Honda Motor (HMC) Q1 2024 Earnings Call Transcript

Honda Motor (HMC 0.59%)
Q1 2024 Earnings Call
Aug 09, 2023, 2:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Unknown speaker

Thank you very much for coming despite your busy schedule today. We would like to now start Honda Motors Company Limited's briefings on FY 2024 Q1 financial results. We have interpretation service for the non-Japanese investors and analysts. Thank you for your understanding.

First of all, let me introduce today's speakers. We have Eiji Fujimura, executive officer and CFO.

Eiji Fujimura -- Chief Executive Officer and Chief Financial Officer

I'm Fujimura.

Unknown speaker

We have Masao Kawaguchi, operating executive, head of accounting and finance supervisor unit.

Masao Kawaguchi -- Operating Executive, Head of Accounting and Finance Supervisor Unit

I'm Kawaguchi. Thank you very much for today.

Unknown speaker

Finally, I am Diva from IR department, and I will be facilitating today's meeting. So, without further ado, I would like to have Fujimura to provide a summary on the 2024, Q1 financial results followed by the details of the earnings by Kawaguchi. Over to you.

Eiji Fujimura -- Chief Executive Officer and Chief Financial Officer

Thank you very much for taking the time out of your busy schedule today. I would like to review the results from the first quarter of fiscal 2024. First, I would like to touch on the highlights of the results. In Q1 FY '24, with the improved fixed cost structure that we have been optimizing, we maximized the effect of increased sales unit, mainly in North America, and achieved the significant growth in automobile operating profit year on year.

With respect to the total profit, operating profit grew 172.2 billion yen year on year to 394.4 billion yen, a quarterly record with operating margin at 8.5%. The fiscal year 2024 forecast is kept unchanged. Today, at the board, a resolution was adopted approving a stock split. I will now turn to the automobile business results in the main markets.

The overall results from the first quarter fiscal 2024 exceeded the same period previous year. In the United States, the improved supply of semiconductors and recovery in production, in addition to strong sales of models introduced last year that result substantially surpassing the Q1 of last year. On the other hand, in China, expansion of new energy vehicle market resulting in more intense competition impacted the results, which were lower year on year. We maintain the previous forecast for fiscal 2024.

In regard to our electrification efforts, in order to develop the next-generation competitive software-defined mobility products and services, we reached basic agreement on partnership with SCSK Corporation. In North America, seven automakers, including Honda, concluded agreement to establish a joint venture to create a high-powered charging network for EV. Next, turning to the motorcycle business. Number of units sold was lower in India and Vietnam year on year.

But in Indonesia, in comparison to last year, when we were impacted by semiconductor supply issues, production has become stable and sales results significantly outpaced the same period last year. Overall, results exceeded the same period last year. Forecast for FY '24 remains unchanged. As regards electrification efforts, we announced this month the launch of the personal use electric motorcycle, EM1 e, which is the first of its kind for Honda in Japan.

Next, I will go over the consolidated results from Q1 FY '24. As I highlighted earlier, operating profit rose a 172.2 billion yen year on year to 394.4 billion yen. Profit for the period attributable to owners of the parent increased 213.8 billion yen to 363 billion yen. Next, I will discuss the stock split and dividends.

At the board today, a resolution was adopted approving a stock split by reducing the company's stock price per investment unit. We aim to establish an environment where it is easier to invest in our company for the purpose of expanding the investor base, each share of common stock will be split into three shares per share. Annual dividend forecast for fiscal 24 remains unchanged on three-stock split basis. The dividend forecast calculated based on the number of shares after the split is as shown here.

Next, I will turn the microphone over to Kawaguchi who will give the details of the earnings result from Q1 fiscal '24.

Masao Kawaguchi -- Operating Executive, Head of Accounting and Finance Supervisor Unit

Let me explain. First, Honda Group's unit sales for Q1 FY 2024 were 4.473 million units in the motorcycle business, mainly due to higher sales in Asia compared to the same period last year. Sales in automobile business were 101,000 units, mainly due to an increase in sales in North America. Sales in the power products business were 983,000 units, primarily due to lower sales in North America.

Next is on the changes in profit before income taxes in Q1 compared to the same period last year. First of all, operating profit increased by 172.2 billion yen year on year. Let me walk through the factors. Impact from sales was plus 133.7 billion yen as a result of higher sales units of both automobile and motorcycle.

With regards to the impact from price and cost, the increase was ¥65.9 billion, as a result of lower raw material prices, especially for precious metals, and the effect of pricing commensurate with the improvement in product value. With regards to expenses, while quality-related expenses decreased, as a result of higher advertisement cost and labor cost, the impact was negative 29.8 billion yen. R&D was minus 20.8 billion yen. Currency effects was positive at 23.2 billion yen.

