本田技研 (HMC) 2008 Q3 法說會逐字稿

Good morning. My name is Judith 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. (OPERATOR INSTRUCTIONS).

This conference call 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, Honda's actual results could materially differ from those described in such 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. It is now my pleasure to turn over to your host, Mr. [Tetsua Oshima]. Sir, you may begin your conference.

Hello. Good morning. This is Oshima of Honda Japan Investor Relations and good evening in Tokyo. We just announced Honda's third quarter earnings. And we'd like to have the telephone conference for the result of the Honda's earnings, and also we'd also like to discuss about the new guidance which Honda made today.

And today, for this conference we have, as usual, the guests, many speakers from London and New York and Tokyo as well. And we have already put in the presentation much earlier on the website. So those who are participating this conference, please download the presentation material from our website, http//world.honda.com/investorfinancialresults/.

So first of all, let me introduce today's speaker. We have Mr. Ike.

Hello. Good morning, and good evening everyone.

And we also have [Mr. Takeuchi], the General Manager with Honda.

Hello. Good morning, and good evening everyone.

And we have Mr. Kitamura from New York.

Hello. Good morning, everyone.

And we also have Miss. Okamoto from London.

Hello. Good morning, everyone.

Thank you very much for joining. And we have a guest analyst from Ohio. [Dan-san].

Hello, everyone.

Thank you for the joining. And we have Honda Investor Relations Team here.

So, let me briefly explaining Honda's financial results by using today's presentation material. So I hope you have in front you the slides but I'll have to choose a couple of pages and talk to you by seeing this slide. The first is the Honda's financial results, page three. If you're looking at, you might say, the business environment on the right side and managed results on left side.

Business environment in particular the third quarter if you're looking at, we see the sub-prime mortgage crisis is slowing down the U.S. economy and also the growth of the emerging markets, we see that. And high price for the raw material and the crude oil has continued. And then yen appreciation versus the U.S. dollar is observed, while the yen has depreciated against other currencies. And that's the backdrop looking at the business.

Motorcycle area we saw the growth of the sales in Brazil and we also see the recovery of the market in Indonesia, while the North America motorcycle market a little bit sluggish has been.

And when we look at the auto businesses, we see the growth of the emerging market, such as BRICs and others, and also the strong demand for the fuel-efficient car in North America, and the Japanese auto market situation remains stagnant and sluggish. That's the general business environment in this third quarter for Honda.

And our unit sales result, as we've seen in slide three, the motorcycle business was 2.3m units, which is down 14.4%, while the Automotive business is 991,000, which is plus 8.3%. And the Power Product businesses, we sold 1,178,000 units, which is down 14.8% for this third quarter.

And our financial results, if you look at the particular third quarter results, our top line revenue has increased 10% to JPY3 trillion. And then operating line has increased about 34.7% and become JPY276.2b which is also a record high. Yes, the top line is also revenue, so that's for the higher third quarter.

And income before income tax also increased to 31.2% to JPY260.7b, which is also a record high. Operating income line, JPY31.3b which is plus 21%, and the net income bottom line JPY200b which was also a record high result.

Earnings per share for this third quarter is JPY110.25, which is plus 30.8% compared to the last year.

And currency environment, particularly this third quarter, U.S. dollar was JPY113 which is stronger -- JPY5 stronger than last year, and euro JPY164 which is JPY12 weaker than the last year.

That's the brief outline of the financial results of the third quarter results. So, we have Mr. Takeuchi. Could you now start with the business for this third quarter?

Okay. Unit sales, based on slides numbers nine to 11. First, Motorcycle unit sales totaled 2,366,000; a decrease of 399,000 units, down by 14.4% from the same period in 2006. The decline in unit sales of the component parts for Joint Venture companies in Asia, despite favorable sales in Brazil and Vietnam.

And Automobile unit sales totaled 991,000; an increase by 76,000 units, up by 8.3%. Introduction of all-new Accord in North America and the increasing unit sales of CR-V and Civic outside of Japan contributed.

And in Power Products business, in spite of the increasing general-purpose engines in China, OEM engine sales decreased in the United States and Europe, and unit sales totaled 1,178,000 units; decreasing 204,000 units, down by 14.8%.

Then, please see the slide 12, the unit sales by business segment. Increasingly, Motorcycle business in Europe, Asia and other regions unfavorable Automobile business outside Japan contributed increasing net sales. It amounted to JPY3,044.8b; increasing JPY276.1b, up by 10% from the same period in 2006. And net sales by business segment, excluding the currency special effects, are as in that slide.

