zero-emissions vehicles will become 100%. And EV SUV, those zero-emission vehicles. And when you switch over to those types of the vehicles, how much investment would you do need? In case of a Tesla, they say in order to start up the one EV factory, they take about 100 million yen or so. What is your prospect for the investment in your case at Honda?

Seiji Kuraishi -- Executive Vice President and Chief Operating Officer

Thank you for your question. So let's talk about the operating profit margin for the automobile businesses. For long, we have been trying to solidify the existing businesses. We have actions over that.

And last year, of course, all Honda, we have been pushing forward reviewing off-the-air businesses. And because of that, we are improving our business structures today. And therefore automobile businesses, we have communicated that before, due to the development -- organization changes at a number of the models and a 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 close down the factories in the UK, and the Turkey, and Sayama factories will move to [Inaudible].

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 Mibe, the other day, talked about 5 trillion yen R&D investments in the next five years. And in the area of the R&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 a 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, the 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 development.

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, the CATL in China. Those are the areas that we are investing with already. And for other kind of technologies, we were looking to the technology trends and particularities 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 electrification processes, however 6 trillion or 10 trillion yen in five years.

Those will be the basic idea as we shared before. Thank you very much.

Noriko Okamoto

Thank you very much. Our next question from Yomiuri Shimbun, Katagini Sung, please.

Unknown speaker

Can you hear me?

Noriko Okamoto

Yes, we can hear you. Please.

Unknown speaker

Thank you very much. Katagini from Yomiuri Shimbun newspaper. Thank you for this opportunity. I have several questions.

First, so you say that there is increasing profit, and you attribute this to the cost reduction of sales among others, SG&A and others. Can you be more specific as to where the profit is coming? And also, you are expecting a further cost reduction for the next fiscal year. Can you be more specific about next fiscal year where you say that you're expecting 200 billion or more cost reduction? And also about R&D expenditure. And then compared to recently, it's 140.

So, it's higher than the past, 840 billion. And also for safety purposes, electrification and safety. Can you be more specific as to what you'll be doing, please?

Seiji Kuraishi -- Executive Vice President and Chief Operating Officer

Mr. Takeuchi will answer these questions. Thank you. 

Kohei Takeuchi -- Senior Managing Director, Head-Finance and Administration

About the SG&A and what -- cost reduction we have achieved and we'll be achieving. Well, as last fiscal year, the SG&A was in area where we have the financial business, and, well, compared to the previous year and when the U.S. unemployments rate, compared to that, the provision wa -- back then was increased, therefore the credit losses. But last fiscal year -- and thanks to the U.S.

government's 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-19. And with -- given the pandemic in the different countries, our workers, associates worked hard to reduce the cost.

And thanks to that. And last, we saw the SG&A reduced year on year for FY '21. 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&A reduction of 200 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, we want to focus on to make -- making our manufacturing efficient. And together with our suppliers, we work hard where we can reduce the cost. And I think that these efforts, as well as the price increase, have produced this result. About R&D, we are expecting JPY 840 billion.

And as for R&D expenditure, well, it was 780 billion the year before, and therefore, 840 billion as high. And before that, it was 820 billion. 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 toward electrification. I cannot give the breakdown of how much it will be spent on what, but it is res -- as a result of this shift. And also connect, we are investing or spending another 40 billion for R&D.

But as Kuraishi said, it's not going to be purely used for R&D for Honda alone. But we also want to rely on alliances. And that is the reason why we are planning for 840 billion R&D expenditure for FY '22. Thank you. 

Noriko Okamoto

Thank you. Our next question, please. From Asahi Shimbun newspaper, Mr. Kamiyama, please.

Kamiyama from Asahi newspaper, can you hear me? Yes? I have two questions. For the FY '21, 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 maybe because of rebounding around from last year and for China. Well, how much growth or percentage growth are you expecting in China? And question two. So March 2022 sales is expecting to grow, but the appropriate 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 an effect included in those results?

Seiji Kuraishi -- Executive Vice President and Chief Operating Officer

So I can talk about unit sales and you can talk about the profits. 

Kohei Takeuchi -- Senior Managing Director, Head-Finance and Administration

So JPY 15 trillion expectations for next year and JPY660 billion operating profit expectations next year. So let me explain about it. As I said earlier, cost reduction every year, negative JPY51 billion. That is a difference as we said earlier.

More than JPY300 billion can't 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 effects by the raw material price increases as much as the gap between the two. And in terms of the semiconductor effect, as of now in the first quarter, as of now, today, we are changing our number of days in our operations and we are trying to reduce the type -- the mo -- type of the models we are producing. This way we can try to contain its effect in terms of needed sales.

And of course, as much as we -- we are trying as much as we can do, but we can also cover that by diverse as well, but also JPY660 billion, 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 an effect. And unemployment rates involved in this factor and also the subsidies by the government's going to be provided until the autumn and sometime like that.

And for those once -- JPY110 billion is going to be included for the negative effect. And then it is not just the raw material prices, but JPY660 billion is a result could be based on the combination of all those efforts.

Seiji Kuraishi

And in terms of the net sales, the COVID-19 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 providing through the economy measures closing higher demands and we have 101 -- 111% of the market growth today year on year in the end of the -- in 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-19 actually was just studied 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, China's government says that the total market will be 2.1 million cars. And this -- they 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-19 in the global business situations. Thank you. 

Noriko Okamoto

Thank you very much. The next question. NHK, Taboi-san, please. Thank you.

