Honda Motor Co., Ltd. (NYSE:HMC) Q3 2024 Earnings Call Transcript

Honda Motor Co., Ltd. (NYSE:HMC) Q3 2024 Earnings Call Transcript February 9, 2024

Honda Motor Co., Ltd. beats earnings expectations. Reported EPS is $1.06, expectations were $0.85. Honda Motor Co., Ltd. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Unidentified Company Representative: Thank you for taking time today. I would now like to begin Honda FY 2024 Third Quarter Financial Results Press Conference. First, an introduction of Executives on stage. Executive Officer, CFO, Eiji Fujimura.

Eiji Fujimura : Thank you. I am Eiji Fujimura.

Unidentified Company Representative: Operating Executive Head of Accounting and Finance, Masao Kawaguchi.

Masao Kawaguchi: Thank you. I’m Kawaguchi.

Unidentified Company Representative: First, Fujimura will present the FY 2024 Third Quarter Financial Results and FY ’24 financial forecast, followed by Kawaguchi’s explanation on the details of both. With no further ado, Mr. Fujimura, please.

Eiji Fujimura: To start with, first of all, I would like to extend my deepest sympathy to the victims of the very worst Reiwa 6 Noto Peninsula Earthquakes occurred on January 1, as well as to their families, and I wish for a quick recovery and the reconstruction, restoration of the affected areas. I will explain the financial results of the third quarter and forecast of the full year of the FY 2024. Starting with the summary of the results. With regards to the cumulative unit sales into the third quarter of FY 2024, the unit sales of the motorcycles businesses increased mainly in Brazil and Europe, achieving the highest-ever operating profits and operating margins. In the automobile businesses, despite the impact of the warranty expenses, the volume went up mainly in North America, significantly raising the operating profits year-on-year.

As a result, operating profits of the whole company marked JPY 1,076.3 billion with the operating profit margin being 7.2%. Regarding the forecast of FY 2024, although some challenging market environment exists in Asia, reflecting additional strength of the earnings structures and the favorable currency impacts, we will revise the previous forecast. For the shareholder returns, in order to improve capital efficiency, we made a decision of our share buybacks in the board of directors meeting today for the amount of JYP 50 billion. Together with the already acquired JYP 200 billion, this term, it will add up to JYP 250 billion in total. Further to the share buybacks, we resolved the cancellation of the treasury stocks as many as 154 million shares.

Honda will accelerate our efforts to improve capital efficiencies in order to enhance corporate values. Let me explain the current situation of automobile businesses in the main markets. Due to the solid demand in the United States and the production recovery in Japan leading to the incremental unit sales, the entire unit sales increased year-on-year. In terms of the sales forecast of the FY 2024, we are expecting the sales drop in Thailand and Indonesia. However, we expect the sales unit increase in China. There’s no change of the previous forecast. Speaking of our initiatives for electrification. In CES, the world largest tech exhibition in Las Vegas, the other day in the U.S., in that show, we made a world of premiere presentation of the new global EV concept model of Honda Zero Series, the concept model named Saloon and Space-Hub.

As the Fuel Cell System Manufacturing LLC, the joint venture company with General Motors, we have started the production of the air fuel cell systems. Next, moving on to the motorcycle businesses. In terms of the cumulative results until third quarter, despite the unit sales fell in Vietnam vehicles because of the economic slowdown, we had a stable demand growth in Indonesia and Brazil, thus the entire result ended up at the equivalent level last year. In the third quarter alone, we had increased unit sales in Brazil and India due to the reduction of units in Vietnam. The entire result was lower year-on-year. Speaking of the results forecast of FY 2024, we expect unit sales reduction in Vietnam and in Japan. However, sales in India and Thailand would grow.

Therefore, the previous forecast still stands unchanged. In November 2023, Honda organized a briefing concession on electric and motorcycle businesses. We updated our sales target of electric motorcycle in 2030 from the previous announcement of 3.5 million to 4 million units. We announced high money models to be launched, and we announced electrification strategies such as production and the procurement structures. Honda will accelerate electrification of our motorcycles, our businesses as well toward the realization of the carbon neutral. Next, regarding the outline of the cumulative financial results up until the third quarter FY 2024. In spite of the negative impact of warranty expenses, we had incremental sales of automobiles and the pricing scheme that reflects the commercial value of the products and so on due to which the operating profit increased by JPY 342.4 billion year-on-year to reach JPY 1.0763 trillion.