Thank you, Takeuchi-san. So I'd like to continue to the increase and decrease of the operating profit line, so just seeing the slide 14. For this third quarter the operating profit line has increased, if you're looking at slide 14. The revenue and model mix has increased by JPY64.6b, with the higher revenue and the strong sales in the newly-introduced Accord in North America and the decrease of provision for the incentives amount as the driver for the revenue and model increase.

On top of that, we have the cost reduction effort which is JPY9.9b. And then a decrease -- no, the increase in SG&A at JPY2.2b, and the increase of R&D expenses at minus JPY4.1b. And as for the currency impact, was JPY2.9b for this third quarter. As the result, the operating income has been increased JPY71.1b which is plus 34.7% compared to the last year.

So taking this opportunity, I would like to a little bit talk about the currency impact and examine more, let's say, the breakdown for this third quarter. Please see the slide 15. You must see each line as currency impact, yen to the U.S. dollar, yen to euro and the yen to others. All these impacts have been made by the transactions between Honda Japan and other countries, and also that sometimes actually we don't know about these countries' impact. But putting all together these transactional impacts, it was minus JPY1.6b.

And then, on top of that, we also have the currency translation effect, which is when we translate the overseas denominated operating profit into the yen statement, we also see the currency translation impact was JPY4.6b.

So on the bottom line, we've said direct impact on the operating line and other income and expenses line, the total currency impact is JPY24.5b. Within that, the impact on operating income was JPY2.9b and the impact on the other income and expenses line is JPY21.6b. That's the impact for the currency [for the third quarter].

So when we are switching gear to the segment information, slide 19, so we have [Mr. Mori] here. So Mori-san, could you talk about the regional segment information?

We'll start with Motorcycle business. Revenue for the third quarter increased 20.3% to JPY364.6b from last year. The main reason was increasing sales in Asia and other regions, and the positive impact of currency translation effects caused by weaker yen [in India].

Operating income increased by 172.2% to JPY30.3b from last year, mainly due to the change in model mix, increased sales and positive currency effects caused by the depreciation of the Japanese yen, more than increased SG&A expenses.

And operating margin was 9.3% (sic -- see presentation). And nine-month results are shown on the right part of the slide.

And please move onto the next slide, number 20. As the Automobile business, our revenue for the third quarter totaled JPY2,449b; increased by 8.2% from last year. Overseas sales, such as all-new Accord in North America, CR-V and Civic, besides the positive impact of currency translation effects, contributed to the growth.

And our operating income reached JPY220.7b; up by 37.3% from the previous year, which was due to increasing sales, cost reduction efforts and a decrease in provision for sales incentives in North America and decreased SG&A expenses, exceeding negative factors, such as adverse effects on elimination of unrealized profits on inventory, high prices for raw materials, increased depreciation and R&D expenses. And operating margin was 9%.

And next, we see the next slide, number 21, Power Products and other businesses. Our revenue for the third quarter declined by 4.6% to JPY100.2b from the same period in 2006 because of decreased sales in North America, such as general-purpose engines that are supplied to original equipment manufacturers. Operating income decreased 78.3% from last year to JPY2.2b. This was primarily due to the decreased sales, increased SG&A expenses and R&D expenses in other businesses. Operating margin was 2.3%.

And for the last segment, please see the next slide. As for Financial Services businesses, revenue for the third quarter grew 33% from last year to JPY139.6b, which came from the expansion of Auto business in North America and increased higher revenue in operating leases.

Operating income increased 0.7% to JPY22.9b, which was attributed by increased revenue offsetting the increased SG&A expenses. And operating margin was 16.4%. Thanks.

Thank you, Mori-san. So as to the geographical segment information, we have Yuki-san there. So could you talk about the geography information?

Let me elaborate on segment information by geographical area. Please have a look at slide 24 through to 29. First, Japan segment, which is a combination of Japan domestic sales and the exporting group.

Thanks to the increase in sales of export business, net sales for Japan segment was up 1.8% to JPY1,246.1b. Operating income was JPY56.2b; up 34.1%.

This increase is due primarily to increased profit from higher revenue and continuing cost reduction which more than offset negative impacts of soaring raw material costs and increasing depreciation and R&D expense. Operating margin was 4.5%.

As for North America, please turn to slide 25. Despite a negative impact of currency translation effects due to the depreciation of U.S. dollar, net sales for North America was JPY1,640.5b; up 1.8% compared to the same quarter last fiscal year. Operating income was JPY156.3b; up 32.3%. Operating margin was 9.5%.

