本田技研 (HMC) 2008 Q1 法說會逐字稿

Good morning ladies and gentlemen. My name is Brianna and I'll be your conference operator today. At this time I would like to welcome everyone to the Honda's first quarter earnings investor relations conference call. (OPERATOR INSTRUCTIONS). Thank you.

Please note the following forward-looking statements. 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 of 1934 as amended. Such statements are based on management's assumptions and beliefs, taking into account information currently available to it. Therefore, please be advised that Honda's actual results could materially differ from those described in these forward-looking statements as a result of numerous 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.

Thank you. At this time I'd like to turn the floor over to your host, [Tetsua Oshima]. Sir, you may begin your conference.

Hi. This is Oshima. Thanks for joining Honda's earnings investor relations call. Honda Japan just announced its FY08 first quarter results in Tokyo. And we'd like to discuss about the earnings results through this conference. And, again, as usual, we have the speakers from Tokyo and London and the equivalent in Ohio. I'd like to introduce all of them. First, Mr. Ike, the CFO from Honda Japan. Ike-san?

Hi. Good morning everyone.

And we also have Mr. [Takeo], the General Manager of the Honda Finance Division in Tokyo. Takeo-san?

Hi. Good morning everybody.

Hi. Thank you for joining. And [Kitamura]-san as usual from Honda Japan. Kitamura-san?

Morning. Hello everybody.

And [Sugiama]-san as well.

Hi. Hello everyone.

Okay. Mr. Sugiama is the Assistant Manager of the Honda Japan Finance Division. And [Okomoto]-san from the U.K. Okomoto-san?

Yes. Good morning. Good afternoon.

Thank you for joining. Ms. Okomoto is the General Manager of the Honda Motor Europe PR Division and always helping us in investor relation activities in Europe. And we have a guest analyst, as usual. Dan-san?

Morning Oshima-san.

Thank you for joining. So I'd like to briefly touching upon the recap, the financial results announced yesterday in Tokyo -- no, today in Tokyo. And necessary material for this conference can be downloaded from the Honda's website, investor relations website, that is http/world.honda.com/investors/financialresults/. So those who haven't obtained the material, please download the material first then join this conference.

So first, I'd like to see the bunch of the slides we have, the picking up to some of the important pages as we continue through this conference. And the slide of page three gives the financial highlights. I'd like to see that. And the top of the line is showing the business result, unit sales.

Motorcycle sales for this quarter, the unit sales, was 2.253m units, which is down 5.3%. And Auto business unit sales has 946,000 units, which is plus 5.6%. And Power Products business for the quarter, the units sales is 1.529m units, which is down 11.3%.

And looking at the financial result summary, top line, the revenue has grown to 12.7% which was the JPY2,931b. And operating profit has also grown 8.9% which was the JPY221.6b. Pre-tax line if you look at, is also growing a lot, 14.1%, which was the JPY218.2b. And then income and equity line mainly contributed by the Asian affiliated companies, it's also growing 22.6%, which was JPY37.0b. And net profit is also grow 15.8%, was the JPY166.1b.

When we look at this financial result, top line operating profit and pre-tax line and also net profit is record high for the first quarter. And equity income profit is also the record high for the whole quarters. So that was the summary of the financial results for this first quarter that Honda announced. And EPS this first quarter became JPY91.38 which is also grown 16.5%.

And currency environment, that's an important issue, one of the important issues. Then the yen for this quarter stayed JPY121. That is JPY7 weaker than last year. And also the euro, JPY162, which is JPY18 weaker than last year.

And then looking at Honda's business environment for particularly this quarter, it's stated in the right side of the slide. The currency stayed weak, while the gas price and material cost stay high. And motorcycle market, if you look at, particularly the Asian market, good news, bad news, mix. And Brazilian market is growing, and also the North American ATV market [staying stable], problem at this moment.

And Auto operations, Auto market, you are aware that in America, North America, the people are paying more attention to the fuel-efficient car. And also in Europe, demand in West Europe stayed the same, while the launch for Eastern Europe market is expanding. And China, India, Brazil, these emerging markets also demand stay growing, while the Japanese stay market weak -- remained weak.

That's the summary of this particular first quarter period.

So first I'd like to invite Sugiama-san or Kitamura-san regarding our business operations occurring this first quarter. So the Auto operations in overseas has been growing while, as I mentioned, that Motorcycle business part of that has been declining. So (inaudible), Mr. Sugiama-san, could you talk about each division in particular in this quarter?

