Canon Inc (CAJ) 2005 Q3 法說會逐字稿

Good morning or good afternoon, ladies and gentlemen. Welcome to Canon's third quarter conference call. My name is Mr. Tanaka. I am in charge of Finance and Accounting, Canon Incorporated, Tokyo, Japan. Today I will begin with a brief review of our third quarter results and full year's projections. I will then provide more details by each product group. Please note that all financial comparisons made during today's presentation are on a yearly basis, unless stated otherwise. Please turn to Page 3.

Third quarter net sales were up 4.8%. Sales momentums for color copying machine and digital cameras remained strong. As for laser bean printers and inkjet printers, we are able to maintain positive growth despite severe price competition. Both factors enabled us to exert the declines in (indiscernible) sales.

Third quarter gross profit increased by 4.9%. Although we continue to be relatively effected by such factors, the severe price competition, a (indiscernible) in demand for low-priced products, a steep rise in crude oil and material prices, we are able to exert the impact from these factors to our (indiscernible) sales and cost reductions. At the same time, we are able to achieve our gross growth profit margins in line with the same period last year.

Operating profit and net income showed negative growth because SG&A expenses in the third quarter of last year were reduced by 13.8 billion yen, which was again we realized to (indiscernible). If we exclude the impact of such onetime factors, we basically obtained the underlying trend of increasing operating profit and net income. Therefore, our actual business performance has not changed.

Now I would like to discuss our third quarter results in comparison with our predictions. Please refer to Page 4. The yen was weaker against the U.S. dollars and euros compared to our projections. This had a positive impact on both the sales and operating profit. The total impact on net sales on the operating profit from sales volumes was also positive. Much of this was attributed to the camera segment, which nearly benefited upon stronger than expected sales of digital A Series (ph) cameras. (indiscernible) products we didn't meet our predictions. This was due to our decision to focus more on profitability rather than same (indiscernible) under price competitions. We're also didn't meet our predictions for computer peripherals. This was mainly due to a delay in launching one new (indiscernible) printer. In the category of others, the positive (indiscernible) net sales were the result of our effort to minimize the price reductions for primarily digital cameras to timely transitions to competitive new products.

As for operating profit, in addition to limiting the price reductions, we are able to cut 17.5 billion yen in cost, an amount that exceeded our predictions. These positive factors however are not enough to offset an increase in SG&A expenses, such as those related to sales promotions.

Please turn to Page 5. Now I would like to discuss our revised predictions. Our revised exchange rate assumptions and the predicted impact of 1 yen change in this rate on first quarter sales and profit as shown on this page. Please refer to Page 6. This page shows our revised projections for the full year, taking into consideration the following foreign exchange rate assumptions. As for quarter net sales we are projecting that 300.7% (ph) increase. We expect this increase to come from continued strong sales on color copying machines, favorable market assistance of new competitive jet printers and digital cameras for the year-end selling season, and consolidation of our NEC subsidiaries that we acquired just recently. This increase also reflects a delay in the (indiscernible) in the same period last year, which resulted in lower levels of net sales. Therefore for the three years net sales are projected to increase by 7.8%, supported by increased sales by all of our core businesses.

In the regard to profit, in that first quarters we're predicting over 30% growth. The reason for this -- an increase in gross profit coming from expanded sales of all our core businesses and cost reductions. Another factor is our plan to hold the increase in SG&A expenses below the growth in sales. Based on this for the full year we expect pricing profit and net income to grow 7.9% and 11.8% respectively. As a result, we expect to achieve a record high net sales and profit this year. And there are six consecutive years of increased sales and profit.

Please turn to Page 7. As for the impact of the foreign exchange rate, we expect the yen to be slightly weaker than the euro and the U.S. dollar. This will have a positive impact on both the sales and operating profit. The total impact from changes in sales volumes is expected to be slightly (indiscernible) on both net sales and operating profit. While our camera segment, led by digital cameras, is projected to perform better then our previous projections, our business machine segment is expected to be below our previous projectdions in terms of sales volume. The current forecast for office machine equipment is lower than the previous projection for unit sales of monochrome copying machines in the second half, as we aim to about (ph) excessive price competition.

