本田技研 (HMC) 2007 Q3 法說會逐字稿

Ladies and gentlemen, my name is Sierra and I will be your conference operator today. At this time, I would like to welcome everyone to the Honda third quarter earnings conference call. This telephone conference contains forward-looking statements as defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act 1934, as amended.

Such statements are based on management assumptions and beliefs, taking into account information currently available to it. Therefore, please be advised that Honda's actual results could differ from those described in these forward-looking statements as a result of numerous factors, including general economic conditions, and Honda principal markets and foreign exchange rates between the Japanese yen and the U.S. dollar, the euro, and other major currencies, as well as other factors detailed from time to time.

The various factors for these increases and decreases in income have been classified in accordance with a message that Honda considers reasonable. [OPERATOR INSTRUCTIONS]. Thank you. It is now my pleasure to turn the floor over to your host, Mr. [Tetsua Oshima]. Sir, you may begin your conference.

Hi, this is Oshima at our Honda New York office. Good morning. Thank you for joining Honda's Investor Relations call. Honda just announced, in Tokyo, its third quarter earning results and this time, through this conference call we like to elaborate the detail of this financial result. And, as usual, we have a couple of speakers joining from Tokyo and the U.K., and the U.S. as well.

I'd like to introduce all of them. First of all, Mr. Ike.

Hello everyone, good morning, and good afternoon.

Yes, Mr. Ike is the CFO of the Honda Motor Corporation. And Mr. Endo -- Endo-San

Good morning, and good afternoon, everybody. Thank you for this meeting.

So Mr. Endo is the General Manager of the Honda Japan Financial division. And [Kitamura-San]?

Hi, how are you, good morning, and good afternoon.

[Kitamura-San] is the Manager of the Honda for Japan Financial division as well. And Mr. [Sugiama-San]?

Hi, how is everyone?

And Mr. Sugiama is the First Assistant Manager of the Honda Japan Financial division as well. And [Nokito-San]?

Yes, good morning, good afternoon everyone, I'm [Ms. Nokito] from London.

Okay, thank you for joining. Ms. Nokito is the Honda U.K. Director of the PR division, and this time we also have the guest analyst joining from [Cleveland], [Diabu-San].

Morning, Oshima-San, morning everyone.

[Diabu-San] and thank you for joining and, yes, this conference that we've used a bunch of material which already been put in Honda's website, and its website address is http://world.honda.com/investors/financial results/. So those who haven't got the financial material yet, please use this web address to download the financial package for this conference.

So we'd like to start the details of the financial results, focusing on the third quarter result. It's also the Honda's new guidance for earnings for this fiscal year, ending March '07.

I'd like to see the slide, the first page is three. Slide three is showing the quarterly financial results highlights. There is three table; motorcycle unit sales and the financial result, and also the currency environment during the quarter. I'd like to, a little bit, recap the results -- of the financial results of the unit sales result in the third quarter.

Motorcycle sales became 2.765m units. That is down 0.8%, almost flat compared to last fiscal year, while the Automobile and the Power Products business has been improved over a double digit basis. Automobile business, 915,000 units, which is plus 12.1%, while the Power Products business, the unit sales is 1.382m, which is up 21.9% compared to last year.

And the financial results, there in the top line, JPY2,768.6b, which is plus 12% higher than the last year. It is the record highest revenue in the third quarters, and operating income also increased 5.2%, which is the JPY205.1b, which is also the record high for the third quarters.

[Pre-tax] line, income before income tax became increased 15.3% compared to last year, and became JPY191.5b. Equity in income with affiliates has been down 13% and became JPY25.8b. Net income is increased, 8.8%, which is JPY144.8b. EPS during the period became JPY79.45, which is plus 9.7%. The currency environment during the quarter is the yen against the U.S. dollar became 118, 1, 1, 8, which is JPY1 weaker last year, while the euro environment is JPY152 against the euro, which is weaker by JPY12 compared to last year.

So that's the financial summary for this quarter, and we'd like to discuss about the unit sales, first of all, so Sugiama-San, or [Kitamura-San], so looking at this quarter, Motorcycle sales are a bit down, while the unit sales with Auto and the Power Products has increased over the double digits. So could you talk about each business briefly?

Okay, [let's see] the slide from 10 to 12 regarding unit sales by segment. Up first, I'd like to talk about the Motorcycle business. Please see the slide 10. Unit sales of Motorcycles decreased by 23,000 units, or 0.8% to 2,765,000 units, compared with last quarter, due to the decreased unit sales of ATVs and kids' motorcycles, which offset the positive impact of the increased unit sales in other regions, especially in Latin America.

Please see the slide 11. Unit sales of Automobile segment increased by 99,000, or 12.1%, due to increased unit sales of Accord and CR-V in North America and increased unit sales of component parts set for China.