Yes. If we just see the slide nine regarding unit sales of Motorcycle business. Unit sales of Motorcycle decreased 2.253m units, by 127,000 units, or 5.3% from last quarter due mainly to the decreased unit sales of parts for low-cost production of overseas affiliates accounted for under the equity method [in Asia], offsetting the positive impact of increasing unit sales in other regions, especially in Latin America.

Slide 10, unit sales of automobiles increased 946,000 units, by 50,000 units, or 5.6%, due mainly to the increased unit sales of CR-V in North America, Europe, Asia. And the increased unit sales of parts for (inaudible) process production at all our affiliates in China.

Slide 11. The unit sales of Power Products decreased 1.529m units, by 195,000 units, or 11.3%, due mainly to decreased unit sales of engines supplied on an OEM basis in North America, offsetting the positive impact of increased sales of general purpose engines in Asia.

Okay, Sugiama, thank you very much. So if I look at the top line, the revenue in this period, this first quarter has been growing 12.7%, reaching to the JPY2,931.1b. So what are the major drivers to boosting this revenue, particularly this first quarter?

On slide 12, this split by business segment for the first quarter increased by JPY331.3b, or 12.7%, to JPY2,931.1b, due mainly to the increased unit sales in Automobile business in North America and Europe, and the positive impact of the currency effects caused by the depreciation of the Japanese yen.

As a major driver for the revenue growth, is the Auto operation in North America and also the (inaudible). Okay.

Then the operating profit line that we're looking at, the operating profit this first quarter is JPY221.6b, which is 8.9% growth compared to last year. So could you analyze what is the major driver to boosting operating profit and what -- are there negative driver for particular this quarter? Could you analyze it?

Could you see the slide 14, regarding analysis of changing operating income for the first quarter. Revenue and model mix was JPY28.5b, due mainly to the positive impact of the increased profit from higher revenues in Automobile business, which offset the negative impact of change in the increased sales incentive in North America.

Cost reduction, the effect of raw material cost fluctuations was minus JPY18.2b, which included the significantly increasing raw material prices and increase in depreciation expenses.

Increase in SG&A was minus JPY17.4b, due mainly to increase in quality-related expenses and effects of newly consolidated subsidiaries. And increase in research and development expenses was minus JPY25.2b. And currency effect on operating income was plus JPY50.5b.

Thank you very much. The currency impact, in particular, (inaudible) is the JPY50.5b figure. So it is all come from the U.S. vis-a-vis the yen?

The currency effect is not all for the yen (inaudible). And please see the detail of currency effects on operating income on slide 15. Difference of average rates were plus JPY34.3b which included yen [to dollar] plus JPY20.5b. And yen to euro plus JPY6.1b. And yen to other currencies is plus JPY11b. And transaction between other currencies, minus JPY3.3b. And difference of currency transaction effects was plus JPY16.1b.

Okay. Now not only the U.S., vis a vis the U.S., the U.S. -- yen vis a vis the other currencies getting bigger impact provided. These other currencies are mainly the Asian currencies or any information about other currencies?

This again (inaudible) and currency.

Okay. Thank you very much. So in other area, let's say the raw material or the cost reduction area, so how was the cost reduction in this particular, the first quarter?

Okay. Continuing cost reduction effect was plus [JPY17b]. And significantly increasing raw material prices was minus JPY15b. And the increase of depreciation expenses was minus JPY20b.

So that's a breakdown of the JPY18.2b of cost reduction. Thank you very much Sugiama-san. So depreciation expense is getting bigger. So could you comment on this?

Yes. As you know very well, the capital expenditure for Honda is recently growing very fast, as you know very well. And the -- this is mainly due to the capacity increasing major Asian countries and other markets. And, of course, in North America, for example, last year, the new transmission plant started operation. So there are many capital -- capacity expansion related expenses, capital expenditures.

So due to this capital expenditure increase, in line with this increase, depreciation expenses also started to increase recently. And this kind of trend may continue for the time being or next several years.

As you know very well, last year, in making the speech, the COO, (inaudible) announced new plants in North America, which is Indiana. And the -- also another new plant in Japan. And there are several additional plants to be built. And the R&D facilities -- new R&D facilities will be built in Japan also. So this high level of capital expenditure will continue for the time being.

So it means that we will see the further revenue growth in coming years within this CapEx expenses. Okay. Thank you very much.

Mr. Kitamura, what about the SG&A expenses? Sugiama-san mentioned there was quality-related expenses in this quarter. Could you talk about it a little bit?