With (indiscernible) computer peripherals in all our quarters, mainly because we didn't meet our projection for inkjet printers sales in the third quarter. In the others category, the positive impact on net sales is due to the consolidations on two former NEC subsidiaries and the CB (ph) Inc., which is expected to add 24.2 billion yen to sales, and lower than previously expected price deductions of 19.2 billion yen for such products as digital cameras. The negative figures on the (indiscernible) profit is mainly due to an increase in advertising and promotional expenses, despite such positive factors as a reduction in price decline and an increase in cost reductions.

For the full year cost reductions is expected to total 72.5 billion yen. This includes 2.5 billion yen in additional cost savings to be realized in the third quarter.

Please refer to Page 8. I would now discuss our third quarter results and full year projections by segment, starting with business machines. Sales from color copying machines and the color and laser beam printers remained strong in the third quarter, in line with increasing demand for color documents in the office. In addition, we also increased the sales of inkjet printers, mainly in Europe. These factors enabled us to secure our sales growth of 3.1% for the business machine segment as a whole.

As for operating profit, although we maintained an operating profit margin of over 20%, operating profit declined 5.2%. This was mainly due to a delay in the launch of one new inkjet printer, which limited growth of not only hardware, but also related consumables.

Turn to page 9. In the first quarter we expect sales in business machines to grow by 8.6%, and operating profit by a significant 22.3%. From a sales perspective, in addition to continued strong sales, both color copying machines and color laser beam printers, we expect significantly increased inkjet printers sales by strengthening our lineups with the launch of 17 new models, offering improved (indiscernible) quality and advanced features in time for the year-end selling season. (indiscernible) through profit the range of new inkjet printers will help to improve our profitability and growth in sales of profitable consumables. It will also lead to a significant increase in profit.

(indiscernible) the organization level of plans for the fourth quarter, we aim to increase sales for the full year by 5.5%, and operating profit by 6.3%. For the full year, our current projection for operating profit is lower than our previous projections. This mainly reflect a lower than projected operating profit for inkjet printers in the third quarter, although we plan to recover from this in the fourth quarter.

Next I will explain business machine sales by product, starting with office imaging product. Please refer to Page 10. Unit sales for color copying machines continued to show strong growth and increased by 23% in the third quarter. In addition to strong sales in Europe and Japan for the first half of the year, promotional efforts in the United States were effective during the third quarter. In value terms, sales for the color copying machines and the consumables continued to grow increasingly -- increasing 21.3% in the third quarter. As for monochrome copy machines, we focused our efforts on increasing sales on high-speed motors for the first half. Because of the rapid shift for the colors, however sales in value trends declined by 5.4%. Overall, sales for office imaging product were up 3.7%, increased not only by a rise in sales of color copying machines, but also by the expansion of our solution businesses.

In the fourth quarter we will seek to minimize the decline in sales of monochrome copying machines and significantly expand sales of color models in our solutions business. Therefore, we're predicting an increase of 4.3% in net sales of office imaging product for 2005 as a whole.

Please turn to Page 11. Now I will discuss our computer peripherals business, starting with laser beam printers. Although demand for both monochromes and the color printers have shifted from low-priced models, this has led to the expansion of the market (indiscernible) particularly for color products. As a result, net sales of the laser beam printers for the third quarter grew 3.7%. In the fourth quarter, we expect high unit sales growth of color models to continue. However, in value terms because of the throw downs in growth of monochrome models and the decline in average selling prices, sales are predicted to grow slightly by 1.6%. For the full year, net sales are predicted to increase 6.9% due to high sales growth that we achieved in the first half.

Next I will talk about inkjet printers. Net sales in the third quarter increased by 7.2% thanks to launching some of our new models in September, mainly in overseas market. In the fourth quarter we will expand our inkjet printer sales by launching a total of 17 new multifunction and single function models with photo quality and the high-speed capability. By strengthening our lineup of the multifunction models, in particular we expect to achieve high growth of 29.4% in the fourth quarter, which should result in an increase of 12.4% for the full year.

Please turn to Page 14. Next I talk about camera segment. Net sales increased by 23.1% in the third quarter. This growth was driven by our digital Kercera (ph) models and compact digital cameras with enhanced features. We also registered strong third quarter growth and operating profit of 63.9%. This reflects strong sales of the higher product margin digital kercera (ph) and interchangeable lenses. We also enhanced marketing efforts for our H Series 3 compact cameras, also called Elph in the United States, and Ixus in Europe. Each have relatively higher selling prices. And despite intense price competition, we are able to achieve a high operating profit margin of 24%.