In addition to higher operating profit and unrealized gains from foreign currency bonds, pre-tax profit was plus 277.5 billion yen. Next on the sales revenue and operating profit by business segment. Operating profit for the motorcycle business was 143.5 billion yen. For automotive business, 176.9 billion yen, 69.5 billion yen for financial services, and 4.4 billion yen for power products and other businesses.

Next is on the cash flows. Cash flows in the three months of Q1 FY '24 were 285.6 billion yen. Net cash at the end of Q1 was 2 trillion yen and 984.1 billion yen. That is all for the explanation.

Thank you very much for your attention.

Unknown speaker

Thank you for your kind attention. We will now entertain questions. Due to time constraints, please limit the number of questions to two questions per person. We appreciate your cooperation.

[Operator instructions] First question, from Citigroup Securities, Yoshida san, please. Please turn on your video and microphone.

Arifumi Yoshida -- Citigroup Securities -- Analyst

Thank you for taking my question. First question, results were quite strong. Operating profit, how do you -- how much -- was it better in comparison to internal forecast? However, you have kept FY '24 forecast for the year unchanged. What is the background? That is the first question.

The second question is about China. When we look at the numbers, it seems that in terms of unit sales, you are struggling. What is the latest status, including price competition and what is the risk in terms of unit sales for this term? And what is the impact based on equity method profit?

Eiji Fujimura -- Chief Executive Officer and Chief Financial Officer

Thank you, Mr. Yoshida, for your questions. First of all, as you rightly mentioned, we have kept full year forecast unchanged. And Q1 quarter results, we wanted to convey the Q1 results today.

And regarding upside and downside, we would like to comment on upsides and downsides for your better understanding. As for how we look up the first quarter results before discussing profitability about unit sales in automobile business, 90,000, in comparison to the same period of last year, profit is maximized in North America. Increase was by 130,000 units. Annual plan is 4.35 million and the progress is 21%.

It is somewhat at a lower level, but we believe this was more or less on target. To begin with regarding China, in the beginning of the fiscal year, we mentioned in our announcement that there was a 6b pollution standard, resulting in a discount competition and there is also increase in market share in NEF market, and we expected that it will be a difficult market. In that sense, regarding unit sales, China was as we expected. As for semiconductor supply shortage last year because of the shortage, we struggled significantly.

But we have a production plan one week, two weeks ahead of time, which was suddenly changed last year. But this year in January -- especially after January, the situation continued. However, in April to June, we no longer experienced such difficult situation, but we cannot become too optimistic regarding China. So, I will come back to China later.

As for motorcycle business, in the first quarter, unit sales was slightly below our expectations. That is the reality. In comparison to last year, group sales increased by 200,000. However, on a consolidated basis, unit sales declined by 100,000.

India and Vietnam saw larger declines. As for India, from April this year, environmental regulations have to be complied to. And for that purpose, we are introducing new components. And for these new components, we were somewhat impacted by semiconductor supply issues, and it was about 50,000 down from the previous year.

However, we expect to recover in the second half of the year, and we believe that we will be able to achieve unit sales in India. As for Vietnam, you are familiar with the situation. Economy is slowing down. There are signs of slowing of the economy.

And to maximize our profit, we are also focused on Vietnam, and therefore, this is a cause for concern. However, regarding Vietnam in -- however, as opposed to Vietnam -- in Thailand and in Europe and the United States, sales unit is increasing. So, we would like to offset the decline in Thailand. As for profitability, as you mentioned, operating profit annual target is 1 trillion.

And it is about a 40% progress at 390 billion. Regarding motorcycle, ROS is 19%. And as I mentioned earlier, in Vietnam, we are struggling a bit. However, we were able to report a rather strong results.

As for automobile business, we have always been saying that we are focusing on fixed cost reduction and we are also introducing new models. We now have more or less all of the new models after Civic, and we are increasing profitability with these new models. And we have been able to improve COGS ratio and unit sales increase. Additionally, it made us -- enabled us to maximize the effect of increase in unit sales.

However, in Q1, quality-related expense was only about 0.6% of operating profit. There are also some changes in lagging -- lag from the fund and ROS for automobile is 5.8%. This is not really an annualized number, but gross profits was driven by strong unit sales, which we assess positively. As for three months, 30 billion was our expectation, but it is at 39 billion, up -- 390 billion, rather the 300 billion, which is up $90 billion and half is because of currency effect and half is because of the delay in delivery, etc.

