Honda Motor (HMC) Q1 2022 Earnings Call Transcript

Honda Motor (HMC 0.09%)
Q1 2022 Earnings Call
Aug 04, 2021, 4:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Noriko Okamoto

Thank you for spending your time to join us here at the Honda Motor Company FY 2022 first-quarter financial results press conference. We'd now like to officially begin the conference. My name is Okamoto from corporate communications. I will be serving as a moderator.

Allow me to introduce to you the executives represented. Director, Executive Vice President Seiji Kuraishi.

Seiji Kuraishi -- Director, Executive Vice President

How do you do? I am Kuraishi.

Noriko Okamoto

Director, senior managing director, Kohei Takeuchi.

Kohei Takeuchi -- Senior Managing Director

I'm Takeuchi. How do you do?

Noriko Okamoto

I'd like to call Mr. Kuraishi to present the first-quarter financial results, please.

Seiji Kuraishi -- Director, Executive Vice President

So let me explain the first-quarter results of FY 2022 as well as the summary of the full year outlook. First regarding the unit sales of Honda Group in the first quarter of FY 2022, the volume sales outperformed year on year in all business segments due to the recovery of the demands from the last year, which had a large impact by COVID-19 pandemic. As a result, our motorcycle businesses, 3.879 million units sold; automobile businesses, 998,000 units; and Life Creation business 1.708 million units were sold. I'll explain about the main market situations next.

The total market in Japan has outperformed the same period last year because the demand recovered from the last year decline due to the COVID-19 pandemic. Honda, too, had impacted by semiconductor supply shortage and so on. However, we outperformed last year unit sales with the effective launch of the new Vezel launched in April. M-Series had reached three million cumulative unit sales in Japan since its launch.

The total market in FY 2022 still remains uncertain going forward due to concerns of resurging COVID-19. Honda revised the forecast from last time. Taking advantage of the new Vezel and new model Civic, that will be launched in this autumn. We will aim to maximize the unit sales.

Total market in the U.S. has surpassed the level same period last year, thanks to increasing vaccine for COVID-19 and effective economic stimulus measures, which really have recovered demand. Light truck models propelled all business in Honda, which have updated the monthly sales record in three months consecutively, exceeding the market growth. New model Civic launched in June, is receiving favorable acceptance by customers.

We expect the total market by FY 2022 to achieve solid demand. However, impact of semiconductor supply shortage and so on still will remain. Honda has revised the last forecast, though we will endeavor to minimize the impact of supply shortage of the chips and to catch up with the production. The total market in China has seen the demand recovery owing to the effective measures for economic stimulation by the government.

However, the market underperformed year on year due to the impact of the semiconductor supply shortage and so on. In spite of such supply shortage of chips, Honda achieved better than the market growth with the incremental sales of our XR-V and so on. Regarding the total market of calendar 2022, we expect the demand to stay steady with the residual impact of semiconductor shortages. Honda has revised the last forecast.

We will plan to expand our unit sales by new model launch and EV lineup improvements with our Breeze PHEV premiered in Shanghai motor show in April. Moving on to the motorcycle business. The total market has outperformed year on year with once dropped demand due to the COVID-19, now are up, recovered. Honda has performed better year on year in all of the markets.

However, in India and in Malaysia, we suspended the production activities for a while because of the resurging pandemic. Speaking of the total market of FY 2022. Because of the COVID-19 infections rising up again, mainly in Asia, the future is uncertain. Honda have revised the last forecast, mainly for India.

Next, summary of the financial results of the first-quarter FY 2022. Despite impact by supply shortage of semiconductors storing the raw material prices and so on as compared to the significant impact by the COVID-19 in the same period last year, our unit sales increased. And as the initiatives we have pursued to solidify the existing businesses being affected, the operating profit has increased by JPY 356.9 billion to JPY 243.2 billion. The profit for the period attributable to the owners of the parent for the first quarter increased by JPY 303.3 billion, JPY 222.5 billion with incremental investment profit from the equity.

