Canon Inc (CAJ) 2009 Q4 法說會逐字稿

Good day everyone and welcome to the Canon Inc. fiscal year 2009 results conference call. The presentation from Canon is for 30 minutes and the Q&A session is for another 30 minutes after the presentation. As a reminder today's conference is being recorded. At this time for opening remarks I would like to turn the conference over to your moderator for today, Mr. Masahiro Osawa, Managing Director, Group Executive Finance and Accounting Headquarters. Please go ahead.

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-over-year basis unless otherwise stated.

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

Please turn to slide three. I will start out by reviewing 2009.

Facing a more difficult business environment characterized by a global recession and [significant yen depreciation], we continued to post lower net sales and profits. At the same time through efforts aimed at realizing improved management quality we further enhanced our financial structure, achieving a record low inventory turnover period of 39 days, utilizing a more advanced supply chain management structure.

In addition, our effort to thoroughly strengthen our balance sheet enabled us to realize a record high stockholders' equity ratio of 70%. Furthermore, through improved management quality and the launch of competitive products, we minimized the decline in net sales and profit, realizing a steady recovery in performance.

With strong product competitiveness our Camera business achieved a significant recovery followed by improvement in Business Machines, leading to an overall recovery of Group profits. In the first quarter (inaudible) a recovery in our core businesses we realized a significant increase in profit and exceeded our projections.

Please refer to slide four. I will now discuss our 2009 results.

For the full year net sales and operating profit decreased 21.6% and 56.2% respectively, reflecting difficult market conditions and the yen's significant depreciation. In 2009 upon bottoming out in the first quarter we have steadily improved our quarterly performance. In the fourth quarter we posted net income of over five times that for the fourth quarter of 2008, representing our [fast] profits increase in the last eight quarters.

Please turn to slide five. I would now like to briefly discuss our efforts in the area of improved management quality under which we strive to strengthen our balance sheet and raise profits. One good example of our achievement is inventory reduction. Here we focused on responding quickly to market changes. This allowed us to reduce inventory by JPY134b compared with the end of December 2008.

Please refer to slide six. Additionally, in the area of expenses, we realized a JPY232b reduction through the promotion of selection and concentration. Also, by promoting investment efficiency, we were able to reduce capital expenditure by JPY146b to JPY216b, reducing inventory below depreciation.

Please turn to slide seven. As a result of these measures and despite the decrease in net sales and profits we were able to increase shareholders' equity by JPY28b, reaching a record high shareholders' equity ratio of 70%.

Please refer to slide eight. In addition, despite a significant decrease in net income, cash on hand at the end of 2009 totaled JPY795b, significantly higher than at the end of 2008. Additionally, despite the current difficult business environment and a significant drop in profit, we plan to maintain our full year dividend at JPY110 per share, as net income basically covers the total dividend amount and we could secure cash flow.

Please turn to slide nine. The product group that produced the best result from improved management quality was Cameras. This group was able to reduce the average inventory turnover period in days by about half. Under this positive inventory situation, we improved profits by launching new competitive products consecutively and recovering the price premium of our SLR and compact digital cameras. As a result we swiftly realized improvement in profitability of Cameras from the second quarter.

As for Business Machines with profitability recovering from the third quarter operating profit for the Company as a whole was within double digits range in the fourth quarter.

Please turn to slide 10. I will now compare our fourth quarter results with our previous projections. Changes in exchange rate had a limited impact on net sales and operating profit. Changes in sales volumes had a slight negative impact on Office Imaging Products, as the market was weaker than expected. The impact on LBPs was also negative.

From the beginning of the third quarter of 2009 we needed to rapidly increase production due to market recovery and increasing OEM orders. Although we had planned for a quick response, we were unable to ship some units in time. The impact of Cameras was positive as SLR cameras and related sales far exceeded our expectations. The overall impact of changes in sales volumes was greater on operating profit due to strong sales of high added value products, which had a positive impact on overall product mix.