Please turn to Page 15. In the first quarter we're predicting a double-digit increase of 10% in camera sales, boosted by new digital cameras launches, which will result in 12.5% growth for the full year. Operating profit for the camera segment is predicted to increase 23.6% for the full year, thanks to increased digital camera profit. In order to maintain this level of profitability with an increased sales of high value-added digital SRLs and compact cameras, and further strengthen our cost reduction activities, such as in-house production of key components.

Please refer to Page 14. Now I'll discuss sales of digital cameras in more detail. Centered on growth in Eastern Europe and Asia, the digital camera market should expand to over 80 million units this year, and over 100 million units sometime in 2008. We projected at the beginning of this year.

In the third quarter we registered strong sales of SRLs and contact cameras, offering superior image qualities and functionality. This was made possible by the use of our proprietary Digital 2 (ph) (indiscernible) processors. As a result, digital camera sales for the quarter increased by 31% in unit terms and 27.2% in value terms. In the fourth quarter we expect the range of new digital cameras in time for the year-end selling seasons to expand sales even further. This include two digital SRLs, one of which incorporates a newly developed 35mm fluid type and semo center (ph), and seven new compact models. For the year as a whole, we are projecting a 21% increase in unit sales to 316.9 million (ph), which is 100,000 units more then we projected at the beginning of this year and a 15.6% increase in value terms.

Please turn to Page 15. By achieving our unit sales target of 16.9 million digital cameras for the full year, we expect to gain a global market share of approximately 20%, and secure our leading position for the third consecutive year. In value terms the contributions of these SRLs will increase thanks to strong sales of new models accounting for about 35% of all our digital camera sales in 2005.

Please refer to Page 16. Next I'll discuss our optical and other products. Net sales in the third quarter declined by 17.3%, reflecting a decrease in sales of semiconductor production equipment. Operating profit for the quarter fell by 1.0 billion yen. This was mainly due to a decline in the operating profit of semiconductor production equipment, 5.7 billion yen in the third quarter last year to 2.9 billion yen.

Please turn to Page 17. For the year as a whole we expect net sales of optical and product to increase 14.8%. This forecast is based on higher sales of LCD liners in addition to our consolidated results of two subsidiaries acquired from NEC and SED Inc. Operating profit for opticals and other products in 2005 is projected to rise by 36.0%. This should reflect an increase in the operating profits of semiconductor production equipment of 2.5 billion yen, which reflects an effect of increased sales of LCD liners and improved profitability of large format and RPC use in inkjet printers.

Please refer to Page 18. Next I will briefly discuss our semiconductor production equipment business. And so IC Stepper result 28 units during the quarter, 5 units was our projection. This is a result of our pure IC device manufacturers in Japan and Asia who accelerated their acceptance process to increase capacity (indiscernible). This however, was hitting heading fewer than we thought during the same period last year, due to the fact that global overall IC Stepper demand has been in a degrading stage.

In the third quarter results 23 LCD liners, 18 units pure (indiscernible) mainly due to an improvement in LCD manufacturers' production yield. However, in value terms sales are about the same as last year due to the fact that we have expanded sales of second generation models which have a higher selling price. Compared to our projection for the third quarter, unit sales of the LCD liner were up 4 units owing to (indiscernible) expected acceptance timing. As a result, sales of the semiconductor production equipment were down 26.1%, due to the decrease in unit sales of IC Steppers. For the full year we expect to sell 133 IC Steppers, 8 units more than our previous predictions, and 110 LCD liners, one unit fewer than our previous projections. In value terms we predict sales to increase by 9.3% supported by a an increase in LCD liners sales.

Please turn to Page 19. This page shows net sales by product group. Although sales of opticals and other products were down in the third quarter we are expecting to turn this around in the fourth quarter. Therefore our current projections shows our core businesses registering positive year-on-year growth.

Please turn to Page 20. This page shows operating profit by products segment. Third quarter operating profit decreased compared with the same period last year. We recorded a significant increase in the operating profit of cameras, which was (indiscernible) degrees in the operating profit business machines, and opticals and other products. But we couldn't compensate for the increasing corporate expenses, mainly due to the gain we booked in connection with (indiscernible). In the fourth quarter, however, given the underlying trend toward increasing camera profit, and a return to increased profit of both business machines and the opticals and the other products, we expect all of our product segments to achieve positive growth for the full year.

