Honda Motor (HMC) Q4 2023 Earnings Call Transcript

Honda Motor (HMC 0.59%)
Q4 2023 Earnings Call
May 11, 2023, 2:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Unknown speaker

I thank you very much for taking time out of your busy schedule to attend our press conference. We would now like to start Honda Motor Company's press conference for financial results for fiscal year to March 2023. The COVID-19 category has been changed to Class 5. We have decided to continue to hold this briefing online as well.

First of all, allow me to introduce the attendees today. We have Mr. Shinji Aoyama, director, executive vice president and representative executive officer, chief operating officer.

Shinji Aoyama -- Chief Operating Officer

This is Aoyama. Good to see you.

Unknown speaker

And then, we also have Mr. Eiji Fujimura, executive officer, chief financial officer.

Eiji Fujimura -- Head of Accounting and Finance Supervisory Unit

This is Fujimura. Good to see you, everybody.

Unknown speaker

Now, Mr. Aoyama will first present an overview of the financial results of financial year to March 2023 and forecasts for FY '24, and then Mr. Fujimura will present the details. Over to you, Mr.

Aoyama.

Shinji Aoyama -- Chief Operating Officer

Good afternoon, everyone. I'm Aoyama, I'm the executive vice president starting April. Thank you very much for your participation today despite your busy schedule. So, let me explain the financial results of the FY 2023 and a summary of FY 2024 forecast.

Starting with the highlight of the financial results, I will explain the progress of the profitability structures and its reinforcement. According to the FY 2023 results, we sold 3.69 million cars. Those previous expectations was set at 3.85 million. Operating profit was 839.3 billion yen, whereas the previous forecast was 870 billion.

The efforts on fixed cost reduction pricing that reflects the improved values of the product and so on helped us strengthen our operational structures. As results, we maintained the operating profit margin of 5%, which is the level of the previous forecast. As for the FY 2024 forecast, we will further improve the operational structures that we have built up until now, and we will strengthen supply chains, such as the staple procurement of the semiconductors, will improve operating ratio of the factories. And we will plan to sell 4.35 million cars with the expected operating profit of 1 trillion yen, which will be the best profit ever.

Cash generated will be invested to provide resources for electrification going forward, and we'll stay engaged in shareholder return programs. In specific, in FY 2024, we plan to increase the dividends to 150 yen per share, which will be the highest ever. In addition, in the board of directors meeting today, we have made a decision for share buybacks for the amount of 200 million yen. Towards FY 2026, we will continue to reinforce our operational structures all together in unity, aiming to achieve the operating profit margin above as 7%.

Let me continue to explain the automobile businesses situations in main markets. In FY 2023, there had been a major impact of the COVID-19 pandemic in China and the supply shortages of semiconductors until third quarter due to which the unit sales dropped below the year before. During the three months of our fourth quarter, supply situations of the semiconductors gradually improved. Thus, the unit sales resulted better year on year in the United States.

In China, the tax protection measures ended, which caused a negative impact on the unit sales. Thus, the results dropped significantly lower year on year. In terms of the unit sales of 2024, although the outlook in China is rather than clear, in the global market, we can enjoy the favorable motorcycles that continues from last year and we'll aim to expand our unit sales based on the resumption of the supplies in the market. Thanks to the improved operating ratio of the forecast.

Regarding our exchange for electrification, we started our discussions with POSCO for a comprehensive partnership in order for achieving carbon neutrality. In the Shanghai motor show in China, we exhibited the world premiere of the second set of the e:N series called e:NP2 prototype and e:NS2 prototype, as well as the third set of the concept model, e:N SUV Xu. Next. I'm moving on to the motorcycle business situations.

For the FY 2023, the unit sales increased year on year in the main markets. During three months of the fourth quarter, the unit sales had dropped year on year in India and Vietnam. However, in Indonesia, although we had a supply shortages of the semiconductors, we replaced the model offerings and utilized the alternative parts which they helped significantly increase of unit sales. Thus, the total resulted in better than last year, year on year.

As for the unit sales for 2024, we plan to achieve higher results year on year based on decreasing unit sales in India and Indonesia. Let's look at the overview of the consolidated financial results for 2023. In addition to the reduction in unit sales and the production of the bills due to the impact by semiconductor shortages and COVID-19 pandemic in China, we had incremental production cost caused by the soaring material prices and inflationary impact. Nevertheless, thanks to pricing scheme that reflects much the values of the products, increase in unit sales over the cycles, and the foreign currency exchange impact, we achieved the operating profit of 839.3 billion yen.

