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Honda Motor Co., Ltd. (NYSE:HMC)

F3Q13 Earnings Call

January 31, 2013 12:00 am ET

Unidentified Company Representative

Welcome to the Honda Financial Results Audio Presentation. On January 31, 2013, Honda Motor Company announced its financial results for the fiscal third quarter, which ended on December 31, 2012. Through this audio presentation, we would like to review the financial results and highlight the major factors, which influenced Honda’s business operations during the period.

The presentation material which will serve as the basis for today’s program is available on Honda’s Investor Relations website at http://world.honda.com/investors/. For those of you, who have not yet downloaded the material; please do so now, as we will start immediately following a forward-looking statement.

This audio presentation contains forward-looking statements as defined in Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. Such statements are based on management’s assumptions and beliefs taking into account information which is currently available.

Therefore, please be advised that Honda’s actual results could differ materially from those described in these forward-looking statements as a result of numerous factors including general economic conditions in Honda’s principal markets and foreign exchange rates between the Japanese Yen and the U.S. dollar, the Euro and other major currencies, as well as other factors detailed from time-to-time. The various factors for increases and decreases in income have been classified in accordance with a method that Honda considers reasonable.

Before explaining the results, we would like to briefly review the global business environment during the past quarter. The automobile industry in the U.S. continued strong growth through the quarter, and was boosted by demand for replacement vehicles, following the destruction caused by Hurricane Sandy in late October. Sales slowed in Japan following the end of the Eco Car incentives program.

While the sales slow down in Europe continued into the fourth quarter though performance was slightly better than the previous quarter. Sales in Asia were mixed with the strong rebound in the ASEAN Region led by a recovery in Thailand, while sales in China continue to rise, but out of much more moderate phase. In the Motorcycle segment, sales rose in Asia led by increasing demand for scooters in India that were at a more moderate pace than the previous quarter.

Due to the introduction of stricter consumer credit regulations related to down payment requirements, sales volume contracted in Indonesia for the second consecutive quarter. Demand was down in Brazil due to limited credit availability and sales in Vietnam were relatively flat compared to the previous year. We would now like to review the financial summary for the third quarter, which ended on January 31, 2012.

Please refer to Slide 4. Honda realized a major recovery in automobile production and sales, predominately in North America and Asia. Motorcycle sales also rose in Asia, but there was a decline in sales in the other regions category primarily in Brazil. For power product operations, sales rose in North America, Asia and other regions.

With respect to group unit sales, strong growth in the motorcycle markets in India and Thailand resulted in a total of 3,815,000 units, an increase of 5.7% compared to the same period last year, despite a slowdown in Indonesia and Vietnam within Asia, and a decline in Brazil within other regions.

Regarding the Automobile segment results were mixed with strong growth in North America, Asia and other regions. The group sales total of 986,000 units represents an increase of 25.9% compared to the third quarter of last year. Power product operations recorded strong unit sales in North America, Asia and other region's markets, resulting, in a rise to 1,195,000 units up 17% from the same period the previous year.

Financial highlights for the third quarter. Revenue totaled JPY2,425.7 billion, a rise of 24.9%. Operating income amounted to JPY131.9 billion an increase of JPY87.6 billion or a rise of 197.8% compared to the same period last year. This was mainly due to a strong recovery following the Thai flooding last year increased revenue from automobile operations, led primarily by new model introductions in North America as well as increases realized as a result of currency fluctuations.

Income before taxes totaled JPY89.7 billion. Equity and income of affiliates totaled JPY21.4 billion, a decrease of 6.5% from the same period last year. Net income attributable to Honda Motor totaled JPY77.4 billion an increase of 62.5% compared to the same period last year.

EPS was JPY42.97, a JPY16.52 increase from the same period last year. With respect to ForEx during the period, the Japanese Yen depreciated against both the U.S. dollar and the Euro. The average Yen exchange rate was JPY81 to the U.S. dollar of JPY4 difference from the same period last year. The Euro average was JPY106 per Euro a JPY1 difference compared to the same period last year.

Operating income analysis. Next, we would like to provide you with more details related to our fiscal results. Please turn to Slide 9. Due predominately to a sharp increase in automobile sales, as well as slight gains in motorcycle and power product revenue in addition to a positive impact from currency fluctuation our total revenue reached JPY2,425.7 billion. In the chart adjacent to the graph, details of the fiscal quarter by business segment are highlighted.

Please refer to the next slide. I will now summarize our income before income taxes for the fiscal third quarter. Income before income taxes amounted to JPY89.7 billion as shown in the bar on the right side of the graph. This represents an increase of JPY31.2 billion compared to the same period last year. Operating income for the third quarter shown at the bottom right totaled JPY131.9 billion, an increase of JPY87.6 billion compared to the operating income of JPY44.2 billion in the same period last year, as shown in the bottom left corner.