In conclusion, we will devote all of our resources to achieving our fourth quarter projections, and close the last years of our current (indiscernible) spend on a positive note, which is six consecutive years of increased segment (ph) profit. This concludes my presentation. I am very happy to answer any questions that you may have as long as time permits. Thank you very much for your kind attention.

Mr. Wei Wong.

I'm just wondering, the cash level of the Company is increasing to be a huge percentage of the market cap, close to 70%. Would the management consider increasing the dividends to a more significant level?

As you can see, according to our record in the past, we keep paying our dividend according to our results. So this year if we can we can obtain our predictions, accordingly we have to review the rigors of a dividend. We didn't decide the actual figures, but there is a big possibility that we're going to review the rigors of the dividend for this year. That is completely an answer?

When you say you are going to review the level of the dividend do you mean increasing the dividend payout ratio?

Yes, we're going to make a final decision sometime in December. And we will make a share announcement of the revised -- the rigors of the dividends, including a percentage against our net profit. That is completed an answer?

Mr. Robert Cross from the United States.

Can you let me -- my question is with regard to pricing and the pricing environment in laser beam and inkjet printers. If you could comment on the pricing environment you are seeing? And then I'm also curious, many of your competitors have now put out all in one inkjet printers in the sub $100 category. And yet you don't seem to have a product there. I'm curious if you anticipate moving down to that level or if you do not see sufficient profit to justify a sub $100 all in one?

The pricing situation in both laser beam printers and inkjet printers has, as you know, there's a big pressure all the prices coming down, including the monochrome laser beam printers and the color laser beam printers. So what we can do to -- this kind of trend is to cut the cost as much as possible. So we're going to transfer all the manufacturing facilities in southeast Asia like (indiscernible) China. So we try to compete pricing pressures like that.

And your second question about the pricing for inkjet printers all in one under $100. At this moment Canon has no intention to announce less expensive models like this. Currently our cheapest model is around $149. So we stay at this level, and we have no intention to make it lower. Is that a completely an answer?

One follow-up question. Lexmark, with their disappointing results, recently stated that they have seen weaker demand for ink from consumers. And they think there may be a change in the usage patterns for consumers. Have you seen anything similar?

That is a good question. The situation that Lexmark has is a little different from what we have right now. Because the total number of machines they have in the market is quite different. Because we just -- Canon just started in the marketing world, especially for multifunctional printers. So it is very difficult to make direct a comparison between within the Lexmark. But as far as Canon is concerned, we cannot see any big changes of decreasing the consumables consumption. That's completely an answer?

Mr. Ben Riskus (ph).

Following up on those questions, could you comment on office imaging and demand in Europe, also, LBP and inkjet printers in Europe? You said there was some different dynamics there. I was hoping you could clarify on the dynamics in Europe versus your other geographies. And then with regard to toner, following up on the Lexmark theme that Lexmark noticed the channel inventory reductions for laser printer toner. And we were wondering if you saw any impact on your toner business recently and what your outlook was for toner into year end.

Talking about the European business in inkjet printers and the laser beam printers, especially we have a very big jump in business of inkjet printers. The reason behind that, the European market realized the superiorities of our products, especially the (indiscernible) printhead. So that is the reason why we have a very big sales of inkjet printers in the third quarter, especially in the European market. And as far as the forecast for the coming fourth quarter, we can maintain the same trend in the inkjet printers as well.

And your second question about inventories of toner cartridge. You mentioned that the inventory of the Lexmark is decreasing. Unfortunately, we don't have any special data from Hewlett-Packard about the situation of the inventories in the European market. But we don't have any special comments about increasing the inventory sale. So we hope that inventory sales in the toner cartridge in the European market remains very reasonable results, we hope.

To clarify, the question was with regard to toner demand, do you see laser printer toner for both color and monochrome remaining steady into year end globally?

Globalwise, the growth of the toner cartridge in the third quarter grew 8%. We expect another growth in the fourth quarter of about 4%. So I think these kind of growth rates is very, very acceptable for us. Is this completely an answer?

Eric Yu (ph) from the United States.

I had a question relating to your SED investment with Toshiba. I see that the cash has exited the balance sheet. And I'm wondering what sort of equity income losses you are expecting next year from this investment as it ramps up?

Answering your question, the details of the (indiscernible) production of the (indiscernible) is finally not decided yet. So it is very difficult to tell about the levels of the deficit we are expecting next year. So as soon as it is finalized, we will make an actual announcement about that. Is this completely an answer?

