Canon Inc (CAJ) 2010 Q1 法說會逐字稿

Hello everyone and welcome to Canon's conference call. My name is Masahiro Haga, the newly appointed Group Executive of Canon's Finance and Accounting Headquarters.

I'd now like to begin. Please refer to the slides we prepared for today's call and note that all financial comparison made during my presentation will be on a year-on-year basis unless otherwise stated.

This slide outlines today's agenda. Please turn to slide three.

I will now summarize our first quarter. In the quarter, the global economy seemed to be on a path of gradual recovery supported by steady economic growth in Asia. In developed countries however, we saw varying degrees of strength and weakness, characterized by a recovery in US consumer spending and [greater] debt problems.

In the market in which we participate, consumer demand remains strong particularly in Asia. We also saw a gradual recovery in demand for office-related product. Amidst these conditions, last year, in our pursuit of improved management quality, we achieved significant results in areas such as eliminating all waste and raising efficiency through expense, capital expenditure and inventory reduction.

This year, we realized positive operating results characterized by a significant improvement in profit through measures aimed at reducing cost of sales such as in-house production and production automation. This also reflects an increase in volume due to the timely launch of competitive new products.

We consider this year to be the first year in a new era of growth. Given our result in the first quarter of double-digit sales growth and substantial profit growth, we believe we have made a good start.

Please turn to slide four. I will now discuss our first quarter results.

In the first quarter, we realized double-digit net sales growth. In addition to our Consumer business unit, which benefited from steadily expanding sales of cameras, in particular, SLR models, our Office business unit benefited from a significant recovery in laser printer sales.

Gross profit increased 23.3% and our gross profit ration improved by 530 basis points to 48.8%. Increases in volume, improvement in production efficiency, as well as the maintenance of price premium contributed significantly to this result.

Operating profit was 4.3 times higher than the same period last year and our operating profit ratio was 11.5%. This reflects the improvement in gross profit and our ability to hold operating expenses relatively flat.

Please refer to slide five. I will now discuss the change in first quarter net sales and operating profit in detail using this slide.

The overall impact of changes in exchange rate was limited on both sales and profit. As for changes in sales volume due to a significant recovery in our Office business and Consumer business, the overall impact was positive on both sales and profit.

In the Others category, the negative figure under net sales represent price declines for cameras and other product. The positive figure of JPY23.4b under operating profit reflect minimized price decline and significant cost reduction derived from improved production efficiency attributable to increased volume and the effect of automation.

Please turn to slide six. This slide shows the trend in quarterly profit ratios for the Company as a whole.

As you can see, our gross profit ratio bottomed out in the first quarter of 2008 and started to recover in the latter half of 2009. As for our first quarter 2010 gross profit ratio, despite the yen's significant appreciation, we achieved a level that precedes the collapse of Lehman Brothers.

As for our operating profit ratio, since bottoming out in the first quarter of 2009, our performance has steadily improved. The operating profit ratio we achieved in the first quarter of 2010 represents our first return to a double-digit operating profit ratio in six quarters.

Please refer to slide seven.

In the areas of expense and inventory control, which contributed significantly to our improved performance last year, we maintained our focus and continued to push initiatives. Amid expanding sales, we held the first quarter operating expenses relatively flat.

As for inventory, in order to respond to expanding sales, inventory turnover in days rose 49 days at the end of March 2010. Excluding the effects of new consolidation derived from companies such as Oce and Optopol, however, this figure remains low compared to historical March-end figures.

Please turn to slide eight. I will now discuss our 2010 projections.

This slide shows our exchange rate assumptions and the projected impact of exchange rate movement on net sales and operating profit for the remaining three quarters.

Please refer to slide nine. This slide highlights some key points regarding our 2010 projection.

As for the global economy, we expect the trend of gradual recovery to continue. Within this environment, our aim is to achieve sales and profit growth in all core businesses in 2010, which we view at the first year in a new era of growth.

To do this, in addition to improved management quality which targets the enhancement of corporate structure and improved profitability, we will also work to strengthen our ability to respond to changes during a phase of expansion.

Please note that in our current projection, the effects of new consolidation derived from such companies as Oce and Optopol have been included.

Please refer to slide ten. This slide shows our current projection for 2010 based on the assumptions I just mentioned.

This year, we aim to expand sales and profit in all core businesses by further raising our product competiveness and our ability to speedily respond to the market. In doing so, we aim to make a big shift in course from the two consecutive years of sales and profit decline to a path of steady growth.

