Hyundai Motor Co

Hello, this is Michael Yoon, head of IR team. Welcome everyone to Hyundai Motor Company's 2024 Q3 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 2024 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 2024 Q3 global wholesale decreased by 3.2% year-on-year to 1,011,808 units, while retail sales decreased by 3.1% year-on-year to 988,594 units. In the third quarter, our global wholesale decreased slightly compared to the previous year. However, excluding China, our Q3 wholesale was comparable to previous year. In the domestic market, sales increased by 1.8% compared to the previous year, driven by the EV sales improvement as the launch of Casper EV and increase in hybrid demand. 3% increase in sales driven by continued strong sales of high-margin vehicles. The U.S. market witnessed increased sales of hybrids and SUVs with growth rates of 71.3% and 4.7% respectively compared to the previous year boosted by increase in demand of overall hybrids models including Tucson, Santa Fe, Avante, and Sonata. In Europe, although hybrid sales increased by 20.9% compared to last year driven by strong sales of Santa Fe, Kona, and Tucson facelift hybrids. Sales decreased by 9.5% compared to the previous year on a wholesale basis due to weaker demand for EVs. In India, sales decreased by 5.7% compared to the previous year on a wholesale basis driven by slowdown due to seasonality and pent-up demand before festival season in Q4. Next is sales by model and key status. Global SUV sales accounted for 60%, a 1.4 percentage point increase compared to the previous year, influenced by the global expansion of Santa Fe and the sales ramp-up of Creta facelift and emerging markets, as well as strong sales of GV70. D-segment, the highest margin segment, was 7.3%, a 1.3 percentage point increase driven by sales expansion of Sonata Hybrid. For eco-friendly vehicle sales, although EV sales decreased by 8.1% due to weakened demand, EV slowdown has recovered from the first half of the year due to the launch of Casper EV. Hybrid sales increased by 45.4%, compared to the previous year, replacing Wigbent EV demand. Hybrid sales are substantially increasing globally, including but not limited to Korea, US, and Europe. This is the end of the presentation on sales summary, and now I'll move on to financial statements. This is the income statement. In the third quarter of 2024, revenue increased by 4.7% year-on-year to 43 trillion won, while operating profit decreased by 6.5% year-on-year to 3.6 trillion won. In the automotive division, revenue increased by 5.3% year-on-year due to regional mix improvements centered on North America and product mix improvements centered on high-margin vehicles, as well as increase in volume. Meanwhile, operating profit, including consolidation adjustments, decreased by 7.7% year on year due to an increase in incentives driven by intensified global competition and an increase in SG&A. In finance division, revenue increased by 10.1% year on year due to expansion of AUM, resulting from increased penetration rate under strong U.S. sales. Despite an increase in interest costs and provisioning costs associated with asset growth, the operating profit increased by 13.6% year-on-year driven by increased return on assets due to the OEM's mixed improvement. Net profit decreased by 3% year-on-year to 3.2 trillion won due to a decrease in operating profit. Next is revenue and operating income analysis. In terms of revenue, there was a negative volume effect of minus 221 billion won caused by a decrease in sales. Despite an increase in incentives, there was a mixed effect of 1.5 trillion won due to the strong North America sales and ASP increase. Also, there was positive effects effect of 494 billion won under favorable exchange rate environment and an increase in financial division revenue resulted in a 4.7% increase in total revenue compared to the previous year. As for operating profit, there was a positive FS effect of 787 billion won due to favorable exchange rate environment. However, a negative mix effect of 469 billion won driven by an increase in incentives as well as one-time warranty cost of 319 billion won due to a proactive warranty extension for GRAT Santa Fe sold in the U.S. resulted in a 6.5% decrease in operating profit. Our third quarter cost of goods sold ratio recorded a 0.8 percentage point increase year-on-year to 80.2%. SG&A increased by 6.1% year-on-year to 4.9 trillion won due to increase of label cost. Lastly, net profit decreased by 3% year-on-year to $3.2 trillion, affected by a decrease in operating income. That concludes the presentation of the third quarter 2024 business results. Thank you for listening. Next, Senior Vice President Seung Jo Lee, the Head of Planning and Finance Division, will address the company's business results for Q3 2024 annual conference. performance outlook, and the dividend payout for Q3. Hello, this is Senior Vice President Seung Jo Lee, head of the Planning and Finance Division. Allow me to share our business results for the third quarter of 2024, as well as the outlook for the business ahead and quarterly dividends. In Q3, driven by strong HGV and Genesis sales, continuous mix improvement, favorable FX effect, and material cost reduction, we have reached the operating profit in line with the market consensus. However, our preemptive guarantee extension measures regarding Lambda II engine of the Grand Santa Fe model sold in North America resulted in around $320 billion won of provisions for liability, recording an operating profit of $3.6 trillion won, and an operating profit ratio of 8.3%. This warranty extension is caused by the high usage of towing by US consumers, and we have proactively implemented the warranty extension for the total number of sales. In the case of other models with the same Lambda 2 engine, this issue has not occurred. If