The profit for the year attributable to the owner of the parent was 695.2 billion. Status of the net sales, PL, are described here. With regard to the forecast of consolidated performance of FY 2024, although incremental production costs and inflationary impact, yen appreciation impact, and etc. may exist.

We have been working on the pricing scheme reflecting commercial values of the products and further strengthening of the operational structures, plus the increase of the production and unit sales of our mills. With altogether, we plan to hit 1 trillion yen operating profit. That will be the highest ever. The profit for the year attributable to the owner of the parent is planned 800 billion yen.

Assumed exchange rate is 125 yen for the full year basis. You can see the unit sales and the PL plans on the slide. Let me explain about the dividend. Annual dividend for the FY '23 is 120 yen per share, and the year-end dividend is 60 yen per share.

As for the expected annual dividend for FY 2024, we will add 30 yen to the amount of FY 2023. Thus, it will be 150 yen per share, the highest dividend so far. In the board of directors' meeting today, we made a decision of share buybacks. For the purpose of improving our capital efficiency, of executing our flexible capital policy and so on, we will buy back our shares up to the total amount of the 200 billion yen of acquisition values.

Unknown speaker

And next, Mr. Fujimura, CFO, will explain the details of the financial results and forecast. 

Eiji Fujimura -- Head of Accounting and Finance Supervisory Unit

Allow me to start the explanation. To begin with Honda Group's unit sales for the fiscal year 2023, in motorcycle operations, unit sales grew year on year, particularly in Asia, to 18.757 million units. Automobile sales came to 3.687 million units, mainly due to decline in China and in North America. In power products operations, unit sales came to 5.645 million units, mainly due to decline in North America.

Next, I'd like to explain the factor analysis of the pre-tax profit for the four quarters compared to the previous fiscal year. Pretax profit was 938.1 billion yen, which was lower by 131.9 billion compared to the previous fiscal year. Operating profit was 838.9.3 billion yen, which is lower by 31.8 billion yen in the year. To give you a factor analysis of the operating profit, impact from sales, though there was an increase in motorcycle unit sales, declines in automobile sales volume and lower profit in financial operations led to income decline of 109.1 billion yen.

Selling price and cost factors, while there was effect from pricing in line with the product value due to surging material prices, as well as the effect from inflation, it resulted in a decline in profit by 27.4 billion yen. Expenses. Due to increase in quality-related expenses and selling expenditures, this gave us a negative impact of 132.5 billion yen. R&D expenses led to profit decline of 58.5 billion yen, and currency effect resulted in positive impact of 295.9 billion yen.

Next to explain the sales revenues in operating profit by business segment. For motorcycles, operating profit was 488.7 billion yen, a record high. Automobiles operations profit was 42.0 billion yen. Operating profit from financial services were 285.8 billion yen.

And for power products business and other businesses, operating profit came to 22.8 billion yen. Next, I will explain the cash flow. Free cash flow of operating entities for fiscal year 2023 came to 685.8 billion yen, and the end-of-term balance of net cash came to 2,750.8 billion yen. Next, I'd like to talk about the consolidated financial forecast for fiscal year 2024.

Firstly, speaking of Honda Group's unit sales compared to the previous fiscal year, in motorcycle business, considering the growth mainly in Asia, forecast is for 19,180,000 units. In automobiles, we are putting at 4.35 million units, considering the growth mainly in North America. And in power products, 4.75 million units in view of the declines in North America. Next, I'd like to explain the factual analysis of pre-tax profit compared to the actual results from last year.

Pretax profit is forecast at 1 trillion and 185 billion yen, up 246.8 billion yen from the previous year's results. Operating profit is forecast at 1 trillion yen, up 160.6 billion yen from last year's results. To explain the factors behind operating income, impact from sales is forecast at positive 440.6 billion yen due to growth in unit sales of automobiles and motorcycles. Selling price and cost impact is positive 265.0 billion yen due to effect from our ongoing pricing in line with product value, though there has been some impact from inflation as well.

Expenses impact is expected to be negative 217.0 billion yen due to increases in selling expenses. R&D expense impact is negative 60.0 billion yen. And the currency effect is forecast at negative of 268.0 billion yen. Lastly, our forecast for capital expenditure, depreciation and amortization, and R&D expenditures for FY '24 are as shown.

This completes my explanation. Thank you very much for your attention.

Unknown speaker

Thank you very much for your attention. Now, we'd like to proceed to the Q&A session. We would like to take questions through Zoom, which have been informed -- which you have been informed in advance. And due to limited time, we'd like to limit it to up to two questions per person.

