Canon Inc (CAJ) 2015 Q1 法說會逐字稿

Okay, thank you very much. Good morning, or good afternoon, ladies and gentlemen, and welcome to Canon's conference call.

Please note that all financial comparisons made during my presentation will be on a year-on-year basis, unless otherwise stated.

Please turn to slide 3; first, this quarter. In the United States, consumer spending and the employment situation appeared stable. In Europe, however, the situation in Russia led to further instability. Additionally, in the emerging countries, consumption was weak, due to currency depreciation. Overall, the global economy was more encouraging than we expected.

In the markets in which we operate, demand for office and lithography equipment was solid. The camera market, however, remained weak in Europe and emerging countries, and dropped significantly in Japan, reflecting a buying rush, ahead of last year's consumption tax hike.

As a result, our unit sales decreased by over 20%, as the rate -- the recoveries in Europe and emerging countries was more challenging than we forecasted, since [April] projections. These factors led to the decrease in sales

As for profit, although we secured an increase in gross profit, profit below [the line] declined. Given the market situations, we emphasize profit by [limiting] price reductions and improving product mix, which helped to reduce the impacts of lower camera volumes.

Profit was impacted by an increase in transportation cost, due to the labor dispute at the West Coast port in the United States.

On top of this, bringing [forward] the development of new businesses and product, as well as the impacts of new companies, that's where the risk to consolidation from and after the second quarter last year, led to a spike in expenses.

Please turn to slide 4. This slide summarizes our first-quarter performances.

Please refer to slide 5. I will now compare our first-quarter's result with those of last year's. Changes in the exchange rate had a positive impact on both net sales and operating profit. As for sales volume impact, the overall impact of negatives, reflecting the increase in transportation costs, but mainly due to lower camera volumes.

The total impact on profit, however, was limited to JPY2 billion, thanks to an overall improvement in product mix, mainly reflecting the expanded sales on color copiers and higher camera profitability.

As for others, the figures under net sales represent price declines, which were held to 70% of last year's levels.

As for the negative figures on the operating profit, despite our effort reduce cost, it was offset mainly by higher expenses, such as R&D, which was over 9% our net sales, reflecting effort to bring the improvements of new businesses, as well as new copiers and printers.

Please turn to slide 6. I will now discuss our current projections for the year. Here are our assumptions for exchange rate, and the exchange rate sensitivities.

Please refer to slide 7. Next, key points. The global economy has been weaker than we expected. Going forward, we anticipate the United States to move towards a stronger recovery trend.

As for Europe, where stability is being undermined, not only by Russia, but also Greece and in emerging countries, where currency depreciation and the weak exports are having a negative impact, we now expect a pickup in recoveries to come later than we previously assumed.

Although we still expect to move toward the recoveries over the second half of the year, we now anticipate the business environment to be more challenging.

Based on this outlook in the markets in which we operate, we expect the demand for office equipment to remain steady; similar to what we saw in the first quarter.

In continuation of the new products that we launched during the second half of last year, we still launch new products from the second quarter and actively work to continue expanding sales.

The semiconductor market is also expected to continue growing, raising the expectation that we can increase our unit sales above our previous projections.

For cameras, however, we lowered our outlook, particularly for Europe, emerging countries, and China, based on our performance in the first quarter.

Although recently launched products have been well received, and the initial sales have been good, we reduced our unit sales projection to reflect many uncertainties that remain regarding the strength of the market recoveries that we can expect in the second half of the year. As a result, we lowered our full-year's net sales outlook by JPY40 billion.

As for profit, we expect to maintain the same levels as previously forecasted.

The decrease in our projected camera sales mainly reflect an expected decrease in sales of lower-priced models.

We feel we can overcome these hurdles through our collective strength, including such measures as improving our office equipment product mix; expanding sales of industrial equipment; enhancing the effort to [limit] price reductions; and through continuing the effort to reduce costs and expenses, facilitating our aims of full-year's sales and profit growth.

Please turn to slide 8. This slide summarizes our projected performance in 2015.

At this time, Axis is not included in our forecast, because we are unable to obtain sufficient information given; among others, their status as a listed company. As we announced last week, however, we now hold 84% of Axis' shares. Given this ratio of holding, Axis will be added to our consolidation from the second quarter.

As for Axis' projected performance, similar reports have been published by research firms. Based on these reports, including Axis, would add approximately JPY60 billion to our consolidated net sales, lifting the total to over JPY3.9 trillion, creating growth of about 5.2%.

Please refer to slide 9. I will now compare our current full-year projection with our previous one. The changes in exchange rate assumption had a negative impact on both net sales and operating profit.

As for sales volume impact, we expect to overcome the impact of lower camera volumes through expanded sales of lithography equipment, and larger contributions from the industrial equipment, and independent businesses Group companies.

At the same time, effort to strengthen high value-added within the office segment should enable us to secure about the same levels of net sales and operating profit.