This slide shows the sales units as well as the P&Ls. Next, with regard to the FY 2022 outlook. We plan to increase both sales revenues and the profits of our FY 2021 results based on the increase in sales units and effective initiatives to solidify existing business and so on. From the last year forecast, unit sales are revised reflecting the latest semiconductor supply plans in addition to the impact of COVID-19 resurgence, mainly in Asia.

Those impacts will be absorbed by additional suppression of SG&A, cost reduction effects and so on, and we revised the operating profit guidance to add JPY 120 billion to hit JPY 780 billion. Regarding the profit for the period attributable to the owners of the parent with incremental operating profit and so on, we up-revised the guidance to add JPY 80 billion to hit JPY 670 billion. This slide shows the unit sales and P&Ls. Speaking of the dividends and the share buybacks.

Annual dividend for FY 2022 stands the same as we announced last time. In the Board of Directors meeting convened today, we made a decision for share buybacks. For the purpose of improved capital efficiency, execution of the flexible capital strategies and so on, we plan to buy back our common stocks up to 18 million shares or the maximum sum of JPY 70 billion of the acquisition prices for the acquisition period between August 5 and December 31, 2021. Next, Mr.

Takeuchi will present to you the details of the results.

Kohei Takeuchi -- Senior Managing Director

Let me begin. First, the FY '22 first quarter three months financial results. Regarding Honda Group unit sales, motorcycles increased in Indonesia, India, among others, automobiles dropped in China, while increased in the United States. Life Creation increased in the United States.

Next, income statement. Due to increase across the board in all business segments, sales revenue increased from the same quarter last year to JPY 3,583.8 billion. Operating profit was JPY 243.2 billion due to increased sales revenue and model mix. And share of profit of investments accounted for using the equity method was JPY 55.9 billion due to profit increase in Japan and Indonesia.

And next is a change in profit before income taxes. Profit before income taxes in the first quarter was JPY 311.3 billion, up JPY 384.7 billion from the same quarter last year. Due to profit increase attributable to increased sales revenue and model mix as well as currency effect, operating profit reached JPY 243.2 billion, up JPY 356.9 billion from the same quarter last year. Moving on to results by business segment.

Motorcycle business, due to increase in profit attributable to increased sales revenue and model mix, operating profit reached JPY 80.6 billion. Next, automobile and financial services for automobile. Both combined, operating profit is estimated to be JPY 159.2 billion. Automobile business due to profit increase attributable to increased sales revenue and model mix, operating profit was JPY 70.6 billion.

Financial Services business, due to increase in used vehicle prices, among others, operating profit reached JPY 92.2 billion. Life Creation business and others. Operating loss was JPY 300 million, of which aircraft and aircraft engines operating loss was JPY 8.3 billion. The next is cash flows in the nonfinancial services in FY '22 first quarter.

Due to temporary increase in inventory, cash flow was minus JPY 99.5 billion. Cash and cash equivalents at the end of the first quarter was JPY 2,297.8 billion. Moving on to FY '22 consolidated financial forecast. First, Honda Group unit sales.

Motorcycles, due to the resurge in COVID-19 infection in mainly Asia, we are forecasting unit sales to be 17.4 million units. Automobiles. Given the resurge in COVID-19 infection, we reviewed our semiconductor supply plan and the FY '22 forecast is now 4,850,000 units. Life Creation mainly expected to increase by 400,000 units in Europe and North America, our revised forecast is 6.3 million units.

Next, FY 2022 consolidated financial forecast is as shown. And change in profit before tax. Profit before tax is JPY 1,000 billion up JPY 85.8 billion from last fiscal year. Operating profit, despite the provision for credit losses and SG&A increase, thanks to profit increase attributable to increased sales revenue and model mix.

Operating profit is up JPY 119.7 billion. Share of profit of investments accounted for using the equity method due to [Inaudible] related companies in the last fiscal year, resulting in a onetime impact of JPY 56.8 billion. Profit is down JPY 52.7 billion. Compared to the forecast announced last in May, despite profit drop attributable to declining unit sales, which is resulting in change in sales revenue and model mix, due to further cost reduction, cost control efforts and currency effects, profit before tax is forecasted to be up JPY 130 billion.