In slide 12, units of Power Products increased by 248,000 units, or 21.9% to 1.382,000 units, due mainly to increased unit sales of general purpose engines in the U.S., China and Japan.

Please see the slide 13, and net sales by business segment for the third quarter increased, especially in the Automobile segment in North America and Europe. If currency effect is excluded, it is still increased compared with last quarter.

Okay, [spoken in foreign language]. Okay, thanks for that, Sugiama-San. Yes, you also addressed about the revenue growth, also that were the driver for the revenue growth in the third quarter. And looking at the operating profit in this third quarter, the operating profit became JPY205.1b, which is plus 5.2% compared to last year, and also the operating margin became 7.4%. So could you elaborate on the increase and decrease factors in operating profit this quarter?

Okay, please see the slide 15 regarding analysis of change in operating income for the third quarter. Revenue and model mix was plus JPY70.4b, due mainly to the positive impact of the increased profit at [inaudible] higher in Automobile, Power Products and Financial Services business segments, and higher revenue in all regions. The effect of a newly consolidated subsidiary decreased the unrealized profit in inventories, which offset the negative impact of changes in model mix that increased sales incentives in North America.

So, Sugiama-San, you mentioned the factors, the top-line growth. There are a couple of factors you mentioned, but anyhow, this JPY70.4b [plus factors], you mentioned some of the components there, so could you detail -- talk about the detail or how -- what factors are impacting this JPY70.4b?

Okay. I will explain just briefly an approximate amount contributing this decrease and increase of operating income. And, first of all, I will explain about the positive factors. Basically, due to the higher income -- the higher revenue, the approximate contribution from that higher revenue is about JPY70b. And the newly consolidated subsidiary's impact was about JPY20b. And the decrease in unrealized profit in inventories is about JPY30b.

And negative factors are -- model mix deterioration is about JPY30b, and the additional incentives in North America, mainly in North America, it's about JPY20b. That's the factors.

Okay, thank you very much. What about the cost reduction area?

Okay. Currently high raw material price is likely to continue. It [set-off] the positive impact of cost reductions. Cost reductions [the result] of raw material cost fluctuation was minus JPY7.2b, which included an increase of deprecation and labor expenses.

Okay, when we look to the SG&A expenses, also they're increasing about JPY45b. So what are the major factors behind this increase?

This SG&A increase mainly is coming from the quality related expenses increase, which is about JPY20b. And of course the volume mix, the positive impact from the newly consolidated subsidiaries, basically those SG&A expenses of newly consolidated subsidiaries, negatively impacts in this SG&A expenses increase. Those are the main factors and, of course, the business is still growing, so due to this sales growth, of course, the transportation costs and warehouse costs, those kinds of expenses also increase.

Thank you Kitamura-San. Could you specify which region the quality issue is taking place there?

Mainly coming from the Japan segment.

Japan segment, thank you very much. And what about the R&D expenses?

Increase in research and development expenses was minus JPY18.2b, and currency effects on operating income were plus JPY10.6b.

Okay, so thank you very much Sugiama-San. So to Diabu-San.

Yes, Oshima-San.

Yes, they just elaborate the increase and decrease factor in operating profit on the third quarter to you? Do you have any concerns or questions regarding increase or decrease factors in this quarter?

Yes, thanks. If, [Pasco], could you address specifically what's going on with mix in North America, and also I did hear a gross number for [inaudible] in North America of JPY20b. Can you talk about that in a little bit more detail?

Okay, first of all, mix -- all of mix changing. As far as the financial results for the quarter, still although mix is negatively affected, due to higher volumes for the smaller passenger car segment. But, however, the [general] trend in the market, actual retail market, because of the [Japanese price] hike is easing down, traffic at the dealership towards a more light truck segment to a larger segment.

So, as far as Honda is concerned, we new into this new light truck vehicle, like [MDX] or CR-V. Actual demand for those new models is very strong so, eventually, our model mix will be improved. But for the first stage of new model introduction, still extensively a new model introduction plus high -- relatively high depreciation costs. The margin itself, at the initial stage, slightly thinner than the [whole life]. So, for the actual results, middle model mix is still a negative factor, but I'm repeating we said that eventually, it's improving. Now, what is your second question?

The incentives. Mr. Kitamura also mentioned that adding a JPY20b incentive for the incentive in North America, but could you address or elaborate it regarding the incentives outlook?

Not JPY20b, but the number is not wide for my understanding. The actual incentive -- the incentive trend is for the third quarter -- compared to the last general trend is -- because of a very strong demand for our passenger cars, especially Accord, we didn't offer aggressive incentives. We didn't have to, because of a short supply of the Accord. But from the [Accord] because of the adjusted price situation changed, again, demand is shifting.