not for the above one time contribution amount, An operating profit of 3.9 trillion won and an operating margin of 9.1% would have been possible. Next, I will talk about the 2024 annual performance outlook and business environment. We expect to achieve the 2024 annual guidance of 4 to 5% of sales growth and 8 to 9% of operating margin, and we have maintained the performance guidance that was mentioned earlier this year. However, due to worsening business environment and the automotive market, such as increased geopolitical risks, high uncertainty in government policies and regulations such as fuel efficiency regulations, and concerns over slowing demand in advanced markets, incentives are expected to negatively affect our profitability in the short term. Regarding the risk of deteriorating business environment, we are closely analyzing the market landscape through regular monitoring. Based on our enhanced fundamentals over the past few years, we will strengthen our profitability-oriented management status by improving sales mix and continuously reducing costs. And we will continue to secure strong profitability through flexible market responses which share our strengths. While maintaining our fundamentals by improving the sales mix centered on high margin models and cost reduction, we will respond flexibly to changes in the market environment. Next, I will talk about the dividend for Q3. As in the first and second quarters, we will implement a quarterly dividend of 2,000 KRW, which was raised by 501 from the previous quarter. including the value of program announced at the CEO Investor Day, we will make sure to implement the shareholder return policy as promised to our shareholders and investors. Lastly, regarding the India IPO, let me share the shareholder return policy. Basically, the Indian competitiveness that proceeds from this India IPO will be returned to shareholders and we will establish the relevant IPO process plan and get approval from the BOD and then share your details later. Thank you all for your support and thank you for listening. Next, Senior Vice President Hyung-suk Lee, the head of Planning and Finance Division of Hyundai Capital, will share the Q3 results and Q4 outlook for the finance business. Good afternoon. I'm Senior Vice President Lee Hyung-suk, CFO of Hyundai Capital. I'd like to begin with the Q3 2024 earnings results and Q4 outlook for the finance business. In Q3, internal and external uncertainties were high due to interest rate volatility and sluggish domestic economy, but Hyundai Capital expanded its role as the captive auto finance company for Hyundai Motor Group and maintained strong asset soundness and financial stability based on outstanding auto financing business. As a result, in August, S&P raised our credit rating along with HMC from BBB plus to A minus. This year, all three global credit rating agencies raised our rating to A, the highest achieved for non-bank financial firm in Korea. Consequently, our funding competitiveness has been further strengthened. I'd like to share the details for each company. First is Hyundai Capital. Backed by our strong funding power, we strengthened the sales support for HMG and were able to further expand our financial assets for auto financing. The proportion of auto financing accounted for 83% of the operating profits, maintaining a high ratio. Expansion of financial assets in the auto financing business increased installment and lease profits, resulting in a YTD operating income to increase by 11% year-on-year in Q3 when excluding FX and derivative losses. In terms of cost, interest expenses have risen due to continued high interest rate, but the cost of bad debts remained stable, increasing the operating profit by 17% year-on-year. Overseas, profit improved in various overseas entities such as France, Canada, and Brazil to achieve a year-on-year equity method income increase of 55%, and as a result, net income increased by 21% year-on-year. Some capital firms are showing performance due to continued high interest rates and real estate PF risks, resulting in deteriorated profitability and soundness but Hyundai Capital expanded its profit and secured soundness by operating a strong auto financing portfolio. The delinquency rate has further dropped to record an all-time low of 0.86%. With optimized portfolio operations and stable funding, Hyundai Capital will strengthen the sales support for HMG domestically and globally and respond to market volatility. Next is Hyundai Capital America . In the U.S., sale mix improvement was driven by SUVs and hybrid models, resulting in YTD penetration rates increased by 8 percentage points year-on-year in September, raising the sale volume by 14% year-on-year. Total financial assets increased by 22% year-on-year. Due to continued asset expansion, YTD installment and lease income in September upped by 50% and 13% year-on-year respectively. Total operating profit increased by 23% year-on-year. Increase in sales raised interest and bad debt expenses, lifting the operating expenses by 23% year-on-year. However, YTD operating profit in September improved by 32% year-on-year. In Q4, drop in interest rates and presidential election results are expected to further increase the uncertainties in the market. However, HCA is maintaining a significantly low delinquency rate even compared to pre-COVID-19 times and increasing its prime customers rate to 88%, minimizing risks. In terms of funding, HCA pre-secured liquidity by issuing global bonds worth $10.7 billion in addition to the $8 billion secured in the first half. HCA will continue to support HGMG sales in the U.S. by expanding EV sales and providing financial support for new mobility businesses. This is the end of my presentation on the finance business. Thank you for your attention. With that, we'll conclude the presentation and take your questions.

