Canon Inc (CAJ) 2011 Q3 法說會逐字稿

Good morning or good afternoon, ladies and gentlemen and welcome to Canon's conference call. Please refer to today's slide and note that financial comparisons made during my presentation will be on a year-on-year basis, unless otherwise stated.

Please refer to this slide outlining today's agenda.

I will now discuss the third quarter. Despite growing financial instabilities in Europe and the United States, and an uncertain outlook, the global economy remained on a path of gradual recoveries. This reflects continued strong growth in emerging markets amid inflationary risk and some progress made in reconstructions after the earthquakes in Japan.

Although our market remained strong, the overall business environment was more challenging than that faced in the second quarters, due to the rapid appreciation of the yen.

Under these conditions, we worked towards improving our product delivery systems in order to realize a swift recovery in production. Through our effort to ensure the stable product price in response to strong market demand, we realized our first quarter, our net sales and the profit growth since third quarter of 2010, despite the yen's rapid appreciations.

Please refer to slide four. I will now summarize our third-quarter performance. Despite the significant appreciation of the yen, particularly against US dollar, we realized a slight increase in net sales of 0.4%, thanks to increased sales volumes following our recovery from the earthquake.

As for profit, our gross profit ratio reached 49.4%, an increase of 0.5 point from the same quarter of last year, exceeding the high 49.2% mark in the first half of this year. This improvement was due to increased net sales and the progress made in cost reduction, thanks to enhanced productivity.

Operating profit increased by 17.4%. This reflects not only the increase in gross profit, but also improved expense ratios, resulting from effort to streamline expenses.

Additionally, we secured an operating profit ratio of 13.4%, representing the first time to reach the 13% level since third quarter of 2008. This shows that the effort to improve profitability, mainly through continued cost reductions, are steadily bearing fruit, even under an increasingly challenging exchange rate environment.

Please turn to slide five. Next, I will compare our third-quarter results with the same period of last year. Changes in the exchange rate had a major negative impact on both net sales and operating profit. As for change in sales volumes, amid favorable market conditions, and through effort to improve our product delivery systems, we achieved unit sales growth in all business units.

In the others category, the negative figures on net sales represent price decline for mainly cameras. The positive figures on the operating profit represent price decline, offset by cost reductions and marketing expenses savings.

In summary, we achieved net sales and operating profit growth by expanding unit sales and reducing cost, offsetting the significant negative impact from the yen's appreciation and the earthquake.

Please refer to slide six. I will now discuss our projection for full year of this year 2011. This slide shows our exchange rate assumptions for the fourth quarter, and the estimated impact that JPY1 change in this rate would have on fourth quarter's net sales and operating profit.

Please turn to slide seven. This slide highlights some key points regarding our full year projections. As for the global economy, while there are increasing uncertainties and risks of the possible slowdown in developed countries, we feel the global economies will remain in the path of gradual recovery, with emerging markets continuing to show rapid growth.

As for the market in which we operate, we expect global demand to remain strong, even towards the end of the year.

Under these conditions, through various measures, such as accelerating momentum in our recovery from the earthquake, achieving unit sales growth through tailored strategies for each product and region, strengthening effort for further cost reductions and controlling the expenses, while investing in sales growth, we had planned to cope with the yen's rapid appreciation. However, after analyzing the flood situation in Thailand, we feel there is sufficient reason to be concerned about the potential impact on our business, particularly in our consumer segment.

As for cameras, although we don't have any camera-related factories in this area, some of our parts suppliers are in the affected regions. As a result, our production will be temporarily impacted. We are now working on a swift recovery, sourcing alternative parts and so on, but the project is some impact during the year-end selling season.

As for inkjet printers, we have factories in flood-affected areas. We are making effort to shift production to our new plant in Thailand, located outside the affected areas, and to our plant in Vietnam and so on.

Despite this effort, some financial impact may occur due to damage to buildings and equipment caused by the flood and delays in production of certain products.

Although the situation keeps changing, we are doing our utmost to minimize any impact on our business. At this point in time, however, we incorporated into our revised projections and impacts of JPY50b on net sales and JPY20b on operating profit. As a result, we now reluctantly project our net sales and profit decline for the full year.

Please refer to slide eight. This slide highlights our revised full-year projections.

Please turn to slide nine. Next I will compare our current full-year projection with our previous forecast. As for changes in exchange rate, the overall impact is negative. As for changes in sales volumes, the impact on our Office business unit is negative on projected net sales.

