Canon Inc (CAJ) 2009 Q2 法說會逐字稿

Hello, everyone. Welcome to Canon's conference call. My name is Masahiro Osawa. I'm 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. The business environment remained challenging in the second quarter characterized by ongoing economic weakness, particularly in developed countries and significant in the depreciation. When will we begin to see some signs of bottoming out amid the weak conditions in the consumer product market?

The market for office equipment remained stagnant, resulting in lower net sales and profit. However, we slowed the pace of decline in net sales and operating profit compared with the previous quarter. We also improved our operating profit margin and achieved more than double the operating profit we did in the first quarter.

We attribute these results to our efforts to improve management quality, which include further Group wide expense cuts and price maintenance for digital cameras through timely launches of new products.

Please refer to slide four. Second quarter net sales decreased 28.2%, reflecting weak overall demand, a shipping adjustment of laser beam printers, as well as the -- in strong end.

Second quarter gross profit decreased 36.2% due to lower sales.

As for second quarter operating profit, although we achieved a high level of expense reduction, operating profit dropped 72% due to the significant impact of reduced gross profit. Including losses resulting from foreign exchange contracts, second quarter net income dropped 85.5%.

Please turn to slide five. I will now compare our second quarter results with those of last year in more detail. Changes in exchange rates had a major negative impact on both net sales and operating profit. Changes in sales volumes had a negative impact on almost all of our businesses.

As for the others category, the negative figure under net sales represents price decline, mainly for digital cameras. The positive figure under operating profit mainly represents aggressive expense cutting that both offsets the price decline and the costs to increase, due to a significant drop in production volume.

Please refer to slide six. This slide highlights the reduction in operating expense and the inventory that we achieved in the second quarter through ongoing measures and improving the management quality. As you can see, we cut operating expenses by JPY80b. We also reduced inventory by JPY190b, compared with the end of same period last year and by JPY76b over the past three months, demonstrating the improvement we made in separating management that enhances our ability to respond to sudden changes in our environment.

Please turn to slide seven. I will now discuss our 2009 projections. This slide shows our exchange rate assumptions and the projected impact that a JPY1 change in exchange rates would have on second half net sales and operating profit.

Please refer to slide eight. This slide highlights some key points regarding our current projections for the full year. As for the global economy, although we anticipate gradual improvement in the second half, market conditions will likely continue to be harsh. Based on this and our assumptions that the yen will remain strong, we expect the business environment to remain challenging under this situation. Although full year net sales and profit are projected to decline, we aim to enhance our profit generating ability by targeting improved management quality, which proved effective in the first half.

As for our operating expenses, we expect to achieve a reduction of JPY220b for the full year, twice the amount we projected at the beginning of the year, by enhancing the expense cutting measures.

As for inventory, we will not only work to reduce the amount but also work to achieve major improvement in the turnover period. In this regard, we assembled a management project team led by our President, charged with comprehensive inventory management. Going forward, we aim to improve profitability through the timely launch of strategic and competitive new products, including our new generation of multi-functional devices.

Please turn to slide nine. This slide summarizes our current projection for the full year. As we assume market conditions will remain challenging, we project net sales and operating profit to decrease by 21.8% and 61.7%, respectively.

Please refer to slide 10. I will now compare our current projection for full year net sales and operating profit with our previous forecast. Changes in exchange rates assumptions had a positive impact on projected net sales and operating profit. As for changes in sales volumes for office imaging product, we rolled out our projection to reflect ongoing weak demand.

As for computer peripherals, due to weaker than expected sales in Europe, we roll out our projection for IJPs. For cameras, we base our projection based on strong sales of SLR cameras we saw in the second quarter. We roll out our projection for optical and other products due to weaker than previous projected sales of SPE and the independent business needs of our manufacturing subsidiaries. As for the others category, the positive figure under operating profit of JPY29.1b represents further efforts to expand expense cuts that offset additional price reductions and the exclusion of previous projected cost reductions due to a more significant reduction in production volumes.

In summary, although we roll out our projection for full year sales due to mainly lower sales volume of the copying machines, we raised our projection for operating profit by JPY10b, to JPY190b, mainly reflecting a significant reduction in expenses.

Please turn to slide 11. I will now discuss our second quarter result and the current full year projections by product group, starting with Business Machines. Second quarter net sales and operating profit decreased 30.3% and 60.6%, respectively. This reflects weak demand for copying machines, the laser beam channel inventory adjustment and the strong yen.

For the full year, net sales and operating profit are projected to decline 23.6% and 49%, respectively, due to lower sales of copying machines and LBPs as well as the effects of the strong yen.

Please turn to slide 12. Next I will discuss sales of business machines by products, starting with office imaging products. In the second quarter, we continued to see sluggish demand in the copying machines market due to lackluster corporate investment and other factors. Our unit sales of copying machines dropped significantly in the second quarter, reflecting not only the market situation, but also aggressive pricing by competitors and the transition to new color models. Also, with weak demand for consumables, second quarter net sales of office imaging product decreased 30.6%.

Going forward, we will focus on expanding sales of recently announced imageRUNNER ADVANCE models which significantly strengthen our mid to high speed color lineup and allow us to enter the light production market. At the same time, we will strengthen our solution business and work to enhance our sales network, mainly in North America. Despite these efforts, however, full year net sales of office imaging products are projected to decrease 27.2%, reflecting our assumption that weak market conditions will continue and that new product will play a limited role in expanding sales this year.