The first question will be presented by Eunyoung Im from Samsung Securities.

Yes, hello. I'm Eunyoung Im from Samsung Securities. Thank you for the opportunity to ask a question. I'd like to ask two questions. The first question is, the director said that the commission is one-time, but including that, the sales warranty fee for this quarter I think it went down by 5,660 billion won more than last year. And when we do a preview of the 3rd quarter, we look for recalls and things like that, but it's not in the article or anything like that. What's the background of the money that you've been fighting for? And even with this included, the warranty is a little higher than last year. I think it's a lot lower, so I think it would be helpful if you could explain why this is so. And the second is, recently, you have resolved the comprehensive work contract with GM, and then you are also paying attention to Waymo and Foundry business, but what I'm curious about is that since the R&D headquarters is integrated with Hyundai Kia, Thank you.

opportunity to ask a question. I'm from Samsung Security. So my first question is regarding the provisioning that you mentioned, that you said it was a one-time provisioning. However, it seems that the overall warranty fee is lower than the year-on-year cost at $566 billion. And when we talk about warranty, we tend to look up if there are any articles regarding recalls or so But I don't think there have been any articles or news regarding a recall, but you said that it was a proactive action that we have taken. So what is the background to such actions? Because the warranty fee is considerably low considering the provisioning. So what is the reason behind that? That's my first question. My second question is Hyundai is now actively engaged with partnering with GM, for example, or with Waymo in terms of foundry business. But I understand that your R&D function is currently shared between Hyundai and Kia, and you also share the costs. So if there is any cooperation with these partners regarding platform, shared platform or power train or hybrid technology, who is holding the patent and who is sharing the cost? Is it solely by Hyundai or would this be shared with Kia as well?

