UPDATE 2-Honda profit beats estimates but U.S. sales dented

Tue Jul 29, 2014 7:32am EDT

* April-June oper profit up 7.1 pct, beats forecasts

* FY oper profit outlook raised to 770 bln yen from 760 bln

* Honda's N.American Q1 operating profit down 6 pct

* Production at new Mexico plant slower than expected -exec

* Still aims for annual US sales target of 1.55 mln vehicles (Adds executive comment, North American profit decline, Brazil and China information)

By Yoko Kubota

TOKYO, July 29 (Reuters) - Honda Motor Co said teething troubles at a new plant in Mexico dented sales and profit in the U.S. market, its biggest, taking the shine off a better-than-expected rise in quarterly profit powered by brisk results in Japan.

U.S. sales by Japan's third-largest automaker dipped 0.8 percent in the first half, while sales rose at rivals Toyota Motor Corp and Nissan Motor Co. It posted a 6.0 percent drop in North American operating profit for the April-June quarter.

Overall earnings were buoyant, however, with a 7.1 percent rise in quarterly operating profit to 198.04 billion yen ($1.9 billion), beating the 181.8 billion yen mean estimate of 12 analysts polled by Thomson Reuters I/B/E/S.

Honda said its Mexico plant, which makes the Fit subcompact, was hit by delays as it adopted new manufacturing techniques, but the company kept its full-year U.S. sales targets unchanged and said volumes would get back on track.

"We are extra careful with quality, and that's why initial delivery was somewhat delayed, but as the workers acquire more skills, we can catch up," Honda Executive Vice President Tetsuo Iwamura, who heads the company's U.S. operations, told a news conference on Tuesday.

"We want to hit our annual (U.S. sales) target of 1.55 million vehicles, and we are doing our best to do so."

Honda nudged up its full-year profit forecast to 770 billion yen from 760 billion to reflect a slightly weaker yen projection.

The company also cited the delayed launch of the new Acura TLX sedan as another factor behind its dull performance in the United States for the quarter.

Honda's average U.S. incentive per vehicle in April-June was $1,941, according to TrueCar - up 11 percent from a year ago and slightly higher than Toyota's, although below Nissan's. A Honda spokesman said it was trying to keep incentive levels low for key models such as the Accord and the Civic.

The quarterly operating margin for Honda's four-wheeled vehicle business was an anaemic 4.3 percent, nearly flat from a year ago, weighed down by the cost of investments in new plants in Mexico, Thailand and Brazil.

Honda is carefully watching conditions in Brazil, where auto sales are slumping despite government stimulus, to decide whether it needs to push back the start of a new $430 million plant, Iwamura said.

Weakness in the United States was outweighed by strength in Japan due partly to strong sales of the redesigned Fit and to back-orders left over from a rush of buying that preceded an April 1 sales tax hike.

In China, Honda's sales grew 11.7 percent year-on-year in January-June, but the car maker's inventories have built up somewhat, and it has curtailed operations at its Wuhan plant to one shift per day from two, Iwamura said.

Honda's shares ended down 0.8 percent before the earnings were announced, compared with a 0.6 percent rise in Tokyo's benchmark Nikkei average. The shares were down 18 percent for the year so far, underperforming the Nikkei's 4 percent drop. ($1 = 101.9600 Japanese Yen) (Reporting by Yoko Kubota; Editing by Edmund Klamann, Christopher Cushing and Jane Baird)