Canon Management Discusses Q2 2013 Results - Earnings Call Transcript

| About: Canon, Inc. (CAJ)

Canon (NYSE:CAJ)

Q2 2013 Earnings Call

July 24, 2013 12:00 am ET


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 presentations will be on a year-on-year basis, unless otherwise stated.

Please turn to Slide 3. Since the second half of last year, the global economy has been stuck in a longer-than-expected period of slow growth. Although Japan and the United States made progress in economic recovery, Europe's economy remained weak. And in emerging markets, the pace of economic growth slowed. This was particularly evident in China, where we expected to see growing sign of an economic recovery around labor holidays in early May, but actually saw monetary tightening and other measures at the economic structure reform.

In the market in which we operate, we expected to see sign of gradual improvement as we headed toward recovery in the second half of the year. Due to a delay in recovery, however, the business environment remained challenging.

In Europe and China, longer-than-expected sluggish market condition had a pronounced impact on the camera market. Within this challenging business environment, we worked to stimulate demand through the active launch of new products and other measures. This had a somewhat positive effect on our Office equipment business. And coupled with the benefit from yen's depreciation, we posted sales and profit growth for the first time in the year.

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

Please refer to Slide 5. I will now compare our second quarter's result with goals from last year's in more detail. Changes in the exchange rate had a positive impact on both the sales and the operating profit. As for changes in sales volumes, the impact was negative on Imaging System due to significantly lower sales of compact cameras and an unfavorable change in product mix, including the interchangeable-lens cameras. As for industry and others, this reflect lower sales of lithography equipment due to the restrained customer investment. In the other categories, the negative figures under the net sales and operating profit primarily reflect price declines due to intensified price competition for memory cameras.

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

Please turn to Slide 7. As for the economy, due to prolonged economic weakness in Europe and the economic slowdown in the emerging markets, we now expect the global economic recovery in the second half of this year to be weaker than our previous assumption. Although we believe that Japan's active monetary and fiscal policies and the United States will provide underlying support for the global economies, we are not optimistic about economic recoveries in emerging markets, such as China.

Based on this outlook, we expect Office to continue its steady performance. For Camera, however, we have revised plans to reflect recent changes in the market environment. The recovery from the second half of this year that we expected in our previous projection is now forecasted to come later.

From a profit perspective, we will work in a concerted effort to reduce expenses and take other measures. Through this effort, we aim to realize sales and profit expansions, returning the company to a path of growth.

Please turn to Slide 8. This slide summarizes our revised full year projections.

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 minimal on both net sales and operating profit. As for changes in sales volume, within Office, we reduced our copier projection to mainly reflect lower sales of low-speed monochrome models in emerging market. In Imaging System, in light of recent market trends, we may revise our projections for Camera's sales in Europe and China. And in industry and others, we lowered our projection for flat-panel display aligners in the group companies due to delayed customers' investment plans and other factors. As for the others category, the negative figures under the net sales represent additional price decline for mainly cameras. The negative figures on the operating profit reflects additional price declines and the decrease in the expected cost reduction due to lower utilization rate.

From a profit perspective, we'll take additional steps to reduce expenses and make other improvements, which are also reflected in our revised projections.

Please turn to Slide 10. I will now discuss each business unit, starting with Office. As for the copier market, although we saw weakness in Europe and in the emerging market, the overall market remained firm, thanks to economic improvement in Japan and the United States. In the quarter, we posted a 3% decrease in sales, mainly due to lower sales of low-speed models in the emerging market.

In the forecast of colors and high value-added mid- to high-end monochrome segment, however, we made a smooth progress in expanding the sales. Sales of color copiers were particularly notable as we achieved unit sales growth in all regions to positive double-digit growth of 12% overall. As for non-hardware sales, we posted a 2% increase on a local currency basis. The actual demand remained firm.

Next, I will discuss laser printers. Since the second half of last year, the pace of year-on-year market decline has been slowing. And in the second quarter of this year, the market was basically flat in terms of hardware unit. In the quarter, we actively worked to expand the sales of mainly MFPs and posted a 9% increase in overall unit sales.