So Accord's inventories piling up at a very positive level of 60 days supply, and when our inventory is as low as 40 days supply, we have some difficulties to meet the demand for us to supply to the dealers. So we sometimes suffered a [chance] loss of sales. Now that the inventory level is at our ideal level, we are now planning to offer relatively aggressive ad campaign from this January.

So for the actual campaign to be implemented, the fourth quarter, we put some provisions for the incentives. That is the implementation of our provision, and that affects the negative for the operating margin [profit].

Okay, thank you very much, so the increase in SG&A -- no, increase in incentives is mainly for the Car division?

Right.

Okay, thank you very much. So switching gear to the operating profit by the business, or regional segment, Sugiama-San, could you talk about the business segment operating profit?

Okay, I'd like to explain from Motorcycle segment in turn. Please see the slide 20, and net sales of motorcycles increased by 7.0% to JPY303.2b, compared with last quarter, due to positive currency effects which offset the decreased sales units. Operating income for Motorcycles decreased by 17.0% to JPY11.1b, due to increased SG&A and R&D expenses, offsetting foreign currency effects caused by the depreciation of the Japanese yen. Operating margin was 3.7%.

Please see the slide 21. Net sales of Automobiles increased by 12.3% to JPY2.263.8b, due mainly to the positive impact of increased unit sales, and the positive currency translation effects. Operating income of Automobiles increased by 6.4% to JPY160.7b, due to increased profit from higher revenue and in sales prices in North America, continuing cost reduction effects and currency effects, offsetting changes in model mix, soaring raw material costs, increased SG&A and R&D expenses. So operating margin was 7.1%.

Slide 22. Net sales of Power Products increased by 10.5% to JPY105.0b, due mainly to the positive impact of increased unit sales and the positive currency translation effects. Operating income of Power Products increased by 23.5% to JPY10.4b, due to the increased profit from higher revenue, and the currency effects, offsetting increasing SG&A. Operating margin was 9.9%.

And please see the slide 23. Net sales of Financial Services business increased by 29.6% to JPY105.0b, due mainly to the increased revenue due to growth of the Automobile business in North America, and the positive currency translation effect. And operating income of Financial Services business increased by 3.3% to JPY22.7b, due to higher revenue due to an increase of finance subsidiaries receivables from growth of business and the currency effects, offsetting the increase of losses on [inaudible] and decreasing margins due to rising interest rates. And our financial receivables is still high quality and our [inaudible] ratio is still low level, and so operating margin was 21.7%.

Okay, thank you Sugiama-San. Could you also comment on the geographic segment?

Okay. Slide 25, revenue for export and domestic sales in Japan was JPY1,223.8b, up by 9.4% compared to the same period in 2005, due mainly to increased unit sales for exports of the Automobile business and the positive impact of the currency translation effects. And operating income in Japan decreased by 44.8% to JPY41.9b [sic - see presentation], due to the negative factors of the change in model mix, the soaring raw material costs and increased SG&A and R&D expenses, which offset the increased profit from higher revenue, the continuing cost reduction efforts and currency effects. Operating margin was 3.4%.

So, Sugiama-San was comment on the domestic operations, Japan operations. And our operating profit has been largely down, to about 44.58%, a bit down from last year, and you mentioned again an SG&A increase there in Japan there. It is related to quality?

Mainly related to quality-related expenses. As I explained in operating profit fluctuation, in slide number 15, main portion of those quality-related expenses coming from this Japan segment. And, of course, there are some positive effects from the decrease of the advertising costs for those kinds of expenses, but that positive impact was offset by the increase of business of the transportation costs and the warehouse costs, and additional newly consolidated subsidiaries. SG&A offset those positive effects, so the remaining -- mostly those negative portions are coming from quality-related expenses.

Okay, thank you very much. So, one more thing. These quality expenses, is it a one-off issue or they're recurring?

Well, unfortunately we just reported to Japan's Government authority for the recall. The largest volume is our Company Joint Venture in China. We imported a small scooter from China and, unfortunately, we find out there are somewhat quality issues, and we filed the recall just last week. So this portion is maybe one third total demand, or a quarter of total demand. Of course, we have some Automobile related recalls which we also filed recently during this quarter. So it's combining those legal reports are provisions marked to JPY20b, roughly speaking.

Okay, thank you, Ike-San. It is a one-off?

One-off.

Okay, thank you very much. So, Sugiama-San, looking at the geographic segment of North America, the North America operation profitability has been improving, 7.3% operating margin and an amount also of the profit has increased. But could you comment about North American geographical segment?