Yes, I would like to talk about the question you asked. Regarding the engine, we told you that we paid the deposit in advance, but this is not a deposit setting related to safety. We sold the Lambda 2 engine in the North American region, and it was Grand Santa Fe. In Korea, it was Max Cruise. 13 to 19 miles attached to Max Cruise. As I said earlier, it's a year, but it's a mile. It's a mile. It's a mile. It's a mile. It's a mile. due to the current extension of the warranty period. The warranty period extension is, as I said before, due to the characteristics of the American consumer, it uses a lot of towing and when using towing, high output, high engine RPM uses high output, In addition, due to the lack of maintenance of engine oil, which is recommended by the manufacturer, due to the lack of maintenance of engine oil due to the lack of maintenance of engine oil due to the lack of maintenance of engine oil due to the lack of maintenance of engine oil due to the lack of maintenance of engine oil due to the lack of maintenance of engine oil due to the lack of maintenance of engine oil due to the lack of maintenance of engine oil due to the lack of maintenance of engine oil due to the lack of maintenance of engine oil due to the lack of maintenance of engine oil due to the lack of maintenance of engine oil due to the lack of maintenance of engine oil due to the lack of maintenance of engine oil due to the lack of maintenance of engine oil due to the lack of maintenance of engine oil due to the lack of maintenance of engine oil due to the lack of maintenance of engine oil due to the lack of maintenance of engine oil due to the lack of maintenance of engine oil due to the lack of maintenance of engine oil due to the lack of maintenance of engine oil due to the lack of maintenance So, when we look at it closely, the share price itself wasn't that big. But now, no matter what happens, when we develop a product, the characteristics of the consumer are not well reflected. And then, through an agreement with a certain road traffic safety country in the United States, this is not a recall, but we have a 5-year warranty. Thank you for your question.

So to answer your first question regarding the provisioning, so that was regarding provision 2, and it wasn't actually a recall regarding safety. The engine that is mounted on this vehicle, Grand Santa Fe, which is sold in the North American market, in Korea that would be Max Cruise model, and it's the 2013 and 2014 model year version. Now, we have contributed $320 billion worth in terms of provisioning to extend the warranty, and the U.S. consumers tend to use a lot of the towing function, and when that function is used, It's really used at a high output, which means that it's done at a very high RPM level. And also, compared to what the manufacturers are recommending in terms of the changing periods for engine oil, the US consumers tend to use it a bit longer, making the oil kind of wear out and kind of putting too much pressure on the engine as well. And as a result, however, this didn't really directly result in the default rate increasing. Whatever the case, We were not able to fully reflect the local users' characteristics in our developing process, so we contacted MIPSA of the U.S. and decided to do a preemptive action in terms of extending the warranty. So it's not necessarily a recall. It's where we have extended the warranty from 10 years to 100,000 miles to 15 years to 150,000 miles.

So, for this cost, we calculated the total amount of $13,000 to $19,000, the total amount sold, and the total amount of $13,000 to $19,000, and the total amount sold, and the total amount sold, and the total amount sold, and the total amount sold, and the total amount sold, and the total amount sold, and the total amount sold, and the total amount sold, and the total amount sold, and the total amount sold, and the total amount sold,

And the provision cost was reflected fully for all 2013 and 2014 model year models, so I don't think there will be additional provisioning contributions in the coming years. Whatever the case, for us, Top priority is the consumers as well as the quality and we have zero tolerance in terms of anything that will damage the quality and also the customer value. So, ConveMotor will continue to proactively and actively act on our principles.

Regarding the second question, I think we need to check more. First of all, I'll tell you, and if that's wrong, I'll correct it and tell you. First of all, Hyundai-KIA is running a joint research center, and Hyundai-KIA is independently developing cars. So, I think the patent will be shared with Hyundai-KIA in terms of developing and investing in advanced technology together. In addition, I think each company will have its own development related to cars. So, I think you asked about the relationship between GM and Waymo when they cooperated. I think that the relationship between the cars can be continued in Hyundai.

Now, to answer your second question, I will have to check the specific details into this, but let me just give you an answer at first hand, and if this is wrong, we will correct you later. Like you said, the R&D Center is currently shared between Hyundai and Kia, where the investments as well as the advanced technologies are developed together. So anything that is used in that field, the patent that is held jointly will be separated. And the two companies actually developed their own models and cards. So any of the technologies that were developed in that space would be also handled differently. Now, if there is any technology patent that is used or collaborated with GM and Waymo, and that is related to Kia, we'll make sure that it's separated. Whatever the case, we will work in a way so that all of the collaboration is to do with Hyundai only and not really an interference with Kia, and that any of the profit made through this will also solely be held by Hyundai as well.

