Honda Motor Co., Ltd. (NYSE:HMC) F3Q12 Earnings Call January 31, 2012 8:00 AM ET
Unidentified Company Representative
Welcome to the Honda Financial Results Audio Presentation. On January 31, 2012 Honda Motor announced its financial results for the fiscal third quarter ended December 31, 2011. Through this audio presentation, we would like to review the financial results and discuss the major factors of Honda’s business during the period. We have posted presentation materials at Honda Investor Relations website at http://world.honda.com/investors/. So please download the presentation materials by clicking the link on the Acura NSX concept photo. If you’ve got the material ready, 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 principle 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.
Now, I would like to start with the financial summary for the third quarter that ended on December 31, 2011. Please have a look at slide 3. Honda again, showed resilience in this quarter. The sever impacts from the flooding in Thailand as well as unfavorable FOREX were partly absorbed by the steady recovery of automobile business in major markets, strong return by the motorcycle business, and the company wide efforts to reduce fixed costs. Moreover, despite a reversal of differed tax assets due to the change in income tax laws in Japan, Honda achieved a bottom line of 47.6 billion yen.
Motorcycle unit sales totaled 3,076,000 units, up by 6.3% from the same period last year. Automobile unit sales totaled 830,000, a decrease of 2.9% from the same period last year. Power Product unit sales were 1,021,000 units, down by 11.8% from the same period last year.
Financial highlights for this third quarter are seen in the middle of the slide. Net income attributable to Honda Motor totaled 47.6 billion yen, a decrease of 41.2% from the same period last year. EPS was 26.45 yen, which was a decrease of 18.56 yen from the same period last year. Revenue totaled to 1,942.5 billion yen. Operating income amounted to 44.2 billion yen, a decrease if 64.7% from the same period last year. Equity in income of affiliates totaled 22.9 billion yen, a decrease of 47.3% from the same period last year.
Now, I would like to analyze sales and operating profit for the quarter. Please turn to slide 9. Revenue decreased by 167.8 billion yen, down by 8% from last year to 1,942.5 billion yen. Due to the FOREX impact and decreased revenue in the Automobile and Power Products businesses, attributable to the impact of flooding in Thailand.
Changes in revenue in the respective businesses without FOREX translation impact are seen on the slide. Had the exchange rate remained unchanged, revenue would have decreased by 36.5 billion yen, which is equivalent to a decrease of 1.7%.
Now, let me elaborate on factors that effected operating profit and income before income taxes. Please turn to slide 10. Here is the year-on-year variance. Operating income for the third quarter totaled 44.2 billion yen as you can see at the bottom of the right hand side, which was a decrease of 81.3 billion yen compared to the operating income of 125.6 billion yen from the same period last year.
Income before income taxes amounted to 58.4 billion yen as shown at the bar on the right side, which was a decrease of 73 billion yen from the same period last year. If you have a look at the first box from the left hand side, it shows how much gross profit was affected by the change in top line sales and volumes. Decreased unit sales mainly caused by a production slash as a result of the Thai flooding, brought a negative 32.9 billion yen.
The second box from the left hand side shows cost reduction, which also belongs to changes in gross profit. Cost reduction negatively impacted this quarter by 16.1 billion yen, due mainly to a raw material price increase, and then increase in fixed costs as the volume of production was reduced.
The third box from the left hand side demonstrates the SG&A impact, decreased SG&A mainly due to fewer quality related expenses led to a positive impact of 11.6 billion yen. Increased R&D expense was 10.3 billion yen. FOREX had a negative impact of 33.6 billion yen, as the yen appreciated toward major currencies.
Regarding pre-tax profit variances from last year Honda is hedging FOREX from interest rate risk by using derivative financial instruments in order to reduce the substantial effect of currency fluctuations and interest rate exposure. There were fair valuation losses and gains from derivative instrument that resulted in a positive impact of 3.5 billion yen. This is mainly associated with FOREX forward agreements for export transactions.
Variance in other non-operating income and expenses net was a positive 4.7 billion yen. This relates to fair valuation on interest rate swap agreements that Honda’s financial subsidiaries hold and others mainly affected by the difference between the hedge rate and market rate to book revenue and interest received. Detailed information on the currency impact and revaluation of derivative instruments is available on slide 33 and 34.
Regarding the results of nine months of operating profit and income before income taxes and the individual factors of increase and decrease, please turn to slide 11. Operating income for the nine months totaled 119.3 billion yen, a decrease of 404.1 billion yen due primarily to a decrease in sales volume and mix, and the 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. Income before income taxes amounted to 164.3 billion yen, a decrease of 389.5 billion yen.
