Honda Motor (HMC) Q2 2022 Earnings Call Transcript

Honda Motor (HMC -2.21%)
Q2 2022 Earnings Call
Nov 05, 2021, 2:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Noriko Okamoto

[Foreign language] Thank you very much for taking time to view our program today. Now we'd like to start our Honda Motor Co., Ltd. fiscal year 2022 second quarter financial results presentation meeting. I am -- my name is Okamoto from Corporate Communications facilitator for today.

Allow me to introduce today's presenters. We have our director, executive vice president, and representative executive officer, Mr. Seiji Kuraishi.

Seiji Kuraishi -- Director, Executive Vice President, and Representative Executive Officer

[Foreign language] Good to see you.

Noriko Okamoto

[Foreign language] And director, senior managing executive director, Mr. Kohei Takeuchi.

Kohei Takeuchi -- Director, Senior Managing Executive Director

[Foreign language] Good to see you, everyone.

Noriko Okamoto

[Foreign language] Then I would like to ask Mr. Kuraishi to give an outline of our fiscal year '22 second quarter results.

Seiji Kuraishi -- Director, Executive Vice President, and Representative Executive Officer

[Foreign language] I would like to begin by expressing my profound gratitude to the support given to us by our loyal customers, supporters, and all other stakeholders around the world. Currently, there are customers who are waiting for Honda products. We sincerely apologize for the vehicle production delay and the inconvenience caused. The drop in production attributable to a combination of supply shortage of certain parts, including semiconductors and lockdown in mainly Southeast Asia due to the resurgence of COVID-19 was greater than our previous forecast.

As a result, FY 2022, Q2, Automobile Group unit sales was 917,000 units. Honda is developing alternative equivalent parts and taking other measures to promote deal source of components. We will recover production from the beginning of next year. But given the prolonged lockdown in Asia among others, FY 2022 Automobile Group unit sales forecast is revised downward from 4.85 million units to 4.2 million units.

With the cooperation from various stakeholders, we will strive to keep impact on production to a minimum, and we will work to deliver our products to our customers as early as possible. I'll move on to present the outline of FY 2022, second quarter financial results, and fiscal year 2022 financial forecast. FY '22 is six months unit sales was: Motorcycles, 8,173,000 units; Automobiles, 1,915,000 units; Life Creation business, 3,230,000 units. Next, the main markets.

Japan's six-month industry demand exceeded the same period last year. But the three-month sales was hard hit by semiconductor supply shortage and was below the same period last year. Despite strong sales vessel, Honda's three-month unit sales was down from the same period last year. N-BOX Series set No.

1 sales in minicar segment for the first half of FY 2022. Forecast for FY 2022 industry demand is expected to be strong despite semiconductor shortage. Honda has revised the previous forecast given the current production situation. Next is United States.

Industry demand recovered due to stimulus package and others. Fiscal six months total was above the same period of the previous year. Second quarter three months was lower due to semiconductor supply shortage. Honda performed the market growth with light trucks as the main driver.

Passport updated its single-month sales record. It sets at an all-time monthly sales record in September. In June, we announced the name of the first Honda brand volume, EV SUV in North America. The name is Prologue.

FY 2022 industry demand forecast despite semiconductor supply shortage, demand is expected to continue to be strong. Honda has revised the previous forecast, reflecting the current production situation. Next, China. Industry demand recovered primarily due to economic stimulus measures.

But semiconductor shortage resulted in demand lower than the same period last year. Honda also saw strong sales of XR-V among others, but the Q2 three-month sales underperformed the same period last fiscal year. Calendar year 2021 industry demand forecast expected to stay strong, exceeding last calendar year. Honda will increase its EV lineup and offer attractive products.

In October, we announced our electrification strategy in China. First, Honda brand, China EV car, e:N series was unveiled. Honda's omnidirectional advanced driver-assistance system, Honda SENSING 360, will be deployed in China in 2022. Moving on to our motorcycle business industry demand.

In many countries, demand recovered and exceeded the same period last year. Honda's Q2 six months total exceeded the previous year. But regarding the second quarter three months total wholesales dropped from the same period last year in Vietnam and Thailand due to resurgence of COVID-19. FY 2022 forecast, industry demand, though there is still concern over a COVID-19 resurgence, demand is expected to increase steadily.

