本田技研 (HMC) 2007 Q4 法說會逐字稿

Good morning. My name is Shauna and I'll be your conference operator today. At this time I would like to welcome everyone to the Honda fourth quarter investor relations conference call. All lines have been placed on mute to prevent our background noise. After the speakers' remarks there will be a question and answer period. [OPERATOR INSTRUCTIONS].

This telephone conference call contains forward looking statements as defined in Section 27A of the Securities Act of 1933 as amended and Section 21A of the Securities Exchange Acts of 1934 as amended. Such statements are based on management assumptions and beliefs taking into account information currently available to it. Therefore, pleased be advised that Honda's actual results could materially differ from those described in these forward looking statements as a result of number of factors, including general economic conditions in Honda's 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 increases and decreases in income have been classified in accordance with a method that Honda considers reasonable.

At this time I would now like to turn the call over to your host, Mr. Oshima. Sir, you may begin your conference.

Hi, this is Oshima from the Honda New York office. Thank you for joining Honda's investor relation call. At this time we'd like to discuss about the Honda's day fiscal '07 March -- ended March fourth quarter result. As usual we have a couple of speakers from U.S. and Japan and U.K. as well. So I'd like to introduce to all of them. First, Ike San.

Hi everyone.

Yes, Mr. Ike is the CFO of Honda Japan. And Mr. Kitamura San.

Hi.

Mr. Kitamura is the General Manager of the Honda Finance Division. And Sugiama San.

Hi, hello everyone.

Hi. Mr. Sugiama is Manager of the Honda Finance Division. And [Don] San.

Good morning.

Hi [Don] San. Thank you for joining us. Mr. [Inaudible] is the President of the research firm [Lafirm] and Associates in Ohio. And he's a guest analyst. And we have Okomoto San.

Yes, Oshima San, good morning.

Hi Okomoto San, thank you for joining us. Mrs. Okomoto is the Honda Europe PR Manager.

So first of all I'd like to briefly elaborate -- recap the financial summary by using the slide presentation as usual. Honda has already put the slide presentation and press release material on its website and you will be able to download all of these materials from the http//world.Honda.com/investors/financial results. So you are able to download this presentation material and the press release as well. So by using the bunch of the slides I would like to proceed with this investor relations call for the Honda fourth quarter results.

So first of all we've seen the slide three. Page three is the financial result of the fourth quarter and I'd like to briefly touching upon unit sales results first. The Motorcycle business unit sales was 2.4m units, which is down 0.2%. Auto operations total unit sales in fourth quarter is 957,000 units. This is plus 6.2%. Power Product business's unit sales was 2.1m which is 0.4% plus compared to last fiscal year.

We're coming to the fourth quarter financial summary in the middle of the chart. Fourth quarter the revenue top line was JPY3,087.8b and operating profit, which is plus 9% and which is also the record high for the whole prior fourth quarter. And operating profit is also -- operating profit came to JPY250.2b, which is down 26.6%.

Although there is a Daiko-Henjyo impact in the last fiscal -- last fourth quarter in fiscal last year. So excluding this Daiko-Henjyo proportion of portion to return to the government -- proportion of portion of the pension fund to be returned to the government, this quarter's result is actually plus 23.4%. And pre-tax line as well the JPY239b, which is minus 29.2%. But excluding the Daiko-Henjyo impact it was 19.2% plus.

Affiliated -- income in affiliated companies was JPY19.9b, which is minus 12.2%. Net income became JPY176b which is minus 19.7%. Again excluding Daiko-Henjyo impact it was plus 28.9%. EPS became the JPY96.7 which is minus 19.3%. Excluding Daiko-Henjyo impact it was plus 29.5%. And the currency environment during this fourth quarter dollar to yen is JPY120 against the U.S. dollar which is JPY3 weaker than last year. And the euro was JPY157, which is JPY60 weaker than the last year against the yen.

So that's the financial summary for this Honda fourth quarter result. So I'd like to invite, or ask Honda Japan Sugiama San or [Kitamura] San. So the -- let's see, the Auto business was plus 6% while the Motorcycle or Power Product business, the unit sales, are flattish. So could you comment or elaborate briefly these fourth quarter results by business?

Yes, could you see the slides from 10 to 12 regarding unit sales by segment. But first I would like to talk about Motorcycle business at slide 10. Unit sales of Motorcycle was 2,408,000 units which is approximately the same level as last quarter due to the positive impact of the increasing sales in other regions, especially in Latin America offsetting the decrease in unit sales of ATVs and motorcycles in North America and component part sales for Asia.

