Now let’s look at the factors behind the expected year-on-year increase in operating income for FY 2011. Operating income for FY 2011 is expected to go from 27.4 billion yen to 43.0 billion yen, up 15.6 billion yen over FY2010.
The major factor behind the operating income increase of 20.9 billion yen is an improvement in the sales volume and mixture. This gain includes:  (1) a domestic market loss of 18.7 billion yen due to a lower sales volume triggered by the waning new car effect of Legacy and termination of green car subsidy; (2) an overseas market gain of 34.7 billion yen due to boosted sales across the board, along with more exports from FHI, which will be resulted in an improved sales volume and mixture; and (3) a gain of 4.9 billion yen due to inventory adjustments.
Cost cuts will lead to an overall gain of 13.0 billion yen with individual gains of 12.7 billion yen at FHI and 0.3 billion yen at SIA. FHI is projected to reap 21.5 billion yen from cost reductions and lose 8.8 billion yen on material price hikes including precious metal and other market related ones. SIA will see a gain of 4.5 billion yen from cost cuts and a loss of 4.2 billion yen due to rising material prices.
A decrease in SG&A expenses and others will generate a gain of 3.2 billion yen. This figure includes (1) a reduction in fixed manufacturing costs that will generate a gain of 8.2 billion yen, with gains of 7.6 billion yen at FHI and 0.6 billion yen at SIA. FHI will yield a gain of 3.1 billion yen due to lower fixed processing costs and a gain of 4.5 billion yen due to cost cuts for suppliers’ dies. SIA will gain 1.0 billion yen due to cost cuts for suppliers’ dies and loss of 0.4 billion yen due to increased processing costs, etc. (2) Increase in SG&A expenses will produce a loss totaling 12.0 billion yen. FHI will generate a loss of 6.0 billion yen and domestic dealers will generate a gain of 3.7 billion yen due to lower SG&A expenses. SOA as a whole will generate a loss of 5.9 billion yen as cuts in advertising and SG&A expenses generate a 2.8 billion yen gain that fail to offset a 8.7 billion yen loss related to the sales incentive. Three hundred dollars will be added to last year’s incentive figure of 1,100 dollars per unit to make the FY2011 incentive 1,400 dollars per unit in addition to the increase in sales volume. Our Canadian subsidiary will generate a loss of 2.6 billion yen due to the increased sales incentive. Other subsidiaries are also expected to lose 1.2 billion yen overall due to increased costs. (3) Cost reductions related to warranty claims will realize a gain of 6.8 billion yen (4) Decreases for other expenses will generate a gain of 0.2 billion yen.
Foreign exchange rate fluctuations are expected to result in an operating loss of 12.7 billion yen. This includes a loss of 8.7 billion yen due to an approximate three yen appreciation against the US dollar and a loss of 3.9 billion yen due to an approximate 12 yen appreciation against the euro while there will be no gain or loss against the Canadian dollar as we forecast the same exchange rate. This 12.7 billion yen figure also includes a loss of 0.1 billion yen due to foreign exchange adjustments for transactions between FHI and its overseas subsidiaries.
We also expect a loss of 8.8 billion yen due to an increase in R&D expenses (up from 37.2 billion yen to 46.0 billion yen) for new model development and more environmentally friendly features .
These factors combined will bring operating income up 15.6 billion yen to total 43.0 billion yen.