Honda Motor Co., Ltd. (NYSE:HMC) Q4 2024 Earnings Call Transcript

Honda Motor Co., Ltd. (NYSE:HMC) Q4 2024 Earnings Call Transcript May 11, 2024

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).

Operator: Thank you so much for taking time to join us here today. And I’d like to begin Honda FY ’24 financial results press conference. First, the executives in attendance today are Toshihiro Mibe, Director President and Representative Executive Officer. Hi, Mibe, and thank you very much. Shinji Aoyama, Director, Executive Vice President, Representative Executive Officer. Aoyama, thank you. Eiji Fujimura, Managing Executive Officer and CFO. And Fujimura, thank you very much. First, Mr. Mibe will give a summary of the results, followed by Mr. Aoyama who’ll present the FY ’24 results and FY ’25 forecast and shareholder returns. Mr. Mibe, please.

Toshihiro Mibe: Once again, good afternoon. I’m Mibe. I’d like to first thank all of you for taking time today and providing generous support to Honda’s business. As a mobility company, Handa Pilot its value proposition of 0 environmental impact and absolute safety through the social values of environment and safety, we aim to realize our vision of future mobility and an attractive mobility society. This will enable us to manifest a new corporate path of growth. We see for continuing understanding and support us Honda’s initiatives. I would now like to review our FY ’24 financial results and explain our forecast for FY ’25. FY ’24 operating profit was a historical high, JPY 1,381.9 billion. Operating profit margin was 6.8%. In FY ’25, we will steadily dedicate resources to electrification and aim for operating profit of JPY 1.420 billion, operating profit margin of 7%, 1 year ahead of our original plan.

FY ’24, cash flows from operating activities, the source for future investment, excluding R&D expenses was roughly JPY 3 trillion, up JPY 1 trillion year-on-year. We have the foundation to support future investment for growth. Shareholder returns is regarded as our top priority management issue. FY ’24 dividend was JPY 68, up JPY 28 year-on-year. In FY ’25, we will acquire a record high JPY 300 billion of the company’s shares and realized a stable, continuous dividend policy. Next, I will review the initiatives we have taken towards establishing earnings base. Motorcycle business, in addition to our dominant position in Asia, we have expanded large motorcycle sales in advanced nations and expanded product lineup in South America to further strengthen our business structure and build a well-balanced global income structure.

Regarding automobile business where profitability was an issue. We increased commonality ratio of car models such as CR-V, Civic and Accord, reduced hybrid system costs and enhanced product appeal to steadily improve our business structure. We will further evolve performance and cost of a hybrid system, targeting the second half of this decade. Next, initiatives for enhancing corporate value. Accurately, the PBR remains less than onefold, we believe there are 3 reasons as shown. To address this, we will optimize capital through proactive shareholders returns, build and maintain earning base and work out granuality of electrification strategy. As for FY ’25, we will acquire JPY 300 billion of our company shares and aim for an operating profit margin of 7%.

The details of our electrification strategy and capital allocation will be explained at the 2024 Honda business briefing on May 16. And through these initiatives and continuing dialogue with stakeholders will aim for an early achievement of our more than 1 PBR. Next, Mr. Aoyama will present the details of our financial results.

Shinji Aoyama: So let me explain about the actual results of FY 2024 followed by FY 2025 outlook and shareholders’ returns. With regard to the updates of the main markets of total bills, the market declined in China, but increase in the United States due to the stable demand has led to the overall sales exceeding last year. Commodore businesses, the market Vietnam declined because of the ongoing slowdown. However, the unit sales increased in India and Brazil due to the solid demand contributing to the Opel market almost or similar to last year. Regarding Honda’s group’s rated sales of motorcycles, mainly due to equipment units in Europe as compared to last year, we achieved 18.819 [indiscernible] sales with the units sold mainly due to decrease in North America.

And for our product urgencies, we achieved 3.81 million units due to this decline in North America. This is the summary of the consolidated financial results. Also on the digital oil unit sales, thanks to the improvements of the model profitability, we achieved the operating profit of JPY 1.3819 trillion, up by JPY 601.2 billion. We accomplished the highest ever results in operating profits, profit before income taxes and profit for the year 2024 to other of the parent. ROIC was 9.5% and ROE, 9.2%. Let me explain factors of ups and downs of profits as compared to the last year. There were some impacts by inflation and so on. However, due to the effective price game that reflects the improved commercial value of the products and incremental auto bill unit sales.

