Canon Inc (CAJ) 2015 Q2 法說會逐字稿

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, the second quarter. As for the global economy, in the United States we saw steady recoveries driven by personal consumption thanks to improving employment conditions. In Japan we saw a continuing trend of modest recovery. In Europe, however, the pace of recovery slowed amid Russia's prolonged weakness. Additionally we saw delay in recoveries of emerging markets, such as China, Southeast Asia and Latin America. Overall, the global economic environment remained challenging, as it was in the first quarter.

In the market for business machines, demand for monochrome models was low due to weak market conditions in Asia, including China. Additional reasons are interchangeable range of cameras market in Europe and Southeast Asia continued to shrink at a double-digit rate as it did in the first quarter.

Even under these conditions, our interchangeable lens camera business showed a visible recovery trend in both Japan and the United States. And in business machines we maintained a positive growth, driven by color models. We also grew sales of lithography equipment and network cameras with the consolidation of Axis.

As a result, overall net sales grew 5.1%. As for profit, our gross profit ratio remained at high levels, mainly thanks to improvement in product mix and effort to cut cost and limit price reductions. As for operating profit, an increase in expenses, linked to the bringing forward of our development of new businesses and new products, caused profit to decline. Profitability, however, was above 10% for the first time in years.

Please refer to slide 4. This slide summarizes our second quarter's performance.

Please turn to slide 5. I will now compare our second-quarter results with those of last year's. Changes in the exchange rate had a positive impact on both net sales and operating profit. As for changes in sales volumes, laser printer consumables and cameras declined. Market contraction was the major reason for the lower camera sales.

As for consumables, the decline reflects a high concentration of shipment in the same period last year. As for industries and others, in addition to strong sales of lithography equipment and industrial equipment of Group companies, we also recorded an increase in network camera sales due to the consolidation of Axis.

In others, we further [retained] price reduction from Russia and raised cost savings. As for expanses, the increase was mainly due to new consolidations. Expenses also increased due to the bringing forward of developments of new businesses and new products, as was the case in the first quarter. Also we recorded an increase in gross profit. Operating profit declined mainly due to the increase in expenses.

Please turn to slide 6. Next our current projection for the year, here are our assumptions for exchange rates and the exchange rate sensitivity. We assume further yen depreciation. This reflects the trend in exchange rates we have seen since May. Our yen/dollar assumption also taken into consideration a possible increase in US interest rates.

Please turn to slide 7. As for the economy in the second half of this year, we expect the United States to remain the driver of global growth. We also expect the trend of our recovery in Japan to strengthen. In Europe we expect the recovery is driven by Western Europe. As for Asia, including China, despite various uncertainties, we expect a gradual recovery driven by growing export to the United States and Europe.

As I said at the beginning of the year, our aim for this year is to achieve higher growth than the market by launching numerous new products. Already in the second quarter we launched strategic office and camera products, in line with our original plan. In the second half we will further add new products and aggressively strive to expand sales.

As for profit, we'll work to improve our product mix by focusing on new products while further concentrating on pricing and cost reduction to achieve our aim of sales and profit growth.

Please refer to slide 8. This slide summarizes our projected performance in 2015. As for the impact of adding Axis to our consolidations, we added JPY70b to net sales. As for operating profit, we didn't anticipate any profit due to accounting treatment linked to the converging of Axis into consolidated subsidiaries.

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

As for changes in sales volumes due to many uncertain factors surrounding recoveries, primarily Asia, including China, will reduce our sales projections for inkjet printers and low-end monochrome office equipment. On the other hand we raised our sales projection for our lithography equipment and network cameras.

As for others, based on favorable trend we saw in both price reduction and the cost savings in the second quarter, we will strive to limit price reductions an additional JPY1.5b to JPY59.5b and raise the cost reductions by JPY1b to JPY42b.

Expenses are projected to increase primarily due to newly consolidated companies such as Axis. As for development expenses, although the first half showed an increase, we expect the three-year level to be similar to past years.

Please turn to slide 10. I will now discuss each business unit, starting with office. In the business mass market, color remains the growth driver. The overall market, however, stayed on the path of moderate growth. The monochrome sales shrunk due to the weak Asian market, including China. As for our operations, we also recorded sluggish sales of monochrome copiers and laser printers, particularly low-end models.