Lastly, FY '22 forecast, capital expenditure, depreciation and R&D is as shown. And this concludes my presentation. Thank you.

Questions & Answers:

Operator

Thank you very much for your attention. So now I would like to move on to the questions and answers as part of the presentation today. We have already announced via Zoom invitations for those in the media. [Operator instructions] Thank you for your cooperation.

So first question from NHK [Inaudible].

Unknown speaker

I have two questions. One is the semiconductor shortages plus in South-Asian countries, the pandemic is resurging again, that's a concern. But after the second quarter onwards, what is the perspective of the regular production plans? And second question, and so when do you think the shortage of the semiconductor components programs continue. In the long run, what is the prospect on those shortage of the parts components of the semiconductors?

Seiji Kuraishi -- Director, Executive Vice President

Thank you for your question. So after the second quarter onwards, our prospect is, for instance, based on the first-quarter results, in the market, thanks to the vaccinations progress and also the government economic stimulus measures, thanks to those things, but from some areas or regions, and of course, the impact of the COVID-19 last year was quite significant. Basically, the sales itself has grown quite significantly. The market is good.

And the semiconductor situation going forward and COVID-19 still unclear, uncertain going forward in both terms. However, the sales is going to stay steady going forward. That's our prospect. And in terms of those parts influence or impact, in the beginning of the fiscal year, when we had the announcement, we talked about our progress of FY 2022.

With the unclear semiconductor supplies, we had thought that there could be a impact on the 100,000 unit production. However, in the second half, we said that we will try to catch up with the production as much as we can, looking at the situations in order to minimize the impact on our production. So when we put together our budget, we did not include the impact by the semiconductor shortages. We state our unit sales perspective to five million instead of the time in the beginning of the year.

But globally, we tried to minimize them. However, in the first-quarter period, the situation is contained within our expectations. However, [Inaudible] recovery is a little bit slow and also in Asia, lockdown of the cities going on. Because of that, based on the latest business situations, we put up those full year forecast.

The latest one now is down revised to 4.85 million units, 150,000 less. And of course, the VOIs, the virus is of concerns and semiconductor shortages. There are many factors impacting on the businesses going forward, still uncertain, I should say. However, we will watch out the market situations, and we will try to hit better than the last year unit sales this year.

And in order to have a stable part supplies, we are speaking to the several companies and suppliers and sites, so that we can get supplies for more than one places. And also we will try to keep appropriate level of the stocks inventories for different parts of component. So the impact on the production is minimized. But in the long run, we need to commonize those parts and components and generalize the use of those parts and more stable supplies by multiple suppliers.

But of course, we cannot avoid impact by the lockdown. As of now, in Asian countries, there are some lockdown situations for the pandemic in several places. Because of that, the production is squeezed. And in other words, we can use -- divert those components and parts, which are not needed in those lockdown sites to other countries like China or Japan.

This is where we can adjust the production situations globally is where we can try to minimize the impact on the manufacturing status. Thank you very much for your question.

Operator

Next is from [Inaudible] newspaper.

Unknown speaker

I am from [Inaudible] newspaper. I have two questions. First, for this quarter, China compared to the United States, the domestic unit sales seems to be low. And this is -- is this due to the shortage of semiconductors or are there any other reasons for this? Can you give an explanation for the reason? The second, about the forecast.

About the motorcycle unit sales, it's down and yet your profit forecast is up. So can you explain this? And the cost reduction or cost reduction efforts, I think that you're expecting more effect. But can you explain what specific effects you are anticipating for this cost reduction effort?

Seiji Kuraishi -- Director, Executive Vice President

[Inaudible] thank you very much. Well, first, about the domestic sales. The domestic sales, the economic activities are recovering and the demand compared to last year when we had the severe impact of the pandemic, I think it is recovering to what we have seen before the pandemic. Meanwhile, I talked about Honda.

Due to the shortage of semiconductors and there's a drop in production volume. And especially for us in the global market, in our global business, we are allocating semiconductors here in Japan. For the April, May impact for us was big, Meanwhile, other companies, the April-May impact was not that big. And because of this, for the first quarter, especially, Honda appears to be low in volume.