Yes. Quality-related expenses actually increased about JPY9b compared to corresponding quarter of last year. And geographically, this is generated by Japanese -- Japan segment. And regarding the SG&A ratio, as you know, as you can see from financial statement, this quarter SG&A ratio again fell 15.5%, which is slightly decreased from corresponding quarter last year.

And as far as the sales continue to grow, the sales selling expenses will increase in line with sales increase. But the G&A expenses is not directly linked to the increase of sales. So SG&A expenses will not increase in line with total sales increase. So overall SG&A expense, SG&A ratio against sales will stay around this level.

Okay. Thank you very much. That means that the SG&A ratio to include the net sales is well managed. Is that correct?

Yes.

Okay. So perhaps invite a question from Dan-san. Dan-san, so we are looking at the increase and decrease of tax in this first quarter result. Any concern in the area, in this area?

Yes, thank you. It was mentioned that incentive costs were a negative factor in the quarter, in North America. And we noticed that the incentives for the Detroit three are down or coming down. And maybe some of the other competitors in North America might come up, might be coming up. Can you talk specifically about Honda's incentives in North America and their impact?

Okay. This is Ike. Actually year-on-year basis and quarterly basis, incentives increased by slightly over JPY30b this quarter. Actually this is not the catch-up basis, but, of course, you may well know that this is the last stage of the current, of course is fading away. And, of course, we put some incentive program from the very beginning of this year. But even the -- our data [conflicted] models which is relatively completely new models. But we noticed that they put some incentives somewhere.

So market was -- our industry had slightly higher than our expectations. That's why American owners put some provisions for all the -- fading away all the, of course, inventories, including dealers' inventories, to get results of the current, of course, models, through the end -- through -- toward the end of this year while we are buying (inaudible) completely new for some time early this quarter.

Okay. Ike-san, than you very much. And I have to switch a gear to the profitability of the each businesses. So Sugiama-san or Kitamura-san, could you comment about each profitability of each business?

Yes. You see the slide 18, I try to explain (technical difficulty) income. Net sales of Motorcycles increased by 18.8% to JPY368.3b, compared with last quarter. Reported currency effects which offset the decreased sales units. Operating income of Motorcycles increased by 137.1% to JPY31.1b due to multiple currency effects caused by the depreciation of the Japanese yen, offsetting increasing SG&A and R&D expenses. Operating margin was 8.5%.

Let's see the slide 19, net sales of Automobiles increased by 11.1%, to JPY2,327.2b, due mainly to the increased unit sales and the positive currency translation effects. Operating income of Automobiles decreased by 1.2% to JPY148.3b, due to increased sales incentive in North America, significantly increasing raw material costs, increased depreciation, SG&A and R&D expenses. Offsetting increased profit from higher revenue, cost down effect and currency effects. Operating margin was 6.4%.

Slide 20. Net sales of Power Products increased by 6.3% to JPY115.2b due mainly to the positive currency translation effects. Operating income of Power Products decreased by 27.6% to JPY7.9b due to increasing SG&A and R&D expenses, offsetting the currency effects. Operating margin was 6.9%.

Slide 21. Net sales of Financial Service Business increased by 42.8% to JPY129.8b, due mainly to the increased revenue due to the growth of the Automobile business in North America and the positive currency translation effects and start of operating these transactions. Operating income of Financial Service Business increased by 16.9% to JPY34.2b due to higher revenue of increased financial subsidiaries, receivables, from growth of business and the currency effect, offsetting increasing SG&A expenses. Operating margin was 26.4%.

Thank you, Sugiama-san. The Motorcycle operation has been jumping up, and also the Financial Service Businesses across the world, they are also growing. So Dan-san?

Yes.

So any question in this area? If looking at each businesses, any particular concern there?

Yes. Thanks. I'd just like to touch briefly on the Financial Services segment again because there's a lot of factors that go into this. And in the fourth quarter -- yes, the fourth fiscal quarter, there was a favorable adjustment to loan loss provisions. So I wonder if you could just expand a bit on what the trend is in loan loss provisions and actual losses in the quarter, given what's going on the sub-prime market in North America. Thank you.

Okay. This question goes to Takeo-san.

Okay. This is Takeo speaking. I will try to explain about North American financial operations. So that is what I will touch on. In general, there are sub-prime loan issues in the United States. But our customers, financial profiles is very good level, same as before. And also with the currency this year and the great cost [ratio] in the United States is still very, very low level, same as last six months. So I cannot see any change or impact due to the (inaudible) issue on our financial operations.

What about the interest rate spread issues? Any changes?