As for others, we revised our price reduction plan from JPY65 billion to JPY61 billion, and raised our cost-reduction plans by JPY3 billion to JPY41 billion.

We also lowered our outlook for expenses to reflect the greater efficiencies in camera promotional expenses, and in R&D spending related to existing businesses.

Please turn to slide 10. I will now discuss each business unit, starting with office. The market of our office business unit remained on a path of gradual growth, driven by continued sales of color equipment.

Within copiers, we posted a double-digit increase in color units, thanks to strong sales of our A4 and write-protection models launched last year, particularly in Europe and the Americas.

As for others, we posted solid sales of continuous feed and wide format printers, launched last year.

As for laser printers, we posted solid hardware sales. Although sales were down in Japan, sales in other regions were strong. Sales of laser printer consumables declined; however, mainly due to economic weakness in Europe.

Please refer to slide 11. Next, our projection for the business unit. Going forward, we expect the market trend we saw in the first quarter to continue. Under this outlook, we plan to launch a number of new strategic products.

For copiers, we expect to grow faster than the market in terms of units, thanks to the launch and sales of new strategic products, including those that were launched last year.

One very important product was recently announced: an A3 color models for the small and medium-sized business market.

In developing countries, demand for compact, mid to low-speed color equipment is growing.

And in emerging countries, where we are currently now replacing monochromes, there is increasing demand for equipment that is easy to maintain. This new product addresses many of those needs.

As for laser printers, new product, based on a platform that were completely revised, for the first time in seven years became available this month, in April. This product incorporates the new technologies that deliver such improvements as a shorter waiting time before printing starts, and smaller form factors. The new product also reduce power consumption to as much as half, thanks to the development of new toner technologies.

Events were held in three locations on the same day, around the world, to announce the new product. Dealers and analysts who attended noted how well they fit users' need. They also confirmed that we continue technological innovation that will help secure our position as the market leader.

Through this new product, we aim to exceed market growth.

As for laser consumables, we expect the condition to remain challenging in the first half of the year, due to the impacts of weak market conditions, mainly in Europe.

Additionally, because there is a lag between hardware replacement in the supply stream that comes from it, we expect the consumable sales to see growth, starting from the second half of this year.

As for others, the release of new strategic products, including those launched last year, is expected to support further growth.

Please turn to slide 12. Next, imaging systems. As for the interchangeable lens camera market, while the United States market was solid, conditions in other regions remained challenging.

Within this market, although with a new return to positive unit sales growth in the United States, in other regions we posted double-digit declines. Overall, we came in below our projections. This reflects such factors as a prolonged economic weakness in Europe and emerging countries.

In China, the market saw a deceleration in growth, due to the enhanced anti-extravagance campaign.

As a result, unit sales decreased by 22% to 1 million units.

As for compact cameras, the market continued to shrink in all regions. Within this market, however, we posted relatively solid sales of high-end models. Sales [of growth] in the models, however, continued to shrink, in line with last year, resulting in overall unit sales that were below our forecast. As a result, unit sales decreased by 27% to 1.4 million units.

Next, inkjet printers. The market shrank slightly as continued weak growth in emerging countries couldn't fully offset market contractions in developed countries. Amid this environment, we steadily expanded unit sales in developed countries, such as the United States, and also Western Europe. This reflects active efforts to expand sales of new products, with our regional retailer sales strategies.

Additionally, we steadily expanded unit sales of MAXIFY, our lineups [sole] business inkjet printers established last year to respond to diversifying market needs.

Overall, however, unit sales decreased 3%, reflecting the buying rush in Japan in the last year, and the [limited] recovery in emerging countries.

Sales of consumables also declined, due to the significant impacts of last year's consumption tax hike in Japan.

Please refer to slide 15. Next, our projection for the business unit. As for interchangeable lenses cameras, our forecast at the start of the year was for unit sales to be basically flat in 2015. This plan was based on the assumption that the new products would stimulate the market, and that sales would benefit from an economic recovery in the second half of the year.

The market and ourselves, however, are both below expectations in the first quarter. Accordingly, we revised our full-year outlook for the market, particularly in Europe, emerging countries, and China, where we saw noticeable gap between our projections and actual result. As a result, we reduced our market outlook by 9% to 13.1 million units.

Amidst this market environment, which is marked by declining purchasing powers, we lowered our projection for unit sales by 9%, from 6.4 million to 5.8 million units, reflecting many uncertainties regarding achieving the unit sales forecasted at the beginning of the year.

As for new products, we recently launched the EOS M3, which has been very well received in Japan.

Additionally, initial market response seems strong for the two DSLRs that went on sale this month, which both incorporate NFC and Wi-Fi technologies, and realize the compact body designs.

As for high-end models, we are seeing healthy pre-orders for the two DSLRs which become available in June, that incorporates our first 50 megapixel sensors.

In this way, our new products were having the impact that we originally projected.