Slide 11, unit sales of Automotive segment increased to 957,000 units by 56,000 units or 6.2% due to the increased unit sales of CR-V and Civic in North America and Europe and increased unit sales of component parts sets for China.

Slide 12, unit sales of Power Products was 2,128,000 units which was approximately the same level as last quarter due mainly to increased unit sales of general-purpose engines, mainly in Asia, offsetting the decreased units of general-purpose engines sold to OEM customers in the U.S.

Okay, this is Sugiama.

Sorry for that, I just forgot to introduce you there in the beginning. So Mr. Sugiama is Investor Relations Assistant Manager. So thank you all for joining. So Sugiama San the top line when we look at the JPY3,087.8b which is plus 9%, but what is the major driver for this fourth quarter when you talk about the top line growth?

Okay, slide 13, net sales by business segment for the fourth quarter increased by JPY254.1b or to JPY3,087.8b mainly in automotive segment of North America and Europe.

Okay, the major driver of economic growth is the North American Auto. And when it comes to the operating profits, operating profit was the -- is down. Of course it's including the Daiko-Henjyo impact, but it was down 22.6%. And could you a little bit analyze the -- what increase and decrease factors in operating profit for this fourth quarter?

Could you please look at slide 15 regarding, and I quote change in operating income for fourth quarter. And revenue and model mix was up JPY72.4b. If the Daiko-Henjyo impact in last year is excluded, you mainly see the positive impact of the increased profits attributable to higher revenue in Automotive segment and higher revenue in all regions, change in sales prices in North America and the effects of newly consolidated subsidiaries which offset the negative impact of change in the increased sales incentives in North America and decreased unrealized profits in inventories.

And cost deductions and effects of raw material costs fluctuation was plus JPY13.5b which included the high raw material prices and increase of depreciation and labor expenses.

Okay, this time the cost reduction becomes positive so the produced -- real analysis of the cost reduction is?

Yes. Cost reduction effect was about plus JPY50b and soaring raw material cost was about minus JPY28b. Increase of depreciation was minus JPY3b and increased labor expenses was about minus JPY5b.

Okay so cost reduction effort -- cost reduction effort was plus JPY50b. Okay.

Then what about the SG&A expenses there? It was growing about JPY36.7b. What is the major driver of the SG&A growth for this time?

The main reason is of course the sales [inaudible] are growing due to the sales growth. Those logistics expenses are increasing of course. And in addition to that, there is newly consolidated subsidiaries in the past fourth quarter. So that also contributed to the increase of SG&A. And the -- there are some other quality related expenses that are increasing also. So those are major factors to increase SG&A.

Okay [Inaudible]. Thank you very much. So the consolidation of the newly affiliated companies impact is significant?

Yes. About I would say around 2 or 3b.

Okay, thank you. So, Sugiama how is the R&D expenses?

Increasing R&D expenses was minus JPY25.2b and currency effect on operating income was plus JPY23.4b.

So the currency environment was a little bit favorable for Honda in this fourth quarter so we get a JPY23.4b plus operating profit line in currency impact positive. So the [Dan] San.

Yes Mr. Oshima San?

We're looking at the increase and decrease factor with operating lines, is there question or genuine concern?

Yes, thank you. I have actually two questions about the revenue and model mix item. First is, how did the incentives impact the quarter and then secondly, looking ahead and I know we're not at the outlook section yet, but how will -- I know you have two plants coming on-stream -- how will that affect volume and mix going forward?

So probably this question goes to Ike San or?

Okay, first of all the impact on incentives. Maybe most of you are hearing this conference call monitoring the alpha data. So maybe you know the trend. In the U.S., the Accord is heavily incentivized because of the fading away for the forthcoming new model introduction by the end of this year. So quarter to quarter the comparison incentives are increasing. But that is offset by a pricing increase on the other side for the new models featuring for example CLD and MDX. So the rapid speaking in this volumes and mix segment, incentive is heavier compared to the last quarter, however offset by the price increase for the new model.

The other thing that boosted this volume and mix is of course the volume. Volume side Automotive itself. And the Financial Services, actually the volume of the Financial business is increasing. So that is a positive link, boosting up business volume adding gross profit. That's the basic trend of the volume and mix.