Honda revised upward its forecast, primarily based on the current sales in India and Indonesia. Outline our FY 2022, three months results. Despite the impact of semiconductor supply shortage and increase in raw material costs, due to positive effects of unit sales increase, cost reduction, and currency, operating profit increased JPY 272.9 billion to JPY 442.1 billion. Also, the earnings per share attributable to owners of the parent due to increase in share profit investments accounted for using the equity method increased by JPY 229.1 billion to JPY 389.2 billion.

Unit sales and income statement are as shown. And next, our FY 2022 financial forecast. COVID-19 resurgence, shortage of certain parts include -- including semiconductors and rise in raw material prices are expected to continue. Though we anticipate a harsh external environment, reduction -- SG&A cost reduction and other profit enhancement efforts are expected to result in maintaining operating profit at JPY 660 billion equivalent to last fiscal year.

Unit sales and income statements are as shown. Next, about dividends. FY 2022 interim dividend is JPY 55 per share. Annual dividend outlook remains unchanged.

Honda will strive to continue to realize stable shareholders' return aiming toward a payout ratio of around 30%.

Noriko Okamoto

[Foreign language] Now we'd like to have Mr. Takeuchi, our director, and senior managing executive officer, to provide details for our quarter financial results and forecasts.

Kohei Takeuchi -- Director, Senior Managing Executive Director

[Foreign language] OK. Allow me to explain. Looking at the results of the second quarter for the three months, our unit sales of Honda Group showed declines in Vietnam and Thailand in motorcycle operations, declines in China and the U.S. in automobile operations, and an increase in the U.S.

and other markets in Life Creation operations. Turning our eye to the earnings. Sales revenues due to lower sales in Automobile operations declined from the second quarter last year to JPY 3.4043 trillion. Operating profit was due to reduced profit from a lower sales revenues and model mix at JPY 198.9 billion.

And equity and earnings of affiliates was due to reduced profit in China, it was JPY 51.3 billion. Next, I would like to explain the different factors affecting profit. Pretax profit for the second quarter was JPY 249 billion, which was down by JPY 96.6 billion compared to the same period last year. Operating profit was, even though there was an increase due to currency effect due to decreased sales revenue and model mix leading to lower profit, it was JPY 198.9 billion, down by JPY 83.9 billion versus same period last year.

Next, going to our financial results by business segment. Operating profit for motorcycle operations was due to reduced profit due to volume fluctuation model mix, it was JPY 67.4 billion. Next, going to operating profit from Automobile operations and operating profit related to Automobile sales included in financial service operations is expected at JPY 127.7 billion added together. Operating profit from Automobile operations was due to volume decrease and lower margin from model mix, it was JPY 46.4 billion.

Operating profit from financial services operations was due to difference in the amount posted as provision for credit losses, JPY 84.5 billion. Next, looking at the operating profit for Life Creation operations and other operations, it was JPY 500 million. Of this amount, the operating loss from aircraft and aircraft engines was at JPY 7.2 billion. Next, the earnings for the first half of the fiscal year are as shown on the slide.

To explain the factors affecting the profit, pre-tax profit was JPY 560.3 billion, which is up JPY 288.1 billion versus the same period last year. Operating profit was due to sales change and model mix impact increase as well as currency effect, JPY 442.1 billion, which was JPY 272.9 billion, up from the same period last year. Next, the free cash flow for the nonfinancial services operations for the first half of the fiscal year was minus JPY 18.7 billion. And the balance of cash and cash equivalents at the end of second quarter was JPY 2.3106 trillion.

Now I'd like to explain the full year forecast for the consolidated performance for the 2022. First, the sales volume, the unit sales of the Honda Group. Our forecast for Motorcycle operations is 17.5 million units, which is up 100,000 units compared to the previous forecast. In Automobile operations, considering the impact from shortages in parts supply, including semiconductors, our estimates are for 4.2 million units, down 650,000 units.

In Life Creation operations, our prospects for sales was 6.1 million units. The financial forecast for fiscal year 2022 on a consolidated basis as shown here. To explain the factors affecting the forecast. Pretax profit is expected at JPY 860 billion, down JPY 54 billion compared to last fiscal year.

