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Executives

Toshizo Tanaka – Executive Vice President and Chief Financial Officer

Canon Inc. (CAJ) Q4 2011 Earnings Call January 30, 2012 8:00 AM ET

Toshizo Tanaka

Okay, thank you very much. 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 is today's agenda. Please turn to slide three. 2011 was a very challenging for Canon. Although the global economy continued to gradually recover thanks to emerging markets, we faced numerous challenges such as the earthquakes, the economic troubles in Europe; the yen's rapid appreciation and the Thai flood. Generally speaking, our market remained strong. We did however see sign of the slowdowns in Europe and other regions.

Within this challenging environment, full year's net sales decreased. Despite this, we raised our gross profit and operating profit ratios. Major factors for these achievements include further effort to reduce cost and the expense efficiency. As a result, despite the natural disasters, and the yen’s rapid appreciation, we achieved our second consecutive years of net income growth.

Please refer to slide four. Fourth quarter’s net sales decreased 9.7%, due to the yen’s rapid appreciation and the Thai flood. Operating profit however is increased 14.2%, thanks to 11.5-point improvement in our gross profit ratios and the expense efficiency. For the full year, despite prompt measures to minimize the impact of the natural disasters, net sales and operating profit decreased 4% and 2.4% respectively, reflecting the yen’s rapid appreciation. Net income, however is increased 0.8%.

Please turn to slide five. I will now discuss the disasters in more details. The total impact on net sales and operating profit was 236.8 million yen and 127.5 million yen respectively. When we exclude this impact our result show an increase of 2.4% in net sales and operating profit growth exceeding 30%. This shows enhanced product competitiveness and significant progress made in cost reductions.

Please refer to slide six. I will now compare our full year’s result with our previous projections. Regarding sales volumes, in our Office Business unit, we accelerated production recoveries after the earthquake and made the progress in reserving back quarters. Despite these, we didn’t achieve our target for copiers due to the economic slowdowns, particularly in Europe. We didn’t achieve our target for other printing devices as well. This reflects movement to reduce channel’s inventories amid concerns over economic conditions, particularly in Europe.

In our Consumer Business unit, [down] factors for not achieving our target was, slightly lower than projected unit sales of compact cameras. Additionally, although we achieved our target for SLR cameras, the contribution to our performance was limited, as we gave priority to entry models due to particularly strong demand amid limited production capacities. This also had a negative impact on sales of midrange interchangeable lenses.

As for Industry and Others Business unit, the major factor for this negative figure is a shift of some sales into 2012 due to [earthquake and some delays]. Regarding the others categories, the positive figures under our net sales represent limited price declines. The positive figures under our operating profit reflect this and the expense efficiencies. As for cost reduction, this was basically in line with our projections amounting to 88.3 billion yen.

Please turn to slide seven. I will now talk a little bit more about the cost reduction activities. This slide shows the correlations between our production reform activities, gross profit ratios and foreign exchange rates, since 1986. You can see how the enhancement of production technology has contributed to significant cost reductions.

Despite sales growth through globalization, since 1985 (inaudible) the yen’s appreciation has been constant burden for Canon’s operations. In the 1990s, we started production reform activities, through this we rearrange the step up in profitability. Until around 2008, however there was still or a very high correlation between our profitability and changes in exchange rate through accelerated production reforms advancement in such areas the automations and in-house productions and progressions from cell to man-machine cell productions. Since 2009, we re-arise improvement in profitability despite yen’s rapid appreciation.

2011 was particularly noteworthy because we overcome not only the impacts of exchange rate, but also the disasters to re-arise improved profitability. Our structure has improved to a point we are able to observe the impacts of exchange rate.

Please refer to slide eight. I will now discuss our 2012 projections. This slide shows our assumptions or exchange rate and the One Yen change impact.

Please turn to slide nine. This slide highlights key point regarding our projections. As for the economies in the emerging market, we expect the growth to continue, but at a slightly slower pace. In developed countries due to structure-related factors, we feel it will take some time to see our recoveries particularly in the Eurozone.