If I may add to that, the reason for the decrease in the amount of subsidies compared to last year was because of the fall in the final return rate. If I could further elaborate, please, regarding the provisioning.

The reason that it's lower than the previous year is because due to the year-end FX rate.

The next question will be presented by Junseong Kim from Merch Securities.

If you look at the 8-page analysis of the increase in business interest, there are 5,690 billion yen of other changes. Except for the 3,200 billion RMB 2 engine recall, there seems to be another 2,400 billion yen of other costs in a very large scale. I'm curious about where this part came from and what kind of costs occurred. Second, we are waiting for the first Metaplant in October to be launched in the U.S. Is it currently being launched? If not, when will it be launched? And the price of IONIQ 5, the first car we will mass-produce, is about $50,000 to $55,000 based on the existing mid-term. I wonder if this will be downgraded by the influence of the smart factory. And the third question is, Uh, a little while ago, Mr. Yoon Da-sik, the team leader, asked Lee Moon-young a question. He said that there was very little repetition due to the change in the final return rate. The final return rate in the second quarter was 1,376 won, and the final return rate in the third quarter was 1,315 won. It was 60 won strong, but if you look at the return rate today, it has returned to the second quarter level. Then, when we estimate the fourth quarter, it's not that the short-term performance is important, but to maximize the accuracy of the estimate, If you calculate it, if the sales tax is continued until the end of the year, I wonder if it should be said that it is going to increase again. And there are a lot of questions, but the last question is about the Indian IPO. As you said earlier, you gave a good comment saying that you will share the details in a short period of time. Is this short period of time an early decision this year? Or next year's dividend season? I have four questions.

My first question is regarding the OP entries and decrease. So if you go back to the OP profit and financial income statement, you said the other cost accounts for about $569 billion. And even excluding the $320 billion one, which accounts for RAMDA recall, there are still remaining $204 billion for other expenses. So I wonder where these other expenses were used. And my second question is regarding the META plant operation in the U.S. that will be held in October this year. I wonder that if the META plant is still in operation, and if not, when it will start operation. And also... Regarding the IONIQ 5 that will start SOP soon, I heard that the middle trim IONIQ 5 model will be set around $55K. So I wonder whether the price range will go down from this set price, or it will remain. And my third question is in connection with the previous question. You talked about the year and exchange rate and the related provisions. And when considering today's FX rate, the level is that of the second quarter. But if you say that this FX rate remains until the end of this year, I want to ask whether the provisions will dramatically go up or down or how the trend will continue. And my last question is about the India IPO process You said that the details will be shared later on, but I want to know the exact timeline, whether the share return policy will be executed within this year, or whether the dividends or the Treasury stock payment will be made next year. If so, when will be the exact timeline?

Yes, I will tell you about the first question. You talked about the other costs. Among them, one of the most increased costs is that this year, we did the 임단협 타결 in July. Since the cost was reflected from July to September, that cost was about 400 billion won. The second question is whether the meta-plant is in operation. The production started on October 3rd. As you know, it is a ramp-up period, so the quantity itself is not that much. Now, we are gradually increasing the speed to normalize the operating rate of the factory, and it is actually operating. Next, you asked about the price. In terms of price, we are considering the raw materials and the price of the battery, and we are reviewing it right now. We are reviewing it, so it is not confirmed yet, but I think it will be confirmed soon. So what you are talking about is whether the price can come out at a competitive price right now. You said this part, but in any case, the price of the We are thinking about the price and the overall competitiveness of the product. We can get all the incentives from next year. As you know, I think we can increase the efficiency in terms of sales costs. I'm thinking about how we can maximize the value of the price, profits, and consumers. The exchange rate for the fourth quarter is now up to 1,380 won, and the exchange rate effect of all 200 of the sales tax If the exchange rate goes back to 1,370 won or 1,310 won, it will go back to 1,380 won, and it will go up to 3,000 billion won. If the exchange rate goes back to 1,370 won or 1,310 won, it will go back to 3,000 billion won. If the exchange rate goes back to 1,370 won or 1,310 won, it will go back to 3,000 billion won. If the exchange rate goes back to 1,370 won or 1,310 won, it will go back to 3,000 billion won. If the exchange rate goes back to 1,370 won or 1,310 won, it will go back to 3,000 billion won. If the exchange rate goes back to 1,370 won or 1,310 won, it will go back to 3,000 billion won. If the exchange rate goes back to 1,370 won or 1,310 won, it will go back to 3,000 billion won. If the In that case, the effect of the exchange rate will be the effect of that amount, that is, the structure in which more profit can come out, even if we take into account the transfer rate. In that regard, I think that the positive effect of quarter-term profitability will increase if the exchange rate increases. Next, you mentioned about the Indian IPO. So, it is difficult to specify the time and the source, but We will communicate with the market within this year. As I said, it's the 22nd, so I went to the Indian market and arrived yesterday. I arrived yesterday, so I'm thinking about a lot of things right now, so I'll finish my concerns as soon as possible and discuss with the board of directors. As I said, we will communicate with the market

