Canon Inc (CAJ) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Canon fiscal year 2008 third quarter results presentation. For the duration of the presentation all the lines will be in listen-only mode. The presentation from Canon is for 30 minutes and the question and answer session is for another 30 minutes after the presentation. This call is being recorded for the replay purpose. Should you have any objections you may disconnect at this time.

I would like to hand the call over to Mr. Masahiro Osawa, Managing Director and Group Executive, Finance and Accounting Headquarters. And I will be standing by for the question and answer session. Over to you, sir.

Hello everyone, and welcome to Canon's conference call. My name is Masahiro Osawa. I am in charge of Finance and Accounting. Please note that all financial comparisons made during my presentation will be on a year-on-year basis unless otherwise stated.

Please refer to slide two. This slide outlines today's agenda.

Please turn to slide three. First I will discuss our revised projection for the full year. What started as a subprime loan problem in US has now become a global financial crisis, which in turn is having a significant impact on the [real] economy. Due to this circumstance, our markets are being curtailed. And coupled with a rapid and sizeable appreciation of the yen, these factors are having a significant impact on our business performance.

Under this severe environment, we decided it was necessary to adjust our full year projections, and are now expecting to post our first sales and profit decline in nine years. We also expect the harsh economic environment to continue into next year. Under this situation, we aim to slowly reduce channels and our own inventory in order to improve mobility and maintain our sound financial condition.

Additionally, we will continue our efforts to slowly reduce expense and cost. Under this extremely severe situation, we also feel it is important to actively push forth measures aimed at building a structure that can speedily respond to significant changes in the world economy and beefing up our operative structure.

I will now discuss our quarterly results. Please refer to slide four. I will now summarize our third quarter performance. In the third quarter, our business performance was impacted by these top three factors. On the positive side, each product group was able to roll out new products as planned. And we also continued to achieve results in reducing SG&A expenses. However, as the rapid deterioration in business confidence was significantly above our expectation, we posted decreases in both third quarter net sales and profits.

Please turn to slide five. Third quarter net sales decreased 6.2%, as the economic weakness that initially impacted office use products started to have an impact on consumer goods as well. Gross profit decreased 10.1% due to lower unit sales of copying machines, the yen appreciation and the high price of raw materials. Despite continued expense cutting, operating profit decreased to 25.8% as we continued to invest in our future by enhancing our marketing capabilities and maintaining a high level of R&D to net sales ratio.

I would now like to explain the four factors behind the changes in third quarter net sales and operating profit in more detail using the next slide.

Please refer to slide six. Due to a substantial appreciation for the yen against the US dollar, currency had a significant negative impact on net sales and operating profit. As for sales volume, although we increased sales of digital cameras and laser beam printers, the overall impact was negative due to lower sales of copying machines and the IC steppers. As for the other categories, the negative figures under net sales and operating profit represent large price cuts of compact digital cameras to cope with fierce competition due to weakening market conditions.

Please turn to slide seven. Next I will discuss our projections for the fourth quarter. This slide shows our exchange rate assumptions and the projected impact that a [volume] change in these rates would have on our fourth quarter net sales and operating profit.

Please turn to slide eight. This slide highlights some key points regarding our current projections for the fourth quarter of 2008. As you can see, we expect the external environment to be challenging. Under this situation we are now projecting our first year of sales and profit decline in nine years.

In order to respond to this situation, we aim to raise our market share by launching highly competitive new products in a timely manner. And to respond to rapid changes in market conditions, we plan to make full use of supply chain management. Through this measure, we aim to squeeze channels and our own inventory to improve mobility and maintain our sound financial structure as we prepare for next year. Furthermore, we will make the most of internal reforms to thoroughly reduce cost and expense on a consolidated Group-wide basis.

Please refer to slide nine. This slide is used to show that we have been actively launching new products at a pace exceeding previous years, raising our new product sales ratio up a notch from the beginning of this year. In the fourth quarter, we will continue launching new products in a timely manner, maintaining our high level of new product sales ratio and promoting our competitive edge.