For operating profit, there have been a positive effect from currency effect, sales revenues, and model mix, but this was offset by sourcing raw material prices and differences from amount posted as provision for credit losses and other SG&A expenses increased so that the operating profit is expected to be flat as last fiscal year. Equity and earnings of affiliates was because in the previous fiscal year, we had posted a temporary one-off impact of JPY 56.8 billion due to TOB of three affiliates. It is expected to be lower by JPY 72.7 billion. Comparing our new forecast to our earlier forecast in August, Pretax profit is expected to be low by JPY 140 billion.

In operating profit, though, SG&A reduction and currency effect generated a positive impact, this would be offset by a reduction in earnings due to sales revenue decline and model mix. Now the forecast is for JPY 660 billion, down JPY 120 billion compared to the previous forecast. Lastly, our prospects for capital expenditure, depreciation, and R&D expenses are as shown on the slide. This concludes my presentation.

Thank you very much.

Noriko Okamoto

[Foreign language] Thank you for your listening. And now we would like to proceed to questions and answers. [Operator instructions] The first question, Nihon Keizai Shimbun. Mr.

Abe?

Kotaro Abe -- Nikkei Asian Review -- Journalist

[Foreign language] This is Abe from Nikkei. First, about the group sales unit and the revision that you've paid. Well, this is a new number of 4.2 million. What is the accuracy -- the outlook of semiconductor shortage and the prospect of being able to secure the semiconductors? What measures you're taking to enhance the prospect? And also, from April-September, the world production, how much reduction in production did you see compared to the original plan? The second question.

Well, currently, there is shortage of semiconductors. But the profit that has been undermined, be it the automobile reform or investment in EV vehicles, does this not have any negative impact on your future plans? So can you elaborate on your views as to how the current shortage will impact future plans?

Seiji Kuraishi -- Director, Executive Vice President, and Representative Executive Officer

[Foreign language] Well, first, let me talk about the impact of semiconductor shortage. First, last time, some of the suppliers experienced a fire and there was a shortage of supply as well as the low temperature in the United States and lockdown in Southeast Asia. And therefore, we believe that it was a one-time impact, but we decided to reduce our prospect to 4.8 million from the 5 million originally anticipated. But we now see that the shortage, the supply shortage has even more serious and will last longer, the lockdown as likewise.

So it's been reduced to 4.2 million. Well, we were anticipating that we will see a recovery in supply from the third quarter. But regrettably, because of the long duration of the lockdown in Southeast Asia, we were unable to do so. We are planning to make a recovery from the beginning of next year, but we believe that it will be difficult to achieve the recovery by the end of this fiscal year.

As for the prospect of being able to secure the necessary semiconductors, we have yet -- we have tried to look into this now. As for the future prospects, due to the shortage of semiconductors, we don't know what the challenges will be in the future. We are starting to see improvements now. And we are also working to ensure dual sourcing so as to gain toughness against these incidents and cope with the supply chain situation.

So we are currently preparing for next fiscal year. And in addition to recovery production in next fiscal year, our model cycle will be at a very good timing. And therefore, we will do our very best to meet the demands. And also about the April-September production, well, I'll explain about that later.

And whether the current drop in production will have an impact on our future strategies. That part of your question. As I said earlier, from next fiscal year, we believe that the semiconductor supply will improve. And this fiscal year, well, this negative operating profit, whether this will have an impact -- direct impact on our automobile and reform EV.

No, we do not think so.

Noriko Okamoto

[Foreign language] Thank you very much for the Global Production, Corporate Communications will provide an answer later, OK. The next question is from Yomiuri newspaper, Mr. Katagiri, over to you.

So Katagiri -- The Yomiuri Shimbun -- Staff Writer

[Foreign language] This is Katagiri from Yomiuri newspaper. I hope you can hear me.

Seiji Kuraishi -- Director, Executive Vice President, and Representative Executive Officer

[Foreign language] Yes.

Unknown speaker

[Foreign language] The impact from our reduced production, Japan and China, it's OK, the -- sorry, it was lower than expected. But in the state, there was a good demand. But probably other than the models, was there any reason for the better demand in the U.S.? And then if you could share with me the regional differences about the demand going forward for the rest of the fiscal year? So I guess, I think, for November, so still the demand is very low, but I just wonder how the demand there are for the rest of the world? My second question is a prospect for the future. But the raw materials prices and then the risk for China, what do you -- how do you view the risks in China?

Seiji Kuraishi -- Director, Executive Vice President, and Representative Executive Officer

[Foreign language] OK. Thank you. OK. I'm repeating myself.

