Hyundai Motor Company (005380.KS) Earnings Call Transcript & Summary

Hello. This is Michael Yun, 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. North America had 9.3% 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 hybrid 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 hybrid, 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 a 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 in emerging markets as well as strong sales of GV70. This 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 weakened EV demand. Hybrid sales are substantially increasing globally, including but not limited to Korea, U.S. and Europe. This is the end of the presentation of sales summary. And now I'll move on to financial summary. This is the income statement. In the third quarter of 2024, revenue increased by 4.7% year-on-year to KRW 43 trillion, while operating profit decreased by 6.5% year-on-year to KRW 3.6 trillion. In the Automotive division, revenue increased by 5.3% year-on-year due to regional mix improvements centered in North America and product mix improvements centered on high-margin vehicles as well as increase in volume. Meanwhile, operating profit, including consolidation adjustment 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 mix improvement. Net profit decreased by 3% year-on-year to KRW 3.2 trillion 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 KRW 221 billion caused by a decrease in sales. Despite an increase in incentives, there was a mix effect of KRW 1.5 trillion due to the strong North America sales and ASP increase. Also, there was positive FX effect of KRW 494 billion 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 FX effect of KRW 787 billion due to favorable exchange rate environment. However, a negative mix effect of KRW 469 billion, driven by an increase in incentives as well as onetime R&D cost of KRW 319 billion, due to a proactive warranty extension for Grand 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 KRW 4.9 trillion due to increase of labor cost. Lastly, net profit decreased by 3% year-on-year to KRW 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 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 SUV 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 proactive warranty extension measures regarding Lambda II engine of the Grand Santa Fe model sold in North America resulted in around KRW 320 billion of provisions for liability recording an operating profit of KRW 3.6 trillion and an operating profit ratio of 8.3%. This warranty extension is caused by the high usage of towing by U.S. 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 II engine, this issue has not occurred. If not for the above onetime contribution amount, an operating profit of KRW 3.9 trillion 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 in 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 are our strength. 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 KRW 2,000 trillion, which is raised by KRW 500 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, the proceeds from this India IPO will be returned to shareholders. And we will establish the relevant IPO proceed plan and get the approval from the BOD and then share you details later. Thank you all for your support, and thank you for listening.

Next, Senior Vice President, Hyungseok 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, Hyungseok, 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 a 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+ to A-. This year, all three global credit rating agencies raised our rating to A, the highest achieved for nonbank 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 we're 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 on Hyundai Capital America, HCA. In the U.S., sales mix improvement was driven by SUVs and hybrid models, resulting in YTD penetration rate increased by 8 percentage points year-on-year in September, raising the sales 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 rates 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 Q3, in addition, to the $8 billion secured in the first half. HCA will continue to support HMG sales in the U.S. by expanding EV sales and providing financial support for new build 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 Eun Young Yim from Samsung Securities.

[Interpreted] I'm Eun Yim Young from Samsung Securities. So my first question is regarding the provisioning that you mentioned that you said it was a onetime provision. However, it seems that the overall warranty fee is lower than the year-on-year cost at KRW 556 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, 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 cost. So if there is any cooperation with these partners regarding platform, shared platform or powertrain 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?

[Interpreted] Thank you for your question. So to answer your first question regarding the provisioning, so that was [ regarding Lambda ] Engine II and it wasn't actually a recall regarding safety. The engine that is mounted on this vehicle, Grand Santa Fe which is sold in North America market. In Korea, that would be Maxcruz model and it's the 2013 and 2014 model year version. Now we have contributed KRW 320 billion worth in terms of provisioning to extend the warranty and the youth 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 commending in terms of the changing period for engine oil, the U.S. 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 NHTSA 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. And the provision cost was reflected fully for all of 2013 and '14 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 their tolerance in terms of anything that will damage the quality and also the customer value. So Hyundai Motor will continue to proactively and actively act on our principles. 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 firsthand. 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 cars. 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 any interference with Kia and that any of the profit made through this will also solely be held by Hyundai as well. 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 Joon Sung Kim from Meritz Securities.