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 quarter. Please have a look at slide 12; unit sales for the quarter totaled 3,076,000 units, an increase of 181,000 units or 6.3% compared to the same period last year. Unit sales were increased mainly in Asia and the other regions including South America. Due to the flooding in Thailand production in Thailand was suspended for about one month. However supply chain disruptions did not severely spread into other countries. Motorcycle sales outside of Thailand such as in India, Vietnam, and Indonesia continue to expand and Honda enjoyed higher sales driven by the 110 CC Cub type models and scooters.
In Brazil, which has the biggest market in South American countries and there Honda has the top market share, our strong product pipeline such as the CG150 and CG125 series contributed to high growth. As per revenue and operating profit in the motorcycle business please have a look at slide 13. Revenue for the quarter amounted to 302.5 billion yen, up 0.2% from the corresponding quarter last year, due mainly to increased unit sales despite an unfavorable foreign currency translation effect.
Operating income totaled 25.8 billion yen, a decrease of 11.2% from the same period last year, due primarily to increased SG&A expenses and an unfavorable foreign currency effect.
Next, let me elaborate on the automobile business results. Please have a look at slide 14 of the presentation materials. Unit sales for the quarter amounted to 830,000 units, a decrease of 25,000 units compared to the last year due to the impact of worldwide production adjustment caused by the flooding in Thailand.
Honda was actually in the start-up phase of ramping up to full production to regain the losses in the first half period caused by the Japan earthquake. In Japan, unit sales amounted to 134,000, up 16,000 compared to last year due mainly to newly introduced models such as the FIT SHUTTLE HYBRID, FREED HYBRID and N-BOX.
In North America, unit sales amounted to 366,000 units, up by 2,000 units compared to the same period last year. Increased sales of the CIVIC and ODYSSEY are the main contributor of this increase.
Sales in Europe were soft. Unit sales for the quarter were 38,000 units down by 3,000 units from the same period last year. In Asia, unit sales were 244,000 units, down 21,000 units compared to the last year, due mainly to the Thai flooding issue. In the other region, unit sales were 48,000 units, down 19,000 units due to decreased sales in Brazil and Australia.
Please turn to slide 15, revenue in the automobile business for the quarter amounted to 1,455.6 billion yen, a decrease of 9.9% compared to last year, due mainly to the decreased unit sales and an unfavorable currency translation effect.
Honda reported an operating loss of 16.9 billion yen, a decrease of 85.3 billion yen from last year, due mainly to decreased unit sales, increased raw material costs, increased R&D expenses and an unfavorable currency effect, despite a decrease in SG&A.
As for the Power Products business, please have a look at slide 16. Unit sales of power products declined in all regions totaling 1,021,000 units, a decrease of 136,000 units or 11.8% compared to last year.
Honda has the largest production facilities in Thailand for power product production, located in the same province where its motorcycle factory operates. This time, the factory itself was not flooded, but Honda stopped the production for one month for the purposes of ensuring the safety of the workplace.
Slide 17 shows revenue and operating income for the power products and other businesses for the quarter. Revenue for the quarter amounted to 68.0 billion yen, a decrease of 5.7% from the same period last year. This decrease in revenue was mainly due to decreased unit sales and an unfavorable currency translation effect.
Honda reported an operating loss of 2.1 billion yen, an improvement of 1 billion yen due mainly to the operating loss in the other business, decreased sales in the power products business and an unfavorable FOREX impact.
With regard to the Financial Services business, please see slide 18. Total assets in the Financial Services business came to 5,290.5 billion yen, while operating profit decreased by 15.7% to 37.5 billion yen because of an unfavorable FOREX translation effect.
Operating income stayed at a healthy level and the operating margin for the Financial Services business was 29.5%. 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 each geographical segment for the quarter. Please turn to slide 19 starting from Japan. In Japan, revenue for the quarter amounted to 863.1 billion yen down by a 0.5% from the third quarter of last fiscal year.
Operating income was minus 41.2 billion yen, a decrease of 55.8 billion yen. The main factors that caused this decrease were increased R&D expenses, increased raw material prices and an increased FOREX effect caused by the appreciation of the Japanese yen, which more than offset decreased SG&A expenses.
The operating margin was minus 4.8%. In Japan, Honda experienced a temporary automobile production adjustment in November due to supply chain disruption caused by the flooding in Thailand. However, this issue has been solved and we’ve already brought our production back up to normal levels.
We introduced the N-BOX mini-vehicle in December last year to stimulate our mini-vehicle model line-up. The mini-vehicle segment became more popular in Japan and demand for this N-BOX has been remarkably good. We've already had more than 27,000 units of orders, three times as many as our monthly sales target volume. We are introducing two more mini-vehicle models shortly and we are confident that they will also be well received.
On top of the N-BOX, we also added a hybrid version to the Freed and Freed Spike models at the end of October. With the popularity of hybrid models in Japan, customers’ acceptance for this model is quite good. The sales mix of hybrid models for Honda in 2011 was 67% in Japan, the FIT SHUTTLE HYBRID [flipped] very well for the quarter too.
