Canon Inc (CAJ) 2014 Q2 法說會逐字稿

Good morning or good afternoon, ladies and gentlemen. Welcome to Canon's Conference Call. Please note that all financial comparison made during my presentation will be on a year-on-year basis, unless otherwise stated.

Please turn to slide 3. In the second quarter, the global economy saw only a gradual recovery in growth. In the United States, although the economy has steadily recovered and the labor market improved, unemployment still stand above 6%. In order to see a real pickup in consumer spending, further improvement is needed.

In Europe, the economy remained weak, and in Japan, the economy was negatively impacted by the consumption tax hike. In China and at the emerging market, we saw a [deceleration] in economic growth due to weak demand and political instabilities.

Under these conditions, we continued to post lower camera sales due to a further delay in market recoveries. Our office and the industrial equipment-related business, however, continued to post solid result. As for profit, we achieved our fifth consecutive quarters of growth, thanks to enhanced effort to improve profitabilities, which I will talk about in more detail later.

Please refer to slide 4. This slide summarizes our performance in the second quarter. We posted a 4.1% decrease in net sales. As for gross profit, we posted a record high ratio of 52.2%. During the quarter, we promoted a shift to high value-added models, limited price decrease, optimized capacity utilization rate, while furthering our cost reduction effort, mainly for cameras. In addition to this, a higher proportion of office sales attributable to products such as color copiers and MFPs/Printers contributed to this result.

As we were also able to reduce expenses by JPY16.1 billion on a local currency basis, we achieved a 12.4% increase in operating profit, [and this was] our fifth consecutive quarter of profit growth.

Please refer to slide 5. I will now compare our second quarter results with those from last year's in more detail. Changes in exchange rate had a positive impact on both net sales and the operating profit. As for changes in sales volume, impact from the shrinking compact camera market and slow interchangeable-lenses, cameras market recoveries, resulted in lower camera sales. [Overall] as a segment posted solid result.

For price declines, which is included in the others categories, the impact was JPY19.1billion, approximately half the [JPY38.0 billion] in the same period last year. This reflects effort to restrain price declines for mainly cameras.

Expenses were down by JPY16.1 billion, due to the reduction of mainly advertising and promotional expenses. As for cost reductions, we raised our levels of production efficiencies, despite lower productions through the optimization of manufacturing sites. As a result, we secured an increase in profit despite lower sales.

Please turn to slide 6. I will now discuss our projections for 2014, this year. This slide shows our assumptions for exchange rate and the exchange rate sensitivities. Please refer to slide 7. Next, our revised [three-year] projections. We expect the trend of gradual global economic recoveries to continue, although at a slightly slower pace. This is a view that was also reflected in the World Bank's June report, which stated that the global economic recoveries was trending below their expectations.

As for our market, taking into consideration changes in the macro-economies and the business situations so far, we now assume a portion of the market recoveries we expected in the latter parts of the second half of this year will be delayed until next year. As a result, we lowered our net sales projection by JPY80 billion for industries and others. We expect some sales to roll over into next year, due to the raise in the storing equipment. This also reflect our revised outlook for camera market recoveries in the latter part of the second half of this year.

As for profit, also there are additional headwind compared to our previous projections, such as lower sales of industry equipment and the cameras, and the additional investment aimed at the expanding sales of new product. Even within office, we'll continue the effort that contributed to improved camera profitabilities in the first half, such as promoting a shift to high value-added models and restraining price decline. We'd also work in a concerted effort to realize further expense savings, facilitating our aim to secure the same amount of profit as our previous projections and achieve our second consecutive year of sales and profit growth.

Please turn to slide 8. This slide summarizes our current projection for the full year. Please refer to slide nine. I will know revise our current projections vis-a-vis previous one. The impact of exchange rate was not significant. As for changes in sales volumes, for industry and others, we expect some sales to grow robust into next year, such as portion of lithography equipment and (inaudible) large-panel overhead projection equipment. As for cameras, taking into account our result in the second quarter and the slower than the expected market recoveries, we lowered our projection for both interchangeable-lenses, cameras and compact cameras.

In addition to this, within office, we also lowered our projection for copiers. As for the Others categories, we decreased price declines and raised cost reduction projections, due to expected improvement, mainly for cameras. At the same time, we included an additional allowance for lower expenses.