This increase is attributable to price change for refreshed models and decrease in provision for sales incentives for automotive segment. Also continuing cost reduction efforts and decreasing SG&A expenses contributed to this big increase in the operating income and operating margin.

Next, let me elaborate on Europe on slide 26. Net sales in the European segment were JPY361.7b, which is up 33.1%. This increase is mainly coming from unit sales growth in Automotive business and positive impact of currency translation effects. Operating income was JPY5.8b; up 54.5%. Operating margin was 1.6%. The depreciated yen against major European currencies positively affected the results.

Next, to Asia on slide 27. Net sales for Asian region was JPY413.4b; up 36.2%. This increase is mostly due to unit sales growth in Automobile business and positive impact of currency translation effects. Operating income was JPY38.3b; up 89.3%. Higher revenue and depreciated yen contributed to this increase. Operating margin was 9.3%.

Concerning equity income of affiliates in Asian region, due to the increased profits in Chinese affiliates, the amount for the third quarter this fiscal year was JPY22.6b which was up 12.6% compared to the same period last year.

Lastly, please turn to slide 29. Net sales for other regions, including South America, Middle East, Africa and Oceania showed strong growth of JPY284.6b, which was up 47.4%, with still increase in every business segment.

Also, there was a positive impact of currency translation effects. Operating income in other regions was JPY31.7b; up 98.1%. Increased profit from higher revenues and positive impact of depreciated yen more than offset the increase of SG&A expenses. Operating margin was 11.2%. Thank you.

Thank you, Yuki-san. So, Kitamura-san?

Yes.

Probably the U.S. investor knows the U.S. Accord is doing well, but maybe Japan investor may not. Could you update sales, maybe current sales in the U.S., particularly in the Accord in America? Could you update the information a little bit?

Okay. First of all, to refresh your memory, the new Accord was launched back in September last year. And the America Honda's total Accord sales for calendar year 2007 was 392,000 units. And out of that 392,000 units, approximately 20% is contributed by new Accord.

And as far as for the current sales color for the Accord is the -- considering the current market condition which has already been explained by Mr. Oshima, due to the sub-prime loan issues, considering these tough market conditions, I think the Accord -- new Accord is quite doing very well, I think.

And the -- especially for the [E Flex] engine, we implemented new variables in the management system which is contributing to better fuel gas mileage. So that basic engine model is pretty popular right now.

And as far as for the most recent sales for Accord, for January, for 20-day sales, approximately 10% up against last year's same period. And as other models, like FIT, or CR-V, or Civic also doing very well so far. That's the color of the sales in North America right now.

Thank you, Kitamura-san. Thank you very much. So, Okamoto-san?

Yes, Oshima-san.

Thanks for joining. So when we look at the European sales color, actually, this third quarter is -- the number of the unit is increasing centered in last year and (inaudible) the market. But what's going on in Western European countries? Could you tell us about what's going on with sales?

Yes. Thank you. Well, let's talk about it by country first. As in Asia, sales in Russia particularly showed the continued strength. And the Russian market for non-Russian car segment has recorded a more than 6% increase in calendar -- in 2007. And Honda sales in the market segment in the calendar year are even stronger, holding double the 2006 sales.

And as you mentioned, if we looked at the -- just at the third quarter, Honda sales actually tripled compared to the same period a year ago. And, as you mentioned, our sales increase is not really happening on the emerging market but also in the such established market as the France, U.K., Spain, they're really doing very well, such as 10% increase or, in fact, even according to (technical difficulty).

We have, however, one exception, which is Germany, because the market has been very stagnant since the VAT rate increase in 2007, so expecting the very keen [compression] there. Honda sales in Germany fell by 30% in this quarter, third quarter. Having said that, though, if we look at the backlog of orders which still need to be filled, particularly for the SUV CR-V model, we expect that strong momentum to continue this year in Europe as a whole.

And if you look at the vehicles themselves by model, U.K.-built CR-V model and the Civic Series are doing very fine, or very strongly. And CR-V model recorded 60% sales volume increase over the same period last year. And, meanwhile, Civic Series produced almost a 45% increase.

Well, that's the situation. Over to you, Oshima-san.

Okay. Thank you very much, Noriko-san. So the European sales were up for centered in Eastern Europe, but to the some slowing down sales in Germany, that's what you said there?

Yes, that's right.

But still the CR-V is the biggest driver in the marketplace, right?

That's right.

Thank you very much, Noriko-san. I'd like to take some questions from Dan-san here. Dan-san?