Yes. I'm sorry. Interest rate is getting higher. But at Honda, we've got an [isolating] for the financial operating company. And also we will try to keep the same margin for the financial service. That's why there is no impact, so even though maybe interest rate is getting high.

Takeo-san, thank you very much. It seems that the Honda financial business in North American stays very competitive at this moment. Okay, Dan-san, is it okay?

Okay. So I would like to switch the gears to the geographical information. Sugiama-san, could you talk about the geographical profitability? If you look at the Japan, production has been growing. And cost reduction -- associated growth of the production has been increasing I think. The currency is a bit favorable, but the material cost increase. So there is very good news, bad news, a mix in Japan side. So could you talk about the Japanese profitability first and going into the other regions as well?

Yes. Slide 23. Revenue for export and domestic sales in Japan was JPY1,176.2b, up by 6% compared to the same period in 2006 due mainly to increased unit sales for export the Automobile business and positive impact of the currency translation effects. Operating income in Japan increased by 23.9% to JPY60.6b due to increased profit from higher revenues and continuing quarterly reduction effects and currency effects, which offset the significantly increasing raw material prices, increased SG&A and R&D expenses. Operating margin was 5.2%.

Okay. Thank you. What about North America?

Okay. Slide 24. In North America, revenue increased by 7.9% to JPY1,583.3b, due mainly to the increased unit sales in Automobile and the currency effects. Operating income decreased by 15.3% to JPY97b, due mainly to the increased sales incentive in Automobile business, and significantly increasing raw material prices, which offset the positive impact of the increased profit from higher revenue in Automobile and Financial Service business, continuing cost reduction effects, and the currency effects. Operating margin was 6.1%.

And slide 25, in Europe, revenue increased by 23.1% to JPY400.2b, due mainly to the increased unit sales in Automobiles and currency effects. Operating income increased by 59.8% to JPY10.3b, due mainly to continuing cost reduction effects, the increased profit from higher revenue and the currency effects, offsetting the change in model mix and the increased SG&A expense. Operating margin was 2.6%.

Thank you. Actually when we're looking at the Auto sales result in Europe, it has increased about 20,000 unit. And it looks like the upward trend in European auto provision. So Okamoto-san --

Yes.

Could you update little what's happening to Honda's European auto operation?

Sure. If you look at the trend, the trend for the first quarter was the same as in the previous quarter. So Honda car sales in Europe continued its very strong growth. This is due to the U.K. big models such as the Civic series and the fully renewed CR-V model. For example, we have a particular figure. The Civic series recorded 30% increase over the same period last year and the CR-V registered 80% increase. We expect that this kind of momentum will continue based on the overwhelming response from our customers, particularly for the new CR-V.

If we look at the sales by country, we registered very steady sales growth in the U.K. and as well as the Central European market. And also we saw a substantial increase in Russia as Oshima-san -- Sugiama-san mentioned earlier. Particularly if you look at the automobile market in Russia, the market has been booming. In particular the non-Russian car segment has been expanding rapidly, recording the 70% increase year-on-year basis in the first six months this year.

And in the meantime thanks to the very strong demand particularly for the CR-V and Civic sedan models, Honda doubled our weekly sales in Russia during this first quarter. And we also expect this momentum will continue based on the current back order situation. That's all from me.

Okay, thank you very much. So when we look at the Asia also, they are another growing geographically segment. So Sugiama-san could you talk about -- a little bit more about Asia.

Yes, could you see the slide 26? In Asia revenue increased by 36.8% to JPY393.3b mainly due to the increased unit sales in automobile business and the currency effects. Operating income increased by 19.2% to JPY36.9b due mainly to the increased profit from higher revenue and currency effect, which offset the negative impact of the increased SG&A expenses. Operating margin was 9.4%.

And please see the slide 27. Our equity in income of affiliates increased by 18.5% to JPY26.8b due mainly to increased profit of our affiliate in China. For reference, this is the operating income and net income for our affiliates in Asia, accounted for under the equity method. In addition, their accounting term is different from parent company.

And slide 28, in other regions, which is South America, Middle and Near East, Africa and Oceania, revenue increased by 27.9% to JPY226.3b due mainly to the increased unit sales in all of the business segments and currency effects. Operating income increased by 42.8% to JPY21.7b due mainly to increased profit from higher revenue and positive currency effect offsetting increased SG&A. Operating margin was 9.6%.

Thank you Sugiama-san. So Dan?

Yes.

If you look at the profitability of the each region, any particular markets you would like to question?