On the right hand side of this slide, you will see our current projection which excludes the effect of new consolidation. On this basis as well, you can see that we are projecting to exceed our previous projection despite the assumption for further yen appreciation against the euro.

Please turn to slide eleven. I will now compare our current projection for full year net sales and operating profit with our previous forecast.

Changes in the exchange rate assumption had a negative impact on projected net sales and operating profit.

Regarding the change in sales volumes, within our Office business unit, for copiers, we expect to achieve our previous projection. For other printing devices, we expect to significantly exceed our previous projection as we aim to further strengthen our effort in the area of sales expansion to improve our market share of laser printers.

Within our Consumer business unit, for cameras, we expect to exceed our previous projection as sales are strong particularly for SLR models. For inkjet printers, we expect to be basically in line with our previous projection.

Within our Industry and Others business unit, for lithography equipment, we expect to exceed our previous projection due to a market recovery. As for the Others category, the positive figure and the net sales represent lower price decline from efforts to maintain prices.

The positive figure on the operating profit represents the lower price decline and additional JPY30b in cost reduction due to improvement in production efficiency and other factors.

In summary, we expect to exceed our previous projection for net sales and operating profit by offsetting the limited impact of yen's appreciation through increased sales volumes in all core businesses, lower price decline and additional cost reduction.

Please refer to slide twelve. I will now discuss our first quarter results and current full year projection by business unit starting with our Office business unit.

In the first quarter, the laser printer market continued to recover and we increased unit sales compared with the same period last year during which we conducted a substantial channel inventory adjustment.

As for copiers, the trend was also positive as the market continued to gradually recover and new products starting to contribute to sales. As a result, first quarter net sales for the Office business unit increased 8%.

As for operating profit due to the increase in unit sales of laser printers in particular and the effects of production automation, first quarter operating profit for the Office business unit increased 50.5%.

Please note that our current year projection incorporates the effects of new consolidation. Figures excluding these effects are also shown on this slide.

As for copiers, we are working to realize result from a series of measures we initiated last year such as promoting channel development in North America, alliances with Hewlett Packard and others and live production product line up expansion.

As for laser printers, we will work towards steady market share expansion and improve the Office business unit profitability. Through these measures, net sales and operating profit for the office business unit are projected to increase24.2% and 29.9% respectively.

Please turn to slide 13. I will now discuss Office business unit net sales by product, starting with copiers.

As for monochrome copiers, although we achieved growth in terms of units, first quarter net sales decreased 1.5%. This reflects a decline in average selling price and weak non-hardware sales. As for color copiers, unit sales increased 36% reflecting strong sales of imageRunner Advance products. Due to expanded sales of color copiers, first quarter copier net sales increased 3.5%.

As for the full year, we expect the gradual recovery trend of copier market to continue. Within this market, we are focusing on further expanding our market share particularly in the color copier arena by expanding the sales of mainly new products in conjunction with customer replacement demand.

Regarding the alliances that we started last year, in cooperation with Hewlett Packard, we recently announced receiving a significant order from FedEx Office. Going forward, we will walk to deliver more positive results expanding sales to large corporations in a similar fashion.

As for product targeting production printing, although there is a delayed recovery in corporate investment, we aim to expand sales of our light and mid-production product line up that we expanded last year to drive growth in future sales of consumables. Through these measures, Office net sales are projected to increase 5.2%.

Please turn to slide 14. Next, I will discuss other printing devices with a focus on laser printers.

As for the laser printer market, we expect the trend of recovery to continue and expect the total market in 2010 to be up about 10% in terms of units.

In the first quarter, our unit sales increased 131%. This reflects our efforts to expand production and sales in line with increasing orders from our OEM partner to respond to market recovery in the quarter. This is in contrast to the same period last year during which we worked to substantially adjust channel inventory.

As we also increased sales of consumables, net sales for other printing devices increased 13.9%.

For the full year, in addition to strong demand in all regions, by expanding the sales that improve our market share and augment print volumes, we now expect to exceed our previous projection and achieve a unit sales increase of 58%. As a result, full year net sales for other printing devices are projected to increase 9.8%.

Please turn to slide 15. Next, I will discuss the Consumer business unit.

In the first quarter, we saw continued strong momentum in consumer-related market. Consumer business unit net sales increased 19.8% driven by sales growth particularly in Asia for both cameras and inkjet printers.

Operating profit increased 166.6%. This reflects expanded sales of SLR cameras, our ability to reduce cost of new cameras and expanded sales of inkjet printers' consumables.

Going forward, we will continue our aim of expanding sales volumes and maintaining our price premium. In addition, we will continue to execute on our regionally tailored strategy while we strengthen our sales network and brand image in growing markets such as China.