But in July. Other companies are starting to suffer from the shortage. And therefore, the new Vezel, mainly and the M-series and the demand is very strong. And we believe that in the second half and once the supply of semiconductors recover, we can achieve the unit sales equal to other competitors and much better than last year.

And about the forecast and the reason why we are forecasting a drop in unit sales, as I've already explained in our budget, originally, we did not include the impact of the semiconductor shortage. But this time, due to a number of new factors, we had to review the unit sales. Especially in the second half, we were planning to offset and recover, but from the second quarter onwards. So we believe that there will be greater impact than we expected in terms of the unit sales.

And depending on the region, we have to produce overcapacity. And therefore, we believe that it's difficult to recover by the end of this fiscal year, and this has been factored in this time. As for the motorcycles, I think it's mostly India. But again, in the first quarter, including the lockdown, due to the spread of the coronavirus infection, there was a drop.

But now in July, India, the pandemic situation has improved significantly. And currently, though there was a drop, we are expecting to increase sales, and that is what we are forecasting for now. The cost reduction effect, Yes, Mr. Takeuchi will respond.

Kohei Takeuchi -- Senior Managing Director

Well, cost reduction covers a lot of things, but two, three years ago as a company, we have been trying to reduce costs in all areas possible in daily production activities. So we have tried to make efficient production. In the first quarter also, we have seen an improvement. And therefore, we will continue to have this impact of the cost reduction going into the second quarter after.

And I think it's an accumulation of small efforts that we are seeing a big result.

Unknown speaker

What specifically are you doing to reduce the costs? Which costs are going down? And about the unit sales, I believe that the unit sales is expected to drop, but the profit as sales revenue is expected to increase as for the cost reduction.

Kohei Takeuchi -- Senior Managing Director

Well, according to our current cost structure, we are purchasing about 80% of covenants outside -- from outside. And 20% is made in-house. But we want to make efficient production, and therefore, we are examining what needs to be changed to -- and also how we can reduce our cost to produce the same number of units. We are looking into the cycle time, how to reduce the cycle time and the man hours, et cetera.

So it's accumulation of all these small efforts that we are seeing a reduction in our cost.

Operator

Next one from Mr. [Inaudible.

Unknown speaker

[Inaudible] from newspaper. So semiconductor shortage. So impact on the unit sales is as much as 150,000. However, operating profit and also the sales revenues.

How much impact on those two sales and operating profit because of the semiconductor shortage. And I know that the future is uncertain in that regards still. But by the end of this fiscal year, what is your perspective of impact -- negative impact by the shortage of the semiconductor? How much impact do you expect for that? And also the raw materials cost increase, including the semiconductors, its impact, how much impact do you expect for this fiscal year? And any counter-measures for that, please?

Seiji Kuraishi -- Director, Executive Vice President

Thank you for question. So the expectation of the semiconductor shortage impact 4.85 million units that we announced this year actually is the number based on the adjustment with semiconductor suppliers as of now, and that is the number that we adjusted and now understand that this will be as many as we can, of course, do. Of course, for the COVID-19 and it is not controllable. Therefore, we cannot say much in that end.

However, as I said, the global production adjustment will be done, so that we will keep our target of 4.85 million EBIT production for the year.

Kohei Takeuchi -- Senior Managing Director

And I'll talk about this sales revenue for the automobiles, 150,000. That's the impact. And as of which 90,000 impacted on the OP list, that includes 60,000 for China. And volume mix is -- volume mix area.

That is including those impact. And our expectation is at 400. That's the impact on that. And in the beginning of the fiscal year as compared to the last one, the raw materials such as the precious metals are soaring -- price is going up about JPY 250 billion.

Cost increase now is included in the expectations for this year for the raw materials cost increase. Precious metal increase of the prices actually are a little lower than the total situation of that. Aluminum, the steel, platinum, there's expected cost increase of those and offsetting with that JPY 250 million upward change up-rate will be expected for that.

Operator

[Inaudible] please?