Please refer to slide 13. Canon recently announced its new generation of multifunction devices for office color environment as shown here. These new imageRUNNER ADVANCE models address the diverse needs of large corporation by offering improved solution capabilities and the enhanced coordination with customers' IT systems and realize optimized work flows to contribute to overall customer productivity improvements and of course savings. They also offer small and medium sized businesses the opportunity to improve productivity and realize considerable cost savings through their enhanced network capabilities and other value added features. And through new PQ toner and long life drums, our new products not only realize high speed, high image quality output, but also contribute to reduced maintenance costs.

Going forward, we will enhance sales of these competitive new products to capture replacement demand for when the market recovers, towards improving sales and profitability of office imaging products.

Please turn to slide 14. I will now discuss computer peripherals, starting with LBPs. We assume that the global LBP market is shrinking by about 20% in terms of units. Amid this situation, our second quarter unit sales decreased 60% and net sales decreased 36.3%, as we continued efforts to dramatically adjust channel inventory. In line with our plan, we have completed channel inventory adjustment. And during second half, we expect to sell up to around the same level as actual demand. As a result, we are projecting full year unit sales to decrease 45% and net sales to decrease 25.3%.

Going forward, we will work to -- work with our OEM partner to further strengthen separation management and to implement measures to expand sales and improve profitability.

Next I will discuss IJPs. We assume that the IJP market to continue to shrink significantly in the second quarter, in terms of units. Within this market, our unit sales increased by 2%, mainly due to continued strong sales, mainly in the US market. Second quarter net sales, however, decreased 16.1%, mainly due to the yen's appreciation.

For the full year, we aim to steadily improve our market share by launching competitive new products for the year end selling season. We also aim to expand sales of mid to high end products, including professional and business models, in order to further expand print volume and steadily grow sales of consumables. Despite this and due to the yen's appreciation, full year net sales are projected to decrease 10.6%.

Please turn to slide 15. Next I will discuss cameras. While demand for SLR cameras was strong, second quarter net sales of cameras decreased 20.7%, mainly due to our lower unit sales of compact models and the yen appreciation. As for our operating profit, we secured an operating profit ratio of 15.8%, more than 10 points better than that of the first quarter. We achieved this through new spring model products, which contributed significantly to maintaining selling prices and by lowering the ratio of operating expense.

For the full year, due to the significant impact of the yen's appreciation, net sales and operating profit are projected to decline 12.9% and 48.1%, respectively. As for our full year operating profit ratio, we are projecting to reach double digit at 10.7% through improvement in product mix and efforts to reduce cost.

Please refer to slide 16. I will now discuss cameras in more detail, focusing on digital cameras. The digital camera market is basically trending in line with our projection in terms of actual demand, inventory levels and pricing. Under this situation, with strong sales of our entry level SLR model with a full high definition video capture function, we are able to steadily expand unit sales of SLR cameras.

As for compact models, although unit sales were down due to the weak economy, sales of new compact models with value added features such as smart card, which intelligently selects the proper setting for the camera, were well received by the market and sold well.

Including the impact of yen's appreciation, second quarter net sales of digital cameras decreased 17.1%. For the full year, we expect the total digital camera market to decrease 7%, to around 115m units. The SLR segment of the market is projected to grow 4% to 9.7m. Canon will again launch value added compact and SLR cameras in a timely manner, with improved functions which expands the range of creative images that can be captured.

For the full year, unit sales of digital cameras are projected to decline 6% to 24m, including SLR cameras, which are projected to increase 5% to 4m, 100,000 units more than our previous projection. As for full year net sales, due to the yen's appreciation, we project a decrease of 8.9%.

Please turn to slide 17. Next I will discuss optical and other products. Second quarter net sales decreased 37.2%, due to lower unit sales of SPE. Second quarter operating profit was in the red, reflecting a significant drop in net sales. For the full year, net sales are projected to decrease 33.8%. And the operating profit is projected to remain in the red, as we expect the semiconductor market to remain weak.

Please turn to slide 18. Next I will discuss optical and other products in more detail, focusing on SPE. For the full year, we expect the IC Stepper market to be 70% smaller than last year in terms of units. Within this market, we sold two units in the second quarter and we are projecting to sell 10 units for the full year.

As for the [IC and LCD] market, although panel manufacturers have completed their inventory adjustment, we expect capital spending plan to remain the strength within this market. We sold 10 units in the second quarter and we are projecting to sell 37 units for the full year. As a result, second quarter net sales of SPE decreased 54.7%. For the full year, we project a decrease in net sales of 58.7%.

From this July 1, Toshiaki Ikoma, Vice President of Canon Inc. is heading our optical product operations segment which -- segment for which we are promoting structural reforms. At this time, there is very little I can [say] about our future plan. I will, however, discuss them at a later time.

Please refer to slide 19. Finally, I will discuss our financial situation. As for capital expenditures, we plan to reduce spending even further to JPY280b, while maintaining strategic group investments. Free cash flow is projected to be JPY110b, greater than our previous projection, reflecting internal reports to limit capital expenditures and reduce inventory.

Please turn to slide 20. As a result, we expect cash on hand to be JPY650b at the year end. This exceeds two months of sales which we use as our last benchmark

As for our dividend, despite the significant drop in first half profit, we declared an interim dividend of JPY55 per share, which is the same as last year. We made this decision as we could secure a certain level of profit and cash flow in the first half.

Regarding our year end dividends, we will make that decision after better ascertaining our performance this year and the trend we can expect next year.

This year, by focusing on improved management quality, we plan to lay a groundwork that will allow us to leap ahead of the competition when the economy recovers.

This ends my presentation.