Hyundai Motor Co

Hello, this is Michael from IR team. Welcome everyone to HMC's second quarter 2023 business results conference call. On behalf of Hyundai Motor Company, I appreciate your time for participating in today's call. Please refer to the presentation HMC 2023 Q2 business results on our IR website. Today's presentation consists of two parts, sales summary and financial summary. For more information, please refer to the appendix. First is sales summary. Our Q2 global wholesale increased by 8.5% year-on-year to 1,059,713 units, while retail sales increased by 8.1% year-on-year to 1,065,397 units. In the second quarter, our wholesale increased due to the production increase as parts supply situation improved and strong fat odors. In domestic market, sales increased by 13% year-on-year due to increased sales of high margin models and SUVs such as the all-new Grandeur which was launched in the fourth quarter last year and the all-new Kona which was launched in the first quarter this year. In North America, strong sales continued led by SUVs and Genesis resulting in wholesale sales increased by 12% year-on-year. In the U.S. market, sales of SUVs have increased by 7% year-on-year with Tucson and Santa Fe. EV sales in the U.S. increased by 134% year-on-year thanks to IONIQ 6 with utilizing lease and fleet program due to IRA. These factors resulted in an all-time high second quarter sales record with a 5.5% of market share. In Europe, wholesale increased by 9.5% year-on-year due to sales growth of eco-friendly vehicles with IONIQ 6 and the launch of the all-new Kona Hybrid. In India, wholesale increased by 9.2% year-on-year as parts supply situation gradually improved. We expect to expand sales in the second half and continue to enhance SUV competitiveness with the launch of Micro SUV Xter in July, which was already received positive reaction from the Indian market. Next is sales by model and key status. In Q2 2023, global sales volume has increased year on year in most segments due to increased production. Global SUV sales have increased by 0.4 percentage point year-on-year to 52.8% due to the all-new Kona and solid sales of our flagship models such as Tucson, Santa Fe, and Creta. Vanessa's wholesale in the second quarter increased by 0.5 percentage point year-on-year to 5.9% due to continued strong sales of existing flagship models such as GV70 and GV90 in North America and domestic market. Sales of eco-friendly vehicles increased 49% year-on-year with the increased sales of EVs and HEVs. Especially continuous strong sales of IONIQ 5 and global sales of IONIQ 6 increased global EV portion by 1.9 percentage point to 7.4%. and resulted in an increase of by 47% year-on-year in Q2. Global hybrid portion increased 3.0 percentage point year-on-year to 9.1%, with strong sales of the all-new Grandeur and Kona Hybrid. While we continue our efforts to expand EV sales through global launch of the IONIQ 6, and with the launch of the all-new Kona EV, We plan to further improve product mix by expanding high-value models with the all-new Santa Fe, which is scheduled to be launched in the second half. More details of sales information for major markets such as Korea, the US, and Europe are provided in the appendix page 11. That is the end of the presentation on sales, and now I'll move on to P&L. This is the income statement. Consolidated revenue increased by 17.4% year-on-year to 42 trillion 249.7 billion Korean won, and operating income increased by 42.2% year-on-year to 4 trillion 237.9 billion Korean won. The automotive division revenue increased 19% year-on-year with volume increase from higher production, mixed improvement with high margin vehicles, and price increase in some regions. The operating profit margin increased by 55% year-on-year. Finance division revenue increased by 6% year-on-year due to the strong sales, but the operating income decreased 30% as higher interest expenses driven by the higher interest rate impacted regions. Net income increased by 8.5% year-on-year to 3,346.8 billion KRW. Next is revenue breakdown. Volume increase from production recovery had an impact of 2 trillion 341.2 billion KRW, and the mixed improvement with more high-value models had an impact of 1 trillion 852.5 billion KRW. In addition, February 1-2 U.S. dollar rate had a 1 trillion 68.5 billion KRW impact, increasing revenue 17.4% year-on-year. operating profit, the volume increase thanks to the production recovery had a 500 billion Korean won impact. Mixed improvement with higher margin vehicles like Genesis had a 201.2 billion Korean won impact. Despite the impact of some incentive cost increase from last year's basis, the favorable Forex rate had a 682.3 billion Korean won impact. Even with The decrease of finance division and increased SG&A cost, OP margin increased by 42.2% year-on-year. Cost of goods sold ratio decreased by 0.4 percentage points to 79% due to increase of utilization rate and favorable Forex. SG&A increased by 5.3% year-on-year to 4,655.5 billion Korean won due to increase of marketing expense and R&D cost. Non-operating income decreased by 34.4 percent year-on-year to 596.4 billion Korean won. Net income increased by 8.5 percent