Honda Motor Co., Ltd. ($7267)

Thank you for your attendance today despite such a short notice. Now I would like to -- we would like to hold a press conference regarding the timely disclosure in the press release announced today at 3:30. First, we would like to introduce attendants today. Director, President and Representative Executive Officer, Toshihiro Mibe; Director Executive Vice President and Representative Executive Officer, Noriya Kaihara; Director, Managing Executive Officer, Eiji Fujimura. First, Mibe will walk you through the background that led to the management decision this time, followed by Kaihara's explanation of the future direction towards the construction of Honda's automobile business in mid- to long term. Now the floor is yours, Mibe-san.

Good afternoon, ladies and gentlemen. This is Mibe speaking. Thank you for taking time to join us despite the short notice. As you may have come to know through sources such as our news release today, we announced a forecast revision in the fiscal year ending March 31, 2026. Though challenging, we will explain the background of this decision and future direction for rebuilding the mid- to long-term automobile strategy. Honda has been working to realize carbon neutrality by 2050. To this end, led by small-sized mobility products, including passenger cars, Honda shifted strategic direction towards EV popularization based on our belief that EVs will be the optimal long-term solution. In this journey, we anticipated increasingly stringent environmental regulations would come into full effect in various countries in the latter half of the 2020s. For example, under the U.S. ACC II automotive environmental regulation, penalties up to $20,000 per vehicle would be imposed on noncompliant vehicles. On this premise, we spent the last several years steadily preparing for widespread adoption of EVs. We decided to allocate more resources to EV business after a comprehensive study of various factors, including U.S. IRA incentives and projected profitability of our ICE and hybrid models upon introduction of EV. Above all, we made the decision to take initiatives towards carbon neutrality. We believe this is our responsibility to our children and future generations as a mobility company. However, during the past few years, our business environment has drastically changed at a speed far exceeding our projection. First, in the U.S., as you know, easing of environmental regulations and discontinuation of EV incentives significantly slowed EV market growth. This trend is expected to continue for some time. In contrast, the EV market has expanded in China. Competitors have launched products and deployed electrification and intelligent technology faster than expected. Even in ASEAN, we are facing strong competition from emerging OEMs. In this competitive environment, Honda was unable to deliver products that offer better value for money, resulting in a decline in competitiveness. We recognize our automobile business is facing tough earnings due to various factors, including our ability to respond flexibly to changes and also the decline in our gasoline and hybrid model profitability due to newly imposed tariffs. Against this backdrop, we decided to cancel market launch and development of the Honda 0 SUV, Honda 0 Saloon and Acura RSX. To achieve carbon neutrality by 2050, electrification is an unavoidable challenge. In this context, through the Honda 0 Series, we have consistently pursued new value Honda aspires to offer in the coming age. However, due to the above changes in our business environment, EV demand has declined significantly, mostly in America. Despite our measures, it will be extremely difficult to ensure profitability of our EV models. If you were to move into the production and sales phase, this would likely result in further losses in the long run. We are fully aware many Honda associates, business partners and those on the sales front line have devoted and embraced passion to the EV model sales with high expectations coming from many customers. This decision was by no means an easy one. Nevertheless, we made this decision believing that introducing these 3 models without an outlook for business viability may result in early production discontinuation. This would cause concern and inconvenience to our customers due to damage to our brand and others. We believe introducing these models will not be in the best interest for the future of Honda. We take this decision seriously and will address each effective supplier partner individually with due care. And based on this management decision, we now expect to record impairment and write-off losses on tangible and intangible assets intended to be used for EV model production as well as additional losses. The maximum total losses estimated as of today is JPY 2.5 trillion, of which approximately JPY 1.3 trillion will be recorded as addition to the fiscal year forecast announced on February 10. The estimated breakdown is JPY 820 billion to JPY 1.12 trillion operating losses, JPY 110 billion to JPY 150 billion, the loss of investments using the equity method in China and other regions. We plan to record the remaining losses of JPY 1.2 trillion for the most part in next fiscal year ending March 31, 2027. It's regrettable that we must record such a large loss. However, what is expected of the Honda management team now is not to justify the past, but to face this reality squarely and transition our automobile business to a structure that enables mid- to long-term growth. Next, Executive Vice President, Kaihara, will explain the direction for rebuilding our strategy.

