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

F2Q 2012 Earnings Call

October 31, 2011 8:00 AM ET

Unidentified Company Representative

Good morning everyone. Welcome to Honda’s Financial Results Audio Presentation. On October 31, 2011 Honda Motor announced its financial results for the fiscal second quarter ended March 31, 2012. Through this audio presentation, we would like to review the financial results and discuss the major factors affecting Honda's business during the period.

Please note that Honda is currently unable to reasonably calculate forecasts of the consolidated financial results for the fiscal year ending March 31, 2012 due to the impact of flooding in Thailand. Therefore Honda will release its forecast as soon as they become available. We have posted presentation materials at Honda Investor Relations website at http://world.honda.com/investors/. So please download the presentation material before listening further, by clicking the link on the all new 2012 CR-V photo to download the material. If you have got the material ready at hand, let's get started.

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 currently available to it. 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, 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.

Now I would like to start with the financial summary for the second quarter that ended on September 30, 2011. Please have a look at the slide three. Honda achieved an operating income of JPY52.5 billion and net income attributable to Honda Motor of JPY60.4 billion. Both of these speed profit forecasts which Honda announced on August 1, 2011 due mainly to strong profits posted by the automobile and financial services businesses in North America and the motorcycle business and the automobile business in emerging countries.

Despite decreased unit sales in the automobile business caused by the supply change disruption following the Great East Japan Earthquake that occurred on March 11, 2011 and an unfavorable currency effect by the yen depreciation. Motorcycle unit sales totaled 3,276,000 up by 20.0% from the same period last year. Automobile unit sales totaled 772,000 units, down by 14.0% from the same period last year. Power product unit sales were 1,276,000 units, up by 9.4% from the same period last year.

Financial highlights for this second quarter are seen in the middle of the slide. Net income attributable to Honda Motor totaled to JPY60.4 billion, down of 55.5% from the same period last year. EPS was JPY33.53, which was a decrease of JPY41.71 from the same period last year. Revenue totaled JPY1,885.8 billion. Operating income amounted to JPY52.5 billion, a decrease of 67.9% from the same period last year. Equity and income of affiliates totaled JPY15.5 billion, a decrease of 56.3% from the same period last year.

Now I would like to discuss an analysis of sales and operating profit for the quarter. Please turn to slide seven. Revenue decreased by JPY366 billion, down by 16.3% from the second quarter last year to JPY1,885.8 billion due mainly to decreased revenue in the automobile business mainly caused by supply chain disruptions from the earthquake. Changes in revenue in respective businesses without the currency translation impact are seen on the slide. Had the exchange rate remained unchanged, revenue would have decreased by JPY277.9 billion, which is equivalent to a decrease of 12.3%.

Now let me elaborate on variance and factors that affected the operating profit and income before income taxes. Please turn to slide eight. Operating income for the third quarter totaled JPY52.5 billion, as you can see at the bottom right hand corner of the slide, which was a decrease of JPY110.9 billion compared to the operating profit of JPY166.2 billion in the same period last year. Income before income taxes amounted to JPY76.5 billion, as shown in the bar on the right side, which was a decrease of JPY89.6 billion from the same period last year as seen on the top of the slide.

If you could have a look at the first box on the left hand side, it shows how much gross profit was affected by the change in top line sales and volume, a decline in unit sales mainly impacted by decreased production resulting from supply chain disruption triggered by the earthquake, brought negative JPY15.1 billion this quarter.

The second box on the left hand side shows cost reduction which is also associated with changes in gross profit. Cost reduction negatively impacted this quarter by JPY34.0 billion due mainly to an increase in fixed costs per unit as production output was reduced and raw material costs increased.

The third box on the left hand side demonstrates SG&A impact. Decreased SG&A expenses mainly due to smaller quality related expenses provided a positive impact of JPY9.1 billion this quarter. Increased R&D expenses provided a negative impact of JPY6.2 billion. Forex had a negative impact of JPY29.7 billion as the yen appreciated toward major currencies.

Pre-tax profit variances from the second quarter in the last fiscal year are as follows. There were fair valuation losses and gains from derivative instrument agreements that provided a positive impact of JPY21.5 billion compared to last year. This is associated mainly with Forex forward agreements for export transactions.

Other non-operating income and expenses net was almost the same level as the same period last year. Differences between the hedge rate and market rate to book revenue provided a negative impact of JPY7.0 billion which was offset by others including fair valuation on interest rate swap agreements that Honda’s financial subsidiaries hold. Detailed information on the currency impact and the reevaluation of derivative instruments is available on slides 27 and 28.

