Honda Motor Co. surprised analysts yesterday by reporting a 4.3 percent drop in profits for the second quarter. Analysts had actually predicted a similar percentage gain for Japan's third largest automaker. Honda reported that its quarterly net profit was down as a result of finance-related losses, but then predicted that better year-end results could be expected due to the weak yen. Strong car sales in North America, India and China helped boost income 19 percent, but the brightest financial spot came mainly because of the decline in the yen's value against the dollar and euro. That alone covered the losses related to higher raw material expenses and the use of incentives to boost sales. So, demand for cars was up, expenses were up too, but it wasn't much of a problem because of the weak yen.

More details and press release after the jump.

[Sources: Automotive News (Sub Req.); Honda via The Auto Channel]

In industry jargon, operating profit forecasts were raised to $6.9 billion (820 billion yen) from the previous $6.29 billion (750 billion yen). The weaker Japanese currency contributed $763.4 million (91 billion yen) to that total. As Honda changed its estimated values of the dollar and the euro for the year, full-year net profit rose to $4.66 billion (555 billion yen) instead of $4.61 billion (550 billion yen).

"We all know that forex is the main reason behind Honda's upward revision, which could be followed by similar moves by other automakers," said Takashi Miyazaki, general manager of the investment strategy division at Mitsubishi UFJ Asset Management. "But because of that I see the risk of the yen strengthening."

One trouble spot for future earnings is that as fuel mileage becomes more important to consumers, sales of lower-margin vehicles will increase, possibly at the expense of larger models. With smaller cars accounting for a larger proportion of sales, the profit from vehicle sales won't be able to help as much with overall profits. It also means that incentives on less fuel-efficient models might be necessary, further reducing profit margins. "There's a global shift towards compact cars, and that's led to a worsening model mix," Fumihiko Ike, a director at Honda, told those assembled.

Honda reported that global car sales in the second quarter were up 6.0 percent to 884,000 units, but slightly lowered its full-year forecast. Analysts, however, still see a problem in that Honda hasn't fixed the bottleneck limiting four-cylinder engine production. That is the engine found in Civic and Fit models. As we previously reported, Honda responded to those concerns on Tuesday, Oct. 24, explaining that it would reallocate production at two of its North American facilities to provide 60,000 additional Civics a year starting in April.

On dividend news (which really makes shareholders smile), Honda also promised an interim dividend of $0.25 (30 yen), and to introduce quarterly dividends in the third quarter, allowing more frequent payouts to its stockholders. The third quarter dividend will be $0.14 (17 yen) per share. Since the 2-for-1 stock split on July 1, 2006, year-end dividend will also be $0.14 (17 yen), and the total dividend for the current fiscal year at $0.54 (64 yen) per share. Had the stock not split, interim dividend would have been $0.50 (60 yen) per share, which is an increase of $0.17 (20 yen) per share and the annual dividend would have been $1.09 (128 yen), which is an increase of $0.24 (28 yen) per share.


Press Release:


I. Results for Fiscal First Half ended Sept. 30, 2006


Yen (billions)
------------------------------------------------------------------------

First Half ended First Half ended Difference
Sept. 30, 2005 Sept. 30, 2006 (% change)
------------------------------------------------------------------------

Net sales and other 4,602.2 5,230.5* +628.3 (+13.7)
operating revenue

Operating income 333.0 396.5* +63.4 (+19.1)

Income before income taxes 313.7 345.8* +32.1 (+10.3)

Equity in income of 47.2 57.6* +10.4(+22.1)
affiliates

Net income 244.3 271.3* +26.9 (+11.0)

EPS (Yen) 132.32 148.52 +16.20 (+12.2)
------------------------------------------------------------------------
*Record result for fiscal first half
(Honda's average rate for the current first half:
JPY 115 = U.S. dollar 1, JPY 146 = Euro 1)

(Note) As of July 1, 2006, one share of the Company's common stock
was split into two, and EPS was calculated based on the issued shares
after this 1:2 stock split.

Consolidated unit sales: All-time first half record unit sales were
realized in the automobile and power product business areas. (The total
includes fully finished products made by Honda and its subsidiaries as
well as unit sales of fully finished products and parts for local
production by affiliates accounted for under the equity method.)