Yes, please see the slide 26. In North America, revenue increased by 9.0% to JPY1,612.1b from the corresponding period in 2005, due mainly to the increase in sales in Automobile and Power Products businesses, and the positive impact of the currency translation effect. Operating income increased by 10.7% to JPY118.2b from the corresponding period in 2005, due mainly to the positive impact of the increased profit attributable to higher revenues, changing sales price, continuing cost reduction effects, and the currency effects.

These offset the negative impacts of a change in model mix, the soaring raw material costs, the increased sales incentives, and the increased SG&A expenses. Operating margin was 7.3%.

And Slide 27, in Europe, revenue was JPY271.6b, and the same level as the corresponding period in 2005, due mainly to the increased unit sales in Automobile and Power Product units, and the positive impact of currency translation effects, offsetting changes in model mix. Operating income increased to JPY3.7b, due mainly to the currency effects, offsetting the changing model mix, and the increased SG&A. And operating margin was 1.4%.

Okay, Sugiama-San, thank you. So it seems that [they are] -- the operation is still -- although the currency held, but there are some of the changes in the model mix earlier. So, Nokito-San?

Yes.

Could you comment about, particularly, the model mix in European operations now?

Right. During the third quarter, if you look at it in detail, sales of the Civic continued to push ahead at a very strong pace, and it increased almost 70% year-on-year, and more than offsetting the slowdown in sales of that. Actually, if you look at the [adjusted] segment, especially from the heavy incentives from other manufacturers, this has been negatively affected in terms of the competition.

However, if you look at the emerging markets, sales in [Russia] and the central European countries collectively grew by 50% during the quarter, and also particularly in Russia we have experienced rapid growth for Accord model. And that is affecting the very strong strength of this model -- this market. And overall, as a result, Honda's car sales in the whole of Europe showed a solid 17% increase over the same quarter a year ago.

And just for your information, if you -- we look at the future, the new Swindon built CR-V, which just went on sale in Europe this month, is obviously an extremely [exciting start] so we expect a solid contribution, this redesigned SUV from the fourth quarter onwards.

Okay, thank you Nokito-San, it's [clear that] the European operations, the model mix for the industry, is more encouraging. But [Endo-San] look at the third quarter profit of our European operations, particularly compared to the second quarter [inaudible], it was down, so any comments as to what changes, factors are reflecting this third quarter in term of the profitability in Europe?

Yes, I think, as Ms. Nokito-San explained, that the new CR-V is coming to -- just started to sell each European countries, so during the third quarter, I think we have spent a certain [quota] amount of the to clear the old CR-V inventory, so those kinds of expenses should be incurred in the third quarter.

And, in addition to that, as also Kitamura-San explained, that segment is -- competition is becoming tougher and tougher, so I think there are some sales promotional expenses that are additionally spent. So I think those are the main factors that these -- compared to the second quarter, the operating profit is down in third quarter.

Okay, thank you very much Endo-San. So, Sugiama-San, could you continue to the -- what about Asian or the other regions?

Yes, please see the slide 28. In Asia, revenue increased by 22.0% to JPY303.4b, due mainly to the increased unit sales in Automobile and Power Products business and the positive impact of currency translation effects. Operating income increased by 17.6% to JPY20.2b, due mainly to the increased profit from higher revenue and currency effects, which offset the negative impact of the increased SG&A expenses. So operating margin was 6.7%.

And please see the slide 30. In other regions, which is South America, Middle and Near East, Africa and Oceania, revenue increased by 31.7% to JPY193.0b, due mainly to the increased unit sales in all of the business segments, and the positive impact of the currency translation. Operating income decreased by 3.8% to JPY16.0b, due mainly to increased SG&A, offsetting increased profit from higher revenue and currency effects. Operating margin was 8.3%.

Okay, thank you for the explanation of the geographical segments profitability. Diabu-San?

Yes, Oshima-San.

Are there any questions in this area, particularly the geographical segment profitability, if you're looking at it?

Yes, thank you. I wonder if it would be possible to talk a little bit more about -- in greater detail about the market trends in the Other market segments, which are the main markets and what are the trends in those markets?

You mean the Other markets, the emerging markets?

That's right.

Okay.

Thank you.

Who can take care of that?

I will take care. Starting with Brazil, so-called one of the break -- emerging markets, the motorcycle market in Brazil is still -- the economy is pretty much stabilized, and interest rate is around 13%, which is much lower than two or three years ago. And due to this stabilized market economy, the motorcycle market is expanding, and as far as for the calendar year 2006, the total market has expanded to 1.27m units. And as far as the year of 2007, we expect this trend is continuing, and market will grow to around 1.55m units.