Regarding the operating profit walk compared to the third quarter of last year, the most significant positive factor was a revenue increase of JPY81.2 billion due to a rise in automobile operations sales volume and model mix.

Cost down efforts resulted in a positive contribution of JPY32.2 billion. This was achieved due to an increase in production volume, which resulted in lower fixed costs as well as the positive effect of cost cutting efforts. An increase in SG&A costs had a negative impact of JPY34.3 billion due to an increase in sales promotion and advertising expenses. An increase in R&D expenses had a negative impact of JPY4.1 billion. The influence of ForEx changes on operating income amounted to a positive impact of JPY12.5 billion.

Regarding pre-tax profit variances compared to the third quarter of last year Honda hedged ForEx and interest rate risk by using derivative financial instruments in order to reduce the substantial effects of currency fluctuations and interest rate exposure. However, due to unexpected rapid changes in the exchange rate of major currencies fair valuations related to these holdings resulted in a negative impact of JPY55.6 billion compared to the same period last year.

Other factors which are mainly related to the difference between average market rates and hedge rates during the period amounted to a negative impact of JPY700 million.

Please turn to Slide 12. Next, we would like to elaborate on Honda’s business performance by business segment. Let me start with Honda’s Motorcycle business operations for the third quarter. Unit sales for the quarter totaled 3,815,000 units an increase of 206,000 units or an increase of 5.7% compared to the same period of last year. Within Asia, strong growth was realized in the two-wheeler market in India led by sales increases of the CB Unicorn and CB Shine and the Dream Yuga commuter motorcycle model, which was introduced in the first quarter.

Strong sales of the Click 125i, PCX150, and Wave 110i models in Thailand also contributed to the strong sales results. In the other regions category a lack of credit in Brazil led to a drop in the overall market, as well as in sales of Honda motorcycles including the CG FAN series and TITAN models. Despite the positive impact from the introduction of the BIZ100.

The North American market was up slightly due to the positive impact of the practical NC 700 X introduction in the U.S. as well as strong sales of the entry level off-road CRF110F dual sport CRF250L and sporty CBR250R models. These gains more than offset slower sales of the FourTrax Rancher and Foreman ATV models. In Europe, the introduction of the new S8 series, as well as the NC 700 S and NC 700 X models generated positive sales momentum, but this was offset by a decline in scooter sales in Italy.

The next slide shows that sales revenue for the motorcycle operations amounted to JPY307.8 billion an increase of 1.7%. Operating income for the third quarter totaled JPY22.8 billion, a decrease of 11.8%. The decline was due to a decrease in sales volume in South America and the negative impact of currency fluctuations despite an increase in sales volume in Asia. The operating margin for the quarter was 7.4%.

Next, I would like to elaborate on our Automobile business results for the third quarter. Please refer to Slide 14, of the presentation. Unit sales for the quarter totaled 986,000, an increase of 203,000 units or a rise of 25.9% compared to the same period last year. The increase in unit sales was primarily achieved on the strength of increased sales in the U.S., Asia and other regions.

Sales in the U.S. and Asia were especially strong due to new model introductions and a continued recovery from the natural disasters and subsequent supply constrains that impacted sales last year. In North America, unit sales totaled 454,000 an increase of 88,000 units or a rise of 24%. This growth was achieved predominately on strong sales of the Accord, Civic and CRV, Honda brand models as well as the fully remodeled Acura RDX despite a decline in ODYSSEY and TL sales.

In Asia, unit sales totaled 279,000 units an increase of 84,000 units or a 43% rise compared to last year. This increase was due to strong sales of the City, Civic, Brio and FIT models in Thailand as well as an increase in sales of the Brio, CR-V and Freed models in Indonesia despite a decline in sales in China. In Japan unit sales totaled 138,000 units a modest increase of 2,000 units. This increase was due primarily to strong sales of the recent N-Box series and N-One model, despite a decline in sales of the STEPWGN and FIT models.

In the other regions category, sales jumped to 77,000 units an increase of 29,000 units or a rise of 60% compared to the same period last year mainly due to an increase in sales of the CIVIC, FIT and other models in Brazil and Australia. In Europe sales were flat as a decline in sales of the Jazz model in Germany and Spain offset the positive sales momentum created by the introduction of the new CR-V in the region.

Please turn to the next slide. Revenue for automobile business operations for the quarter amounted to JPY1,918.4 billion, an increase of 31.8% compared to last year. Operating profit was JPY70.9 billion. This was mainly due to a rise in income as a result of gains for higher unit sales and model mix despite the negative impact of increased selling expenses and other factors, the operating margin for the quarter was 3.7%.