Overall, we cannot control significant global economic growth in 2012. As for the exchange rate environment, (inaudible) expected to remain severe. To return to a profitable growth within this severe environment, we are further accelerates the launch of attractive new products and services. This include broadening the new business areas through such product of the Cinema EOS Systems and DreamLabo and expanding our solution business centered on the imageRUNNER ADVANCE series. We also work to totally reinforce our global sales trends.

In addition to bolstering our sales networks in Asia and in developed countries we’ll work through accelerate majors aimed at expanding our solution business from a broader perspectives, which encompasses not only documents but photo, imaging, and medical areas as well.

Through this effort, we’ll work to finally achieve our target of net sales and profit growth exceeding the 3.3% growth in global GDP projected by the IMF. At the same time, we’re also work to build a solid foundation that will sport effort to achieve our 2015’s target.

Please refer to slide 10. This slide shows our projected three years performance. Despite a severe external environment, we aim to achieve this three years at a very least by thoroughly executing the strategies I just mentioned. Please turn to slide 11.

I will now compare our three years projections with our results of last year’s. Changes in the exchange rate are projected to have a major negative impact. As for change in sales volumes all the businesses are projected to benefit significantly from (inaudible) launch of new product and services.

In the other categories negative fees and net sales represent around 110 billion yen in price declines due to the aggressive promotion of sales expansions. The negative fees and the operating profit represent price declines and the increase of the expenses to expand sales and the strength of our sales structures. As full effort to reduce cost, we included 100 billion yen.

Please refer to slide 12; here we now discuss each business unit starting with the Office. In 2011, the copier market continued to gradually recover in developed countries. In the emerging markets, we saw continued strong market expansion, particularly in Asia. Although we are impacted by an economic slowdown in Europe, [MESA] and over the years, we recovered from shipment delays caused by the earthquakes and achieved our fourth quarter unit sales growth.

Sales of color models were particularly strong growing 14%. And as for consumable sales, despite the steady print volumes, sales decreased 2% in the local currency basis due to low pricing. As a result, fourth quarter net sales of copier increased 4% in the local currency basis, but decreased 0.9% in yen terms. For the three years, net sales of copiers were basically flat on the local currency basis, but down 4.7% in yen terms.

In 2011, the laser printers market continued to steadily expand, despite instabilities in Europe and thanks to emerging markets. Amid this market environment, we posted three years unit sales growth of 8% exceeding our predictions. As for consumable sales, despite movement to deduce channel inventories due to [various] concerns, particularly in Europe, actual demand remained steady and we posted a 4% annual increase on the local currency basis. As a result, three years net sales of our printing devices were flat on the local currency basis, but decreased 7.4% in yen terms.

For the Office business unit as a whole, net sales decreased 9.3% in the fourth quarter and decreased 3.5% for the three years. Fourth quarter operating profit grew 12.2% [deflecting] increased effort to reduce cost. This profit increase was our first in five quarters. For the three years (inaudible) due to the yens appreciation and the earthquake, profit declined 11.6%. However, as you can see on this slide, profitability has been steadily improving.

Please turn to slide 13. In 2012, we expect the copier market to continue its gradual recoveries in developed countries. In the emerging market, we expect continued high growth amid rise in the office related investment pushed by economic expansions.

On top of this, we also focus further progress in the global adoption of color equipment. Within this environment, we’ll grow our proprietary cloud service, Canon Business Imaging Online with our highly competitive imageRUNNER ADVANCE series (inaudible) strengthen our corporations with leading IT vendors and to expand our customers’ base.

Through these measures, we have secured the rate of sales expansion to facilitate our aim of recovering market shares in developed countries. In the commercial operating arenas, we will make use of the synergies with Océ to further our presence. We’ll also enhance our sales structure through such measures as expanding our sales and service workers.