Can you hear me? 

Unknown speaker

Yes, please. NHK, Taboi. About the unit sales once again. At [Inaudible] you say -- well, I'm sorry, it's 5 million.

And because of the soaring raw material cost and semiconductor shortage, what ex -- 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?

Seiji Kuraishi -- Executive Vice President and Chief Operating Officer

So basically, we'll avoid the automobiles are 5 million units. We have factored in the impact of the rise in raw material cost and semiconductor shortage. Let me explain about semiconductors more in detail. From the end of last year, due to COVID-19, we have been suspending our production, had problems with logistics, and the industry on the whole, had a shortage of components procurement, especially for semiconductors because there was a growing demand for games and there was a shortage in supply of semiconductors.

We -- for a stable supply, we, including overseas with multiple sources, have tried to secure our sources semiconductors so as to have appropriate inventory. And for each of the companies, 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 -- and Texas was hit by a storm. And then the semiconductor -- when semiconductor was hit by a fire outbreak and unfortunately in the first half of this fiscal year we were still continue to see an impact of semiconductor shortage. But we will try to minimize the impact. We're continuing to make effort to assist them.

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 with -- through our corporate effort, as explained, we will be able to defend the budget that we explained.

And it is based on that premise so that we have put together this budget for FY '22. Thank you.

Noriko Okamoto

Thank you. Next question, Toyo Keizai. Mr. Yokoyama, please.

Unknown speaker

Yokoyama from Toyo Keizai. Hello. Question one, 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 stocks are really tight? 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 North America and China and including Japan, you probably have a plan or idea about different markets in different regions including Japan, for instance? Please tell me your ideas about it in terms of the inventory situations in North America.

Seiji Kuraishi -- Executive Vice President and Chief Operating Officer

In the first place, since last year, due to the COVID-19, every company we needed to do the adjustment of the production days and because of that, of course, we have the effect by that all of the inventory level today. And of course, every company has different origins from that and a semiconductor insufficiency, of course, caused that as well. And we had some stocks of our 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 in our stock situation may continue too.

And 33 days, that is the average stock days. That is the average in North America. Ours is about 50 days. And semiconductors' situation is now being adjusted in the market and then we will look at the inventory levels and does 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 5 million yen target, finally. And in terms of the battery, we are sourcing GM in North America and CTL in China, those other partners to try to get the batteries and, of course, batteries are one of those components and we need to work all night to see all those meetings that we might have different sourcing in different regions that we have not defined who as a yet. But of course, we do have such ideas, as you said.

Unknown speaker

Thank you very much. 

Noriko Okamoto

Next question from Reuters. Mr. Shiraki? Mr. Shiraki, excuse me.  

Maki Shiraki -- Reuters -- Analyst

How do you do? This is Shiraki from Reuters. Can you hear me? About India production, let me confirm the situation including the outlook. Currently, the four motorcycle factories are closed down until tomorrow and also the automobile factories have also been suspended. And with the spread of the pandemic, how are you going to try to secure the production of motorcycles automobiles -- automobile production in India? And how do you see the impact on the unit that can be produced? Well, it's very difficult to predict, but what is your premise on doing the production in India?

Seiji Kuraishi -- Executive Vice President and Chief Operating Officer

Well, about the situation in India. Well, motorcycle plants -- due to the second wave of COVID-19 and also the lockdown that was introduced domestically, our dealers are also -- about 80% of our dealers in India closed down. And from May 1st, four factories have been closed and will suspend production until May 18th. That is our current situation.

Well, to be candid with you, we really don't know what will happen and we cannot predict. But we have to observe what happens to the pandemic. Do 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 did not know for sure as it 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 partially to the government's pump-priming measures. But from the end of March and 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. 

Maki Shiraki -- Reuters -- Analyst

Thank you. 

Noriko Okamoto

So next question, please. Wall Street Journal, Mr. Sean McLain, please. 

Sean McLain -- The Wall Street Journal -- Analyst

Nice to meet you. Sean McLain from Wall Street Journal. I'm going to ask in English if that's OK.

Unknown speaker

[Foreign language] 

Noriko Okamoto

Yes, please.

Sean McLain -- The Wall Street Journal -- Analyst

Two questions. One, 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 do you think will be lost in this current fiscal year as a result of the shortage? And secondly, if you can give us a high level 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?

Unknown speaker

[Foreign language]

Seiji Kuraishi -- Executive Vice President and Chief Operating Officer

So in terms of how the semiconductor effect, we had 100,000 units affected last year. And in the current year, as I said before, the effect 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 effects on the production will be a trade-off or set off at the end of the year. And with GM, actually, two companies taking actions for the PFC and other areas of automated-driving support.

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 collaboration going forward. And in specific, I can not give you an idea as yet. And going forward, when we are ready to share with you more specifics, we will, of course, do that.

Noriko Okamoto

Thank you very much. Any other questions? Thank you. If not -- with this, we would like to conclude today's presentation on our financial results. As for the materials, they will be posted on our webpage.

So please access our webpage. Once again, we thank you for your attendance.

Duration: 44 minutes

Call participants:

Noriko Okamoto

Seiji Kuraishi -- Executive Vice President and Chief Operating Officer

Kohei Takeuchi -- Senior Managing Director, Head-Finance and Administration

Unknown speaker

Maki Shiraki -- Reuters -- Analyst

Sean McLain -- The Wall Street Journal -- Analyst

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