Hyundai Motor Company (A005380) Earnings Call Transcript & Summary

Good morning. Thank you for joining us today. We'll now begin the Hyundai Motor Company's Q1 2026 Earnings Call. Please note, once again, that the earnings presentation materials are available for download from the Financial Supervisory Services electronic disclosure system or under sales results within the IR resources menu of the HMC website. For the call, we are joined by Head of Finance Division, EVP Scott Lee, Head of IR, EVP, Zayong Koo; and Head of Finance and Accounting Sub-Division, VP Hyosok Han; Head of IR Group, VP, Michael Yun; and Finance Division -- Head of Finance Division of Hyundai Capital VP Hyungseok Lee. The conference call will begin with earnings announcement followed by a Q&A session with the attending investors. [Operator Instructions] Now we'll begin the earnings presentation by Head of IR Group VP, Michael Yun.

Hello. I am Michael Yun, Head of IR Group. Welcome, everyone, to HMC's Q1 2026 Business Results Conference Call. Please refer to the presentation HMC 2026 Q1 business results on our IR website. This presentation includes quarterly highlights, sales performance and profit analysis. And for quarterly summarized cash flow statement and detailed regional sales breakdown, please refer to the appendix. First, Q1 highlights. Despite the global demand slowdown due to the geopolitical risks, our global market share rose by 0.3 percentage points this quarter. Our market share in the U.S. market rose by 0.4 percentage points, maintaining MS of 6% range for fourth consecutive quarters. In response to strong hybrid demand, the global hybrid sales reached 174,000 units and the share of global hybrid sales recorded 17.8%. Also in the U.S. market, the share of hybrid sales recorded 24.8%, continuing the momentum. Finally, despite unfavorable business conditions with demand slowdown, market share increase in major markets and robust hybrid sales led to the highest first quarter revenue on record. Next, the sales performance. In the first quarter of 2026, while global demand declined by 7.2%, global wholesale demand -- excuse me, wholesale sales recorded 976,000 units, a decrease of 2.5%. Retail sales recorded 949,000 units, reflecting a 0.7% decrease. Next, I'll go over details about our wholesale by key markets. In the U.S. market, sales increased by 0.3% year-over-year, totaling 244,000 units despite industry demand declining by 0.5%. Sales of eco-friendly vehicles rose 22.7% year-over-year, reaching 69,000 units, thanks to strong eco-friendly vehicle sales. Hybrid sales accounted for a record high 24.8% of total sales. SUV sales also recorded share of 75.2% in the U.S. market, driven by strong sales performance of SUV models. In Europe, sales decreased by 7.8% year-over-year, totaling 140,000 units. Optimization of product mix drove SUV sales to rise 3.6% year-over-year and hybrid sales increased by 22.7%. Despite challenges, mix improvement was achieved by focusing on high-margin vehicles. Sales of eco-friendly vehicles rose 7.1% year-over-year, reaching 70,000 units, driven by strong hybrid sales in Europe. We expect to sustain this momentum by launching the new IONIQ 3 in the second half of this year. In the domestic market, sales decreased by 4.4% year-over-year, totaling 159,000 units. However, EV sales rose 65.5% year-over-year, driven by government incentives for eco-friendly vehicles and IONIQ lineups. Hybrid sales grew 5.3%, reaching the share of 24.9%. And sales of eco-friendly vehicles reached 60,000 units, a 21.2% year-over-year increase. Next, I'll explain the sales analysis by vehicle types. Global SUV sales, including Genesis, totaled 607,000 units accounting for 62.2% of total sales. While EV sales dropped 8.3% year-on-year, hybrid sales continued their strong momentum, growing 26.9% year-on-year. Eco-friendly vehicle sales increased by 14.2% year-over-year, driven by strong hybrid sales. This concludes the discussions on sales. I'll now move on to the profits and losses. This page summarizes our income statement. Consolidated revenue increased by 3.4% Y-o-Y to KRW 45.9 trillion, and operating income decreased by 30.8% year-on-year to KRW 2.5 trillion. The automotive business' revenue decreased by 0.5% year-on-year due to the global demand slowdown and increase in incentives, which is a revenue deduction item. The operating profit decreased by 36% year-over-year with the tariff impact and one-off temporary external factors. Revenue from finance business increased by 21.5% year-over-year, and operating profit increased by 1.4% due to continuous growth in the U.S. market penetration rate and asset size. Net income decreased by 23.6% Y-o-Y to KRW 2.6 trillion as a result of operating profit decline. Next is quarterly revenue and operating income analysis. Revenue benefited from favorable exchange rates contributing KRW 997 billion, while decreased global wholesales resulted in negative volume effect of KRW 857 billion. Additionally, general increase in incentives resulted in negative mix effect of KRW 319 billion. Combined with growth in the financial segment, total revenue rose 3.4% year-on-year. Despite the record high first quarter revenue, negative foreign exchange impact on sales warranty provisions due to quarter end exchange rate increase reduced positive ForEx impact to KRW 25 billion. Sales shortfall caused by the Middle East war and the sales halt of Palisade to negative volume impact of KRW 247 billion. Higher incentives driven by intensified competition in key markets led to negative mix effect of KRW 337 billion, along with tariff impact of KRW 860 billion. As unfavorable business conditions and one-time costs negatively impacted on our profitability, the operating profit decreased by 30.8% year-over-year to KRW 2.5 trillion, resulting in operating profit margin of 5.5% despite contingency plan partially offsetting tariff effects. The last part is SG&A and net profit. Our Q1 cost of goods sold ratio recorded 82.5%, a 2.7 percentage point increase year-over-year due to the rise in materials cost. SG&A recorded KRW 5.5 trillion, which is a 2.9% increase compared to last year due to increase of sales warranty provisions owing to quarter end exchange rate increase. Finally, our net profit decreased by 23.6% to KRW 2.6 trillion as a result of operating profit decline. That is the end of my presentation. Thank you.