But with the COVID-19 impact and the harbor traffic congestion, the lockdown in Asia impacting the parts. There are various factors impacting the supply chain. That is the current situation. Particularly, the lockdown in Asia -- those are having a prolonged impact compared to our initial estimate, but we'd like to minimize, continue to minimize the impact we suffer.

So stock inventory allocation, and we're reviewing our allocation and production stock situation on a weekly basis. And then we are trying to monitor the supply, particularly semiconductor. And if there's any shortage, we will adjust. We are adjusting production on a global basis.

Maybe we need to monitor the balance across different regions and then consider we are doing -- allocating the semiconductors. But the semiconductor, of course, there are many different types. And depending on our parts and components, there were available ones and not so available once that there are differences. So I can't say generally, but basically, our stance is that along with the sales planning we do proper allocation.

But as well because different models mix are there. So there are differences between different regions as a result. But in principle, going forward as well for different reasons, we want to -- we will continue to monitor the sales situation on a weekly basis and continue our timely allocation. That's our strategy.

And then for the power shortage in China, currently, as of now for the two joint ventures in China. We have not seen any impact due to the power shortage, including their suppliers. So we will closely monitor the future conditions and then take action, if needed. But currently, Guangqi Honda and then the other entity as well.

Those are important production sites in those regions -- in these regions. So they are closely monitoring the situation. So we would like to continue to monitor the situation closely together with the central government to monitor the situation. Thank you.

Noriko Okamoto

[Foreign language] The next question, Asahi Shimbun, Mr. Kameyama, please.

Keiji Kameyama -- President and Chief Operating Officer -- Asahi Shimbun

[Foreign language] Asahi Shimbun newspaper, Kameyama. Can you hear me?

Noriko Okamoto

[Foreign language] Yes.

Keiji Kameyama -- President and Chief Operating Officer -- Asahi Shimbun

[Foreign language] Two questions. First, you said the group unit sales has been reduced from 4.85 million to 4.2 million. I think that we are already seeing delivery delays now. But as a result of this reduction.

What impact will it have on sales? And also how long do you think the current situation will continue? That's the first question. And second question, Well, on the one hand, production is declining. But in the United States, are you seeing a drop in sales incentive? And this is a positive for your performance. So how much incentives have been is incentives -- incentives have been reduced? And what impact has it had on your corporate performance, please?

Seiji Kuraishi -- Director, Executive Vice President, and Representative Executive Officer

[Foreign language] Well, first, I will respond to the unit sales. So the semiconductor supply delay has resulted in us having our customers wait for the delivery of our products. We apologize for the delay. Well, currently, based on the plan that we have for the unit sales, we are in communication to ensure the delivery date.

We don't think that we'll see any further delays, but COVID-19 impact. We have to see what impact will continue. And so observing the situation, we will try everything to try to deliver cars to our customers as early as possible. So as for semiconductors, as I said, from the fourth quarter, we believe that we will start to see a recovery.

And we can enter into a recovery production phase. That is all. Thank you.

Kohei Takeuchi -- Director, Senior Managing Executive Director

[Foreign language] Allow me to explain about the incentives in the United States and what impact it has on our performance, especially the incentives. Because of the large volume and the amount of money spent, this is -- the biggest part is in the United States. But as you know, because of the delay in component supply, production is down. And the inventory dealers are really short.

And because of this, in the past, at the dealer's, there were these incentives had to be reduced significantly because of that from the unit sales. And this decline, this has turned out to be a positive in North America. Last fiscal year, there's auto rater data. There was about JPY 200,000 incentive per vehicle.

But this fiscal year, it will be slightly above half of that, and that the incentive includes the loan incentives. And it cannot offset the drop in sales -- unit sales, but still, it is a positive for us.

Noriko Okamoto

[Foreign language] Thank you. Then the next question will be from Nikon Automotive, Mr. Misitori, please.

Unknown speaker

[Foreign language] Good afternoon. This is Mr. Misitori from Daily Newspaper -- Daily Automobile Newspapers. I have two questions.

My first one is the raw material price surging. At the beginning of the term, I think you were expecting a JPY 250 billion impact throughout the year. But by changing your forecast, any impact? I mean -- of course, I mean that sourcing crisis will that's something you need to take into consideration. Would you consider repricing the final product? Another one is the RCEP that's starting in January, do you have any expectations for that? Of course, vehicles and local other parts, all of those are localized, I'm sure, in your case, but I would just like to know what your expectations are.