And so, for profit and for sales units, we are achieving the plan more or less online. As for full year, forecast maintained unchanged. Well, there are China and Vietnam situation, but in areas other than currency effect, on a real basis, we have the target of 1 trillion, and we would like to make sure that that is achieved. And in the beginning of the fiscal year, we felt that it is too premature to change full year forecast, and that is why forecast remains unchanged.

So, that is my response to the first question. Turning to the situation in China. In the beginning of the year, 1.4 million was the plan, and this plan is also kept unchanged. On this point, as I mentioned earlier, we expected for the first quarter to be somewhat weaker.

And from the second quarter onwards, Accord and Breeze, Inspire, CRV, with these models, new models have been launched. And we want to make sure that with these new models, sales is expanded. But we believe that we will have to focus significantly. We have to spend a much effort.

That is how we view the situation. In coastal cities, some of the cities, and in inland cities where we were not traditionally as strong, we will also have to reinforce our sales capabilities. And in Chinese headquarters, with the partners, to achieve the target, efforts are being made. But a recent trend is such that in July, the -- combining the results, including our joint venture, at the retail level, unit sales is about 80,000 to 90,000.

And we are also dependent on our partners in our business. And currently, I'm not able to discuss on the exact number of units, but the decline in number of units, we allocate components to regions, and we will make up for that in other areas on an effective or on real basis. We will make up for the profit, and unit sales will be offset on a global basis. I think that will be the focused area going forward.

Those are my responses to your questions.

Arifumi Yoshida -- Citigroup Securities -- Analyst

Thank you very much. One supplementary question here. So, in the past, I know, you used to change your forecast on a quarterly basis, but this time, the way you present it has changed. Is that the case? Would you be willing to comment on that? And the second point is that.

So, you have not changed your forecast of 4.35 million, but the reductions in China will be reallocated to North America and other parts of the world. So, maybe, you have enough demand trend you see or maybe you have some semiconductor forecast. So, maybe you'll see some opportunities in other parts of the world other than China. Is that the case?

Eiji Fujimura -- Chief Executive Officer and Chief Financial Officer

Well, with regards to the first point, so depending on the situation, what we do with this quarter and the next quarter next year, yes, but because we're basically in line, and whatever we have laid out at the beginning of the year is our forecast, and it's also our ambition, our targets. So, if you exclude foreign currency, we would like to make sure that we're able to go with our commitments. And that's the significance of it. And also related to your latter question, about 4.35 million units.

And the reason why we have kept this plan unchanged is, basically, as you point out, let's say, it turns out to be difficult in China, if we make that decision, then we will offset that in other parts of the world. And I did not talk about North America, but actually, if you look at North America, we are producing in a very extremely, difficult environment. The supply shortage is beginning to be solved. However, we have been producing at a very low volume.

And now we're trying to lift that up. And I think last time in Q4, against the forecast, our production was not able to catch up. And so, there was a shortfall, but we need to in the stage of wrapping up for our units, and suppliers are also struggling with us together. So, we are cautious in that sense, but we -- in any case, 4.35 million, this is our global target, which we would like to make sure we're able to achieve.

We'd like to make that effort. So, that is why we kept it unchanged. That is all from me.

Arifumi Yoshida -- Citigroup Securities -- Analyst

Well, thank you very much.

Unknown speaker

Thank you, Mr. Yoshida, for your questions. Next from Mizuho Securities, Ishiyama san, please. Please turn on the video and microphone.

Yoshitaka Ishiyama -- Mizuho Securities -- Analyst

This is Ishiyama from Mizuho Securities. Can you hear me?

Unknown speaker

Yes, we can. Please go ahead.

Yoshitaka Ishiyama -- Mizuho Securities -- Analyst

Thank you. First question, I'm looking at Page 17 of the material. There is a business-by-business profit results. And for sales price, for motorcycle and automobile business, could you comment on this? According to the earlier presentation, it seems that the price level is also, more or less, in line with your expectations, but results are quite strong.

So, what is happening in more detail? That is the first question. And the second question motorcycle demand, generally speaking, how do you foresee the demand for motorcycle going forward for automobile? The 4.35 million units is the overall target. Although the breakdown might change, but for motorcycle business, could you elaborate on outcome?

Eiji Fujimura -- Chief Executive Officer and Chief Financial Officer

Thank you, Mr. Ishiyama, for your questions. As for the sales price and costs, Mr. Kawaguchi will explain.

As for motorcycle business, basically, the same applies. The target, we have to ensure the targets are achieved. And as for that likelihood, regarding India, as I mentioned earlier, there was a semiconductor shortage. However, we are making sure that we are able to take responses and that we are -- we have increased the visibility.

