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Executives

Masahiro Osawa - Managing Director, Group Executive, Finance and Accounting Headquarters

Analysts

Canon, Inc. (CAJ) Q4 FY07 Earnings Call January 30, 2008 8:00 AM ET

Masahiro Osawa - Managing Director, Group Executive, Finance and Accounting Headquarters

Hello everyone and welcome to Canon Conference Call. My name is Masahiro Osawa, I am in-charge of finance in our company. Today, I will review our fourth quarter and the full year results for 2007 and the full year projection for 2008. Please note that all financial comparisons made during my presentation will be on a year-on-year basis, unless otherwise stated.

Please refer to slide 2. This slide outlines today's agenda.

Please turn to slide 3. I'll now start my... by summarizing our performance in 2007. During the second quarter of 2007, we implemented change in the method used to calculate depreciation, in order to more accurately reflect business conditions. The impact of this change was an increase in depreciation expense of around 64 billion yen before taxes.

In the second half of the year, we saw a rapid downturn of economic conditions, due to the subprime problems in the U.S. which has a significant impact on our businesses in the fourth quarter. Despite severe conditions to our businesses, excluding semiconductor production equipment was strong for the full year. As a result, we recorded our eighth consecutive year of net sales and profit growth, commemorating the seventh anniversary of our establishment.

As for profitability, by promoting sales of high value-added products and actively pursuing cost reduction, we posted record levels. Additionally, we generated above 400 million yen in free cash flow for the first time, indicating the strength of our business, utilizing management ability to proactively respond to the sudden changes. Inventory levels are in good shape as we enter 2008. As we recorded, record high inventory turnover levels at the end of 2007.

Please refer to slide 4. I will now discuss our fourth quarter and full year results. In the fourth quarter, through double-digit net sales growth in color copying machines and continued favorable net sales growth for both digital cameras and laser beam printers, we posted record high net sales on a quarterly basis. Net sales growth however, was restricted to 3.9%, mainly due to a sudden downturn in the economic climate that started to appear in the second half.

As for fourth quarter profit, amid numerous negative factors such as slowdown in unit sales growth, due to the downturn in the economic climate and the impact from the jump in raw material prices, we focused on increasing sales of products that are highly profitability and on making progress in the area of cost reduction. Through such measures, we secured a gross profit increase of 3.9%.

Fourth quarter operating profit decreased 1.2%, due to the increased investments in R&D to enable the development of next generation business domain and enhance the technology and change in the method used to calculate depreciation. However, through exchange gains and through our exchange contracts and other factors, fourth quarter net income increased 1.8%. For the full year, net sales increased 7.8% due to favorable sales in [indiscernible] or businesses.

As for full year profit, gross profit increased 9.1%, thanks to the efforts aimed at expanding sales of highly competitive high value-added products. However, gross profit ratio also improved to 50.1%, representing the first time since 2003 that our gross profit ratio had exceeded 50%.

Operating profit and the net income for the full year increased over 7%, despite the downturn of the economic environment and the increase in expense, enhancing our corporate structure.

Turn to slide 5. For difference, if we exclude the impact of the change in the depreciation method, which was around 23 billion yen before tax in the first quarter, operating profit and the net income will show double-digit growth of 10.8% and 0.9% respectively. For the full year, excluding the impact, which was around 64 billion yen before tax, operating profit and net income will both show an increase of around 15%.

From the profitability standpoint, on pre-depreciation method change basis, gross profit and operating profit as a percentage of net sales, will be 51% and 18.3% respectively, both record high.

I would now like to review our fourth quarter results against our projections using the next slide. The overall impact of exchange rate fluctuations on projected net sales and operating profit was slight. As for sales volume, this was significantly impacted by the sudden downturn in the economic climate. We would not achieve our projection for office imaging product, due to delay in the U.S. and Europe holding off on purchasing decisions. As for inkjet printers, digital cameras and video cameras, there year-end selling season were not as brisk as expected.

Optical and Other Products were below our projection due to the lower than projected unit sales of IC Steppers. As for the Other category, the projected figure and the net sales represents lower than projected impact from price decline, thanks to our ability to maintain prices even in the face of severe price competition. The positive figure on the operating profit represent our effort to calm price decline and cut expenses to offset lower than projected cost reduction, due to the jump in raw material prices and lower than projected unit production volumes.

Please refer to slide 7. Next, I will discuss our fourth quarter and the full year result by product group, starting with Business Machines. Fourth quarter net sales of Business Machines increased 5% as color copying machines and consumables, for each product gained traction. Fourth quarter operating profit however decreased 1.9%, reflecting the change in depreciation method.