As for the Other category the positive figure under net sales represents efforts to minimize price declines. The negative figure under operating profit represents a JPY26.1b impact from the write-down of SPE related assets substantially offset by minimized price decline and efforts to realize additional expense reduction and cost savings.

Please refer to slide 11. I will now discuss our fourth quarter and full year results by product group, starting with Business Machines. Fourth quarter net sales decreased 5.7%, an indication that sales of all core businesses are on track for recovery.

Fourth quarter operating profit decreased 1.1% and our operating profit margin was 18.2%, demonstrating a steady improvement.

For the full year, net sales and operating profit decreased 24.4% and 46.1% respectively, reflecting the yen depreciation and decreased shares of copying machines and LBPs.

Please turn to slide 12. I will now discuss Business Machines by product, starting with Office Imaging Products. Although the office market is on the path to recovery, it was still weak even in the fourth quarter, particularly in developed countries. In this environment net sales of Office Imaging Products decreased 12.3% in the fourth quarter. In terms of unit sales, however, we grew color copying machines by almost 50% sequentially, supported by new imageRUNNER Advance models.

Please turn to slide 13. Next I will discuss LBPs. The LBP market in 2009 bottomed out in the second quarter and has since shown signs of recovery despite a decrease of approximately 20% in unit terms for the full year. Fourth quarter net sales decreased 3.6% amid efforts to increase production and sales to address a recovery in demand and OEM orders since the beginning of the third quarter. For the full year net sales declined 27.9% reflecting the huge inventory adjustment in the first half and the yen depreciation.

I will now discuss Ink Jet Printers. Despite the difficult market conditions, we increased unit sales by 3% in the fourth quarter. This reflects unit sales growth, particularly in Asia, along with high user evaluation of our differentiated product line-up. As a result, fourth quarter net sales increased 1.9%.

For the full year, although the market shrank significantly, we exceeded our unit sales of the previous year, steadily raising our market share. Net sales of Ink Jet Printers, however, decreased 12.2% due to a significant impact from the yen depreciation.

Please refer to slide 14. Next I will discuss Cameras. Fourth quarter net sales increased 15.2%, representing double digit growth amid a difficult economic environment, and due to strong sales of SLR cameras and interchangeable lenses. Fourth quarter operating profit also increased, representing our second consecutive quarter of operating profit growth. This increase reflects the timely launch of new products leading to significant price premium expansion and cost reduction.

Profit also benefited from a higher proportion of sales attributable to midrange SLR cameras. Fourth quarter operating profit margin was 21.3%, higher than that achieved in the third quarter of 2009.

For the full year we achieved an operating profit margin of 16.8% despite significant yen depreciation.

Please refer to slide 15. I will now discuss Digital Cameras in more detail. In the fourth quarter the compact digital camera market was roughly in line with our projections. The SLR camera market, however, was stronger than we had expected, particularly in Asia and Europe. Within our enhanced line-up of Digital Cameras sales of mid- to high-end compact and SLR models realized strong sales. As a result we posted double digit net sales growth of 16.5% for the fourth quarter.

For the full year, total unit sales of Digital Cameras decreased 6% to 24.1m. This figure includes unit sales of SLR cameras, which increased 16% to 4.4m. In terms of market share we maintain our number one position worldwide for the second consecutive year in both the compact and SLR camera segments.

Please turn to slide 16. Next I will discuss Optical and Other Products. Fourth quarter net sales decreased 40.4% due to factors including a significant drop in IC Stepper unit sales and a decline in sales of independent businesses of related subsidiary. Fourth quarter operating profit was negative JPY34b due to such factors as the write-down of SPE related assets.

For the full year net sales decreased 35% and operating profit was negative JPY71.4b (sic - see presentation). In response to severe situations we are currently working on structural reforms.

Please refer to slide 17. Next I will discuss Optical and Other Products in more detail, focusing on SPE. In 2009 the IC Stepper market shrunk to one-third in size as compared to 2008. Within this weak market we posted significantly lower unit sales totaling 2 in the fourth quarter and 13 for the full year.