We achieved JPY 1.31 trillion, operating profit up JPY 601.2 billion year-on-year. Profit before income taxes was JPY 1.64233 trillion, up by JPY 762.8 billion year-on-year. Regarding operating profit by business segment. Motorcycle business is JPY 556.2 billion, the highest ever result. Automobile business is JPY 560.6 billion. Financial services business JPY 273.9 billion. And for power products and other businesses, it was a negative JPY 8.8 billion. Free cash flow of our business companies, excluding financial businesses, was JPY 1.4609 trillion with JPY 3.7616 trillion of net cash balance at the end of the period. And next, let me explain financial forecast of FY 2025 on consolidated basis. Regarding our expected sales of Honda Group comparing to the last year for motorcycles, we expect 19.8 million units, reflecting the growth in main in Asia, 4.12 billion units of auto mobile is expected reflecting the equipment is mainly Japan and North America.

And for Power Products, we expect 3.66 million units, reflecting the decline mainly unit sales volume on a consolidated basis will increase in motorcycle and automobile businesses. Moving on to the outlook of the consolidate the financial results of FY 2025, operating profit will be JPY 1.42 trillion with the operating profit ratio of 7%. And the profit for the year attributable to orders of the bond will be JPY 1 trillion. Foreign exchange assumption is set for JPY 140 for dollar throughout the year. Factors behind those profit before income taxes forecast as follows. R&D and other expenses will increase. However, thanks to the pricing scheme that reflects the commercial value of the product, profit before income taxes will be JPY 1.25 trillion, down by JPY 142.3 billion year-on-year, and operating profit will be JPY 1.42 trillion, up by JPY 38 billion year-on-year.

These are the outlook on capital expenditures, depreciation, amortization and R&D spending for FY 2025 on the slide. Lastly, let me touch upon shareholder returns. Annual dividends for FY 2024 is JPY 68 per share, a JPY 28 more from the year before and JPY 10 higher than our previous projection. Dividend at the end of the year is JPY 39 per share. Annual dividend for FY 2025 is expected to be JPY 68 per share, same as FY 2024. In the Board of Directors meeting today, we made a decision to execute share buybacks up to JPY 300 billion. That concludes my presentation. Thank you very much.

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Q&A Session

Operator: Thank you for your listening. And now we would like to proceed to Q&A. [Operator Instructions] The first question comes from Yomiuri Shimbum, Mr. Nakamura.

Unidentified Analyst: Nakamura from Yomiuri Shimbun newspaper I have 2 questions about your China business. Each of the manufacturers, they are having difficulty charging the Chinese EV companies mean I think that there are a lot of fans for ICE vehicles. So what is your marketing strategy going forward? And what about the optimization of excessive production capacity? And secondly, is to Mr. Mibe. I think it is the first time to become present that you attended the financial results presentation meeting. So what is the reason for your attendance? Is there any message that you would like to deliver directly to us? If so, please introduce them to us.

Shinji Aoyama: So first, thank you for your question, Mr. Nakamura. First about the Chinese business. I Aoyoma, would like to explain. Yes, there are a lot of Honda fans, and ICE fans and I agree with you on that. And as for our future marketing strategy at the Beijing Motor Show and also prior to that, there was an announcement that we made. But the YE series, the second of the series will be introduced. And this will be done in the first half of this fiscal year. Furthermore, the second half of this fiscal year, as we’ve already announced, the YE series, the first of the series will be — well, as the first battery EV platform in China, and Middle East, the P7 and S7 will be launched. And therefore, the YE Series will be expanded, and this is how we want to expand our business in China, especially the battery EV.

We want to introduce competitive amount of products. And this is a basic marketing strategy. Meanwhile, about the overall production capacity and excessive capacity, with our joint venture partners, we will consult and we are currently examining this what can be done. And for this fiscal year, within our budget of FY ’25, we have included some expenses towards that purpose. About the specifics of how to optimize, we will like you to wait until we can make the announcement.