We ask for your cooperation. Now, if you have any questions, please use the raise your hand button to let us know. To start with, first question from NHK, Mr. Toma, please go ahead with your question.

Toma from NHK, can you hear me?

Yes, we can. Thank you for your question, please.

So, I have two questions. One is the Chinese businesses, that is dropping quite a bit. That is my question. But for that, what is your analysis? And, of course, for that and for the recovery plans for going forward? What is your expectations this year in terms of the data volumes and your plans for the production for the 2024 forecast? And the second question is about semiconductor.

The supply is on the improvement now gradually, but this time or this year, including our semiconductor supply areas, I assume that you're going to recover the production volume, including semiconductor supply recovery. And when do you expect to have that picked up? When do you think it will be normalized?

Shinji Aoyama -- Chief Operating Officer

All right. Thank you very much, Mr. Toma, for your question. Aoyama is going to answer your question, For the first question, in the fourth quarter, the business is getting down in China in the fourth quarter and the forecast going forward and in our January-March period.

The fourth quarter -- actually up until the third quarter of last year, the purchase tax, that is the acquisition tax of a purchasing car, that particular measures ended in December last year. Together with that, we had a negative impact, the response to that measure being ended. That is the situation there. And also, to get along with the environmental regulations, in order to make the sales out from the inventories completely.

There are some discounts being done. And then toward the end of the year time period of the ERs setting out plans of the ER products in stock, the consumers expected more discount. And then, people waited to buy cars for some time. Because of that, the ER demand dropped.

And such reactional situation will improve now. And also, last year, we had a lockdown COVID-19, which also had a negative impact on the businesses. But for the FY '24 Honda, going forward, we will have the full model change new model to introduce in the market from Honda, which we expect 1.4 million cars to sell according to the plans in China. That is what we think as of now that NEVs and new energy vehicles portions will increase going forward gradually.

So, as of now, we expect one third of the demands will be of a new energy vehicle, we suppose. And we are selling ICE and HEV vehicles as a main product to sell as of yet. But we need to make a good utilization of the intensives and so forth so that we can continue to sell and keep the presence in China. And in terms of the semiconductor toward the end of the fiscal year or in the second half of the year, specifically, the supplies of the semiconductors will improve finally.

And we still have the 404.35 million unit sales forecast. And it is not going to be the abrupt recovery, but it is going to be a gradual recovery from the mid of the year to the second half of the year. And full recovery is expected to be found in the fiscal year '25. Thank you very much.

Unknown speaker

Thank you very much, Mr. Toma. We'd like to proceed to the next question. Mr.

Kondo from Asahi newspaper, please.

Kohei Kondo -- Journalist

My name is Kondo from Asahi Shimbun newspaper. Good to see you. OK. Thank you.

I would also like to ask one question about the Chinese market and the different question for the second one. Right now, Mr. Aoyama explained the situation that the NEV percentages are getting higher and also the ICE vehicles shrinking down. And then, there were some pricing competition.

So that, for the time being, probably the feasibility economics of the business in China, I would like to know how you view the Chinese market in terms of market feasibility. My second question is you are going to -- going for the selling price hikes that should contribute to the profit of a 1 trillion yen for the first time. So, in what -- how you are making those price hikes for different regions? I believe for Japanese market you announced a price hike for the N-Box series, so please let us know what your price hike strategies are.

Shinji Aoyama -- Chief Operating Officer

OK. Thank you very much, Mr. Kondo, for your questions. OK.

First, about the profitability for Chinese business. NEV is really coming up. And then, so Honda has announced this e:N series, so that's something we will continue to strengthen. The second wave come at the first of '24, and the SUV called Xu, that will come at the end of '24.

That's what we talked about. So, therefore, in terms of fiscal year '24, I believe as NEV expands, we will not really have any NEV products available for the time being. So, we would like to continue to maintain our presence so we might consider using the incentive and then try to maintain 1.54 million unit sales. So, if you think about the FY '24, yes, in terms of business feasibility, it will deteriorate, will be challenging for us.

And then, the other question about the price hikes, for North America and then for Asia and then also Europe as well, for those markets or regions, we are seeing a lot of increasing on the manufacturing and procurement cost. So, we have been reflecting those cost hikes increases to the price hike. So, Mr. Fujimura will give you more detail, specific numbers.

But when it comes to a Japanese domestic market, well, yes, we did raise our prices. However, when it comes to the prices, we believe we still do have pricing in line with our product value. So, we want to go through another review. So, I cannot give you any specific numbers right now, but we will continue to consider further price hikes.

Mr. Fujimura, if you have anything to add?