As for Vietnam, situation is somewhat more difficult. However, from the beginning, and I always say this, regarding motorcycle business, Asia and Brazil, our markets were very, very strong in terms of sales unit and profit. And they account for the majority of sales unit and profit. However, these are also markets with higher volatilities.

Last year -- in comparison to last year, ROS number is 19% this quarter. But given high volatilities, we expect further volatilities. So, around 15% or so, is the target for ROS constantly. And that is as far as profitability is concerned.

And as per unit sales, we would like to make sure to achieve the target. And regarding profitability, although Vietnam is somewhat down, we would like to make up for that in other markets such as Thailand and Europe and North America, where per unit profitability is higher. And it's not that we have given up on Vietnam. We would also like to continue to make effort in Vietnam.

Masao Kawaguchi -- Operating Executive, Head of Accounting and Finance Supervisor Unit

On pricing cost, thank you for the question. With regards to the impact of pricing cost, if -- I want to start from the companywide total. So, first of all, in Q1, if you look at the total, compared to last year, the selling price was actually positive, 65.9 billion yen. This includes material cost and different inflation and cost increases.

And against that, we have pricing based on the company efforts. So, this is the net effect. And up until last year, there was a significant inflation impact and raw material cost increase. And in order to absorb that, we have tried to reflect that in the pricing.

As I said at the beginning of the year, starting from this fiscal year, inflation is starting to come down. And if you look at the precious metals and materials, the pressing has also calmed down. So, whatever we have tried to respond in terms of the cost affects, this has been actually reflected in our full year basis. So, in first quarter, whatever we planned at the beginning of the year, we are beginning to see that effect in the three months interest of cost compared to Q1 year on year because inflation was intermittent.

If you compare to this quarter, including labor costs, there was elements of cost increase. Also, our suppliers, they have also been trying to raise cost -- have seen increasing cost as well. So, we talked to each one of them and tried to share the burden of the cost increase. So, increasing cost compared to the last quarter -- last year, we still see that in this quarter.

And in terms of material cost, because of the reductions in the production volume of automobile, we have seen reductions including PGM. And that portion compared to Q1 2023, we are seeing the reductions in the metal prices. So, we have seen the cost increase, but also the cost reductions in the material cost. So, that's a negative effect.

So, in other words, on a company basis, in terms of the pricing of the products, we're beginning to see a full effect of it. So, if you could kind of get that idea from that. And in terms of a motorcycle and automobile, if you look -- see the breakdown. For automobile, as we had just explained, in terms of cost increase, this has been absorbed, I think, decreasing material cost and metal price costs, and we're beginning to see positive effect on pricing.

In terms of motorcycle, the pricing is the same as automobile. But in terms of cost reduction, because of the production volume has recovered quicker in motorcycle, cost is a little bit more positive on the motorcycle side. So, 29.4 billion in here, this includes positive impact of selling price. And also, we have a net positive effect on cost as well.

So, for automobile, we are also looking at how the suppliers are doing as well, but we will continue to realize cost reductions in line with the production volume. That is all from me.

Yoshitaka Ishiyama -- Mizuho Securities -- Analyst

Thank you very much. Quickly second question. First quarter was more or less in line and probably, your forecast is kept unchanged. So, do you think that there are opportunities for upside labor costs and regarding inflation?

Eiji Fujimura -- Chief Executive Officer and Chief Financial Officer

In comparison to our expectation, we believe our costs are generally somewhat higher, but as for materials cost, they were lower than our expectations. And offsetting these, it is more or less in line from the beginning of the year forecast. As for precious metal, this is affected by commodity market, and we cannot foresee. But for the moment, it is in line with our forecast.

Thank you.

Unknown speaker

Isihyama san thank you. Next, Kei Nihonyanagi san from BofA, Bank of America Securities, please. Could you turn your camera on and the microphone on as well?

Kei Nihonyanagi -- Bank of America Securities -- Analyst

This is Nihonyanagi. Thank you for the opportunity to ask a question. I have two questions, please. First question, I'm a little bit persistent here, but in Q1, in particular, if you look at fixed cost for domestic and with regards to sustainability, would you able to elaborate? So, basically, at the beginning, I think your answer to the earlier question was that this fixed cost structure is not sustainable.

But if based on the numbers that we have seen, if you exclude the claim fees, I think you have increase of cost of about 25 billion yen year on year. Meanwhile, if you look at geography, profitability in Japan is 8.9%. This is unprecedented margin, and this seems as though this too good to be true. Meanwhile, you have undertaken different initiatives, and I think this is the effect.

