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Honda slashes profit outlook on disasters

A man is silhouetted against a logo of Honda Motor at the company showroom in Tokyo January 31, 2012.

Toru Hanai/Toru Hanai/REUTERS

Honda Motor Co. slashed its annual profit guidance to the lowest level in three years as it counted the cost of natural disasters in Japan and Thailand and a strong yen. But it forecast a healthy rebound next year.

Japan's No.3 auto maker was the slowest to recover from the supply chain disruptions after the Japanese earthquake and tsunami and it was the only carmaker whose factory was inundated by historic floods in Thailand, Southeast Asia's export hub.

Honda cut its expectations for operating profit for the business year to March 31 by a quarter to ¥200-billion ($2.6-billion U.S.), below the average forecast of 24 analysts polled by Thomson Reuters I/B/E/S of ¥283-billion. It marks a drop of 65 per cent compared with year-earlier profits.

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"Any way you look at it, this has been an extremely tough year for Honda," Chief Financial Officer Fumihiko Ike told a news conference on Tuesday after Honda released its results.

"We consider this to be a year of unparalleled, abnormal difficulty, and even though the global economy may not be looking good now, we'll see a big leap next year and beyond," he said.

In the face of the disasters, the firm's global output dropped last year by a fifth to 2.91 million cars, slipping below 3 million for the first time in eight years. Production at other Japanese automakers, except for Nissan Motor Co, also fell but not so severely.

Honda had withdrawn its previous operating profit forecast three months ago because of uncertainty over when production could restart following the floods. The dollar's estimated ¥8 fall to ¥78 also hurt profits.

Honda, whose bottom line has been propped up by its leading motorcycle business and a strong finance arm, expects net profit to fall 60 per cent to 215 billion yen in the financial year. The figure, reported under U.S. accounting standards, includes earnings made in China.

"It was a tough year, with the earthquake and Thai disasters, so there is a sense out there that it's only natural for the numbers to look bad," said Masayoshi Okamoto, head of dealing at Jujiya Securities.

While Honda's new forecast may trigger a temporary drop in its shares, he added that they were supported by solid demand.

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Quarterly profit was also grim. The company said operating profit for the October-December quarter slumped 65 per cent to ¥44.3-billion, well below an average estimate of ¥81.2-billion in a Reuters poll of nine analysts.

The Thai floods have hurt other Japanese companies as well. Toshiba Corp on Tuesday posted a 72 per cent decline in quarterly operating profit, partly a result of the disaster.

Honda estimated lost sales owing to the Thai floods would add up to 260,000 vehicles this business year. It cut its worldwide sales outlook to 3.15 million from the previous forecast of 3.435 million.

It said the Thai plant should be up and running at full speed from April, when other affected Asian production would also return to normal.

Chief Executive Takanobu Ito has said he wanted Honda's global car sales to recover to at least 4 million in the business year from April.

"Their new guidance does imply a pretty good fourth quarter, and our expectations are for them to enjoy some pretty robust growth next fiscal year as they recover from the twin disasters of the earthquake and the flood," said CLSA Asia-Pacific Markets auto analyst Christopher Richter.

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With production steadily recovering in the final months of 2011, investors have turned their attention to an anticipated jump in sales as Honda restocks its depleted inventory.

Honda's stock is the best performer among Japanese automakers so far in 2012, up 14.2 per cent as of Monday, outperforming an 8.9 per cent rise in the auto sector index.

Still, concern in the United States, Honda's biggest market, lingers over whether the Japanese car maker might be losing its edge after its the remodelled Civic got panned by critics last year.

Competition is set to heat up as resurgent U.S. giants Ford Motor Co and General Motors Co and South Korea's fast-rising Hyundai Motor Co flex their muscles in the sedan segment long dominated by Honda and Toyota Motor Corp .

While acknowledging some of the criticisms of the revamped Civic in the United States, Honda executives have stressed that the car had topped the country's compact sedan segment in the latest quarter, outselling Toyota's Corolla.

"Inventory for the Civic is finally back up above 60 days, so we expect it to finally start selling strongly from here," CFO Ike said, adding that Honda had placed priority on restocking the new car.

Overall, Honda had just 37 days worth of inventory at the end of December in the United States, according to Autodata, compared with the 55-60 days Honda considers healthy.

Honda is targeting a 25 per cent jump in its U.S. sales this calendar year, also by shoring up its struggling Acura premium brand.

Honda's shares fell 0.6 per cent in trading on Tuesday that ended before the results were announced. The benchmark Nikkei average ticked up 0.1 per cent.

Honda is the first Japanese automaker to report third-quarter earnings. Toyota will report on Feb. 7 and Nissan on Feb. 8.

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