Eiji Fujimura -- Head of Accounting and Finance Supervisory Unit

OK, about price hikes. And then, of course, what we need to do first is to try to reduce our costs, trying to absorb cost hikes, price hikes. However, with the raw material procurement cost and with the inflation, our cost has been going up a lot. So, over two years, we have like a 600 billion yen cost increases over the past three years.

But when it comes to a price hike, so when it comes to our pricing strategy, we have been able to recover like about 540 billion yen, so about 90% of the cost increases. But we say 90%, but in Asian markets, we have been able to recover almost 100% in Asia in motorcycle market. But speaking of automobile market, still, we have not been able to recover all the cost increases. And, of course, in North America, there has been a lot of cost increase, which contributes a lot.

But for Japan, because we have been trying to gain understanding from our customers and improve our services and products values and that's what we have been doing our best start. And then, in this fiscal year, now, the cost, if you can look at this graph here, we -- I believe the number was shown this plus benefits from cost increases. Let me show the chart that drives up the 1 trillion yen. So, we have been addressing the issue of cost increase toward our suppliers.

So, that issue still exists. However, we have been seeing good benefits, at least as far as the raw materials go. And then, also, we are doing better at our pricing strategy so that this box, I believe, this has -- after a few years, has gotten to be in the positive impact. That's what I can say for now.

Thank you very much.

Unknown speaker

Thank you very much, Mr. Kondo. Next, from Nikkei Shimbun newspaper, Mr. Tanabe.

Shizuka Tanabe -- Journalist

Tanabe from Nikkei. I have two questions. First one, regarding R&D cost, 980 billion yen planned this year. And this is the largest, highest ever, I think.

And please tell me why it is increasing. Maybe that includes electrification. As far as you could tell us, please explain. And you're going to invest on the electrification and the softwares next year and the other companies saying about additional investment on the electrification.

And do you have any plans to change that expenses plan? And in the past fiscal year, automobile businesses, January through March, you had an operating losses, in fact. And what is the reasons for that? Please share with us.

Shinji Aoyama -- Chief Operating Officer

Thank you very much, Tanabe-son. So, Aoyama speaking to respond to your question as much as I can. And then my colleague, Mr. Fujimura, will give us a further explanation.

So. R&D expense is 980 billion yen, that is the largest ever. And, of course, battery EV R&D cost is on the increase. That is the main part of this expenses.

And also, ICE and HEV as well, which will be also to be developed for the next generation ones. The R&D expenses, that includes those conventional ICE, HEV, plus battery EV development now coming to the full-fledged efforts. And that is why. And then, I said 5 trillion yen in 10 years.

As of today, we do not have any new plans now. But I think in April last year, I shared with you the number like that. However, we have been updating the numbers like that every now and then and actually the trend is going up more to invest. And sometime later, we can share with you more.

Please wait for that. And automobile businesses operating losses in January through March. Finally, the annual rate itself was 3.69 million and then we had 160,000 less sales finally. And in terms of their operating profit, regarding that, out of 160,000, about 110,000 Chinese won losses in China and the remaining are the negative situations for the consolidated basis figures.

But the 50,000 part is going to be -- is actually causing impact on the gross margin numbers.

Eiji Fujimura -- Head of Accounting and Finance Supervisory Unit

I have nothing much to add to this. But in the fourth quarter, we usually have this kind of a trend every year, but it is a kind of a step, like changes of the expenses, R&D expenses that tend to occur toward the fourth quarter period. That happens every year almost. And this year, especially, we have a quality-related cost included in that position.

And this fiscal year, the quality cost actually that is rather low ratio to the sales turnover. It was a 0.9% level of the total turnover. But in this fourth quarter, it was up to 1.7% of the total turnover because of the quality-related campaigns which are like recalls. So, it doesn't mean that we had a new incidences happening, but we estimated the number of the vehicles in scope for that.

And then, we had to have the reserve allowances for that. And, in fact, we have about 5% level of R&D to their turnover. That is usually one. But now, this year, we had a 6.4% instead.

And it is about a U.S. situation in the area of the cost with our suppliers. We've been working together, negotiating for the cost-related issues with them. And then, we finally came to the agreement after a year, and then we are going to return back to them for that portion of their businesses together, and that is put up in the fourth quarter accounting, and that is why for the automobile businesses like that.

Thank you.

Unknown speaker

Mr. Tanabe. Thank you very much. We'd like to take the next question from Weekly Toyo Keizai, Mr.

Yokoyama, please.

OK. This is Yokoyama from Toyo Keizai.

Yes, we can hear you.

OK. Thank you. I have two questions as well. First one is concerning automobile business.