Hello, Oshima-san.

Thank you for joining. We just explained about the geographical segment information for the business segment in Asia. So just looking at our third quarter results, or looking for the coming quarters, any concern or questions in our businesses?

Thank you. Yes, I have two questions, and one's regional and one's divisional. The first one I'd like to pick up on some of your comments at the opening, and Kitamura-san's comments on the Accord. And could you expand on this outlook for calendar year demand in the U.S. market and the mix and how that will impact -- how you expect that will impact Honda?

The question may go to Ike-san.

Well, for the calendar year demand forecast, we [offshore] especially our Head of our North American operation, Mr. Mori, mentioned that most probably total demand for the calendar year might be flat, be weaker than last year. But our offshore number, 15.9m units, is rather optimistic side considering the consensus in the market, so somewhere between 15.5m, so -- but we don't know yet.

However, so far, of course, the market situation, we said that severe headwinds for the coming year. So for the demand, it's still strong, especially for the high-fill mileage cars. And as Mr. Kitamura from New York mentioned that still CR-Vs and Civic demand is very strong.

And our positive surprise is, again, Mr. Kitamura mentioned, that [E Flex] Accord demand is much stronger than our expectations considering the current sentiment for the customer preferences toward more for high gas mileage cars. So we expected more demand for the in-line four-cylinder Accord.

So, first, our allocation for the production is a little bit misjudged and so far the E6 Accord, the inventories, they are low. But in general terms, still -- although the gasoline price, I understand that a little bit coming down, but still the general trend is more focused on the high gasoline many mileage cars. So we expect that the strong demand for the high fuel-efficient car continues to be strong.

Okay. Thank you, Ike-san. Dan-san, are there any other questions?

Yes. Thank you. Thank you, Ike-san. Also, I'd like to turn to the Financial Services business and I'm noting that the margins are down there. And I'm wondering if you could expand on what, if any, impact the sub-prime problem in the U.S. is having on your Financial Services division in terms of credit quality and/or access to capital.

Okay. Thank you. The next question goes to Takeuchi-san.

Okay. I would like to explain about sub-prime issues to our financial operations in the United States. Actually, United States housing price has been declining and the sub-prime mortgage crisis is spreading. The bank is applying more [strict] standards. Each financial environment changes, especially certain [complier] and increased credit losses and makes (inaudible).

In the meantime, if car market also impacted by sub-prime program and the financial companies need to increase their provision for the risk-taker [initial period crossing]. Deflecting such issues -- situations, in our capital financial company in the United States, credit risk has been increased consistently and these [curve regional] losses also becomes slightly bigger than second quarter period.

However, these curves of loss are still better than last year. When we look at this third quarter result, both provision of the credit losses and the [regional] losses are not significant yet. However, we need to watch the situation more carefully and we will increase the provision if it is necessary.

Thank you, Takeuchi-san. So far we haven't got any significant impact yet.

Right. Thank you.

So we would like to continue to the Honda -- we have the new guidance for the second -- no, the (technical difficulty) fiscal year. I just briefly elaborate, as you can see in the slides.

Let's say the unit sales then, the Motorcycle and other Power Products, Motorcycle new sales target for this fiscal year is 9,230,000 units, which is down about 1.1m units from the last year. And the Automobile unit sales for this fiscal year new guidance is 3.9m units, which is plus 248,000 units from last [two] year. And the Power Product businesses, we expect to sell 6.035m units, which is down 386,000 units from last year.

For the outlook, new guidance financial result, the net sales we revised upward it -- no, sorry, we revised downward it. The new guidance top line is to JPY12,150b, which is plus 9.6% from last two years, but actually it's down JPY150b from our previous forecast which we made in October time.

And the new operating line income is JPY920b, which is plus 8% last year and also increased about JPY40b from our previous guidance, so operating line's growing.

And income before income tax, our new guidance is JPY915b, which is plus 15.4% from last [two] year and also increasing JPY45b from the previous guidance.

Equity line also revised upward, JPY107b, which is plus 3.5% from last [two] year and a JPY9b increase from our previous guidance.

Our net income bottom line, JPY690b, which is also an increase 16.5% from last two year and also JPY50b increase from our previous guidance.

So new EPS, JPY380.25, which is up JPY55.63 from last year.

And the new currency assumption for the fiscal year is JPY114 for the U.S. dollar, JPY161 for euro. And particularly for the fourth quarter, our yen assumption is JPY105. Previous assumption was JPY110. So we have assumed a more stronger yen as stated JPY105 for the fourth quarter.