This is mainly due to a temporary decline in OEM partners' orders. As for other business unit, the impacts were positive on net sales, particularly for SLR cameras and interchangeable lenses.

Regarding earthquake's effect, we mitigated the projected third-quarter for mainly copiers, by realizing an early improvement in our product delivery systems. In the other categories the negative figures under the net sales represent additional projected price decline of JPY10b for such products as cameras and the copiers, to further expand sales.

The positive figures on the operating profit represent JPY20b in additional cost reductions from ongoing measures aimed at improving productivity and other measures, such as expense streamlining.

In summary, amid the yen's appreciation, we were aiming to realize as much improvement as possible in our performance. Due to the impact of flooding in Thailand, however, we factored into our projections a JPY50b impact on net sales, and JPY20b impact on operating profit.

Overall we lowered our net sales and operating profit projections. We will, however, take best effort to minimize this impact on our business.

Please refer to slide 10. I will now discuss each business unit, starting with Office. As for copiers in the third quarter, the market continued to gradually recover, thanks to strong global demand. Within this market and the continued strong demand for our imageRUNNER advanced products, we maximized sales and their [limited parts] price. We also made steady progress in the cross-selling of Office and the Canon products.

As a result, we reached a 2% increase in unit sales. We also saw sign of a gradual recovery in non-hardware sales. For the quarter, production steadily recovered and we also recorded a monthly record high in color copier unit sales in September. Despite this, we are still unable to fully respond to back orders. As a result net sales of copiers decreased slightly by 0.8% on local currency basis, and 4% in yen.

As for laser printers, emerging markets, such as China, continued to drive ongoing market expansion. Within this market, we made steady progress in line with our plan to realize a recovery in production and expand sales, achieving 9% unit sales growth. Despite this, net sales of other printing devices decreased 8.7% due to the yen's appreciation. In total, Office business unit third quarter net sales decreased 6.7%.

As for operating profit, while on a trend of improvement, the yen's appreciation led to a decline in our operating profit ratio of 0.8 points, and a decrease in operating profit of 11.2%.

Please refer to slide 11. I will now discuss our full-year projections. In 2011 we expect the global copier market to remain on the path of gradual recovery. As we head towards the year-end period, we aim to further expand our market share through sales promotion programs and effort to speed up production recovery.

As a result, we project a 10% increase in unit sales, which is in line with our previous projections. As for non-hardware, demand remains firm. Even in Japan the market has been on the recovery trend in the second half. As we are also making smooth progress in production recovery, we expect sales to increase 1% on a local currency basis.

As a result, we expect our full-year net sales of copiers to increase 3.5% on a local currency basis, but decrease 1.1% in yen.

According to a market research firm, despite medium-term outlook for continued steady expansion led by emerging markets, it slightly lowered its projection for this year due to economic uncertainty in Europe and the United States. As such, we now expect full-year unit sales to be lower than our previous projections, as fourth-quarter shipment to our OEM partners temporarily decline. Compared with last year, however, we expect unit sales to increase 7%, which is in line with the market trend.

As for sales of consumables, despite the pullback in channel inventories that we mainly saw in Europe, we expect net sales to be up 7% on a local currency basis.

This is based on a steady increase in printing volumes we are seeing. As a result, we project net sales of other printing devices to increase 2.5% on a local currency basis, but decline 5.2% in yen.

As a result, Office business unit net sales are projected to increase 4.7% on a local currency basis, but decline 1% in yen.

Regarding operating profit, we expect a 13.4% decline as we don't expect measures to reduce cost and expenses to fully offset the impact of the yen's appreciation.

Please turn to slide 12. I will now discuss our Consumer business unit, starting with our third-quarter's result. As for SLR cameras, we recorded a nearly 15% increase in unit sales. This reflects continued strong demand for our products and a rapid recovery in our ability to supply products after the earthquakes. We also continued to post strong sales of interchangeable lenses, supported by robust demand for SLR cameras.

As for compact cameras, due to recovery effort made after the earthquakes, we achieved a 5% increase in unit sales. As a result, third-quarter net sales of cameras increased 11.8%, despite the yen's significant appreciation.

As for inkjet printers, facing challenging market conditions in Europe due to the aggressive pricing strategies of competitors, we recorded a 4% increase in unit sales. This reflects the continued economic growth in emerging markets and unit sales expansion in Japan, due to recovering demand.

As for consumables, we recorded a slight decrease in sales on a local currency basis due to a slowdown in printer unit sales in Europe. This also seems to reflect restrained channel inventories, due to economic instabilities. As a result, despite steady unit sales growth, even in the third quarter, net sales decreased 3.8% due to significant appreciation of the yen.