This 0.4%, Mr. Aoyama, how do you view this? How do you evaluate this? And then, also, this fiscal year, quantities and numbers will improve, I believe. But where would be the focal point in the automobile business for you to earn, make better earnings? That's my first question. Second question is concerning supplier support.

Other OEMs, there are some of them that are taking care of the electricity bills or pay expenses, you know, in line with the production. But I believe Mr. Aoyama mentioned it briefly, but what kind of range of support you are giving this fiscal year? That's what I'd like to know. Thank you.

Shinji Aoyama -- Chief Operating Officer

OK. Thank you very much for your questions, Mr. Yokoyama. OK.

So, for 99 business here, yes, well, the 0.4%, I'm not satisfied at all. But when it comes to issues, I also, as Mr. Fujimura explained, recently, there have been many factors that have been pushing up the cost. And then, so how much of that we can reflect that, the cost increases, in either in the form of cost reduction or price hike, so to what extent we can recover? We don't know.

I mean, are we really doing enough? Maybe not enough. So we need to do a little bit more. And then, also, this can be -- well it comes down to the semiconductor, but because the volume is below what we aimed for, so for the previous year, that was the biggest factor that we could not meet the volume that we were aiming for. So, we want to reach this 4.3, 5 million units right now.

So, that's what we're aiming for. When it comes to issues and focus, so as you've seen in these numbers, in North America, we want to grow our volume, particularly in North America, as you're seeing here. So, the total -- if you look at the total market trend, we need to monitor closely how that develops. Is it going to recession due to inflation? We need to monitor how that trends into the future.

That's something we really need to follow closely. That's what we believe for North America. For supplier support, to what degree the support is given, that will be answered by Mr. Fujimura.

But, you know, just taking on the electricity costs, that's only part of it. And then we had some impact from a semiconductor shortage. And then, of course, there will be some excessive fixed cost and all that. That would be another big item for the suppliers as well.

So Mr. Fujimura will provide some additional information, including some specific numbers.

Eiji Fujimura -- Head of Accounting and Finance Supervisory Unit

OK. Thank you very much for the questions concerning the supplier support, support to suppliers, particularly in the past fiscal year due to the inflation and the logistics cost. And then, also, particularly the energy utilities cost, and particularly electricity labor costs after one after another. Suppliers have had a lot of factors that increase their costs as well.

So one-to-one basis, with each individual supplier in different regions, we have engaged in discussions and made some decisions. So, last year, globally, we made about 100 million yen cost increase support. So, for that cost, without really reducing this cost, we want to -- we believe that cost level will continue at that level. But as I said, per region, because of the pressure from inflation is working -- started to come into effect in North America by region, sorry, for this business here, I cannot tell you the detailed numbers because it's up to individual negotiations.

But last year, business year, we saw main cost increases in North America last business year. And then, in Japan, we have incorporated a bit of budget to support. And in North America, there was some cost increase. And then, we have accepted the part prices in line with the part cost.

And, also, we had some volume expansion and also in order to ensure stable production, that which we aim to do, to some extent, those suppliers who are very capable and then who have the room for expansion. We have been working together closely with the suppliers to work out some cost reduction measures. So, we have been engaging and then we will be engaging in those discussions. The same applies to Asia as well.

With several suppliers, we have decided to work on cost reduction together. So, this is just an image, but this is how we are including our ideas and work together into a budget for this 100th business year. Thank you.

Unknown speaker

Thank you, Mr. Yokoyama. Next question from Yomiuri newspaper, Mr. Nakamura, please.

Can you hear me?

Yes.

Nakamura from Yomiuri newspaper. I have two questions. Earlier, there was a mission to read about Chinese, the discount situation. So, it is like a discount competition.

And how long do you think it will continue? In extreme cases, other companies offer another car if I buy a car. And what is the extent of the discount in practice today? And also, second question is about forecast of operating profits, the highest-ever operating profit in the fiscal year 2024. Are there any other ever highest numbers expected?

Shinji Aoyama -- Chief Operating Officer

Thank you for your question, Mr. Nakamura. So, for the question one, I will address that part. And the second question will be supported by my colleague.

And then, in terms of the discount, how long you guys will continue, it is difficult to foresee how long it will continue, practically speaking, because the discount this time is in association with the response to the environmental measures, the [Inaudible] and that is to ban certain types of models buy a certain time. So after the end of June, it is ended. And then, from the July 1st, we need to sell the product that satisfies [Inaudible] type of regulations. Other cars have to be sold out by the end of June because of that.