Thank you.

Kohei Takeuchi -- Director, Senior Managing Executive Director

[Foreign language] OK. Let me answer about the raw material prices. It's true, as Mr. Misitori said, for -- at the beginning of this fiscal year, we said that JPY 250 billion to JPY 260 billion, surging higher prices for the full year.

And that included the metals -- precious metals has used in the catalyst because the prices have really surged. So that's why we came up with that expectation. But the precious metals unit price has -- of course, there were some intervention for the government, and they are coming down somewhat from the peak. But aluminum and steel, those other materials for those -- so we are still expecting the higher prices of those.

And then so we still incorporated those increasing prices of those other materials. But right now, still we are expecting JPY 260 billion-or-so impact. But any incorporation into the selling prices? No, we cannot transfer all those cost increases to our vehicle prices. But we will monitor what the competitors are doing.

And then we might -- we will monitor what the competitors are doing, and we might include the increase of prices. If it's OK with the customers. OK. So for RCEP, we are far advanced with the localization because we want to produce where the demand is.

So we don't think there's going to be that bad impact, but we will monitor the situation and take actions necessary. Thank you

Noriko Okamoto

[Foreign language] Thank you very much and next, Automotive News. Hans, please?

Hans Greimel -- Automotive News -- Editor

[Foreign language] I have two questions. One is about the foreign exchange rate. It's been a real tailwind for a lot of Japanese automakers lately. I think you're keeping it steady for the rest of the fiscal year.

Do you expect the exchange rate to maybe help you improve your full year results in the end if it keeps moving in this direction? And the second question is about your provisions for the shift to electric vehicles. When will we start to see some kind of investment or outlays or announcements from Honda about your investments in batteries or new electric vehicle lines or factories? Already, we hear from other Japanese automakers about their investments in electric vehicles, but yet they don't even have as ambitious plans of total makeover for electric vehicles only as Honda. When can we start to see or expect some announcements or provisions from Honda?

Noriko Okamoto

[Foreign Language]

Kohei Takeuchi -- Director, Senior Managing Executive Director

[Foreign language] Well, let me try to answer your foreign exchange question. Yes, as Hans says, the foreign exchange, well, on the one hand, we are supplying components in North America. And also, we have to convert the North American profit to Japanese yen. So the foreign exchange rate has a big impact on us, and the weak yen is favorable for us.

And if you compare the forecast last time from the second quarter, it was JPY 105, and it's actually JPY 110 in the second quarter. And in the third quarter after, we have replaced JPY 110 against the dollar. So because of this, we are seeing an impact of some JPY 50 billion on profitability revenue. But as we hear, there -- the quantitative easing being reviewed in the United States and -- so I think that there might be a shift toward a stronger dollar.

And this would be a positive. But when it comes to strong dollar. Well, we're not just doing operation in the U.S. and Japan, we're doing Brazil and supplying United States and also Thailand, etc.

So the local currencies, if they become weak and then the imported components will see a negative impact. So we have to look at the overall situation. It's not as simple to say that we just look at the U.S. dollar and see the weak yen is advantageous.

No. But what we're saying is that we have to be -- well, if there's $1 swing throughout the year, then we see an impact of JPY 112 billion. So in the second half, I hope that we see a tailwind, but it's not as simple as that because we have to think about other currencies other than the U.S. dollar.

Seiji Kuraishi -- Director, Executive Vice President, and Representative Executive Officer

[Foreign language] About the shift to EV and the specific strategies. Well, in regards to transition, yes, battery -- we want to partner with the best for the local. I'm sorry, GM in the U.S. and CATL in China.

So we are working with those partners, and we're already making the investments necessary. For other regions as well, we have to look at the local conditions, etc and consider various possibilities, including alliance. As for factories, the other day in China, and we announced our EV strategy and, GHAC, WDHAC, we said that we will start to aim toward operation so that we can establish an environment-friendly factory. So as for the details, well, I'm not in a position to disclose them now.

But we are making such preparations. And when the time comes, we will be able to announce to you is including the investment numbers and what we are doing. But please allow me not to disclose those numbers today.

Noriko Okamoto

[Foreign language] Thank you very muchThen the next question is from NewsPicks. Mr. Hiraoka, please?