And the second question of volume increase. However, as we announced the new production capacity will come online in 200 -- online so actually this ongoing fiscal year the only change in volume or production is as we already announced, that we're shifting pilot production from Canada to Alabama and increasing the Civic production onto the second plant in Canadian plant to boost up the Civic production. So the total volume wouldn't change. The light truck segment slightly -- well reduction in the Canadian plant production was offset by the increase of the Alabama factory. So the total volume wouldn't so much increasing. The only difference is the previously at the second plant or our first plant in Alabama production capacity is 650 units per day on one line. But that previously running on the 500 units per day basis. But after shifting the pilot from Canada to Alabama, Alabama will be producing at a full capacity.

And we have been trying to increase the Civic production capacity because of very tight supply issues for the last year. But currently Civic demand is becoming weaker and you noticed we already incentivized by providing a special interest rate for the Civic model. So maybe we have to reallocate more the production mix. Maybe we have to increase the CR-V production at this [facility] because of very high demand for the CR-V, at the same time becoming weaker demand for the Civic. So, anyway, whole year this coming fiscal -- ongoing fiscal year production capacity won't be not so big a jump.

Okay, thank you very much. Although the production amount has not been changed much but the mix will be changed because of the increase of CR-V volume, that's the point right?

Right.

So if I can switch the gears to the business segment. could you comment either [inaudible] San or Sugiama San could you comment on the business segment?

Yes. Motorcycle segment. Could you see the slide 20? Net sales of motorcycles increased by 7.7% to JPY421.7b compared with last quarter due to positive currency effects which offset the decreased sales units. Operating income of motorcycles decreased by 27.0% to JPY44.2b due to effects of gain on return of Daiko-Henjyo recognized in corresponding period of FY06, increased R&D expenses offsetting positive currency effects caused by the depreciation of the Japanese yen, continuing cost reduction effects and decreased SG&A expenses. So operating margin was 10.5%.

Could you see the slide 21? Net sales for Automobile increased by 8.0% to JPY2,430.7b due mainly to the positive effect of increased unit sales and a positive currency translation effect. Operating income of Automotive decreased by 35.1% to JPY157.7b due to the effects of gain on corresponding period of a gain on -- and a gain on returning of return of Daiko-Henjyo in FY06, soaring raw material costs, increased sales incentives, increased SG&A and R&D expenses offset cost down effects, increased profit from higher revenue and changing sales price in North America and currency effects. So operating margin was 6.5%.

And slide 22. Net sales of power products increased by 12.4% to JPY125.3b due mainly to the positive currency translation effects. Operating income of Power Products increased by 45.0% to JPY7.2b due to effects of gain on return on Daiko-Henjyo and increasing R&D expenses relating to new business offsetting decreased SG&A and the currency effects. So operating margin was 5.8%.

Fumihiko San, you mentioned that the margin has been a little bit pressured by the increase of the R&D for the new businesses in the Power Products. What is this new business?

It's mainly related to the aircraft business and [tour] business.

Okay, thank you. Please go ahead.

Okay. Could you see the slide 23? Net sales of Financial Services business increased by 40.9% to JPY180.4b due mainly to the increased revenues due to the growth of the Automotive business in North America and positive currency translation effects and commencement of operating lease transaction. And operating income of Finance Services business increased largely by 70.8% to JPY40.9b due to the high revenue and increased Financial Services subsidiary in the Group from growth of business and the currency effect and decreased SG&A expenses by estimating amount of allowance for credit losses. So operating margin was 34.6%.

Okay [Dan] san --

Yes, Oshima San

When looking at Honda's business, so any concern in Auto, Motorcycle, Financial Business whatever?

Yes, if I could go to the Financial Services section I wonder if you could talk a bit about if you're seeing anything coming through in terms of -- in the Financial Services business from the supply and lending. Is there any impact there in terms of delinquency and also what's the trend with Honda's borrowing class in the Financial Services unit? Thanks.

Okay. As far as for the top line lending issues, I think Honda's case the customer profile for our Financial Services business, such customers percentage is pretty low, just around 15%. And this percentage is pretty much stable the past over three or four years. So I think the top line lending issues is not currently directly impact our Financial Services profitability.

And as for the cost for, the funding cost issue, of course due to this higher interest rate our margin will be slightly squeezed. But you know there is some time lag to reflect such higher interest rate. But eventually we will reflect such higher interest rate on our loans. So I don't think that should not too much impact our profitability.

