Honda cuts profit target as Takata air bag recalls bite

Japan's Honda Motor Co sliced 6.5 percent off its core annual profit forecast as it set aside hundreds of millions of dollars in extra cash to cover an extended car recall to replace potentially faulty air bags made by Takata Corp.

Reporting its third-quarter earnings fell by nearly a quarter as it soaked up recall costs, Japan's third-largest automaker said it now expects an operating profit of 720 billion yen ($6.1 billion) for the year to March 31.

It previously forecast 770 billion yen, but has set aside an extra 50 billion yen to cover what it said were quality-related costs including the Takata air bag recalls. Still, Honda's Executive Vice President Tetsuo Iwamura said, "We are not seeing a big impact on sales in North America from the air bag issue."

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In the three months ended December, Honda said operating profit skidded 22.5 percent to 177.2 billion yen from 228.57 billion yen in the same period a year earlier. That was below the 189.11 billion yen forecast by Thomson Reuters SmartEstimate from a poll of 10 analysts.

A sign is shown over the O'Hare Honda car dealership in Des Plaines, Ill.
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Honda also said it now expects to sell a total of 4.45 million cars this fiscal year, down from the 4.62 million it previously forecast, as sales in Japan fall short of its original target. With new model launch delays and fierce competition in the domestic small car market, Honda now expects to sell 790,000 cars in Japan this year, 11 percent below the 890,000 it previously expected.

Speaking at a news conference in Tokyo, Honda's Iwamura said the impact of lower sales on its earnings will be cancelled out by the beneficial effect of the weaker yen. The slide in the value of the Japanese currency means sales booked overseas now translate back into more yen.

Honda accounts for more than half of the Takata-related recall of about 25 million vehicles since 2008. Takata's inflators can explode too forcefully and send metal shards into cars, and have been linked to five deaths, all on Honda's cars.

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Honda is paying for the voluntary recall of about 4 million cars in the United States alone. But it expects to get those costs back if investigations find Takata at fault, and many analysts say reputational damage from the recalls seems minimal, including in the United States, Honda's most important market.

Potentially a bigger near-term concern is cheaper fuel as global oil prices slide, with U.S. sales of light trucks up 10 percent in 2014 against a 1.8 percent rise for passenger cars. That's a red flag for Honda, which excels in cars that have attracted buyers concerned about fuel economy.

"The fall in fuel prices represents a body blow to Japanese automakers," said Merrill Lynch analyst Kei Nihonyanagi, speaking before the third-quarter results were published.