Honda Motor Company, Ltd.

Thank you very much for joining us here at Honda Motor's announcement of financial results for FY 2021. Fiscal third quarter ended December 31st, 2020. I am Watanabe from Corporate Communications. I'll be serving as the MC. First of all, allow me to introduce the members that are represented. Executive Vice President Seiji Kuraishi, Mr. How do you do? I'm Kuraishi, a senior managing director and CFO, Kohei Takeuchi. How do you do?

I'm Takeuchi.

As a precautionary measure against COVID-19, this announcement is being made live stream without any audience in this room. We seek for your understanding.

First, Executive Vice President Kuraishi will be announcing our financial results.

So let me explain our third quarter FY 2021 financial results and full year forecast over FY 2021. Regarding the cumulative unit sales of Honda Group up to the third quarter, motorcycle businesses had 10.591 million units sold and automotives at 3.425 million units and life creation businesses at 3.855 million units sold. With regard to the business situations in the main markets, Unit sales of Total Japan Market for the nine-month stimulative dropped below the same time last year due to the impact of the COVID-19. However, since October, the market improved from the year before when the sales had dropped a post-consumption tax hike. Honda followed the total market trend after October, marking the results better than the last year thanks to the fine sales of N-Box and the effective launch of the new model N1. In FY 2021, NVOX series have made the top unit sales in four-year running of new launch unit sales ranking. The total market in FY 2021 is expected to be below last year due to the impact of the COVID-19 and so on. Honda expects its results to be below the year before because of the market's deceleration impact and short supply of semiconductors. Regarding the total market in the U.S., due to the stepwise resumption of the economic activities since May, the market is on recovery trend slowly. However, the nine-month cumulative results stayed below the same time last year. Honda also is on recovery, mainly with the CR-V, Civic, and Pilot. Nine months' cumulative result was almost equivalent to that of the market. Regarding the whole market for 2021, with high level of new infections of COVID-19 still continuing, expectations of the total market is not clear. Honda will try to expand sales, mainly with the light trucks, such as the launch of a new MDX model. Nevertheless, due to the impact of the semiconductors, short supplies, and so on, our results will end below the level last year. In China, thanks to the stimulative measures to boost consumption, the unit sales in total market marked higher than the same time last year. Breeze, CRV, and Civic were selling well, plus the launch effect of new models such as Civic Hatchback fit in life. Honda enjoyed a growth better than that of the total market. For six months running, we have achieved the record highest monthly sales. In addition, we added EV lineups to the main automotive families. In November, we launched the MNV, Mass Production EV Model, which was co-developed with Dongfeng Honda. For the calendar year 2021, The total market will grow above the year before. Despite the impact of the semiconductor supply shortage, Honda will try to perform better than the preceding year by incremental sales of the main models, further improvement of EV lineups, and so on. Next, motorcycle businesses. In China and in the U.S., People tend to use motorcycles instead of the public transportation systems. Because of that and the strong demands for the outdoor use, the market has almost restored. Asia, the largest market, is showing gradual recovery. However, the cumulative results in nine months still resulted below last year. Honda also stays below the same time last year. But in India and in Thailand, solid recovery is observed.

So is the gradual recovery in Indonesia since October.

Expectations of the total market for 2021 is still unclear due to the impact of the COVID-19 and so on. Honda is expecting sales drop in Brazil and elsewhere. However, reflecting incremental sales in India and Indonesia, we have up-revised our expectations from last time. Next, let me explain the summary of the cumulative results in three quarters of the year. Despite an increasing impact of the COVID-19, which cut down the demands, We continuously and radically reviewed our business activities across the whole group. That resulted in the restrained SG&As and the reduced costs. The operating profit was 447 billion yen, finally. The profit up to the third quarters marked 444.1 billion yen, which was also contributed by the incremental shares of investment profits in equity methods. Unit sales and PLs are also shown in this slide. Next, FY 2021 forecast.

Speaking of the unit sales of Honda Group, motorcycles sales will increase from the previous forecast due to the sales growth in India and Indonesia.