The profit for the period attributable to owners of the parent is JPY 869.6 billion, up by JPY 206.4 billion. Moving on to the consolidated financial forecast of the FY 2024. In spite of the challenging market environment in Asia and the higher warranty expenses with the reflection of additional fortification for profit improvements and current impact, we have revised the operating profit expectations to JPY 1.25 trillion, up by JPY 50 billion. The profit for the period attributable to owners of the parent is expected to be JPY 960 billion, up by JPY 30 billion. Forex assumption is JPY 144 for $1 in the second half and is JPY 142 for $1 for the full year projection. Unit sales and PL are shown in this slide. Regarding dividends. Expected annual dividends for 2024 will be JPY 174 per share based on the condition before splitting the shares.

Therefore, no change from the previous announcement. At today’s board meeting, we passed a resolution regarding acquisition and cancellation of our own shares. For the acquisition, we have set an upper limit of 34 million shares or JPY 50 billion. Regarding the cancellation, approximately 154 million shares will be canceled. Next, Mr. Kawaguchi will explain the details of the financial results and forecast.

Masao Kawaguchi: Let me begin. At first, the Honda Group FY ’24, April to December, nine months unit sales by business area is as follows. Motorcycles, a decline to 13,961 million units compared to the same period last year, mainly due to decrease in Asia. Automobiles, 3,114,000 units led by an increase in North America. Power products business, total sales amounted to 2,548,000 units led by decrease in North America. Next, a change in profit before income tax for nine months and compared to the same period last fiscal year. Firstly, operating profit increased by JPY 342.4 billion. The change factors are as follows: Sales impact. We saw a positive impact on profit of JPY 282.4 billion mainly due to an increase of automobile sales, price, and cost impacts.

The pricing that reflects increased products value, a decrease in precious metal prices and other raw material costs had a positive impact of JPY 359.8 billion. Expenses. Increase in warranty expenses plus other factors had a negative impact on profit of JPY 366.6 billion. R&D expenses had a negative impact of JPY 28.5 billion. Currency effects, a positive impact of JPY 95.4 billion. Profit before income taxes, despite a decrease in equity method profit mainly from China due to an increase in operating profit, interest income, and other, profits was increased by JPY 405.1 billion. Next, sales revenue and operating profit by business segment. Operating profit marked a record high of JPY 411.5 billion in motorcycle business. Operating profit for automobile was JPY 460.5 billion, financial services JPY 204.8 billion, power products businesses and others was a negative JPY 400 million.

Next, I would like to explain the cash flow situation. The FY 2024, nine-month free cash flow of operating companies, excluding financial, was JPY 926.5 billion. Net cash balance at the third quarter end was JPY 3,183.3 billion. Next, the forecast for fiscal 2024. Honda group unit sales for each business operation by region, the total volume is unchanged from our previous forecast. Next, forecasted change factors behind profit before income taxes year-on- year. First, operating profit, we expect an increase by JPY 469.2 billion. The breakdown is as follows. Sales impacts, a positive profit — for sales impacts is positive of JPY 360.6 billion, mainly due to an increase in automobile unit sales, price, and cost impacts. Although there is an increase in labor costs, positive effects of pricing, plus a decline in raw materials such as precious metals lead to a decrease of JPY 434 billion.

Expenses, negative JPY353.4 billion due to an increase in warranty expenses and others. R&D expenses, a negative impact of JPY 51 billion on profits. Currency effects, a positive impact of JPY 79 billion. Although profit before income tax is expected to increase by JPY 565.4 billion despite a decrease in equity method profit mainly from China, offset by increase in interest income and others. Next, changes from the previous forecast. Operating profit and profit before tax forecast is increased by JPY 50 billion. The breakdown is as follows. Sales impacts, negative JPY 11 billion, mainly due to decrease in consolidated unit sales and price and cost impact. Although there is labor cost increase,pricing relating to the increased product value plus decrease in raw materials such as precious metals, will result in a JPY 40 billion increase in profit.

