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Executives

Toshizo Tanaka – Executive Vice President and Chief Financial Officer

Canon, Inc. (CAJ) Q1 2012 Earnings Call April 25, 2012 8:00 AM ET

Toshizo Tanaka

Good morning or good afternoon, ladies and gentlemen, and welcome to Cannon’s Conference Call. Please refer to today’s slides and note that our financial comparisons made during my presentations will be on a year-on-year basis unless otherwise stated.

Please refer to Slide 2. This is today’s agenda.

Please turn to Slide 3. In the first quarter, global economy saw only a gradual recovery. In addition to continuing weakness in Europe, we also saw sign of dissertations in managing the market. As for exchange rate, although the year end moved away from its excessive appreciation, it remained strong against U.S. dollars and euro.

In addition to the challenging business environment, we faced some effect of last year’s Thai flood. Under these situations, despite posting a slight decrease in the sales, we recorded our third consecutive quarters of operating profit and net income growth through cost reductions and comprehensive effort to streamline expenses.

Please refer to Slide 4. This slide summarize our first quarter’s performance. As for the sales, we posted slight decline of 1.2%, thanks to continued strong sales of SLR cameras and color copiers.

As for gross profit, although we made steady progress in cost reductions, gross profit as a percentage of net sales declined 1.3 point due to such factors, as a rise in oil prices and changes in product mix.

As for operating profit, we secured a slight increase of 0.2% reflecting progress we made in firmware and accessories. Net income increased 11.0% due to a gain on foreign currency denominated assets and other factors.

Taking into considerations, our strong performance prior to last year’s earthquake and this year’s challenging business environment, our abilities to maintain profit growth can be attributed to further improvement in our financial constitutions.

Please turn to Slide 5. I will now compare our first quarter’s results with that of last year’s in more detail. Changes in exchange rates had a negative impact on both the sales and operating profit. As for changes in sales volumes, the impact was negative on the office due to inventory adjustments of other printing devices. For our other two business units, the impact was positive.

In the other categories, the negative fees on the sales represent price declines. Positives fees on the operating profit represent the price declines offset by cost to reductions and comprehensive efforts to streamline expenses. In this way, despite a slight decline in sales, we secured an increase in profit absorbing the Yen’s appreciation.

Please turn to Slide 6. This slide shows our exchange rate assumptions and their estimated impact predicted in the sales and the operating profit for the remaining nine months of this year.

Please, turn to Slide 7. This slide highlights some key points regarding our revised projections. Although, we feel the global economy maybe sluggish, we still believe that the emerging markets will continue to drive overall expansions, and that it will take considerable time before Europe realizes an economic recovery.

As for the United States, although there are sign that the worst is over and the things seems to be improving. We feel it will take time before the U.S. economy can contribute to driving strong growth in the global economy. In addition to the challenging market environment, we expect Japan’s manufacturing industries to be exposed to prolonged yen’s appreciation. However, in such adversities we’ll work to further balance our manufacturing as a way to enhance our abilities to respond to rapidly changing market need through a swift start-up of production of attractive new products.

We’ll also strive to enhance our production and sales structures, which will allow us to rapidly deliver this product around the world. We were firmly achieving this target and build our foundation for future growth to achieve our target read out in Page 4 of the Excellent Global Corporation Plan.

Please refer to Slide 8. This slide summarize our revised projection for the full year. I’ll now compare our current predictions with our previous forecast. Changes in the exchange rate assumption had a positive impact on projected net sales and operating profit.

As for projected changes in sales volumes, in our office business unit, the impact was negative after debut of (inaudible) for other printing devices. As for consumers, the impact was positive reflecting in particular, strong sales of high-end cameras and inkjet printers.

The total impact on industries and others was positive due to favorable sales of group companies. In the other category the negative figures under net sales, represent the same 110 billion yen in price declines for mainly copiers and cameras. The negative figures on the operating profit depict cost reductions totaling 90 billion yen, which exceeds our results of last year, but is lower than our previous projections due to impact of Thai flood under the factors. In total, we plan to significantly exceed our previous sales and operating profit projections.