And Brazil's automobile market is in calendar year 2007, will also grow around 8%, and that total market -- automobile market, will reach 2.06m units. And if you exclude the commercial automobiles, the number of automobiles will reach 1.96m units, which is 7% increase. That will be a record high volume.

And the other markets, such as Thailand, the motorcycle market in 2006, total number of units of motorcycles was 2.06m, which is slightly down, compared to 2005. And this is mainly coming from several times gas price increase, and political instability, and the bad weather, those kind of factors affecting the total market in calendar year '06.

And, as you know, the political instability is still continuing, so the next year, 2007, the total market of motorcycles will go down to around 1.9m units. That's our forecast. And the automobile market in Thailand is also in calendar '06 -- in August in 2006, there were some floods. Those kinds of bad weather affected the total market, also, mainly to commercial vehicles.

So, as a result of those factors, calendar '06 actual market size was about 680,000 units for calendar year '06, which is 3% down from the previous year. And the calendar year '06 was slightly up, but just around 700,000 units. That's the forecast for emerging markets.

Okay, Kitamura-San, thank you very much. So we need to speed up further. [Inaudible] were either the income in affiliated companies be? We're looking at the pre-tax line. It's the JPY359.5b [sic - see presentation], which is up 15.3%, while the equity income line is JPY25.8b, which is down 13%. So there are ups and downs [13]. So could you talk about the pre-tax and the equity income line as well?

Yes, please see the slide 15 again. Other income and expenses was plus JPY15.3b which included minus JPY5.1b in [inaudible] and plus JPY20.4b in other factors. Excluding fair value of derivative instruments were plus JPY20.4b which included plus JPY10.2b in difference between transaction rates and average rates, and plus JPY10.1b in proceeds from sales of available for sale securities.

Next, please see the slide 17, regarding the detailed change in fair value of derivative instruments. Gain and loss on fair value adjustments for foreign currency exchange contracts was minus JPY11.3b, and interest swap was minus JPY5.9b and fair value adjustments of XMSR convertible bonds, warrants and others were plus JPY12.1b.

And our subsidiary in the U.S. has convertible notes and convertible [prepared stock] of XMSR [radio] in order to gain our [satellite radio] targets. However, for the third quarter of the fiscal year 2007, these convertible instruments were converted to the common stock. From the next quarter, the gain or loss of these convertible instruments will be none. Therefore, until the third quarter of the fiscal year '08, the change will occur compared to the corresponding period in fiscal year '07.

Okay, so what about this with the income lines? We were looking at down and this portion is mainly, it comes through our Asian affiliated companies, so could you comment about the equity income line, particularly, what's going on in our Asian affiliated companies?

Yes, the slide 29, our equity in income of affiliates decreased by 16.0% to JPY20.1b, due mainly due to decreased profit of our affiliates in China, due to heavy competitive automobile markets. In addition, the accounting time is different from parent company.

So the major decline in it, the reason is China, and also the accounting time was affected, is that correct?

Yes.

Okay, thank you. So the next one is that Honda announced new guidance, that is switching gear to the new guidance and the new EPS outlook. So the slide 33, where we're looking at, the new year guidance, fiscal '07, is the revenue will decrease JPY11.100 trillion, and also while the operating profit stays the same as the previous guidance, JPY820b, and the EPS outlook has been a little bit changed to the JPY307.33. So Sugiama-San or Endo-San, either, could you talk about the new guidance, what is it?

Yes, in order to talk about forecasting itself, and in sales of motorcycles in the revised forecasts, will increase by 189,000 units to 10.4m units compared with last fiscal year. And unit sales of automobiles in the revised forecast will increase by 274,000 units to 3.6m units. And unit sales of Power Products in the revised forecast will increase by 244,000 units to 6.1m units.

Okay, the unit sales of each business are a little bit revised, but what about the increase and decrease factor in operating line? Is it also revised?

Yes, please see the slide 33, and net income will be increased compared with the last quarter, due mainly to the increased unit sales in all business segments.

And please see the slide 34, learning the analysis of changes in income before income taxes. If the Daiko-Henjyo impact in last year is excluded, revenue and model mix will be perhaps JPY141.0b. Cost reduction and the effect of raw material cost fluctuation will be minus JPY13.1b. And increase in SG&A will be minus JPY111.2b. And increase in R&D will be minus JPY34.7b. Currency effect will be plus JPY107.1b. Other income and expenses will be minus JPY10.7b.

Thank you Sugiama-San, thank you very much. So, Diabu-San?

Yes, Oshima-San.

I'd say that Honda is revising guidance every quarter, so do you see their new guidance, is there any comment or any question there?

Yes, thank you. Two questions really. One is, can you talk about specifically what you changed, or what the outlook for the North American market is, and how that changed the forecast, and also the same for currency, specifically with respect to the dollar? Thank you.