Toshihiro Mibe: And next, Mibe, would like to explain why I’m here today the background. Well, it is my first time. But in the past, our presidents have not attended this meeting. And I’m the very first in the history of Honda that I’m attending as President. Well, this is because we are faced with a lot challenges at this time of transformation. And I as President, I want to explain about the current management situation and also our short to midterm plans. I thought it was important I directly communicated that as I mentioned today, for this — well, 2025, we want to achieve the ROS. But we — 1 year in advance, we’d like to achieve this margin — profit margin is 7%. So this is something that I personally have led, and I have want to demonstrate my leadership this fiscal year as well to achieve this goal.

And in my presentation, yes, we have less than 1 PBR. And I think that this is a major challenge that we currently face. And as of the end of March, about 60% of the prime market companies listed market have exceeded one. But Honda, we have 0.76 billion — so this is a major challenge on the part of Honda. As I said, shareholder returns, we have to look at the investment balance and consider this. But what’s most important is for us in order to — well, first of all, we have to make clear our growth path. In particular, we want to make clear what our plans are for electrification, our future vision of electrification. And that included — we would like to update you on the progress we’re making. And I think that there will be opportunities that the financial results meetings to present this.

I don’t know if I’ll be attending all the quarterly meetings, but at the final full year announcement. I would like to attend this meeting in the full future about making clear the granularity of electrification strategy. But on May 16, we are going to have a meeting, a briefing session to elaborate on our strategy. And I will talk about our outlook for electrification and all the other details. So please wait until the 16 for the details. And I would like to — I continue to attend this meeting. Thank you.

Unidentified Company Representative: So next question, please.

Operator: Nihon Keizai [indiscernible] please.

Unidentified Analyst: R&D that is going to be the highest as well R&D spend in order to strengthen the shareholders, how do you manage that? And also what is the backdrop of having to reinforce your R&D efforts?

Eiji Fujimura: So let me explain about its position of the overall situation rather than the each quarter situation, as we said before, electrification and software and intelligent in use of that. And we said that we are going to invest JPY 5 trillion by 2030 and then I’m going to explain more of the details in our — on the 16th of May. But in the meantime, we actually changed our strategy a little bit. For instance, in terms of the electrification, specifically speaking of the batteries, we had explained about Canada before. And we are going to be shifting to the vertical type system in order to sustain the total electrification businesses. To do that, we need to have the investment development as well. We have to internalize those technology, and that will be on the increase as well.

And for the software so core of the software has to be supported by Honda itself and R&D menus will be toward more of the internal kind of efforts. Therefore, we have more petition is going to give us more details about the spending. And then that for the question. As for the R&D spending, it is going to be the highest ever. As we said now, JPY 1 trillion spending for that would include the upcoming electrification related to our model development expenditures. And also in the first place, we have to support a foundation for the electrification going forward. We call it DR and which is the functionality and its evolution. And in our R&D efforts, we have to put more efforts in the process before the development of the vehicles to strengthen that part.

And specifically for the model year 2027, there will be still more efforts of the ICE model based on the hybrid basically. And for those ICE models, towards 2030, there will be still a 60% of the ICE model to be run, therefore, we need to earn from those businesses. Therefore, we need to allocate us resources we’ll do that as well. So we have to spend on both and which will be in the next 3-year efforts. And those will be important. And we will keep up with the higher level of R&D spending going forward will be growth going forward, and we will be more aggressive on that part. And they were so now for that is such that now after the R&D adjustment, we have this operations cash flow. That is a new kind of indicator. And for this past fiscal year, we had a JPY 3 trillion and 2 years before, it was JPY 2 trillion.

So we are adding JPY 1 trillion more to that part, that means we try to improve the profitability of the ICE models that we have supported so far, and that is going to be earning more going forward. That is why we can intensify such just spending. And then we are going to spend 1 trillion R&D again. And cash flow after the R&D adjustment, we’ll be staying around JPY 3 trillion based on the earnings strength, and then we would like to be based on such a stronger earnings structure and then spend more on the R&D. At the same time, we are going to strengthen our shareholders’ return as well that is our financial strategy. And in terms of the capital allocation, as we said, up until 2030, as we said before, we are going to give you more communication in the business update as scheduled on the 16th of May, and we will give you more details on that point on that day.