And for LCD aligners the market shrank significantly to about 60 units, despite moves to panel manufacturers to invest particularly in China. As a result, we posted sales of 8 in the fourth quarter and 38 for the full year. Net sales of SPE decreased by 70.9% in the fourth quarter and 56.6% for the full year.

Please refer to slide 18. Before turning to our 2010 projections, I would like to explain the changes we have made to disclosure segments. From fiscal year 2009 our disclosure segments are changed and are now based on our internal organizational structure. In this presentation my explanation of 2010 projections will be based on the new segments. This slide shows how reportable segments have changed.

Please turn to slide 19. I will now discuss our full year 2010 projections. This slide shows our exchange rate assumptions and the projected impact of exchange rate movement on full year net sales and operating profits.

Please refer to slide 20. This slide highlights some key points regarding our projections for 2010. As for the global economy, although we see some strength in Asia, overall we are expecting an L-shaped recovery. Within this environment we will leverage our competitive new products and our corporate structure [reinforced last year] to secure net sales growth of 7.5% and profit growth that exceeds 50% in a year we view as the first year in a new era of growth.

At the same time we will further our improved management quality activities and taking full advantage of the structure that allows us to respond swiftly to changes in our business environment as we work to maximize profit expansion.

Please refer to slide 21. This slide shows our current projection for 2010 based on the assumptions I just mentioned. This year, by further raising our ability to respond quickly to the market, we plan to significantly increase net sales and profits of all core businesses and achieve net sales growth of 7.5% and operating profit and net income growth of over 50%. This marks a huge change in course from two years of consecutive decline in net sales and profits to a course of sustainable growth. Please note that our projections do not take into account any contribution from Oce at this time.

Please turn to slide 22. I will now compare our projections for full year net sales and operating profit with our 2009 results. Changes in exchange rates are projected to have a negative impact on net sales and operating profits. Changes in sales volumes are projected to be positive for all businesses. I will provide detail when I discuss each business in the remainder of my presentation.

As for the Other category the negative figure under net sales represents projected price decline for mainly cameras and copiers in expectations of severe price competition. The negative figure under operating profits represents projected price decline and projected increase in expenses, related to strengthened sales and marketing activities partially offset by JPY70b in the cost reduction.

Please refer to slide 23. I will now discuss our full year 2010 projections by business unit, starting with Office. Last year was a period during which we prepared for a major turnaround. This year we put our plan into action. With our expanded line-up and broadened printing sphere, our alliance with HP, our partnership with Adobe and the steps we have taken to build Canon Managed Document Services into a pillar that supported our solution business, we will expand market share and improve profitability. Through these measures net sales and operating profit are projected to increase 7% and 25.1% respectively.

Please refer to slide 24. Next I will discuss Office business unit by major product category, starting with Copiers. As for the Office Copier market, we expect improvement from the latter half of the year when the markets [tend] to gradually recover. Within this environment we aim to expand our share of the color copier market, which was relatively strong towards the end of 2009, and expand sales of new imageRUNNER Advance models.

In addition, we will work to expand profitability, leveraging our expanded alliance with HP, which enhances our ability to sell to large corporations, promoting the strengths of our imageRUNNER Advance line-up which offer advantages in the area of mission critical system applications and by providing solutions. As for monochrome copiers, we will strive to expand sales of our imagePRESS production model for volume office printing and low end models targeting Asian markets. As a result, net sales of copiers is projected to increase 6.3%.

Please turn to slide 25. Next I will discuss Other Printing Devices, focusing on laser printers. As for laser printers, we expect the market to grow at a rate of about 10%. Under this situation in contrast to the first half of last year we will work to expand production and sales given the rapid recovery in market demand.

In addition, we aim to improve our market share position and profitability by launching competitive new products and expanding sales of mid to high end models, for which higher levels of print volume can be expected. Through these measures we expect significant increases of 41% in laser printer unit sales and 6.8% in net sales of other printing devices.

Please turn to slide 26. Next I will discuss Consumer. In our Consumer business our focus is to further raise the competitiveness of our products. In emerging markets, where we expect accelerated growth, we will focus our response by supplying the same high added value and the superior quality products that we do worldwide. In this way we can expand our price premium and through production volume efficiency improve cost competitiveness, further improving profitability.