Kitamura san, thank you very much. So I would like to switch a gear to the geographical segment. So there Japan has been largely impacted by the Daiko-Henjyo in the last year and this year, became the profitability was down to the -- excluding Daiko-Henjyo basis they're still growing. And the margin we can hope for 5.4%. So Kitamura san, or either Sugiama san, could you talk a little bit about the geographical segment by each region, Japan and the U.S., North America, Europe, whatever, other region too.

Okay. Slide 25, revenue for exports and domestic sales in Japan was JPY1,265b, up by 7.2% compared to the same period in 2006, due mainly to increase unit sales for exports the Automotive business and the positive impact of the currency impact and translation effect.

Operating income in Japan decreased by 63.1% to JPY68.2b due to the effect of gain on Daiko-Henjyo and soaring raw material costs including SG&A and R&D expenses, which offset the continuing cost reduction effect, decreased SG&A expenses and currency effect. And operating margin was 5.4%.

Okay. So we do remember the last, third quarter there was a quality issue in Japan. That's giving pressure to the margin. And this quarter the import -- no the export amount has increased and the revenue has been jumping up. But if you're looking to the pure domestic Auto operation, Kitamura San or Sugiama San is it revamping or stay the same?

Okay. As far as for the number of unit sales, for domestic sales it's not revamping yet. And, but as far as for the model mix for Honda, since the previous corresponding last quarter, last year fourth quarter, we just launched ZEST mini car model in Japan. But this fourth quarter we have strong sales for such as the CR-V or Crossroad or Stream, new Stream. So that we, in terms of mix wise, that prospect basically in Japan mix is improving. But unit sales itself is still very flat in Japan.

Okay thank you very much. So what about North American operations?

Could you see the slide 26? In North America revenue increased by 2.8% to JPY1,671.4b, due mainly to the increase in unit sales in Automotive and positive impact of currency translation effect. Operating income increased by 21.3% to JPY128.4b from the corresponding period in 2006, due mainly to continuing cost reduction effect and the positive impact of the increased profit attributable to higher revenue in Automobile and Financial Service business, the change in sales price and the currency effect which offset the soaring raw material cost, the increased sales incentives. So operating margin was 7.7%.

And slide 27, in Europe revenue increased by 24.5% to JPY440.1b due mainly to the increased unit sales in Automotive and the positive impact of currency translation effect. And operating income increased by 28.8% to JPY12.6b due mainly to increased profit attributable to higher revenue, the currency effect and model mix and increased SG&A expenses. And operating margin was 2.9%.

So when we're looking at the European operation the unit sales would also have increased by over 100,000 units and revenues growing and profitability has been -- it looks really revamping in upward trend. So Okomoto San --

Yes.

Could you update to what's going on in European operation particularly the auto?

As Sugiama san mentioned earlier Honda's car sales in the European region benefited from the continuous trends of the U.K. produced models. That is the European Civic series as well as the fully renewed CR-V model. We have started the sales of the three door version of the Civic from January this year across Europe. And all the new CR-V sales also started in January. So during the quarter therefore we enjoyed the sales from these two new models as well as the Accord model.

And as for the CR-V SUV model, we have been receiving the overwhelming response from our customers. I think this is thanks to its sophisticated design and its smooth driving. And on top of that we have been seeing very strong demand for particularly its higher end band.

And if you look at by country, we registered a steady sales growth in the U.K., Italy and the Central European countries. And also we saw a substantial increase in the emerging markets such as Russia. That is the current sales situation in Europe.

Thank you Okomoto san. It is a really upward trend in Europe so. What about in Asian or other regions Sugiama San?

Yes. Slide 28, in Asia revenue increased by 28.4% to JPY366.9b, due mainly to the increased unit sales in Automobile business and the positive impact of currency translation effects. And operating income increased by 50.2% to JPY19.2b, 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 5.2%. And please see the --

Sugiama San, when we're looking at the slide 28 and 29 as well, so in Asian countries the subsidiaries operation is going up while the affiliated operation is going down. So when you're looking at the slide 29 as well. So could you explain what is going on in these subsidiaries and affiliated companies in Asia?

Okay. On the subsidiaries operation in Asia mainly are concentrated on the Automotive business and while the affiliates operation is mostly concentrated on Motorcycle business. And Motorcycle business situation in Asia, especially in Indonesia and India, the market itself, I mean Indonesia is recovering from the last year's flat market, but India is also continuously growing market. But at the same time the competition is becoming much tougher than before. So due to that environment our profitability used to be the most highest in Motorcycle business, but due to that environment change our profitability in those major countries, Asian countries is not so high as previous years.