Regarding the fiscal first half years results for operating profit and income before income taxes and specific factors for increases and decreases, please turn to slide nine. Operating income for the fiscal first half totaled JPY75.0 billion, a decrease of JPY322.8 billion. Income before income taxes amounted to JPY105.8 billion, a decrease of JPY316.4 billion, due primarily to a decrease in sales volume and mix, an increase in fixed costs per unit as a result of decreased production, increased raw material costs and unfavorable foreign currency effects despite decreased SG&A expenses.

Now we would like to elaborate on Honda's business performance for each business segment. Let me start with Honda's motorcycle business operations for this second quarter. Please have a look at the slide 10. Unit sales for the quarter totaled 3,276,000 units, a record high quarterly unit sales, up by 547,000 units, or 20% compared to the last year. Unit sales increased in all regions especially in Asia and the other regions including South America.

Motorcycle demand in Thailand, Vietnam, India and Indonesia expanded strongly for the quarter. Honda's sales were also favorable supported by 110 CC Cub type models and scooters that are well accepted throughout the region. We also enjoyed increased sales due to the introduction of new models in Indonesia. In other regions, industry demand for motorcycles in South American countries continuously expanded, especially in Brazil which has the biggest market in South American countries and which Honda has the biggest share in, Honda enjoyed strong sales with the year-on-year increase of 15% during the quarter, boosted by the strong product pipeline like the CG150 Series and the NXR 150 Bros equipped with a flex-fuel injection system.

Sales of motorcycles in other countries in South America also increased especially in Argentina and Columbia. It is good news that unit sales in developed countries also showed increases year-on-year. In Japan, the GIORNO and Dio110 all new scooters and the CBR250R all new sports model were received well by customers which led to the sales increases. In North America, in addition to the year-over-year sales increase inventory was reduced to the optimal level. In Europe, favorable sales of the SH125 and SH150 were the main driver of this quarter’s year-on-year sales increase.

As for the revenue and operating profit in the motorcycle business, please have a look at the slide 11. Revenue for the quarter amounted to JPY357.3 billion, up by 14.2 % from the corresponding quarter last year, due mainly to increased unit sales. Operating income for the quarter totaled JPY38.9 billion, up by 29.7% primarily due to increased unit sales despite increased SG&A. The operating margin was 10.9%.

Next let me elaborate on the automobile business results. Please have a look at slide 12 of the presentation material. Unit sales for the quarter amounted to 772,000 units, a decrease of 126,000 units compared to last year but an increase of 225,000 from the first quarter of this year as supply chain disruption almost recovered in September and production has been normalized. As production volume was gradually ramped up, Honda’s unit sales in Japan were 131,000 units, up by 40,000 from the first quarter. Hybrid models are well accepted among customers in Japan and our Hybrid models such the Fit Hybrid and Fit Shuttle Hybrid were the main contributors to this increase.

In North America, unit sales amounted to 269,000, up by 44,000 compared to the first quarter. Increased sales of the Accord, CR-V and Odyssey were the main contributor to this quarter-on-quarter sales increase. Honda’s sales in Europe were still weak. Unit sales for the quarter were 40,000 units down by 8,000 from the same period last year, although sales increased by 5,000 from the first quarter of this year. In the year-on-year comparison decreased sales of the Civic and Jazz undermined total sales despite the new Jazz Hybrid model somewhat boosting sales.

In Asia, unit sales for the quarter were 286,000 units, up 42,000 compared to last year due mainly to increased shipments of knocked down sets to china as well as strong unit sales in the rest of the Asian countries, were industrial demand is growing. In the other region, unit sales for the quarter were 46,000 units, down 15,000 compared to the same period last year which is due to decreased production resulting from supply chain constrains following Japan’s earthquake.

Please turn to the slide 13. Revenue in the automobile business for the quarter amounted to JPY1,337.1 billion, a decrease of 22.4% compared to last year due mainly decreased unit sales in resulting from supply chain constrains and unfavorable currency translation effects.

Honda reported an operating loss of JPY29.1 billion, a decrease of JPY115.5 billion from last year due mainly to decreased unit sales and increase in fixed costs per unit as production output was reduced, increased raw material costs, and unfavorable currency effects despite a decrease in SG&A.

As for the power products business, please have a look at slide 14. Unit sales of power products totaled 1,276,000 units, up by 110, 000 units, or 9.4% from a year ago due to an increased unit sales in North America, Asia and Japan. Sales of power products in North America increased year-on-year mainly due to higher sales of general purpose engines such as the GCV160. Sales in Asia were also strong for the quarter particularly for the favorable GX160 general-purpose engines for OEM use in China and the GK200 general-purpose engines for OEM use for pumps.