And then, it was actually -- the deadline was the end of December, the switchover timing. And then, it was postponed until the end of June recently. And it is very difficult to tell how long it will continue because of such changes. In Honda's perspective, we will not do extreme discounts such as buy one and then give you another car or extreme discounts.

We are not going to do it. And for us, in the second half this year, we plan to launch new models. And it will refresh the models altogether. And we like to make sure that those fresh new models will be sold in the market.

Fujimura-son, please?

Eiji Fujimura -- Head of Accounting and Finance Supervisory Unit

I do not have the data with me right here. However, I mentioned a bit earlier in my presentation about the motorcycle operating profit, 480 billion or above the operating profit in that segment. That is going to be the highest-ever motorcycles. And in terms of the net profit, 1,000.

Before there was a tax system change under the Trump administration, and then there was release of some of the tax debts. And then, it kind of pushed up the numbers a little bit higher transiently and including that. It might change. However, still, I believe it is going to be the record highs.

I'll get back to you with the precise numbers later on. But in terms of the sales turnover revenue, it is also related to the exchange rate. But 18 trillion, that is actually trending upward. Thank you.

Unknown speaker

Thank you very much, Mr. Nakamura. Next, I would like to take the question from Mr. Uribe from Nikkan -- Nikkan -- sorry, the Automotive newspaper, sorry.

Yes. This is Uribe from Daily Automotive newspaper. I have two questions as well. First of all, about the factors for pushing up the operating profit, I believe that one comes from selling prices.

But can we get more a little bit details about the negative factors like the raw materials impact? So, I believe there are some questions asked about support to supplier. How much of that is included in here? And then, sorry that I'm getting into different details, so you are expecting 120 yen to a dollar for '24, but, probably, this is more accurate. But when you do the -- if there was any background story you can share in consideration of the forex exchange rate as well.

Shinji Aoyama -- Chief Operating Officer

OK. So about the -- thank you very much. So, your first question related to the past results as well as for outlook?

Unknown speaker

Both. Both, please. Yes, both of the financial results and the outlook.

Shinji Aoyama -- Chief Operating Officer

About the outlook, I think I can answer that. I believe there's about 50 billion increase and the material cost increase. I believe Mr. Fujimura -- sorry, raw material costs down reduction.

So, Mr. Fujimura can give you the details.

Eiji Fujimura -- Head of Accounting and Finance Supervisory Unit

OK, then, starting with the financial results. So, in the selling cost, if you can show those boxes showing the factors, it was a -- we had a 12.7 billion minus. So, what this is -- sorry, this is minus 27.4. So, the negative was about 180 billion or so.

And then, we have the logistics and labor costs, and those are included in there. So, those, we actually did pricing that negated, that cancel those factors enough. And then, we have this 330 billion and so. For the outlook, we have a plus 265 billion then -- so this includes a positive effect from raw materials of 50 billion and then also minus 40 billion.

So, the difference would be the cost increase and then that's going to be the net offset results of the selling price and the cost increase. But as mentioned earlier, for cost factors, sorry, this is something that we negotiate individually so I cannot really talk about it. But anyway, offset, there is about 250 billion or so, 260 billion, 250 billion yen or so. So, about the exchange rate, just to give you the background.

Because the interest rate hikes in the States might settle down in the second half, that's what we are expecting. And then, maybe 130 yen to a dollar during the first half, and 120 yen during the second half. So, that's where our 125 average came through. That concludes my answer.

Thank you.

Unknown speaker

Thank you, Mr. Uribe. Next question, from Jiji Press, Ms. Toyoda.

Toyoda speaking from Jiji Press. Can you hear me?

Yes.

I have a question regarding the past fiscal year, the details of the ups and downs of the profits and its reasons behind. And the chart says that 56.5 are for quality. And as you said, it is related to the recalls in the United States. And in the same box, you have 60 billion in the same box.

And next one, 800, so forth. That is a negative, in fact. And what is the breakdown inside of the box? And the second question, in the United States market, financial instability so forth now happening today. But what is your macro perspective of the U.S.

economy going forward and its potential impact on the automobile industry? What is your thought about it?

Shinji Aoyama -- Chief Operating Officer

Thank you, Ms. Toyoda, for your question. So, the operating profit from the past year, quality-related one, is connected to the recall cost in the United States. That is your question.

But actually, it is not limited to the U.S. But globally, there are other regions also connected to it. Main part is the U.S. But as a fact, however, other regions or countries are connected to the recall as well.  But in terms of the numbers, Fujimura is going to answer that.

In terms of the U.S. market and financial instability, outlook of the economy, and its impact on the automobile businesses, according to your question, and I would say that the market itself is quite solid as of now recently. And for 2023, toward the end of that fiscal year, the U.S. OEMs actually resuming their stock levels for the market.