Unknown speaker

[Inaudible] newspaper. I have two questions. The first about the U.S. Well, the incentives are going down.

And I think this is resulting in good, better results. But in the first quarter and FY '22, do you have any specific numbers about the incentives? And about China. In the first quarter, I think that the retail volume unit sales is increasing. But yesterday, the Wuhan factory operation was suspended.

And well, in Asia, you are seeing this. But what about the outlook for just China only for this fiscal year?

Seiji Kuraishi -- Director, Executive Vice President

Let me respond in regards to your question regarding China. About China we are seeing that the new models are being introduced. And we believe, overall, as a market, the business will be better than last fiscal year, the results will be better than last year. But I said because of the components shortage and also the various uncertainty related to this industry, we have to pay attention to these developments.

As for Honda, there is this impact of the semiconductor shortage but the new models and also the lineup -- strengthening our lineup of EVs and others, we think that because our brand and also models have been well received. And I think that in the first quarter, it has been a record high. We want to enhance the strength of our brand and also expand the lineup of our EV cars and Honda Connect will be evolved so that we will be providing products which are filled with fun features. As for Wuhan, from August 3, the factory has suspended operation.

But this is because of the development area where our factory's located, there was a cluster at the supplier there. And therefore, we had to suspend the operation. And we are consulting with the local government at Wuhan. And we don't think that this will continue for a long time.

And as for our impact, we already, we have the shortage of semiconductors. We have to adjust the production even without this. And well, we don't know how long this situation will continue, but we believe that in principle the impact will not be that big and we are targeting toward sales more than last year. So our target remains the same.

About the incentive, please?

Kohei Takeuchi -- Senior Managing Director

Yes. Allow me to explain about the incentives. Well, yes, in the first quarter, the incentives on a cash basis. Well, in auto data, it includes the dealers incentives so -- but looking at the incentives as we define it in the first quarter, I think it was much lower than the previous year.

And therefore, I think it's very low, the incentives, but still, the incentives toward the inventory because of the accounting, they have to adjust the inventory and also keep down the incentives. And therefore, this fiscal year, the outlook compared to last year, I think it's about -- the incentive is about 10% lower than the previous year.

Operator

[Inaudible] newspaper, Mr. [Inaudible].

Unknown speaker

[Inaudible] from [Inaudible] newspaper. Two questions. One is the semiconductor shortage was being touched upon in the first quarter. How many are units of the production is impacted by the semiconductor shortage in the first quarter? And then you may not be able to tell, but how long would that situation continue? That's the question one.

And second question in the Southeast Asian countries, lockdown maybe posing impact and what is going on at the dealers, distributors over there? What is going on because of the lockdown in Southeast Asian countries?

Seiji Kuraishi -- Director, Executive Vice President

So the impact on the production first quarter, about 170,000 to 180,000 units of production impacted by the semiconductor supply shortage in the first quarter. But until when will that continue, we'll try to catch up in the second half as we have produced 150,000 in the first place. And in the second quarter, I think, we thought the impact will be resolved. But in the second quarter, first, however, because of the pandemic in Asian countries and also dealers there plus production's lost in some places and those impact is actually being carried over to the same quarter.

And in the second half, in principle, I believe, we can catch up with that. We can recover that in the second quarter. And the impact of the lockdown in South-East Asian countries. At the moment, large impact is seen in Indonesia, in Thailand and in Vietnam and in Malaysia.

And dealers of course, have different situations in place -- different areas. I wouldn't say all of the dealer distribution activities are stopped. That is really variable from one place to another. Basically, those dealers are still active by selling the products as usual.

Operator

Automotive News, Mr. Hans, please?

Unknown speaker

[Foreign language] I'm wondering if you can tell us a little bit about the inventory situation in the United States. It must be very tight. The numbers say it's very tight compared to last year. How is that impacting incentives? Are you able to lower incentives because you have such low inventory? And what adjustments are you making to make sure that you can get more cars to dealers to increase those inventory levels.

In other words, how are you trying to boost inventories in new ways.