Operator: One more? Do you have more questions or? What is your second question, please?

Unidentified Analyst: A specific question. So the unit sales as per the regions. In China, it declined from the previous year. Is that what you expect again, you’re going to provide a new series, right? What is the expectations? And you also said that you’re expecting growth in North America. Is that because of the SUV we’re incurring more.

Unidentified Company Representative: So the unit sales are for regions we most speaking. And for China, as we said before, YE series is going to be the very highly expected and that is going to be launched in the second year of our FY 2025. Second half of this year, therefore, it will be effective after that. And we plan to provide 50,000 units of those in addition to the existing is and have products. Therefore, compared to the previous year, it is going to be on the bid for North America, Civic Hybrid, which is not yet a launch. However, we are going to add Civic hybrid, which will be added to the growth. And in terms of the incremental units, battery EVs in May and April this year, we added BEV, and that path will be the incremental portions in the North America. That is the plan.

Operator: [Indiscernible] Mr. Yokoyama, please.

Unidentified Analyst: This is Yokoyama from Weekly magazine. I also have 2 questions. The first about hybrid and competitiveness and product appeal. I’d like to ask one question about this. Yes. Eifiji, in your material, you did refer to this slightly. But in North America and Europe, your competitors, Japanese competitors are also doing well. But also, you said that you’re going to invest in ICE. But the earnings base, I think hybrid will be a very important contributor. So within your electrification strategy, what is the positioning of hybrid? That’s my first question.

Toshihiro Mibe: I would like to respond to this question. Yes, hybrid competitiveness. First of all, volume-wise, we believe that in FY ’24 about 800,000 units we sold. That is hybrid. But in FY ’25, this fiscal year, we are aiming for 1 million it’s JPY 4.12 billion in total. So 1 out of 4 vehicles will be hybrid that’s our plan, about earning power. Well, currently, looking at our current situation. Well, how we position hybrid will make a difference in terms of our profitability. And there’s a variance in profitability as how we position hybrid. But ICE and hybrid, these 2 are expected to bring about this more or less the same profit. And in FY — well, the 2018 model year and 2023 model year. If you compare the 2 system-wise data is more efficient and also the performance is higher.

And despite that, we’ve seen the cost wise, we are trying to make it more affordable. And therefore, in FY — rather the 2027 model, we are currently developing the bottle. But here, again, we want to increase our competitiveness, not just in terms of cost but also in terms of performance. That is how we are adjusting this in the second half of this decade, we will increase battery EV. And therefore, the volume will fall, but the earning power per unit will increase so that we can earn profit. This will be happening also in the second half of this decade. And this is going now to be the source for injecting resources into electrification the battery EV.

Eiji Fujimura: Mibe if I may add. Well, hybrid, yes, we have one hybrid that we’re focusing on. Yes, we have been reducing the cost. But in the past, from the perspective of profit ICE, we much more competitive as OEM has had. It’s at par more or less. And so if we had, for example, this fiscal year, in the automotive business is EV-related development expenses were excluded. And if it were only typed and ICE alone, if you cover our justice to, operating profit margin-wise, we can expect 8%. So competitive-wise, including cost, it is quite strong. But in addition to that, in the second half of this decade, it will further evolve, we have one evolution plan. And therefore, the current hybrid is doing quite well. But up until 2030, we want to be able to compete in North America with the current competitive we have.

Unit volume is 1 million this fiscal year by 2030, if things go well, then I think we’ll come close to 2 million units. And that is the one plant that we have, including our suppliers, we are trying to meet this increase so as to be able to achieve a scale of 2 million units. That is how we are preparing for hybrid. And if we can lead this then, I think we will have more power to generate cash. And thereby, we will be able to make a transition to electrification. So hybrid, I want to begin with a strong weapon, and we want to enhance this technology. This technology that we are already strong in. That is how we want to do our business.