Please turn to slide 10. This slide summarizes our projected results for the fourth quarter. In the fourth quarter, we expect the weakened global economy and sizeable yen appreciation to negatively impact net sales which is projected to decrease 9%.

Excluding the impact of currency, however, we've projected a slight increase in net sales and a significant increase in unit sales of LCD [items]. And digital cameras are expected to offset lower net sales of copying machines and laser beam printers.

Operating profit is projected to decrease 38.1% due to the yen's sizeable appreciation and the cost increase resulting from high prices for raw material.

I will now compare projected fourth quarter net sales and operating profit with our result in the same period last year, using the next slide.

Under our revised projections, changes in exchange rates have a significant negative impact on projected net sales and operating profits. As for sales volume, although we are projecting lower volumes for copying machines and the laser beam printers, the overall impact of changes in sales volumes is projected to be positive on both net sales and operating profit, mainly due to expected strong unit sales of digital cameras and the significant increase in sales of LCD items.

Within the other category, the negative figure under net sales represents expectations that competitors will continue to be aggressive in the pricing of mainly compact digital cameras.

The negative figure under operating profit within the other category represents the aggressive pricing by competitors, slightly offset by continued efforts to reduce costs and expenses.

I will now compare the current second half projection with our previous forecast. Changes in exchange rate assumptions had a negative impact on currently projected net sales and operating profit. As for changes in sales volume, we lowered our projection for copying machines, as we expect a further decrease in the willingness of corporations to invest.

As for Computer Peripherals, specifically laser beam printers, taking into consideration our expectation that demand will slow down in major markets and aiming to avoid pileup channel inventory as we head into next year, we reduced our projections for both hardware and consumables.

For Cameras, although we expect sales of SLR cameras and the interchangeable lenses to remain on track, we lowered our projection for compact cameras due to an expected weak global market.

For Optical and Other Products we slightly lowered our projection for Japan, as we expect the market conditions surrounding IC steppers to worsen. As for net sales within the other category, this represents a JPY10b lower impact from price decline due to lower sales volumes.

As for operating profit within the other category, this represents the previously projected price decline of JPY10b and additional expense savings of around JPY40b absorbed by a JPY30b reduction in expected cost savings.

Please refer to slide 13. Next, I will discuss our results and current projections by product, starting with Business Machines. Third quarter net sales decreased 5.1% despite increased net sales of laser beam printers and due to decreased net sales of copying machines and inkjet printers. Third quarter operating profit decreased 12%, reflecting decreased net sales, the yen's appreciation and the high price of raw materials.

Please turn to slide 14. Fourth quarter net sales are projected to decrease 16.1% against the backdrop of the yen appreciation and weak global business conditions, impacting sales of copying machines and laser beam printers. Fourth quarter operating profit is projected to decrease 33%, due to the expected decrease in unit sales and significant yen appreciation.

I will now discuss net sales of Business Machines by product segment, starting with Office Imaging Products. Please refer to slide 15. Third quarter net sales of monochrome copying machines decreased 17% as lackluster corporate investment resulted in lower unit sales and a shift to low-end products.

Third quarter net sales of color copying machines decreased 4% despite strong unit sales of new mid to low-speed models, launched in the first half of this year and due to the weakened economy, price competition and yen appreciation. As a result, net sales of Office Imaging Products declined 11.7%.

In the fourth quarter, we plan to expand sales in the A4 color market with a new A4 color copying machine recently launched and mid to low-end black-and-white machines, together with a strong lineup of imagePRESS models targeting the POD market. However, net sales of office imaging products in the fourth quarter is projected to decline by 17%, as we expect the weak economic situation to continue and intensifying competition, mainly in the color market.

Please turn to slide 16. Next I will discuss Computer Peripherals, starting with laser beam printers. As a result of weak business conditions worldwide, the laser beam printer market started to slow, not only in developed countries, but also in emerging markets.

Under this situation, we posted a 2.5% increase in net sales or a 10% increase in local currency terms. We accomplished this through an increase in sales of multifunction models, even though our overall units were flat, as well as through continued double-digit net sales growth of consumables in local currency terms.