As for consumables, sales declined on both unit and local currency basis. Like hardwares, the pace of year-on-year decline has been slowing but at a slightly slower pace.

Please refer to Slide 11. Next, I will discuss our full year projection for this business unit. In the copier market, we expect color models to remain the drivers of overall market growth. As we are also seeing a pickup in business activities, we believe the market will continuously pass a gradual recovery. In this market, our global rollout of new second-generation imageRUNNER ADVANCE series product has been progressing smoothly. Highly evaluated by the market, these products are waiting to a steady increase in large account deals. Leveraging this advantage will support dealer's effort and offer the various promotion to achieve steady sales expansions.

As for our solution business, we will take measures to expand sales, such as strengthening our abilities to offer our solutions that address the need of each market and the global rollout services that make use of the cloud.

As for production printing, in order to further benefit from effect of the integration of Océ, we worked to improve the effectiveness of sales organizations.

As for laser printers, we expect the market to grow slightly for the 3 years in terms of units. This reflect an expected return to growth in the second half of this year, driven by color models and the MFP segment. Within this market, we aim to increase future sales of consumables, promoting sales expansions of high-performance models within this segment as we grow our installed base.

In order to accomplish this, we'll have to rework to make some sales from low- to high-end models with a focus on MFPs. Additionally, we are on track and making good progress against our original plans for the new product we launched in the autumn of last year.

As for consumables, we expect demand to gradually increase in the second half in terms of unit, but remain flat for the 3 years, which is in line with estimates for the market overall.

Please refer to Slide 12. I will now discuss the Imaging System Business Unit, starting with cameras. Although we are seeing different trends in different regions overall, the interchangeable-lens camera market continue to grow. In Japan, the market benefited from rising consumer confidence, and demand remained solid, not only at the entry levels, but also for mid-range models. Demand was also firm in the United States.

In Europe, however, demand was weak. And in China, where we had a high expectation for recovery, market growth slowed due to the economic slowdown. Although demand for durable consumer goods is starting to return, demand for luxury items, such as interchangeable-lens cameras, has been slower to recover. As a result, reducing the inventory in the market took longer than expected.

In the course of reducing inventories, we also invested a certain amount to lower prices. Due to these factors, we posted a 4% decline in interchangeable-lens cameras unit sales, which reflect lower-than-expected sales in Europe and China. However, we maintained our leading position in terms of global market share.

As for compact cameras, the market demand is shrinking in both developed countries and emerging market. Although we posted strong sales of models equipped with high-magnification zoom lenses, overall unit sales decreased 26% due to market contractions.

Next, I will discuss inkjet printers. In the second quarter, the market continued to shrink due to ongoing global economic weakness and the subsequent weak market recovery. During the quarter, we executed regionally tailored marketing strategies and maintained our trend of strong sales from the first quarter. The decrease in second quarter unit sales highlights the fact that we were in a phase of recovery last year, following the Thai flood from the previous years. We also posted a steady result in the area of consumables, reflecting favorable hardware sales.

Please turn to Slide 13. Next, I will discuss our full year's projection for the Imaging System Business Unit, starting with cameras. And for the interchangeable-lenses cameras, we lowered our projection for market size from 20 million to 19.5 million units. This reflects the expected slower growth in Europe and China due to continuous economic downturns and the higher levels of mirror-less camera market inventory. As such, we have also lowered our unit sales projection from 9.2 million to 9.0 million units.

We believe the market inventory levels of digital SLR cameras are within reasonable limits. As for the market, however, due to prolonged economic weakness, consumers are becoming increasingly price-oriented. Given this, we expect an unfavorable change in product mix.

Faced with these circumstances this year, we are launching digital cameras that not only offer improvement in basic performance but also responded to users' need through their compact and lightweight designs while also realizing improved video recording capabilities.