Slide 15 shows revenue and operating income for power products and other businesses for the quarter. Revenue for the quarter amounted to JPY74.5 billion, a decrease of 2.4% from the same period last year. This decrease in revenue was mainly due to unfavorable currency translation effects despite an increase in sales volume. Honda reported an operating loss of JPY100 million, an improvement of JPY0.3 billion due mainly to the positive impact of increased sales in the power products business and decreased SG&A expenses.

With regard to financial services business, please see slide 16. Total assets in the financial services business came to JPY5,169.2 billion, while operating profit decreased by 9.7% to JPY42.8 billion because of the unfavorable impact of Forex effects. A decreased allowance for credit loss and higher residual values for Honda products continue to underpin profits in the financial services business.

Operating income stayed at a healthy level and the operating margin for the financial services business was 33.2%. Honda expects its financial services business to continue to be solid with consistent conservative operation.

Now let me elaborate on Honda's business results by geographical segment for the quarter. Please turn to slide 17 starting with Japan. In Japan, revenue for the quarter amount to JPY805.3 billion, down by 13.2% from the first quarter of last fiscal year mainly due to decreased revenue in the automobile business as a result of the parts shortage caused by the Great East Japan Earthquake.

Operating loss was JPY35.5 billion which was a decrease of JPY55.4 billion. Despite a decrease in SG&A expenses revenue and model mix as well as the currency impact negatively affected operating income. The operating margin was minus 4.4%. In Japan, Honda introduced the Fit Hybrid and the all new Fit Shuttle Hybrid which is a new wagon model at the end of June. Sales of both Hybrid models have been extremely favorable much better than Honda had anticipated at the time of launch.

On top of the aforementioned two Hybrid models, we introduced the Freed Hybrid model at the end of October. In Japan, due to the earthquake that occurred on March 11, production declined sharply due to supply chain constrains. As a result, for the first quarter of this fiscal year 92,000 automobile units were produced in Japan and approximately 60% declined from the first quarter of last fiscal year. However, from the end of June production has returned to normal and we have begun to increase supply building up inventory.

Japan’s new car sales in September achieved its highest 462,000 units for the first time since the financial crisis took place in 2007, thanks to an increase in production volume. Also with the ongoing government subsidy for fuel efficient vehicles on top of our popular Hybrid and to the enhanced minicar line up we are aiming to increase our automobile sales toward the end of the fiscal year. As for motorcycle sales in Japan newly launched models this fiscal year such as the Dio110, GIORNO and CBR250R largely contributed to increased sales in the second quarter.

Let's look at slide 18, North America. Revenue for the quarter amounted to JPY794.1 billion a 22.3% from the corresponding period last fiscal year. In the second quarter again, we continued to experience a negative impact from decreased production in the automobile business due to supply chain constrains resulting from Japan’s earthquake and ongoing unfavorable Forex effects.

Operating income was JPY47.7 billion, a decrease of 37.1% from the corresponding period last fiscal year. This was largely due to weak revenue and the model mix, increased fixed costs per unit as a result of decreased production and the Forex impact. The operating margin was 6%.

Now I would like to discuss more about the U.S. automobile market during the quarter. During the July to September quarter, we saw the U.S. industry sales come back to a seasonally adjusted annual basis of 13 million units recovering to the April pre-earthquake level. This reflects the recovery of the availability of the Japanese brand vehicles.

Also as gasoline prices came down and there were promotions in the large pickup truck segment, the light truck segment as opposed to the car segment increased its ratio of total industry sales now reaching close to 55% of the total as of September. Regarding Honda’s sales, the inventory situation has been getting better starting from this July to September quarter and it has brought improved retail sales month-on-month finishing with September sales of an 8% decline compared to last year.

Having said so, the inventory level is still tight for Honda. It was just 34 days of supply at the end of September. Honda’s automobile production in North America during the July to September quarter, was recovering from supply chain disruption as a result of Japan’s earthquake. It produced to a level of 85% compared to the same quarter last year.

As for Europe, please turn to slide 19. Revenue in Europe for the quarter amounted to JPY144.5 billion, down by 10.4% from the corresponding period last fiscal year. Major factors were decreased revenue in the automobile business as well as an unfavorable currency translation effect. Operating loss in Europe was JPY4 billion down by JPY0.9 billion from the second quarter last fiscal year mainly due a negative impact of revenue and the model mix, increased fixed costs per unit as a result of declined production and increased SG&A expenses.