Expenses, minus JPY 32 billion is forecast mainly due to an increase in warranty expenses. Currency effects, an increase of JPY 53 billion. Lastly, the forecast for capital expenditures, depreciation, and amortization, and R&D expenditures for FY 2024 as shown. There are no changes from the previous forecast. This concludes my explanation. Thank you for your attention.

Unidentified Company Representative: Thank you very much for your attention. So, we’d like to now continue on with the questions and answers. As we have announced before, we are going to take questions on the Zoom. And because of the interest of time, please limit your questions to two questions per person. Thank you very much for your cooperation.

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Q&A Session

Operator: The first question from the Asahi Shimbun Newspaper, Mr. Wakai, please.

Unidentified Analyst: Wakai speaking from Asahi Shimbun. Can you hear me?

Unidentified Company Representative: Yes.

Unidentified Analyst: I have two questions. Question one is Daihatsu homologation problems. You have many Kei cars by yourself. And what is the impact of sales because of that? And those are fraud in the homologation and development stage. What sort of actions do you take to prevent those compliances? And the second question is the Noto earthquakes, there should be some reduction of a production ongoing today. What is your perspective going forward as a business? How do you address the situations, especially with the suppliers involved?

Unidentified Company Representative: Thank you very much for your question, Mr. Wakai. Thank you for those two questions. And let’s start with the Daihatsu fraud. These are other company matters. And we do not fully understand what actually had happened. Therefore, speaking of the financial status, and also what we do to prevent such things, that’s the thing we can explain perhaps. And in terms of the results, Daihatsu may have a less number of the sales and then the sales of those Kei cars, whether that will be added to our sales of budget cars. In fact, we do not have any reflections as such effect of additional sales in our financial results at this time. However, of course, there should be some impact on the sales to a certain extent.

However, their cars and our Kei cars are priced differently, different price range. And also, our Kei cars are not really shipped to the general dealers, different sales dealers. Therefore, the impact should be restricted, I believe. And also, in terms of our actions to prevent such fraud. At Honda, we have those homologation testing and we have those homologation department who does the testing and the application of those matters. Actually, this department is separately organized away from the development and the production. And in order for that department to conduct test and process for homologation, they already have the well-documented processes as to, for instance, how many days it should take until the acquisition of those certificates.

And of course, those certification has to be given in order to make the process to go on to the next development process. We have the clear rules for that. Therefore, we do not have the system such that we can prevent the very tight development stage, which might induce the fraud of those kind. And starting from April 1, new homologation department and quality improvement departments are to be a part of the functional department so that they can have the improved and fortifying their quality governance going forward. And in the EV area coming up now, digital as well, maybe in those areas of electrifications or digital things, we would have additional checks, including cybersecurity, I suppose. Therefore, we should make sure we would have a good hands on that.

And as a head office, we have a good organization to ensure those control. In terms of the Noto Peninsula earthquakes. As we said, right at the beginning, we would like to wish for a quick restoration of the affected areas and people there. And our situation is that Tier 1, 2, 3 suppliers, those have a very tight lifeline situations and the possibility of the recovery of the production, the stock levels and so on, in fact, every day, we are checking out the level of the stocks, their situation of the recovery of those suppliers. And every day, the situation is progressing. And in fact, our financial statements at this time do not reflect the impact by the Noto Peninsula earthquakes. However, every day the situation progresses. And as for the recent production conditions, specifically with the Kei cars, mini cars, so-called shaving reduction of the production unit per day is actually conducted now.

And we had the operations planned on Saturdays, Sundays, holidays too, but we had to cancel those holiday operations in order to adjust production. And we have about 20,000 units affected due to that reason. And in terms of the recovery and so forth, we will continue to look into the situation so that we can explain when the situation is clear. And in terms of the BCP and the supply air condition, how do we control that? Specifically, the suppliers operating the affected areas, of course, making the greatest efforts to recover. And thanks to them, we try to get information of what they do, stock levels, and the potential production of alternative manufacturing in other areas globally. In fact, we’ve had quite a good know-how since the last earthquake events.

Therefore, at earlier stage, we could grasp the situation earlier. So, this is the situation today. Semiconductor included as well.