Okay, Diabu-San, thank you very much. So the currency environment since October has been changing, particularly the yen is getting weaker compared to the last forecast. So, Sugiama-San or [Endo-San], is it reflecting weaker yen environment? Could you talk about how the guidance has been changed since October?

Okay. Please see the slide 35 regarding the change from previous forecast. And the new model makes will see minus JPY28.9b, due mainly to a decrease in sales -- increase sales incentive in North America and Europe and the elimination of unrealized profit in inventories which offset effects of new consolidated subsidiaries.

And increase in SG&A will be minus JPY21.9b, due mainly to increase in quality-related expenses and the effect of new consolidated subsidiaries which offset expenditure reduction efforts. Meanwhile, currency effects will be plus JPY51.3b. Other results, the revised forecast of operating income will be the same as previous forecast. And income before income taxes will be increased by JPY10.0b.

Thank you very much. So, yes, still one question remains, the [inaudible] -- the outlook for the U.S. industry demands, so not just only the U.S. demand, but on global basis the business environment has been changing. So, I'd like to invite Ike-San to [list] Honda's outlook for the coming quarter or year basis that, Ike San --

Yes.

Could you comment on the [inaudible] current business environment is changing?

Well, of course. When we announced the outlook or guidelines in the end of October, from that point we revised the outlook for the currency forecast. At that time we presumed an exchange rate of JPY113 per U.S. dollar, but actually U.S. -- Japanese yen appreciated about JPY5. So JPY5 change is impacted relatively. So market expectation is because of the weaker yen, we would revise the guideline upwards.

And, as Sugiama-San mentioned, that exchange impact is, roughly speaking, JPY51b. However, some negative impacts of the whole JPY51b currency effect, not only for the U.S. market but, as Sugiama-San, the revised volume. But he mentioned just compared to the previous years the actual forecast -- results, but compared to the last guideline, we revised the sales volume for each product segment for Motorcycles, Automotives Power Products.

And especially Motorcycles reflecting the unfavorable market situation affected seasonably. Weather conditions were economic situation in Asian countries, we revised -- reduced the guideline of Motorcycle sales to under 50,000 units. And Automobiles, we revised -- reduced 35,000. So this volume impact is relatively -- largely contributed to the negative impact. And, roughly speaking, JPY16b impact on operating income.

And in response to the [inaudible] questions, as I have mentioned before, the incentive situation in the U.S. market, last calendar year we are fortunate that we didn't have to do relatively higher incentives for the Accord. We anticipated to prepare some incentives spending for the Accord because the Accord is at the last stage of the model cycle. And to meet the strong competitors, we presumed to -- we have had to spend some incentives on the Accord. But fortunately last year, because of high gasoline price, demand for the Accord was very strong. So our incentive spending was relatively lower than previous year.

But now that the gasoline price is coming down and our inventory level is piled up at the ideal level of 60 days supply, we put some provisions for the actual incentive campaign for the Accord and other -- some models. So, in total, in the U.S. and the other regions, mainly for Europe, we have put some provisions for the incentives. Roughly speaking, JPY15b. So this is the volume and its negative impact.

And SG&A level, as repeatedly mentioned, that quality issues we put some provisions for the recall. That is a JPY20b. So, a [guess] of JPY51b positive impact due to the weaker Japanese yen, all those JPY51b offset by those three main, major negative factors, again, volume and mix and the incentives and quality provisions.

Okay, Ike, thank you very much. So before we go into the Q&A session, could you comment on the dividend policy?

Actually we -- today's Board meeting we resolved that we pay out -- we will pay out JPY17 per share as a quarterly dividend. We didn't implement quarterly dividend before. But from this third quarter we initiated a dividend payout by quarterly basis. So we [resolved] JPY17 per share for the third quarter.

And for the fourth quarter our plan is, again, another JPY17 per share. So combining third quarter and the fourth quarter, dividend will be JPY34. So, combining the intermediate dividend of JPY30, total dividend per share will be JPY64. So we split the shares as of July 1. So compared to the last year, on the assumption of the previous number of shares, it's about -- not about, but a JPY20 increase per share.

Okay, thank you very much. Now that Honda is starting to the quarter dividend, so please check the dividend pay date. So, yes, that's all the things we did for the recap for the third quarter results. So, Sierra, I would like to get into the Q&A session.

[OPERATOR INSTRUCTIONS]. Your first question is coming from Ron Tadross from Banc of America.

Okay, well, good morning. Good evening. And thank you for that detailed discussion. Just a few questions. In the third quarter you said volume was about JPY70b globally. Can you give us a similar number for 2007? Of the JPY140b volume mix, revenue mix, other, how much of that is volume?

Are you saying 12-month forecast?

