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Canon Inc. (NYSE:CAJ)

Q1 2011 Earnings Call

April 26, 2011 8:00 am ET

Executives

Toshizo Tanaka – Executive Vice President and Chief Financial Officer

Toshizo Tanaka

Good morning or good afternoon, ladies and gentlemen, and welcome to Canon’s conference call. Please refer to the slide we prepared for today’s call and note that all financial comparison made during my presentation will be on the year-on-year basis, unless otherwise stated.

Please refer to slide two. This slide outlines today’s agenda. Please note that my discussions of result and in our revised projections, we include to the extent possible that impact of the March enables earthquake.

As of we do our best to recover from these disasters. We have received corporations and sports from many of our business partners and communities in which we operate. The future is however remains unclear due to a range of factors such as availability for parts (inaudible). Although we have revised our projection for the three years based on latest information, please keep in mind that the situation is changing day by day.

Please turn to slide three. In the first quarter, the global economy continued its past level gradual recoveries boosted by the rapid growth of the emerging market in such countries as China and India. In our market, conditions also continue to improve. As for foreign exchange rate, however, the yen remained quite strong. Under these circumstances, Canon achieved increase in market shares and we steadily expanded our MIF in the field growing unit sales within all core businesses.

We achieved this by enhancing sales of competitive products. Additionally, Océ, which was added to our consolidation investors, also contributed to the increase in the sales. As a results, despite the yen significant appreciations, we posted a double-digit increase in the sales.

As for profit, well we are making better than expected progress toward our three years target, the earthquake focus as to report a reduction in profits.

Please refer slide 4. This slide provides a summary of our first quarter performance. Net sales increased 11.1%. The growth profit ratio remained at the high 48.4% as we overcame the strong yen through accelerated cost savings. Operating profit was down 5%, reflecting effect of the earthquake.

Please turn to slide five. Looking at the effect of the earthquakes in more details, the disasters caused serious delays in production and shipment resulting in a 21.4 billion yen negative impact on the sales.

On gross profit, the impact was negative 20.9 billion yen, reflecting lower net sales and recovered factories overhead cost associated with dramatic drop in productivities, and other cost, such as damaged good. At the operating profit levels, the impact was negative 21.2 billion yen, which include cost related to the disposals of fixed assets. For reference, first quarter result that exclude earthquake effect as shown on this slide.

Please refer to slide six. Next I will discuss our first quarter result with our result from the same period last year’s by factors. As for changes in the exchange rate, the impact was negative on both sales and operating profit. As for changes in sales volumes as we realized increased unit sales – in all business unit, the impact was positive on both net sales and operating profit.

In the others categories, the negative series and the sales to be present price decline for mainly consumer products. As for the negative figures on the operating profit although we made progress in cost savings, it was not enough to offset such factors as the price declines and increased promotional expenses.

In total, net sales and operating profit excluding the impact of the earthquake increased 105.1 billion yen and 16.9 billion yen respectively. This indicates steady improvement in our business foundation. However, as you can see the earthquakes impact offsets increased profit we achieved.

Please refer to slide seven. I will now discuss our projection for 2011. This slide shows our exchange rate and 1 yen change impact assumptions. Please turn to slide 8. This slide highlights some key points regarding our 2011 projections. As for the global economies, also there are ground for concerns such as the steep rise in oil prices and the impact of the earthquake. We expect gradual recoveries to continue.

Furthermore in our market although there are concerns about Japanese market, on a global basis, we expect to continue seeing steady demand. Under this circumstances, we expect our abilities to supply product to become slightly diminished reflecting temporarily decline into production of older product due to the earthquake.

Given these, our first forecast is to build a stable product spray structures through an early recovery in productions. Then from the second half, we’ll reiterate a safe to recoveries minimizing the earthquakes impact as we aim to achieve net sales growth for the full year.

Please refer to slide 9. We revised our full year projection for 2011 based on review of each business after the earthquakes and new exchange rates assumptions. As I mentioned at the beginning, while we face many elements of uncertainty. At this time, we project full year net sales to increase by 0.6%, operating profit to decrease by 13.6% and net income to decline by 10.8%.

Please turn to slide 10. I will now discuss the earthquake effects that included in our three years projections. We expect defect such as productions and segment delays due to difficulties in procuring parts for such product as a cameras and copier hardwares resulting in negative 314.4 billion yen impact on the sales.

As for profit, lower net sales and recovered factory overhead cost due to noticeably lower productivities, projected negatively impact gross profit by 193.3 billion yen and operating profit by 197.7 billion yen. Our three years projections, excluding the effects of the earthquakes are shown on this slide.

Please turn to slide 11. Next that compares our three years net sales and operating profit productions is our previous one. As for changes in the exchange rate, the impact was positives on both net sales and operating profit.

As far changes in sales volumes, in our office business unit, we adjusted our outlook to reflect our market slowdown in Japan were the product proportion of our copier sales is high.