And I hope that this effect will continue. So, as we have some hopes in your ability to sustain this. So, would you be able comment on sustainability? So, this is my first question. The second question is on the free cash flows and how you think about it.

If you could update us on your way of thinking in Q1, if you exclude financial services, it was a positive of 290 billion. Meanwhile, if you look at the balance sheet, there's a foreign exchange impact, but you still have a high level of inventories. So, if, let's say, as you have been saying from before, production recovers and you have increasing unit productions, that maybe you will see reductions in the internal inventory. So, this year's free cash flow could be at a very significant level.

So, if you have any target, numerical target or ballpark figure we'll be able to look at, please share that with us. So, that's my second question. Thank you.

Eiji Fujimura -- Chief Executive Officer and Chief Financial Officer

So, Nihonyanagi san, thank you very much. So, with regards to domestic Japan, every time -- I know that this is a little bit difficult to understand because it's by site, by -- and we submit this number by segment. So, as you know, very well -- so, that we have the business we produce in Japan and sell in Japan. We have business where we do knockdown export from Japan and then we have R&D and we have business where we're able to collect on a royalty basis.

So, there are three different types of businesses which exist, and we're trying to present this altogether. So, that is why it's very difficult to understand. In Japan, the fixed cost reductions benefit that's being realized here in Japan, this is more or less -- this is the impact on the increasing royalty from overseas and also foreign exchange. And, I think those have comprised a very large portion.

With regards to the reductions in fixed cost, in North America, Europe, and Asia, we have implemented different measures to do that. And, of course, we are also trying to improve our debt situation in Japan as well, but I think the growth comes from mostly from foreign exchange and royalty -- royalties. I think those are the two large effects. 

Masao Kawaguchi -- Operating Executive, Head of Accounting and Finance Supervisor Unit

With regards to free cash flows. It's true, 290 billion yen, that's right. This was the case last year, but there's about 700 billion yen or so on an annual free cash flows. So, with regards to this year, we're eyeing about that same level.

So, as I have said, profit is about 40% right now. And also, in terms of investment, it will be -- and of course, we happen to invest, taking equity stakes in companies, but investment is more leaning toward the second half of the year. So, between 600 billion yen to 700 billion yen in free cash flows, we should be able to generate for this full year, that's our plan. And with regards to the inventory this is compared to our peers, our inventory management against sales, revenue tends itself.

It tends to be, a little bit, on the larger side because we are trying to supplement on a global basis. But reversely put, we have some challenges on the distribution logistics side. So, I have mentioned before that we would like to entrust this to [Inaudible] but as you point out, this is an area where we would like to improve. We do have foreign change impact, but inventory is of that situation.

So, it is slightly high. We do agree with you. Hope that answers your question.

Kei Nihonyanagi -- Bank of America Securities -- Analyst

Thank you very much. So, for each point -- first, the question. So, in Japan, it is lagging behind in terms of when it is accounted for n this current fiscal year or the next quarter. But what is the situation? And as for -- toward the end of the fiscal year, inventory will decline and the free cash flow, of course, there may be more investments but decline in inventory will contribute to free cash flow.

Eiji Fujimura -- Chief Executive Officer and Chief Financial Officer

As for the first question, the answer is yes. Your understanding is correct. As for inventory, naturally, if our products are sold, inventory should come down. And right now, production -- as soon as we produce a car, it is sold, especially in North America.

So, I believe, the inventory level at the current level may continue where it is a slightly higher, it may come down, contributing to free cash flow. But overall, what we envision is around 700 billion yen in free cash flow.

Kei Nihonyanagi -- Bank of America Securities -- Analyst

Thank you very much.

Unknown speaker

Thank you, Mr. Nihonyanagi. Next from Daiwa Securities, Hakomori san, please. Please turn on your video and microphone.

Eiji Hakomori -- Daiwa Securities -- Analyst

Hello. I'm Hakomori from Daiwa Securities. Thank you for taking my questions. I have two questions.

First, according to the presentation material, Page 17, detailed breakdown of increase and decrease are given for both motorcycle business and automobile business. As for the unit for automobile, the sales unit, it is 130 billion. And I understand that there was an increase of 130,000 in the -- in North America, where there's a higher profitability. But in any event, increasing profit is very large.

So, could you comment on this? And the -- as for the operating profit ratio of automobile, it was mentioned that it is not sustainable, but the 5.8% is in comparison to the competitors is not especially high. And with the unit sales recovery, could you comment on the mechanism where you do not expect a much recovery in operating profit margin? And the question is a very simple question. In the United States, what is the latest in terms of your demand forecast for North -- for the United States?