On the next slide 20 is North America. Revenue for the quarter amounted to 986.2 billion yen, a decrease of 2.5% from the corresponding period last fiscal year, as a result of a negative currency impact. Operating income is 74.8 billion yen for the quarter, which was a decrease of 16.5% from the third quarter last year, primarily due to increased raw material costs and a negative currency impact. The operating margin for the quarter was 7.6%.
Now I would like to discuss more about the U.S. automobile market during the quarter. Despite supply constraints of Japanese brand vehicles caused by the March earthquake in Japan and the October flooding in Thailand, two U.S. auto industry annual sales grew in 2011, with 12.8 million units or 10% growth over 2010.
We expect total demand to continue to grow in 2012, reaching at least to 13.5 million-unit level. In the October to December quarter, the seasonally adjusted selling pace was actually already showing more than the 13.5 million-unit level. The Truck segment especially continued to show good sales and reached a pace of 7 million annualized sales.
Regarding Honda's sales in the U.S. market during the quarter, Honda unfortunately faced another supply constraint due to flooding in Thailand, just after it had recovered from the impact of the earthquake in Japan. We quickly recovered at the beginning of December with all North American Honda factory production normalized. However, we still not able to make it up and finish December with retail sales of 19% decline year-over-year. The inventory level at dealerships was extremely tight and for example, popular models such as the CR-V had only 17 selling days of inventory at the end of December.
We expect to have good sales in 2012. First of all, the supply has been normalized and capacity added. Honda added or reinstated a second shift to the line that its Indiana factory, Ohio factory and Canada factory, for the first time, since the recession in 2008. North American automobile production in December for example was that in all time high for the month and was up 18% over the last year.
Secondly, our pillar models have been or will be refreshed. The new Civic came out in April last year and regained number one sales in the segment during the last quarter with the supply recovery. The new CR-V was just introduced in December last year and the new Accord will come out in autumn.
Thirdly, the Acura brand will also go through a complete line of change. The compact luxury utility vehicle RDX will also go through a full model change this spring. And at the same time, the new compact luxury sedan, ILX will be introduced. We are targeting Honda and Acura combined sales of 1.43 million units in the United States this year, which is more than 20% growth over 2011.
As for Europe, please turn to slide 21. Revenue in Europe amounted to 119.4 billion yen, which was a decrease of 20.7% from the third quarter of last fiscal year, due mainly to decreased revenue in the automobile business as a result of the impact of the flooding in Thailand and a negative currency translation effect.
Operating income for the quarter was minus 3.8 billion yen, which was an improvement of 5.6 billion yen as a result of decreased SG&A expenses. The operating margin was minus 3.2%.
In Europe also, we have had a temporary production adjustment through the quarterly period. However, this has been back to normal level since the 19th of December, and we’ve started to produce the all-new Civic.
Honda’s automobile sales in Europe decreased due to weak market demand particularly in Southern European countries and production disruption as I mentioned before.
The business environment continues to be quite challenging. However, with the new Civic’s we’re now producing in the UK and the all-new CR-V to be introduced in autumn this year, as well as a vehicle equipped with our own small diesel engines that is also to be launched in autumn this year, Honda intends to expand its sales volume.
Let us move onto Asia on slide 22. Revenue in Asia for the quarter amounted to 317.6 billion yen, a decrease of 28.7% from the corresponding period last year. A decrease in automobile business due to the flooding in Thailand as well as the negative currency translation effect more than offset increased revenue in the motorcycle business.
Operating income for the quarter was 13.3 billion yen, a decrease of 62.7% from the third quarter of last fiscal year, mainly due to a decrease in revenue, changes in model mix et cetera and an unfavorable currency effect. Operating income for the quarter was 4.2%.
The flooding in Thailand had a very large impact on our operations worldwide. For regions such as North America and Japan, the supply chain of certain electronic parts procured from Thailand was temporarily disrupted and we reduced production in step with the available inventory of the component. However, the issue has been solved and our production in the two regions has already been normalized.
Another issue that we experienced was that the factory in Thailand sustained physical damage due to the flooding. We have examined all the damaged facilities and the equipment so that we can resume automobile production in Thailand in April. As for production other than in Thailand in the Asian region, production normalization schedules differ for each country. For example, in Indonesia, production will be normalized in March, and the Philippines in February with the all-new City model and India will be normalized in March. For motorcycle operations on the other hand, the impact has not been as large. Fortunately, Honda’s motorcycle factory in Thailand was not flooded.
Sales volumes certainly decreased in Thailand due to the flooding. However, it increased very steadily and rapidly in other countries in the region and particularly in India, Indonesia and Vietnam, Honda has enjoyed robust growth in sales.