Unidentified Analyst: My second question. About the possibility of your automotive business. Well, in the fourth quarter, the — I think the margin compared to the third quarter, I think has gotten worse. I think you mentioned that there is an addition of expenses here. But looking about the profit margin of the current automobile business. And I think that you will also have to support the suppliers. So how about you said, I think it’s about 5% or a little less of 5%. But including the support to suppliers, how are you going to try to increase the operating margin of your automotive business?

Eiji Fujimura: Well, about the fourth quarter, yes, there is a tendency for the expenses to increase. And therefore, if you look at the full year, I think it’s better to talk about the full year, not just the fourth quarter. As you pointed out, yes, there’s a bit of 4% or so ratio at the end of the fiscal year. And after the first quarter, as I’ve been explaining, this fiscal year — well, last fiscal year, there was an increase in the quality related to expenses, but it used to be 1% versus the sales, but we have seen that the warranty has increased. In this fiscal year based on that, we are accounting for 1.2% warranty expense ratio. So that is the ratio and also the support to suppliers. Because of the restructuring yet there was impairment.

And so excluding those, it’s a little less than 5%. So last fiscal year, rather, I’ve been saying this, sorry, it’s last fiscal year. I think that is the actual result that we have retained. But then going forward, how we’re going to improve this? Well, those areas that we have been trying to work on the profitability and also the fixed cost part. We want to continue to work hard on those things. And so we tightened and therefore, the top line where possible, will be raised for this fiscal year in the United States and in Japan. I think these will be major markets. But in those areas, we want to post a positive. And also, we’ll reduce the incentives, et cetera. I think that our product feel has increased, and therefore, we can do this. And based on that and also the pricing, though we will be more prudent.

We pick up that in each of the domains. We will try to price in line with the value that we are offering to our customers. Now about the support to suppliers that for our suppliers, especially in Japan, and U.S., there is the impact of UAW, and it’s not just that in-house production, but also — at the same time, we have to give consideration to this. It’s on a negotiation basis, it’s one by one. But still, there’s the inflation part that we have to take into account. So we have to — we have budgeted so that we can provide support for inflation. Now what’s different from prior to COVID? We have stable production, and we’re doing models inquiry together with our suppliers, manufacturing. So we have to think about where we can improve our cost competitiveness together with our suppliers.

So we want to do co-creation with our suppliers. That is the sort of budget that we have compiled this time. That is all. Thank you.

Operator: Next question. From NHK, Mr. Obi.

Unidentified Analyst: NHK, Obi speaking. Thank you for our presentation today. I have 2 questions. First one, the sales turnover revenue and OP you are achieving the highest ever and your business is very good, very well going. And then in this context, what is your impression reaction to this good business today? And the second question is a bit away from the financial results today. Speaking about yen depreciation today in Japan, it is quite a common place today, JPY 155 today as of today. However, that may be good for you. That is quite supportive for the businesses for you. But for Japan on the whole, what is your thinking about current exchange rate situation today? What is your thought about it?

Toshihiro Mibe: So first question I’d like to address. In the second part of our 2010, we said that we would measure 6 million cars, 6 new units, we were on the expansion of the businesses mainly. And then we needed to shift our directions. And then we said that we would solidify our basic businesses with the efficiency. For instance, we would optimize the surplus capacity by fixed cost reductions and then less derivatives more commonality of the parts components and system cost reduction of the hybrid cars with a better performance to enjoy the cost reduction effectiveness, this where we could improve value of the commercial vehicles with the appropriate prices with those initiatives in the automobile businesses have improved a lot.

And if you look at the EP businesses alone, we are reaching a near 8% today. In addition to that, for the motorcycles, we were relying on the Asian markets are quite heavily bands. We now have expanded our profitabilities in other areas, too. In Europe, 20%, and Asia 80% — and South America 20% and Asia 60%. And then for both motorcycle businesses, both together, we have improved our strature of the businesses quite nicely. And then altogether we were successful in that regard because of that, now for 2030, for instance, we can envision the 2 million EVs in the year. That is our vision. Plus, our businesses ROS 5% EV. That is our target. And we will keep spending for research and development so that our EV businesses in 2030 will be something like that.