Taking into consideration the slowdown in demand in major markets, we reduced our projections for sales in the fourth quarter, as we aim to squeeze channel inventory in preparation for next year. By taking prompt action, we also aim to squeeze our own inventory and further raise our mobility in preparation for next year. As a result, fourth quarter net sales are projected to decrease 19.1%.

Next year, although we expect the severe economic situation to continue, if balance in the world economy is restored, we expect the growth path of the laser beam market to return driven by [realization] and the demand in emerging markets. Given this, we will continue to develop new competitive products and work to reduce costs and improve productivity through automation and unmanned production in order to make improvements in profitability over the mid-term.

I will now discuss inkjet printers. Third quarter unit sales of inkjet printers increased 12% as a result of strong sales in Southeast Asia and Latin America as well as favorable sales of business-use multifunctional models in North America. Third quarter net sales of inkjet printers however, decreased 2.2%, reflecting the yen's appreciation and a temporary decline in unit sales of consumables due to actions taken by [a peer] in Europe to squeeze inventory levels.

In the fourth quarter, due to future improvements in print speeds, (inaudible) designs and the newly-developed inks that makes possible further improvements in image quality and longevity, we expect to actively expand sales of both hardware and consumables during the year-end selling season, but record 6.4% decrease in net sales due to the yen's appreciation. As a result, we expect to achieve our unit sales projection of 8% and maintain double-digit growth of consumables in local currency terms.

Please refer to slide 17. Next I will discuss Cameras. Third quarter net sales of cameras decreased 6.8% despite strong sales of video cameras and due to a decrease in unit sales of compact cameras, which were impacted by worsened business confidence in developed countries and falling prices.

Third quarter operating profit decreased 41.3%, reflecting the significant impact from falling prices of compact cameras and the yen's appreciation. As for the significant drop in third quarter operating profit ratio, this is due to lower pricing of compact models launching in the spring and the [2-point] impact due to currency.

Please turn to slide 18. Despite expectations for continued severe competition due to expanded sales of competitive new products, we are projecting steady unit sales growth of digital cameras and video cameras. As a result, fourth quarter net sales of cameras are projected to increase about 8% in local currency terms, but decrease 5.7% due to a significant impact from the yen's appreciation.

Fourth quarter operating profit is projected to decrease 24.7%. This reflects the yen's significant appreciation and falling prices of compact cameras, as well as the expected benefit from expanded sales of new products and an improvement in product mix due to a higher ratio of SLR cameras.

Despite our outlook for continued severe pricing of compact cameras, through new (inaudible) products incorporating cost reduction and the factors I just mentioned, we expect an improvement in profitability. As such, fourth quarter operating profit ratio, excluding impact of currency, is projected to be a high level similar to same period last year.

Please refer to slide 19. Next I will discuss mainly sales of digital cameras in more detail. In the third quarter we steadily increased sales of new compact cameras that we launched in the first half of this year. We also posted continued strong sales of SLR cameras. Despite this, third quarter net sales of digital cameras decreased 9%, reflecting the significant impact of falling prices of compact cameras in developed countries and the yen's appreciation.

In the fourth quarter, we expect unit sales to increase 18%, driven by expanded sales of new products that incorporate our Digic IV image processing engine. However, due to falling prices and the yen's appreciation, net sales are projected to decrease 5%.

Taking into consideration the weak market for compact cameras, falling prices and the yen's appreciation we lowered our three-year projection for unit sales from 29.4m to 27.9m. This includes our projection of 4.4m SLR cameras, which we did not change.

Please turn to slide 20. Now I would like to briefly talk about new products for the fourth quarter on that incorporate our next generation high-performance image processing engine, the Digic IV. Compared with the Digic III, the Digic IV offers more functionality, faster processing speed and improved image quality, which works to differentiate and further raise the competitiveness of our products. So far, we have incorporated this processor into five compact models and two SLR cameras.

