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Executives

Toshizo Tanaka – Executive Vice President and Chief Financial Officer

Canon, Inc. (CAJ) Q3 2011 Earnings Call October 25, 2011 ET

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 comparisons made during my presentation will be on a year-on-year basis unless otherwise stated.

Please refer to slide two. This slide outlines today’s agenda. Please turn to slide three. I will now discuss the third quarter. Despite growing financial instabilities in Europe and United States and uncertain outlook, the global economy remained on a path of gradual recovery. These reflect continued strong growth in the emerging markets amid inflationary risk and some progress made in reconstructions after the earthquakes in Japan.

Although our market remained strong, the overall business environment was more challenging than that faced in the second quarter due to the rapid appreciation of the yen. Under these conditions, we worked toward improving our product delivery systems in order to realize the swift recoveries in productions. Through our effort to ensure the stable product price in response to strong market demand, we realized our first quarter net sales and profit growth since the third quarter of 2010 despite the yen’s rapid appreciation.

Please refer to slide four. I will now summarize our third quarter performance. Despite the significant appreciation of the yen, particularly against the US dollars, we realized a slight increase in net sales of 0.4%, thanks to increased sales volume following our recoveries from the earthquake.

As for profit, our gross profit ratio reached 49.4%, an increase of 0.5 point from the same quarter of last year exceeding the high 49.2% mark in the first half of this year. This improvement was due to increased net sales and the progress made in cost reductions, thanks to the enhanced productivity.

Operating profit increased by 17.4%. This reflects not only the increase in gross profit, but also improved expense ratios resulting from effort to streamline expenses. Additionally, we secured an operating profit ratio of 13.4% representing the first time to reach the 30% levels in the third quarter of 2008. This shows that effort to improve profitability mainly through continued cost reductions are steadily bearing fruit even under an increasingly challenging exchange rates environment.

Please turn to slide five. Next, I will compare our third quarter results with the same period of last year. Changes in exchange rates had a major negative impact on both net sales and operating profit. As for changes in sales volumes have made favorable market conditions and through effort to improve our product delivery systems, we achieved unit sales growth in all business units.

In the other categories, the negative figures on the net sales represent price decline for mainly cameras. The positive figures under operating profit represent price decline offset by cost reductions and marketing expense savings.

In summaries, we achieved net sales and operating profit growth by expanding unit sales and reducing cost offsetting the significant negative impact from the yen’s appreciation and earthquake.

Please refer to slide six. I will now discuss our projection for full year of this year 2011. This slide shows our exchange rate assumptions for the fourth quarter and estimated impact that ¥1 change in this rate would have on fourth quarter’s net sales and operating profit.

Please turn to slide seven. This slide highlights some key points regarding our previous projections. As for the global economy, while there are increasing uncertainties and risks of the possible slowdown in developed countries, we feel the global economy will remain in the path of gradual recovery with the emerging markets continuing to show rapid growth.

As for the market in which we operate, we expect global demand to remain strong even towards the end of year. Under this condition through various measures such as access rating momentums in our recovery from the earthquake, achieving the unit sales growth through [period] strategy for each product and regions.

Strengthening effort for further cost reductions and controlling the expenses while investing in sales growth we had a plan to cope with the yen’s rapid appreciation. However, after analyzing the flood the situation in Thailand we feel there is the sufficient reason to be concerned about the potential impact on our business particularly in our Consumer Segment.

And for cameras, although we don’t have any cameras related factories in this area, some of our past players in the affected the regions, as a result our production maybe temporally impacted. We are now working on a shift recovery sourcing alternative path and so projected some impact during the year-end selling season.

As for inkjet printers, we have factories in flood affected areas. We are making effort to shift production to our new plant in Thailand located outside the affected areas, and to our plant in (inaudible) and so on. Despite this effort some financial impact may occur due to damage to buildings and equipment caused by the flood and delays in production of certain products. Also, the situation keeps changing. We are doing our utmost to minimize any impacts on our business. At this point in time, however, we incorporated into our devised projections and impacts of ¥50 billion on net sales and ¥20 billion on operating profit. As a result, we now deduct on three projects and net sales and profit decline for the three years.

Please refer to slide eight. This slide highlights our revised previous projections. Please turn to slide nine. Next, I will compare our current previous projection with our previous forecast. As for changes in the exchange rates, the overall impact is negative. As for changes in sales volumes, the impact on our office business unit is negative on projected net sales. This is mainly due to a temporary decline in OEM partners orders. As for other business unit, the impacts were positive on net sales particularly for SLR cameras and the interchangeable lenses.