Next, Head of the Finance Division will give us the Q1 business performance.

Good afternoon. I'm Scott Lee, Executive Vice President and Head of Finance Division. I'll now present HMC's Q1 business performance and the Q1 dividend. As previously noted, Q1 results recorded revenue of KRW 45.9 trillion, operating profit of KRW 2.5 trillion and operating margin of 5.5%, which is broadly in line with market consensus. Compared to January, when we announced our annual guidance, the global auto industry environment has become more uncertain than ever. As a result, global auto demand, including major markets declined by approximately 7.2% in the first quarter. In response to the demand slowdown and uncertainties such as the potential reappeal of the U.S. IRA legislation, incentive costs increased by approximately KRW 300 billion compared to last year. Additionally, sales disruptions caused by the Middle East conflict and the suspension of policy sales resulted in a negative impact on operating profit of around KRW 250 billion. Regarding foreign exchange effects, the average exchange rate against the dollar in Q1 was KRW 1465.2, representing a 0.9% increase compared to the same period last year. However, sharp ForEx volatility toward the end of March led the quarter end exchange rate to close at KRW 1,513, marking a 5.5% increase compared to 2025 year-end. This result -- this quarter end exchange rate, which was higher, temporarily increased the Korean won denominated valuation of Korean currency-based warranty provisions at the end of the quarter. This resulted in approximately KRW 270 billion negative impact on the operating profit. Regarding the tariff effect, as sales subject to the 15 tariff rate began to materialize, the decline in operating profit was approximately KRW 860 billion, which was material -- which significantly lower, was lower compared to the quarterly tariff impact in the second half. Despite intensified macroeconomic uncertainty, we still achieved solid sales performance by leveraging hybrid models and maximizing sales mix optimization in key markets such as North America. Our global market share expanded by 0.3 percentage points from 4.6% to 4.9% and the U.S. market share increased by 0.4 percentage points from 5.6% to 6% reflecting continued strong strengthening of our market presence. In addition, hybrid vehicle sales reached a record high mix of 17.8%, sustaining strong growth momentum. Accordingly, revenue reached KRW 45.9 trillion in Q1, the highest ever first quarter result, underscoring sustained top line growth. To offset profitability pressures stemming from macroeconomic challenges and tariff headwinds, we are actively executing zero-based budgeting-driven contingency plans and mobilizing company-wide efforts to protect margins on a sustained basis. For reference, excluding contemporary external factors such as negative ForEx impact and the Middle East conflict, the suspension of Palisade sales, operating profit is estimated at around KRW 3 trillion with the operating margin of 6.6%. Next, I would like to address the dividend for the first quarter of this year. In accordance with the value-add program announced in August 2024, we plan to distribute a quarterly dividend of KRW 2,500 per share for both common and preferred stock. The record date for the first quarter dividend is May 31, and the payment date is June 30. As mentioned earlier, the global auto industry is facing unprecedented level of uncertainty driven by macroeconomic headwinds, tariff policies and the ongoing conflict in the Middle East. Despite such challenges with our improved fundamentals, including record high hybrid sales and resilient performance in the North American market, we remain confident in our ability to achieve our annual operating margin guidance of 6.3% to 7.3% through the launch of the new model cycle in the second half of the year and continued execution of contingency measures, including zero-based budgeting initiatives. Going forward, we'll continue to strengthen profitability to support shareholder return and future investment by leveraging our company-wide capabilities. We deeply appreciate the continued support of our shareholders and investors. Thank you.

Next, the finance business results will be shared by the Head of Hyundai Capital.

