Honda forecasts small annual profit as costs cut

Honda Motor Co (7267.T) forecast a small profit for this year as it cuts costs to counter plunging car sales and a strong yen, and said its leading position in motorcyles is helping it cope with the severe global slowdown.

Carmakers everywhere are being hammered by an acute downturn in demand brought on by the worst financial crisis in generations that has some rivals fighting for their very survival.

Even in China, one of the world's few growth markets, profits at top carmaker SAIC Motor Corp (600104.SS) nearly halved in the first quarter as a slowing economy hit sales.

Honda, Japan's No.2 automaker, has been relatively shielded by its manufacturing flexibility, line-up of fuel-sipping cars and its profitable motorcycle business.

For the financial year to March 31, 2010, Honda expects both an operating profit and a pretax profit of 10 billion yen ($104 million), narrowly escaping its first loss since the company was founded in 1948, which analysts had expected.

This is positive, said Credit Suisse auto analyst Koji Endo. Honda is a very conservative company so the fact that they're saying, 'We won't be in the red this year,' is a strong message.

A survey of 12 analysts had forecast Honda's operating loss at 93.2 billion yen for this year.

Honda Executive Vice President Koichi Kondo said the forecasts were conservative and excluded a potential boost of up to 100,000 car sales for Honda in Japan from an expected government incentive to scrap old cars for new ones.

Unlike other major automakers, Honda also has its motorcycle division, which contributed 60 percent of Honda's operating profit last year.

Having the motorcycle business is a big strength for us, Kondo said.

In the United States, Honda's most important market, Kondo said he saw signs that demand was leveling out after driving sales to a near three-decade low.

The North American region isn't quite on a recovery track yet, and the support will come from emerging markets. But we're seeing a bottoming out of the overall U.S. market.

Risk factors remained, including the fate of Detroit's Big Three and any impact of the outbreak of swine flu, he said.

Japanese rival Toyota Motor Corp (7203.T), which also relies heavily on the U.S. market, is expected to widen its operating loss this year, while Detroit's Chrysler CBS.UL and General Motors Corp (GM.N) are finalizing plans to reorganize or face bankruptcy.

Honda said it was monitoring several U.S.-based suppliers that may require some form of action such as financial aid in case of a failure at a U.S. automaker.

Separately, Honda will help auto electronics supplier Pioneer Corp (6773.T) at home by providing $26 million.

Q4 BEATS FORECASTS

Honda, the maker of the Accord and Civic models, reported an operating loss of 283 billion yen ($2.93 billion) in the January-March quarter, compared with a profit of 168.84 billion year ago and a consensus estimate of a 331 billion yen loss in a survey of 23 analysts polled by Thomson Reuters.

Its fourth-quarter net loss of 186.16 billion yen was a stark contrast to the profit of 25.43 billion yen a year ago.

Honda expects its global car sales to fall 8.7 percent to 3.21 million vehicles this financial year and motorcycle sales to fall 15 percent to about 8.6 million.

China's SAIC remained cautious on its sales and China as a whole, which has overtaken the United States as the world's largest car market so far this year.

Analysts said there were encouraging signs, however.

The market is warming up since February and SAIC is already showing improvement in Q1 compared with Q4 of 2008, said Chen Qiaoning, an analyst with ABN AMRO TEDA Fund Management.

CAPEX CUTS

Honda is scaling back capital spending by more than a third to 390 billion yen and cutting production to reduce inventory.

Its UK plant in Swindon, due to remain closed through May, will work on a single shift beyond June, keeping production levels low, Kondo said. Six factories in North America are also due to shut down for 13 days starting in May.

Honda is hoping for a big sales boost this year from the new Insight gas-electric hybrid car, but will face stiff competition from Toyota, which has said it would price its next Prius to compete more effectively with the Insight.

Another challenge both automakers face is a strong yen.

Honda is assuming a dollar averages 95 yen and a euro averages 125 yen for this financial year, after they averaged 101 and 142, respectively, last year.

Shares of Honda have risen 40 percent in the year to date, against a 36 percent rise in Tokyo's transport sub-index.