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Canon (NYSE:CAJ)

Q3 2013 Earnings Call

October 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 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. Amid the prolonged global economic weakness, we have seen increasing sign of slowdowns. This seems to be reflected in the IRS [ph] Latest forecast as well.

In our previous projections, we assumed a delay in economic recoveries but thought gradual global economic growth would continue, supported by Japan and the United States. In fact, we are seeing the expected growth in Japan. In the United States, however, although we are seeing the steady recoveries in demand for durable goods, with no real improvement in employment, we are not seeing the expected rise in demand for consumer good. In the market in which we operate, especially within the consumer market, we are -- we expected interchangeable-lens cameras to drive growth. We plan to expand sales in each region. We intended to use seasonal momentums in the third quarter and use it to drive further expansion in the year-end selling season.

Unfortunately, whether it was back-to-school in the United States, summer vacation in Europe or even the founding anniversary of China, market activity was not what we had expected. Additionally, it became sluggish in the emerging market, due to such factors as depreciation of local currencies and economic slowdown.

Within this business environment, however, we maintained or improved our market shares, enhancing our product competitiveness through the launch of new products. Although through cumulative effort to reduce costs and expenses, along with the yen's depreciation, we posted our second consecutive quarter of growth in both net sales and profit.

Please refer to Slide 4. This slide summarize our third quarter's performance.

Please refer to Slide 5. I will now compare our third quarter result with those from last year's in more detail. Changes in the exchange rate has a positive impact on both net sales and operating profit. As for changes in sales volumes, we posted solid growth in Office. As for Imaging Systems, this was due to ongoing compact camera market contractions. In the other categories, the negative figures under net sales represent price declines, which was significantly higher than last year's, particularly for cameras. The negative figures on the operating profit represents the price declines particularly offset by cost and the expense reductions. Overall, the business environment remained challenging even in the third quarter.

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 turn to Slide 7. I will now discuss our revised full-year projections. As for the economies, we expect continued weakness, mainly in Europe and the emerging markets such as China. As such, we assume some uncertainty, particularly in consumer-related business areas as we approach the year-end selling season. Accordingly, we rolled out our projections primarily for interchangeable-lens cameras.

Based on this outlook, we will work to maintain our sound financial conditions, promoting measures that emphasize profitability, such as cost reductions and further expense savings, as we execute our tailored sales strategies. Through this effort, we aim to firmly secure sales and profit growth in the fourth quarter and for the full year.

Please refer to Slide 8. This slide summarize our revised projections. For the full year, we expect sales and profit growth but at lower levels than our previous projections, which we also lowered. A major reason for the downward revisions remain the same, and this is related to the review of our sales spend for interchangeable-lens cameras. In our previous projections, we made an allowance for active sales promotion activities. Amid the severe price competition, we assumed we could maintain market growth by strengthening sales promotion of new products. As market inventory levels were appropriately ranged [ph] and the pricing pressures started to settle down, we changed our forecast to profitability, taking demand trend in each region into careful consideration. Due to the fact that the market lacked strength in the third quarter, as well as our expectation that a swift recovery in the fourth quarter was unlikely, we lowered our expectations and our projection for unit sales.

Please refer to Slide 9. I will now compare our current projection with our previous one. As for changes in the exchange rate, the impact was positive on both the sales and operating profit. As for changes in sales volumes, the impact was negative on all segment. In Office, we lowered our projection for both copiers and printers, mainly due to economic slowdowns in emerging market. In Imaging Systems, we lowered our projection primarily for interchangeable-lens cameras. In the other categories, the positive figures under the net sales reflect effort to restrict price declines. In addition to this, the positive figures under operating profit reflect continuous effort to reduce cost and the expenses.

In summary, we lowered our projection for both net sales and operating profit by JPY 100 billion and JPY 20 billion, respectively, due to expectation that we'll not be able to fully offset the negative impact of changes in sales volumes.

Please turn to Slide 10. I will now discuss each business unit, starting with Office. As for copiers, the overall market grew, thanks to continued growth in the color segment.