Thank you. I would like to elaborate on the direction for the rebuilding the mid- to long-term strategy. First, we will reassess the allocation of our resources previously focused on EV business. And towards the second half of 2020s, we will introduce new hybrid models, improve immediate profitability and strengthen the foundation of our automobile business. As for EVs, assuming that EVs demand will grow again in the future, we will maintain investment discipline to lay the groundwork from a long-term perspective. In addition, as part of our regional strategy, in addition to the U.S. and Japan, we will define India as our focused country and strengthen our initiatives. In the U.S. market, in light of this change in resource allocation, in addition to the existing plans, we are planning to introduce new hybrid models towards the second half of the 2020s. Moreover, as we've been saying, from 2027 onwards, we will start applying our next-generation hybrid system to key models in stages. Also, in the D or larger segment, which represent a significant market size, we are planning to further expand our HEV lineup by applying a newly developed large-sized hybrid system. In addition, this is already in the development phase with on-road testing in the U.S., but we plan to apply our next-generation ADAS to key hybrid models and continue to expand the lineup. By making the new hybrid models equipped with the next-generation ADAS as our main axis, we will improve the model mix through which we will further grow our North America operations in both volume and profit. In the Japanese market, in addition to the recently announced sport line and trail line model launches, we will start full-fledged application of our next-generation hybrid system from 2027 onwards. The next-generation ADAS will be introduced to Japan market by fully matching to the complex road environment and unique driving preferences of customers in Japan. The next-generation ADAS is a novel technology for most customers in Japan, and we believe it could change the concept of driving for them. That's why we would like to offer our next-generation ADAS to as many customers as possible, and we will apply it to all new vessel. We will offer them in an affordable and competitive price range to popularize them in Japan. Through these initiatives, we will elevate our product lineup, which currently has a high ratio of mini and small-sized models and further strengthen the Honda brand in Japan. In India, we are not ready to share any details today, but we are discussing various initiatives. We will talk to strengthen our automobile business, including enhancement of the model lineup by introducing new models tailored to demand in India. Meanwhile, in China, where the conditions of the business environment, including the progress of electrification is different from other regions, we take regional characteristics into account and enhanced application of intelligent electrification while building a competitive supply chain optimized for the Chinese market to fundamentally enhance our product and cost competitiveness. In addition to these regional strategies, in order to fundamentally enhance the competitiveness of our automobile business and ensure sustainable growth into the future, we will transform our manufacturing operations focused on shortening the development period, improving production efficiency and strengthening supply chains. We would like to share more details on each initiative at a later time. But as for supply chains heavily impacting our automobile business, in addition to stable procurement of high-risk components like semiconductors and rare earth materials, we will enhance our supply chains based on the business environment in each region. In North America, when new tariffs have significantly have impact on our business, we will further increase the local procurement ratio, mostly with our next-generation hybrid models, which will be launched from 2027 onwards, especially as for batteries, one of the core components of a hybrid system, discussion is moving forward as part of JV joint venture partnership with LG Energy Solution to localize production on hybrid batteries by converting EV battery production lines to hybrid battery lines at our joint venture company, LH Battery. With this approach, we will strive to respond to high demand for HEV in North America, mitigate the tariff impact and achieve a stable operation of LHB, all at the same time. While pursuing these initiatives, from a financial perspective, we will thoroughly control disciplined expenditure to achieve a fixed cost structure appropriate for the business scale. To be more specific, we will tighten the criteria for setting investment caps based on earnings, and we will enforce even more disciplined decision-making than before. Based on the strategic importance and profitability, we will be more selective and focused in making investment, and we will continue monitoring past investment earnings performance. Due to these EV-related impairments this time, our consolidated earnings will bottom out in the fiscal year ending March 31, '26 and March 2027. However, excluding the impact of these one-off losses, we estimate operating profit will remain at the level of JPY 1 trillion. Furthermore, through the initiatives outlined today, we will put our automobile business back on growth trajectory. In particular, from the fiscal year ending March 2028 onward, positive effects of introducing new models in the U.S. and next-generation hybrid models globally can be expected for multiple models and for the entire fiscal year. With these efforts, we will steadily regain the inherent earnings power of our automobile business. By increasing our product competitiveness and improving model mix, we will strengthen our earnings structure, both in volume and profitability, with which we will transition to a stable profit-generating business structure. Moreover, though additional expenses may be recorded next fiscal year and after, thanks to solid earning power and cash-generating capability of our motorcycle and financial service businesses, the operating cash flow adjusted for R&D expenses for the fiscal year 9 months remained at par year-on-year. From a financial stability perspective, we will continue to hold cash on hand equivalent to 1 month's revenue considered appropriate and borrowing remains relatively low, thereby, we maintain a relatively high credit rating compared to other OEMs. With this robust cash-generating capability and solid balance sheet, we will continue to provide stable shareholder returns based on the DOE indicator. And despite forecast revision, the forecast for dividends this fiscal year remains unchanged.