Please refer to slide 21. Next I will discuss Optical and Other Products. Third quarter net sales decreased 12.2% due to a decrease in unit sales of IC steppers that more than offset the increase in sales of LCD items. Third quarter operating profit increased 47%, mainly due to the increase in unit sales of LCD items and the improvement in the profitability of large-format printers, which offset a decrease in sales of IC steppers.

Please turn to slide 22. Next I will discuss our fourth quarter projection for Optical and Other Products. Fourth quarter net sales are projected to increase 39% due to an expected increase in sales of LCD items. Fourth quarter operating profit is projected to increase JPY4.2b mainly due to the increase in sales of LCD items.

Please refer to slide 23. Next I will discuss sales of semiconductor production equipment in a little more detail. The IC stepper market is projected to shrink by about 40% this year, from about 560 units last year, due to continued downward trend in memory prices. Reflecting this severe market condition, our IC stepper sales decreased by 23 units, to 19 in the third quarter. The third quarter sales of LCD items, however, increased by five units to 15, due to expanded investment by panel manufacturers. As a result, third quarter net sales of semiconductor production equipment decreased 25.6%.

Fourth quarter sales of IC steppers are projected to decrease by 32 units to 11 due to expected weakness in memory prices. Fourth quarter sales of LCD items, however, are projected to increase by 27 units to 33 as shipping and installation are processing -- progressing smoothly. As a result, fourth quarter net sales of semiconductor production equipment are projected to increase 67.8%.

Please turn to slide 24. This slide summarizes operating profit by product group for the full year. As for Business Machines, operating profit is under pressure this year due to various factors such as the drop in sales reflecting the weak economy, the yen's significant appreciation, high prices for raw materials, as well as measures to curtail production and the burden of higher depreciation due to investment in automation.

Despite this, each major product group within Business Machines has steadily built upon its installed base of products and demand for consumables is also increasing. Excluding the impact of the yen's sharp appreciation, operating profit ratio is projected to be around 22%, similar to high level we achieved last year.

As for Cameras, operating profit is projected to decrease 25.9%, due to significant impact from a dramatic decline in compact cameras prices and the sharp yen's appreciation. Excluding the impact of the yen's sharp appreciation, however, operating profit ratio is projected to be around 24% as the dramatic fall in prices puts pressure on profits.

As for Optical and Other Products, despite a significant contribution to net sales of LCD items, operating profit for the whole segment is projected to decline, due to decrease in net sales of IC steppers and the independent businesses of Group companies as well as declining profit margins.

Excluding the impact of exchange rates, operating profit ratio for the whole Company is projected to be around 16%, as we expect to offset the dramatic economic slowdown through expense reduction to a certain degree, but not overcome the sharp yen appreciation in such a short period of time.

Please refer to slide 25. Finally, as for our cash on hand situation, starting with cash flow, through internal efforts such as compressing inventory we expect free cash flow to be JPY175b due to the harsh economic environment.

As for shareholder return, despite the severe environment, we believe our corporate structure remains sound. And thus, at this time we expect to maintain our projected dividend of JPY110 per share for the full year.

As for share repurchases, in line with our aim of improving capital efficiency and ensuring a flexible capital strategy that provides for such future transactions of share exchanges, we decided to use JPY50b thus far to acquire our own shares. As we move forward, we plan to flexibly respond to future repurchasing activities, taking into consideration our cash-on-hand situation, investment price, trends in stock price and other factors.

In the fourth quarter, given the economic environment, exchange rates and other factors, we are faced with an unusually severe situation. To overcome this, we will work to implement measures in the area of cost and expense reduction to further enhance our corporate structure and prepare for the possibility of further significant growth.

This ends my presentation. I would now like to use the time remaining to answer any questions you may have.

Thank you. (Operator Instructions).

Mr. Osawa will answer in Japanese and his answer will then be translated into English by the interpreter provided by Canon. Also, due to the limited time, please ask one question at a time. (Operator Instructions).

Our first question comes from the line of Ben Legge from Barclay Capital. Please go ahead, sir.

Yes, thank you.