And then, in 2020 FY, in the middle of the COVID pandemic, you compare the situation to that, the stock level in the market is not that high as of yet. It's not that much of the recovery, but also the market of the midterm perspective. It is a little bit coming to be weak, perhaps, in the midterm perspective. However, as of now, it is trending quite solidly, I should say.

And then, this is more of the macroeconomic perspective that including stable financial situation. But that part should be -- the area where we should pay closer attention to, we shouldn't have a prejudgment on that. And particularly speaking, this year, we will have the fresh product out. The fresh product will be there, so it is a good situation for us.

And in the industry like that, I'd like to make sure that we will sell those fresh new products in the market in the coming year.

Eiji Fujimura -- Head of Accounting and Finance Supervisory Unit

Thank you for your question. And then, you say that other box is quite big. And then, I'm sorry that we couldn't give you a good explanation for that. In terms of gross margin, it is 6.4 billion.

In the second quarter, a part of the [Inaudible] entities had recognized the impairment of the fixed asset that is as much as 300 million or so. And also, we had the impact of the reduced unit sales, and that is included in the breakdown of the units of sold. And Chinese ones actually are in a different box. About 304,000 -- 40,000 units were down, reduced the amount in China.

And we had [Inaudible] parts, profits for Honda, and we had a royalty payment less made from Chinese joint ventures. And we have consolidated subsidiaries in China where they had a reduced profit level, too. So, out of those impairments of the subsidiaries, we have an impact by the reduced volume situation in China. That is in that.

And, also, it's 80 billion yen expenses -- excuse me, 60 billion expenses. So, the largest part of that is the impact by the inflation of various countries. And most of that is actually for that reason. And then, practically, maybe new models are starting up quite a bit.

And then, we do spend some advertisement, of course, for the new models. But still, we try to maintain our lean structures that we achieved so far.

Unknown speaker

Thank you very much. Ms. Toyoda. Next, Mr.

Hiraoka from News 6.

This is Hiraoka from News 6. Can you hear me?

Yes.

So, as a total, as your company, how do you generate the cash that goes into investment? And going forward, in your automobiles business, you will be spending a lot of R&D and also capital expenditure, which would increase -- this will be reflected in the depreciation. Probably in NEV, probably the raw material price will probably stay high. So, I'm thinking, just as a -- maybe this is an issue for the -- across automotive companies. So, how do you gain the cash? So, you know, for you, maybe motorcycle business is good and profitable.

You can earn cash there, so you can probably pour a lot of investment in automobile. Let me know if that's really a strength you feel. The second question is talking about the automobile -- sorry, PBR across all Japanese companies tend to be low -- rather, below one, and then there are voices saying, why don't you give us the account accountable for this. In your case, in the medium- to long-term perspective, how do you propose to increase PBR?

Shinji Aoyama -- Chief Operating Officer

OK, thank you very much for your questions, Mr. Hiraoka. I will leave all the details to Mr. Fujimura.

But so are we -- first of all, to answer if you're earning cash from a motorcycle business, OK, even for battery -- sorry, even for motorcycles, we need to convert to battery, electrify them in the future. But there is a bit of a time lag between motorcycles and automobiles. So, in medium-term perspective, I think it's all fair to say that we can earn cash to put into automobiles. So, for BEV, you said the raw materials prices are really staying high.

But when it comes to raw materials, you're talking about the batteries and cells. I guess that's what you are talking about. But this is something you cannot really say that cost is staying up high across the board. You can't say that.

It is something, I mean, because it's market, it moves up and down. So, I wouldn't really say -- the material cost does not hit only an individual company. So we hope to be -- for those that moves up and down in terms of prices, costs, we would like to accommodate ourselves. At the Shanghai Motor Show as well, there are some relatively low-priced battery EVs coming out.

We see that for sure. So, we would continue to monitor the situation for EV. For PBR, the second question, this is one of the critical issues in our management operations, of course. So, basically, last year, with the reporting, this is something we touched upon a little bit, the capital cost.

We want to stay keenly aware, and then we will continue to consider introducing ROIC. But when it comes to the specific KPI, we like to set up a roadmap, and we'll communicate what our KPIs will be for going forward.

Eiji Fujimura -- Head of Accounting and Finance Supervisory Unit

OK, then, well, just additional, I don't know if this means additional information for you. But as you've pointed out, the cash that we earn from a motorcycle operation is considerable. But for automobiles, even though the operating margin, due to the fixed cost, because the operating time is only 80 percent or less. So, we hope to be able to earn 0.3 percent or higher.

