| YOKOHAMA, Japan
YOKOHAMA, Japan Nissan Motor Corp (7201.T) posted a steeper-than-expected 19.7 percent drop in quarterly operating profit on Thursday as a strong yen and costly sales incentives outweighed the impact of solid vehicle sales.
Japan's second-biggest automaker vowed though to meet its full-year operating profit target of 700 billion yen, pinning its hopes on revamps of existing models, such as the Altima sedan, to boost earnings.
The company, 43 percent-owned by Renault SA (RENA.PA), said it was confident of hitting sales growth targets in China but may struggle to increase sales in the fiscal year to March 2013 in Europe, where several countries are mired in recession.
"It is true that progress is poor," Joji Tagawa, Nissan's corporate vice president, said of the company's performance in the April-to-June period, or Nissan's first quarter.
"We will be introducing new models in the second half of the financial year. Our internal plan is that while performance in the first half is rather slow, we will see growth in vehicle sales and profits in the latter half of the year ... It's a matter of how much we can succeed in selling the new models, as well as how the yen moves."
Operating profit in April to June dropped to 120.7 billion yen ($1.5 billion), below the average forecast of 142.5 billion yen from six analysts polled by Thomson Reuters I/B/E/S.
Net profit fell 15 percent to 72.3 billion yen from a year earlier 85 billion yen.
Nissan's earnings showed that the yen's strength reduced operating profit by 25.7 billion yen. Increased sales costs, including incentives to sell older models in the United States, cut another 76.4 billion yen.
Japan exporters have long bemoaned the steady rise in the value of the yen as it reduces their international competitiveness, including against South Korea automaker rivals, and eats into the income made abroad when converted into yen.
Nissan kept its foreign exchange assumption for the financial year of 82 yen per dollar, a level the yen has achieved in only two weeks since the fiscal year began on April 1. Otherwise the yen has traded at higher levels.
It rose to 78.14 per dollar on Thursday from more than 83 in mid March, an increase of 6.2 percent. Shares in camera maker Canon Inc (7751.T) slumped on Thursday after it cut its profit forecast, citing the strong yen.
Nissan also had penciled in a foreign exchange assumption 105 yen per euro, but the currency has traded at higher levels than that since early May.
"With first-quarter profits weaker than expected, and Nissan already facing challenges from the strong yen and concerns in markets in China and the U.S., we're unlikely to see any upward revisions late in the business year, like we've seen over the past few years from Nissan," said Koji Endo, analyst at Advanced Research Japan.
Nissan started selling revamped models of its popular Altima sedans in the United States in late June and it plans to revamp others such as the Pathfinder sports utility vehicle later this fiscal year to try to boost sales.
The quarterly results from Nissan are likely to look weak in comparison with domestic rivals Toyota Motor Corp (7201.T) and Honda Motor Co (7267.T).
But that is largely because Nissan bounced back more quickly than its rivals from the Japan earthquake and tsunami in March 2011, so the annual comparison of its results is less flattering.
Japan's biggest automaker Toyota, due to report on August 3, is expected by analysts to swing to a net profit of 243 billion yen from an 80-billion-yen loss a year earlier.
Honda, Japan's No.3 automaker, is likely to post a net profit of 144.8 billion yen, nearly five times its year-earlier result. It reports on July 31.
CONFIDENT IN CHINA
Nissan sold 1.2 million vehicles globally in the three months to June, up 15 percent from the same period in the previous year. North America and China each accounted for about 28 percent of the total.
Tagawa said that the firm is confident in hitting its target of 8 percent growth in vehicle sales in the Chinese market even though economic growth is slowing down.
Vehicle sales in China for Nissan, Japan's top-selling brand there, grew 10 percent in June from a year earlier, though an executive has said that increasing demand in inland areas is barely offsetting slowing demand in China's coastal areas.
The China new car market grew just 2.9 percent in the first half of 2012 after posting anemic growth of 2.5 percent in 2011, setting the country up for its slowest back-to-back years of growth since the market took off in the late 1990s.
Tagawa described conditions for Japanese automakers in Europe as tough, saying Nissan may struggle to increase sales there this fiscal year.
Its European sales fell 1.7 percent in the quarter from a year earlier. The company had said it wanted to boost European sales by 1 percent this fiscal year.
Nissan said in May that it expected to sell 5.4 million vehicles globally in the year to March 2013, up 10.4 percent from the previous year.
Under Chief Executive Carlos Ghosn, who was not present for the earnings presentation, Nissan has pushed into fast-growing markets like China and Russia.
Since the start of the business year in April, shares in Nissan have dropped by around 19 percent, similar to a drop in Toyota. Honda's shares have fallen more than 23 percent.
On Thursday ahead of the results, Nissan's shares ended at 707 yen, up 1.1 percent, which compared with a rise in the Nikkei average of 0.9 percent.
(Additional reporting by James Topham and Kentaro Sugiyama; Editing by Neil Fullick)