Honda Motor Co's quarterly earnings handily beat market estimates but it cut its annual profit and global car sales forecasts as it battles with rising costs for raw materials and a crumbling US auto market. Quarterly net profit at Japan's No 2 automaker and the world's top motorcycle maker showed a surprise 8 percent rise on Friday due mainly to a fall in allowances for US sales incentives from the year before.
But like many other Japanese automakers due to follow with results in the coming weeks, Honda is suffering from a collapse in demand for big, gas-thirsty vehicles in the United States, its biggest market.
With supply of popular, fuel-efficient cars such as the Civic falling far short of demand, Honda cut its sales forecast in North America this business year by 1.4 percent to 1.745 million cars and its global sales target also by 1.4 percent to 4.08 million cars.
Koichi Ogawa, chief portfolio manager at Daiwa SB Investments, said the quarterly numbers were a positive surprise although rising costs clouded the outlook. "The situation looks tougher over the whole year, what with the lower forecast," he said. "Usually you'd think they might revise their forecast upwards, but things over the short term probably look pretty tough."
Honda's April-June operating profit, which excludes earnings made in China, fell just 0.2 percent to 221.4 billion yen ($2.1 billion) despite a 16-yen fall in the dollar and soaring prices of steel, platinum, and other raw materials. Net profit was 179.6 billion yen, ahead of an average estimate for a 19 percent fall to 135.4 billion yen in a Reuters poll of eight brokerages.
For the year to end-March 2009, Honda trimmed its operating profit forecast to 630 billion yen from 650 billion yen to account for an extra 125 billion yen ($1.17 billion) burden from rising steel and other input costs.
It kept its net profit forecast unchanged at 490 billion yen despite a more favourable exchange rate than assumed three months ago. Honda tweaked its dollar exchange rate assumption for this business year to 101 yen from 100 yen, and the euro to 162 yen from 155 yen.
Consensus forecasts from 18 brokerages call for an operating profit of 688.1 billion yen and a net profit of 531.1 billion. The quarter's performance at European rivals has been mixed, with Daimler cutting its earnings outlook, Renault seeking job cuts, while Volkswagen Peugeot Citroen and Fiat stuck to their forecasts. In Detroit, conditions are more dire with Ford Motor Co posting a record $8.7 billion loss under the weight of its slumping truck and SUV operations.
MIXED RESULTS: Unlike its rivals, Honda has managed to keep its North American factories operating near full capacity thanks to a model line-up mostly made up of passenger cars and its manufacturing flexibility, which has helped it sell more Civic and Accord cars instead of the Pilot sport utility vehicle and Ridgeline pickup.
Sales in Asia and Latin America were also strong, making up for a drop in Japan and Europe. Demand for its fuel-efficient vehicles has been so strong, in fact, that Honda said it was losing out on short-term sales opportunities due to a shortage of supply.
"We have a capacity problem," Executive Vice President Koichi Kondo told a news conference. "We're doing everything we can, but I don't see a solution in the near term." The bottleneck should ease somewhat with the start of Civic production at a new factory in Indiana this autumn, but Honda said it would need to lower production by 25,000 cars in North America this business year from initial plans to prevent an inventory build-up of big SUVs.
Characterising overall business conditions as "extremely tough", Kondo added that the need for extra allowances to account for plunging residual values on big used vehicles would shave another 25 billion yen from its operating profit in 2008/09, boding ill also for domestic rivals Toyota Motor Corp and Nissan Motor Co.
Shares of Honda, the world's fourth-most valuable automaker behind Toyota, Volkswagen and Daimler, have held steady so far this year, performing better than Tokyo's transport sub-index ITEQP.which has lost 16 percent. Before the results, Honda ended down 2.1 percent at 3,760 yen.