Regarding earthquake’s effect, we mitigated the projected third quarter’s impact for mainly copiers that are rearranging an early improvement in our product delivery systems.

In the other categories, the negative figures under the net sales represent additional projected price decline of ¥10 billion for such products as cameras and the copiers to further expand sales.

The positive figures on the operating profit represent ¥20 billion in additional cost reductions from ongoing measures aimed at improving productivities and as measures such as expense streamlining.

In summary, amidst the yen’s appreciation, we were aiming to re-arise as much improvement as possible in our performance. Due to the impact of flooding in Thailand however, we factored into our projections ¥50 billion impacts on net sales and ¥20 billion impacts on operating profit. Overall, we lowered our net sales operating profit projections. We however take best effort to minimize this impact on our business.

Please refer to slide 10. I will now discuss each business units, starting with office. As for copiers in the third quarter, the market continued to gradually recover, thanks to strong global demand.

Within this market and the continued strong demand for our imageRUNNER ADVANCE products, we maximize to sales under limited parts price. We also made the steady progress in the (inaudible) and the Canon products. As a result, we reached 2% increase in unit sales. We also saw a sign of a gradual recovery in non-hardware sales.

For the quarter, production steadily recovered and we also recorded our monthly record high in color copier unit sales in September. Despite this, we are still unable to fully respond to third quarter. As a result, net sales of copiers decreased slightly by 0.8% on a local currency basis and 4% in yen.

As for laser printers, imagine the markets such as Chine continue to drive ongoing market expansions. Within this market, we made a steady progress in line with our plan to [realize] our recoveries in productions and expand sales achieving 9% unit sales growth. Despite this, net sales of our other printing devices decreased 8.7% due to the yen’s appreciation.

In total, office business units for the quarter net sales deceased 6.7%. As for our operating profit, while on the trend of improvement, the yen’s appreciation lead to a decline in our operating profit ratio of 0.8 point and the decrease in operating profit of 11.2%

Please refer to slide 11. I will now discuss our previous projections. In 2011, we expect a global copier market to remain on the parts of gradual recoveries. As we head towards our year-end period, we aim to further expand our market shares through sales promotion programs and therefore to speed up production recoveries. As a result, we project a 10% increase in unit sales, which is in line with our previous projections.

As for non-hardware’s demand remains firm. Even in Japan, the market has been on the recovery trend in the second half. As we are also making smooth progress in production recoveries, we expect sales to increase 1% on the local currency basis. As a result, we expect full year net sales of copier to increase 3.5% on the local currency basis, but decreased 1.1% in yen.

According to our market research firm, despite medium term outlook for continued steady expansion read by imaging market is slightly lowered projection for this year due to economic uncertainty in Europe and the United States.

As such, we now expect prior unit sales to be lower than our previous projections as fourth quarter shipment to our OEM partners temporarily declined. Compared with last years however, we expect unit sales to increase 7%, which is in line with the market trend.

As for sales of consumables despite product in channel inventories that we mainly saw in Europe, we expect net sales to be up 7% on a local currency basis. This is based on a steady increase in printing volumes we have seen. As a result, we project net sales by the printing devices to increase 2.5% on the local currency basis but declined 5.2% in yen.

As a result, Office Business unit net sales projected to increase 4.7% on the local currency basis but declined 1% in yen. Regarding operating profit, we expect 13.4% decline, as we don’t expect measures to reduce cost and expenses to fully offset impacts of the yen’s appreciation.

Please turn to slide 12. I will now discuss our Consumer Business unit starting with our third quarter’s result. As for SLR cameras, we recorded nearly 50% increase in unit sales. This reflects continued strong demand for our products under rapid recoveries in our ability to supply products after the earthquake.

We also continue to post strong sales of (inaudible) supported by robust demand for SLR cameras. As for compact cameras, due to recovery efforts made after the earthquakes, we achieved a 5% increase in unit sales. As a result third quarter’s net sales of cameras increased 11.8% despite the yen’s significant appreciation.

As for inkjet printers, facing challenging market condition in Europe due to the aggressive pricing strategies of competitors we recorded a 4% increase in unit sales. This reflect continued economic growth in emerging market and unit sales expansion in Japan due to recovering demand.