Eiji Fujimura -- Chief Executive Officer and Chief Financial Officer

Thank you, Hakomori san, for your questions. As for the breakdown, I would like to ask Kawaguchi san to discuss later. In comparison to a unit, it might appear larger. Profitability by model and cost reduction efforts have been providing a positive impact.

Marginal profit per unit, although this is not disclosed in North America, in comparison to when I was in the U.S. three years ago, it has increased substantially. There is also an impact from currency effect to the positive side, but very high level is realized, Accord, CRV, Pilot are the new models that were added, and I see strong positive impacts from these models. As for 5.8% in comparison to the peers, it is not necessarily high, and that is true.

But in any event, ROS of 7% or above, by 2025, these are our target. And in the pursuit of such target for automobile business, it is not 7% or more. With the help from motorcycle, it is 7%. So, it may be around 5% to 5.5% in automobile for ROS.

And steadily, 5.8%, whether it is sustainable or not, I'm only looking at this fiscal year. And I mentioned that it may not be sustainable, but we would like to make sure to raise ROS, and in what ways can we increase ROS by region or globally. We have production capacity of 5.14 million, but we are producing only about 4 million or so. So, we should increase our production and price per unit.

We will continue to examine the unit price. We have been making efforts to reduce cost. And we also have been supporting our suppliers. And after COVID pandemic, unit number declined and there were also some issues with our operations.

Based on the premise that we have sufficient semiconductor, we have production plants. However, because of a shortage of supply, we have to stop in some places, and we have, of course, inconveniences to some of our suppliers. We have to stabilize the production and we have to make sure that we do that. There is no magic wand because we're dealing with production.

We have to steadily improve the production and thereby achieve the target. As for the U.S. business before that, could you give the breakdown?

Masao Kawaguchi -- Operating Executive, Head of Accounting and Finance Supervisor Unit

Thank you for the question. With regards to automobile, impact from sales is not much trick to it. As Fujimura said at the beginning, last year, we invested highly profitable sort of architecture effect in our models, so highly profitable models we have launched, and that is why we have seen an increase of 125,000 units excuse me. And meanwhile, in Asia, especially in India, we have seen slowdown in units.

And on the average basis, we need -- I think it has helped increase the unit price for automobile. And in North America, the fact that the production volume has seen beginning to ramp up on a supplier basis, there are some that it will be included in consolidated basis. So, there's improvement in profitability there as well. So, there's a little bit of that, but I would say the majority is contributed from the North American increasing units.

So, that is all from me.

Eiji Fujimura -- Chief Executive Officer and Chief Financial Officer

Thank you. And that's a situation in North America. So, Q1, as we have described, sales are solid. Demand is good.

Civic, HRV, CRV, Pilot, Accord, all of these model cycles have been leveraged, and I think we been able to make a good use of that. In terms of dealer's inventory at the end of last fiscal year, so end of March, we had about 60,000 in big dealer inventory. While we are increasing production, our inventory level is only 62,000. So that's only an addition of 2,000 units.

So that's why wholesale, you know, production and sales, I mean, this is all continuing in a good cycle. So, as I have been saying, we would like to work with the suppliers to focus on ramp up. And there will be some challenges, of course, but we would like to make sure that we're able to wrap up our production in North America. So, we're working on that.

And for this fiscal year, there may be some concerns of recessions and maybe in terms of the used car market impact. There is a little bit of uncertainties, maybe with -- in terms of certainties, but maybe on the recession side, we're starting to see some anticipation of that. So, we would like to maximize our sales opportunity, and in order to leverage that we need to make sure that we are able to complete our production plan. With regards to finance -- financial services, so there was a time, where we had reduced incentives, and that's why the penetration was less than 50%.

And also, you know, U.S. Honda units were slow. So, financial receivables have decreased, but finally, penetration has recovered to more than 60%. And as a result of that, in terms of the reductions, receivables has hit bottom in terms -- We look at KPI, of an ROA in order to operate our financial services.

So, in terms of operating profit, it's somewhat inevitable that there's a little bit of decline here, but we have hit the bottom. So, even compared to last year, receivable is low. And so, there's reductions on the profit side, but that's the situation with the gross profit. Now in terms of used car, if you were looking at Anaheim Index as well, we see some result there.

But against that residual contract amount, there's about $4,000 per unit on average. We're still on the gains. There's gain cut from there. So, I don't think it will turn into losses right away.

And even if it does turn into losses, you can say that this is heading toward normalization. Also, in terms of residue of value, the fact that it is on gain sign, validation gain side, it means that we are not able to return -- the cars are not returned to us. Before COVID, it was, like, 60,000 that was returned, and we were able to auction it, and that was a residual loss. But that's only about 2 million right now -- 200 units right now.

