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Canon (NYSE:CAJ)

Q1 2013 Earnings Call

April 24, 2013 12:00 am ET

Executives

Toshizo Tanaka - Chief Financial Officer, Executive Vice President, Senior General Manager of External Relations & Corporate Communications Center, Group Executive of Finance HQ and Director

Toshizo Tanaka

Good morning or good afternoon, ladies and gentlemen, and welcome to Canon's conference call. Please refer to today's slide and 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. The stagnant global economy conditions we experienced last year continued into the first quarter. In the United States, we saw some bright spot in economic indicators. In Europe, however, we saw further economic contractions. And in emerging markets, such as China, India and Russia, economic activities was restrained.

In Japan also, although we saw our recoveries in consumers and the business sentiment, expectations seems to be running a bit too high, as actual economic improvement will take time to realize.

In our initial projections, we expected to start the year under severe conditions, with improvement coming in the second half, thanks to economic recoveries. However, the external environment was actually more trending than we anticipated due to growing sign of further economic slowdowns in China and Europe, as well as aggressive pricing in the cooling markets. As a result, we were not able to avoid posting lower sales and profit.

Please turn to Slide 4. This slide summarize our first quarter performance.

Please refer to Slide 5. I will now compare our first quarter results with those from last year in more detail. Despite the benefit from the yen's depreciations, net sales decreased. In addition to lower variance of cameras and the industrial equipments, we reduced the price of product more than we have in the past in response to severe price competition, particularly for compact cameras. Operating profit also decreased for these reasons.

Please turn to Slide 6. I will now discuss our revised projection for 2013. This slide shows our assumptions for exchange rates and the exchange rate sensitivity.

Please refer to Slide 7. This slide highlights some key points. As I just mentioned, the global economies remains stagnant. When we look towards the future, however, positive sign of recovery are emerging.

In the United States, we are starting to see sign of a recovery. In Europe, some large corporation are starting investment activities in the emerging markets. In China, economic reforms to seek growth engines from export to personal consumptions are expected to produce result. And in Japan, the inflationary measures are expected to spur growth.

Despite many uncertainties, we expect to see more positive sign of recoveries in the latter half of the second quarter and the growing trend of recovery from July on. The speed and levels of recovery will differ between regions and products. We'll make every effort to return to a positive growth by watching trend even more closely than we have in the past. In addition, by actually driving our sales and marketing activities in line with market conditions in each region, we'll work to stimulate the market.

Additionally, in order to raise the competitiveness of our products, we continue to pursue R&D investments and the cost-reduction activities. Fully utilizing our product to strength and our sales and marketing skills, we'll take firm steps toward returning to a path of growth.

Please turn to Slide 8. This slide summarize our full year's projections.

Please refer to Slide 9. I will now compare our current projections with our previous one. We raised our projection to reflect changes in our exchange rate assumptions. As for changes in sales volumes, we lowered our projections for compact cameras.

Our current projection also includes JPY 30 billion of additional price decline. Our cost reduction assumption remain unchanged at JPY 80 billion. As for expenses, we raised our projection to reflect increase in sales promotion, particularly in the second half of the year.

Please turn to Slide 10. I will now discuss each business unit, starting with Office. In the first quarter, the copier market remained challenging due to such factors as global economic uncertainties and the economic slowdown in the emerging market, such as China. Because of this and the other factors, such as customers' purchases brought forward in the first quarter of last year in the United States due to an announced price increase, our unit sales declined 6%.

Amidst these conditions, we posted steady sales of second-generation imageRUNNER ADVANCE models. Initially launched in the second half of last year, the series enjoys wide market acceptance for its superior printing and security functions and its abilities to easily integrate with systems.

As for non-hardware products, despite customers' effort to restrain printing due to the weak economy, actual demand remains steady. Sales declined 3% on a local currency basis, however, due to lower unit pricing. As for laser printers, the market shrank in the first quarter, reflecting ongoing economic weakness.

Within this market, the new product that we released in autumn of last year have been highly evaluated, not only for their basic performance, but also for their advanced environmental features and improved usability. As expected, sales have been strong for this product. And in the first quarter, we posted a slight increase in unit sales. For the full year, we expect the contribution from these new products to increase. As for consumables, despite resolving the inventory adjustment problems, Russia's sales were lower on a unit and local currency basis due to continued economic weakness.