The CBA cost, which was signed in July this year, so from July to September this year, there was additional expenses or other expenses that were $400 billion. And for your second question about the META plant operation in the U.S., it actually started operation on October 3rd this year. And now we are in the ramp-up phase, so the volume is quite low. But we are trying to make things speed up. And once it's normalized, I think the volume will go up as well. And regarding the price range of the IONIQ 5, we are considering various factors, including raw material cost and battery cost. And the price hasn't been finalized yet. But we are trying to make it as competitive as possible. So for that, we are looking things from the multi-sided angle. And if the metal plant starts operation, we'll be able to receive incentives for that from next year. And that will further make increased efficiency of our sales costs as well. So we will try to maximize our customer value in this respect. For your third question, the fourth quarter FS rate, $1 rate, stayed at around $1,381 per dollar. And I believe your concern is about the FX rate impact on the provisions. And the logic is that once the FX rate goes up, then we'll get more profit from selling the foreign currencies. So according to that logic, I believe that we'll see more profits in the upcoming fourth quarter. Regarding your last question about Indian IPO, although it is difficult to specify the exact timing, we will try hard to communicate with the market within this year. And I actually just came from the India business trip yesterday, so I will try my best to communicate with the relevant parties, including the board of directors, and get to you as soon as possible.

The next question will be presented by Yonggun Moon from Sinyoung Securities.

Thank you for the opportunity to ask a question. I have two questions. The first is related to the Lambda engine. You just said it's related to Grand Santa Fe. Is there a possibility that this will be expanded to KIA or other cars? As you said in 2017, there was a small impact on the Lambda engine. I remember that we called it Genesis. So, since this Lambda engine is used in high-end vehicles such as Grand Santa Fe or Genesis, I would like to ask if this 3.2 billion won is only applied to Grand Santa Fe or if it is applied based on the engine. Recently, overseas, especially European companies, have begun to make a lot of guidance. As you said, we said that there was a quality cost, but even if there was no quality cost, the sales profit rate for cars is about 7-8%. You said that the business environment is a little difficult, but how much do you think the sales profit rate for cars in the future is? Can you keep it at the top level for 23 years or this year? Even if it's not specific, please tell us about the direction. Thank you.

Thank you for giving me the opportunity. I have two questions. First, regarding the Lambda engine again, you said that this was mounted on the Grand Santa Fe. However, do you think there will be a possibility for this issue to be spread out to other models, such as the Kia models? Because I understand that there was an issue with the same engine in 2017 with Genesis. So there was a recall regarding the luxury vehicles as well. So will this $320 billion provisioning just covering the entire engine that are mounted on all models, or will it just be for Grand Santa Fe? My second question is regarding the downsizing of the guidance, because many of the European OEMs are also lowering and readjusting their guidance level. And they are not able to portray an OP level of maybe two digits, but maybe 7% to 8%-ish. And you also said that this is due to the unfavorable environment that is expected in the upcoming years. So although you might not be able to give you a specific number, what is your forecast for the automotive business OP? Will it be the same level as the first half of this year? Or what is your rough outlook?