Automotive sales will drop from the previous forecast because of short supply of the semiconductors and so on. In regard to the operating profits, despite the COVID-19 infections rising up again or impact of the semiconductors in short supply, we are up revising the forecast from last time with additional 100 billion yen to 520 billion yen.

In terms of the current profit,

Due to the incremental shares of investment profit based on equity methods, we are adding 75 billion yen to the last forecast, uprevising the figure to 465 billion yen, which is higher than the year before. You can also find our unit sales and the PL on the slide. Next, regarding the expected dividends for 2021, though the business environment is unclear, we can improve the revenues by revisiting our business activities We expect to provide 82 yen per share, 14 yen more to the previous announcement. For the third quarter, we provide 26 yen, 7 yen more to the share.

Now, Mr. Takeuchi, Senior Managing Director, will talk about the details of our financial results and forecast.

And now, allowing me to give the explanation. First, the third quarter financial results, the three-month results. Honda Group unit sales in motorcycle business increased in markets such as Pakistan and India, while decreased in markets such as Indonesia and Vietnam. Automobile business increased in markets like China, U.S., and Japan. Life creation business increased sales in OEM engines in mainly North America and Europe. And next, income statements. Sales revenue despite drop in motorcycle unit sales and negative foreign currency translation effects Increase in automobile and financial service businesses resulted in sales revenue of 3,771.5 billion yen. Operating profit, despite increase in SG&A and currency translation effects due to the efficiency improvement in R&D and cost reduction effects amongst others, operating profit was 277.7 billion yen. Due to reversal of impairment loss, a profit increase in China, amongst others, share of profit of investments accounted for using the equity method was 102.2 billion yen. Next, I will explain change in profit before income taxes. Third quarter profit before income taxes was 386.4 billion yen, up 179.6 billion from the same period last year. Operating profit was 277.7 billion yen, up 111 billion yen from the same period last year. Operating profit excluding currency effects was 136.5 billion yen due to improved efficiency in R&D expenditure and cost reduction effects. Regarding R&D expenditure, due to development, efficiency improvement, and the fact that last fiscal year saw a significant increase in electrification costs. So it is lower, but R&D activities will be carried out as scheduled. by business segment information. Motorcycle business segment operating profit was 72.7 billion yen, despite cost reduction effects and lower SG&A. These were partially offset by decreased profit attributable to decreased sales revenue and model mix. Regarding automobile business segments and financial services business related to automobile sales, the combined operating profit is estimated to be 205.4 billion yen. Automobile operating profit, though SDNA increased due to profit increase attributable to sales revenue and model mix, as well as cost reduction effects, automobile operating profit was 123.1 billion yen. Financial services operating profit was 85.7 billion yen due to accounting difference in the provision for credit lost, et cetera. Regarding life creation and other businesses, there was operating loss of 3.8 billion yen. Operating loss of aircrafts and aircraft engines included in life creation and other businesses was 9.1 billion yen. And next, fiscal year 21, nine months financial results are as shown. Regarding changes in profit before income taxes, profit before tax was 658.7 billion yen, down 127.4 billion yen from the same period last year. Operating profit, despite reduction in SDNA and cost reduction effects, decline in sales revenue and product mix, amongst others, resulted in operating profit of 447 billion yen, down 192.2 billion yen from the same period last year. Let me proceed to explaining the nine-month cash flows of non-financial service businesses. Free cash flow was 104 billion yen. Cash and cash equivalents at the end of third quarter was 2,521.2 billion yen. Net cash was 1,884.8 billion yen. And next is the FY21 forecasted consolidated unit sales. Honda Group unit sales of motorcycles, due to upward revision of sales plan in markets such as India and Indonesia, unit sales forecast is 15 billion units up 200,000 units from the previous forecast. Automobiles, due to impact of semiconductor supply shortage amongst others, unit sales forecast is 4.5 billion units, down 100,000 units. Life creation business remains unchanged at 5.5 million units. Next, FY21 consolidated financial forecast is as shown. As for FY2021 forecasted change in profit compared to last year, despite negative impacts such as sales revenue, model mix, and currency translation, these will be partially offset by decreased SG&A and cost reduction effects. We're planning operating profit of 520 billion yen. Operating profit has been revised upward by 100 billion yen compared to the full year forecast last announced. declining in sales revenue and model mix due to cost reduction effects and cost curbing in mainly SDNA. Sales revenue and model mix include the profit decline attributable to semiconductor supply shortage. Lastly, these are the FY21 forecast, capital expenditures, depreciation, and R&D. This concludes my presentation. I thank you for your attention.