Please refer to Slide 10. I will now discuss each business units starting with our office business unit. In the first quarter, the overall copier market remained on a puzzled gradual recovery.

However, we faced a changing environment due to the economic slowdown in Europe. In emerging market, office-related product sold the best demand, thanks to the economic growth.

And in this environment, we focused on promoting sales of our imageRUNNER Advance series, which lead to an increase in unit sales. Our performance in color was particularly noteworthy as we achieved unit sales growth in all regions. As a result, net sales of copiers increased 1.7%, on a local currency basis. In yen terms, however, net sales decreased 1.8%.

As for laser printers, the overall market continues to see sluggish growth and made the effort to reduce inventories due to the uncertain business climate mainly in Europe. As a result, hardware unit sales decreased 13%, while the sales of consumable decreased 9% on a local currency basis. In total, first quarter’s net sales of other printing devices, decreased 14.9%. Looking at the entire business office business unit, first quarter net sales decreased 8.9%; operating profit decreased 16.2%; and operating profit ratio declined by 1 point.

Please refer to Slide 11. Next, I will discuss of our full year projection for this business unit. We expect the market for copier to remain on a puzzled gradual recovery. Among this market environment, we will further strengthen our product lineup and enhance our sales networks boosting our corporation with leading IT vendors, and further accelerating synergies with Océ.

In addition, we will comprehensively strengthen our ability to provide those hardware and software solutions that address the new need of office environment created by cloud based computing and other advancements. Through these measures, we aim to recover the market shares we lost last year due to slight constraint caused by the earthquake.

As for non-hardware product for which demand remain stable, we plan on further accelerating sales growth for hardware products, and we expect net sales to increase 3% in a local currency basis.

In total, net sales of copiers are projected to increase 7.8%. As for laser printers, we believe the market will need more time to recover from the slowdown caused by the uncertain business climate, particularly in Europe.

Based on this outlook, we lowered our full year projection for unit sales from flat to minus 4% and our full year projection for consumable sales from 1% gross to 2% decline on a local currency basis.

In total, net sales of other printing devices are projected to decrease 5.7%. Despite our cautious outlook for this year, we still expect the global market for laser printers to grow over the medium terms at a rate exceeding global economic expansion driven by new demand in the emerging market, and global trend towards color and multi-function devices.

Canon will steadily work to improve profitability and market share in preparation for the eventual economic turnaround by launching and expanding sales of new products that support higher print volumes. For the office business unit, net sales and operating profit projected to increase 1.1%, and decrease 6.3% respectively.

Please refer to Slide 12. Next, I will discuss our consumer business unit starting with the camera segment. The market overall remained favorable, particularly for the sale of cameras reflecting growth in the emerging market.

Among this market environment, we achieved a nearly 30% increase in unit sales of SLR cameras reflecting strong sales of our entry level models, and strong demand for recently launched camera targeting advanced, amateur users. We also continue to see the best sales for interchangeable lenses. We posted strong sales for new compact digital cameras, launched in March that incorporated Wi-Fi connectivity capabilities. As a result, overall cameras’ net sales increased 7%.

Next, I will discuss inkjet printers. In the first quarter, the market shrunk due to declining business confidence in Europe, and slight constraint due to impact of Thai flood. In addition to the difficult market environment, our unit sales decreased 300% reflecting the significant impact of supply constraint caused by flood. We also posted a decline in net sales for consumables. In total, net sales of inkjet printers decreased 12.6%.For the consumer business unit, the sales and operating profit increased 4.8% and 17.1% respectively.

Please, turn to Slide 13. Next, I will discuss our full year projection for the camera segment. We expect a strong global demand for SLR cameras to continue driven by such factors as an expanding user base and replacement demand.