I guess for budgeting purposes you must have some contingency. Let me ask it another way. How much property, plant and equipment are you expecting to have in the JV next year? And what sort of depreciation schedule are you using?

Answering the question, we are expecting some additional investment of 180 billion yen sometime later parts of next year. So before that we invested only 20 billion yen. So most of this property was equipment and machinery. So we're depreciating I think it is -- I believe in is five years. So you can simply divide it by five years. Then you can get some rough idea of what some depreciation. That completely an answer?

Just one other question. With respect to the corporate unallocated cost, you have been adjusting for the Gigo Hunshu (ph) from third quarter of last year, it seems to be a pretty significant increase in unallocated cost. Could you give us some more detail on that?

Answering the question, in addition to this related expenses to Gigo Hunshu this year we have special expenses related to the Canon's Expo, which recently just we have in New York and Paris and Tokyo, and some additional sales promotional expenses. Because of that, in addition to this Gigo Hunshu related expenses, our operating profit becomes negative in the third quarter. This completed my answer?

Keith Bockman from the U.S.

Thank you for taking my question. My question is I wanted try to clarify in the fourth quarter it looks like you're expecting office imaging products and computer peripherals to increase on a year-over-year growth rate versus the third quarter. And I wanted to try to understand if you could add some additional comments? Is that because less pricing pressure? Is that because of the new inkjet products that you have coming out? Better demand trends? I wanted to try to understand how you are expecting growth to accelerate in those two categories. Thank you.

Answering the question. The area that we are expecting big growth in the fourth quarter is especially inkjet printers. As I mentioned in my presentation, the -- especially for inkjet printers, the end of the year (indiscernible) big chance for us, because especially for the year-end receivables. So we introduced a total 17 new models, very attractive new models. So this helps to increase our sales of this area. And not only the printer itself, it helps to increase the sales of consumables at the same time. So at the same token, we are expecting the very good sales of the digital cameras, because digital -- end of the year is one of the big selling seasons for the camera itself. And on top of that, the sales of the LCD liners last year were very small because we changed the process of the (indiscernible) for the sales by the standard of the acceptance. So that is the reason why the sales of LCD liners in the fourth quarter last year was so poor. So in comparison with that we expect a very big jump this year.

If I could just follow-up please. On the printer specifically, on the laserbeam and on the inkjet printer, in terms of those two groups, what are your expectations for pricing in the fourth quarter versus the third quarter?

Answering your question, the pricing pressure especially for inkjet printers, the area that we're going to put so many new models is mainly for multifunction printers. In this area we can expect a higher price compared with single function printers. So in the fourth quarter we're not expecting so much high pressures -- pricing pressures compared with the third quarter. So we can enjoy the very healthy growth in the affairs of the digital printer area in the fourth quarter.

Coming from the line of Mr. Rick Herman from the United States.

Thank you for the call. My first question is regarding labor costs. And in regards to the both (indiscernible) comments about the importance of lifetime employment recently, and also an Economist article that talked about the increase in the number of nonregular workers in your Japanese factories, from 10% a decade ago to 70% now. So I'm just wondering with the large percentage of your manufacturing still in Japan, and the improving employment conditions in Japan in which employees may be looking for more full-time jobs, I'm wondering about your labor costs and whether those will be able to continue to decline going forward?

Answering your question, what other Presidents, Mr. (indiscernible) keeps saying, the labor costs itself I think never drops. Rather than dropping maybe it is increasing. So in depend upon our product. If it has labor intensity we have to go to China or Southeast Asia. But if our production is equipment-oriented production, then we should come back to Japan. Because among the total cost the portion of the labor cost is very, very small. So it doesn't make any difference whether we produce in Japan or in China.

So it depends upon what kind of product we are producing. Still in some printers, laser beam printers and our inkjet printers we are producing most of them, some in China, some in Vietnam. But other products like toner cartridge, we're going to produce most of them in Japan, utilizing our equipment. So the labor costs itself is never dropped. It keeps increasing. But depending upon the features of the products we're going to decide where we're going to produce. That completely an answer?

Second question, is your inventories have been increasing to 55 days or 538 billion yen in the most recent quarter. Can you comment on what is the reason for that?