Thank you very much.

That was the results and its presentation for the FY 2021 and the third quarter of this year. And I would like to entertain the questions from the media. And in advance, we have already shared the way we proceed with this conference. We're going to use the Zoom system. And we are going to resume the QH session at 3.45. Please wait for the moment. Thank you. you you you

Thank you. Thank you. Thank you. Thank you. you

Now, we'd like to start QA session.

In advance, we have already introduced to the media journalists we are going to accept questions through the Zoom systems. And if you have questions, please press the button, raise your hand for the questions. And please limit the questions to two questions per person because of the time constraints. So please start. Raise your hand if you have questions, please. Question from Mr. Shimazato from Yomiuri newspaper.

Please.

Shimosato from Yomiuri. Can you hear me?

Yes, I can hear you. Thank you.

Question one, you revised the forecast and could you share with us the plus factors and minus factors? for the revisions and then you say that you have reduced 100,000 units because of the semiconductor shortage. It is a big impact, however, even after the recovery of the supply, you still have to reduce the number by 200,000, right? And also, up until when do you expect the impact of the semiconductor shortage to continue? Would that continue until the next fiscal year again? And are there any impact on the operations at the factory? If you have additional impact on the factory operations, please let us know.

Thank you. So question one.

With regard to the revision of the forecast, the plus or minus factors, and then the 100,000 units down due to the semiconductor shortage, and how long would that continue? impact will continue. So the revision of the forecast, we have the impact due to the COVID-19 and also a semiconductor supply shortage. We do have the impact. However, we have reduced our costs and we also revisited our business activities across the company. SG&A, R&D cost expenses have been restricted, and then we're now able to add 100 to make 150 billion yen, finally, for the profit, finally. Without the semiconductor shortage, without the exchange rate fluctuations, we would be able to absorb the impact by the coronavirus, COVID-19, and then we would have been able to report you the better results than last year. However, the impact by the semiconductor will resolve in the first half this year, and it will resolve completely in the next fiscal year. And we have adjusted our production models in different locations. However, due to the shortage of the semiconductors, the forecast for the full year for the production had to be adjusted without less of a hundred thousand and then um the impact on the values i'm afraid i cannot tell you however we have already factored in the impact in the financial results this year and also we continue to address the situations to minimize its impact on our business. And then the semiconductor companies, suppliers, are trying to add their production to alleviate the situation. The situation is getting better. Therefore, its impact will be resolved in the first half this year. And, of course, we will adjust the calendar the production calendars and also the model mix in the production. Therefore, however, we can resolve the issues in the first half, not up to the RFI at next fiscal year.

And next question from Nikkei Shimbun.

Mr. Asayama from Nikkei. I'm Asayama from Nikkei. Can you hear me? Yes, please. Thank you. Well, you talked about the impact of the semiconductor short supply, and you said that you will not be able to quote any numbers as to the impact. But you believe that you have factored in the impact into your sales and operating profit estimate, and also about free cash flow.

Compared to the same period last year, you say that the cash flow is in the negative compared to last year.