Yes. Maybe if you can get that, maybe you could also give us an idea of what the breakdown is Automotive versus other, Motorcycle, Power Products.

Ron, let me verify your question. It's on a full-year basis, right?

Yes.

Compared to last year.

Yes.

So maybe to slide 34 you are referring?

Yes, the JPY141b revenue model mix, how much of that --

Yes, [you need to divide it] how much comes from volume, mix, then by the region as well, it's possible.

Well, by segment. I don't need regions.

[Inaudible], do you have any detail here?

Okay, this is Ike. Volume mix and implementation was JPY141b. Our new guideline compared to last year's actual. Lastly speaking, the volume -- volume is JPY199b. And we -- the price increase was down, roughly speaking, JPY40b. Mix is, on the contrary, negative impact, JPY95b and incentives, mainly in the U.S., for JPY35b. So that is the -- it's not the total breakdown of JPY141b, but the major items is that number.

Okay. And the price and the incentive, if you put those together it would be pretty much neutral, right?

Yes, that's right.

Okay. And just a couple of other quick questions. The quality issue in Japan, the JPY20b in the quarter, how far back do the recalls go that you're doing in Japan? How many years back?

How many years back? I don't know. We [inaudible] but as we find out any -- the past -- I don't know what is the legal requirement. But whatever we recognize the technical issues or quality issues, we diligently and honestly recall to the Japanese Government authority. And this time the biggest one is, as I mentioned before, the imported motorcycles. We started the import of Chinese motorcycles back about four years back. And also -- and that is not a total of JPY20b provisions.

But the other items is bits and pieces, the pile up automotive quality issues. And it's not a big one like as we recalled a large number of our transmissions in the U.S. about a couple of years ago. But some of the items we found out the issues initiated back about five or six years ago. So most of the quality issues find out, after the long-term usage of the vehicles, some issues incurred.

Okay. So --

I'm sorry. I don't know really what is the legal requirement, how far we reviewed. But as long as any car's on the market, I think.

So the Government is just basically reviewing what you have submitted in the past and they are getting a little stricter based on -- they're just getting a little stricter on what should be recalled?

They didn't change any policy. Of course, some of our Japanese manufacturers cheated -- try to -- they're not honestly fighting all those recalls. But we've been diligently, honestly, whenever we recognize any technical issues or quality issues, for the sake of our customers, no matter how the product is sold. As long as we recognize all those vehicles, regardless cars or motorcycles, we just report the defect and we recall.

Okay. And then two other quick questions, the raw materials, it looks like for fiscal 2007 your material costs will be -- your material costs will be roughly flat with 2006. Given the commodity cost trends, do you think that the same might -- should happen in fiscal 2008?

First, the calendar year, this year, when we explained before, the [longer-term] prices peak out. And this last year, especially May time, a lot of hedging speculation deteriorated all those raw materials price. But since then, because of the very strong demand worldwide, raw materials, like aluminum, copper or precious metals is plateau, I mean it stays at a very high level. And we assume that this high level of transactions -- trends will continue for this year.

We are continuing, Ike-San, to stay the same as last year, right?

Yes, very, very high level.

So, meaning that if further Honda maker for the cost reduction area, it can be offset.

I assume it's gone very positive, just looking at these. So -- okay, just one last question, the other non-cash on the cash flow statement, the minus JPY90b, what is that and does that reverse in the fourth quarter?

Ron, could you mention which page you are referring there? Are you looking at the financial statement?

Yes, hold on one second. Let's see.

It would be easier to find out, please.

Yes, on the financial statement, let's see, excluding the -- basically, here, for the nine months. We basically took the nine-month cash flow statement and we backed out the first two quarters, so we got -- it's the non-financial services businesses, the minus JPY103b, and then we minused out -- which is on page 30 of your press release. And then we netted out the first two quarters of the year we ran about minus JPY11b, other non-cash.

So, we need some little calculation on that cash flow.

Okay. Well you can get back to me if you want.

Oshima-San will get back to you.

Okay. Thank you.

Okay. Sierra, are there any other questions?

[OPERATOR INSTRUCTIONS]. The next question is coming from Kurt Sanger from Macquarie.

Hi gentlemen. I can't let you off that easily. Just one question on the U.S. motorbike market condition. It was commented on earlier this evening about some structural issues in the ATV market and how that's shrinking. Other companies are finding growth with new products in that segment. I think Yamaha's a good example. How are you planning to stabilize that business on the ATV side, and if you could comment on the motorcycle side as well? I'd be interested to hear your thoughts on the total market and the U.S. consumer.