Regarding our product portfolio, Canon offers a broad lineup of SLR cameras to meet the wide range of market need. This year, we are updating our lineup with a particular focus on higher-end segment. We have already announced new advanced amateur and professional level cameras. We will use our rich lineup to expand sales 27% to 9.2 million unit. At the same time, we will also work to increase sales of interchangeable lenses. As for compact cameras, we are aiming to boost sales by 17% to 22 million units.

To achieve this, we will further differentiate and enhance our lineup by launching new cameras offering the image qualities that approaches SLR cameras; furthering the improvement in design and qualities, and by incorporating features such as network, connectivity capabilities.

In addition to the launch of differentiated new products, this high growth rate also reflects last year’s supply constraint due to the earthquakes and Thai flood. As for our cinema use systems, which targets motion pictures on television production industry, we also expand sales by enhancing our product lineup. In total, we expect net sales for the camera segment to increase 23.1%.

Next, I’ll discuss our full year prediction for inkjet printers. We expect the overall market to be on par with last year in terms of units sold. Although, we expect the impact of declining business confidence in Europe, but to continue, we are seeing favorable demand in Japan and the increasing demand in emerging market due to economic growth.

As such, we have seen strong sales and our market shares has improved in high-end segment. Thanks to the recoveries, we realize in production. We work to expand sales from the second quarter, launching new high quality product with enhanced usability.

On the results, we will maintain our target of 1% increase in unit sales for the full year. And for consumables, we expect the net sales to increase, thanks to best sales for mid-to-high end models. With regard to the DreamLabo, we target business growth in the retail photo market. We started the shipment this February, and going forward, we’ll work to expand sales in each region.

Through these measures, we expect inkjet printer sales overall to increase 2.8%. In total, consumer business unit net sales and operating profit projected to increase 20.4%, and 37.4% respectively.

Please refer to Slide 14. Next, I will discuss industry and others. First quarter, IC stepper sales increased from last year’s 11 units to 13 units. This reflects favorable demand for i-line and CRF equipment; made the strong demand for such products as smartphones and tablet PCs.

First quarter unit sales of LCD aligners, however, were the same as last year’s 5 units. Sales for Group companies increased due to ordered equipment, new orders for equipment for electronic (inaudible) manufacturing and recent acquisitions.

In total, industry and other business unit, net sales and operating profit increased 19.4% and decreased 39.5% respectively.

Please turn to Slide 15. Next, I will discuss our full year projection for this business unit. And for IC steppers, we project sales to be 70 units, this reflect favorable demand for end product, such as those used in eco-friendly automobiles, and increasing demand for sensors, LED elements and ICs for inverter related products.

And for so LCD arena, we project sales to be 16 unit. This reflects our outlook for weak investment by permitting manufacturers amid ongoing effort to reduce inventories and lower factory utilization rate. We project sales by Group Company to increase due to contributions of (inaudible) and effects of newly consolidated companies.

In total, industries and our business unit sales and operating profit projected to increase 10.7%; and decrease 44.9% respectively, and due to lower unit sales or LCD arena.

Please turn to Slide 16. Finally, I’ll discuss our financial conditions. At the end of March, inventory turnover was 56 days, which can be merely attributed to an increase in inventories held by our sales companies, as they work to expand sales.

Please, refer to Slide 17. This slide highlights capital expenditure and free cash flow. Going forward, we will maintain our financial health promoting more through cash flow management.

Please, turn to Slide 18. As a result, we expect cash on hand at the end of December to be 70 billion yen and amount equal to 2.4 months of net sales. Since last year, we have been steadily building up our results while coping with various situation such as last year’s earthquakes and flood.

Going forward, Canon Group will work in conservative efforts to firmly return to a profitable growth and achieve the target laid out in Page 4, of the Excellent Global Corporation Plan.

This conclude my presentation. Thank you very much.

Question-and-Answer Session

[No Q&A session for this event]

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