So, there will be negative impact on the used car side, but it's not that we will be impacted by that immediately, at least not so much. So, with regards to charge-offs, we are now beginning to see this come back to pre-COVID situation. And during the days of Mr. Trump and onward, there was support for the households during COVID.

So, there was hardly any charge-off credit losses at the time. But now, beginning to -- go back to the pre-COVID. So, there's about 0.6% in terms of credit loss allowance rate, but this is, on a normalized basis. I think we're going back to a normalization.

So, in the United States, on the finance basis, we will manage ROA based on pricing. So, we do not have any large concerns over financial services at this point in time. I hope that answers your question.

Eiji Hakomori -- Daiwa Securities -- Analyst

Yes. Thank you for that very thorough detailed response.

Unknown speaker

Thank you. Next from Goldman Sachs, Yuzawa san, please.

Kota Yuzawa -- Goldman Sachs -- Analyst

This is Yuzawa from Goldman. Thank you for taking my question. I have two questions. First, appropriate valuation.

You have announced a buyback and you have also announced a stock split this time. And I believe you will continue with these actions, but what are other measures and actions that you plan to take going forward? And at the same time, you had these results this time, but how do you plan to change the structure of the group companies? What are your thoughts? And second question, about China, you've mentioned that you need to make much efforts. Could you comment in more detail? EV market, it is very difficult. And at the price level, it seems difficult to improve the situation in China.

So, what are your plans for the countermeasures in China?

Eiji Fujimura -- Chief Executive Officer and Chief Financial Officer

Thank you, Mr. Yuzawa for your questions. First, about, buyback. As we have been stating from the beginning of the year, inclusive of future free cash flow and net cash is 2.2 trillion -- 2.9 trillion, about 2.3 months' worth, and there is an accumulation of cash.

And equity ratio is about 46% in terms of capital policy. And in anticipation of a major transformative time in the future, we also have to be mindful of our ability to invest, but we have to be reviewing our capital policy. And as for PBR, there's much talk about PBR these days. But even before this became a hot topic, we have been conscious of this issue, and we have been making efforts to improve.

As for the measures going forward, it is difficult to comment specifically. As for a dividend, we would like to ensure that we will continue to have a payout ratio of 30%. As for acquisition of our own shares buyback, we would like to look at the situation and be even more timely. As for stock split, we have been considering this for quite some time.

Of course, others are also, taking measures recently. And I do not know whether the numbers that I have at hand are correct. I apologize if I'm mistaken, but there's a 2,000 trillion of individual assets and about 1,000 trillion is in bank deposits, close to a market capitalization of a total TSC are parked in bank deposits and government is encouraging, investments, including in NISA. 8% is the percentage of individual investors out of our investor base or shareholder base.

We would like to see more individual shareholders. And through holding of our shares, we hope that individuals will support Honda and will take greater interest in Honda's business. We hope that that will be the case. And that is why we have decided to implement the stock split this time.

And it should be done at such a time as when the stock price is rising. And since it is currently rising and right before a new NISA program is introduced the next fiscal year, we were able to implement this. Unfortunately, and the stock split by itself is not sufficient. We would also like to enhance investor relations for individual investors, retail investors.

We would like to stay young as a company, and we would also like to make a young investors interested in our company. So, we would like to make it toward that end as per reorganization of Yachiyo, and as for the structure of group companies. In electrification, because of electrification, what components, what technologies will become core technologies. We have to be able to identify that as we consider the structure as a group.

What company -- what to do going forward? I'm not able to comment naturally, but the basic is the technology. And what will happen given the electrification going forward. However, if we combine and consolidate, as was the case with Yachiyo, we believe that we are able to improve our enterprise value. And mothers supported us.

And so, we would like to pursue a win-win solution for our structural reform. As per improving the situation in China, I think there are about three things, over time, short-term measures. Right now, we are trying to establish a new factory with two joint venture companies targeting 2024. And if the current 1.4 million unit is difficult, we have to think about fixed costs, those will be short-term measures -- short- to medium-term measures.

And going forward, regarding EV, we will be focusing on EV, and we would like to launch attractive products. And as we have been saying, in fiscal '25, the third phase, fourth phase, EVs will be introduced. And by fiscal 2028, we will have 10 models of EV in our lineup. Whether this is speedily enough, we may have to review that once again.

And as I mentioned earlier, we are doing this through our joint venture business. And our intentions will have to be discussed thoroughly with our joint venture partners to reach a conclusion of what we should be achieving. And therefore, at this point in time, I would like to refrain from commenting specifically on what we will be doing, but I believe there is a shared understanding of the issues among our joint venture partners. So, through discussion with our partners, we would like to decide the measures over short -- medium to long term.