Now onto the other region on slide 23; in the other region, which includes South America, mainly Brazil and Oceania, the Middle East and Africa, revenue amounted to 206.1 billion yen, a decrease of 13.7% from the corresponding period last year. This was caused mainly by a decline in revenue in the automobile business in Oceania and Middle Eastern countries, as they got shipments from Thailand in part. And an unfavorable currency translation effect that more than offset increased revenue in the motorcycle business in Brazil.
Operating income for the quarter was 12.5 billion yen, a decrease of 20.2% from the third quarter of last fiscal year, mainly due to negative revenue, changes in model mix and a negative currency impact. The operating margin was 6.1%.
Please note that the biggest contributor in the other region, which is Brazil, has a fiscal year period that is from January to December unlike the rest of the regions. Therefore the third quarter results reflect their performance of the July to September quarter in Brazil.
In Brazil, in the July to September quarter, growth in automobile demand slowed down to slightly more than 1%, due to a credit [squeeze] policy. Under such circumstances, Honda’s unit sales declined by more than 20% compared to the same period of last year. For the October to December period, the market environment worsened and declined by 6.5% year-over-year. Honda’s sales for the quarter declined due to the weak market, but also due to a production slash as a result of supply chain disruption caused by the flooding in Thailand.
The motorcycle market was expanding in the July to September quarter. However in December, it slowed down due to a tightening of credit. Honda's sales have been slowing down as well as in recent months. However, sales of the CG150FAN and Biz 125 has still been strong. That is all for the breakdown in Honda’s business in each geographical segment.
With regard to equity in income of affiliated companies, please see slide 24. Equity in income of affiliated companies in the third quarter was 22.9 billion yen, down by 20.5 billion yen from the same period last year. This decrease in equity in income was due to a decline in income in joint ventures in China during the period, there July to September, mainly due to decreased production triggered by Japan’s earthquake.
Please note that the fiscal term of these joint ventures in China is January to December, which differs from Honda Motor Company. A decrease in sales of our motorcycle-affiliated company in Thailand due to the flooding also had an impact. For your reference, there is a chart that shows operating income and net income of Asian affiliated companies combined.
Please see slide 25. During the third quarter, net profit for Asian affiliated companies amounted to 45.4 billion yen; major contributing companies are mentioned at the bottom of the slide.
With regard to CapEx for the quarter, please see slide 26. Total CapEx for the third quarter was 239.7 billion yen, which was an increase of 49.3 billion yen. CapEx related to new model production in the automobile business increased in North America as well as in Japan. CapEx related to expanding capacity in Asian motorcycle production also increased.
Now, I would like to discuss the company's new earnings guidance for the fiscal year ending March 2012. Please see page 27. Our forecast at motorcycle unit sales for fiscal 2012 is 12,660,000 units. Automobile unit sales are expected to be 3,150,000 units. We’ve revised this down by 285,000 units from the forecast we announced on the 1st of August. The Power Product unit sales’ forecast for fiscal 2012 is 5,850,000 units.
As for revenue and profit, please turn to slide 28. Net income is expected to be 215.0 billion yen, a decrease of 319.0 billion yen from the last fiscal year. Earnings per share are estimated to be 119.29 yen, a decrease of 176.38 yen from last year. Revenue is expected to be 7.85 trillion yen, which will be a decrease of 1,086.8 billion yen from last year.
Operating income is estimated to be 200 billion yen, a decrease of 369.7 billion yen from last year. Income before income taxes is expected to be 250.0 billion yen, a decrease of 380.5 billion yen from last year. Equity in income of affiliates is estimated to be 95.0 billion yen, a decrease of 44.7 billion yen from last year. Our currency assumption for the full year will be 78 yen against the U.S. dollar and 106 yen against the Euro.
With regard to the changes in guidance from August 1st, please see slide 30. The flooding in Thailand has given us a negative impact of approximately 110 billion yen. However, this was absorbed by our company wide efforts to reduce fixed costs, and the sole or remaining negative impact would be from FOREX due to the higher yen.
As for the guidance for CapEx depreciation and R&D expenses, please see slide 31. CapEx for the year is estimated to be 410.0 billion yen up by 98.7 billion yen from last year. Depreciation is expected to be in 295.0 billion yen down 30.2 billion yen from last year. R&D expenses are estimated at 525.0 billion yen up 37.5 billion yen from last year.
With regard to cash dividends, please see slide 7. The Board of Directors of Honda Motor resolve to distribute dividends per share of 15 yen for the third quarter as of the record date, which is December 31, 2011. We’re projecting annual dividend of 60 yen, an increase of 6 yen from last year.
This concludes Honda’s fiscal third quarter earnings results audio presentation. Thank you again for listening to our web program. This is Honda Investor Relations. Have a wonderful day.
[No Q&A session for this event]
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