Yes, I'd like to talk about two. First it was mentioned that Japan is weak and I wondered how Honda plans to sustain or improve profitability going forward?

And secondly, with respect to the equity income line, that's a very high number. And I peeked at the forecast and I wonder if the equity income, which I think is concentrated in Asia, is sustainable?

This question for -- to Ike-san.

The Japanese situation -- everybody's -- every industry player is facing very difficult times. And as you may well know, the registered retail numbers has been decreasing in 24 months in a row. So every manufacturer is facing big issues. And we don't see or we couldn't expect a bright future for the Japanese market I'm afraid to say. So all the manufacturers therefore is, what they're trying to retain the current consumers, which owns the foreign brand names. So that's why everybody is trying to restructure Japanese distribution networks and so we did, as consolidating three different channels into one and so forth. So considering the total population I expect it should be decreasing.

And the customers' motivation to buy a car has gone completely different from maybe a decade or two decades ago. Maybe young people are more interested in spending their affordable money into the other fields. And even the affordable senior persons, now their families are, for example their children left home, all they need is the very practical small car. That's why the mini vehicle is capturing high attention, even the senior affordable people just carrying a couple, senior couple.

Dan's question about the equity incomes and actually we did make a record high of equity income mainly attributable to the strong growth in China of course. However, you should notice that our Chinese operation is rather different fiscal period and starting calendar is January to December. So operating -- equity income included in our financial statement, while our unit sales business just [exploding] production [parts], China is incurring this for fiscal first quarter. But the actual equity we absorb into our P&L is the actually what's happening in China January through March.

Certainly the market situation is very much competitive or deteriorated because of very oversupply by the local brands. And there is no official analysis, but the current production capacity is maybe as large as double of the actual demand. So what's happening is everybody's offering a very aggressive price. And so the market situation is very much deteriorated.

So we're facing very severe competition situation right now. And even our competitors are likely initiated their local operations. So even the same situation in China. Accord is a fading away model, so because of the very severe market situation, we have to spend a lot of incentive money to fade out the current Accord to switch over to the next generation. So in general -- generally speaking the Chinese market situation is a very, very crazy situation I have to say.

Okay, Ike-san, thank you very much to talk about the region, their status. So switching gear to this pre-tax line, Sugiama-san, when we're looking at the first quarter pre-tax, it's JPY218.2b which is 14.1%. So could you analyse, or could you comment on this increase in the pre-tax line?

Yes, could you see the slide 14 again? Other income and expenses was plus JPY8.7b, which included plus JPY11.3b in fair value of derivative instruments and minus JPY2.6b in other factors. The details of others were minus JPY2.6b, which included minus JPY13.4b in difference between transaction dates and other delays, and plus JPY10.7b in gain and loss from variation of the balance of receivables and debt in foreign currency.

Okay. And it's stated that the derivative variation gain or loss became the positive JPY11.3b. Is it correct?

Please see the slide 16 regarding the detail changes in the fair value of derivative instruments. Gain and loss on fair value adjustments for foreign currency exchange contracts was minus JPY11.5b. Interest swap was plus JPY5b and others was plus JPY17.8b. Our subsidiaries in the U.S. have convertible notes and convertible preferred stock of XM Satellite Radio. The loss from variation of this convertible instrument was included at the corresponding period in 2006.

Okay, thank you very much. It has already converted to the stock right?

Yes.

Okay, thank you very much. We'd like to discuss about the new fiscal year guidance, the page to slide 33. I believe the new guidance shows that the revenue will be JPY12,350b which is plus JPY1,262.8b. And operating profit will grow 3.3% to JPY880b. And pre-tax will also increase 11.6% to JPY885b. And net profit will be increased 5.5%. That's the new guidance which Honda announced today. And EPS outlook will be in the JPY344.58 which is plus 6.1% compared to the April -- compared to the last year.

And the currency assumption also has been changed to U.S. dollar for the full year basis 117 to the Japanese yen, while the euro became 155 to the Japanese yen. The dollar is almost the same as last year while euro will be JPY4 weaker than the last year. That's the new estimate based on the new guidance announcement. And Kitamura-san or Sugiama-san, could you talk about some more detail the new guidance?

Yes, please see the slide 32 regarding the forecast for FY '08 guidance of unit sales by business segment. Unit sales of Motorcycle in the forecast will decrease by 439,000 unit to 9.9m units compared with last fiscal year. Unit sales for Automobiles will increase by 380,000 units to 3.9m units. Unit sales of Power Products will decrease by 201,000 units to 6.2m units.

