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Honda Motor Co Ltd (NYSE:HMC)

Q1 2013 Earnings Call

July 31, 2012 12:00 pm ET

Executives

Analysts

Operator

Unidentified Company Representative

Welcome to the Honda Financial Results Audio Presentation. On July 31, 2012, Honda Motor Company announced its financial results for the fiscal first quarter, which ended on June 30, 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 our forward-looking statement.

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 economic environment during the past quarter. The U.S. market showed continued signs of a gradual recovery. However, the unemployment rate has remained at a high level and housing investments have been sluggish.

The European sovereign debt crisis continues to be a major cause of concern. The European market has slowed down to a standstill. Serious concern over the future of financial markets has negatively impacted capital investments and its continued high unemployment rates in the region. There is a high risk of protracted stagnation in the regional economy.

Asia's business environment has been influenced by weaker growth in China and India, which in turn has negatively impacted the economies in the surrounding countries in the region. Weariness over the European debt crisis, along with further tightening in financial markets, is expected to lead to much more gradual growth in the near future.

Japan's bleak economic situation continues, but a slight upturn was realized during the quarter. Looking ahead, significant risks exist due to the influence of the European debt crisis, tightening of global financial markets, fluctuations in financial exchange rates, as well as subsequent swings in stock prices. From a market segment standpoint, the automobile industry in the U.S. rebounded from the sales slowdown in the same period last year, which resulted from the supply constrains following the earthquake. Eco car incentives in Japan and Russia led to market growth, while India also experienced an increase in market demand. Conversely, sales in Brazil were relatively flat and the market contracted in Europe.

In the Motorcycle segment, demand was exceptionally strong in India and market growth was also realized in Thailand. Due to the introduction of stricter consumer credit regulations regarding down payment requirements, sales volume contracted in Indonesia. The sluggish global economic environment also led to sharp drops in Vietnam and Brazil.

Financial summary, we would now like to review the financial summary for the first quarter, which ended on June 30, 2012.

Please refer to slide four. Honda realized a major recovery in automobile production and sales, predominantly in North America and Japan. High motorcycle sales for the quarter and a contribution from stable financial services operations led to higher revenue and operating income, compared to the same period last year. With respect to group unit sales, a sharp increase in several Asian motorcycle markets led to a total of 3,911,000 units, up 12.5% compared to the same period last year.

Regarding the Automobile segment, both, North America and Japan rebounded strongly from last year's disaster. And in Asia, Thailand also posted increased sales. These gains led to a total of 999,000 units, an increase of 59.8% compared to the first quarter of last year.

Power product unit sales declined in Europe and Japan, but a sharp increase in North America, as well as a gain in Asia, resulted in a total of 1,625,000 units, up 7.5% from the same period the previous year.

Financial highlights for the first quarter. Revenue totaled ¥2,435.9 billion, a rise of 42.1%. Operating income amounted to ¥176.0 billion, an increase of ¥153.5 billion or 679.5%, compared to the same period last year. This was mainly due to increased revenue from motorcycle and automobile operations despite an increase in R&D costs and the negative impact of currency fluctuations.

Income before taxes totaled ¥194.7 billion. Equity in income of affiliates totaled ¥20.7 billion, a decrease of 27.6% from the same period last year. Net income attributable to Honda Motor totaled ¥131.7 billion, an increase of 314.3% compared to the same period last year. EPS was ¥55.45, which represents a ¥37.8 increase from the same period last year. With respect to ForEx during the period, the Japanese yen appreciated against the U.S. dollar and the euro. The average yen exchange rate was ¥80 to the U.S. dollar, ¥2 higher than the same period last year. The euro average was ¥104 per euro, ¥14 higher than 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 eight. Due predominantly to an increase in automobile and motorcycle operating revenue, our total revenue reached ¥2,435.9 billion, despite the negative impact of currency fluctuations of ¥87.7 billion.

In the chart directly below 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 first quarter.

Income before income taxes amounted to ¥194.7 billion as shown in the bar on the right side of the graph. This represents an increase of ¥165.4 billion, compared to the same period last year. Operating income for the first quarter, shown at the bottom right, totaled ¥176.0 billion, an increase of ¥153.5 billion, compared to operating income of ¥22.5 billion in the same period last year, as shown in the bottom left corner. Regarding the operating profit walk compared to the same period last year, the most significant positive factor was the revenue contribution of ¥174.3 billion from automobile business operations due to changes in sales volume and the model mix, despite an increase in incentives.

Cost reduction resulted in a positive contribution of ¥75.6 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. SG&A had a negative impact of ¥60.9 billion as expenses associated with revenue growth increased.

An increase in R&D expenses had a negative impact of ¥15.7 billion. The influence of ForEx changes on operating income amounted to a negative impact of ¥19.7 billion. Regarding pre-tax profit variances compared to the same quarter 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.

There were fair valuation losses and gains from derivative instruments that resulted in a positive impact of ¥18.7 billion. Other factors which are mainly related to ForEx forward agreements, amounted to a negative impact of ¥6.7 billion as the yen's value appreciated compared to the same period last year.