Next I would like to summarize our results for power product business operations. Please refer to Slide 16. Unit sales of power products totaled 1,195,000 units an increase of 174,000 units or an increase of 17.0% compared to the same period last year. This growth was realized due to sales increases in all regions expect Japan which saw a slight decline. In North America growth was driven strong OEM demand for GCV and M4 general purpose engines, as well as high demand for portable generators following Hurricane Sandy.

Within Asia, Thailand saw an increase in sales of lawn mowers, while Indonesia saw growth in sales of water pump models. In China, sales growth was led by an increase in OEM sales of general purpose engines. An increase in sales was also realized in other regions, due in part to strong sales of water pumps in Saudi Arabia, despite a decline in sales of generators in South Africa following the end of a special sales campaign. Sales were up slightly in Europe due to an increase in OEM sales of general purpose engines despite a decline in tiller sales.

Please turn to the next slide. Revenue for power product operations totaled JPY71.3 billion and increase of 4.8% from the same period last year. Operating profit was JPY70 million a sharp improvement from the same period last year due mainly to an increase in sales volume and model mix in Asia. The operating margin for the quarter was 0.1%.

Next I would like to address our financial services business operations. Please refer to Slide 18. Revenue for financial services business operations was JPY138.1 billion, an increase of 8.3%. Operating profit was JPY38.1 billion, a 1.4% increase. The operating margin for the financial services business was 27.6% down slightly due to a rise in costs related to the residual value of leases.

Geographical regions: Now I would like to review Honda’s business results by geographical region for the quarter. Please refer to Slide 19 for information on Japan. In Japan, revenue for the quarter amounted to JPY902.3 billion a JPY39.2 billion increase or 4.5% higher than the corresponding quarter last fiscal year.

Operating profit was JPY40.7 billion, an increase of JPY81.9 billion from the corresponding period last year due mainly to increased revenue from sales and model mix despite an increase in R&D expenses. The operating margin was 4.5%.

Now, I would like to review Honda’s business results for North America. Please refer to the next slide. In North America, revenue for the quarter amounted to JPY1,245.8 billion, up 26.3% from the corresponding quarter last fiscal year. Operating profit was JPY70.8 billion a decrease of JPY4 billion or 5.3% lower from the corresponding period last year. The main reason for the decrease was a rise in SG&A expenses, which served to undermine the positive impact of revenue from higher sales volume and model mix. The operating margin was 5.7%.

Now I would like to specifically discuss the business environment in the U.S. automobile market during the quarter. During the October through December quarter industry sales maintained a seasonally adjusted annual rate of just over 15 million units. Strong sales were realized in the midst of a steep drop in gasoline prices as well as a surge in sales of replacement vehicles following the vast destruction in the wake of Hurricane Sandy which struck at the end of October.

High trade-in values bolstered by consistently high used car prices also contributed to robust retail sales during the quarter. Regarding Honda sales in the U.S. during the quarter Honda’s core models generated strong sales in the period leading to an all time November sales record. This was due in part to the successful introduction of the fully remodeled Accord, a midcycle refreshing of the Civic and subsequent sell down of older model inventories.

In addition, both the Civic and CR-V realized record monthly sales in both November and December and were the best selling vehicles in their respective segments for the calendar year.

The CR-V also set an all-time sales record for the year. Acura realized strong sales during the quarter led by the popularity of the fully remodeled RDX which recorded its eighth consecutive month of record sales. The MDX remain the top selling Acura model. To meet our sales goals for the coming year and mid-term, Honda has begun expanding its North America production capability. Currently, we have nine assembly lines at seven plant sites in North America, which are being fully utilized.

Early this year, our Indiana plant will increase production capacity by 50,000 units. We are also in the process of expanding and introducing new production capabilities and upgrades to our production operation in Alabama where the fully remodeled MDX which goes on sale mid-year will be produced. Our Alabama plant will increase production capacity by 40,000 units in early 2013 to accommodate the MDX.

The introduction of new production capabilities is also taking place in Ohio where the Accord Hybrid will be produced for its launch this fall following the recent introduction of the Accord Plug-in Hybrid in the U.S. earlier this month. This will be the third hybrid model to be produced in the U.S. In addition, preparation for a new plant in Mexico, which will build FIT series subcompact models from 2014 is now underway. These changes will bring our annual production capacity in North America to 1.92 million in 2014 from the current capacity of 1.63 million units. Currently, the percentage of our sales produced in North America is approximately 85%.

Now, I would like to review Honda’s business results for Europe, which are shown on Slide 21. In Europe, revenue for the quarter amounted to JPY142.8 billion, which is a 19.5% increase compared to the corresponding quarter last fiscal year. The operating loss was JPY3.5 billion, a JPY300 million improvement from the corresponding period last year. The improvement was mainly due to an increase in revenue and model mix. The operating margin was negative 2.5%.