As for color in our color business -- in the copier business we saw a steady increase in sales of A4 color models and [the right] production models that were launched last year. Additionally, we launched a new A3 color model in April for small- and medium-sized offices that seeks high image qualities, operability and productivity. These new products were the driving force for the 25% increase we posted in color unit sales.

As for laser printers, we recorded solid sales of color models, including the new models launched in April. Overall, unit sales were down, however reflecting lower sales of monochrome models in Asia, including China. Sales of consumables were also down. In addition to lower sales in Asia, this reflects high levels of sales in the same period last year.

As for commercial printing, we posted an increase in sales, thanks largely to new products, including high-end wide-format printers.

Please refer to slide 11. Next, our projection for this business unit. In the office market we expect the pace of growth to remain moderate, with color models continuing to drive growth. As for copiers, we expect to achieve unit sales growth that exceeded the market.

In addition to the first full year's contributions to sales of products launched last year, we expect the newly launched A3 color models and the other models that follow to support further sales expansion in the second half.

As for laser printers, the new models launched in April have been well received by users for features such as output speed and low energy consumption. From autumn we will further reinforce our line-ups and work to expand sales.

As for consumables, also we expect the sales to be basically flat this year. We are building the foundation for future expansion, introducing new toner technologies in connection with the launch of our new products

Please turn to slide 12. Next, our imaging system business unit, starting with the cameras. The interchangeable lens camera market continues to decline at a double-digit rate in Russia and Southeast Asia, where personal consumption remained weak.

The Chinese market is also showing signs of slowing down. Japan, however, returned to positive growth and trend of recovery in the United States is strengthened. Overall, the interchangeable lens camera market is heading toward recovery. Under these conditions, we recorded a 9% decline in unit sales, (inaudible) the [deceleration] in sales declines compared to the first quarter, which is in line with our expectations.

As I addressed at the beginning of the year, we are setting aside the economic recovery and focusing heavily on actively stimulating demand in order to return to stable growth. Our core strategy has been to respond to market need, such as improved image quality, usability and network connectivity with new products. After June, we have launched five new models with this in mind.

The high amateur model 5DS produces high image qualities, incorporating high-resolution sensors. The two new entry models also incorporate our latest sensors and imaging processing engines and offer improved auto-focus performance and network connectivity.

The 8000D provides higher levels of operability to capture the attention of users who have a strong desire to move up in class. And the new mirrorless models that offer advantages in the weight and size also have improved operability and is picking up market shares, especially in Japan.

Next, compact cameras. The market shrank, as it did in the first quarter. In line with the overall market trend, we posted solid sales of high-end models and lower sales of low-end models, resulting in a 27% decline in total unit sales.

And for cameras, in our previous forecast we lowered our unit sales projections due to a heightened sense of market uncertainty. Based on the performance we saw in the second quarter, we now feel that we are close to a point where we can predict the future more clearly.

Next, inkjet printers. The market contracted slightly due to weak market conditions in Asia, including China and Russia. Within this market we steadily grew unit sales in the United States and Western Europe, where demand is recovering. This, however, was not enough to offset the impact of weak market conditions in the emerging market. Despite the lower unit sales, inkjet printer revenues grew thanks to strong sales of large formats and other printers in the B2B market.

Please refer to slide 13. Next, our projection for the business unit, and starting with cameras. As for the interchangeable lenses camera market, in Japan and the United States we expect the trend of recovery to strengthen. In Europe and Southeast Asia, we expect a gradual recovery toward the yearend, supported by improvement in consumer spending. For our sales, the trend we saw in the second quarter was in line with expectation. We feel comfortable keeping our three-year projection at 5.8m units.

As I mentioned earlier, our aim of this year's new products is not only to expand sales of our entry-class models, but to capture demand of users who have a strong desire to move up in class. Moving into the second half, we will put more focus on expanding the sales of these new products, along with promotions that bundles lenses and the accessories.

As for mirrorless cameras, on top of being compact and light, improvement in other core features have heightened their market acceptance in Europe and the United States, which is leading to a gradual increase in share.

Our newly launched M3, which captures this need, is already gaining high acceptance in Japan and Asia. And in the second half of the year we plan to roll out further into other regions to expand sales. Additionally, we will work to expand the overall market, offering new ways to enjoy photography, such as through our Connect Stations for sharing, viewing and managing photos.

As for compact cameras, although we expect the market contraction to continue, mainly in the low end, we expect our share in Japan to settle down from the second half. And in other regions we expect the pace of sales decline to slow.