To same -- and similarly, for the euro environment, we expect the yen to euro again of JPY155 for this fourth quarter. And the yen is JPY2 stronger compared to last year, and JPY3 stronger last year and (technical difficulty) weaker last year.

That's the new guidance. And the increase and decrease of taxes on the previous year is showing on slide 35. And also the increase and decrease of taxes from our previous guidance showing slide 36. Please see each slide to know how it changes.

So, again, I'd like to take questions from Dan-san regarding our new guidance. Dan-san?

Yes.

We just (technical difficulty) our profit guidance. Also, the top line has decreased but the other top line, all these lines growing. Any particular question if you look at the new guidance?

Yes. Thank you.

Is there any specific market you are concerned with for the future -- for the coming quarters?

Yes. Thank you. I noticed that the profits in North America remain positive with margins improving. But as you move into the year you've said -- into the new calendar year, you've said that you're expecting the currency to weaken further in the fourth quarter and industry conditions to get a bit tougher. So I'm wondering if you could expand on what the outlook is for emerging markets to provide a potential profit cushion, looking ahead. Thank you.

Okay. This is Ike again. Previously Honda's profit driver is heavily [around] the North American operations. But in the past year or so, the emerging markets growth is outstandingly strong. And especially the Latin Americas where, in any emerging markets represented by BRICs, Brazil, India, Russia or China, and all those areas, Honda's operation has been strongly growing, especially Brazil.

Of course, the general condition is -- economy is very strong because of the high demand for the natural resources that country has. So they have very strong currency. On top of that, we just -- not just, but we introduced a flex fuel vehicle that consumers can mix any, whatever the portion he or she likes to, a mixture of the gasoline and ethanol fill. And that captured very strong attention and a strong demand. And, currently, over 50% is represented by this flex vehicle.

And so after -- in addition to this very strong economic situation, after the introduction of the new flex fuel vehicles, Honda's unit sales are growing rapidly. And we believe that maybe ongoing growth is much stronger because we are going to introduce more flex fuel vehicles in our model product line up. And all our regional heads expecting that maybe Brazilian sales, our sales will be increased by additional 40% for the coming year.

The other emerging markets, like India, and especially -- well, motorcycle market has some difficulties because the economic tightening by heightened interest rates or so, but demand for the (technical difficulty) shows very strong, especially for the smaller segment.

We haven't been participating in that smaller -- well, basic entry level of car. The -- our product line ups belongs to the little bit tight and so-called premier segment. And this market is very steady growth, although the volume is not as rapidly growing as the entry level. Again, [CD or Fit], or CR-V, those models, captured very strong demand.

And also, now Russia, we have a very strong growth. Although we don't have any local operations yet and the distribution network, the outlet numbers, are still very moderate numbers and [particularly] on the Russian market is in marketing side, it is very time consuming for the dealers to get the permission to open up their showrooms. So it takes some time for us to catch up the growth of our established dealer bodies, but fundamental growth is very strong.

And in China, of course, it is notably strong demand, although the market situation has been deteriorated because of mainly local manufacturers over-capacity of the productions creates some deterioration in the marketplaces to get rid of the stocks the price is -- has been crazy situations. Still, our segment belongs to a relatively high end and that deterioration of the price has not heavily impacted our demand.

And quite recently we just introduced a new Accord, same as the USAccord in China. So last year, our Chinese operation had some difficulties because the Accord, which we produced in local operation as the old one, so it lost the competitiveness. But right after we introduced the new Accord, which is equivalent to the new USAccord, we captured very, very strong demand.

And currently, I heard from the Head of the Chinese operations, currently a customer has to wait six months' long to get his Accord to be delivered. So we can expect a very strong growth, again, once our production capacity catches up with [the new Accord].

Thank you, Ike-san.

[Spoken in Japanese], thank you very much. And before taking a question there, the one -- just one thing, Honda's decided the dividend amount for this quarter. So [Ike-san], could you talk about this dividend (technical difficulty)?

Yes, today's Board Meeting we resolved that we pay out JPY22 dividend per share for -- as the third quarter dividend. And for the fourth quarter we just plan to pay out JPY22. So the total dividend amount is planned to JPY86 per share for the year. That is JPY19 increase over the last year's dividend.

: Okay, thank you very much. What about the Honda's earning result and also the new guidance for this fiscal year? Judith, we'd like to take a question if the participant has. Would you ask the participant if they have a question?

Thank you. (OPERATOR INSTRUCTIONS). Your first question is coming from Kurt Sanger of Deutsche Securities. Please go ahead.