In our consumer business unit, we adjusted our outlook to reflect global shift in the inkjet printers market toward low priced products. In our industries under the business unit, we also factored in some delays in customers equipment deliveries, due to the earthquake. The other categories, the positive fees and net sales represent our outlook that we can reduce amounts so three year price declines for mainly cameras by 20 billion yen.

The positive figures and operating profit, mainly represent the lower price decline amount and the expense reductions. As a result, excluding the effect of the earthquakes, we have lowered our net sales projection by 55.6 billion yen, but raised our operating profit projection by 62.7 billion yen. Higher profit reflects steady progress to improved profitability.

However, as I mentioned before, the impact of the earthquake is large as you can see. While we are focusing all our efforts on recoveries at this stage, due to the need to save on the electricity and the uncertain outlook regarding part procurement, we need to anticipate severe manufacturing conditions. As such, we expect net sales and operating profit to fall short of our previous projections.

Please refer to slide 12. I will now discuss our first quarter results and the full-year projection for 2011 by business units, starting with Office business unit and so office-related market in the first quarters. In developed countries demand continued to gradually recover. In emerging market, we saw strong market expansion particularly in Asia. Under these conditions, we took steps to expand sales and copiers with a focus on image (Inaudible) series.

We also promoted the sales of razor printers mainly in emerging market. So, with the effort and due to newly consolidated companies such as office, we achieve 17.5% increase in office business unit net sales despite significant yen’s appreciations. And for operating profits, despite cost savings and production deforms effort, the yen’s appreciation and the effect of the earthquake resulted in 12.5% decrease in profit and 4.5% decline in profitability’s compared with same period last year.

Sequentially, however we posted improved quarterly profit and profitability. And for office related market in 2011, also they are expecting slowdown in Japan, we are expecting the trend of our expansion manly in the emerging market to continue. Under this scenario, although uncertainty remains we plan to minimize the impact from a sales perspective we’re rising the least possible recoveries from the production decline. In doing so, we project an increase in net sales of 2.6%. However, due to the effect of the earthquakes, we project decrease in operating profit of 18.2%.

Please refer to slide 13. I will now discuss office business unit net sales by product starting with copier. As for the copier market in the first quarter, demand continued to gradually recover in all regions.

Under this circumstances, we significantly expanded the unit sales leveraging our highly competitive imageRUNNER ADVANCE series. The low speed color models introduced (inaudible) were well received and contributed significantly.

In the emerging market, we achieved increased sales of the low priced monochromes models. As a result, we continue to achieve double-digit unit sales growth in every region, which lead to market share recoveries. Through these, net sales increased 4.5% on the local currency basis, but declined 2.5% in yen, reflecting the yen’s steep appreciation.

And for the Copier market in 2011, although we anticipate defect from the earthquake may remain in Japan. We expect the global market to continue on the path of recovery. Amid the strong market acceptance for our imageRUNNER ADVANCE, it will be difficult to realize a full recovery during the years due to the uncertainty of parts procurement.

As such, we don’t expect to achieve our previous projection for unit sales, due to production delays. As for consumables, we also expect net sales to be slightly down. As the impact of the earthquake was minus, through careful supply management and higher levels of cooperation with parts and material’s prior, we feel, we will be able to provide a decreased level of product to the market. As a result three year net sales of copier projected to decreased 6.1% compared with last year.

Please turn to slide 14. Next I will discuss our printing devices with a focus on laser printers. In the first quarter, the laser printers market continued to expand at a steady rate mainly driven by emerging market. As a result, we increased the unit sales 44%. We also made a steady progress in improving our market sales. Furthermore, Canon realized significant growth in consumer business sales, which grew 15.7% in the local currency basis.

As a result, first quarters net sales of other printing devices increased 4.6%. For the three years, we expect the laser printer market to expand at a steady rate even after the earthquakes. As for printers’ productions, we expect to fully recover from the temporary decline in production in 2011 to basically achieve our original unit sales projections.

As for consumables, we have a good sense as to when we will be able to produce at levels similar to our original projections and don’t feel that the supply of consumables to the market will be hindered.

We will continue this effort to realize a swift recovery in productions responding to strong demand in the market and steadily raising our market shares and profitability. Through this effort, we projected three years as our printing devices net sales to increase 1.1%.

Please refer to slide 15. Next, I will discuss consumer business unit. We posted a strong unit sales growth for cameras in the first quarters amid strong demand, particularly for SLRs and so inkjet printers, we work to expand sales, mainly in the emerging market supported by strong demand. Although, we have to temporarily hold productions at our camera manufacturing plant. First quarters net sales for the consumer business unit increased 7.6%, the local currency basis. In yen’s – however net sales decreased 0.2%. Despite strong sales first quarters operating profit decreased 15.7%, due to the significant impact of Yen’s appreciations.

From the second quarter zone [although] you foresee an impact on camera productions due to problems sourcing some parts and remitted electricity. In the later half of the years we’ll work to expand sales to meet the strong demand. As for inkjet printers, which saw little impact from the earthquake, we aim to further expand unit sales by enhancing their structures in Asia.