Despite the challenging environment, we worked to improve our product mix, stimulating demand in the second half of the year through regionally tailored promotions that highlights advantages to turn our product offer users. As the economy recovers and the market situation improves, we expect the market to return to double-digit growth for next year.

As for compact cameras, we lowered our market size projection from 70 million to 66 million units, taking into consideration the delayed recoveries and lowered our own unit sales projection from 14.5 million to 14 million units. Within this market, we'll work to expand sales of high value-added models, featuring, for example, even higher levels of image qualities or higher-magnification zoom lenses. We'll also take steps to stimulate the market, continue to offer entry levels and mid-range models, which make up a large portion of the overall market. The point of entry that we'll hopefully read is customers to upgrade to interchangeable-lenses cameras in the future.

Next, our full year projection for inkjet printers. This year, we expect the market to shrink slightly in terms of unit. This reflects a noticeable slowdown in market contractions that began last year and our outlook that the market will remain relatively flat over the medium term. Based on this outlook, we'll work to capture available sales opportunities, enhancing our product lineups to meet the best line the market needs.

By ranking and promoting sales of new products for the year-end selling season, we plan to increase unit sales by 2%. As for consumables, because hardware sales have been favorable, we expect healthy growth.

Please refer to Slide 14. I will now discuss industry and others, starting with IC steppers. Unit sales of IC steppers in the second quarter decreased. Although investment in lithography equipment for image sensors remained firm, investment in equipment for memory continued to be restrained due to oversupply of NAND flash memories.

In the second quarter, we didn't post any unit sales of flat-panel display aligners. This reflects stagnant market conditions surrounding large-size panels. In the others segment, sales related to the independent business of group companies decreased due to such factors as delayed investment in the product development and the restrained investment in hard disk drives due to reduced demand for PCs. This resulted in lower sales of semiconductors and the storage-related manufacturing equipment. In addition, severe price competition in the market for LEDs held back investment in electronic device manufacturing equipment.

Please refer to Slide 15. Next, I will discuss our full year projection for this business unit. As for IC steppers, we maintained our full year unit sales projection mainly due to unexpected recovery in the restrained investment in the second half of the year.

Going forward, we'll focus our energies on expanding unit sales of our high-throughput KrF lithography systems to gain shares in the segment where our participation have been very low.

As for flat-panel display aligners, we lowered our full year's unit sales projections, mainly due to a shift of some sales into next year's. In addition to unexpected resumption of investment, we plan to start shipping high-resolution flat-panel display aligners from the second half of this year, and from next year on, target market share expansions.

In the others segment, we anticipate an increase in sales of medical equipment in the second half of this year, boosted by expanded sales as a result of a large order for DR systems, along with benefit made possible through our joint development effort with OPTOPOL. Overall, however, we expect sales within the others segment to decline as we anticipate a situation we faced in the second quarter where equity continues along with restrained customers' investments in Tokki's ordered manufacturing equipment.

Please turn to Slide 13 -- 16. I will now discuss our financial situation. At the end of June, inventory turnover was 60 days. Although this is slightly higher than in the past years, it is still within an acceptable range. We are reducing inventory of the cameras in line with our plans and the inventory held by sales companies at acceptable level. Work in process, however, increased due to planned industrial equipment sales in the second half of the year. Despite these factors, work in process was still somewhat high, therefore, we'll continue efforts to strengthen the supply chain management to optimize levels.

Please refer to Slide 17. As for capital expenditures, through a review of our plans, we now plan to trim JPY 20 billion of the total. In addition to our plan to keep capital expenditures below depreciation, we will work to maintain our financial health through comprehensive cash flow management.

Please turn to Slide 18. At the end of this year, cash on hand is projected to be JPY 690 billion or 2 months of net sales. As for dividend, our interim dividend is JPY 65 per share. Decisions regarding our year-end dividend will be withheld until we can better assess our future performance and the funding plans. Despite the expectations that the business environment will remain challenging this year as well, we will strive to achieve our targets of increased sales and the profit return companies to a path of growth.

This concludes my presentation. Thank you very much.

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