Okay. And what about the profit analysis for the new guidance?

Please see the slide 34 regarding the analysis of change in income before income taxes. Revenue and model mix will be plus JPY170.3b. And cost reduction and effect of raw material cost fluctuations will be minus JPY26b. And increase in SG&A will be minus JPY105b. And increase in R&D will be minus JPY38.2b. Currency effect will be plus JPY27b. And other income and expenses will be plus JPY64b. That's all.

Okay. Is it possible to break out each box? If you're looking at the revenue growth how much comes from the revenue growth, how much mix and how much whatever. Is it possible?

Yes. Regarding revenue and model mix which is including plus JPY145b in increased profit from higher revenue and minus JPY20b in change in model mix and plus JPY45b in changes in sales prices. And that's all.

What about the cost reduction areas? Similar can you break out there?

Which is included plus JPY80b in continuing cost reduction effects, minus JPY55b in significantly increasing raw material prices and minus JPY40b in increase of depreciation expenses and minus JPY11b in increased (inaudible) expenses. And that's all.

Okay thank you very much. So Dan?

Yes.

If you look at the new guidance, particularly the increase in (inaudible) factors for the full year basis, any question you'd like to handle?

Yes, thank you. I'd like to drill down a little bit further on the cost reduction measures. And can you elaborate on how -- what you're doing on the cost reduction side, how you're actually achieving it?

Okay thank you very much. It goes to Ike-san here.

Well, actually cost reduction efforts is very much -- it's very bits and pieces, efforts by the suppliers. And in long term of course from the very beginning we work with the suppliers to, for example to minimize the variation of parts and even the materials or the way of engineering there. So it's not going to be just overnight effort.

However, the current -- our estimated cost reduction is slightly lower the total cost reduction impacts of the previous full fiscal year because we considered still even our suppliers has been suffering a very increasing raw material prices. And so absorbing those raw materials hike we are working together with suppliers to reduce the problem. But maybe our cost reduction total amount will still slightly lower than the whole last year.

Thank you very much, Ike-san. How do you expect the top line growth for the coming quarters?

Top line growth for especially the Automobile [incrementation] is getting bigger. And especially regional mix is different, changing. For example on our new guidance, especially our -- as I said before, the Chinese operations market situation is getting more difficult. The new guidance includes the number reduction in Chinese operation. Instead we increased the number for the Automobile sales in for example, North America or Europe, especially as Okamoto-san mentioned we have very strong demand in Russia. So while we're decreasing the knockdown parts to be exported to China, we're increasing exports and local sales in North America and in Europe and even some Asian countries like Malaysia or Vietnam.

Thank you very much Ike-san for your comments. So the Honda top line growth comes from the, not just from North America but also it comes from the margin, the so called margin market as well.

Any change in the CapEx or depreciation, or (inaudible)?

Yes, slide 36. The total of capital expenditure will be increased by JPY127.9b to JPY755b compared with last fiscal year due mainly to expansion of production capacity in North America, Asia and Latin America and so on. Depreciation and amortization will be JPY410b and R&D expenses will JPY590b.

Okay Sugiama-san, thank you very much. So we just announced the first quarter results. So Ike-san any message to the investors?

Well, this is just the end of first quarter, too early to mention -- to make any changes in our assumption. What I could say is the market competitive situation is getting harder and harder everywhere on the globe. And we see a lot of economic situation changes in emerging markets like Asia.

Like in India because of the very lavish economic growth, Indian government had to tighten the financial interest rate to cool down a little bit. That's affected our operation in India for Motorcycles and Automobiles in a way. While Indonesia for example, our largest -- one of the largest, next to India largest motorcycle market, economic situation is rebounding because the central government reduced the interest rate. So while our total demand is catching up again but competitive situation is getting harder.

So while -- when we made our first projections, we expected much higher catch up over the last year. But unexpectedly strong competitors' performance is putting some difficulty on us.

But again so there is a lot of difference in the marketplaces but it is too early to foresee every factor. So basically we just put the direct impact of our currency impact because the numbers are relatively large numbers. So while market situations, we didn't change drastically our scenario. So we just simply put the favorable impacts on the currency. That is our new guidelines at this moment.

Thank you very much, Ike-san. Any comment on dividend?

Well, dividend again first quarter as we announced at the very beginning of -- actually in April, currently although we revised the total guidelines, but so far the official resolution at our shareholders meeting is the first quarter's record date. And our dividend policy is not reflecting each quarterly performance but however based on the annual planned dividend. So as we announced JPY80 per share through the year. And at this moment, for this specific first quarter end dividend we didn't change our scenario. So we resolved at today's board meeting that JPY20 per share dividend for the first quarter.