In total, third-quarter Consumer business unit net sales and operating profit increased 7% and 27.9% respectively. Our operating profit ratio at 21.6% marks the first time since the fourth quarter of 2007 that we reached -- achieved a ratio above 20%, which is especially noteworthy, given the yen's appreciation.

Please refer to slide 13. I will now discuss our full-year projection for this business unit. As for camera market in 2011, for SLR cameras and the interchangeable lenses, we expect continued strong demand during the year-end selling season.

As for cameras, we expect camera sales to remain strong, particularly for SLR cameras and interchangeable lenses. Amid accelerating growth in our SLR unit sales, we are aiming for further expansion during the year-end selling season. Due to the flooding in Thailand, however, we lowered our full-year projection to 7.2m units, which is 100,000 units below our previous projections.

As for compact camera, we also lowered our full-year projection, 20m to 19m units for the same reason. As a result, and also due to the yen's appreciation, we project a 2.3% decrease in full-year camera sales.

As for inkjet printers, sales of new products that we launched in autumn are off to a good start, as we approach the year-end selling season. For the full year, however, we lowered our unit sales projection due to increasingly aggressive competitor pricing, mainly in Europe. As a result, we now expect full-year unit sales to increase 60 --- 6%.

As for consumables, due to an increase in machines in the field over the past several years, we expect to post positive growth as we look towards year end. Despite this, net sales are projected to decrease 6.3%, reflecting the yen's appreciation and some impact from the flooding in Thailand. As a result, we expect our full-year Consumer business unit sales to increase 1.8% on a local currency basis.

In yen terms, however, we expect our net sales to decline 3.6%. As for operating profit and due to the yen and the impact of flooding, we project a 12.4% decrease.

Please turn to slide 14. I will now discuss our Industry and Others business unit. In the third quarter, sales of IC Steppers expanded, thanks to the bullish demand for i-lines and KrF equipment, driven by strong demand for such products as smartphones and tablet PCs.

Sales of LCD [lines], however, decreased significantly due to a weak market and other factors, such as impact of investment on large panel equipment made in 2010 last year.

As for Canon Group companies, Tokki showed significantly increased sales due to OLED panel equipment sales. As a result, the Industries and Other business unit posted a 12.8% in net sales and an operating profit of JPY9.1b, reflecting the steady improvement in profitability and the further effort to reduce cost and expenses.

Please refer to slide 15. Next I will discuss our full-year projection for this business unit. As for IC Steppers, due to strong demand for CCD and CMOS sensors, as well as the power [strike] controller ICs for hybrid electric vehicles, we are seeing strong demand, particularly for [hiring] equipment. As a result we raised our unit sales projection from 46 to 50 units.

As for LCD liners, we project full-year sales to be 28 units, which is significantly below the 56 units we sold last year. This reflects a weak demand for [ready] panel equipment.

For Group companies, as production systems have returned to normal, we project net sales to be in line with our previous projections. In total, we project a decrease in Industry and Other business unit net sales of 0.7% due to lower unit sales of LCD liners.

As for operating profit, we expect to be JPY29.3b in the black, which exceeds our previous projections. We project that our Lithography segment will be in the black, thanks to increased IC Stepper unit sales and greater production efficiencies. It also reflects the progress made to improve production efficiency at Group companies.

Please turn to slide 16. Finally, I will discuss our financial situation. At the end of September inventory turnover was 54 days. This reflects an increase in inventories held by sales companies in preparation for sales expansion. Going forward we will promote further optimization of inventory levels, to prevent lost sales opportunities.

Please refer to slide 17. This slide highlights capital expenditure and free cash flow. Going forward we will continue this effort to promote more thorough cash flow management and maintain our financial strength.

Please turn to slide 18. As a result, despite a share buyback totaling roughly JPY100b, we expect cash on hand to be JPY700b at the end of this year, which is equivalent to 2.1 months of net sales.

Please refer to slide 19. On top of the earthquake, we are now faced with a new challenge of extensive flooding in Thailand. As this slide shows, however, actual business conditions remain strong and we are overcoming the rapid yen's appreciation and the economic uncertainties when the impact of the earthquakes and the flooding in Thailand are excluded.

Despite this very severe business environment, the Canon Group will make a concerted effort to firmly achieve its new target. In doing so we will work towards the target of achieving a record high result in 2013, as outlined on page four of our excellent global corporation plan started this year.

This concludes my presentation. Thank you very much for your kind attention.

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