Honda profit rises 7 percent on cost cuts, Japan sales

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TOKYO -- Honda Motor Co.'s April-June operating profit rose 7 percent from a year earlier to 198 billion yen ($1.94 billion), as lower sales in the United States were offset by costs cuts and the company's stronger focus on Asian markets.

Net income rose 20 percent to 146.5 billion yen, Honda said today.  Sales rose 5 percent to 2.99 trillion yen.

Sales in Japan were bolstered by back-orders from a rush of buying that preceded a sales tax hike on April 1, while model changes boosted sales in China, India and Indonesia, the company said today. That offset flagging sales in Thailand, where political turmoil has hurt business, and a sales drop this year in the United States, where its average sales incentive per vehicle has been on the increase.

Honda is boosting sales in emerging markets to help reduce its reliance on North America, which accounts for almost half of revenue. Honda has introduced cars tailored for China, India and Indonesia since last year, betting the models will take share from rivals including Volkswagen AG and Toyota Motor Corp.

"India and Indonesia have been very strong," said Kota Yuzawa, an auto analyst at Goldman Sachs Group. "The recent aggressive investment in products for these markets are starting to pay off."

Lower N.A. profit

In North America, Honda reported 67.5 billion yen in operating profit last quarter, falling from 71.9 billion yen a year earlier. U.S. sales fell 1 percent in the first six months this year, dragged down by the Accord sedan and Acura models including the ILX and TSX, according to market researcher Autodata Corp.

Honda from April 1 elevated Acura to a division within the company, giving it dedicated management, marketing and other resources. Acura is struggling to boost U.S. deliveries amid competition from bigger luxury brands. Acura should see faster growth from August with the arrival of the new TLX sport sedan, the division's U.S. chief, Mike Accavitti, said in an interview in July.

Among key models Honda introduced this year to the United States is the new Fit, which is being built at a new plant in Mexico. Honda began shipping the car to U.S. dealerships in June, even as the magazine Consumer Reports said deliveries had been scheduled to begin in mid-April.

The company is counting on the model to grab market share from the Chevrolet Sonic hatchback and Ford Fiesta.

Separately, Honda is considering whether to continue buying airbags from Takata Corp. following a wave of recalls that have affected at least nine automakers. Honda plans to examine the quality of the supplier's airbags as well as how many Takata is capable of supplying, Honda Executive Vice President Tetsuo Iwamura said today.

Honda is still negotiating with Takata on who will pay and how much of the costs related to the recent airbag recalls will be covered, Iwamura told a news conference. He declined to give the amount of the costs.

Europe loss narrows

The company's operating loss in Europe narrowed to 1.49 billion yen from 9.7 billion yen loss a year earlier, even as the region has shown signs of bottoming out. The company will halt production at one of the two production lines at the Swindon plant in the U.K. from autumn, in anticipation that it won't see any growth in Europe in the next two to three years, it said in March.

In Japan, operating profit was little changed at 62.1 billion yen. Deliveries jumped in the quarter, helped by the new Fit and back orders from the rush buying before the sales tax rise in April. Though Fit sales rose, Honda this month recalled all of the cars and the Vezel hybrid models it has sold in Japan since last year over a software flaw causing unintended acceleration.

The call-back -- the fourth for the Fit and the second for Vezel -- crimps Honda's plan to boost Japan deliveries by 21 percent to 990,000 units. The Fit is Honda's top-selling model in Japan and about two-third of the sales are hybrids.

"The Fit and Vezel are key models for Honda in Japan," Masataka Kunugimoto, an analyst with Nomura, wrote in a report this month. Honda's sales target in Japan "will be a challenge, given the time it will take dealers to sort out product recalls and possible delays to the launch of new vehicles, especially hybrids."

Honda, which started to sell its N-series mini vehicles since 2011, saw minicar sales rise 7.8 percent this year, according to Japan Mini Vehicles Association. Minicars, with engines smaller than 0.66 liters, account for more than 40 percent of new-car sales in Japan, thanks to lower prices and taxes.

China demand

In China, Honda's sales extended gains last quarter, as a consumer backlash eased over a territorial dispute between Japan and China. Last year, its China deliveries rose to a record, fueled by the Jade wagon and Crider sedan, which Honda says are the company's first models tailored for the Chinese market.

Sales of the Accord -- which until three years ago was the top-selling midsized sedan in China -- slumped this year, as the initial versions of the car were more expensive than Nissan's Teana and Toyota's Camry.

In late February, Honda pushed out a stripped-down Accord that started at about 180,000 yuan ($29,000), compared with more than 200,000 for earlier versions. Honda expects to sell 900,000 vehicles this year and double annual sales in China to 1.3 million units in the three years through 2015.

In Asian markets excluding Japan, operating profit rose 21 percent to 65.3 billion yen, as deliveries surged in India and Indonesia on new models.

Honda sales rose 40 percent in April-June quarter to about 40,000 units in India, helped by diesel versions of its City and Amaze cars. The carmaker is counting on the seven-seater, multi- purpose vehicle Mobilio introduced this month to further boost deliveries. In Indonesia, sales rose 68 percent to more than 82,000 vehicles in the first half of the year, with more than half of sales from Mobilio, which qualifies for the government's new low-cost green car subsidizing program.

Forecast raised

Honda raised its forecasts for revenue and operating profit, after revising its currency projections to 101 yen to the dollar and 136 yen per euro, versus the previous estimate for 100 yen and 135 yen, respectively.

Net income will probably climb to 600 billion yen ($5.9 billion) in the year ending March 31, the company said. That compares with the 595 billion yen the company previously forecast.

Editor's note: An earlier version of this story contained a typo in a reference to the Acura TLX. 

Reuters and Bloomberg contributed to this report

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