As our sales in the quarter were in line with our expectations, we expect that we can maintain our projections of 7m units for the year. Sales of high-end models remained solid, which was also in line with our expectation. As for our G7X models, which was launched last year, sales increased in developed countries. We expect this solid trend to continue and we work on expanding our line-ups accordingly.

One such product is a G3X models which we launched in June. This model offers both high image quality and a high-ratio zoom. Thus we will continue our efforts to improve profitability by improving product mix mainly through new high-end products.

Next, inkjet printers. We expect the market to be slightly down from last year, continuing the trend we saw in the first half. Under this outlook, we'll work to expand market share by launching very competitive products for the year-end selling season. In the B2B field we will promote global expansions.

As for large-format printers, our abilities to provide solutions that match customers' need is allowing us to secure great deals. With this, in time, with continuous working to achieve growth that exceeds our market.

For the full year, we expect to post flat unit sales, offsetting the declines in consumer-oriented products with those products for the B2B market. As such, we expect the firm consumable sales, based on a steady increase in [MIF]. Through this we expect the net sales of inkjet printers to increase 1.8%. Overall we project a 2.5% decrease in the net sales for this business unit. Operating profit, however, is projected to increase 4.3% thanks to efforts to promote improvement in product mix.

Please turn to slide 14. Next, I will discuss industry and others, starting with IC lithography equipment. The willingness of customers to undertake capital expenditure remains high. Within this market we recorded strong sales of lithography equipment for memory chips and power management ICs. As a result, we sold 19 units, over 2 more than in the same period last year. Sales of flat-panel display lithography equipment have also been solid, resulting in seven units being sold in the period.

Within others, we recorded an increase in sales of industrial equipment of Group companies. Moreover, the consolidation of Axis from the middle of April added approximately JPY20b to our consolidated net sales. This amount represents a calculated portion of the SEK1.6b Axis book sales in the quarter. As a result, sales of this business unit increased 36.8%. Operating profit, however, remained in the red due to [an active] investment for the development of new businesses and next-generation technologies.

Please refer to slide 15. Next, our projection for this business unit. As for IC lithography equipment, we expect the market to grow due to the expanding demand for memory, image sensors and power IC chips. Based on this expanding demand, we raised our full-year projection for unit sales from 64 to 71 units.

As for nanoimprint lithography equipment, we continue to carry out developments with the aim to commercialize our systems within the year. As for flat-panel display lithography equipment, we also anticipate the market growth thanks to an expected increase in capital expenditure as panels continues to increase in size and offer higher definition.

As for the other segment, we expect the network camera sales to increase, which includes JPY70b from Axis. Within the other segment, we also focused an increase in sales of medical equipment, mainly of high-added-value systems. We also expect an increase in sales for Group companies, such as Tokki's OLED production equipment.

Please turn to slide 16. Next, our financial situation. Inventory at the end of June increased in both days and values compared to the end of March. The increase in value reflects plans to actively expand sales of new products as well as the impact of adding Axis to our consolidations.

Inventory turnovers increased by five days from the end of March. Of this, inventory held by sales companies and work in process both increased by two days. These transitory increases primarily reflect a trend to expand sales of lithography equipment and new products, such as copiers. As such, inventory levels are within a healthy range.

As for cameras, due to the launch of new products in the quarter, inventory turnover was 59 days. It was three days longer than it was at the end of March. As the labor dispute at a west coast port was resolved, goods in transit decreased. Compared with the end of March last year, the cameras inventory shows a six-day improvement and is being maintained at an appropriate level.

Please refer to slide 17. For capital expenditures and cash flow, please refer to this slide. In our previous projection we assumed that all of Axis' shares would be acquired. At the end of June we held 85%. Also our goal of making Axis a wholly owned subsidiary has not changed. Our current projection assumes that we maintain the current situation. As a result, we revised our free cash flow projection from negative figures to a positive JPY10b.

Please turn to slide 18. As a result, cash on hand at the end of 2015 is projected to be JPY650b or approximately two months of net sales. Since last year we have been facing challenging market conditions. To overcome this, we will work to strengthen the existing businesses through the aggressive launch of new products. At the same time we will reinforce efforts to cultivate new businesses.

In our next five-year plan that starts next year, we will aim for further growth. In order to raise the foundation that will support this leap forward, we work to close this year posting sales and profit growth.

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