http://money.cnn.com/2005/10/27/news...reut/index.htm

Honda stuns with operating profit dip
Japanese automaker cites high raw material costs in 2Q, but says it expects record sales this year.
October 27, 2005: 6:48 AM EDT

TOKYO (Reuters) - Honda Motor Co., Japan's third-biggest automaker, posted a surprise fall in quarterly operating profit on Thursday, pressured by high raw materials costs, but lifted its full-year forecasts thanks to a weaker yen.

Honda expects record sales this business year after a recent revamp for the Civic sedan, its best-selling car after the Accord, but like its rivals it faces mounting pressure from soaring raw materials costs, especially for oil-related products.

An uncertain outlook for the U.S. market, which accounts for more than half the company's revenue, also poses a risk, and Honda said it expected a bumpier road for the rest of the year.

"If you look at the North American market now, a softening in sales in the second half looks inevitable," Executive Vice President Satoshi Aoki told a news conference.

While analysts expect Honda to outpace the industry thanks to its fuel-efficient cars at a time of high pump prices, the auto maker said it now expected to dish out more on sales incentives -- as much as $1 billion this year instead of the $890 million forecast three months ago and $690 million projected in April.

Operating profit at Honda, also the world's biggest motorcycle maker, dropped 5.9 percent to ¥162.69 billion ($1.4 billion) in the fiscal second quarter that ended in September, falling short of the consensus projection of ¥177.92 billion in a survey of seven brokerages by Reuters Estimates.

Domestic rivals Nissan Motor Co. and Toyota Motor Corp. are also expected to report bigger quarterly revenues but limited or no profit growth as rising supply and research and development costs squeeze margins.

For the full year ending in March, Honda raised its profit forecast to ¥675 billion from ¥665 billion to reflect a stronger assumption for the dollar and euro in the second half, at ¥110 and ¥135 instead of ¥105 and ¥130. A weaker yen raises the value of profits earned overseas when repatriated.

Second-quarter net profit, which includes earnings from its Chinese and some other Asian operations, rose 5.2 percent to ¥133.71 billion, against market estimates of ¥130.29 billion, as sales grew by 11.7 percent to ¥2.338 trillion.

Honda now expects a net profit of ¥490 billion for the full year, instead of ¥470 billion forecast in July.

Reflecting the rosier outlook, Honda lifted its full-year dividend forecast to ¥80 a share from ¥74, which is up from ¥65 paid out last year.

It will also buy back up to 4.7 million of its own shares, or 0.51 percent of those outstanding, by Jan. 16.
U.S. demand a worry

Honda continues to carve out a bigger slice of the U.S. market at the expense of General Motors Corp. (Research) and Ford Motor Co. (Research), which have reported big quarterly losses as sales declined at home despite massive spending on discounts.

Analysts expect U.S. retail sales to slide in the coming months as consumer sentiment chills on the back of high fuel prices, especially for gas-guzzling sport utility vehicles (SUVs), the local brands' main cash cow.

Aoki said Honda expected U.S. industry-wide sales to come in between 16.5 million and 16.8 million vehicles for calendar 2005, and kept its business year sales forecast in North America at 1.675 million units.

Worldwide, it lifted its sales forecast slightly by 10,000 units to 3.425 million cars, expecting stronger sales in Europe, Asia and other markets to offset sluggish growth in Japan.

Sales of motorcycles are now expected to grow by 0.8 percent to 10.57 million units, rather than fall.

Japan's second-ranked Nissan will announce its results on Friday, followed by Toyota on Nov. 4.

Honda shares rose 17 percent in the July-September quarter, in line with Tokyo's Nikkei share average, but lagging a 24 percent gain in the transport sector sub-index.

The stock ended down 0.6 percent at ¥6,360 ahead of the results on Thursday, while the sector sub-index gained 0.7 percent.