With regard to laser printers, you did okay in the quarter of about flat growth and then you're guiding to negative 36%. Can you just talk about, first, what does that mean for supplies?

And second of all, with regard to negative 36%, how much -- what is the difference between inventory reduction and sales out? Basically, is the market declining double digits or is -- what is the difference between the market growth and the negative 36%? Thank you. So supplies and the difference between negative 36% and what the market is doing for laser beam printers.

(Interpreted). Thank you very much for the question. On the actual sales basis, it seems that the market is actually growing. However, in Europe especially, we see that the inventory out in the market is accumulating. That was our judgment. And therefore we have made some adjustments with the OEMs. And on our sales basis we have adjusted our figures accordingly.

And since this does involve our discussions with our OEMs, it is a very delicate issue. However, some of our dealers are now moving toward adjusting their inventories.

And supplies? What is he thinking about supplies for the quarter, fourth quarter?

(Interpreted). Concerning supplies, on a local currency basis, we do see an increase ahead. However, once that is calculated back into yen, we project a minus 10%.

However, over the year, on the annual basis, although we do see some of our dealers adjusting their inventories, we are projecting a double-digit growth. Therefore we are -- excuse me, therefore we do see things are moving very smoothly.

Thank you very much.

The next question comes from the line of Shannon Cross of Cross Research. Please go ahead.

Yes. Thank you very much for taking my questions. My first question is also on the laser business. Could you talk a bit about what you're seeing from a pricing standpoint with some of the slowdown in the economy? Where do you see ASPs trending?

And then I have a follow-up question. Thank you.

(Interpreted). First of all, concerning the price of the product, basically that price -- that market price, would be determined by the OEM. Therefore as the supplier to these OEMs, we will not be in a position to comment on the market price.

Okay. For Canon products that you sell yourself in Japan, I'm curious as to what you're seeing from pricing.

(Interpreted). Well of course, since the Japanese economic situation is quite severe right now, we do not believe that things would go as has in the past. However we do not see any large reduction in the market price.

Okay. Thank you. And I know that Graph Expo, which as you know is a large trade show for copiers, there's been significant discussion about the IKON/Ricoh transaction. And I'm curious as to whether or not Canon has any additional comments with regard to how you're planning on handling the transaction, and how we should think about your US channel strategy in 2009. Thank you.

(Operator Instructions).

(Interpreted). Concerning the IKON deal, the deal has not been finalized, but our basic stance is to strengthen our direct sales and also sales to the independent dealers that we have been dealing with until now. We want to strengthen this. And so our basic stance is to strengthen the direct sales, and that would include direct sales strengthened through possible M&As.

Okay. And one final question on the inkjet business. You're expecting your growth, which is fairly aggressive in -- just given what's going on in the economy. I'm curious to know -- as we have decent results this quarter, I'm curious as to specifically if there are geographies or -- you note increased feature functionality.

But other than that, I'm curious as to whether or not -- how you expect to basically gain market share in such a challenging market. Thank you very much. And that will complete my questions.

(Interpreted). Concerning the inkjet business in the first half, we posted a 10% growth. And our projection for the year is 8% growth all together.

We believe that the trend would continue following on the path of the first half of the year. And concerning what areas we want to strengthen, so far the inkjet printers for business use have been very favorable. And we are seeing this business expanding. Therefore we hope to strengthen this area.

And I believe this would lead to your first question, the first half of the question. But in the latter half of this year we have launched products that have very new aspects -- very new technical aspects. For example, in the supplies area we have reviewed the ink that has been used. Therefore we are launching very strong and appealing products.

Therefore I believe that even under this worsening situation of the economy, we still can see a very strong growth that will take us -- will help us achieve the 8% projection.

Thank you very much. That completes my questions.

The next question comes from the line of Ben Lu of Seligman. Please go ahead.

Hi. Thank you for taking my questions. I have two questions. In a follow-up to IKON question, can you talk about what was the impact in terms of OP from Ricoh's Global Imaging and from Ricoh's Danka? And how should we think about the impact from IKON? Will it bigger than the impact versus Global Imaging and Danka?