Regionally, while market condition were firm in Japan and the United States, Europe remained challenging. In the emerging market, we saw worse-than-expected slowdowns in market growth amid ongoing price competitions and the economic slowdowns. In this market, we worked to expand sales of mainly second-generation imageRUNNER ADVANCE series product, which have been highly evaluated by the market for their enhanced security and ease of systems integration features.

As for non-hardware sales, also, we saw a gradual increase in overall print volumes. Sales decreased 1% on a local currency basis, mainly due to price declines.

Next, I will discuss our laser printers. Since the second half of last year, we have seen a gradual year-on-year easing in laser printers market contraction. And in the third quarter, we believe the market returned to positive growth, with MFPs driving expansions. Amid this market conditions, we worked to expand sales of mainly MFPs, posting of our unit sales growth that exceeded the market. As for consumables sales, we posted positive unit sales growth.

Please refer to Slide 11. Next, I will discuss our full year projection for the business unit. We expect the copier market to continue its path of gradual growth, although we lowered our sales projection mainly for low-speed monochrome models, we'll continue effort to globally get second-generation imageRUNNER ADVANCE series product as we approach year-end. We'll also work to expand sales through efforts to strengthen our abilities to offer solution in response to development in the areas of cloud computing and mobility, which will help open doors to expanding opportunities for large deals.

In the production printing area, we'll implement some measures for further sales expansion, such as enhancing our sales capabilities with a focus on the direct sales channels. We gained through the integration of Océ and making the most of our highly competitive product lineups.

Next, I will discuss our laser printers. Within the laser printer market, in terms of unit sales, in the fourth quarter, we expect to see growth among color models and MFPs. Within this market, we'll work to expand the trend of positive sales growth, achieving double-digit unit sales growth for the full year. We'll also work to expand sales of new models that will be launched in the autumn of this year, including MFPs with enhanced features to address mobility and MFPs specifically designed for emerging market. As for consumables, as hardware growth will lead to somewhat greater [ph] growth in country sales, we expect the unit sales of consumables to be basically flat this year.

Please turn to Slide 12. I will now discuss the Imaging Systems business unit, starting with Cameras. As for interchangeable-lens cameras, although the Japanese market continued to post significant growth, the recovery of overseas market is taking longer than expect -- than we expected. Another situation, we lowered our plans regarding the additional price declines that we incorporated into our previous projections. As a result, unit sales decreased 3%, which was below our projections.

As for compact cameras, demand continues to shrink in both developed countries and the emerging market. Although demand for models featuring high-magnification zoom lenses remained firm, overall unit sales decreased 31% due to market contractions.

Next, I will discuss inkjet printers. The inkjet printers market in the third quarter continued to shrink. The impact of economic weakness was especially strong in Asia. And as a result, we posted a decline in unit sales. Within this market, however, we took advantage of our full lineup and worked to expand sales in line with our regionally tailored sales strategies. As a result, we believe we improved our market share position in basically all regions. As for consumables, we posted positive growth on a local currency basis, thanks to the steady expansion of our installed base.

Please refer to Slide 13. I will now discuss our full year projection for this business unit, starting with cameras. As for interchangeable-lens cameras, prolonged economic weakness and uncertainty about the future seems to be impacting consumers' sentiment, which looks cautious. With limited purchasing power, consumers are becoming increasingly selective, which is delaying the recovery in luxury items like cameras.

Another situation, consumers are becoming low-price oriented. Moreover, from the temporary imbalance in supply and demand that we experienced from last year to this year in the course of inventory adjustment, prices of all the models have become down, and we are seeing the negative shift in the product mix. This negative mindset is also impacting the channels. Additionally, diminished purchasing power of dealers and the retailers is making it difficult for them to build up inventories.

Another situation, it is difficult to expect the market to swiftly improve. Additionally, it's taking into consideration the fact that we are starting to see impact from economic slowdowns in other Asian regions. We now expect the market to be 18 million units compared to 19.5 million units we projected before. As for our unit sales, given our market outlook, we lowered our projection from 9 million to 8 million units.

