Hyundai Motor Co

Good afternoon. This is Michael Yoon, head of the investor relations team. Now let me start Hyundai Motor Company's 2023 Q3 business results conference call. Please refer to the presentation, HMC 2023 Q3 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 page. First part is sales summary. Our 2023 Q3 global wholesale increased by 2.0% year-on-year to 1,045,510 units, while retail sales increased by 1.8% year-on-year to 1,019,849 units. In third quarter, our wholesale increased due to strong sales in North America and Europe despite seasonality. In domestic market, sales increased by 3% year-on-year due to strong sales of the all-new Kona along with steady demand of hybrid vehicles and launch of new Santa Fe in August. In North America, wholesale increased by 13% year-on-year due to strong sales led by high-value models like Genesis and significant increase in EV sales after active response to IRA. Especially in the US market, wholesale increased by 27% year-on-year, helped by strong sales of SUV models. In addition, EV retail sales increased by 183% year-on-year due to proactive marketing. In the European region, whole sales increased by 8% year-on-year due to steady sales of eco-friendly vehicles with new Kona EV and HEV. In India, we had stable sales in SUV segments with the launch of micro-SUVs extra in July. Starting with the launch of Kratz facelift next year, SUV sales momentum is expected to strengthen. Next is sales by model and key status. Global SUV sales portion increased by 4.1 percentage point year-on-year to 54.7% due to global launch of the all-new Kona and solid sales of our flexion models such as Tucson and Santa Fe. Genesis portion in Q3 increased by 0.2 percentage point year-on-year to 5.1% due to strong sales of flagship models such as GV17. Sales of eco-friendly vehicles increased with stable sales of EVs and HEVs. Global HEV portion increased 2.9 percentage point year-on-year to 8.6% with the global sales of the all-new Kona, especially in Korea and European markets. Also, global EV portion increased 1.2 percentage point year-on-year to 6.3% with increased sales of EVs in Q3 US market due to appropriate use of incentives to respond to IRA. More details on sales for major markets such as Korea, the US, and Europe are provided in the appendix page 11. This is the end of presentation on sales and now I'll move on to financial summary. This is the income statement. Consolidated revenue increased by 8.7% year-on-year to 41 trillion won, and operating profit increased by 146.3% year-on-year to 3.8 trillion won. The automotive division's revenue increased 9.3% year-on-year due to increase of volume, mixed improvement with high margin vehicles. The operating profit increased by 207% year-on-year. Finance division revenue increased by 0.9% year-on-year, and the operating profit increased by 1.3% due to strong sales of vehicles and growth in penetration rate. Accordingly, debt income increased by 133.9% year-on-year to 3,303.5 billion won. Next is revenue and operating income analysis. Volume effect from sales increase was 1.6 trillion won. Despite the increase of incentives, mixed improvement with high margin models had an impact of 1.1 trillion won. Despite the unfavorable 1.2 US dollar rate, revenue increased by 8.7% year on year. Regarding operating profit, volume impact was $314.4 billion won. Positive mix improvement effect that offset increased incentives was $460.9 billion won. Also due to base effective provision cost in Q3 2022 operating profit increased 146.3%. Cost of goods sold ratio decreased by 1.1 percentage point to 79.4% due to the decrease of raw material prices. Despite the increase of labor and R&D cost, SG&A decreased by 20.1% year-on-year to 4.6 trillion won due to base effect of one-off provision cost in Q3 2022. Non-operating income increased by 72.7% year-on-year to 845 billion won. That income increased by 134% year-on-year to 3.3 trillion won. This is the end of our Q3 2023 business results. Thank you. Next, EVP Seo Kanghyun, HMC, Head of Planning and Finance Division, will discuss Q3 performance evaluation, annual earnings outlook, and third quarter dividend plan. Good afternoon. I'm Seo Kanghyun, Head of Planning and Finance Division of HMC. Let me share the overview of Q3 2023 business result, four-year outlook, and Q3 dividend plan. In Q3 2023, despite the market concerns over global automotive demand and the low season, HMC posted global wholesales of 1.05 million units, thanks to the continuously solid market demand, achieving operating profit of 3.8 8 trillion won with OP margin of 9.3%. Our sales mix continues to improve with higher ASB models such as Genesis and SUV sold more, combined with our regional mix improvements such as the record sales in the US and strong sales in Europe and Korea. With the favorable average $1 exchange rate of 1,301, all this contributed to the Q3 performance. I understand that the rapidly changing auto market and macro