In addition, we will strengthen our local sales structure and brand and take additional measures to achieve our competitive advantage in emerging markets. As a result, Consumer net sales and operating profit are projected to increase 5.3% and 16.6% respectively.

Please refer to slide 27. Next I will discuss Consumer, starting with Cameras. As for digital cameras, we expect the overall market to be about 121m units in 2010, representing 5% growth. This includes our assumption that the SLR camera market will also grow 5% to 10.7m units. Within this market our aim is to achieve higher than market growth, launching competitive products on a worldwide basis. As for compact cameras we will timely launch high-added value, superior quality products, with enhanced [basic] features, further expanding the realm of imaging.

As for SLRs we will leverage our competitive line-up of SLR cameras, to maintain our worldwide number one share position when we aggressively expand sales of our wide array of interchangeable ranges. For the full year, unit sales of Canon digital cameras including SLR cameras are expected to increase 6% to 25.7m units. Unit sales of SLR cameras alone are projected to be JPY4.7m, representing 6% growth, which is higher than the market. As a result, net sales of Cameras are projected to increase 4.5%.

Please refer to slide 28. Next I will discuss Ink Jet Printers. As for the market we expect only [slight] growth in 2010. Under this situation we will launch several new products that build upon our proven product competitiveness. We also plan to expand our installed base of printers, achieving growth that exceeds the market, placing importance on Europe and China.

By expanding sales of midrange models and above and aggressively expanding to professional and [SOHO] market we also aim to further accelerate sales of consumables. Through these various measures, we project the sales of Ink Jet Printers to increase 5.8%.

Please turn to slide 29. Next I will discuss Industry and Others. As for SPE the transfer of Canon Marketing Japan's semiconductor equipment related business to Canon Inc. was completed at the beginning of this year, setting the groundwork for business structures that allow us to incorporate customer demands into our product design phase.

As for medical equipment, we are working to expand this business and are currently in the process of making Optopol Technology of Poland a subsidiary. With our retinal camera and Optopol's OCT technology we aim to become the world leader in total ophthalmic diagnostic equipment. We also aim to strengthen the industrial equipment businesses of Group companies.

As a result, we expect total net sales of Industry and Others to increase [12.1%] and operating profit to improve by JPY60b but still be in the red.

Please refer to slide 30. Next I will discuss Industry and Others with a focus on SPE. As for IC Steppers in terms of units, we expect the market in 2010 to be larger than 2009 and be more than over half the size it was in 2008. Within this market we expect our unit sales to be around (inaudible) and consist mainly of i-line and KrF [tuners].

As for LCD aligners, we expect the market in 2010 to expand by around 50% due to such factors as continued strong demand for TVs. Within this market we expect our unit sales to be 53 as we work to respond swiftly to customer needs and expand sales of our G82. As a result, we expect total net sales of SPE to increase 18.3%.

Please turn to slide 31. We view 2010 as the first year in a new era of growth, a year in which we will strive to expand net sales and profits of all businesses. We will do this by leveraging our competitive products while continuing our work in improving the management quality, [in our path to model] strong growth.

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

Thank you Mr. Osawa. (Operator Instructions). We ask you to limit yourself to one question and one follow-up. I repeat one question and one follow-up, so that we can get to everyone. Please note that Canon [prepared] an interpreter for today's question and answer session. Sound will be in listen mode while the interpreter translates your question into Japanese. Mr. Osawa will then respond to your questions in Japanese. And then the interpreter will translate his responses. (Operator Instructions).

Our first question comes from Ms. Shannon Cross from Cross Research. Please go ahead.

Thank you very much. My question is regarding slide 25.

Looking at your printer forecast, you're forecasting 10% constant currency revenue growth and 41% growth in units.

So, can you help to walk us through the different -- I'm sure some is pricing, some is HP inventory. But if you can just help us to try to figure out how you get from 41% unit growth to only 10% revenue growth? And then I have a follow-up. Thank you.

