Kenwood CEO sees slight growth in 06/07

By Nathan Layne

HONG KONG (Reuters) - The chief executive of Japan's Kenwood Corp. (6765.T: Quote, Profile, Research, Stock Buzz) said on Thursday he was hoping for a small rise in operating profit in the new business year from April, helped by higher sales of car electronics and cost cuts.

Haruo Kawahara, speaking at the Reuters Global Technology, Media and Telecoms Summit in Hong Kong, said he was banking on its budding original equipment manufacturer (OEM) car electronics business to be a major driver of revenue growth.

Kawahara predicted that sales in its loss-making home electronics division would likely decline, but said it would turn profitable in the second half of 2006/07 thanks to production reforms and rising demand for high-end portable audio devices.

As a group, Kenwood is targeting an operating profit of 10 billion yen on sales of 185 billion yen ($1.59 billion) in the current year to March 31. Sales should rise next year but increased investments could limit profit growth, Kawahara said.

"At this moment it is time to finalize the budget for next year so I cannot say precisely, but we hope sales will be a little bit better than this fiscal year and operating profit level equal or better than this year," he said.

Kawahara, who became CEO in 2002 after 41 years at Toshiba Corp. (6502.T: Quote, Profile, Research, Stock Buzz) and a two-year stint at Ripplewood Holdings, said Kenwood needed to boost spending in the new year to upgrade plants in Europe and to bolster development of new products.

Analysts are also conservative about its growth prospects in 2006/07. According to the average of five forecasts, the consensus is for operating profit to grow less than 10 percent to 10.6 billion yen, compared with 40 percent growth this year.

One area of concern is the car stereo market, where prices are tumbling by some 15 to 20 percent amid tough competition with the likes of Pioneer Corp. (6773.T: Quote, Profile, Research, Stock Buzz), Sony Corp. (6758.T: Quote, Profile, Research, Stock Buzz) and Clarion Co. Ltd. (6796.T: Quote, Profile, Research, Stock Buzz).

Kawahara said, however, that Kenwood could cut costs by about 30 percent in the new financial year by streamlining its procurement, design and manufacturing operations.

"We're going to invest more in advanced design technology and infrastructure and also improve the cost of procurement," he said, noting plans to open a new international purchasing office in Hong Kong next month.

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Historically, Kenwood has been focused on the aftermarket for car electronics but it is trying to expand its OEM business because auto makers are increasingly using electronics as a way to add value to their cars.

Kenwood's top OEM customers are Denso Corp. (6902.T: Quote, Profile, Research, Stock Buzz), Fuji Heavy Industries Ltd. (7270.T: Quote, Profile, Research, Stock Buzz) and Honda Motor Co. (7267.T: Quote, Profile, Research, Stock Buzz), but it has enjoyed increasing sales to Mitsubishi Motors Corp. (7211.T: Quote, Profile, Research, Stock Buzz) and Germany's Robert Bosch.

Kawahara said its OEM business would likely generate sales of about 45 billion yen in 2006/07, compared with slightly below 40 billion yen this year.

He also sounded more upbeat on its home electronics business, which posted an operating loss of 977 million yen in the nine months to December and is considered its Achilles' heel.  Continued...