And we will be implementing those measures. I apologize that I cannot discuss in concrete terms, but that is what I meant in terms of improving China.

Kota Yuzawa -- Goldman Sachs -- Analyst

Thank you for the explanation.

Unknown speaker

Mr. Yuzawa, thank you. I need to apologize. But next question will be the last question.

Mr. Nurase rom Okasan Securities. Over to you.

Thank you. I'm Nurase from Okasan Securities. Can you hear me?

Eiji Fujimura -- Chief Executive Officer and Chief Financial Officer

Yes, we can hear you.

Unknown speaker

Thank you. I just have one last question. About your battery strategy, if you could explain once again, not to give an example from other companies, but Toyota has made different announcements about battery. And there's some OEMs that have made and announced about yen investment.

So, you are starting up a business on battery with a GS Yuasa. So, what sort of battery are you planning to develop? I know you have all solid state, but what is the situation today? And also, overseas, you are now tying up with LG. But domestically, who's going to produce the batteries? So, you have announced on the development, but what about production, including sourcing raw materials? So, I know this is going to be a right topic, but if you could give us a progress update on battery?

Eiji Fujimura -- Chief Executive Officer and Chief Financial Officer

Thank you, Mr. Nurase. With regards to battery, in April 2026 -- I'm sorry, April 26, excuse me, we have made announcement about technology strategy. So, I think you have looked at that and your question is based on that.

But basically, in terms of the nature of the batteries, it should be producing soon locally. So, our main markets or electric vehicle in markets where the developments of EV will be fast. So, that would be most likely in North America and China. So, in China, we would purchase from CDATL.

That's how we would source in China as we -- it was mentioned earlier. And there's some challenges in terms of speediness, and we have some other challenges as well, but that's where we are. With regards to North America, this year, finally, we have been able to -- we have been developing a model, EV model, electrified model, which we have co-developed with GM, and that would be launched finally. But in this way, we will be able to source from GM in terms of vehicle.

But we also have a joint venture production with LG, which we established in Ohio. So, we will produce there and we will install that on our vehicles. So, those are what we have in mind. With regards to GS Yuasa, this is a company that developed battery, but we are also thinking about manufacturing development.

So, we were looking at the manufacturing method, development, and this is more or less looking up from the raw material stage to recycling. So, this is all a resource circulation. We're looking at to see whether we can do some circular activity like that with GS Yuasa. So, that's what we have published already, and we started activity already.

So, that's manufacturing and development of battery. But ahead of that, we will be producing battery as well with GS Yuasa and also, Blue Energy, the company that we have been working together, and Honda. So, this is a three-party structure for production. And this is something that we are discussing in Japan.

So, that's the situation. Hope that answers your question.

Unknown speaker

Thank you. So, I understand the direction. Meanwhile, what about battery performance? Are you going to look for something that's innovative, or is it something to be considered on all solid-state batteries maybe for this initiative, this is more on the recycling, more sustainable and more practical basis? So, what is the type of batteries which you plan to sort of segment or break it down? So, if you could give us some -- your thoughts on that?

Eiji Fujimura -- Chief Executive Officer and Chief Financial Officer

So, in principle, the mainstream is lithium, but -- liquid lithium-ion, but -- and of course, we're looking at that. But if you look at the technology trend, I think it's risky to just focus on one direction. So, in terms of pattern, but for semi solid state, we work with GM. And as for all solid state, we have seen a pretty good result in lab basis, and we are trying to produce production Pilot line -- build the production of Pilot line.

And I think the key will be the manufacturing method in terms of all solid state. So, we're aiming for a breakthrough there. So, that is why in the latter half of 2020 -- so, '25 to '29, that's we're looking at commercialization. So, we need to pursue, basically, different strategy -- different technologies at the same time.

So, that's how we proceed with it. Thank you very much.

Unknown speaker

Thank you for your questions. Thank you, Mr. Naruse. [Operator signoff]

Duration: 0 minutes

Call participants:

Unknown speaker

Eiji Fujimura -- Chief Executive Officer and Chief Financial Officer

Masao Kawaguchi -- Operating Executive, Head of Accounting and Finance Supervisor Unit

Arifumi Yoshida -- Citigroup Securities -- Analyst

Yoshitaka Ishiyama -- Mizuho Securities -- Analyst

Kei Nihonyanagi -- Bank of America Securities -- Analyst

Eiji Hakomori -- Daiwa Securities -- Analyst

Kota Yuzawa -- Goldman Sachs -- Analyst

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