Thank you, Kaihara-san. As explained, we will reassess additional EV-related investments. However, we will fully leverage the software technologies and expertise we have amassed through EV development. In particular, the new values we intended to offer through Honda 0 Series, such as ASIMO OS and next-generation ADAS will be offered through our hybrid models without significant delay. As of today, EV demand is declining in North America and other regions. However, this trend will not be permanent. To achieve carbon neutrality when EV demand resumes, Honda will be ready to fulfill customer expectations and offer compelling products unique to Honda. We must lay the groundwork for EV business with a long-term and flexible perspective while monitoring profitability and demand trends. This is the reason for our decision to step back and reassess and rebuild our earnings structure. Today, I explained the direction we will take to rebuild our mid- to long-term strategy. We will share more details at our May press conference. Thank you for your attention.

[Operator Instructions] First question from Nikkei, [ Okinaga ].

This is [ Okinaga ] from Nikkei. As of Honda, I think this is the largest deficit you posted since being listed. And about the management responsibility and compensation. So can you explain your thoughts as to how the management will take responsibility? And also, will there be a revision to your target for 2040, 100% EV?

Well, I'd like to answer the first question about including the possibility of resignation, how the management will take responsibility. As I earlier stated in the United States, the environmental regulations and also trade policies have changed drastically and slowed down the EV market and also the emerging OEMs are rising. So there are different factors. But essentially, we believe that the automotive market structure is being shaken, and automobile OEMs are all facing a transition at this point in time. And having said that, as a result, in hindsight, we believe that there are a lot of uncertainties in our business outlook. We have to look at the market and also the policy trend and be flexible. In other words, we have to have multiple scenarios in place. But even with this effort, I think that we were not able to meet the requirements. Ultimately, the responsibility lies with me. And that is the reason why as a management decision, without putting off, we didn't want to put off losses to the future. And though it was a hard decision, we had to discontinue the EVs that we had planned for. In February, we changed about our change in organization, but I myself as a Chief Transformation Officer, will try to play my role as the officer responsible for transformation. So first, we have to stop the bleeding. And then we have to think about how to rebuild our business competitiveness and produce results. I think that is the biggest responsibility that I have, and I would like to focus on this. Also about your second question, the 2040 carbon neutral target and whether or not this will be revised. Well, we are seeing global warming, and it is a social issue. And as a company, we have to deal with this. And this remains unchanged and will not give up. But as a means of achieving, we were trying to accelerate popularization of EVs until today. But currently, due to various factors, battery EV, the market included is slowing down. And as a milestone, there was a need to reassess. So the 2040 target that you mentioned, well, we were saying 100% EV, but this target, well, realistically, it will be difficult to achieve. Now as for the long-term road map and also our strategy, we are redrawing. And therefore, the details will be given to you at our business update in May. We'll present to you our new strategy at that time. That's all from me.

Next question from [ TV ] Tokyo, [ Abe-san ], please.

Can you hear me? I'm [ Abe ] from [ TV ] Tokyo. Yes. Okay. So this time, you decided to discontinue the 3 models development. And last year's fourth mobility show, Mibe-san was advertising those models with pride. But that's what I remember, when I was listening to you at that time, the EV was not improving. And because of the slowing registration of EV, you said that's the time to develop EVs. And within 6 months since then, you've decided not to develop. So from that time, did you have a thought that it would be difficult? Or did you make a sudden decision at this point? So we would like to know from the last fall, what went on to make decision like this? And also Honda 0 Alpha, so you will continue developing and do mass production to sell this model. I would like to know if that's the case.