As a result, consumer business unit net sales and operating profit for three years are projected to decrease 1% and 9.7% respectively due to significant impact from the Yen’s appreciation and opportunity arises.

Please turn to slide 16. Next I will discuss consumer business unit sales by product starting with cameras. In the first quarter demand for cameras remained strong mainly in Asia and the SLR camera’s market continue to grow at a strong double-digit rate. Within this market, we achieved nearly 30% increase unit sales of SLR cameras. As for compact cameras, we realized a total unit sales increase of 5% reflecting the strong demand particularly in Asia and Russia.

As a result, first quarter net sales of the camera increased 2.8% reflecting the negative impact of the earthquakes on our portion of our production that was offset by the strong sales of SLR cameras.

For the full year, although we are anticipating a slowdown in domestic consumptions, we expect the strong demand to continue in overseas market especially in Asia. Under this outlook, we will work to further expand SLR camera sales by targeting the new users.

Furthermore, for compact cameras, we will incur sales through the release of new product incorporating value-added features. However, due to difficulties in procuring parts for the second quarter zone and the impact of reduced productions particularly for compact cameras we know expect three years unit sales for compact cameras to be around 20 million unit, which is below our previous projections. As so cameras, which are also facing difficulties in terms of production we are still targeting unit sales of around 7 million unit. As a result three years camera net sale projected to decrease 2.5%.

Please refer to slide 17. Next, I will discuss inkjet printers. In the first quarter, the inkjet printers market remained strong supported by increased demand in emerging market and economic recoveries in developed countries. Under this conditions unit sales increased 8% with the steady increase seen in – may seeing in the field, we also made a steady progress in the sales of consumables. Despite this, net sales of inkjet printers decreased 4.6% due to aggressive pricing strategies of competitors and the fixed to low priced models to expand sales in emerging market.

For the full year, we expect emerging market to continue to drive the ongoing recoveries of the inkjet printers market. We review our abilities to supply inkjet product and feel there is no problem with our price structures. Therefore we have decided to leave our full year projection for unit sales growth of 8% unchanged

In terms of full year, net sales, however, due to the current market environment and our view that the shift to lower priced product will continue, we revised down our previous predictions. As a result three-year inkjet printer’s net sales are projected to increase 4.5%.

Please turn to slide 18. Next, I will discuss the industries and as a business unit. In the first quarter, lithography equipment, which is a part of industry has posted growth. This reflect increased demand for memory manufacturers driven by strong sales of smartphones and tablet PCs. Stronger demand also benefited other industries such as cookies or LED business.

As a result first quarter industries and other business unit’s net sales increased 11.7% and the operating profit was (inaudible).

Our Utsunomiya Office was hit hard by the earthquake. Following the earthquake, we have been working full force toward recoveries. In the case of lithography equipment, however, we don’t think it is possible to recover from the production delays.

Additionally, also, Group companies have companies have essentially returned to the normal stage of productions, we expect three years net sales of Group companies to fall short over previous projections due to production delays caused by bend our outreach on the push out of customers’ deliveries by the earthquake.

As a result, three years industry and other business unit net sales are projected to decrease 9.5% and operating profit is projected to in the block.

Please refer to slide 19. Next, I will discuss lithography equipment, which is a part of the Industry and Other business unit. For IC Stepper, we sold 11 units in the first quarter, reflecting the start of active investment by device manufacturers.

For the full year, however, we lowered our projections from 47 unit to 41 unit, due to the extensive damage toward tsunami office and time needed to make repairs. And so LCD arena, we sold 5 unit in the first quarter. For the full year, we lowered our projections from 38 unit to 27 unit, reflecting the earthquake impact on production.

As a result, first quarter lithography equipment sales were 2.3 times greater than the same period last year. For the full year, however, we have projected a 29.3% decrease due to lower unit sales of LCD arena for our second quarter.

Please refer to slide 20. Finally, I’d like to discuss our financial situation. As of the end of March, our inventory turnovers in days was 42 days. For the time being, we are promoting inventory levels that allow us to avoid sales opportunity losses. To achieve this, we aim to increase production avoiding production delays due to parts supply problems.

Please refer to slide 21. This slide shows capital expenditures and free cash flow. Going forward, we will further strengthen our cash flow management, especially under these circumstances, we aim to face particularly importance in the financial health.

Please turn to slide 22. As a result, at the end of 2011, cash on hand is projected to be 800 billion yen, equivalent to 2.6 months of full year’s net sales. This year Canon Group will work as one to achieve an increase in full year’s net sales, first working to quickly restore production and next, realize an accelerated recovery from the second half.

And from next year onward, returning to (inaudible) sound growth, we will challenge our sales to achieve the target we set in phase 4 of our five-year management plan. The company’s performance if you exclude the impact of the earthquake shows a recovery in performance that exceeded our original projections. This indicate that actual business situation is strong. Although the timing of recovery has been pushed out, we will take the earthquake’s lesson and along with taking quick action toward recoveries, we will build an even stronger corporate structure.

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

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