So, even though that's the situation in terms of earning in automobiles, but for operating cash flow, within the operating -- the depreciation that we are able to get this back, but also the equity earnings, maybe 20% of the net profit comes from that. And then, of course, dividend from there is contributing as well. And then, in addition, there are some investment related to ICE. We need to wisely manage in our operations.

But as you've been pointed out, going forward, we will be making a lot investment in BEV, is that what you expected? But what we are thinking of is that we need to maintain the current level of the investment. But just as a shift, We want to shift away from ICE to spend more in R&D and investment for the new areas. So, that's what we are thinking of. So we want to have a comprehensive control, and then we would probably keep in mind this cash generation capability from automobile operations as well.

That's what we'll continue to do.

Unknown speaker

Thank you very much, Mr. Hiraoka. And because of the interest of time, the next question is going to be the last one from the Nikkei newspaper, Mr. Uehara, please.

Uehara, from Nikkei newspaper. Can you hear me?

Yes. Thank you. I have two questions. One about United States.

The interest rate hikes and also the economy have a risk for the depression. But what is your judgment about the outlook? As of now, do you have a -- how do you see the situation for businesses? And also, the cash finance, what is the impact on your -- the financing situation of cash support? And then, also, the outlook for China, midterm perspective, specifically its impact on the upcoming fiscal year revenue.

Mr. Uehara, did you complete your question?

Yes. Thank you.

Shinji Aoyama -- Chief Operating Officer

Thank you for your question, Mr. Uehara. So, in this year, in the fiscal year 2024, how do we see the economy's impact on the sales, so in terms of the finance businesses, we have basic revenues of financing operations. And we have so-called penetration, how much we should acquire from that, that is one part.

Whereas we have some -- the rate of delinquencies and the bad dates and allowances, reserves for that, should we go about it. And also, they lease businesses. The residual values of -- the fleet vehicles, let's say, so-called net charge-off, we take that net charge-off quite severely because of the inflation and economic pressures. We have included our forecast quite severely for that pattern, and, also, the fleet vehicles' residual values.

In the previous two years of our businesses, we had a shortage of the supplies. And because of that, the trade-in markets, used car market, was quite booming in a way. But in terms of the residual values of those cars, actually, in the past two years, it was quite favorable to us. However, in the upcoming fiscal year 2024, that is not going to stay positive, and that is our assumptions now.

And for the China situation, the FY 2024, it will stay with a bit of the difficulty in China. But after FY '25, we are going to strengthen the e:N series with the battery vehicles and so forth more and more, to add. And then, for our businesses along from the FY '25 onwards, we will expand the battery EV vehicles more, along with the revenues that you enjoy as well. Thank you.

Eiji Fujimura -- Head of Accounting and Finance Supervisory Unit

And in terms of the details, in fact, in the last few years, as Mr. Aoyama said now, financial businesses were like -- we had losses of those with value-related, used car ones. And also, the bad debt things. And in fact, the used-car prices were very high.

And also, the government provided supports for the individual consumers. After the pandemic, there was not much of the loss cost, and we had about 360 billion to 380 billion also, and then it went on like that until now. But in fact, the cost as such is actually abnormal in the last two years. So, I think we should say that we are coming back to the normalized status as we speak now.

It's coming back like that. However, still, the used car prices are still high, so the losses due to the residual values still exist. And in fact, after that is over, it will be turning to the profit level. But actually, when the lease period is over, the customer's cars will be returned back to us.

And then, we'll put that in the market of the used cars again. And we used to have 60,000 cars like that before pandemic. And now, we have about 200, 300 cars, that kind of level. And in terms of the bad debts? We have about 0.3% of the bad debts, in fact, and we've been doing the assessment of the credit score, like 70%, 80% of the AB score, and we try to be prudent in terms of the customers like that.

And we try to control the asset side of the chart. And when we had a financial crisis, we had a similar situation about procurement. The idea is how diverse -- how well we can diversify the procurement. And we shouldn't be optimistic, of course, but we will try like that.

And we will stay operating with the procurement, and we have a policy as such. Thank you very much.

Unknown speaker

Thank you, Mr. Uehara. OK. Then, with this, I would like to finish our financial results press conference.

The press release information, the materials for financial results are listed on our website. Thank you very much for participation.

Duration: 0 minutes

Call participants:

Unknown speaker

Shinji Aoyama -- Chief Operating Officer

Eiji Fujimura -- Head of Accounting and Finance Supervisory Unit

Kohei Kondo -- Journalist

Shizuka Tanabe -- Journalist

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