(Interpreted). So in relation to your question about the LBP, when it comes to the actual units, we are, on a local currency basis, anticipating projecting a 43% increase.

Meanwhile, when it comes to the consumables, again, based on a local currency basis, we are projecting only a 5% increase. And that is the reason why we are presenting a 10% growth.

Okay. Thank you. And that comes to my next question, which is can you tell us what your supply sales grew, both for inkjet printers as well as laser-beam printers during this quarter? And then you've now given us your laser-beam projection for 2009, can you also give us your inkjet projection for 2009? Thank you.

I'm sorry, for 2010?

Yes. I'm sorry. I'm one year off. Yes.

Okay.

Sorry.

(Interpreted). In response to your questions, first of all in regards to for the fourth quarter for 2009, we basically said that printer consumables, again, on a local currency basis, was a 3% increase. Meanwhile, for the inkjet in 2009, for fourth quarter, again, local currency basis, our consumables were a 1% increase.

Earlier, I explained about the 2010 consumable level for laser-beam being 5% projection. And for the inkjet, again, on a local currency basis, we are projecting an 8% increase.

Thank you very much.

Our next question comes from Mr. Ben Lu from Canon (sic). Please go ahead.

Hi. Thank you, guys. Hi. Thank you, guys. It's Ben Lu from Seligman.

One housekeeping question. I noticed you guys changed your disclosure for your segments. Do you have any plans to provide, for purposes of transparency and disclosure, proforma quarters for 2009, just so we know how the trends are?

(Interpreted). Well, in response to your request there, by the end of March, after the auditing has been completed, we are planning to disclose the data for the past three years. Three years' worth.

And will that be on a quarterly basis?

(Interpreted). Yes. We're planning to disclose it on a quarterly basis.

Perfect. Thank you. And then my two questions are, one, can you give us an update on Oce? There's been a lot of noise over -- with, for example, a Hermes shareholder who's not looking to tender their shares. What's your target for ownership in Oce?

And then my second question is, your sales target for copiers for 2010 is JPY885b, which is a 6% growth. If you annualize your Q4 number, you -- we already get to JPY880b in sales. So, based on your full-year 2010 copier sales target, are you implying, basically, no sequential revenue growth through 2010? Thank you.

(Interpreted). Well, in regards to your first question about Oce, we are following the plan that we have announced on November 16, 2009. So, in line with what we have announced, we are carrying out the preparation.

And how much do you own of Oce currently?

(Interpreted). Well, on a voting rights basis, we have already acquired about 20% of all voting rights.

Well, to answer your second question [here], first of all, we have to take into account that there has been a segment change for 2010. Yet having said that, when it comes to the copier business, sales for '09, this is in Japanese yen currency, was JPY640b, whereas for 2010, we are projecting JPY680b.

Now, in regards to your question about the fourth quarter '09. In the fourth quarter we did launch a new [imageRUNNER Advance]. And so it is true that in that quarter there was a slight increase in the shipments.

Does that mean that, as we go through 2010, if we take the annualized Q4 sales number for copiers, you're seeing zero sequential growth for Q1, Q2, Q3 and Q4?

(Interpreted). Well, in regards to the Office segment and especially the Copier and other Business segments, it is true that because we're seeing that, especially in the Business sector, the business recovery is still very slow. In other words, we are projecting that we will be witnessing an L-shaped recovery, a very moderate growth. And that is the reason why we have this projection in sales.

However, if the respective economic stimulus packages introduced by governments are proving to be effective and the recovery's speed were to pick up then we would have to change our way of [reserving] and projecting 2010.

Great. Thank you, guys.

We will now move to our next question from Ms. Shannon Cross of Cross Research. Please go ahead.

Thank you for taking my second question.

I was curious if you could talk about, perhaps on a geographic basis and certainly on a product basis, how you're feeling about channel inventory levels at the end of fourth quarter? Not channel as in HP but channel as in the retail channel? So, what you were seeing in terms of digital cameras, inkjet printers, and, perhaps, what H2 was telling you in terms of channel inventory for laser-beam printers at the end of the fourth quarter? Thank you.

