Remarks by Steve Center, Morgan Stanley Seminar (Part 2 of 2)

Another important aspect of Acura's success is our substantial investment in research and development and manufacturing operations in North America. In fact, this year is the 25th anniversary of the first product we assembled at our original plant in Ohio. We produced our first Acura model in America in 1996.

Acura is unique from our European and Japanese competition in the luxury segment in terms of the advantage of our local R&D and production operations. We currently build our two biggest selling Acura models - the TL and MDX - at two plants in North America. But these models were each developed in America as well. Two of our most sophisticated and advanced products were each designed at our LA Center and developed by engineers in our Ohio Center. These R&D operations have been critical to Acura's success.

Of course, the current Acura lineup also includes the RSX sports coupe at the entry point. RSX remains very important to us. Not just because of sales volume, but because it provides us a gateway to lifetime owner loyalty as young buyers find a home at Acura, and then move up through the product line. A Car and Driver magazine "10 Best" pick in its first two years - RSX is our most youthful entry. And in this role it helps attract the type of buyers that every luxury brand covets -- young career-oriented professionals. With a minor model change coming this fall - again, our commitment to continuous improvement - we will keep it fresh in the marketplace.

Another area where we need continuous improvement is the experience our customers receive at the 260 Acura dealerships across America. We made great progress in improving customer satisfaction last year, as Acura jumped from 7th to 3rd place in the JD Power rankings. It's great to have Acura back in the top 3, but when you consider the roots of the Acura division in that number one position - you can bet that our target is to return to the top spot again.

One of our major efforts toward this goal is a program we call EXCELL -- Exceeding Customer Expectation Levels for Life. Dealers are independent entrepreneurs, but we need consistency in the treatment of our customers. EXCELL roots out inconsistencies in customer handling - and gives dealers a clear process to guide improvement. The goal is to ensure that dealers treat Acura customers in a way that is consistent with the performance, quality, and integrity of our products.

In addition we have undertaken a facility image program - and by the end of this year, more than 80 percent of Acura stores will have completed facility upgrades designed to enhance the look and feel of Acura dealerships inside and out - and create a more customer-friendly sales and service environment.

And as the founder of American Honda's E-business Division, I have to mention the important role our world-class Acura internet environment plays in customer satisfaction. This now includes a shopping site, Owner Link, and an E-Store where dealers can sell genuine Acura parts and accessories on-line.

Acura and Honda shopping sites are the only sites in the industry that can route customers back to their prior dealership. Customer leads go free of charge to dealers who have been certified on the Acura interactive network. So, there is an incentive for our dealers to be just as internet savvy as our sophisticated customers.

We have to do these things because our MDX, TL and TSX models are getting the right people to the brand: high education - high income - keeping Accord owners and other members of the Honda family as they grow up - and conquesting Euro brands as well.

The good news is - we are continuing our direction of introducing new vehicles that are focused on high performance and a high level of useful technology.

The market acceptance we have received on the new TL suggests we are headed in the right direction. And it tells us the next RL is right on the money.

We just debuted the RL Prototype sports sedan at the New York Auto Show -- with a 300-horsepower V-6 engine, a super handling all-wheel drive system, sporty styling and breakthrough telematics technology. The RL Prototype will provide a driving experience that other cars in its class just cannot match.

Let me highlight just a few areas that I think are really worth your attention. Unlike competitor all-wheel drive systems, the Super Handling All-Wheel Drive system is the world's first to distribute the optimum amount of torque between the front and rear wheels, and the left and right rear wheels -- based on driver input and driving conditions. The result is class-leading cornering performance and stability, a reduction in torque steer, as well as enhanced traction on dry and wet surfaces.

One of the most exciting trends in the industry has been the emergence of "telematics." Acura wants to be a leader in effectively integrating these new technologies into our vehicles to enhance our customers' driving experience. We won't burden them or create greater distraction. To the contrary, these are very customer useful features that will very soon be in hot demand.

The RL Prototype has the industry's first standard Real Time Traffic capability. This AcuraLink' Satellite-Based Communication System transmits information to and from the vehicle with XM as the broadcast medium - and a Bluetooth enabled cell phone as the back channel to servers at American Honda.

In this way, the RL Prototype's 8-inch navigation screen displays personalized, up-to-the-minute traffic information relative to the driver's position, including traffic flow, accidents, and construction delays -- currently in 20 major metro areas, including New York, Los Angeles and Chicago. Unlike radio traffic reports, the RL's real time traffic system provides a constant flow of relevant information reflecting conditions along the driver's chosen route.

There are other features - including real-time diagnostic information unique to the vehicle that will inform the driver whether to stop or continue driving. There is even a text to speech option - to minimize the potential for driver distraction. But you can't buy this system from a supplier. This is home grown Honda technology, with patents pending on delivery device and hardware.

The RL Prototype's technology advancements also include safety. RL will be the first Acura equipped with the Advanced Compatibility Engineering body structure Honda announced last year. It is designed to enhance passenger safety by efficiently absorbing and dispersing collision energy, and reducing override in collisions with SUVs and other high riding vehicles.

The ACE body uses a new frame structure to help deliver improved protection for vehicle occupants -- while at the same time reducing aggressivity toward other vehicles in a frontal collision. Front, side and side curtain airbags also are standard - as is Vehicle Stability Assist (VSA).

Now, if you are looking for big, fluffy luxury cars with a V8 engine -there are vehicles like that out there in the traditional luxury segment. But that is not our customer. The "Great One" - hockey legend Wayne Gretsky - used to say "Most players go to the puck. I go where the puck is going to be." Well, in that same spirit, we are not aiming at the current market, we are going where the luxury customers' interests and demands will be in the future.

Our target with RL is a flagship vehicle for customers in their '40s. We want customers with a long career of buying new luxury cars. And, along with the TSX and TL, the new RL will give us a solid 1-2-3 punch in performance luxury sedans.

But - once again - we are not stopping there. Those of you who went to the Tokyo Motor Show last year or Detroit Auto Show in January, probably saw the 300-plus horsepower HSC -- High-Performance Sports Concept. In fact, it won "best of show" at the Tokyo Show. The HSC combines the ultimate in supercar performance with the interior comfort and handling ease of a daily driver. And it will serve as the basis for the next generation NSX you will see within a few years. Sales volume doesn't rival our other models, but the NSX continues to enhance Acura's high performance image. And this is an exciting direction.

Further, as you probably know, we have acknowledged our plan to introduce a new SUV - underneath the MDX. While I can't tell you much about this new vehicle, you can bet that - consistent with Acura strategy - we are going to go where we see the greatest market potential. And the largest growing segment is the smaller SUV market. We are excited about the potential of this new product.
Further, like both the MDX and TL, this new vehicle is being developed at our R&D Centers in America and will be produced at one of our plants in North America. This has been a great advantage for us in meeting demand for both TL and MDX.

And demand is a good word for me to finish with today. Because the Acura models on the road today are generating true demand. And we are confident this will continue. Acura is now focused - with a clear direction - a certain understanding of what our products should be - and a strong commitment to provide our customers with a level of service matching those products.

I think it is fair to say that we have now created a number of "Destination products." And we believe we are on the verge of the next step - making Acura a "Destination brand."

Thank you for your attention. With the help of Mr. Oshima on the financial end, I am now happy to take as many questions as time allows.

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