Overall, net sales of printers increased 2.5% in yen terms but declined 10.8% on a local currency basis due to impacts of volumes and product mix.

Please refer to Slide 11. I will now discuss our projection for this business unit, starting with copiers. Against the backdrop of global economic recovery, we expect current models to play a central role in driving gradual recovery of the overall copier market.

Within this market, we'll work to further enhance our product competitiveness, launching globally the new imageRUNNER ADVANCE models that were launched in Japan and Russia. Growing importance of mobile devices and the cloud-evolving office environment, in the future, in order to respond on this and the vast customers' document management need, it will become increasingly important to offer higher level of solutions.

Leveraging our broad product lineup, spanning high-speed copier to printers, we'll take advantage of our common solution platforms, which offers smoother document management operations. We'll also improve our abilities to respond to various customers' need and take measures to cultivate business with large corporations.

In addition, our sales organization integrating Oce is realizing steady progress in achieving operational efficiency. The integration has enabled us to expand our product lineups, leveraging -- leverage Oce's blue chip customer base and realize further benefit from sales from a marketing perspective. In this way, we'll promote sales expansions and the buildup of our installed base, constructing a stable profit base from future consumables and solution business.

As for laser printers, we expect the market to be up slightly in terms of unit for the full year, thanks to growth in color MFPs in the second half of 2013. Within this market, we'll actively promote sales expansions of low- to high-end MFPs in order to realize double-digit growth and facilitate our aim of expanding our installed base of printers.

In addition, we'll work to further activate the laser printer market into producing product in a timely manner that respond to such market need and high cost performance and low environmental impact.

As for consumables, we anticipate pickups in demand due to expected global economic recoveries for the second half of this year and project our unit sales to be basically flat, which is in line with the market.

This year, we are focused on increasing our installed base of printers, strongly promoting hardware expansions. Linking this to an expansion in consumable sales will take some time. Nevertheless, we have high expectations for next year and beyond.

Overall, net sales of printers are projected to increase 10.1% in yen terms but decrease 5.4% on a local currency basis due to product mix and other factors.

Please turn to Slide 12. I will now discuss Imaging System, starting with cameras. As for interchangeable lens cameras, although we saw some market weakness in China and Europe due to continued economic pressures, the global market remains solid, growing at a double-digit rate.

Within this market, we posted a 15% decrease in unit sales but still maintained our global #1 market share position. The reason for this lies in the fact that in the same period last year, due to effect from Thai flood, suppliers -- supplies to the market was focused on us.

And for the compact camera market, demand contracted in both developed countries and the emerging market due to weak economic conditions and the significant impact from smartphones. As a result, we posted a drop in unit sales that exceeded our projections, consisting mainly of low-end models.

I will next discuss inkjet printers. Despite a challenging market environment, we realized a 14% increase in unit sales. Our products were well received by the market for featuring, not only exceptional image qualities and basic performance, but also improved design and the ease of use. Thanks to strong hardware sales, we are also seeing steady growth in consumables.

Please refer to Slide 13. I will now discuss our projection for the business units, starting with cameras. For interchangeable lens cameras, we still expect the market to grow at a rate of 11% to reach 20 million units this year. Our assumptions takes into consideration such factors as the continuing growth in the emerging market and expanding user base, relatively low household penetration ratio -- rate and the recent sign of a market recovery in China.

Amidst market that continue to grow at a double-digit rate, we have launched several new products, including mirrorless cameras, compact lightweight digital SLR that incorporate full-frame sensors and entry-level cameras that has been significantly reduced in size and weight compared to its predecessors.

In addition to updating our existing lineups, we'll work to expand sales by stimulating replacement demand and expanding our user base and by launching new models in response to users' request to capture higher-quality pictures with more ease.

By expanding new product sales, we expect our unit sales to grow at a rate of 12% to 9.2 million units. As for compact cameras, we lowered our market projection from 83 million to 70 million units, reflecting such factors as the impact of smartphones, which was greater than we expected; and the market conditions seen in the first quarter. Under this outlook, we lowered our unit sales projection from 17 million to 14.5 million units.