year-on-year to 3,346.8 billion Korean won due to increase of the margin. This is the end of our Q2 2023 business results. Thank you. Now, EVP Kang Hyun-seo, Head of HMS Planning and Finance Division, will share updates on our annual guidance. Good afternoon, I am EUP Kang Yeon-seo, Health Planning and Finance Division. When the company announced the annual guidance early this year, there were some concerns due to the potential economic slowdown, Forex rate change, demand reduction, and intensifying competition. Still, in the first quarter, we posted operating profit of 3.6 trillion and OP margin of 9.5%. In this quarter, the company achieved operating profit of 4.2 trillion and OP margin of 10%. As we have achieved our earnings beating market expectations as well as our initial outlook in the first half, we'd like to give an updated full year guidance for investors and analysts based on the second half outlook and target. Regarding wholesale, there are still macroeconomic concerns over a potential economic slowdown. However, reflecting the better-than-expected market demand and stronger volume driven by production normalization, the company will keep the initial sales guidance of $4.32 million announced early this year. Regarding profit guidance, the initial guidance for revenue and OP margin was 10.5% to 11.5% and 6.5% to 7.5% respectively. However, considering the continuous ASP growth, production and region mix improvement, and favorable Forex rate, we'd like to update our guidance and raise our year-on-year revenue growth and OP margin forecast by 3.5 percentage point and 1.5 percentage point to the range of 14% to 15% and 9% to 8% respectively. Regarding investment, In line with our aggressive electrification plans announced at the CEO Investor Day last month, the $10.5 trillion investment plan will be executed. The initial free cash flow guidance of $3 to $4.5 trillion remains the same, too. Regarding our shareholder return policy, the company announced a new set of shareholder return policies to improve shareholder value. As part of the policy, the company set the dividend payout ratio of 25% or higher of its consolidated net profit to improve dividend transparency and visibility. Also, the company will pay dividend every quarter instead of twice a year and cancel 1% of its treasury stock every year for the next three years in an effort to significantly boost shareholder returns. The company will endeavor to achieving yet another good result and prioritize shareholder returns to achieve revised full-year guidance including higher profit numbers. For details, please see the updated guidance posted on the company's website. That's all on the annual guidance. Thank you. And again, EVP Kang Yeon Seo will provide us with the second quarter result and the outlook for the second half. Yes, I'm Kang Yeon Seo. Following the great results in Q1, in Q2, thanks to the sales volume increase driven by robust demand, mixed improvement with higher ASV models including SCV and Genesis, and the impact of favorable FX rate continued, and the company posted consolidated OP margin of 10%. Interest rate hikes, inflation, and other macroeconomic uncertainties were looming, which raised concerns over global vehicle demand, but the demand is strong globally across major markets including the US, Europe, and India. On such demand, our global sales went up 8.5% year-on-year. Our product mix has been steadily improving too. The share of SUV globally posted 52.8%, indicating consistent growth, and Genesis and EV sales too were 5.9% and 7.4% respectively, showing a clear upward trend. Our EV sales in particular soared by 47% to 7.4% year on year, despite the IRA and intensifying competition. As a result, our Q2 global ASV increased 5.9% year on year, contributing to higher profitability. Let me now share the outlook on the second half. With global OEMs production returning back to normal, many are worried about potentially more severe competition. In fact, the average incentive spendings of OEMs in the US are globally increasing, but still capped at around 50% compared to pre-COVID levels. And as global inventory is only 0.3 months, incentives will remain stable for the foreseeable future. With a solid demand in key markets and launch of new models including Santa Fe and IONIQ 5N in the second half, the company is expected to continue to stable results for the remaining period of this year. Having said that, Fed might raise rates again and $1 exchange rate might change. So, macro conditions will remain uncertain. The company will focus our efforts on flexibly managing changing demand in order to stabilize our profits. For the EV market in particular, we are seeing price cuts aggravating competition and factors posing a risk to our EV strategy, including different charging standards. However, as we have announced at the recent CEO Investor Day, we'll utilize our unique Hyundai Motorway in the form of flexible production and a modular architecture to continue to expand our footprint and presence in the US EV market. Lastly, allow me to share our dividend payout plan for this quarter. As explained during the last quarterly earnings call, we plan to pay quarterly