Through these measures, we aim to cost unit sales growth that exceed the market have increased the number of machines in the field to support future profit expansions. Through these measures, we project 2012 copier sales to grow 4.5%.

As for our laser printers, we expect steady market expansions over the medium terms mainly due to continued demand in emerging market. However, in 2012, especially in the first half of the years, we expect the market to slowdown particularly in Europe. We also expect the channels inventory adjustment to continue.

In this environment, we’ll work to improve market shares and profitability focusing on expanding sales of higher usage printers. Through these measures, we project three years unit sales to increase slightly.

As for our consumable sales, we only expect a slight increase on the local currency basis, despite a steady actual demand. Net sales about the printing devices, others projected to increase 1.7% on a local currency basis, but fall 3.9% in yen terms.

As a result, net sales for the office business unit are projected to increase 0.3%. Operating profit, however, is projected to decline 12.6%, reflecting an increase in operating expenses aimed at enhancing our sales structures.

Please refer to slide 14. I will now discuss consumer starting with cameras. Despite, the impact of the earthquakes and Thai flood, the SLR cameras’ market grew by 23% to 16 million unit. The compact to cameras’ market however shrunk by about 5% to 105 million unit due to the natural disasters.

In this environment, we couldn’t avoid the decrease in production due to the shortage of parts caused by the Thai flood in the fourth quarter. By taking swift action to minimize the impact however, we achieved our three years SLR cameras sales targets of 7.2 million unit. As for compact cameras, unit sales were 18.7 million unit basically in range with our target. Regarding global market shares, we believe we achieved the number one position for digital camera overall.

In summary, fourth quarter’s net sales of camera declined 8.5%. Three years net sales however, increased 1% from the local currency basis, but declined 4.6% in yen terms.

I will next discuss inkjet printers. The inkjet printers market was basically flat for the years as continued strong growth in the emerging market was offset by a slowdown in developed countries.

Amid this environment, we posted lower unit sales for the quarter [reflecting] flood effect. For the three years however, unit sales were up 2%. As for consumable sales, we posted positive local currency growth in both the fourth quarter and for the three years. The actual demand remained strong.

Despite these fourth quarter and three years inkjet printers net sales decreased 12.1% and 7% respectively reflecting flood defect under yen’s appreciations.

In summary, due to the limited supply of parts caused by the natural disaster under yen’s rapid appreciation’s we posted a lower consumer business unit net sales and profit in both the fourth quarter and for the three years.

Please turn to slide 15. In 2012, we expect SLR cameras market to grow by 25% to reach 20 million units, thanks to expansion in all regions. As for compact cameras, we expect the market to grow by around 8% to reach 113 million units reflecting the expansion primarily in emerging market. Amid this environment, we’d like to launch attractive new products accelerating product differentiation through the (inaudible) of proprietary key components while at the same time, diverging our optical technologies to promote product advancing.

As a result, we predict SLR camera sales to increase 27% to 9.2 million unit and compact camera sales to increase 17% to 22 million unit. At the end of last year, we announced of our plan to enter the mobile industry with our cinema [yield] systems. (Inaudible) from the end of this month the systems have already and upgrade in the market. This new business (inaudible) is the representatives of our effort to expand our business. As a result, three years net sales of cameras projected to increase 17.2% despite the yen’s appreciation.

Next I will discuss inkjet printers. We expect the market to be flat amid concerns from economic slowdown in developed countries particularly in Europe. As for Canon, although we expect some impacts of Thai flood at the beginning of this year, production of all models will start by the middle of February. Once production is normalized we’d work to expand sales to achieve our three targets of 1% unit sales growth.

As for consumables, we expect to steady extra demand to continue. Going forward, we also expand sales of our dream (inaudible), which target business expansion in the retail photo market. Through this measures, and despite of our print to steadily recover from the impact of Thai flood and to expand sales, three year net sales projected to decrease 4.6% due to the yen’s appreciation.