Hello, I am Hyungseok Lee. I'd like to tell you about the results of the finance. With the Iranian conflict and uncertainties continued, but Hyundai Capital and Hyundai Capital America strengthened the collaboration with the group. And based on the strong captive asset portfolio, we maintained a stable performance. I'd like to tell you about the details. First, Hyundai Capital. With our superior financing capabilities, we continue to support the group's car sales business and the auto asset share was maintained at around 82% with the no interest installment program for Grandeur and the new car promotions and with the fourth quarter Genesis specialized financial product, the new car and the lease assets improved by 9.4% [indiscernible], improving the asset by 4.8%. In case of the retail sales, with the lease growth, the asset grew by 2.1% and the operating expenses was down by 1% compared to the same period last year. By selectively utilizing different lending methods, including overseas receivables and ABS, we were able to reduce the interest rate -- interest expenses down by 0.7% and the total bad debt expenses were down by 23.7%. With the premium captive asset portfolio management and the aggressive risk management led to this result. And so the delinquency rate in Q1 was 0.78%. Therefore, the operating profit improved by 31.8% and the pretax as well. And the -- we are expecting heightened volatility in the first quarter. Therefore, we'll optimize the operation and manage our profits better and we'll have a solid financial management so that we can continue our stable business. And also, we'll continue to expand globally in the second half. We'll finalize the preparation for the financial entity launch in India. By doing so, we improve the financial support for the auto business of HMG. Next is Hyundai Capital America HCA. With the solid sales results in Q1, we've maintained a high penetration rate of 67% and the product asset improved by 30.1%. With higher installment and lease profit, the operating profit improved by 17%. And because of the bad debt expenses, the operating expenses rose by 17% with the additional provision and the bad debt provision expense went up as well. In the U.S. market, the delinquency rose, but still it's below the market average, and we are thoroughly managing our client portfolio with prime customer share over 87%. Therefore, the pretax income, however, declined by 12.6%. In the first half, because of the headwinds from the Iranian conflict and so on, we are expecting some heightened market volatility and challenging market environment. However, based on our solid credit rating, Hyundai Capital America is very well prepared for the impact and the market uncertainties. We'll continue to provide higher finance synergies and support the group's auto business. That is all. Thank you.

That is all for the presentation part. We'll now move on to the Q&A. [Interpreted] [Operator Instructions] [Interpreted] The first question will be provided by Eun Young Yim from Samsung Securities.

[Interpreted] I am Yunjung Lim from Samsung Securities. So I have 2 questions. First, I understand that there was a fire regarding one of your suppliers for the engines valves. And I think the impact will be reflected as of Q2 in terms of your production. So could you give us an update on the setback of the production and how you're responding to this? And also regarding additional costs with the Middle Eastern war ongoing, how is that going to impact your profitability function as well due to the increase in raw materials? The second question is regarding the robotics industry. During the Kia CID, there wasn't much additional update regarding the robotics business other than what was provided during the CES. So I understand that as of this year, the production plant as well as the training center will begin. However, what would be the investment structure as well as the share structure regarding these facilities? And when are you planning to open that information to the market?

[Interpreted] Right. Let me answer your first question. I understand your first question regarding the fire of our supplier producing the engines valves. The name was Anjan Industries and how it's going to impact our production. To be frank, yes, it is going to somewhat set off our production to some degree. However, we are currently developing a replacement and testing the durability of that part. And we will probably be able to use -- put that to use in the near future. [Interpreted] So in the end, we want to normalize the issue as soon as possible. It will differ depending on each engine. However, some engines, it could come back to normal by mid-April, if it as fast as possible. So we are trying to pull forward this timing as much as possible. We cannot give you the exact number. However, our plan is to recover the offset of the production within the second half of the year and also make use of our global production side so that we can recover the entire amount for the global production within the year. [Interpreted] Now regarding your follow-up question regarding raw materials, even before the war at the end of the previous year, the prices actually have started to hike, resulting in the production shortage. For example, nickel, platinum and calcium. So we did already see hikes in prices. [Interpreted] So how that impacted our Q1 performance, I believe that we said it was about KRW 200 billion. But at the end of the first quarter, the raw material prices are partially actually going down. And so we are seeing how that is going. But even in Q2, we believe if there is going to be a hike in raw material prices, it's pretty much going to be similar to what it has been in Q1, but the fact is the raw material prices are gradually going down. But despite that, we are working with purchasing to see how we can further save costs to recover the losses that have been made due to the raw materials. [Interpreted] Another factor that is made due to the increase in raw materials is the impact on the overall OEMs. So we are constantly monitoring the trend of our OEMs -- of other OEMs, how they're responding, what other possibilities there are in the market for us to take opportunity of so that we can be aligned with the market trends. [Interpreted] As for your second question, it will be answered by Zayong Koo.

So regarding Boston Dynamics robotics business, to be frank, there is no specific update since our CES presentation in January. We did announce that we will be running the RMAC, the Robotics Meta Application Center in Q2. And in Q3 2023, we said that we will be building a factory in Savannah with the capacity of 30,000 units. So I think for that to be commercialized or anything to actually get see the action, you still have to wait until the end of the year or for the latter half of this year. So we still do need time to give you any update. Just an additional note, the CEO of BD has resigned and the Board is currently undergoing the process to select a new CEO. And if there's any update regarding that, we also let you know.