Operator

[Foreign language]

Seiji Kuraishi -- Director, Executive Vice President

Well, first about the inventory situation. Well, the industry on the whole, the inventory level is quite low. And regarding Honda as well and because of the shortage of components, mainly in semiconductor has a impact on our production. And in regards of Honda, the industry average is 25 days.

Honda is currently 23 days, I understand. And therefore, compared to the normal situation, there is a very low level of inventory. And given this tight inventory situation, the cars which are due to be delivered to the dealers, we are trying to increase the inventory cycle and make it faster so that we can deliver more. Well, the United States, the people -- well, they buy it and they take home the car with them on that very day.

So we need to deliver these new cars to the dealers as early as possible. But through digitization and other efficiency measures, we have been doing this in the past as well. But using these new methods, we want to try to adjust the inventory. But in regards to the United States, I'm thinking about the business style there.

Unless there's an inventory at the dealers, there will be a very tough situation. Then normally, we will try to reduce the inventory. And including the online sales, we have to think about how we can try to sell despite tight inventory. About the incentives, let's begin with Honda, our incentive is low.

And the average of the industry is 2,700 and our average is 2,100. So in regards to Honda, I don't think that there has been such a significant drop in incentives. But depending on the product, there are some differences

Operator

Next question [Inaudible].

Unknown speaker

I have two questions. One is about the automobile business operating profit. In the first quarter, 3.1%. Last year, full year basis, it was 1%, therefore, it's an improvement and what are the factors behind for that improvement? And question 2 is about European businesses.

European commission said that by 2030, where Hybrid, as those cars -- of those types are banned. And what's the plan for that Swindon plant. And what is your positioning of our European businesses, to say, and if we have any plans for the European businesses going forward, please share with me.

Kohei Takeuchi -- Senior Managing Director

OK. The operating profit for automobiles, as you said earlier, last year, our operating profit margin that was 3.1% at Honda and high now because of the North American markets and other areas will be more numbers of volume sold. And also there were negative impact as well because of the soaring raw materials and also the cost reduction efforts and also the price -- excuse me, the commercial value of the vehicles that also is impacting, and also I think mainly these are because of the unit sales, the volume number going up and that is impacting on that number, plus because reduction efforts being carried, finally. And then as for the European businesses, electrification businesses.

In Europe, by 2022, we would like to make main products 100% electrified and that is planned and now. And when we say EVs, that includes HEV as well. Therefore because of the announcement recently, actually, we need to look into the specific parts of that. Now specifically with regard to what they want to do with the environmental issues.

However, in 2050, we are trying to achieve carbon neutrality. However, in response to the announcement recently, we'd like to accelerate our electrification activities for our product. Thank you.

Operator

Next question will be the last question. Last question is Nikkan Kogyo Shimbun newspaper, [Inaudible].

Unknown speaker

My name is [Inaudible] from Nikkan Kogyo Shimbun newspaper. Well, you have been talking about the semiconductor shortage and also the lockdown and the pandemic spread in Southeast Asia. But in the mid- to long run, you have been making various efforts like cost reduction and supply chain review. So do you have any plans that you can disclose for the mid- to long term? And the second question about capital investment.

Well, you say that there is no major change. But due to the external environmental changes, is there anything that you might change in terms of the substance of capital investment? Though demand is the same.

Seiji Kuraishi -- Director, Executive Vice President

About the supply chain. As I earlier mentioned, in the long run, in order to have a stable supply, stable procurement, we need to have more sources of semiconductors and consider how we should be holding our inventory. So there are a number of things that we are currently studying. And the supply chain review needs to be done, I think, as a result of all these factors.

And about the capital investment?

Kohei Takeuchi -- Senior Managing Director

Yes. And the capital investment, it does include a number of things. And there are the renewal of existing equipment and new equipment and the external environment has been changing, and thought the amount remains the same. If we have to accelerate our electrification efforts, I think what, we'll be investing and will change.

But currently, we have nothing that we can announce here today. Thank you.

Operator

[Operator signoff]

Duration: 47 minutes

Call participants:

Noriko Okamoto

Seiji Kuraishi -- Director, Executive Vice President

Kohei Takeuchi -- Senior Managing Director

Unknown speaker

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