Although we lowered this year's market projection for compact cameras, demand for mid- to high-end models remains solid. As the economy recovers, we expect the demand to improve as we head towards the year-end selling season. As the emerging markets return to a strong economic growth, we anticipate low-end models' market to bottom out. Under these conditions, we'll work to stimulate demand. We'll expand our lineups of cameras, offering WiFi connectivities and make networking features easier to use in order to promote coexistence with smartphones and other devices.

In this way, we're encouraging new way to share and enjoy high image qualities and high added-value photos, possible only through using dedicated cameras. High-performance optical zoom and the superior ability to shoot in low-light situation are just 2 areas of our features, where dedicated camera excel. We'll also offer new features that create a new way to enjoy photos, such as new imaging modes [ph] that contribute to creative expression.

In this way, leveraging the technological capabilities, we have cultivated, up until now, improving performance and enhancing features. We aim to differentiate our products, gain market shares and stimulate consumers' interest.

Leveraging the technologies cultivated for our cameras and lenses, we are also making steady progress in developing new business areas. One of our new business domains include the Cinema EO Systems lineup. Since last year, we have launched new cameras on the interchangeable lenses, which have been highly evaluated by professionals in the motion picture industry and have received several awards. Going forward, we'll respond to the need of the market as we work to further expand sales.

Another new business is network cameras. The shift from analogue to digital technology is leading to an expansion in the way these systems are being used. In order to take advantage of this growing business opportunities, this year, we established the Network Visual Solutions Business Promotion Headquarters. Leveraging these new organizations, we'll work to accelerate [ph] expansion of this business.

I will now discuss inkjet printers. In 2013, we expect the overall inkjet printers market to be basically flat with growth in emerging markets. As we have shown an ability to grow unit sales even amidst weak market conditions, we'll work to increase full year unit sales by 2%, enhancing product competitiveness and expanding sales models, specifically redesigned for emerging markets.

As for consumables, we'll continue to actively expand hardware sales in order to grow our installed base of printers, which will lead to steady consumable sales.

Please turn to Slide 14. I will now discuss Industry and Others, starting with IC steppers. In the first quarter, investment in the memory sectors continue to be restrained. As a result, we sold only 5 IC steppers during the period. In the Other segment, sales of group companies such as Tokki, Enerbus [ph] and machineries decreased due to the impact of the weakening industrial equipment market. As a result, net sales for the business unit decreased 31.6%, while operating profit was in the red, reflecting such factors as deteriorating financial results of lithography equipment and group companies.

Please refer to Slide 15. I will now discuss our projection for this business unit, starting with IC steppers. We expect the market to improve in the second half, supported by a recovery in restrained investment. Against this backdrop, and mainly due to an increase in i-line unit sales, we expect to sell 44 units for the full year.

As for front-panel display lineups, we expect a recovery in the market for large panels from the second half of the year, as the manufacturers become more willing to invest. As a result, we expect to sell 23 units for the full year.

As for the Other segment, we expect that the conditions seen in the first quarter to continue over the foreseeable future. And that performance of Tokki, Enerbus [ph] and the machineries to be below that of last year's. On the other hand, thanks to new product, such as OCT [ph] and the large order received for DR systems, we expect sales of medical equipment continue to expand. As a result, we project net sales for the business unit to increase 3.7% and for the operating profit to be red, reflecting active investment for future growth.

Please turn to Slide 16. Now I will discuss our financial situation. At the end of March, inventory turnover was 61 days. Inventory held by sales company was a bit high, mainly for compact cameras, due to lower-than-expected sales in the first quarter. Overall, however, inventory was within acceptable ranges. From April, we'll work to reduce inventory levels.

As for work in process, although influenced by planned launches of new cameras in April and orders for lithography and the industrial equipment, it was still a little higher than we planned. As such, we will continue to strengthen our management systems and work for optimizations.

Please refer to Slide 17. We'll manage capital expenditures within the range of depreciation, and we'll work to maintain our financial health through comprehensive cash flow management.

Please turn to Slide 18. Cash on hand at the end of December is projected to be JPY 670 billion or 2 months of full year net sales. Although we expect the business environment to remain challenging, we aim to increase sales and profit, making 2013 the year in which we return to a path of growth. This concluded my presentation. Thank you very much.

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