Thank you for your question, [ Abe-san ]. So as for JMS, Japan Mobility Show, since I made a speech at that time, what changed? So from that time, EV market was growing, but we were hitting the ceiling. So at that time, we had a tariff impact and also the incentive topics were coming in. So we have been focusing on these topics. And from that time, in 2025, the 8% of the Americas new models were from EV. And as our plan, ACC II, our prediction at that time was in 2026, the 12% to 18% growth was projected at that time. That was the market growth we anticipated in 30% in 2030, and that was a general perspective. But since then, what changed to include greenhouse regulation was removed. And also because since then, in America, the consumer sentiment was really down and were lowered. So January in the February ratio of 2026, it went down to about 5%. So that led to production volume declines. So our plan, the volume got dropped so much. So -- and a large incentive needed to be given, but also, our gross profit became negative. And more than our plan, the negative become larger than we expected. And we also studied whether those 3 models cancellation will recover our status and that those models development will impact our future direction. So with heavyhearted, we made this decision. So since JMS, the market became so lowered. So that's one of the reasons. And meanwhile, we came up with a lot of cost down measures. And also, we reviewed our volumes setting, but we took a lot of countermeasures in order to deliver as much product as possible to our customers. But in reality, it was still very difficult, and we decided -- we made this decision because this will impact our future business. So as for 0 Alpha, the main market for this model is not North America, it's mainly India, Japan, and that's the market we are looking at. So the environment surrounding this region has also changed, and we can see profitability in the future in these regions. That's why we decided to keep this model. That's all.

Next question, Yomiuri, [ Ukita ], please.

So this [ Ukita ] From Yomiuri Newspaper. Can you hear me?

Yes.

Well, in your presentation, you talked about shortening the production and development period. Well, in China, in order to compete against these new players, there was a need to shorten this period. But you said that you're still working out the details, but for example, using AI or other measures. If you have anything that you can share with us in terms of the direction, please do so now.

Well, today, Kaihara did explain about that. And also in the materials that we have provided you, it does make reference to that. The emerging OEMs, especially the Chinese OEMs -- well, outside of the United States, they have entered into all markets. And the Chinese OEMs, unless we can compete against them, it will be very difficult for us to do business. And as a means to win, for example, drastically shortening the development period, also drastically improving the production efficiency. Well, these types of measures need to be taken. But that included, we are trying to change the structure of our automotive business and the details will be explained in May. That is all.

Next question from [ Beskar, Terasako-san ], please.

[ Terasako-san from Beskar ] So Honda 0 Series development and production will be canceled. So I would like to know more details. So earlier, as you mentioned, the 3 models in North America development will be canceled. What I was surprised is that Alpha will continue. So in that sense, so 0 Series, it doesn't mean that you will discontinue everything. But Honda Series will be existing, but depending on the models, it will be continued or discontinued. Because last year, in the Mobility Show, 2027, you said as for 0 Alpha introduction of the market will be implemented. So that plan is still running. The Honda 0 Series itself, I would like to know that more specifically what your plan is.

[ Terasaka-san ], thank you for your question. So it was maybe difficult to understand, but in those 3 models that we showed in Japan Mobility Saloon and SUV and Alpha. So those are 3 models, the top 2, Saloon and SUVs. So the main market is North America, especially the U.S. So that was the precondition and that's the precondition for the development, but the BEV market is slowing down in the U.S. So our market -- this business will be so much lower than what we had expected. That's why we decided not to do it. But as for Alpha, like I said earlier, India market and Japan market and also some Asia markets, that's the main market where we are developing this model. So although we see some changes, it's not a major changes in the market. So -- and we still see some profitability in that market. So we will stick to our plan to sell them.

So as for Honda 0 Series, so it will continue, right?

Yes. In that sense, yes, we will continue 0 Alpha. So it doesn't mean that all 0 Series will be canceled.

Next question, NHK [ Nishizono-san ], please.

Can you hear me? This is [ Nishizono ] speaking.

Yes, I can hear you.

I don't know if I should be asking this to Mibe-san or Kaihara-san. The JPY 2.5 trillion, the breakdown, can you elaborate to the extent possible, please?

Yes. Fujimura will explain.