Business segments. Please turn to the next slide. 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 first quarter. Unit sales for the quarter totaled 3,911,000 units, an increase of 434,000 units or 12.5%, compared to the same period of last year.

The next slide shows that sales revenue for the motorcycle operations amounted to ¥346.8 billion, an increase of 4.9%. Within Asia, strong growth was realized in scooter and motorbike market in India, led by the Activa and CB Shine models, as well as the newly introduced Dream Yuga model in the Commuter Bike segment. Club-like models such as the BeAt in Indonesia and the Click i and Wave models in Thailand, as well as the Vision model in Vietnam, also contributed to sales growth.

In North America, a sales gain was realized in the ATV segment, led by the FourTrax Rancher. In Africa, which is in the other regions' category, a modest increase was realized due to increased sales of Ace CB125 model which has been produced locally since September of last year.

Operating income for the quarter totaled ¥36.8 billion, a decrease of 18.1%. Negative influences this past quarter, included increased SG&A costs and the negative impact of currency fluctuations which more than offset the positive impact of higher unit volume and the model mix, along with the subsequent gains in income. The operating margin for the quarter was 10.6%.

Next, I would like to elaborate on our automobile business results for the first quarter. Please refer to slide 12 of the presentation. Unit sales for the quarter totaled 999,000, an increase of 374,000 units or 59.8% compared to the same period last year. The increase in unit sales was achieved on the strength of increased sales in the U.S. and Japan which rebounded strongly from last year's earthquake.

In North America, unit sales totaled 450,000, an increase of 225,000 units or 200%. This growth was achieved predominantly on the sales momentum created by the Accord and the Civic, which suffered supply constraints a year earlier due to the earthquake as well as brisk sales of the fully remodeled CR-V. For the Acura brand, the fully remodeled RDX and the newly introduced ILX model generated positive growth momentum.

In Japan, unit sales totaled 185,000, an increase of 201%, or 93,000 units. This increase was due to strong sales of the recently introduced N-BOX, as well as the Freed Hybrid and Spike Hybrid models, which all qualified for a government Eco incentive program, which provide subsidies for fuel efficient vehicles.

In Europe, sales edged upwards to 39,000 units, an increase of 4,000 units or 11.4%, compared to the same period last year. This increase is primarily due to an increase in sales of the Jazz and Civic models in the U.K. and Germany which had been in short supply a year earlier.

In Asia, unit sales totaled 262,000 units, an increase of 46,000 units or a 21.3% rise compared to last year. This increase was due to strong sales of the City model in Thailand, as well as higher sales of the Brio in India and Thailand. In the other regions category, sales increases in the Middle East and Australia led to a unit sales total of 63,000 units, an increase of 6,000 units, or a 10.5% rise despite lower sales in Brazil.

Please turn to the next slide. Revenue for automobile business operations for the quarter amounted to ¥1,894.6 billion, an increase of 60.7% compared to last year. Honda reported an operating profit of ¥100.6 billion, compared to a loss of ¥76.2 billion during the same period of the previous year. This was mainly due to a strong rebound in unit sales and income. These gains more than offset the negative impact of increased selling expenses, R&D costs and unfavorable currency translation effects. The operating margin for the quarter was 5.3%.

Next, I would like to summarize our results for the power product business operations. Please refer to slide 14. Unit sales of power products totaled 1,625,000 units, an increase of 113,000 units or 7.5% compared to the same period last year. This increase was predominantly due to higher GCV160 engine sales to OEMs for use in lawnmowers and pressure washers, as well as an increase in sales of Honda branded lawnmowers and generators in North America. An increase was also realized in Asia, due in large part to an expansion of the sales network in Indonesia which led to an increase in GX160 engine OEM sales, as well as higher WB20 and WB30 pump sales. An increase in GX160 engine OEM sales was also recorded in China.

Sales in Europe dropped sharply due to lower sales of lawnmower engine OEM sales in countries in Southern Europe, among other factors. Revenue for power product operations totaled ¥69.9 billion, a decrease of 5.4% from the same period last year. An operating loss of ¥2.2 billion was reported, a ¥2 billion decline from the same period last year due mainly to an increase in SG&A expenses and negative ForEx impacts. The operating margin for the quarter was negative 3.3%.

Next, I would like to address our financial services business area. Please refer to slide 16. Revenue for financial services was ¥134.0 billion, a decrease of 3.3%. Operating profit was ¥40.8 billion, a 23.8% decrease mainly due to fluctuations in gains and losses on off-lease vehicle sales as well as an increase in provisions for credit losses. The operating margin for the financial services business was 30.5%.

Reviewing the operations of our financial services business in North America, American Honda Finance recorded solid operating results for this quarter, despite negative currency effects. Used vehicle prices have remained at high levels supported by strong demand and new car sales have maintained a consistent pace through the quarter.