Through these measures, we project Consumer business unit net sales and operating profit to increase 6.4% and 22.1% respectively.

Please refer to slide 16. I will now discuss Consumer business unit net sales by product starting with cameras.

In the first quarter, the digital camera market remained strong for SLRs globally and compact models mainly in Asia. First quarter net sales for cameras increased 24.9%. This reflects expanded sales of mainly new high added value compact models, expanded sales of SLR supported by our new entry model and continued strong sales of interchangeable lenses.

For the full year, we expect the overall camera market to be about 121m units, representing 5% growth. This includes our assumption that the SLR camera market will grow 8% to 11m units which is slightly higher than our previous projection.

Within this market, our aim is to achieve higher than market growth, expanding sales of mainly high added value products that expand the realm of imaging. As a result, our unit sales of digital cameras are projected to increase 7% to 25.9m. This includes our projection that SLR unit sales will grow 11% to 4.9m units which exceeds our previous projection by 200,000. As a result, we expect the full year net sales for cameras to increase 6.9%.

Please turn to slide 17. Next, I will discuss inkjet printers.

This year, we expect a gradual recovery of the inkjet printer market. Within this market, we achieved 8% unit growth in the first quarter, reflecting strong sales in Asia in such countries as China. We also achieved a double-digit growth in consumables sales. As a result, first quarter net sales for inkjet printers increased 14.6%.

For the full year, we will work to launch several new products that build upon our proven product competitiveness and maintain the strong momentum we generated last year.

Regionally, we are focused on steadily building machines in the field, placing importance on expanding sales in Asia in such booming markets as China. At the same time, in developed countries, we aim to further expand print volumes and will work to expand the sales of mid to high end models including those for business.

As a result, full year net sales for inkjet printers are projected to increase 5.8%.

Please refer to slide 18. Next, I will discuss Industry and Others business unit.

First quarter net sales for the Industry and Others business unit decreased 4.1%. This reflects a decrease in lithography equipment sales due to last year's weak market situation which negatively impacted orders and an increase in sales related to the independent businesses of Group companies amid an improvement in the economic environment.

As for the first quarter operating profit, we were able to significantly narrow the loss.

For the full year, due to an expected recovery in the semiconductor production equipment market, we expect to exceed our previous sales projection. Furthermore, we expect higher sales related to the independent businesses of Group companies due to a recovery in the market situation.

As a result, full year net sales for the Industry and Others business unit is projected to increase 11.2%.

Although operating profit is projected to remain in the red, we expect the loss to be approximately JPY70b lower than last year.

Please turn to slide [19]. Next, I will focus my discussion on lithography equipment.

As for IC Steppers, we expect this year's market to recover to a level of about 200 units which exceed our original assumption due to signs of active device manufacturer investment to deal with expanding demand stimulated by Windows 7 and tablet PCs.

Within this market, our unit sales in the first quarter were 4. For the full year however, reflecting our assumption for a market recovery, we raised our full year projection from 12 to 31 units.

As for LCD Aligners, amid the sharp rise in demand in flat panel displays, panel manufacturers are beginning to invest and the total amount of investment is projected to recover to 2008 levels.

Within this market, our unit sales in the first quarter were 5. For the full year however, reflecting our assumption for panel manufacturer investment and production expansion, we raised our full year projection to 59 units.

As a result, although first quarter net sales for lithography equipment decreased 66.6%, for the full year, we projected lithography equipment net sales to increase 27.8%.

Please refer to slide 20. Finally, I will discuss our financial situation starting with capital expenditures.

Our current projection for 2010 is JPY210b. This figure includes continued strategic investment in such areas as production technology advancement and new products. It also represents continuing efforts to improve investment efficiency and reviewing investment timing.

As for free cash flow, we expect to generate about JPY240b through improved profit investment screening and inventory control. This projection includes an investment expenditure of approximately JPY90b for Oce. Excluding this, free cash flow is projected to be approximately JPY330b (sic - see presentation). Please note that our current projections for capital expenditure and cash flow do not include the plans of newly consolidated companies.

Please turn to slide 21.

Cash on hand at the end of 2010 is projected to be JPY800b, which is higher than our previous projection and represent confidence in maintaining our year-end cash level in line with 2009 and securing cash on hand equivalent to 2.8 months of net sales while covering the disbursements for newly consolidated companies with cash on hand.

Regarding our 2010 dividend, we will make that decision after better ascertaining financial trends not only this year but also next year.

This ends my presentation.