So can you explain about the details, and how do you assess this? This year, it is 104 billion yen. First of all, a question is in regards to the impact of the semiconductor in terms of revenue as well as the operating profit. Is this factored in? And next is about the free cash flow, the positioning of the free cash flow, and how it is assessed. Yes. Thank you. In regards to the first question, yes, it is factored in. So about cash flow, please. Mr. Takeuchi, I'd like to talk about the cash flow. Well, until last fiscal year, we were seeing that the free cash flow had a positive impact. But this fiscal year, in the first quarter, due to COVID-19, because of the unit sales decline, this has had an impact. As for this fiscal year's forecast, well, we have made, again, another revision.

And looking at this,

We think that Kessler will be a positive. And I said that the fourth quarter will see an impact of the semiconductor on the unit sales and sales. And this is also factored in. But the decline from last year is due to COVID-19. And therefore, it is lower than this last year.

Next question, please.

From Asahi newspaper. Mr. Inagaki, please. Inagaki from Asahi. Can you hear me? Yes, please. So semiconductor business again, 100,000 units from January to March, a reduction of that much in that period. Is that right? And also the forecast, would that impact on the production amount? For instance, how many units have to be reduced in the production because of that? And you said that you have less of 100,000 units, and that is a greater impact than other companies. How do you analyze the situation yourself? On page 13, you have the reversal of the impairment, 56 billion yen reversal. What does it mean? Could you elaborate on that, please? Impairment loss reversal. So 100,000 units due to semiconductor short supplies, and that is – the question is if that is an impact on the first quarter and the January to March. And the next question is if the impact is greater in your company rather than others, and also the reversal of the impairment losses. The reversal of the impairment losses, what is the impact on that?

That is the question.

So the semiconductor businesses, that is the reduction applied in the fourth quarter, January to March, and in terms of the unit production unit number, production volume, Honda is head-harder. And the semiconductor affected are related to the Fed-N series in Japan and the cordial disease civics for the U.S. market. And those are the well-selling, popular models that sell well for Honda, those were hit hard by the semiconductor. Therefore, we needed to swap around or adjust or coordinate the production plans to alleviate the situation, but it wasn't enough. And other companies, I don't know, I can't really say about it. However, for the semiconductor short supplies, this is how we how it goes and we of course tried hard however we ended up having this 100 000 units losses however the situation changes every day even yet now so we keep addressing the situation so that we can minimize this impact on our businesses And back to the reversal of impairment losses. In equity methods, we have Keihin, Nisshin, Showa. We have three companies in alliance. And then we have Hitachi and Asumo. We have major companies together. pure appraisal of the assets. And then we had their participation based on the equity method in the past. And then, of course, every company had different situations. And then the share prices were down for some time. And then we needed to pick up the lower share prices. in the accounting practice, because that is practice to take the lower prices for the impairment calculations. And that is now taken up, and then now we have a TOB completed, and then we can now reverse the impaired amount in the past, and that was 106.8 billion yen, much reversed back.

Next question from Nikkan Jidousha.

Mizutori-san, please.

My name is Mizutori. I'm from Nikkan Jidousha, Daily Automotive News.

I think you didn't answer the previous question, but in regards to this downward revision of 100,000 units, does this lead to a reduction in production? And also, the shortage of semiconductors, based on this, are you planning to review or change your procurement strategy? Well, this might be for the midterm, not just in new term. I think that one of the causes for this problem is that over-dependence on mega-suppliers. So can you explain about this as well? Thank you.

Thank you very much.

Well, in regards to your first question about this impact of 100,000 units and whether this will impact production, whether there'll be a decline in production, and also based on this shortage, does Honda plan to review its procurement strategy? These are the two questions. Yes, about the impact on production, whether we intend to reduce production. Well, including the breakdown of 100,000 units, whether this will directly lead to a reduction in production, I really don't have the information at hand, so I cannot respond to that question. And in regards to your other question about reviewing procurement strategy, Well, currently, for stable procurement, including overseas, we are sourcing, procuring from multiple sources, and trying to ensure sufficient inventory. So we're trying to do risk distribution, and yet we are faced with this shortage. So in regards to semiconductor, Honda also will try to review what needs to be done, including how to hold inventory. So we are currently in the process of reviewing. You might ask if we are relying on overseas suppliers too much. Well, in regards to procurement, we are doing based on QCD. And so it's not intentionally that we are relying on overseas suppliers.