Hiraoka Daisuke -- NewsPicks -- Representative Director

[Foreign language] OK. This is -- my name is Hiraoka from NewsPicks.

Noriko Okamoto

[Foreign language] Yes, we can hear you.

Hiraoka Daisuke -- NewsPicks -- Representative Director

[Foreign language] Earlier this was mentioned about the semiconductor shortage. I would like to ask a little bit more detailed question. And at the same time, are your actions for the future -- for going forward about the semiconductor shortages, I'm sure -- you said that there are many different types. But when it comes to the most, it is not that the most advanced semiconductors only are used in the automobile.

So I believe some ECU contains those 200-micrometer wafers, those legacy types are used as well. So the legacy semiconductors for the semiconductor producers, ROI is low. So they don't have a priority on producing them first. So as the shortages get resolved, that type of production might be a bottleneck? Do you agree with me? And then another question is, are you trying to do some ECU integration? So that you might come up with a new technology for production like using 28-nanometer or 22-nanometer ECU.

Would you be considering integration into those types over like five years or so. I'm just wondering if you have that kind of strategy. And then my second question is concerning your prospects for the raw materials, resources prices, I think back in 2017, there were some surging prices. So I'm sure that there is a chance that it might go down, but like copper and then rare metals, because people go to electronics, those prices, the demand will be increasing for those structurally.

So I believe even if there is some fluctuation in the prices, they will be structurally, the long-term wise, long term, I believe, the prices might go up. I'm just wondering if you have that kind of prospects for the prices.

Seiji Kuraishi -- Director, Executive Vice President, and Representative Executive Officer

[Foreign language] For the semiconductor long-term, of course, we need to think about how we -- how much of our stock we want to hold. And then we might think about like reviewing our contracts, about purchase agreements, also relationship with the semiconductor manufacturers. We need to consider the supply chain and also we need to maybe work with the -- try to increase our toughness against semiconductor supply issues like working with the tier ones' company. So we are taking those actions at the same time.

Currently, we are doing tests to use off-the-shelf semiconductor as well. And then -- with that, we are trying to think of different options to obtain semiconductor -- secure semiconductor supplies. Of course, we believe that the semiconductor shortage will continue going forward. So we will continue to take -- and think of and then take actions in order to secure stable supply of semiconductors in different ways.

That completes my answer.

Kohei Takeuchi -- Director, Senior Managing Executive Director

[Foreign language] OK. And then about the -- our view on the resource prices. As I mentioned already earlier, it is true that the PGM for the precious metals at the beginning of the fiscal year because of the speculation, there was some -- unit price went really surged high. And depending on the market -- so there are some metals where structurally, the demand could be high.

So we do consider the price can stay high structurally or long term. So how do we minimize the impact from that? So maybe we come up with alternative materials for that for certain parts in the car or can we review our specifications so that we can reduce the amount we used and then the purchase contracts can maybe do long-term contracts. And then we will take actions, different actions. And if it has to be, we might transfer the cost increase to the prices.

But anyway, so to simply put, we do expect that there's a possibility that the prices go up. OK, thank you.

Noriko Okamoto

[Foreign language] Next question, NHK, Mr. Tivoli, please.

Unknown speaker

[Foreign language] Mr. Tivoli from NHK. How do you do? About the raw material. This is a follow-up to the previous question.

Crude oil price is extremely high now. Of course, steel, aluminum, you gave those examples, but about crude oil price, sorry. I think that this has an impact on resin manufacturers. So how much of an impact does it have? Currently, how much of an impact is it having? And going forward, if this should continue going forward, how much impact are you foreseeing?

Kohei Takeuchi -- Director, Senior Managing Executive Director

[Foreign language] Well, as we've been saying, yes, oil is about $85 per barrel. So it's extremely high. And resin, you said, yes, some plastic. They are being made from crude oil and the painting, the coating on cars.

Again, this is made from crude oil. And currently, the prices have not gone up. But if the crude oil prices continue to surge, it will have an impact. The question then is how will we come up with alternative materials.

We are currently researching that and so that we would try to absorb the cost increase coming from the raw material cost increase. So we also tried to offset with reducing the cost in other areas and so as to be able to offer our customers with good products. Yes, as you say, Mr. Tivoli, the components that we use and the impact of crude oil price increase is something that we are factoring in.

Thank you.