As for consumables, we recorded a slight decrease in sales in the local currency basis due to a slow down in printer unit sales in Europe. This also seems to reflect between the channels inventories due to an economic instabilities. As a result, despite the steady unit sales growth even in the third quarter’s net sales decreased 3.8% due to significant appreciation of the yen.

In total third quarter’s Consumer Business unit net sales and operating profit increased 7% and 27.9% respectively. Our operating profit ratio at 21.6% marks the first time since the fourth quarter of 2007 that we reached achieve the ratio above 20% which is especially noteworthy given the yen’s appreciation.

Please refer to slide 13. I’ll now discuss our previous projection for this business unit. As for camera market in 2011, for SLR cameras and interchangeable lenses, we expect continued strong demand during the year end selling season.

As for cameras, we expect camera sales to remain strong particularly for SLR cameras and interchangeable lenses. Amid accessory thing grows in our SLR sales, we are aiming for further expansion during the year end selling season.

Due to the flooding in Thailand, however, we roll out our three-year projection to 7.2 million unit, which is 100,000 unit below our previous projections. As for compact camera, we also roll out our previous projection 20 million to 90 million units for the same reason.

As a result and also due to the yen’s appreciation, we project a 2.3% decrease in previous camera sales. As for inkjet printer, sales of new product that we launched (inaudible) off to a good start as we approach year-end selling season.

For the three years however we roll out our unit sales projection due to increasingly aggressive competitor pricings mainly in Europe. As a result, we now expect a three year unit sales to increase 66%. As for consumables due to an increase in machine in the field over the past several years, we expect to post positive growth as we look toward year end.

Despite this net sales projected to decrease 6.3% reflecting the Yen’s appreciations and some impact from the flooding in Thailand. As a result, we expect three year’s consumer business unit sales to increase 1.8% in the local currency basis. In Yen terms, however, we expect net sales to decline 3.6%. As for operating profit and due to the Yen and impacts of flooding we project 12.4% decrease.

Please turn to slide 14. I will now discuss our industries and other business unit. In the third quarter sales of IC Steppers expanded thanks to the bullish demand for high-range and carrier (inaudible) driven by strong demand for such product smartphones and tablet PCs. Sales of LCD aligners however decreased significantly due to a weak market and affect us such as impacts of investment in large panel equipment made in 2010 last year.

As for Canon Group companies (inaudible) showed a significantly increased sales due to OLED panel equipment sales As a result, the industries under the business unit posted a 12.8% increase in the sales and operating profit of ¥9.1 billion reflecting a steady improvement in profitabilities and further effort to reduce cost and expenses.

Please refer to slide 15. Next, I will discuss our previous projection for this business unit. As for IC Stepper’s due to strong demand for CCD and CMOS sensors, where was Panel Display Controller ICs for hybrid electric vehicles. We are seeing the strong demand particularly for hiring equipment.

Other result, we raised our unit sales projection from 46 to 50 units. And for LCD aligners, we project three-year sales to be 28 units, which is significantly below the 56 units we sold last year. This reflects our weak demand for large panel equipment.

For group companies, production systems have turned to normal. We project the sales to be in line with our previous projections.

In total, we project a decrease in industries under business units and net sales of 0.7% due to lower unit sales of LCD aligners. And for operating profit, we expect to be ¥29.3 billion in the block, which exceed our previous projections.

We project that our lithography segment will be in the block, thanks to increased IC Stepper’s unit sales and greater production efficiencies. It also makes a progress made to improve production efficiencies at group companies.

Please turn to slide 16. Finally, I will discuss our financial situations. At the end of September, inventory turnover was 54 days. This reflects an increase in inventories headed by sales companies in preparation for sales expansion. Going forward, we’ll promote further optimizations of inventory levels to prevent lost sales opportunities.

Please refer to slide 17. This slide highlights capital expenditures and free cash flows. Going forward, we’ll continue effort to promote through cash flow management and maintain our financial strength.

Please turn to slide 18. As a result, despite share buyback totaling roughly ¥100 billion, we expect cash on hand to be ¥700 billion at the end of this year, which is equivalent to 2.5 months of net sales.

Please refer to slide 19. On top of the earthquake, we are now faced with a new challenge of extensive spreading in talent. This slide shows however, actual business conditions remain strong and we are overcoming the rapid begin appreciation and economic uncertainties when the impact of the earthquake spreading impact excluded.

Despite this very severe business environment, the Canon Group will make concerted effort to firmly achieve its new target. In doing so, we’ll also work toward our targets of achieving record high result in 2013 that was in the page four, of our excellent global operation plan started this year.

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

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