Now, I would like to review Honda’s business results for Asia. Please refer to Slide 22. In Asia, revenue for the quarter amounted to JPY587.4 billion, an increase of 84.9% from the corresponding quarter last fiscal year.

Operating profit was JPY40.5 billion, an increase of 203.9% from the corresponding period last year. This was mainly due to higher revenue from increased sales volume and model mix, as well as cost reduction efforts despite the negative impact of increased SG&A expenses. The operating margin was 6.9%.

Now, I would like to review Honda’s business results for the other regions category. Please refer to Slide 23. Revenue for the quarter amounted to JPY222.5 billion, an increase of 8.0% from the corresponding quarter last fiscal year. Operating profit for the quarter was JPY2.6 billion, a decrease of 78.7% from the corresponding period last year, mainly due to an increase in SG&A expenses as well as unfavorable exchange rates. The operating margin was 1.2%. Honda’s Brazilian operation, which is one of the significant markets in the other regions category adopts a calendar year based fiscal schedule. As such, please note that the July through September quarterly results for the country have been reflected in this quarter’s consolidated results. This concludes the geographical region portion of our explanation.

Equity in income of affiliates: With regard to equity in income of affiliated companies, please refer to Slide 24. Equity in income of affiliates totaled JPY21.4 billion down by JPY1.5 billion or a 6.5% decline from the same period last year mainly due to a decrease in China.

Capital expenditure: With regard to CapEx for the quarter, please refer to the next slide. Total CapEx was JPY389.7 billion, an increase of JPY150 billion or 62.6% higher compared to the same period last year. Please note that the respective increases in capital expenditures for each business area exclude the impact of unfavorable currency translation effects. New guidance on group unit sales, based on our results for the first three quarters and presumptions for the fourth quarter, we are making adjustments to our unit sales forecasts as well as our revenue and income forecasts for the current fiscal year.

Please turn to Slide 27 for details on our group unit sales forecasts. For motorcycle business operations, we are reducing our group unit sales forecast from 15.56 million units to 15.52 million units, a reduction of 40,000 units or a decrease of 0.3%. This is primality due to declines in Indonesia and Brazil within the other regions category.

Regarding automobile business operations, we are reducing our group unit sales forecast to 4.06 million units, a reduction of 60,000 units or a decrease of 1.5%. This is mainly due to lower sales projections for Asia, Europe and other regions.

We will also be making a downward adjustment to our power product group unit sales outlook to 6.06 million units, a reduction of 160,000 units or a decrease of 2.6%. This change is mainly due to lower sales in Asia, Europe and other regions, as well as declines in North America and Japan. For your reference, the corresponding consolidated unit sales forecasts are shown on Slide 28, new guidance on fiscal 2013 financial forecasts.

Next, please turn to Slide 29 for details regarding the changes in our financial forecast. There are no changes in our revenue and operating income forecasts. Income before taxes is forecast to be JPY515 billion, a decrease of JPY25 billion. Our forecast for equity in income of affiliates remains unchanged. Net income attributable to Honda Motor is forecast to be JPY370 billion, a decrease of JPY5 billion compared to our previous outlook. EPS is expected to be JPY205.29 for the fiscal year, an increase of JPY87.95.

With respect to ForEx for the fiscal year, the Japanese Yen exchange rate forecast has been changed to JPY81 to the U.S. dollar, JPY1 lower than the previous outlook. The Euro is now forecast to be JPY105 per Euro for the fiscal year, JPY2 lower than our previous forecast. Regarding the operating profit walk forecast, compared to our original plan, please refer to Slide 31. We expect a JPY38 billion decrease in volume and model mix, mainly due to a decrease in automobile sales in Europe, other regions and countries within Asia such as Malaysia and Australia.

Further, there is a slight increase in the cost forecast amounting to a rise of JPY2 billion. R&D expense as well as SG&A forecasts are unchanged. ForEx is expected to have a positive impact of JPY40 billion on operating income, as a result of our revision of the second half U.S. dollar exchange rate to JPY83. Regarding Honda’s hedging of ForEx and interest rate risk by using derivative financial instruments, we expect fair valuation losses and gains to have a negative impact of JPY12 billion on pre-tax profit variances compared to our previous forecast.

Other factors which are mainly related to the difference between average market rates and hedge rates are expected to have a negative impact of JPY13 billion compared to our previous forecast. Please note that despite the changes in our revenue and operating income for the 2013 fiscal year ending March 2013, we project an annual dividend of JPY76 per share, an increase of JPY16 compared to the previous fiscal year. This is unchanged from our original forecast.

This concludes our financial results presentation. We hope that you found this audio presentation helpful and would like to thank you for your continued interest in Honda’s activities.

Question-and-Answer Session

[No Q&A session for this event]

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