Okay, Kitamura san, thank you very much indeed. This trend will continue or just only this quarter?

Probably continue for the time being.

Continue for the time being, okay thank you very much. And what about the other region?

Slide 30. In other regions which is South America, Middle and Near East, Africa and Oceania, revenue increased by 43.4% to JPY231.3b, due mainly to the increased unit sales in all the business segments and the positive impact of the currency translation. And operating income increased by 67.1% to JPY19.5b, due mainly to the increased profit from higher revenue and continuing cost reduction effects offsetting increased SG&A. So operating margin was 8.4%.

Okay, thank you Sugiama San. So just want to discuss about the pre-tax line. Pre-tax for this quarter became the JPY239b, which is down 29.4% including Daiko-Henjyo. Excluding Daiko-Henjyo it was plus 19.2%. So could you a little bit analyze or elaborate this pre-tax line impact. What's the factors impacting this?

Yes. Could you see the slide 15 again? Other income and expenses was minus JPY8.9b which included plus JPY12.9b in fair value of derivative instruments and minus JPY21.8b in other factors. The details further of minus JPY21.8b which included minus JPY7.1b in difference between transaction rates and average rates and minus JPY14.6b in gain and loss from valuation of the current amount of debt and receivable in foreign currency.

Okay. So this JPY14.6b is relatively big. So what is the exact this one?

Yes. It's mainly loss from currency variation of the [raw] subsidiary in Europe. But we hedged it with foreign currency for the contracts. So it's positive impact gain on fair value adjustment for foreign currency for the contracts.

Okay. Thank you very much. What about other currency impact in this pre-tax line?

Currency effect on operating income was plus JPY23.4b and difference between transaction rates and average rates on other income and expenses was minus JPY7.1b. And currency effect on income before income taxes was plus JPY16.3b.

And next please see the slide 17 regarding the details of changes in fair value of derivative instruments. And gain and loss on fair value adjustment for foreign currency exchange contracts was plus JPY9.7b. And interest swap was minus JPY5.4b. And fair value adjustment of XM Satellite convertible bond and warrant and others was plus JPY8.6b.

Our subsidiaries in the U.S. have convertible notes and convertible preferred stock of XM Satellite Radio in order to obtain satellite radio studies. The gain or loss of this convertible instruments will be none. Therefore, until the third quarter of FY08 the change will [go up] compared to the corresponding period in FY07 because the third quarter of the fiscal '07 this convertible instrument were converted to the common stock.

So for the coming quarters there is no impact. Or until a certain quarter we do have impact?

As far as absolute amount we will not have any impact. But if you look at the difference between year to year --

Year on year.

Yes, year on year will be there.

But until the next third quarter right?

Yes.

Okay. Thank you very much.

So I'd like to talk about or I'd like to discuss about the new guidance. Page, slide 37, I believe. Yes Honda announced a new guidance actually for this running fiscal year ending March '08. New guidance, if you look at the page 37, sales will be JPY11,750b which is JPY662.8b increase of the revenue.

Operating profit will be JPY770b, which is down 9.6%. And the pre-tax line is JPY780b, which is down 1.6%. And net profit will be down 9 -- 2.9%. Net profit will be down 2.9%. And EPS earning per share is expected to be JPY315.59, which is also down 2.8% compared to last year.

And the currency environment Honda assumed for this fiscal year, the full year basis is yen vis-à-vis U.S. dollar is 115, and EUR1 for the yen is JPY150, which is the case of the yen is JPY2 stronger and in the case of the euro it is JPY1 stronger than last year. So Sugiama San or Kitamura san could you comment about this new guidance.

Yes. Please see the slide 36 regarding the forecast FY08 guidance of unit sales by business segment. Unit sales of Motorcycle in the forecast will decrease by 39,000 units to 10.3m units compared with last fiscal year, due to decreased unit sales of component parts sets for Asia, based on increased Honda brand Motorcycle products which were not supplied from Honda.

Unit sales of Automotive in the forecast will increase by 283,000 units to 3.9m units. Unit sales of Power Products in the forecast will increase by 84,000 units to 6.5m units.

So in terms of the unit sales is growing but to the, how do you analyze the profitability for the current, this full year basis?

Okay. Please see the slide 38 regarding the analysis of change in income before income taxes. And revenue and model mix will be plus JPY130.7b. And cost reduction and the effect of raw material cost fluctuation will be minus JPY37.9b. Increase in SG&A will be minus JPY55.3b. Increase in R&D will be minus JPY38.2b. Currency effect will be minus JPY81.2b. And other income and expenses will be plus JPY69.0b.