Operator: Next question. Mr. [indiscernible], please. Mr. [Indiscernible], please. We cannot hear you. Can you check out with your microphone? Can you hear me?

Unidentified Analyst: Thank you for the presentation. I have two questions. Well, we have seen a number of recalls in this fiscal year. And I think it’s reached to some tens of thousands. And you say that the warranty is JPY 353.4 billion. And does this include all the costs of a recalls? Or is it a case that the warranty expense will increase further from what you have already stated?

Unidentified Company Representative: Yes, thank you. And yes, in the third quarter, well, the warranty costs expenses have increased. I did explain that. So, there was a fuel pump [indiscernible] this incident. So, this has been added to the fuel pipe. First of all, I’d like to express my condolences to the person who has passed away. But this, in terms of the accounting, the financial statement, is this reflected in the numbers? Well, in terms of the units, as you mentioned, it is increased to some few million units, and we will respond to this situation. And in terms of the financial statement, we believe that this is a failure coming from supplier side. And therefore, we will have them compensate for the recall expense. And this is how we’ve handled it in our financial statement.

In regards to this case, the warranty expense is not that large. And that is our understanding. And the reason why it’s large, in the February 1, the U.S. authority and we’ve already filed notification of a recall, there’s a seat weight sensor. And there was a failure with the seat weight sensor. And we have added some JPY 55 billion for that recall. And I think that this is a reason that can be attributed to the increase in warranty cost. Thank you.

Unidentified Analyst: May I have an ask another about your buyback of shares? Why did you decide to acquire your own shares? Well, yes, I think there’s still room for increase in shares given the weak Yen. And I think that impact of the interest rate hike in the U.S. and China. But is that the reason behind this decision, the resolution?

Unidentified Company Representative: Well, about the acquisition of our own shares, we want to improve the capital efficiency. And recently, the issue is the PBR, onefold. Given this, I’d like to start talking from there. We, the management, we are aware of this PBR issue, and we take it seriously. And therefore, we are thinking of what we need to do. We believe that it is a responsibility for us to take further steps. It’s about JPY 1,700. It’s about 0.7 folds right now, and it’s less than one fold, 1.0. And I think there are three reasons for this. Well, the three are: those accumulated from the past and the current and the future. So these are the three-folds. First, from the past. Over the past decade, our capital has increased from JPY 6 trillion to JPY 12 trillion.

And so, it’s 45% in terms of the ratio. And we have to deal with this past that we have. And the current situation is, that for a long time, the automobile revenue had dropped and therefore, the share prices were not increasing because of this situation. But in regards to this, I’m looking at the financial results here. As we’ve been saying for the past, we are trying to reduce the fixed cost and also improve the revenue of new models, and incorporating these measures, plus the shortage, we are starting to recover from the shortage of semiconductor, and therefore, the revenue of automobile business is improving. And so, this is the current situation. And what’s more important is the future, the auto sector as a whole, their share prices are not picking up.

This is because in this age of the XEV, we really don’t know who the winner will be, and therefore, there is this lack of transparency, uncertainty. And I think that this is having an impact on our business. But we believe that given the age of zero emission, we have to come up with our own strategy and try to improve our resolution, so to say, and try to make investments in the growth sectors and try to reap the profit from those investments. So, in order to improve this so-called resolution, the other day at CES, we communicated that we have a brand strategy in place. Plus, we have technology investment and other strategies to reap the fruit from our efforts in place. And next fiscal year, we are going to have a press meeting. And so, the way we communicate will be changed so that we can gain more understanding from the market.

And we will also try to change our way of communicating our technology to the public. So, this is something that we are thinking of right now. So, among these three and going back to the first one, so in regards to our capital here, we want to return to investment. And for the beginning, we have had JPY 200 billion acquisition of own shares and this program has ended in December last year. So, just like that, we are going to maintain that pace. And by the end of this fiscal year, we want to complete this process. And given this, we believe that this time, the JPY 50 billion decision was made, and we’ve just made this announcement here. We want to be actively investing in the future. And so, while we do that, and also, we have to try to continue to earn with the profitability of ICE, Internal Combustion Engine, and we have to invest in growth and have a balanced way and at the same time, improve our capital efficiency.