Yes, the first question is about the Lambda engine. Please understand that it is difficult for us to tell you about the requirements for other commercial companies. As I have said to everyone, the problem is caused by the engine, but there is a part that is due to the characteristics of the consumer, so the characteristics of the consumer are caused by the characteristics of the consumer, such as Max Cruise and SUV. As I said, it's a problem with the engine, but it's a problem with the car equipped with the engine, but it's a problem with the engine, but it's a problem with the car equipped with the engine, but it's a problem with the car equipped with the engine, but it's a problem with the car equipped with the engine, but it's a problem with the car equipped with the engine, but it's a problem with the car equipped with the engine, but it's a problem with the car equipped with the engine, but it's a problem with the car equipped with the engine, but it's a problem with the car equipped with the engine, but it's a problem with the car equipped with the engine, but it's a problem with the car equipped with the engine, but it's a problem with the car equipped with the engine, but it's a problem with the car equipped with the engine, but it's a problem with the car equipped with the engine, but it's a problem with the car equipped with the engine, but it's a problem with the car

Thank you for your question. Let me answer your first question regarding the Lambda engine. I would like to apologize that I'm not able to comment on what the other companies or listed companies or actions they're going to take. However, I would like to emphasize once again that the Lambda engine is not really actually due to the engine itself, but because of the characteristics and the use environment of the consumers of the SUV that is mounted with this engine, in particular Max Cruise and other SUV models. So although this problem is somewhat connected to the engine, but it's really more to do with the user characteristics of the SUV drivers that has this engine mounted on. And that led to the increase in the provisioning. However, apart from that, I apologize again that I will not be able to give comments on what other companies will do in the upcoming future regarding this.

I would like to say once again that we have been thinking about a wide range of issues regarding the Lambda engine, and we have been saying that we have made enough money from a conservative point of view so that we will never be an enemy of the past. The second question is that the 4th quarter is not in a good situation. The 4th quarter is not in a good situation, but the incentives are increasing. However, in the 4th quarter, we will try to increase the total sales. We will try to increase the total sales as much as possible. We will try to increase the total sales as much as possible. We will try to increase the total sales as much as possible. As I mentioned earlier, the overall guidance is that even if we consider the quarter-finals, the guidance of 8% to 9% that I told you about yearly can be maintained by the sales profit rate. We are looking at it now. Next, it won't be easy next year, but we talked about it at the CEO Investor Day. In the short term, And I would like to reiterate again that regarding the revisioning contributions, we did go through a lot of discussion as well as multi-faceted review.

And we really did not want to repeat the same problems that we had in the past. this contribution level was calculated at a very conservative level. Moving on to your second question, the Q4 business environment is actually not as favorable. We also have increased incentives, so we will have to pull all our efforts in the sales, not only retail but also wholesale as well. so that we can make up for any of the losses that could occur for Q4. Now, our annual guidance, we have mentioned that the OP level will be at 8% to 9%, and we will be able to keep that level. As for next year, as we mentioned in the CEO Investor Day previously, it will not be easy. However, we do intend to maintain our mid- to long-term profit level at 8% to 9%. Whatever the case, we'll keep a close eye on our upcoming future so that we can respond accordingly. Thank you. Due to the time constraint, we will be receiving one last question.

Thank you. The next question will be presented by Kyungjae Hwang from Merrill Lynch Securities.

Yes, hello. I'm Kyungjae Hwang from Merrill Lynch Securities. On the other hand, if you adjust it to one-off, the sales profit of 3.9 trillion won is 9.1% in terms of profit and loss, and the car part is 9.4% in terms of night. In fact, despite the difficult external environment, if you look at the margin rate in the last three minutes, I think it is quite strong at 9.1, 9.7, and 9.4. There are various reasons for this, but what I am curious about is the profitability of the recent hybrid powertrain mix. My first question is about hybrid mix and powertrain profitability.