Next question.

Automotive News. Mr. Hans Grimmel, please ask a question.

May I ask a question in English, please? Thank you for taking my question. I have two questions. One is about the earthquake anniversary. It's the 10th anniversary of the earthquake, the Tohoku earthquake next month. What lessons did Honda learn about supply chain management from that disaster? And how are you applying those lessons in the current supply chain problems of COVID and semiconductors? And second question is, can you please give us an update on your cooperation and your agreement to align with General Motors in the United States and North America? When can we see some results from that? Thank you.

Yes, this is Hansu. I have a question. Next year, the Great Earthquake in Tohoku will take place in March. It will be the 10th anniversary. What did Mr. Honda learn from the Great Earthquake? What did he learn about supply chain management during the earthquake? And what did he learn from COVID-19 and the shortage of semiconductors? How do you respond to the supply chain problem? This is the first question. The second question is, what kind of cooperation and agreement do you have with the US GM in North America? Please update us on the current situation. Please also tell us when the results of cooperation with this GM will come out.

As I said, with regard to the supply chain in the earthquakes in Tohoku, and we, of course, had experiences of a flood in Mexico, various disasters we experienced.

And then in order to make the stable supplies, including other countries, We always try to get supplies from several suppliers, and of course we need to keep some inventory levels too for that purpose. However, now we have hit very hard by the semiconductor shortage, and we don't actually buy the semiconductors from the manufacturer of the semiconductors directly, but we have the secondary or tertiary manufacturers. We buy from two, and there are things we cannot control in this system. And for the semiconductor businesses, we probably will have to address, such as keeping a certain level of the inventories going forward to better manage that. And in terms of GM and how the relationship with them, actually, we have already implemented our businesses together for the FC. and automated driving. We have a broad range of the collaborations. And last year, we have announced collaborations in North America. The discussion is going on at the moment. And for Honda, we need to have a powerful manufacturing, powerful product. We need to solidify and then make the businesses today more powerful and solid. And to do that, we are having a very aggressive discussion so that we can strike up the win-win relationship with the GM finally. And practically speaking, we do not have a deadline for the discussions at the moment. We simply have a broad range of discussions, and I cannot really tell you when we can report the result back to you. However, whenever that is ready, we will, of course, share with you the results of our collaboration. Thank you very much.

Thank you.

The next question.

NHK, Mr. Tsuboi. Tsuboi from NHK. Thank you. A very detailed question, but on page 13, about the increase in the investment profit, and also you talk about the increase in profit in China. Can you explain about what you are talking about when you say profit increase in China on page 13? On page 13, it talks about the current profit, and here we talk about the increase in profit in China. So can you elaborate on this? Well, in China, we have two production companies in China and these joint venture companies. And the profit, this is based on the equity method. I talked about the three companies in Japan, but what I'm talking about are the two joint venture companies that we have in China. And we have assessed this, and it is incorporated based on the equity method.

Thank you.

Next question, please. From Jiji Tsushin, Mr. Hirano, please. Jiji Press, Hirano. Thank you very much. You talked about a profit forecast that is higher. You said that cost reduction effect and the SGA reduction and so forth are affecting on that. And could you specify what sort of effort in place for that? Thank you. And the reasons for the up-revision this time, the reduced SG&A and cost, what are the contents of those efforts? So 100 billion yen profits added. That's the revision. And of course, I had said that negative impact by the semiconductors of the flies included. And in the third quarter, Because of the COVID-19, of course, there was some restraints on our activities of businesses. And then in different regions, we've worked on the SG&A and we had due to above cost reductions and the R&D being revisited too. And then, together with the performance in the third quarter, and, of course, we need to continue those activities on to the fourth quarter, too. And that means every day level we need to revisit how we spend. And then the aggregation of those efforts are now reflected in this forecast. And then, of course, there is no single thing that make a good contribution. However, that is the cumulative efforts. I think I should say a motor show was not in place. Those events were canceled. So that was a good part of the reductions and also the new launch of the new models. Now it is made online basis instead of the wheel and the accumulative efforts like that It's now realized that, of course, we need to continue this sort of effort going forward. And, of course, events will happen, of course. We will do that for the new launch and so on. But how we're going to hold, how we're going to do those new launch events will have to be thought out. So we will try to maintain those efforts going forward. So the effect is going to be enjoyed going forward.