The operating margin was minus 2.8%. Automobile sales in Europe for Honda decreased due to decreased production caused by supply chain constrains resulting from Japan’s earthquake, however along with the production recovery sales in September showed a steep increase compared to the prior month. In Russia, demand continues to be brisk and Honda’s unit sales grew slightly. We intent to increase our sales with the all new Civic that we are introducing in early 2012 and the CR-V that is also due to be fully renewed and launched some time later.

Now let us move onto Asia on slide 20. In Asia, revenue decreased by 10% to JPY407.7 billion as a result of a decline in sales in the automobile business due to decreased production caused by supply chain constrains resulting from Japan’s earthquake and a negative Forex translation effect. Operating income for the quarter amounted to JPY21.8 billion, a 42.9% decline primarily due to increased raw material prices and SG&A expenses. The operating margin was 5.4%.

Honda’s new car sales in the Asian Region like in the rest of the world were not immune to the earthquake impact. Unit sales in Asia increased over the same period of the previous fiscal year. However this was due mainly to increased shipments of knocked down sets to China during the term. In terms of automobile production in Asia, a V-shaped recovery was seen in the second quarter.

With regard to the impact of flooding in Thailand, we have suspended our production since the 4th of October, and from the 8th of October our automobile factory located in Ayutthaya province has been flooded. We are still assessing damage to the supply chain and to what degree it will impact operations other than in Thailand. In Malaysia, where we have 40,000 units of annual production capacity, we have suspended production since the 25th of October as parts supply from Thailand has been disrupted.

Concerning the motorcycle business in Asia, excluding Japan, we enjoyed very strong growth in sales for the quarter along with growing demand particularly in Indonesia, India, Thailand and Vietnam. Newly introduced models in those countries like the Scoopy, and CBR250R were also large contributors to the growth in sales. We are confident that there still remains large room for growth in demand in this region and we’ll keep introducing new models as well as enhancing the attractiveness of our existing models, thereby continuing to meet the growing demand.

We also suspended our motorcycle production from the 11th of October to the 31st of October due to supply disruptions as some of our suppliers in Thailand have been affected by the flooding. Our motorcycle factory in Ladkrabang, Bangkok has not been flooded as of today.

Now, let's look at the other regions on slide 21. In the other region, which includes South America mainly Brazil and Oceania, the Middle East and Africa revenue amounted to JPY244.3 billion, up by 0.8% from the second quarter of last fiscal year. This increase was brought mainly about by increased revenue in the motorcycle business that more than offset the negative impact of decreased revenue in the automobile business as a result of supply chain constrains caused by Japan’s earthquake.

Operating income for the quarter was JPY23 billion, up 12.8% from the same period last year, primarily due to an increase in revenue and the model mix in the motorcycle business although SG&A expenses increased. The operating margin was 9.4%. Please note that the biggest contributor in the other region was Brazil, which has a fiscal year period from January to December unlike the rest of the countries in the other region, therefore the second quarter results reflect the performance of the April to June quarter in Brazil.

In the automobile business, again in this region, we have the impact from Japan’s earthquake, therefore unit sales also decreased in Brazil. In the July to September quarter, we still suffered from a parts shortage although sales have been increasing month-on-month. However in the motorcycle business in Brazil, sales growth has been remarkable. In the April to June quarter, we enjoyed more than 15% sales growth year-over-year. Honda’s market share was close to 90% for the quarter. Sales growth was quite strong in the July to September quarter too. Sales growth of the CG 150 and NXR 150 models has been particularly strong. That is all for the elaboration of Honda’s business in each geographical segment.

With regard to equity in income of the affiliated companies, please see slide 22. Equity in income of affiliated companies in the second quarter was JPY15.5 billion down by JPY56.3 billion from the same period last year. This decrease in equity and income is due to a decline in income of affiliated companies in China during the period from April to June mainly due to decreased sales and production from supply chain disruption triggered by the earthquake.

The affiliated companies fiscal term is January to December which differs from Honda Motor Company, therefore that decline in income during April to June is reflected in Honda’s second quarter consolidated financial results. For your reference, there is a chart that shows operating income and net income of Asian affiliated companies combined.

Please see slide 23. During the second quarter, the net profit of Asian affiliated companies amounted to JPY34.1 billion. Major contributing companies are mentioned at the bottom of the slide. With regard to CapEx for the quarter, please see slide 24. Total CapEx for the second quarter was JPY132.1 billion which was almost the same level as the same period last year. CapEx in the motorcycle business increased compared to the same period last year due mainly to capacity expansion in Asian countries which was offset by decreased CapEx in the automobile business and currency translation effects.

That is about all of our results. This concludes Honda’s fiscal second quarter earnings results audio presentation. Thank you for listening to our web program. This is Honda Investor Relations. And have a wonderful day.

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