[ Nishizano-san ], thank you for the question. JPY 2.5 trillion, the breakdown you asked. Well, this time, these 3 models development will be canceled. And in making this decision, impairment, the development assets, we have had development assets, and we have to write them off or the dies and dedicated facilities also exist, and we have to have impairment of those assets. Plus -- well, to our suppliers, well, because they have made a lot of preparation for our EVs, we have to sincerely negotiate with them one by one and provide compensation. So those are included coming to JPY 2.5 trillion. Another -- this is a separate issue, but this box, which talks about the equity method. As you know, we, in China have struggled -- our Chinese business. And so we have been putting on our balance sheet, the share of investments accounted for using the equity method. But for those which we have difficulty, this will be put under impairment. Now the portion will be half and half. This fiscal year, JPY 1.3 trillion and next fiscal year, JPY 1.2 trillion at maximum. And the cash items and noncash items, well, this fiscal year FY '26 is JPY 0.6 trillion to JPY 0.8 trillion. These are noncash items. And so JPY 1.7 trillion is cash item. This will be generated under the current fiscal '26. It's different from the JPY 2.5 trillion. But as Kaihara has explained already, this loss -- by posting these losses, we believe that EV related, especially North America, the losses -- the future losses, I think, it can be written off more or less. Of course, this is our estimate as of today. I cannot guarantee that there will not be any additions, but it will not be the same size as you see here in terms of the addition. And the JPY 1.7 trillion cash out, this is a large portion. But as said, on a consolidated basis, we have a gross cash of JPY 4 trillion. And also, the balance sheet, I think we have a very solid balance sheet. And therefore, the level of cash at hand and also next fiscal year, we will be able to earn operating cash flow the same as this year. Excluding these losses this year, I think you will be at par as this year. And therefore, in terms of the health and also security of our balance sheet, I think you can be rest assured. We've switched to DOE, and stable dividends will be something that we will work on. Of course, the details, please wait until we make an announcement of our final financial results in May. And there, we would like to respond to your question further in detail. That is all for me. Thank you.

About JPY 1.3 trillion for next fiscal year. This is also related to the 3 models, the tangible intangible write-offs? Or is it China?

For next -- what we're saying next fiscal year is more -- I cannot state any specific names of our suppliers, but it will be mostly compensation to our suppliers. We have rationally estimated the maximum amount of compensation to be paid to our suppliers.

So JPY 1.3 trillion is for the 3 China-related models. And next fiscal year, JPY 1.2 trillion will be more or less for supplier compensation for the 3 model related compensation to our suppliers?

Yes.

Okay, we have next question [ Shimasta-san ].

Can you hear me okay?

Yes.

So it was very convincing this time like the next hybrid completion progress. Listening to that, maybe it's going to the good direction. But on the other hand, we feel kind of sad hearing the discontinuation. But for new Honda, we would like -- maybe some people are wondering about the Sony Honda, but is the [ liberty bill ], are those separated? And also the development of these models, I think Afeela models or what will happen to this model. So if there is anything that you can share about this model?

As for Sony Honda Mobility, we started with the Sony Group. It's an SPC strategy. It's a very important project. And that will -- we will -- our shareholders will discuss the future of this project, and we haven't made any decision at this point yet.

So we have -- you have already started discussions?

Yes. But we have discussed a little bit earlier, but we will continue discussing among our shareholders about this Sony Honda.

So because unless we know anything until May, we will be very concerned. So I would like you to share as soon as possible.

[ Mira-san ] from Asahi Shimbun Newspaper, please.

[ Mira ] from Asahi Shimbun Newspaper. I have a question also to Mibe-san. In your explanation, you said that you have not been posting deficits for a long time, but this time, you are. So historically speaking, I think this could be regarded as a crisis for Honda. Now historically speaking, how do you recognize this case? And of course, it is attributable to the market environment. But compared to your competitors, I think it appears to be that Honda has a greater impact. What are the factors that have led to this result?

Well, how do we perceive this historically? Well, this -- well, ever since we have shifted to this accounting standard, it's the first time that we're posting a deficit. So I think that this announcement and impact is something that we need to take seriously. Now why has it come to be such a large sum of losses? Well, over the past few months, we have been discussing this internally, including myself. We were able to have a very open discussion. And we don't think that this is attributable to our governance. But ACC II, this is a very tough regulation in California. And if we fail to achieve it, there will be a penalty of $20,000. Well, this is not just Honda, but all companies, auto companies doing business in U.S. were thought of this as a bottleneck. And therefore, we had tried to comply this regulation. The investment was very large, and we wanted to comply with this regulation at a minimum level. And though we have done that, the sum was large. Plus the EV market in the United States is suffering a downturn, and it is less than half of what we were assuming. That is how much the market has shrunk. And if we could proceed as is, we thought this would further undermine our profitability. And therefore, this decision was made. Of course, we wanted to launch these models and our associates and suppliers who were involved and ultimately, our shareholders too. We do understand that we have put a lot of impact on these parties, and we do take this seriously. But yes, I think that is the reason why the number is so large.

Okay. It's time now. So now we would like to end today's press conference. Thank you for your participation. [Statements in English on this transcript were spoken by an interpreter present on the live call.]