Honda posts record Q1 profit on China demand

TOKYO (Thomson Financial) - Honda Motor Co., Japan's second-largest automaker by sales, on Friday reported a record net profit for the first quarter ended June, buoyed by strong demand in China.

The record profit growth came as a positive surprise because many analysts had projected a double-digit decline in profits for Honda.

The Japanese automaker, which is also the world's largest motorcycle maker, raised its first half to September forecasts to reflect the better-than-expected first-quarter results.

But it kept its year to March net profit forecast, which projects an 18 percent drop in the bottom line.

Honda lowered its year to March 2009 operating profit forecast, citing a bigger-than-expected rise in the cost of raw material and rare metals, and also trimmed its annual global car sales projection.

First-quarter net profit rose to 179.61 billion yen ($1.7 billion) from 166.12 billion yen a year earlier. It was the first net profit rise in two quarters for the maker of Honda and Acura brand vehicles.

'Strong profit growth of our affiliates, especially in China, contributed to the record net earnings as equity method gains reached 38.2 billion yen in the first quarter, the biggest income in any past quarter,' Honda executive vice president Koichi Kondo said at a press conference.

A decline in sales promotion incentives in the United States, cost cuts and brisk sales of its vehicles also helped offset the adverse impact of a firmer yen and rising procurement cost of materials such as steel.

'We could not book what provisions we had initially planned to set aside for sales incentives for accounting reasons, which inflated the profit level,' Kondo said.

The company had initially earmarked about 30 billion yen in provisions for sales promotion incentives in the first quarter.

Operating profit stood at 221.35 billion yen, nearly unchanged from 221.68 billion yen a year ago, even after a stronger yen subtracted 81.3 billion yen off the quarterly result.

The average export hedging rate stood at 105 yen against the dollar and 164 yen against the euro in the first quarter, compared to the year-earlier rate of 121 yen and 162 yen, respectively.

Revenue dipped 2.2 percent to 2.87 trillion yen, hit by the firm yen.

Meantime, global sales reached 962,000 vehicles, up from 946,000 a year earlier, led by strong sales growth in Asia.

But Honda lowered its year to March 2009 global sales forecast to 4.08 million units from the earlier estimate of 4.14 million vehicles.

'U.S. demand for new vehicles is now expected to fall to below the 15 million level, whereas we had earlier thought it would come in at about 15.2 million to 15.3 million vehicles,' Kondo said.

'As consumers are shifting their preference toward small-sized cars from large pick-up trucks and other high fuel-consumption vehicles, we are cutting production of our light trucks, such as the Pilot SUV, by 50,000 units,' he said.

Output of its small size sedans such as the Civic, Fit and the Accord will be raised by 25,000 units to deal with surging demand for environment-friendly cars.

'We wanted to hike the production of small-sized cars more actively, but due to production capacity bottlenecks, we could not do so,' Kondo said.

'How we can smoothly resolve capacity bottlenecks for these models will be crucial given rising consumer awareness about the environment and fuel efficiency issues,' he said.

The automaker hiked its first half to September earnings guidance and is now projecting to make an operating profit of 350 billion yen, net profit of 280 billion yen and revenue of 5.75 trillion yen. In April, it projected an operating profit of 300 billion yen, net profit of 230 billion yen and revenue of 5.78 trillion yen.

For the year to next March, Honda is now forecasting an operating profit of 630 billion yen, net profit of 490 billion yen and revenue of 12.13 trillion yen, compared to earlier projections for operating profit of 650 billion yen, net profit of 490 billion yen and revenue of 12.14 trillion yen.

'Procurement costs for such materials as steel and rare metals will increase by 125 billion yen from the initially budgeted amount, while we also have to book some 25 billion yen in unexpected provisions to deal with falling prices of second-hand light trucks in the U.S.,' Kondo said in explaining the reason for the downward revision of its operating profit.

Japanese automakers lilke Honda use rare metals like platinum, palladium and rhodium for their automotive catalysers to filter out carbon monoxide and particulate emissions.

On the plus side, a slower-than-expected rise in the yen as well as price hikes of its vehicles should support Honda's earnings going forward.

Honda tweaked its dollar exchange rate assumption for the 2008/09 business year to 101 yen from 100 yen, and the euro to 162 yen from 155 yen.

'Due to strong demand for such models as the Honda Fit, Civic, CR-V and Accord, we can generate about 60 billion yen from hiking the price tags of these models,' Kondo said.

'But given challenging market conditions, we do not plan to hike the prices of our cars sold in Japan, although we may have to review prices when we launch new models,' he said.

Before the results were released, Honda ended Friday trading down 2.1 percent at 3,760 yen.