dividends in Q2 and maintain an annual dividend payment ratio of 25% or higher accordingly. Given HMC's improved performance and commitment to better shareholder return, the dividend for Q2 has been decided at 1,500 Korean won per common share. Thank you. We'll hear from Hyung Sung Lee, head of the Planning and Finance Division of Hyundai Capital. Good afternoon. I am Hyung Sung Lee, head of Planning and Finance Division of Hyundai Capital. Allow me to report our Q2 2023 business results and outlook for the second half. With high interest rates persisting to delay economic recovery and regulations tightening, Along with other internal and external uncertainties, the finance business has benefited from increased car sales with normalizing supply situation, proactive risk management, and excellent liquidity management capability, all leading to a competitive advantage despite challenging circumstances. In the later half of this year, we'll further leverage our competitiveness as HMG's captive finance company and execute a well-balanced strategy that addresses both external and profit growth. Details of the company are as follows. First, Hyundai Capital. Boosted by strong HMG sales and enhanced partnership with other grill affiliates, the penetration rate has been rising, resulting in financial assets growing 3% year on year. Despite unfavorable financing conditions, such as the capital market crunch continuing from late last year, the company has leveraged its strong liquidity management capability to increase auto financing volume now accounting for 80% of our asset portfolio. As a result, cumulative operating profit grew 13% year on year, led by growing retail and lease sales. In terms of cost, interest expenses rose due to continued high interest rates, but we were able to upgrade our credit rating to AA+, and diversified funding sources to minimize the increase. Moreover, the cost of bad debts increased due to concerns over economic slowdown, resulting in a 13% drop in operating margin year on year. However, our preemptive risk management efforts led to a delinquency rate below 1%, indicating very strong soundness. While we expect uncertainties such as macroeconomic downward pressure in the second half of 2023, Hyundai Capital will continue to operate a profitable asset portfolio based on auto loans, manage risks preemptively, and secure stable liquidity in preparation for financial market volatility. Furthermore, in support of HMC's upcoming certified pre-owned vehicle business, we'll enhance financing for used cars and add new operations for greater global finance coverage in order to strengthen our role as a captive finance company. Next is Hyundai Capital America, or HCA. In the U.S. market, our business continued to grow on the back of strong automotive sales and a penetration rate, pushing up the cumulative sales volume for the first time by 34% year-on-year. In addition, Genesis and SUVs helped improve the sales mix and contributed to a higher average selling price, including financial assets by 6% year-on-year. With stronger volume, loan sales drove a 5% increase in operating margin year-on-year. However, but continued interest hikes raised the interest and bad debt costs significantly, driving up operating costs as well. Further compounded by negative phase effect, Operating profit fell nearly 50% year-on-year. Next is our outlook for the second half of this year. While rising cost of interest and bad debt and weakening used car prices are a possibility, HAC has been mitigating such risks by elevating the prime share to 86% for financial solidness. In March and June, the company also issued global bonds worth a total of $5.5 billion in a proactive effort to secure liquidity. Moreover, HSAC will align even more closely with HMG sales strategy and expand access to secure profitability while continuing to manage soundness proactively and improve operation efficiency to defend our profits continuously. That's all on my side. Thank you for your attention.

Now, training session will begin. Please press Start 1, that is, star and 1, if you have any questions. Questions will be taken according to the order you pressed, star and number 1. For cancellation, please press Start 2, that is, star and 2, on your phone. The first question will be presented by Junseong Kim from Merits. Please go ahead with your question.

Hello, I'm Junseong Kim from Merits. I would like to ask a simple question about performance and delivery. In terms of sales, there have been a lot of sales in the past compared to the past, other than car finance. Please tell us why. And if you look at the profits other than sales, it seems that there was a lot of cost on the other side, except for finance and spending laws. I would like to ask for some reasons for this. And lastly, you announced 1,500 won this time, and now our profit guidance has been provided by sales growth and sales interest rate. If this number comes out, If the dividend in the second half of the second half of the second half of the second half of the second half of the second half of the second half of the second half of the second half of the second half of the second half of the second half