To reduce the inventory we tried so many different ways. One of the most important things -- we reduced the rate of production by the production reformation activities. We switched, as you know, from (indiscernible) system to (indiscernible) production. By this third production system we can control the number of the units we produce -- very basis. So we can make a very close relationship with our sales company about their orders. And we try to limit the number of the products the sales company orders. So by this -- production -- the formation activities we reduced so much inventories in process and final products. So even now that we have close, very close contract contact in the sales companies under our Tokyo office, and we try to reduce our inventory as well as possible. This completely an answer?

I don't understand how that answers the question of increasing inventories. If inventories were declining, I could understand where your close relationships with your clients was declining. But the cell production method has been around for 5, 7 years. And so you would think that inventories would be in better shape, not increasing. So are there any specific products that are the result of the increase in inventories?

The figure that you mentioned, 55 days turnover is result at the end of September. So usually the inventory levels end of September is very high because the sales company is preparing for the year-end selling season. So usually in the levels of inventory at the end of the year will decrease dramatically. For example, last year we reduced about 9 days from 58 to 49, 47. So I hope that very similar things will happen this year. Then we can reach maybe 42 or 43 days turnover end of the year. Is that completely an answer?

So it is seasonal. The last question I have is the CapEx needed for the new television project, SED TVs. What do you expect CapEx to be for the next couple of years?

According to the current trend, we're going to make 200 billion yen in total. And we're going to split this total CapEx between Toshiba and Canon. So our portion should be 100 billion yen. But of course this is a current plan we have, and this will be reviewed on a daily basis. So maybe they is some change. But according to the current plan that is about the plans for the CapEx. That is completely an answer?

That 100 billion would be over the life of the projector or how much would be next year, and how much in '07?

100 billion yen covers up to 2010, five years. So if we try to expand our business, of course, we need some additional CapEx as required. But this 100 billion yen for Canon and Toshiba is covering the plans that we have until the end of 2010. This is completely an answer?

Ben Yu (ph) from the United States.

As a follow-up to the SED question, when do you start to consolidate the JV? Is it the fourth quarter of this year?

Yes, we're going to consider it starting from the fourth quarter of this year.

At the analyst meeting in Japan just a few hours ago, you guys have talked about 7.3 billion in SED sales for Q4. What is the operating loss associated with that, or do you expect to have some profits associated with the 7.3 billion in SED sales for Q4?

Answering the question, the growth in the fourth quarter is a very negligible figure. Because right now they are not producing the panel so much. Most of the income comes from the R&D activities. So both Canon and Toshiba is subsidizing for the (indiscernible) expenses for the sake of being a parent company. So that is reason why. This will be treated as R&D expenses in the parent Company of Canon and Toshiba. So it is (indiscernible) Company. They don't absorb so much of the gross because of. This completely an answer?

Where is the 7.3 billion in SED sales coming from then for Q4?

As I mentioned, we're not actually producing the panes yet, so these sales is R&D outsourcing fee that we receive from Toshiba and -- from Toshiba.

Originally I think you guys had planned 180 billion in CapEx for 2006 to 2008. I think earlier you said it was 200 billion, up to 2010. Has that changed from the original plan?

There is no change from the beginning. We're going to make a 20 billion yen investment sometime next year, and 180 billion yen from 2006 to some time 2010. It depends upon the how quick they can -- they need it, this investment.

I understand the cash portion to split 50-50 with Toshiba, about 100 billion out of your own pocket. But from a consolidation standpoint, because you have to consolidate does that mean that you'll have to bear the entire burden of the $200 billion in depreciation on your P&L?

As you know, Canon has one share more than Toshiba, so considering this we treated this as a fully (ph) consolidations. But as you know, we -- as a profit is concerned -- we split according to the percentage of the shares we're holding. So finally, we observe just 60% of the profit or a loss by Canon.

In terms of 200 billion through 2010, I assume most of it will be spent on PKE and any equipment. So would it be fair to assume that most of the CapEx will be spent in the early part of the period rather than in the back end?

It is very difficult to divide it by each year.

Would be fair to assume that it is more front-end loaded than back end?

Yes, I think so. Relatively speaking it will be divided by each year.

My last question is can you talk a little bit about the timing of your new ARF emergent scanner. Is it still on track to come out in 2007? And when should we start expecting the first sales? Is that more of a second half '07 or is it an '08 timeframe?

Our schedule of introducing the new ARF during the year of 2007 is unchanged. We are sure that we can put in our revenues during the year 2007. This completes my answer?