Good evening, gentlemen. Just one follow up on the Finance business. It -- we saw the profitability decline in the third quarter. You talked about higher provisioning for residual values on leased products, but you also talked about loan loss ratios being better year on year.

What I -- what I'm -- hope to understand is what impact has the change in the operating lease depreciation? How much of an impact did that have on the profitability year on year versus the actual core fundamentals of the business?

Actually, the depreciation, the total profit amount itself is the -- basically same as the previous accounting method. Because in the past, as a financial risk, we just count the leasing sales as the interest rate for the leasing program.

But now that we -- our Finance Company purchased the old cars at their assets and they're leasing the car to the customers, and so receiving the total lease -- lease sales. So, (superficially) the sales increase incrementation is so big, but after the deduction, the depreciation, the net profit is same as the -- exactly same amount of the money as previous accounting method.

So the operating profit margin seems to be drastically dropped, but that's just adding the depreciation cost. So, superficially, revenue increased and, in SG&A, depreciation cost is incurred. So -- but the net actual cash of our profit is same as the previous year.

Okay. So, Ike-san, we've seen the margin go from 26% in the first quarter to 21% in the second and 16.5% in third.

Right.

And, basically, I'm hoping that you're saying the core earnings are fine; that's just the accounting change. Don't -- so you can look at that and worry about the -- not know what's going on, right? So I just want a -- (multiple speakers).

[Right] (multiple speakers).

-- a clear message that it's just the accounting impact and not the core fundamentals.

Right. So it's just -- of course, it's not exact calculations, but if we assume that no calculation change incurred, roughly speaking, it is assumed about a 20%, 21%, profit margin, same as [the] almost a year ago.

Okay, great.

[So].

My second question is on the Motorbike business. Seasonally, the third quarter you're usually quite weak from profitability standpoint. This year is was quite strong; still over 8% operating margin. Is that just because of the shift in focus to Brazil and Vietnam being the main drivers of profitability that we don't see much seasonality in profits any more?

Well, the Vietnam, their growth is very drastically increasing. And now, the Vietnam, the market belongs to the million club number. So that's currently the largest motorcycle market for Honda, as of course the India the largest, the second is Indonesia and maybe third Brazil. And, of course, (inaudible) Vietnam.

So the incrementation of Vietnam and Brazil contributes the seasonally adjustment.

Okay. So the seasonality of the business is changing as those businesses grow?

Right.

Great. Okay, thank you very much, gentlemen.

Thank you, Kurt-san. So, Judith, could you take our next question if they have?

Thank you. (OPERATOR INSTRUCTIONS). Your next question is coming from Steve Usher of Japan Investments. Please go ahead.

Good evening, everyone. Congratulations on a powerful third quarter in a difficult environment.

(Technical difficulty).

The -- just a few questions. First of all, on page 15, your foreign exchange breakdown, the other currency, I assume, is largely the Brazilian real? Is that correct, or are there -- what other currencies would be included in the Others category there?

Okay. The Brazilian real is one of the strong currencies, but not only the Brazilian real. Almost every major local currency, like Canadian dollars, euro, sterling pounds, Australian dollars, were notably the Asian currencies, like Thai bhat. So, you name it. Other than U.S. dollars, every local currency is much stronger against U.S. -- I mean Japanese dollar, Japanese yen.

But in terms of that JPY4.9b contribution to operating profits from other currencies, would that be primarily the real? In terms of [its] (multiple speakers) contribution?

Yes, and the Thai baht.

Okay.

And the Australian dollars, Canadian dollars. So --

Okay. Great, thank you.

Secondly, in terms of SG&A expenses, sales were up 10%, SG&A was up only 1% in the third quarter. And certainly currency would have contributed there, but can you give a bit more color as to how you were able to restrain SG&A expenses in the third quarter so effectively?

Well, basically, some expenses is -- has to be carried over to the fourth quarter. And, well, that's the only thing I could say. Of course, [the product] is increasing and so [for a ration], I mean especially the logistic expenses is increasing. But mainly the U.S., they tend to spend a little bit higher incentives, and they've tried to reduce the SG&A expenses to offset the relatively higher incentives provisions against the original plan.

So it seems to me that they are switching from an SG&A to incentives spending.

So, Usher-San, one thing that is the largest driver of decline [SG&A] is [the] last year we had this big amount of the warranty or --- not warranty, but the kind of quality-related expenses in Japan. So we have some adverse effect in this third quarter because of the bigger amount in last third quarter. That's one of the drivers on how we -- SG&A this third quarter declined compared to last year.