Okay. Thank you very much. So [Dan] san --

Hi, [inaudible] here.

Honda just announced a new guidance. The top lines are growing and the currency environment a little bit negative, staying -- providing the minus JPY81b of negative because of the stronger yen, we assumed there. And when we're looking at this guidance any question or your concern there?

Yes thank you. I have two kind of growth questions and one cost side question. Starting with the cost side, I know that Honda was experiencing higher quality costs as we exited fiscal '07 and I wondered if that's continuing in the forecasts for '08.

And then on the growth side can you talk about the trends in China and where Honda will be expanding most aggressively in Asia this year? Thank you.

This is Ike speaking responding to your questions. First of all the warranty provisions, as we added some provisions for the last third quarter of JPY20b, but for the whole year maybe it's going to be picking up. So hopefully this ongoing fiscal year our total warranty provisions, or claims will be slightly lower than the previous year,

And you asked second question what is the trend in China. Of course among the Asian countries China is the most strongly growing market and last year, the whole year we sold 345,000 units of cars combined through a joint venture. And that is about 26.5% increase compared to last year. And this year we are planning to increase almost the same gross ratio about 25%. So eventually we're hoping to sell over 400,000 cars in China.

Okay Ike san, thank you very much. I was just looking at the chart and the negative impact, JPY81b in operating line is almost the same as the negative currency impact. So it means that if the currency stayed the same the profitability is flattish. Is it correct or?

Almost correct.

Okay, thank you. And could you elaborate and talk about CapEx. The CapEx is increasing a lot so here we're looking at the 39 slide. So could you talk about why the CapEx is going up so much?

Yes. The forecast of CapEx will be increased by JPY82.9b to JPY710.0b compared with last fiscal year, due mainly to expansion of production capacity in North America, Asia and Latin America and the effect of the newly consolidated subsidiary. Depreciation and amortization will be JPY400b and R&D expenses will be JPY590b.

So Sugiama San or Kitamura San can we expect the immediate return from this newly consolidated company?

I think if you look at for example for the Hanjyo industry, just we consolidated last year. As we always say in order to develop more cost competitive traffic, mini cars, it will not immediately -- we will not immediately launch such competitive mini car.

So in longer term of course that kind of CapEx will be, we will expect such return. But in short term it will be very difficult to expect such return.

Okay. It's a long term investment yes? So then what about the R&D outlook?

Yes. And R&D expenses will be JPY590b.

Okay. It's also the long term investment. So Ike San in the end could you comment about the dividend policy?

Okay we are planning to increase the year end dividend, actually the fourth quarter end dividend, of course subject to the final resolution at the Shareholders' meeting, but JPY20 per share. And so as a consequence, we already pay out JPY30 as an interim dividend, and the third quarter dividend JPY17, so total [JPY70] is going to be dividend per share for this year.

And the next year, whole year we are planning to pay out JPY80 per share. And of course by four times. That means every each quarter at JPY20 per share.

Okay. Thank you very much. So the dividend details it can be seen slide seven, so please refer this page to get some more detailed information regarding dividend.

So it's almost the discussion is over so we'd like to get into the QA session.

[OPERATOR INSTRUCTIONS]. Our first question comes from Ron Tadross with Banc of America. Please go ahead. Ron, you're line is live for a question.

Good evening everyone and thank you for hosting the call. Two quick questions. First, on the soaring commodity costs, why are the material cost increases worse in 2007 -- 2008 than they have been in 2007? That's the first question.

And the second question is, on capital spending, is 6% of sales a new level that we'll be at for a few years and can you just give us some examples of the consolidated subsidiaries that are driving this?

Okay. Commodity prices, our assumption for planning out this budget for the year, I don't know if you have supplemental charts for the commodity prices?

Yes. I see those.

If you look at the fourth quarter, the average for the precious metals, or aluminum or the copper, as you notice on that chart, the commodity price is hiking up again. We expect it to come down in the middle of last year or full time. But we noticed that commodity prices rising again and our budget assumption is we actually we pick up this high level of average commodity prices. So if we look at the comparison a year on year basis, the last fiscal versus previous year, maybe the total volume impact is not as much as the last fiscal year but I would say still maybe two-thirds of the total volume will be happening on this year. That's our assumption as far as the budget building.