And my second question is, regarding your fiscal '09 guidance, if we look at where the FX is right now, the fiscal '08 FX rate yen/dollar will be about JPY104, yen/euro will be JPY153. And given where currencies are right now, I [admit] that it seems like fiscal '09 FX impact will particularly be about JPY300b to the negative side. Is it possible that fiscal '09 will be another year of potential double-digit year-over-year decline in operating profit? Thank you.

(Interpreted). Let me take one question at a time. Concerning your first question on the impact from IKON, we have overcome Danka and Global Imaging problems through strengthening our direct sales and also our sales through the independent dealers.

And yes I believe, as you indicate, the impact from IKON could be greater because last year our deal with IKON was about $800m. However, our basic stance is to deal with this situation similar to how we dealt with Danka and Global Imaging, meaning we will deal with this through strengthening our direct sales path and also strengthening our ties with independent dealers. And we believe that we will be able to overcome this.

(Interpreted). Concerning your second question, yes, in our announcement today we did touch upon the impact of a JPY1 change in the exchange rate with the dollar and also with the euro. However, I believe the figure that you mentioned in your question is a simple calculation of the figures that we've given.

But in the past week, we have seen the yen and dollar exchange rate change rapidly. And under this situation, we cannot really simply calculate the impact of a JPY1 difference and just extend that into the next year because that may not really reflect the reality that may happen ahead.

But I would like to say that, yes, we are watching the market situation and we're trying to reflect that back into our management plan. We are looking at the market and we're looking at the situation as we compile our plans for the next year.

So I do not think it is appropriate to simply answer concerning a simple calculation using the base exchange rate.

But it's mathematically -- if the current spot rate of yen is at about JPY93 to the dollar and the euro is about JPY115 to the euro, mathematically that would show that fiscal '09 will probably see another big year-on-year drop in OP, correct?

(Interpreted). Well yes, probably a simple calculation using the exchange rates would lead to that calculation, or lead to that result. However, it's not just the exchange rates. Of course we will have stronger and more appealing products. And by doing so, even under these very severe economic situations, we will be aggressively challenging the market. And all these things would be reflected in the plans we will have for next year.

And when we present our results for the whole of '08, I hope that we -- I believe that we will be able to talk to you about what plans we have [forward] ahead.

Great. Thank you so much. Best of luck.

This is the last question. The last question comes from the line of Woojin Ho of Merrill Lynch. Please go ahead sir.

Great. Thank you for taking my questions. A couple of questions with regards to the office imaging products. In terms of your fourth quarter outlook, does that reflect any or all business lost through the IKON channel?

And secondly you had mentioned, in terms of regaining distribution in the event of losing IKON, possibly M&A, is this something that you can do with one or two strategic acquisitions, or are we talking about multiple small acquisitions to make up some of that loss? Thank you.

(Interpreted). Concerning the IKON impact, of course the IKON deal has not been finalized yet. However for '08 -- fourth quarter '08, we do not see the IKON impact being that great.

And concerning what lies ahead, as I've mentioned already, we want to overcome this situation by strengthening our direct sales and strengthening our ties with our independent dealers which would include, as you mentioned, some M&As. It could be a large-scale M&A. It could be a combination of smaller-scale M&As. But in any case our stance is to strengthen our direct sales.

Thank you.

If you have further questions, please send them to Canon's email address, [trj-irco@list.canon.co.jp]. That's trj-irco@list.canon.co.jp. Canon will respond as soon as possible. Mr. Osawa?

(Interpreted). Thank you very much for taking part in this conference call today. Of course, we are facing very severe economic situations. However, we hope to look at this very severe situation as a chance, an opportunity for us and make our challenge ahead. And therefore, I would like to end this conference call by asking for your further support and cooperation. Thank you.

This concludes today's Canon's fiscal year 2008 third quarter results presentation. Thank you for using Verizon Conferencing. You may now disconnect your line.

Portions of this transcript that are noted 'interpreted' were interpreted on the conference call by an Interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.