uncertainties such as interest rate hike and inflation keep creating worries over the global auto demand. Still, HMC has been showing a robust growth in major markets such as the US, Europe, and India, while expecting record sales in the US. As a result, HMC's global wholesales posted 1.05 million units, up 2.0% year-on-year. Following the first half, in the third quarter, the impact of product mix improvement continued. While the total volume increased, the share of SUV and Genesis improved even more, marking 54.7% and 5.1% respectively, which is close to 60% of the total sales. Also, despite the market concerns over the worsening EV sales environment, our EV sales grew 6.3% by 26.2%. Overall, the product mix improvement, sales volume growth, and positive FX impact all drove strong third quarter results. I would now like to touch upon the market concerns over the increasing incentive spending. Excluding the increased incentives for EV sales in the US market to respond to the IRA, the incentives for ICE vehicles in the US have been managed stably below the industry level throughout the third quarter, and the profitability-driven sales policy will continue in the future. HMC has completely reorganized our decision-making and evaluation system, focusing on profitability away from volume growth and has been implementing incentive policies through careful analysis of each market and vehicle type. Next, let me briefly explain our quality cost. Even if there's media coverage on our new quality cost, the precise amount, calculation of liability ratio, and evaluation of the existing provision amount due to the consistent quality improvement may cause quite a gap through this quarter's provision. Also, the amount of provision may change significantly depending on the difference between the $1 exchange rate at the end of the previous and the current quarters. As we keep improving the quality of our products, the impact is recognized by evaluating the existing provision according to the accounting standards, and the current amount of provision to the total revenue is at a stable level. Next is our full year 2023 forecast. In the second quarter earnings call, we raised the annual guidance revenue growth of 14% to 15% and OP margin of 8% to 9%. In Q4, macro uncertainties are expected to grow significantly, such as interest rate hikes, Israel-Hammaz war, prolonged Russia-Ukraine war, and rapidly changing EV market environment. However, we expect to achieve annual results near the upper end of our annual guidance for sales and OP margin through robust growth in key markets, continued improvement of our product mix, minimal increase in incentives, and favorable exchange rates. Even with the growing macro uncertainties, the company will proactively respond to the market environment based on the profit-driven decision-making and strengthening regional HQs in each market. As evidenced by our response to the supply shortage, through our flexible production and response capacity, we will keep the direction of the EV strategy announced at the CEO Investor Day while executing sales and production strategies for EV HEV and ICE by closely monitoring the local market demand in order to consistently maximize profits. Finally, Q3 dividends. As announced at the first quarter earnings call, we set the quarterly dividend payment and dividend payout ratio of 25% or higher as part of our mid- to long-term shareholder return policy. The third quarter dividend will be paid accordingly. The third quarter dividend was decided at 1,500 won per common share, the same as the second quarter. Thank you for listening. Next, SVP Lee Hyung-suk, head of Hyundai Capital's Finance Division, will brief on third quarter finance segment earnings and fourth quarter outlook. Good afternoon, I'm Lee Hyung-suk. I'll report the Q3 2024 business results and outlook for the fourth quarter. In the third quarter, while downside risk persists including interest rate hike and concerns over slowing economic recovery, Hyundai Capital is the captive finance company of the HMG. We are sustaining our performance with the portfolio led by solid auto financing segment. In the fourth quarter, although internal and external uncertainties will continue, Hyundai Capital will respond with agility to secure competitive edge. I'll elaborate on details of each company. First is Hyundai Capital. Based on the HMC's production normalization and close cooperation with subsidiaries, we strengthened installment product competitiveness. As a result, financing assets increased by 2% year-on-year. Moreover, supported by the company's stable financing capabilities by providing the captive auto financing in a stable manner, the share of profitable auto financing exceeded 80% in our portfolio. As a result, on a basis of excluding Forex and derivative valuation gains and losses upsetting the profit and loss effect, third quarter cumulative operating income increased mainly in installment and leased by 