Next question, Wall Street Journal. Ms.

Tsuneyoka, please. Tsuneyoka from Wall Street Journal. Can you hear me? Yes, we can hear you, please. Thank you.

Well, at Honda in China, or last year in Europe and Japan, EVs were sold.

So what is your reaction to that and also about your future EV strategy? Is there anything new that you can disclose to us and another?

Well, recently,

There is some report that you are talking about Apple car production. So have you been approached? Well, your first question was about our EV strategy. We've already launched battery EVs in China, Europe, and Japan. So what is our reaction to the EV that's already in the market and also our future EV strategy? And about Apple car production, has Honda been approached?

Well, climate change and sustainable development, sustainable society is a requirement, and therefore we cannot afford to lose any time when it comes to EVs.

Well, Honda, we have been mainly focused on HEV. And so we have been trying to introduce such EVs in 2030 globally. We want to electrify two-thirds of the models that we'll be selling. But meanwhile, to accelerate electrification in the different regions, we have to deliver Honda-like products, models which carry our identity. And therefore, in North America, we are collaborating with GM. In China, we have an alliance with CATL. And also, including our own EVs, where appropriate, we will choose the best approach that we can.

we believe is needed.

And also, last year, our President Kajigo said that Honda will aim towards carbon neutral in 2050, and we need to accelerate these efforts to achieve this goal. And including our organization, we want to strengthen our R&D in energy-related topics, and we are concentrating our efforts and resources on this research. About Apple Car, well, we have seen and heard about this both on TV and newspapers. We don't know what kind of car it is to begin with, and therefore, we cannot make any comment in regards to Apple Car production. That is all. Thank you.

Due to the interest of time, next question is going to be the last one.

From Toyo Keizai, Mr. Yokoyama, please.

Yokoyama from Toyo Keizai, thank you. Two questions.

As for the semiconductor supply chain perspectives, what is the reasons for that problem? And you said that it is going to be resolved and it will not cause impact on the next fiscal year. Is that right? And in the end of the year, the government talked about 100% EV cars by 2030, 2050 or 30-something. And then, at the moment, you have N-Box, but you have not much EVs available at the moment. How do you approach for that? So speaking of the semiconductor shortage, what is the cause of that, including the implication in the supply chain and impact on the next fiscal year and so forth? And then in the Japanese market, the government is now saying the electric vehicles 100% achieved by 2035, and the idea of the RK minicars and EV. So semiconductor, as I said earlier, we do not buy semiconductors directly from the manufacturers of the semiconductor. However, the supplier told us that because of the COVID-19, the demands would come down, and that was the perspective. Therefore, they reduced the production of the semiconductors in time. And then, in fact, people played games or used computers more because of the COVID-19. Therefore, there was increasing demands for the semiconductors, not for the cars, but for others. And that was why they had higher demands practically. And then, at the moment, we are asking them to produce more. And suppliers are also planning to increase the production volume. And I think the situation will resolve toward the next fiscal year. And also, the electrification of the K cars I can't really share with you with the specific ideas at the moment. However, of course, the direction of our company is to progress more electrification on and on. And of course, K cars, one of those cars we should work on too. And I'm not able to give you which model or which car is going to be electrified. Of course, K cars will be. of an EV system going forward some time. Thank you. Mr. Thank you very much.

We apologize, but we have run out of time. And therefore, for those questions, we were unable to answer the corporate communications. We'll give you the answer later on. With this, we would like to conclude today's announcement of financial results. And please refer to our website for the IR documents. Once again, thank you for your attendance.