But when we announce the second quarter maybe we could tell more specific changes or analysis of the global market, then there might be some consideration for us to increase the dividend because current -- just putting our favorable currency impacts, new guidelines increase the bottom line profit. So naturally we have to consider to change the dividend amount through the year.

Okay, thank you very much. Brianna it comes to time to -- we'd like to take -- go into the Q&A session. So could you take the questions?

Thank you. (OPERATOR INSTRUCTIONS).

Thank you. Our first question comes from [Ronald Tadross] of Banc of America.

Hi, this is Jairam Nathan for Ron. I just wanted to ask a couple of questions. Can you give us more details on why you raised the SG&A expenditure forecast by JPY50b? Is there any -- can you give us some breakout?

Okay first question, JPY50b increase. Of course whilst maybe most of the total JPY50b is attributable to the incrementation of the volume because we're planning to increase the Automobile unit sales. And accordingly the other, for example, sales expenses like promotional expenses included in advertisement will be increasing accordingly. And there we [check] our depreciation cost which is not included in our cost factors, but for example some assets for the property rights and something like that, there might be some little adjustment. And the rest of the others have lots of bits and pieces which still to minor to [state] at this moment. And again as I said before this is just first quarter so we should analyze more precisely when we announce the second quarter maybe we can specify more details.

Okay. Is there any more quality related expenses in that JPY50b?

(Inaudible) no.

No. Okay. You gave us a break up on the revenue model mix on the forecast. Can you give us the same for the quarter?

: You mean quarter, year on year?

Yes.

Volume mix and including the price increase, roughly speaking JPY60b. And that is negatively impacted by incentives as I said before slightly over JPY30b, mostly for the American Honda provisions for the future. And there is a new consolidation impact but offsetted by the other factors. So basically volume mix and price increase reflecting our new features especially for the new models like CR-V or MDX, that is JPY60b offsetted by JPY30b incentives. That is roughly speaking round up JPY30b incrementation.

Okay. A question on CapEx. It looks like CapEx will be over -- close to 6.5% to 7% of sales this year. Is that kind of the peak, or do you think it will remain at these levels?

Actually we have a big project coming on, coming to two years by year 2010. For example including the new manufacturing plant in Indiana or engine plant in Canada which going to commence the operation for next year. And we just purchased the land for the new engine and assembling plant in Japan which will start the operations some time year 2010. And also the new facilities or power plant production incrementation.

So get back to your question, maybe CapEx will continue to be high or slightly higher than the current year -- current guidelines. That's my guess. Because we haven't reserved any official number internally at this moment. We're working on this through this fall, through the strategic planning management meeting, gathering whole regional operations head is coming to Japan this fall. And we discuss and we will see how to materialize the big projects to be materialized.

Alright, thanks. Thank you.

Okay, Brianna. Please take the next question comes from the [connection].

Thank you. Our next question comes from [Sherman Chow] from Impala Asset Management.

Thank you for taking my question and thank you for the call. My question is regarding the Motorcycle business. And looking at your forecast for 2008, I see that you revised down your expectations for Asia. I'm curious about whether the revision down is significant enough or sufficient enough to capture what's already occurred in India.

And secondly, looking at North America where both the motorcycle and ATV market is very, very weak. I was wondering why you continue to forecast up volumes. Are there things that you [have in] corporate that have yet to be announced as far products or strategies.

Thank you.

Okay. Motorcycle operations, as I -- as you mentioned or pointed out, we revised negatively the Motorcycle unit forecast for this fiscal period. And as you mentioned exactly the correct regions. And in India as I said before the government imposing -- has been imposing a very high interest rate guidance. So reflecting the very high credit interest which is incurred in the marketplace, that's negatively impact our operation in India for Motorcycle. Not only for the Motorcycles but Automobile operation as well.

But our Automobile operations thanks to the new models like the Civics or CR-V still although the market situation, not the economic situation but interest rate on the credit instruments is very severe, so it's difficult. But Motorcycle customers, direct impact of this very high interest rate for the credit facilities.

And Indonesia, as I said before the market is started to recover as high as maybe a year ago. However, the competitive situation getting harder, more specifically our direct competitors very aggressively penetrating this market which we have been enjoying. But now market situation getting tougher and tougher. That's why Motorcycle unit forecast is declining for these two areas.