Okay. Generally speaking, motorcycle segment is shrinking. But when we said motorcycle segment, there is a couple of different segments. And the segment -- most segments we would -- in terms of volume, we are selling a lot of bikes for the kids. And this demand, when gasoline price was very high, demand was, in general, very weak. And when the gasoline price was very high, the scooter demand was very strong. But maybe some consumers are purchasing motor scooters as a substitution of transportations to save his, maybe, gasoline price expense or something like that.

So now that the gasoline price came down, this one-time special demand for the scooters are vanished. And kids' bike or -- we said the kids' bike, but smaller motorbikes for the children, usually for the Christmas time, obviously, for a Christmas gift demand was previously strong, but this past Christmas season, we didn't see any strong demand. So maybe because of the, I don't know, demand is a little bit shrinking.

The other segment for the relatively lower-priced bikes, we see a lot of new competitors coming into the market, especially from Chinese-made bikes. It's starting their penetration in the market. And the high-end motorcycles, as you mentioned, Yamaha offer very good bikes. Unfortunately, we didn't have a product -- good product in time. But we're planning to offer new bikes coming soon. And it's a 1050. So we're expecting some catch-up of this high-end segment.

ATV segment, we witnessed some changes in the demand, especially for the [UTV] purpose ATVs. Some new segment, MUV type of vehicle was coming out. And some demand is shifting towards MUV. As first, the ATV, how to stimulate or catch-up our sales. We newly introduced the TRX, a new ATV. And we are planning to introduce new ATVs for this fourth quarter, or partially from last December. So we are expecting to catch up some sales in the ATV segment.

I'm wondering if you are planning any time soon to launch an MUV to try and capture some of this growth.

R&D, we are working on that. But for the immediate timing, within a few months' time, no.

A few months' time, okay.

No.

So, Sierra, it should be the last question there. Please take next one.

Yes. Our final question is coming from Benjamin Moyer from Blackrock.

Yes. Hi. Thanks for the call. I just had actually two questions. The first one was something that Mr. Ike mentioned. He mentioned JPY15b in provisions for European incentives.

Not European. Combining U.S. and Europe, yes. They're mostly U.S. I would say JPY12b. So the balance is for Europe.

Okay. Because what was confusing me was I heard these numbers and I wasn't sure whether they were in the third quarter or they were your expectation for the fourth quarter.

The provisions in the third quarter.

Okay.

Provisionally in the third quarter means going to be spending in the fourth quarter.

Yes.

Okay. So in the factors behind the change in third quarter profit, you mentioned JPY20b in provisions for the U.S. So that's been reflected on the third quarter P&L and there won't be a fourth quarter effect. Is that correct?

Right.

Okay. And in Europe, that JPY12b, is it JPY12b, that was in the third quarter P&L and won't be a factor in the fourth quarter?

No, actually JPY12b for the U.S.

Okay.

And Europe is only JPY3b. So combining U.S. and Europe that is total -- did I say JPY15 or JPY16b? JPY15b, right.

Okay. So that will affect the fourth quarter P&L?

No. It's all provisions, so in the third quarter.

It's already included in the third quarter.

The JPY20b provision for [inaudible], that was also in the third quarter?

Quite right.

Okay. And then my final question, you mentioned -- someone mentioned something about the accounting periods in China being different. I just wonder if you could explain that.

Okay, some affiliated company in Asian countries, most of them are running as a calendar year from January to December. And our Joint Venture Company in China is also running from January to December. So our equity in income in the affiliated companies declined, this for the third quarter. But this third quarter is equivalent from [drive] through September in China.

And at that time, actually, some bad weather attacked -- type of a typhoon attacked our factory site. So we shut down three days because of that bad weather. So that affects our whole sales of the Chinese operations. That's affected the Joint Venture's earnings.

Okay. Was the factory that was shut down, was that -- do you know which factory that was?

[Guangzhou] Honda.

Okay. Okay, well thanks very much.

Okay, Benjamin. Thank you very much. So Sierra, it's almost time to close the conference.

Thank you, we have no further questions.

Yes, for further questions, just address Mr. Oshima in New York.

Yes, whenever you have the questions, just call to my office. I am here.

So thank you very much everyone for participating in Honda's earnings results conference call. This time we have participants from -- in relation to the [radio] in New York and Boston investors, we also have Toronto, Montreal, Houston, Kansas and also the Singapore as well.

So thank you very much for joining the conference. And thank you Ike-San.

Thank you.

And Endo-San.

Thank you.

Sugiama-San.

Thank you very much.

Kitamura-San.

Thank you.

Nokito-San.

Thank you very much.

Diabu-San, thank you very much for joining.

Thank you.

Thank you, and see you next time. Thank you very much. Have a nice day. Goodbye.

Thank you. This concludes today's third quarter earnings conference call. You may now disconnect your lines at this time and have a wonderful day.