Next, the compact cameras. Based on a review of each region, we now expect the market to be smaller in size compared to our projection at the beginning of the year. Therefore, we lowered our market projection from 33 million to 29 million units; and our own unit sales projection from 7.8 million to 7 million units, a decline of 22%.

Although we expect lower unit sales, we'll work to improve the profit through continued efforts to shift to high-end models.

While we did lower our unit sales' projection for cameras, we do see a sign of improvement in the United States.

Based on this outlook, we worked to avoid price competition and stimulate the demand, mainly for new products, facilitating our aims to maximize profit.

Next, the inkjet printers. We anticipate the emerging markets to recover as we move into the second half. And, as such, we expect the inkjet printers might get to be basically flat in 2015.

Based on this outlook, we'll work to strengthen the competitiveness of our products, and increase our market shares. In addition, in the B2B field, we aim to achieve growth by promoting the comprehensive strengths of our inkjet technologies. These measures will contribute to expanding consumable sales.

We'll also promote cost reduction to raise profitability further.

In addition to expanding sales of new products launched in last year, we work to expand our market shares through the introduction of increasingly competitive new products.

In the B2B market, we'll work to globally expand sales of the MAXIFY series.

As for our large format printers, which have received high marks for their high speed, high image quality performance, and accurate color reproduction capabilities, we will continue working to expand sales and profit by offering products and solutions that respond to users' needs.

In this way, we aim to achieve growth across our entire inkjet lineups, enabling us grow unit sales by 2% for the full year. As a result, we expect to build up [MIF] and steadily promote sales of consumables.

Please turn to slide 14. Next, industry and others. Sales of IC lithography equipment reached 18 units in the quarter, exceeding last year's 12 units. In this market, customers are continuing to increase capital expenditure, contributing to our strong sales of lithography equipment for memory chips and power semiconductors.

As for flat panel displays lithography equipment, the market was strong and we saw good development in our orders and shipments.

As for others, we posted decreased sales in both the independent business sales companies and medical equipments, reflecting last year's buying rush in Japan.

As a result, business units net sales decreased 0.5%.

Operating profit was in the red, due to active investment in new businesses and next-generation technology areas.

Please refer to slide 15. Next, our projection for this business unit. As for IC lithography equipment, demand for memory chips, image sensors, and power semiconductors is expanding. As a result, customers are increasingly motivated to increase capital expenditure. Based on this outlook, we also expect our sales to be strong; and, as a result, we raised our projection from 56 units to 64 units.

As for flat panel display lithography equipment, we expect that customers will increase capital expenditures in response to expanding demand for panels. As such, we expect our sales to be 32 units, exceeding the 22 units of last year.

As for medical equipment, which is included in others, we'll focus on expanding sales of high added-value products, such as wireless digital x-ray systems and the new [digital] camera, which is the world's first to incorporate the image-processing function that makes it easy to make observations for patients with cataracts.

Additionally, we expect to expand sales of new businesses, as well as Canon Tokki's OLED, and the Canon ANELVA semiconductors, and LED production equipment.

Through these measures, we expect net sales of this business unit to increase 15.6%.

Operating profit, however, is projected to be in the red, due to expenses linked to the development of new businesses.

At this time, I'd like to provide an update on our developments progress related to nanoimprint lithography. In an effort to realize sub-20 nanometers high-resolution processes, Canon is working to improve alignment accuracy.

Aiming to commercialize the systems in 2015, this year, we initially target memory-device manufacturers that produce flash memories. In the future, we will aim to apply these technologies in the production of DRAMs and logic devices.

Please turn to slide 16. Next, our financial situation. At the end of March, inventory was 54 days; four days longer than the end of December. Of this, inventory held by sales companies was healthy, but up to two days, due to an increase in goods in transit caused by the labor dispute at the West Coast port in United States.

As for work in progress, inventory was 17 days; one day longer than the end of December. This basically reflects a balanced preparation for new products, and expanding orders for lithography equipment.

As for camera inventory, it was up, compared to the end of December, due to seasonality. Compared to the end of March one year ago, it was eight days shorter, and at very acceptable levels.

Please refer to slide 17. Next, capital expenditures and cash flow. As I mentioned earlier, Axis is not included in our forecasted profit and loss. As announced, however, we hold 84% of Axis shares. In calculating cash flow, we assumed 100% acquisitions; as a result, free cash flow is projected to be negative JPY40 billion.

Please turn to slide 18. Next, cash on hand. Despite the large-scale acquisitions, cash on hand at the end of 2015 is projected to be JPY600 billion, or, basically, two months of net sales. Many uncertainties remain in the market environment, especially in the first half, where we expect business conditions to remain challenging.

In the final year, so phase 4 of the global corporation plan, we'll promote the expansion of the new businesses, as well as the strengthening of B2B areas.

At the same time, we'll strive to sum up the year, posting sales and profit growth, and a further developed base that will allow us to make a great leap forward in our next five-year plan.

This concluded my presentation. Thank you very much.