Great. Okay. Thank you.

And then the next question is if you look at your fourth quarter assumptions, I mean needless to say you're projecting a pretty sharp decline in operating profits -- a 46% decline in operating profit. Is this a harbinger of things to come in terms of the next fiscal year? Or do you think you're going to be able to sustain profit growth in the March 2009 fiscal year?

Well, the biggest negative driver for the big drop for the fourth quarter is mainly for the very high level of SG&A. And the third quarter's SG&A hasn't been that big as we planned, so some of them seems to be carried over to fourth quarter. That is one factor.

So, of course, the seasonality, the -- every fiscal year the fourth quarter tends to be -- show high one-time expenses or something like that. So, of course, you can -- you wouldn't expect that the fourth quarter's profit margins, or the [observed] demand passed for --- for past to be on next year's full year performance. So you have to consider the peculiarity of the fourth quarter.

And the year-on-year comparisons, last year's fourth quarter we had some one-time gain for the provisions which we preserved for the Canadian financial captive finance companies. So last years, we had some one-time gains. So we will see.

Okay. Okay.

And Usher-san, also one more thing. The current environment is totally different.

Exactly.

[Yes], so if for this fourth quarter we assume it at 105, and last year the fourth quarter [was] 120, so the biggest changes also created a negative driver for fourth quarter. But we don't know how currencies move yet.

Okay, excellent.

And then finally, in terms of the equity method profitability, can you give us more of an idea as to the contribution from the Chinese operations?

Well, total equity in the income, roughly speaking, [50%] comes from China.

Okay, and that hasn't changed. Okay, excellent. Thank you very much.

So, Judith, could you take our next question?

Thank you. Your next question is coming from Sherman Chao of Impala Asset Management. Please go ahead.

Hello.

Hello, Chao-san.

How are you? Thanks very much for holding this call.

Yes.

My question is, looking at inventories and production planning, with your revised forecasts for units for all three of your major product categories; Motorcycles, Automobiles and Power Products. Can you discuss both the products and the regions in which you feel the inventories are adequate, under control, or where they may be a little bit of an issue, and how that might effect your production planning for all three of these categories? Thank you.

Yes, as far as the inventories situations, we see some relatively pile up of the inventories, especially -- namely for the Japanese market because of the very weak demand, and much weaker than our anticipations. So inventory tends -- seems to be a little bit pile up year-on-year basis in Japanese domestic sales.

And also Europe, as Okamoto mentioned that the emerging market in Europe, like Eastern Europe, or Russia, the sales is very strong. But especially the loss in Germany, because of VAT -- having tax situation changed, but, in addition to that, maybe the total confidence for the consumers seems to be very weak. And the market is so weak and we saw some pile up of the inventory in our conventional Western Europe operations, mainly for Europe.

And apart from that, because of the very weak demand for the OEM engines, and especially OEM component manufacture for the high pressure washer or lawnmowers in North American operations, we see very heavy inventory in our Power Product operation in North America.

And also Motorcycles; a very weak situation in North American Motorcycle market. We revised our forecast for the retail or wholesales of the -- our Motorcycle operations North America. We have to spend some time to get rid of the [sub] to the [come down the nominal] volume.

And then, can you comment on what the production schedules might look like in fiscal fourth quarter this year versus last year? Thank you.

Well, the productions, we -- we've been monitoring the inventory trend, so the -- our production control is -- we already adjusted. So we don't have any shutdown or production control. But previously we had some weekend -- week days working hours, but after the negotiation of the -- our domestic unions, but now that we are refraining -- well, we are canceling that weekend working hours to get -- to adjust the inventory.

Thank you very much.

Okay, Judith, this might be the last question, I believe, so could you take our next question from Andrew from Japan?

Thank you. Your final question is coming from Andrew Phillips from KBC Securities. Please go ahead.

Good evening. Just a couple of quick questions. First of all, there's a quick question there about the associate income. I notice for the full year you revised up from JPY98b to JPY107b, but actually that does imply quite a sharp slowdown in Q4. Given that, as I understand it, a lot of your associates and affiliates are already on a December year, is there some structural problem there? Or is this some sort of short-term model changeover problem? If you could please elaborate on that a little bit, please.

Andrew, the question is not clear for us. Are you talking about the equity income line?

Yes. Yes. So for the full year --

(Multiple speakers).

So in the nine months to date it's grown from JPY83b to JPY95b.

(Multiple speakers).

Then for the fourth quarter assumption, it's not like a third quarter, second quarter, right?