Although condition remains challenging in overseas market, in Japan the improving tone of economic recovery, as well as appears [ph] -- and the smooth transitions to new product have led to market recoveries ahead of other regions.

As concerns over the future course of the economy settled down and the consumers' mindset improves, we expect the market situations surrounding cameras to improve in other region as well. We will watch the market closely in order to capture the right time to effectively promote a shift to new products.

Regarding the new products, the EOS 70D, which features a newly developed CMOS sensors, has been highly evaluated by the market, and sales got off to a strong start. Regarding other new product, we carefully promote the advanced features of each model. In doing so, we promote the switch to new products and then improvement in product mix.

In summary, despite the expectation that the market environment will remain challenging, through economic recovery and the effect of new products, we expect the trend of growth to continue into the future. As for compact cameras, our outlook remains the same. We expect the market and our sales to be 66 million and 14 million unit, respectively.

Within this market, so we launched 6 new models in the second half of this year, including high-end models that features high-speed autofocusing systems and realize exceptionally high image qualities. It also include models that incorporate Wi-Fi features that improve ease-of-use. Leveraging our technological capabilities to differentiate our product from the competition will work to realize our aim of market share expansion.

Furthermore, by promoting measures that respond to changes in market scale, we'll work to improve profitability. We'll also strive to expand B2B business opportunities. And in industry-use imaging equipment areas, we are commercializing new cinema lenses and projectors to respond to our broad range of customers' need.

Next, I will discuss inkjet printers. For the full year, we expect the market to shrink at close to a double-digit rate based on expectations of continuing impact coming from worsening economic condition in Asia. Within this market, with our enhanced link with cloud services and the launch of new product that make it easy to print photos and document directly from smartphone and tablet, we'll work to expand sales as we headed into the year-end selling season. As for consumables, we expect solid growth in line with steady growth of hardware.

Please turn to Slide 14. I will now discuss industry and others, starting with IC lithography equipment. Third quarter IC lithography equipment unit sales increased. This reflects firm demand, particularly for equipment used in the production of memory devices. As for Flat Panel Display lithography equipment, although the market is in the process of recovery, we didn't book any unit sales in the third quarter.

In the Other segment, sales of medical equipment continued to increase due to such factors as the large [indiscernible] orders for DR systems and the full-fledged sales expansion in China. Additionally, within the independent business of group companies, Tokki posted a sales increase due to shipments of OLED production equipment.

Please refer to Slide 15. Next, I will discuss our full year projection for the business unit. As for IC lithography equipment, we are seeing the recovery in restrained investment. And in the fourth quarter, we expect the demand to be strong, particularly for IC lithography equipment used in the production of memory devices. As for the Flat Panel Display lithography equipment, we expect the full year sales to be 17 unit. These unit have already been shipped to customers sites, and they are in the process of being installed.

As for medical equipment, we expect sales of ophthalmic equipment and the benefit from new OCT products jointly developed with OPTOPOL. As for the independent businesses of group companies, however, due to restrained capital investments of customers, production-related equipment sales have decreased. And for the segment as a whole, we expect sales to be down for the full year.

Please turn to Slide 16. I will now discuss our financial situation. At the end of September, inventory turnover was 59 days. Inventory held by the sales company increased due to seasonal factors but rose within acceptable limits. As for work in process, despite the increase [ph] in lithography equipment inventory for sales in the fourth quarter, inventory turnover improved by 3 days compared with the end of June.

Please refer to Slide 17. Capital expenditure is projected to be within the limits of depreciation and the JPY 10 billion below our previous projections through comprehensive cash flow management with continuous effort to maintain our financial health.

Please turn to Slide 18. At the end of the year, cash on hand, even after the recent share buybacks and due to comprehensive cash flow management, is projected to be JPY 710 billion or 2.2 months of the net sales. This year, with each passing period, the timing of expected economic recovery has been pushed out. Although we expect the business environment to remain challenging, through our product competitiveness and the capacity to earn profit, which we have steadily enhanced, we aim to firmly secure sales and profit growth this year and link this to a leap in growth in next year, 2014.

This concludes my presentation. Thank you very much.

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