Geographical regions. Now, I would like to review Honda's business results by geographical region for the quarter. Please refer to slide 17 for information on Japan. In Japan, revenue for the quarter amounted to ¥1,006.6 billion, a ¥381.3 billion increase or 61.0% higher than the corresponding quarter last fiscal year. Operating profit was ¥60.9 billion, an increase of ¥106.7 billion from the corresponding period last year, due mainly to a strong recovery in automobile unit sales, volume and income despite an increase in SG&A expenses and R&D costs. The operating margin was 6.1%.

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 ¥1,214.7 billion, a ¥480.8 billion increase or up 65.5% from the corresponding quarter last fiscal year. Operating profit was ¥82.2 billion, an increase of ¥63.7 billion, or 334.1% higher than the corresponding period last year. The major reason for the gain was the revenue increase from higher sales volume and the model mix, despite an increase in SG&A expenses and unfavorable currency translation effects. The operating margin was 6.8%.

Now, I would like to specifically discuss the business environment in the U.S. automobile market during the quarter. During the April through June quarter, industry sales maintained a seasonally adjusted annual rate in the neighborhood of 14 million units. Consistently strong sales were realized in the midst of declining gasoline prices, which are believed to have helped spur vehicle sales in the mid-size and compact car segments, earlier in the year.

Sales results for the quarter also reflect the fact that Japanese brands have recovered from last year's earthquake. High trade-in values bolstered by consistently high used-car prices also contributed to retail sales during the quarter. Honda expects a seasonally adjusted annual rate of 14.3 million units for the calendar year which is unchanged from our assumption from the previous quarter. Regarding Honda's sales in the U.S. during the quarter a strong rebound in sales was realized, as the inventory balance improved for models like the Civic and Accord.

The Civic was number one in sales in its segment during the quarter, and sales of the Accord were also brisk, as preparations are underway for the introduction of a fully remodeled version this fall.

The newly remodeled CR-V, which was launched in December, continues to set all time high monthly sales records despite less than optimum inventory levels. Against this background, Honda is on pace to achieve its sales target of 1.47 million units of Honda and Acura vehicles for this calendar year. To meet our sales goals for this year, as well as the mid-term, Honda has begun expanding its North American production capability.

Currently, we have nine assembly lines at seven plant sites in North America, which are being fully utilized. Earlier this month, we announced that our Indiana plant will increase production capacity by 50,000 units by early 2013, and will also add production of the Civic Hybrid model. We are also in the process of expanding and introducing innovations to our production operations in Alabama and Ohio, which will add production of the Acura MDX and NSX models, respectively. In addition, this spring we broke ground for a new plant in Mexico, which will build Fit series subcompact models from 2014.

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. This expansion will also serve to increase the percentage of our sales produced in North America from more than 85% last year to well above 90% in the near future.

Now I would like to review Honda's business results for Europe, which are shown on the next page. In Europe, revenue for the quarter amounted to ¥147.8 billion, a decrease of ¥3.1 billion, or 2% from the corresponding quarter last fiscal year. Operating profit was negative ¥7.6 billion, a decrease of ¥1.5 billion from the corresponding period last year, mainly due to an increase in SG&A expenses as well as negative currency translation effects. The operating margin was negative 5.2%.

Now, I would like to review Honda's business results for Asia. Please refer to Slide 20. In Asia, revenue for the quarter amounted to ¥512.8 billion, an increase of 37.3% from the corresponding quarter last fiscal year. This was mainly due to a higher volume of automobile and motorcycle sales despite unfavorable currency translation effects. Operating profit was ¥31.7 billion, an increase of 26.5% from the corresponding period last year. This was mainly due to higher revenue from increased sales volume and the model mix, despite an increase in SG&A expenses and the negative impact of currency fluctuations. The operating margin was 6.2%.

Now I would like to review Honda's business results for the other regions, such as South America, the Middle East, Africa and Oceania. Please refer to slide 21. Revenue for the quarter amounted to ¥220.3 billion, a decrease of 4.2% from the corresponding quarter last fiscal year. The operating result for the quarter was operating profit of ¥12.3 billion, a decrease of 7.8% from the corresponding period last year due mainly to decreased revenue from lower automobile and motorcycle sales as well as unfavorable currency translation effects. The operating margin was 5.6%.

Honda's operation in Brazil, which is one of the significant markets in the other regions category, adopts a calendar year-based fiscal schedule. As such, please note that their January through March quarterly results were reflected in our 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 22. Equity and income of affiliates totaled ¥20.7 billion, down ¥7.9 billion, or 27.6% from the same period last year. Please note that equity in income of affiliated companies in Asia is included in this total. In this quarter there was a ¥6.5 billion impairment charge on investments in affiliates due to other than temporary declines in the market value of the securities.

Capital expenditure. With regard to CapEx for the quarter, please refer to the next slide. Total CapEx was ¥95.9 billion, an increase of ¥36.6 billion, or 61.8% higher compared to the same period last year. Please note the respective increases and decreases in capital expenditures for each business area excluding the impact of unfavorable currency translation effects.

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

Question-and-Answer Session

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