Yes, yes. Is there some official reason there?

Yes. Well, okay, by -- anyway, equity in income line, our new guideline which we announced today is JPY9b incrementation of last --

Yes.

-- our forecast. And, of course, main contributor comes from China. And -- but if you look at the nine months and the fourth quarter, and the fourth quarter seems to be much smaller amount compared to the last three quarters. That's your point, I think.

Yes.

And this is just a seasonality, or a Chinese GAAP, some expenses in the U.S. GAAP, for example, the incentives, whenever we plan out the incentives we approve, or we put some provisions for the -- prior to the real cash out. Well, in Chinese GAAP the end of the whole year, the -- after payment has been made, then it's -- so it's -- last year we spent relatively aggressive incentive for -- to get rid of the old Accord.

And because the Accord has been facing difficult times, and once the larger in our competitor started the operations and brought in their new models, direct competing models in Guangzhou, so the Accord has -- facing a challenging period almost a year. And we aggressively put some campaigns.

But so it's a peculiar year in China. So the whole year's adjustment is done by the fourth quarter. So it seems to be the fourth quarter's equity line seems to be much moderate compared to the third -- past three quarters. But that is the peculiar accounting issues, or we're just conforming with the Chinese GAAP.

So, [Phillip], if you [search in] pages 28, you might see the Asian our affiliates that operate the profit line in last year, you might see some down in the fourth quarter in last year as well. So some seasonality in Asian and equity income companies (technical difficulty). So probably this fiscal is to do the same.

Okay. So, just to clarify, so when we -- as we move into 2008, we shouldn't expect these large year-on-year declines to continue. We should expect a -- it's reasonable to -- assuming the volumes are okay, that the profitability should still be quite good on those Chinese operations.

Right. And, as I said before, the new Accord captured very, very strong attention, so we don't have any worry about our Chinese operations.

Okay, good.

Just my next question, I noticed in the third quarter that the tax rate was quite a bit lower year on year.

(Technical difficulty)

And I realize there's a regional mix issue where Asia, other regions tend to be lower.

Right.

But in the third quarter the North American profits were still very high. If you look at the high tax regions, like North America and Japan, the -- year on year, the weight hasn't really changed very much, so there's no other factors coming into play?

Well, we just fine tune and recalculate whole -- our consolidated companies tax rate wherever all our entities are located. And in the past, the weighted average for the tax rate was 37%. But, thanks to the very strong contribution, or increasing contribution of the emerging markets, like Asian countries, like Thailand or Indonesia, Vietnam, and Brazil, where the tax rate is 34%.

So, while the Japanese contribution -- I'm afraid to mention this, but the highest tax rate for the over 40%, Japanese contribution becomes much lower, and the U.S. contribution is somewhat saturated, while the emerging countries contribution is going to be increasing more and more.

So tax rate -- the weighted average tax rate is, roughly speaking, 33% and we will assume that this trend -- trends to continue.

Right. So just --

So maybe for your calculation, you could put 33% [year] tax rate.

All right. And just a final question. In the volume and mix, you talked about unrealized inventory gains. Were there any specific regions or products which were really affecting this?

Well, inventories pile up in Europe and the Japanese operation. And some models, even in North American operations, if you look at the, for example, the Auto Data data or something like that, inventory for the light trucks and especially pile up which models become very old and we have planned to switch over to the new pile up some time later this year so, regionally, Europe, Japan and North America.

But this is a little bit different to about a bit over a year ago when we had the new CR-V coming through (multiple speakers).

Right. Right.

And we saw that big increase in the exports from Japan.

Right.

And that next quarter it was all shipped out. This is a little bit different this time (multiple speakers).

Right.

That's correct?

Yes.

Okay. All right. Thank you very much.

Okay, Judith. It's almost time and we would like to wind up and finish the conference. Hello, Judith.

Yes, sir.

Okay, we'd like to wind up the telephone conference. So this time we have the many participants, thanks for the joining. And we see the participants from conferences for Boston, Connecticut and New York as well, and Toronto, San Diego and Ohio and Kansas City and Tokyo as well.

So thank you very much for joining and whenever you have an additional question for the U.S. investors, please contact our New York office, 212 355 9191. [Tak] will be taking care of nicely. And Japan investors and Tokyo [sales analysts], please contact us tomorrow morning (multiple speakers).

Thank you very much for joining. Thank you and see you next time. Goodbye.

Thank you.

Thank you. This concludes today's Honda third quarter earnings conference call. You may now disconnect.