Before that, I'd like to mention that even considering the one-time expenses of 319 billion won. There was an operating profit worth 3.9 trillion won, and the operating margin was 9.2%. So even despite the challenging external environment, like you mentioned, I believe that you have achieved a very stable and strong operating margin. So in regards to that, I'd like to know about the profitability of hybrid powertrain until the first half of this year versus the ICE engine vehicles. And my second question is regarding the real cost trend. So I'd like to know what the trends were like until the end of this year and what is the outlook for next year?

The first hybrid was sold 131,000 units in three quarters. So the sales volume is about 13%. It accounts for about 13% of the total sales. This is about 3% compared to the previous year's East quarter. It's not 3%, it's 4%. It's a 4.5% increase, and it's a 1.3% increase in the 11.6% of the previous quarter, so there is a trend that the hybrid mix continues to rise. We will continue to maintain this trend in the fourth quarter. And in terms of profitability, I keep saying this, but it's a shame that we can't tell you the exact number. Regarding that, the hybrid profitability is higher than we planned. It's higher than we planned. It's higher than we planned. It's higher than we planned. It's higher than we planned. It's higher than we planned. It's higher than we planned. It's higher than we planned. It's higher than we planned. It's higher than we planned. It's higher than we planned. It's higher than we planned. It's higher than we planned. It's higher than we planned. It's higher than we planned. It's higher than we planned. It's higher than we planned. It's higher than we planned. It's higher than we planned. It's higher than we planned. It's higher than we planned. It's higher than we planned. It's higher than we planned. It's higher than we planned. It's higher than we planned. It's higher than we planned. It's higher than we planned. It's higher than we planned. It's higher So, the first answer to your first question is about the hybrid sales.

In the third quarter, we sold 131,000 units that accounts for 13% of the total sales. It is 4.5% up year-on-year, and even compared with the last quarter, it's 1.3% up, and we will maintain this strong sales momentum in the fourth quarter as well. Regarding hybrid profitability, I'm sorry I cannot tell you the exact number, but when considering the FX impact, we are overachieving the business level, and even when compared with the ICE vehicles, I would say that some hybrid models are very profitable. It's the second digit number, and the profitability is even higher than the overall operating profits. So I would say that we have very strong sales in terms of hybrid portfolios.

The second question is about the trend and outlook of 재료비. The material cost trend is that we are continuously reducing the cost. Then, the PE parts, the parts that go into the hybrid, and the parts that go into the battery, the parts that go into the electric car, have a long-term cost reduction plan, and they are continuously moving forward according to the cost reduction plan. So, we are looking forward to that part to be improved gradually. However, in other parts, In terms of processing cost, the processing cost can go up a little depending on the income. The cost of sales itself is much higher, so it will be lower overall. As for the price of raw materials, We have the continuous efforts to reduce raw material costs

And we have the medium to long-term plan for reducing material cost for PE parts and EV parts as well. So I would like to tell you that we are making gradual and continuous improvements in this part. However, there may be some increase in the material cost due to high processing cost by increase in wage. However, we will make sure to offset that as well. And we're keeping a close eye on the raw material cost, which has been continuously declining this year. There is a possibility of increasing next year as well, but we will secure much more volume in order to proactively respond to this increasing raw material cost. So we will try our best to minimize its side effect.

Thank you. By September 1, we will reduce the cost of raw materials by about 400 billion won through the raw materials innovation. We will continue this trend of reducing the cost of raw materials as much as possible, and we will continue this trend in the next year as well. In the next year's business plan collection, we will make a goal to reduce the cost of raw materials in each part.

To add one more comment, from January to September this year, we have been making innovative efforts to reduce material costs. And thanks to these efforts, we were able to reduce $400 billion. And with that, we will also combine our accumulated know-hows in terms of innovative raw material reduction. So we will maintain this trend to the next year as well. And when setting the business plan next year, we'll make sure to reflect our efforts and we will cooperate with the relevant departments to maintain this momentum as well.

Thank you. Now to end the earnings call for Q3 2014.

Thank you for your time.