And the CapEx level is very high. But although we just plan out the project and, of course, for the future, we haven't planned out the further expansion of our production capacity sold. So currently it is very difficult to foresee. But maybe ongoing a year or two, the CapEx level is up highest this budget year.

Okay. Well, just to follow-up, on the commodity costs, it looks like you have about a $38b -- JPY38b increase this year and last year it was closer, I think, like to about JPY15b. So that's -- is that -- why is that getting worse? Are you helping the suppliers more? Are the contract prices catching up with the spot prices? Or maybe are some of your cost reduction programs not as good as they were in '07?

No. Actually, I'm talking about just the commodity prices. That is not the out of control our suppliers or manufacturers. And, of course, cost reduction effort is we will, of course, need to manage. But last year, fiscal -- the ending last fiscal period year, the total annual basis, our cost of reduction effort, could not exceed the total impact of the raw material price up and also the depreciation increase and other wages increase implementation. So we conservatively, maybe you would say it is conservative. But we presumed that commodity prices keeping a high level of trend. So that cost reduction is still cannot oversee the last year cost reduction effort.

Okay. Thank you very much.

Thank you, Ron. So, could you take the next question?

Thank you. Our next question is coming from Margaret Moore with American Century Investment. Please go ahead.

Hi. Thank you very much. I was wondering if you could, first, give us an update on the impact of the restructuring of your sales network in Japan?

Secondly, we're a bit surprised at the cooling off of the small car market in North America despite the high oil prices, and I was wondering if you could comment on your outlook for that?

And then the third question is if you could give a brief update on your plane and your solar cell ventures. Thank you.

Okay. First of all, we started dealer network restructuring, so what we actually consolidate three different systems, turning three into one. And it's rather still too early to get any financial positive impacts after this restructuring. The rather total market shrink impact is bigger than our restructuring -- our restructuring planning. The immediate impact is the mini vehicles sales is up, but, on the other side, the other regularly registered car volume is categorized and decreased, so it's very difficult to get any positive impact. Maybe it takes another few years, I would say.

The second question of cooling off for small car in spite of the price hike in the U.S., but our analysis shows now that the gasoline unit price is hiking up again at the level of over -- almost $3 per gallon in the U.S. so when gasoline prices increasing up still, again, consumers' trend, or dealer traffic towards more smaller or not really small car but better selection segment cars. So our analysis shows the Japanese makes -- I mean brand made cars or even increase including live traffic segment is increasing while the other transition big threes -- big cars is decreasing.

The third question of update of aircraft, Jet business and Solar business. Although we decided to commercialize all those new business, it's not material-wise there. We already started to take actual orders for the aircraft. And we -- when we officially launched the HondaJet last year at NBW Airshow, we received the offshore order of over 140 customers and our original plan is 70 aircraft per year for the sales. So that means only two -- first two days of the airshow we already took the order for the two years' supply. So it's very promising. And one typical American rich family came to us and, parents and one daughter, they place a three aircraft for their family.

Must be hedge fund managers.

No. No. I don't know who they are but -- and solar panel, this is only for Japanese domestic business. And we just -- we are now constructing a factory in Kyushu prefecture. So, hopefully, by the end of this year we started to pilot and test sales for that solar panel and full year production will be starting next year. So we will expand our solar panel sales next year. But maybe the business plan is very moderate. Maybe 8,000 household per year or so. So it's a very, very tiny business.

Is that because you're just starting off slow and careful or because of the shortage of polysilicon?

Polysilicon, we're not utilizing silicon but our panel is multiplied copper and [AGM] on selling or that kind of stuff.

Thank you. Shauna, please take the next question.

Sorry.

Thank you. Our next question is coming from [Matt Silver] with Wellington Management. Please go ahead.

Thank you very much for hosting this conference call. I was hoping to go back onto the question that Ron was talking about with regards to the cost items last year and then comparing that to the forecast. It appears, as Ron mentioned, that there was a 13m increase and raw materials overwhelmed your cost reduction efforts last year. Could you give us the exact breakout of cost reduction in raw material last year?

Okay. The raw materials impact, the whole year, is roughly speaking JPY75b.

JPY75?

And our assumption for this budget year is about two-thirds of that. That is JPY52.

Okay. So roughly JPY50. And so then, you.

I'm sorry to interrupt you but the cost now includes the, of course, the depreciation increase and, as we expand our CapEx for the year, the direct impact on the depreciation including in the cost down segment, is about JPY40b.

Okay. And so you -- were you, from a cost reduction standpoint, it would appear then that the absolute level of cost reduction in fiscal year 2008 is lower than last year.