Noriko Okamoto

[Foreign language] Thank you. The next question from Weekly Toyo Keizai. Mr. Yokoyama, please.

Unknown speaker

[Foreign language] This is Yokoyama from Toyo Keizai. I have two questions as well. First one is the profitability, profit margin in automobile business. So it's a 2.6 percentage at the end of second quarter.

So at 1.0, it looks like it's gotten better from 1.0 for the full term, but how do you view that? You talked about the incentive coming down. But I'm just wondering if the automobile business renovation is taking bearing fruit? Or I'm just wondering if the -- maybe the stock has gotten lower and maybe that's what's boosting the profitability. Let me just like, you know, my second question is about the battery. So you said, you are thinking about a lot of our investment.

You have not made it clear whom you might team up within Japan. I'm sure you cannot mention any name. But if you could tell me your approach. And then fourth, so you've got GM states and CATL for China.

But do you have any multiple sourcing idea for those markets as well? Thank you.

Kohei Takeuchi -- Director, Senior Managing Executive Director

[Foreign language] OK, about the automobile business operations profitability. As Mr. Yokoyama said, the automobile business of -- we consider this a big challenge in our company. So we have been working to renovate, innovate the profitability of automobile business.

And then within that, in the production volume, we wanted to optimize the production volume. So in U.K. and Turkey, we have compressed fixed cost in those markets. And then even against the -- even midst of COVID, we have had some good results.

So for U.K., let's say, we have stopped the production already and then the Sayama Plant will close at the -- stop production at the end of December. And also, we have some -- brought in some organizational changes that brought some efficiency in R&D. So the automobile development team used to be in R&D, we have moved it to Honda Motors organization so that we can provide better efficiencies or better products to our customers through lower prices. So we have been doing those innovation projects.

So we are seeing good benefits. But this would take several years for the full benefits to come through. So by then, we will have solid profitability from automobile business. But if you think about the efficiency of development work and the optimization of production.

And then I don't know how -- we still need to consider how we are going to do this together in the EV business. So we will need to -- might wait until next opportunity. So, so far, we have been optimizing and then we have been getting better benefits from optimizing the existing businesses anyway. And then now the incentive is lower and then the stock level is lower, so profitability is getting higher.

But if the -- so do we have to bring back the incentive when the stock comes back? I guess we cannot really say no outright considering the competition. But now we've come up with a good profitability structure, foundation infrastructure. So we probably would have to work better so that we can provide better products, better value to our customers at a lower incentive. So it's not going to be the incentive comes right back just because the stock went back up.

So we hope that we continue -- can continue to secure good profits.

Seiji Kuraishi -- Director, Executive Vice President, and Representative Executive Officer

[Foreign language] OK. About the battery strategy. As we -- as I mentioned earlier, for large markets for China and then states, like I've said, we got GM for states, and then we got CATL for China. Those are the ideas we have.

And at the same time, for Japan and for other markets, right now, we are still considering. But our stance to that is that for Japan, we want to produce batteries in Japan and then consume them in Japan, so we can contribute to the local economy. That's the consideration for the Japan market. We don't have any specific thing we can share with you.

About the -- and then also for multiple sourcing for the other markets, for states in the U.S., we need to think about the States-China relationship as well. So we need to closely monitor the situation and then make decisions. There was a possibility, I'd say. That's all I can say for now.

Noriko Okamoto

[Foreign language] Thank you very much. The next question will be the last question. Nikkan Kogyo Shimbun. Ms.

Egami, can you hear us? Please check if you are unmuted. Ms. Egami, can you check whether you are unmuted. We apologize.

She does not -- she doesn't seem to be able to unmute. So with this, we would like to conclude today's FY '22 second quarter financial results and presentation material. And what we have presented today will appear on our website. Thank you for joining us today.

Duration: 52 minutes

Call participants:

Noriko Okamoto

Seiji Kuraishi -- Director, Executive Vice President, and Representative Executive Officer

Kohei Takeuchi -- Director, Senior Managing Executive Director

Kotaro Abe -- Nikkei Asian Review -- Journalist

So Katagiri -- The Yomiuri Shimbun -- Staff Writer

Unknown speaker

Keiji Kameyama -- President and Chief Operating Officer -- Asahi Shimbun

Hans Greimel -- Automotive News -- Editor

Hiraoka Daisuke -- NewsPicks -- Representative Director

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