Please turn to slide 10. I will now discuss each business unit, starting with office. In the second quarter, the copier market showed steady growth, driven by sales of color devices. Within this market, despite a slight delay in the launch of our new models, originally planned for June, we posted copier sales that were basically in line with last year, thanks to firm sales of our new models for imaging market that we launched in the first quarter.

Next, laser printers. The laser printers market has grown for five consecutive quarters, thanks in part to double-digit unit sales growth of our color MFPs. Within this market, we posted steady growth in color MFPs, a segment where we are actively working to expand sales. Overall, however, unit sales declined due to weak sales of monochrome models, mainly in Europe. As for consumables, unit sales were down in the quarter, due to the timing of [segment], but up for the first half.

Please refer to slide 11. Next, our [three-year] projection for this business unit. We expect the copier market to continue growing at a gradual rate, thanks to continued growth in sales of color models. Within this market, in addition to the new monochrome models for emerging market that we already launched, we started selling new models in June for the right production market. On top of this, we are planning a global rollout of our new A4 color models that was made available in Europe in July, this month. Through this new product, we plan to grow unit sales 10%, significantly exceeding growth of the overall market. As for Oce, which is included in the Others segment, we will expand sales of new continuous-feed and wide-format printers, while leveraging the benefits of integrations.

Next laser printers. We expect the laser printers market to continue to grow in unit sales -- in unit terms, powered by such factors as sales of color MFPs on new demand in emerging market. Within this market, we aim to expand sales of color printers and the MFPs, which will increase consumable sales in the future.

In terms of hardware, we expect to realize unit sales growth in line with the overall market. As for consumables, we forecast the unit sales to be basically in line with Russia.

Please turn to slide 12. Next, I will discuss our Imaging Systems business unit, starting with cameras. As for interchangeable-lenses/cameras, the market shrunk in Japan, following a rush in purchasing ahead of the consumption tax hike. Overseas market also seems to have contracted. Especially in Western Europe and Russia, market recovery was slower than expected.

Impacted by this market environment, we posted a 19% decline in unit sales. Regionally, however, we saw a strengthening trend of positive growth in China and in the United States, the [monetary] trend in sales seems to show gradual recoveries. As for compact cameras, the market continued to shrink in each region. As a result, we posted a 38% decline in unit sales. However, we have been gaining share since fourth quarter of last year, thanks to our strong lineup of high-end models. For the quarter, net sales of camera decreased 18%.

We are taking various measures to stimulate demand and recover profitabilities. In the United States, we started a new marketing campaign, focusing on interactive communications with users. We set up programs to communicate splendors of images and videos, you can only get from interchangeable-lenses/cameras. In China, we are working to expand the user base through promotional activities aimed at, for example, females and the senior citizens. Additionally, in Asia and Europe, we are also working to optimize product offering, such as lens kit variations in order to capture various regional demand.

Through this -- under the effort, our product mix has improved steadily. As for compact cameras, since last year, we have been constantly beating our production at overseas manufacturing sites, as well as our low-end product lineup. These measures have produced results and the profitability of our cameras business is steadily improving.

Next, inkjet printers. In the second quarter, the inkjet printers market continued a trend of modest year-on-year decline. Within this market, we saw a decrease in unit sales due to the longer-than-expected recoveries of Asian market, as well as resulting drops in demand following the consumption tax hike in Japan. Sales of consumables, however, were basically in line with the same period last year.

Please refer to slide 13. Next our full-year projection for the business units, starting with the cameras. As for the interchangeable-lenses/cameras market, through [seeping] adjustment, channel inventory levels have come down and are now basically aligned with demand. In the United States, where our sales are starting to show sign of gradual upturn is a positive effect of the economic recoveries, expected to gradually reach the camera market. Therefore, we expect the market to show recoveries in the year-end selling season.

In China, we expect a steady market recovery that we saw in the first half to continue. On the other hand, in Europe, the pace of market recovery has been slower than expected, and in emerging countries, market has been decelerating, possibly affected by uncertain factors like political instabilities in Southeast Asia. Accordingly, we lowered our outlook for the year-end selling season, mainly in Europe. Our [full year's] projection for the market and our unit sales are now 15.7 million and 7 million units respectively, as compared to 17.3 million and 7.6 million unit previously. Amidst these conditions, we will take various measures to achieve stable growth, while maintaining and improving profitabilities, as I mentioned before.

