HONDA MOTOR CO LTD Q2 FY2027 earnings call

• Strong First Half Performance: Despite a challenging global environment characterized by rising raw material costs, inflation, and geopolitical risks, Honda achieved robust profitability. Adjusted operating profit for the first half reached 113.36 billion yen.
• Strategic Investment in North America: Honda announced a new automobile production plant in Ohio to address capacity constraints and meet growing demand for large hybrid models. Total North American production capacity is set to increase from 1.67 million to 1.91 million units by 2029.
• Flexible Manufacturing Design: The new Ohio facility will be designed with flexibility to produce hybrids, gasoline vehicles, and battery electric vehicles (BEVs), allowing for quicker transitions as market conditions evolve.
• Motorcycle Growth Drivers: Record unit sales were achieved in the motorcycle division, particularly in India and Brazil. In India, favorable tax policy changes boosted sales, while Latin America saw strong growth that helped absorb cost increases.
• China Market Challenges: The automotive business continues to struggle in China due to economic slowdowns and a shift toward EVs, leading to revised downward unit sales forecasts for the region.
• Supplier Collaboration: Honda is working closely with suppliers to manage rising raw material costs and ensure supply chain stability for the new Ohio plant, including potential supplier investments and process improvements.

Motorcycle Business: Operating profit was 43.9 billion yen, with adjusted operating profit (excluding EV losses) at 47.9 billion yen. This segment contributed significantly to the group's strong performance, driven by record unit sales in India and Brazil. Automobile Business: Reported an operating loss of 5.7 billion yen, primarily due to 48.48 billion yen in one-time EV-related losses. Adjusted operating profit excluding these losses was 47.9 billion yen, supported by strong hybrid demand in North America. Financial Services Business: Generated an operating profit of 21.09 billion yen. Power Products and Other Businesses: Contributed 4.4 billion yen in operating profit.

• Consolidated Operating Profit Forecast: Revised upward by 13 billion yen to 78 billion yen for FYE March 2027.
• Adjusted Operating Profit Forecast: Revised upward by 13 billion yen to 130 billion yen for FYE March 2027, excluding EV-related losses.
• Unit Sales Forecast: Motorcycle unit sales expected at 23.3 million units; Automobile unit sales expected at 3.16 million units (reflecting reductions in China); Power products expected at 3.6 million units.
• Dividend: Annual dividend forecast maintained at 70 yen per share.
• Foreign Exchange Assumption: Set at 156 yen per US dollar for the full year.

• One-Time EV Losses: Significant one-time charges of 48.48 billion yen related to EV partnerships and supplier negotiations have impacted reported profits.
• Rising Input Costs: Soaring raw material prices (including copper, aluminum, and precious metals) and energy costs are squeezing margins, despite some price revisions.
• Geopolitical and Supply Chain Risks: Instability in regions like the Strait of Hormuz and ongoing supply chain difficulties pose risks to production and procurement.
• China Market Volatility: Continued economic contraction and aggressive competition in China’s auto market present significant operational and sales challenges.
• Regulatory Uncertainty: Potential trade regulations in Europe regarding vehicles produced outside the EU may impact future strategies and local production decisions.

Q: Regarding the new Ohio plant, how does Honda plan to handle the gap between current capacity limits and rising demand for large hybrids before the 2029 commissioning?

A: Management stated that existing plants are at full utilization. To bridge the gap until the new facility opens, Honda will optimize shift management and working styles internally while collaborating with suppliers to enhance efficiency. They anticipate being able to generate additional tens of thousands of units through these operational adjustments, though they cannot guarantee specific volumes during this interim period.

Q: What are the drivers behind the significant upward revision in the full-year operating profit forecast, specifically regarding the SG&A and tariff components?

A: The revision includes approximately 40 billion yen from SG&A, resulting from the reversal of previously accrued provisions for lawsuits after successful settlements. Additionally, tariff impacts, including refunds from past U.S. component tariffs and Supreme Court decisions affecting IEFA duties, contributed to the positive adjustment. These one-time factors, combined with strong core profitability, drove the 13 billion yen upgrade.

Q: How is Honda addressing the EV-related losses and what is the outlook for future EV strategy in North America?

A: Honda recognized 48.48 billion yen in EV losses this half after finalizing communications with partners. They aim to conclude all related matters by fiscal year-end to reduce uncertainty. For North America, the strategy remains focused on hybrids in the early-to-mid 2030s. The new Ohio plant is designed with flexible infrastructure to switch to BEV production quickly when market demand shifts, ensuring long-term adaptability without committing prematurely to pure EV volumes.

Q: What is the strategic outlook for the Chinese automotive market given the current decline?

A: Honda acknowledges difficult conditions due to economic shrinkage and a rapid shift to EVs, forcing a reduction in ICE unit sales forecasts. The strategy involves minimizing costs using joint venture capabilities and local resources to maintain competitiveness. Long-term, Honda plans to leverage its JV platforms to produce EVs locally, aiming to retain brand presence and eventually lead in the evolving market rather than exiting it.