- Motorcycles: 5.196 million units (+2.5%); the increase was due mainly to sales growth in India and Brazil. (Of the unit sales of Honda-brand motorcycle products that are manufactured and sold by overseas affiliates accounted for under the equity method, those with respect to which parts for manufacturing were not supplied from Honda or such subsidiaries are not included in unit sales, in conformity with U.S. generally accepted accounting principles as well as net sales and other operating revenue, which amounted to approximately 1.06 million units.)

- Automobiles: 1.78 million units (+6.3%); the increase was mainly due to a rise in sales in North America and Asia.

- Power Products: 2.911 million units (+11.0%); the increase was mainly due to sales growth in Japan, North America and Europe.

Consolidated revenue rose to JPY 5,230.5 billion (+13.7%), a sixth consecutive all-time record, due to increased sales in all business areas.

Consolidated operating income totaled JPY 396.5 billion (+19.1%), the third consecutive increase for the fiscal first half. The increased profit from higher revenue, and a positive effects of the depreciation of the Japanese Yen, offset the negative impacts of changes in the model mix, soaring raw materials costs exceeding continued cost reduction efforts, and an increase in SG&A expenses.

Income before income taxes increased to JPY 345.8 billion (+10.3%), for the first increase in two years for the fiscal first half.

Equity in income of affiliates totaled JPY 57.6 billion (+22.1%), for a seventh consecutive increase for the fiscal first half, due primarily to increased income in automobile operations in China.

Consolidated net income was JPY 271.3 billion (+11.0%), for the sixth consecutive increase.

II. Results for Fiscal 2nd Quarter of the fiscal year ending March 31, 2007

Consolidated revenue for the fiscal second quarter totaled JPY 2,630.8 billion (+12.5%), a sixth consecutive all-time record. Consolidated operating income for the period was JPY 193.0 billion (+18.6%), consolidated income before income taxes was JPY 158.8 billion (-6.2%) due mainly to fluctuation in fair value of interest rate swap included in non-operating income and expenses, and consolidated net income totaled JPY 127.9 billion (-4.3%).

III. Forecast for Fiscal Year Ending March 31, 2007

Honda aims to achieve JPY 11 trillions of consolidated revenue for the fiscal year ending March 31, 2007, a seventh consecutive all-time record, based on the unit sales plans of 10.71 million motorcycles, 3.7 million automobiles and 6.255 million power products. (Of the unit sales of Honda-brand motorcycle products that are manufactured and sold by overseas affiliates accounted for under the equity method, those with respect to which parts for manufacturing were not supplied from Honda or such subsidiaries are not included in unit sales, in conformity with U.S. generally accepted accounting principles as well as net sales and other operating revenue, which amounted to approximately 3.02 million units.)

Honda will carry out its business operations based on the goals described in the following chart with assumption of the average currency exchange rate of JPY 115 = U.S. dollar 1 (average rate for the first half of the fiscal year: JPY 115, second half of the fiscal year: JPY 115) and JPY 145 = Euro 1 (first half: JPY 146, second half: JPY 145 ).

Yen (billions)
------------------------------------------------------------------------
Year ended Forecast FY Difference Previous
March 31, March 31, (% change) forecast
2006 2007 (July 26)
------------------------------------------------------------------------

Net sales and other 9,907.9 11,000.0 +1,092.0 10,700.0 (+11.0%)
operating revenue

Operating income 868.9 820.0 -48.9 (-5.6%) 750.0 [730.8] [+89.1 (+12.2%)]
[gain on Daiko-Henjo*
excluded]

Income before
income taxes 814.6 745.0 -69.6 (-8.5%) 735.0 [676.6] [+68.3 (+10.1%)]
[gain on Daiko-Henjo*
excluded]


Equity in income of
affiliates 99.6 101.0 +1.3 (+1.4%) 103.0

Net income 597.0 555.0 -42.0 (-7.0%) 550.0 [514.2] [+40.7 (+7.9%)]
[gain on Daiko-Henjo*
excluded]

------------------------------------------------------------------------
*Gain on the return of the substitutional portion of the Employees'
Pension Funds to the Japanese government.
About Honda Motor Co., Ltd.

Honda Motor Co., Ltd. is one of the leading manufacturers of automobiles and power products and the largest manufacture of motorcycles in the world. Honda has always sought to provide genuine satisfaction to people worldwide. The result is more than 120 manufacturing facilities in 30 countries worldwide, producing a wide range of products, including motorcycles, ATVs, generators, marine engines, lawn and garden equipment and automobiles that bring the company into contact with over 19 million customers annually.


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