Yes. Our budget is so.

Now, if I think about the Accord in terms of it being a large volume program and this being a major model change, I would think that the opportunity to reduce costs on that program would go up and that because of the size of the Accord it would have a proportionately high effect on your absolute cost number. Is that incorrect?

Well, it's not incorrect and your assumption is right, I would say, partially but it's not all -- the Accord is not only the model for the year so it got analyzed that way and -- but, at this moment, that is our budget for us. So, hopefully, we try to implement our budget in our cost reduction efforts, of course, involving the suppliers' effort, and we would like to not realize that. It's not just vehicles pressure. Reduction we materialize last year. But the budget is, as you mentioned, slightly lower than last year's actual cost reduction.

Okay. And the SG&A increase, why is the actual level of SG&A increase so significant in fiscal year when compared to fiscal year '07?

Basically, it's in line with the incrementation of top line. So if you maybe calculate the percentage-wise against the total turnover, in percentage-wise it's not so well.

[inaudible] San, do you have a figure of how much percentage of the SG&A for this fiscal year running?

I think they're just around 15%.

What about the last two years?

I think that was about 16%.

So it's declining?

Yes. Declining.

Okay.

Okay. Thank you very much.

Okay. Operator, please take the next question from the West Coast.

Thank you. Our next question is coming from Steve Usher with Japan Investment. Please go ahead.

Good evening. Thank you very much for taking or providing us with this call. Just a quick follow up question on the Finance operation in North America. Can you give us the actual delinquency rates and loan loss ratios for last year and any particular measures you're taking in order to deal with the sub-prime mortgage? The answer before was very helpful but if you could just provide some specific numbers that would be very useful. Thank you.

Actually, delinquency ratio is just around 0.4% and the -- I think, compared to other automakers, our delinquency ratio is pretty lower than other automakers.

Okay. And the loan loss ratio?

Loss ratio is I don't have a figure on hand but, as far as the trend line, that was the ratio, ratio itself is now pretty much stable. And I think the, as I mentioned earlier, our customer profile we purchased so-called AB papers. That percentage is almost 85% so our customer profile is pretty healthy situation and that ratio is pretty much stabilized.

Yes. I can check the operational rate down. Just give me a ring later.

Okay. Great. Thank you very much.

Okay. Shauna, let's take a last question from the sell-side analysts in New York, please.

A final question is coming from [Mark Wasney] with Prudential. Please go ahead.

Hello and thanks for hosting this call. My question is with regard to the mix of vehicles sold in Japan, particularly with the increased importance of many vehicles for that market. Can you give us some sense of the relative margins between the mini vehicles and, let's say, the Civic, the Accord, or even the CR-V, so we can some sense of what that shift in mix is going to mean for your profitability in Japan going forward?

If you talking about specifically for domestic market, I think the -- as far as the output amount, just the mini cars retail prices much lower than other Civic or Accord model, so the actual amount is much lower than Civic or Accord. But the margin-wise, there is not too much difference between mini cars and either Civic and Accord, if you talk about, specifically, for domestic market.

Yes. That's what I was referring to. So, in Japan, we won't see the range of margins that we see, say, in the U.S. going from small car to large car?

No.

So, from a margin perspective, the mix shift toward mini vehicles is not going to have a significant impact on your domestic profitability.

As far as margin-wise, it will not have a significant impact.

Okay. Thank you.

Thank you very much. Shauna, it's almost the time to wind up so we would like to close the Honda's fourth quarter annual telephone call for investor relation conference. And this time we had a lot of the participants in this conference. They are from the Denver, Montreal, and Houston and Japan as well and Europe as well so thank you very much for joining and thank you again, [Nikasa].

Hi.

Thank you very much for the joining. And [inaudible].

Thank you very much.

Thank you for joining. And [inaudible].

Thank you.

Thank you. And [inaudible].

Thank you, Oshima.

Thank you for the joining. And [Akomotosa].

Thank you very much, Mr. Oshima.

What time in London now? [inaudible]. So thank you very much everybody. Thanks for the joining the investor relation call and whenever you have additional question, please call the New York office, 2123559191, or you may contact Honda Japan investor relations or the Honda Europe investor relation as well. So thank you very much and we like to see you again in the time of the Honda's first quarter earning result in next time.

Thank you very much. Bye-bye.

Bye.

Thank you. This does conclude Honda's investor relation conference call. You may now disconnect and have a great day.