(Interpreted). Well, in regards to our inventory situation, we believe that our current inventory level, we have now recorded the lowest in our history ever. And so I think -- and also the inventory in the market is progressing quite smoothly and therefore we do not see, in any of the geographic markets -- geographical markets that there is any abnormal accumulation of inventory. And we believe that we are in a very healthy situation.

Now, having said that, in regards to LBPs, partially, yes, there has been some problems with the supply and we are seeing a shortage of supplies in some areas.

Okay. And when do you anticipate the shortage of supplies for laser-beam printers to be alleviated? When will your production equal demand?

(Interpreted). Well, we believe that the situation will be gradually alleviated. And so we will be able to catch up. And we can safely say that that alleviation process will be completed in the first half of 2010.

Thank you. And my final question is, with regards to the new relationships that you have with HP in the Copier business, can you provide more details on how the relationship between HP and Canon USA will work? How will you avoid channel conflicts between HP selling to the same customer base that perhaps Canon USA is selling to, or Oce is going to be selling to? Just how should we think about that relationship working? Thank you.

(Interpreted). Well, to respond to your question, first of all, in regards to the relationship between HP and Canon USA. Well, HP is strong and has a large number of major customers, large and big-sized companies. And, therefore, this is an area that we want to also address and therefore we do not believe that there is any conflict between the customers of Canon USA and that of HP.

Now in regards to your question about Oce. Oce has a track record of being strong in the field of production and, therefore, together with Oce, we want to try to build up on our production business.

Thank you.

We will now move to our next question from Mr. Ben Lu. Please go ahead.

Hi. Thank you, guys. Just two clarification questions.

Earlier, did I hear correctly, when you say that you will maintain the JPY110 dividend? Is that for 2009 or were you referring to 2010?

(Interpreted). Well, the JPY110 figure I referred to was 2009. That is the dividend for '09. In regards to 2010, we have to see how our business develops in 2010 based on which we will make the decision. Meaning that, as of now, we have not made any decision in regards to dividends for 2010.

Now, in the past, Mitarai-san has said that the dividend for 2009 was dependent on a certain level of net income. Do you have any target or some boundaries that we can think about to decide how and when you may decide if you will pay the JPY110 dividend?

(Interpreted). Well, actually, we do not have any boundary, so to say, based on which we're deciding on how much dividend. But, instead for 2010, we still have to observe carefully, how the global economic situation develops from hereinafter. We do not know, as of yet, how things will develop. For example, if you look at the current situation, for example, yen versus euro. It is true that there is still a great deal of instability in the global economy. So we have to keep an eye on how the economy develops and also, in the meantime, we will strive to make sure that we do achieve the performance that we are targeting towards. And based upon that, we will make the final judgment.

Our last question comes from Ms. Jennifer [Sawyer] of Barclays Capital. Please go ahead.

Yes. Hi. I was wondering if you could please give us some color and characterize the pricing environment, especially in Copiers? If the pricing environment is relatively stable right now and whether you have any expectations to be more aggressive in pricing to gain share in 2010? Thank you.

(Interpreted). Well, with reference to the Copier business, there are quite a few powerful competitors which are marketing, and so competition, the price competition, is tough.

However, against that backdrop, last year and in the second half of last year, we have introduced the iR Advance, which we believe is a very competitive product. And therefore, with this competitive product, we want to leverage on this and then try to compete. We do think that we can compete in 2010.

This ends the Q&A session of today's conference call. I will now hand the call over to Mr. Osawa for any additional or closing remarks.

(Interpreted). Well, thank you very much to everyone who has attended this Canon conference call. We thank you very much for -- to all of you from different countries. And we look forward to your continuing support towards our activities. With this we would like to conclude Canon's conference call. Thank you.

This concludes today's conference. If you have further questions, please send them to Canon's email address, prj-ircall@list.canon.co.jp. Canon will respond as soon as possible. Thank you everyone for your participation.

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.