Three year net sales for the consumable business unit however are projected to increase 10.9% despite the yen’s appreciation mainly driven by growing sales of cameras. As for operating profit, thanks to expanding sales of the SLR cameras and the interchange of (inaudible) as where as expected cost reductions due to improved productivities. We expect profit to increase 23.5%.

Please refer to Slide 16. Next, I will discuss industries and others. In the fourth quarter, I see Stepper sales were 22 units reflecting bullish demand for our (inaudible) and the KrF tools driven by strong demand for smartphones and tablet PCs. Demand for our [hiring] equipment was particularly strong with sales of 52 unit. This reflects strong demand for CMOS and the CCD sensors and such product are power supply controllers ICs used in hybrid (inaudible).

As for LCD aligner, the market was negatively impacted by large panel investment in 2010. As a result, fourth quarter unit sales of 25 units were significantly below those of last year’s. As a result, net sales of lithography equipment declined 70.8% due to lower LCD aligner unit sales. Operating profit however returned back the first time in four years, thanks to structural reform. And for the sales companies in the fourth quarter, we posted negative growth due to the delay of delivery schedule. For the three years, however grouped sales increased, thanks to medical equipment and a significant growth in the sales of top key OLED panels manufacturing equipment. As a result, our net sales for the industries and the business unit decreased 13.6% in the fourth quarter and 2.8% for the three years.

As for profit, we were 24.3 billion yen in the (inaudible) due to the lack of [body] structuring expenses.

Please turn to slide 17. In 2012, we expect the IC Steppers market to shrink to around 450 units as demand for ArF and KrF tools, using DRAM manufacturing is projected to decline. For i-line equipment, however, we expect the market to remain strong due to the same factors in 2011. Accordingly, we expect our IC Stepper sales to grow to 94 units.

As for LCD aligners, we expect the market to be around 70 units, given our outlook for panels, manufacturers, investment to remain weak. As a result, we expect our LCD aligner sales to be 20 units.

For group companies, we expect to see sales expansion to come from recently acquired companies such as ELK and Showa Information Systems as well as from strong demand for OLED panels manufacturing equipment and so on. In summary, we expect the net sales and the operating profit for our industries and as a business unit to increase 8.5% and decrease 7.4% respectively.

Please refer to slide 18. Finally, I will discuss our financial situations. At the end of December, inventory turnover was 46 days. This represents (inaudible) to optimize the inventory levels held by sales companies. Going forward, we’ll promote further optimizations of inventory levels from the standpoint of preventing our lost sales opportunities and responding flexibility through emergency situations.

Please turn to slide 19. This slide highlights capital expenditures and free cash flow. As for capital expenditures, although, we have received plans mainly to invest in production capacity expansions in response to medium-term growth, we’ll also promote more through cash flow management and maintain our financial strength, projecting cash on hand at the end of 2012 to be 770 billion yen.

Please refer to slide 20. Despite the 100 billion yen in the share buyback, cash on hand at the end of 2011 was 773.2 billion yen equivalent to 2.5 months of net sales. Even within the severe business environment, Canon maintained its solid financial structures.

As for our dividend, Canon works to provide us stable and active profit returns to shareholders mainly in the forms of dividend taking into consideration medium-term profit forecast along with the planned future investment cash flows and other factors.

In 2011, thanks to comprehensive cash flow management, the Company generated adequate cash on hand despite the yen's appreciation and the natural disasters.

Reflecting this situation, Canon announced a plan to distribute a year-end dividend of 60 yen per share. Based on this, our three-year divided will be 120 yen per share, which is the same amount we distributed in the last year. At this point in time, we haven't decided our plan for the dividend in 2012.

This year as well despite the severe business environment that we project we will achieve net sales and the profit growth and the steadily (inaudible) measures aimed at building a solid foundation from which we’d again return to the path of growth accelerating the momentum for achieving our 2015 target set out in our Excellent Global Corporation Plan, Phase IV.

This concludes my presentation. Thank you very much.

Question-and-Answer Session

[No Q&A session for this event]

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