35% year-on-year. In terms of cost, interest costs increased from continued high interest rates and deteriorated asset quality across the financial sector, resulting to the increased cost of bad debts, decreasing operating profit by 8% year-on-year. However, preemptive risk management efforts led to delinquency ratio below 1%, the lowest this year, suggesting very strong soundness. In Q4, While the uncertainties are heightened due to continued tightening monetary policies in major countries and geopolitical risk, Hyundai Capital will manage an auto finance-led portfolio so that the external impact will be limited. Also, we will remain proactive in risk management to safeguard against the concerns over worsening soundness. Despite the volatile financing market, we successfully issued one trillion worth ABS this week. We will diversify funding sources to stably secure liquidity and respond to volatility of the financing market. Moreover, in support of HMC's upcoming CPO business, we will expand the financing for used cars and enlarge global finance coverage to solidify the leadership in auto finance market. Next is Hyundai Capital America, HCA. Supported by strong sales of vehicles, cumulative auto financing volume of Q3 increased by 48% year-on-year. Improved mix led by Genesis and SUVs and continuous increase of ASB caused financial assets to go up by 9% year-on-year. Q3 cumulative operating income increased 8% year-on-year. but due to the interest cost increase from high interest rates and rise in provision cost led by asset growth, operating expenses have also increased. As a result, one denominated operating profit went down by 43% year-on-year. But in terms of credit risk, prime asset ratio was raised to 88% within our portfolio, by which we recorded favorable delinquency ratio, securing stable soundness. In September, following March and June, we issued global bonds worth of $7.5 billion total. In Q4, as concerns over prolonged high interest rate and high inflation continue, HCA is preparing in every way to minimize negative impact from risk. By pursuing proactive risk management focusing on prime customers through conservative underwriting strategies, enhanced collection activities to minimize asset insolvency and reduction of OPEX, we will continue our efforts to defend profitability. This is all for the presentation on the finance segment. Thank you. This is all for presentations and now we will take questions.

The first question will be presented by Eunyoung Im from Samsung Securities. I think foreign companies are slowing down their production plans. From the second half of 2024 to 2025. So, the electric car price competition has been too severe, and due to the high demand and high interest rates, is it possible that the schedule for our American factories to return next year will be delayed a little? And is there a possibility that the electric car medium-term sales in 2026 and 2030 will be slowed down a little? The second is that there are a lot of variables about the total budget, so you said that it will be set differently from what is published in the media. First of all, due to the engine total deposit, the total budget was piled up to about 10 trillion won at the end of the first half. So, I get the feeling that it is piled up a little more than what is going out per quarter. It's not this year or next year, but I think it's been about 10 years since the beginning of 2011, so I'd like to ask if there is a possibility of re-entry in 2-3 years. That's all.

So the first question was asked by Lee Moon Young of Samsung Securities. Thank you for the opportunity. Congratulations on the great result despite the difficulties in the market. I have two questions. First, you mentioned the direction of your EV plan. According to the sales report and the earnings calls in the previous quarters, I believe that there has been some slowdown in the EV demand and some OEMs are adjusting their EV production plans. Maybe shifting the focus from 2024 to 2025 and so on. I believe there's going to be more intensified competition on EV price and the demand seems to be slowing down. So I was wondering about the U.S. plan and the timeline for your U.S. plan. And also between 2026 and 2030, I was wondering if the company has a plan to reduce or maybe adjust the mid to long-term EV sales plan. And the second question is about the provision. I believe there are many aspects at play regarding the provision. You mentioned that the amount of provision may be different from what's been covered by the media. But I believe in the first half of this year, Hyundai Motor Company set aside about 10 trillion Korean won provision for engine. It seems to be quite excessive. So, it may not be this year or next year, but I was wondering, because it has been about 10 years since you introduced the new engine, because it has been launched by the end of 2011. So, I was wondering if there is going to be additional provision regarding the Theta engine.