North American operation as we've mentioned is still -- the total demand is declining. But however we see some good signs. For example, whenever we introduce new models, relatively large displacement on models, CBR 1000rr or 600 or ATVs new version. Every time we introduce new models, the sales is satisfactory considering the very sluggish market. But the other models reflecting very, very slow market. Across the board, the market, the unit sales is declining.

So what we're trying to do is right now is try to reduce the inventory levels, both manufacturing side and dealership. And continue to introduce new ATVs for example featuring power steering or new models. So unit sales is declining drastically.

But most of the declining numbers which we have been enjoying in the smaller displacement (inaudible) which we call kids bike, like the small bikes for the Christmas present type of bikes, which have been deteriorated for the past few years. And one of the reasons is of course the total negative situation in the marketplace. But we witnessed that this segment is penetrated by a very inexpensive or I would say cheap models from -- exported from China. So even the ATVs are small displacement and very low-end models has been penetrated by all these Chinese models.

Regarding the new models for motorcycles and ATVs a number of have competitors have announced model '08 introductions in recent weeks. And I don't know that -- has Honda introduced your 2008 model year line up yet?

Actually I can't comment at this moment.

Okay, thank you.

(Inaudible) Okay. Brianna, please take a question from San Diego next.

Thank you. Our next question is from [Steve Usher] with JapanInvest.

Good evening Ike-san and everyone. Thank you very much for this call.

Just a few quick questions. First of all can you actually give us the volume figures for the China market and for the Russian market? And can you give us an idea of how the profitability is trending in the Russian market.

And secondly with regard to the finance segment, revenues and profits were up sharply. But we did see a slight contraction in the operating profit margin. Could you comment on that decline in profit margin?

Easier questions first Steve, okay.

Okay.

The financial operation, if you may know that we changed the leasing program accounting method from the fall of last year. The previous year we just -- our instrument was just financial lease. But we changed that financial lease to the operating lease, which means previously our revenue for the financial lease is just margin, interest for the leasing assets. But now that we are lending the automobiles to the lessors. So leasing, total leasing is now our revenue, but deducted by our depreciation because now asset is belongs to us. And as you could see here our balance sheet new investment. Currently the assets is only finance but now it's investment.

So the total top line is increasing but because of the operating lease program. But net profit absolute number is same as the before because we didn't deduct the depreciation of course and net profit is exactly the same. So small -- same profit absolute amount divided by -- but to divide the -- increase the revenue, that's why the margin looks lower.

Okay.

China, currently total industry size -- Steve, your question is the total Chinese market size?

Both the total market and your sales volume in China.

Okay. My people gave me wrong numbers. While we're checking on it -- I'd say Russia we sold over almost 10,000 units for this only quarter. Volume incrementation is almost 100%, that means we have doubled. And very popular models the Accord, the new CR-V and new Civic, especially for the sedan models. So Russia is very strong. And as Okamoto-san mentioned a few minutes earlier, we have a long waiting list for the delivery. So new guidance including the volume incrementation of 15,000 units for the European operations, that's mainly go to the Russia.

Total market size of China is increasing about 25% annual basis still. So passenger car, excluding commercial vehicles roughly speaking 8m is current market size.

Including. 8m is including commercial.

I'm sorry, 8m is including commercial vehicles. And Honda sales is still we are planning to increase about 25%. So last year we sold over slightly over 35,000 -- 350,000, but we are planning to sell over 400,000 this year. Is that okay, Steve?

Okay, yes. I was just wondering do you have numbers for the first quarter, actual numbers?

For China?

Yes.

70,000.

Okay.

I'm sorry that's only Guangzhou Honda. And combining Dongfeng Honda about 100,000.

Okay, excellent. And the profitability in Russia?

That's very profitable.

Okay Steve, thank you. Brianna, it comes to time we need to winding up the conference.

Thank you. I'll now turn the floor back over to Tetsua Oshima for any closing remarks.

Thank you very much for everyone participating. And this time we have many questions that comes from the West Coast and the East Coast. And I know that some Japanese investors are participating. So maybe next time please raise a question too as well.

And yes, whenever you need some following up question to Honda, you can contact Honda Japan as well Honda New York office and European office as well. So we are here, so 212 355 9191. That's the New York office number so whenever you need just call me if you have a follow up question and ask.

So thank you very much and we have many participant this time, Toronto as usual New York and many, many places. Thank you very much for participating and see you next time. Bye-bye.

Thank you. That does conclude today's Honda's first quarter earnings investor relations conference call. You may now disconnect and have a wonderful day.

Thank you very much.

You're welcome. Have a great week.