On top of this, we are working to stimulate demand from a service perspective. Last month, in Europe, we launched our new service, strengthening tie with networks for the storage and the sharing of images. In Asia, we are working to expand our sales network. In India, for example, we're setting up a Canon Image Square exclusive brand shops, which have become an important pipeline to customers. In Brazil, we aim to accelerate the sales and plan to launch localized productions from the second half. As for profitabilities, in addition to continuing effort to improve product mix, we will work to further boost sales of highly profitable interchangeable lenses.

Next, compact cameras. After reviewing our plans for low-end models, we have raised -- revised projections for the market and our unit sales from 48 million and 10.5 million units respectively to 43 million and 9.5 million units. Amidst this shrinking market, as I previously explained, we will continue to pursue various measures in an effort to maintain and improve profitabilities, enhancing our lineups of high value-added models that offer superior image qualities and performance. As a result, we expect camera sales decline 10.7%.

Next, inkjet printers. We expect overall market to bottom out and recover to basically the same level as last year. Within this market, we aim to strengthen our lineups with the launch of new product, including models that leverage connectivities with cloud-based services and mobile devices to capture new demand. Through these activities, we expect our unit sales to increase [1%] for the full year. As for consumables, we expect a solid growth, thanks to steady expansion in our [machine] in the field.

Please turn to slide 14. Next, Industry and Others. Sales of IC lithography equipment for memories and the image senses showed solid result, thanks to continued investment linked to strong demand for smartphones and tablet. As a result, we sold [17] units in the quarter. As for front-panel display lithography equipment, customers continued to invest due to increasing demand for panels. As a result, we sold 7 units used for the production of large sized panels. Our (inaudible) equipment and Independent Business Group companies also putt in solid performances. As a result, sales for the industry and others business unit increased 10.9%. Operating profit, however, was in the red, due to active investment to establish new businesses and develop next generation technologies.

Please refer to the slide 15. Next, our full year's projection for this business unit. As for IC lithography equipment, we plan to sell 54 units, thanks to expected steady growth in demand for memories and image sensors. Also, flat-panel display lithography equipment, we plan to sell 23 units this year. In addition to our existing strength in the equipment for large panels, we entered the small to midsized panels market this year, with new equipment and are making good progress.

As for medical equipment, we plan to expand sales, focusing on the X-ray image sensors, capable of capturing dynamic images. As for Group companies, we expect sales to be basically in line with last year, thanks to continued customers' investment in areas such as our narrow bus, MRAM, and the machineries (inaudible) production equipment. As a result, sales of Industry and Others is projected to increase 7.9%. As for operating profit, we expect to be in the red, due to investment in new businesses.

Please turn to slide 16. Next our financial situations. At the end of June, inventory turnover was 54 days. Inventory held by sales companies were 24 days, two days shorter than it was at the end of March, mainly reflecting effort to optimize camera inventory levels in the United States. As for work-in-process, inventory turnover was 16 days, one day longer than it was at the end of March. This mainly reflects preparations for expanded sales of lithography equipment in the second half.

Our target for inventory turnover is approximately 50 days. Based on this, we feel inventory at the end of June was basically at an acceptable level. We will, however, continue with the effort to reduce inventory, particularly work-in-process.

Please refer to slide 17. Next, capital expenditure and the cash flow. By thoroughly evaluating individual project, we plan to hold the capital expenditure to below depreciation. Furthermore, we will maintain our financial health through comprehensive cash flow management.

Please turn to slide 18. Next, cash on hand. Although [JPY50 billion] was used to acquire treasury stock, thanks to comprehensive cash flow management, cash on hand is projected to be JPY750 billion, or 2.3 months of the net sales at the end of this year.

As for this year's dividend, aiming to maintain stable returns, we plan to distribute the interim dividend of JPY65 per share. As for the year-end dividend, we'll make our decision after taking into considerations our future performance and funding requirement.

We will work to achieve our second consecutive year of sales and profit growth and return the Company to a positive growth. This concluded my presentation. Thank you very much for your kind attention.