Please turn to slide 8. Full year net sales of Business Machines increased 9.1%, reflecting continued stronger sales of office-use copying machines, laser beam printers and inkjet printers, all of which posted record unit sales in 2007. Full year operating profit for Business Machines increased 8.5%, thanks to cost reduction and the strong sales, which steadily fueling the consumable growth.

Please turn to slide 9. I will now discuss Business Machines by products, starting with office imaging product. Fourth quarter net sales of color copying machines including consumables increased 14.4% reflecting steady unit sales growth for office-use models, particularly in Europe and the unit sales in line with our projection of over 100 per month of our imagePRESS C7000VP, a product designed for the POD market.

Copying machines, for the fourth quarter, net sales of monochrome copying machines including consumables decreased 3.1%, while it met our market share for copying machine-based monochrome models, improved compared with previous year due to unit sales growth in imaging market.

First quarter net sales of others increased 19.1% of solution related sales increased due to the acquisition of Argo 21 and the consolidation of its results. Other results fourth quarter net sales of office imaging products increased 6.7%. For the full year, net sales of office imaging products increased 8.8%.

Please turn to slide 10. I will now discuss computer peripherals, starting with laser beam printers. The market for both color and the monochrome laser beam printers continues to expand, as products which improve the features and the low pricing stimulate demand. Amidst this market condition, first quarter unit sales of laser beam printers increased 8%, thanks to 10% increase in monochrome lower-priced models and sales of color models decreased 6%, reflecting the launch of several new color products in the first quarter of 2006.

Net sales of laser beam printers including the consumables, increased 5.1%, reflecting lower net sales of hardware due to the shift to lower-end of products and continued double-digit growth in consumables sales, pointing to steady increase in the number of our machines in operation.

For the full year, net sales of laser beam printers increased 10.5%, thanks to the significant growth in monochrome and the color unit sales and expanded sales of consumables. In 2007, unit sales of laser beam printers increased 20%, which we estimate represent for the market share gain on top of our overwhelming number one position.

Next I will discuss inkjet printers. The market for inkjet printers continues to be flat, amidst this market condition and time for the year-end selling season. We launched new stylish designed products that liberates our proprietary ink print technology, which enables both high-speed and the high quality printing. Targeting higher printer volume customer, our new lineup also incorporated innovative future which makes it easy to print photos at home. As a result, we were able to post strong growth in consumable sales.

Net sales growth of inkjet printer including consumables however, was limited to 0.8% due to the rate of difference in unit sales, amidst sluggish market and severe price competitions. For the full year although, unit sales only increased a modest 1%, net sales increased 9.2%, reflecting the steady progress we have made in expanding our installed base of high print volume printers and the positive impact this expansion had on consumable sales. As a result, net sales of computer peripherals in the quarter and for the full year increased by 3.7% and 9.9% respectively.

Please turn to slide 11. Next slide we will discuss Cameras. In the fourth quarter, the overall digital camera market environment was basically strong, reflecting significant growth in emerging markets and other factors. Amidst this market conditions, we worked through expand sales of our competitive lineup of both SLR and compact digital cameras. However, because of the slowdown in growth due to the downturn in the business conditions, fourth quarter net sales and operating profit growth was expected to restrict to 5.4% and 0.7% respectively.

Please refer to slide 12. For the full year, net sales of camera increased 10.6%, driven by strong sales of digital camera, as full operating profit by expanding our price premium through the competitiveness of our product, improvement to product mix and the effects of cost reduction. We achieved an operating profit increase of 14.4%, we also improved our operating profit ratio by around one point to 26.7%.

Please turn to slide 13. Next slide will discuss sales of cameras, focusing on digital cameras. In the fourth quarter, although the downturn in business confidence had a negative impact... negatively impact unit sales of digital cameras showed around 13% increase with sales in each region, driven by the release of new products. For the quarter, unit sales of compact digital cameras increased 13% [ph], as each region maintained strong sales of stylish compact models.

As for SLR camera, sales of our EOS 40D remained strong, contributing to the significant increase of 23% in fourth quarter unit sales. At the same time, we steadily increased sales of interchangeable lens. As a result, fourth quarter net sales of digital cameras marked 7.4% increase for the year. Unit sales of digital camera were up 17% to 24.6 million yen, basically inline with our projection, representing the maintenance of our worldwide number one position for both compact and SLR digital cameras.

For the year, net sales of digital cameras increased 13.3%.

Please refer to slide 14. Next slide we'll discuss Optical and Other Products. Fourth quarter, net sales of Optical and Other Product decreased 9.1%, despite gross unit sales of LCD aligner and expanded sales of large format printer, and due to significantly lower sales of IC Stepper, reflecting strong sales in the first quarter of 2006. As a result, first quarter operating profit for Optical and Other Product was negative 2.7 billion yen.

Please turn to slide 15. For the full year, net sales of Optical and Other Products decreased 7.2%, although we expanded net sales of large format printers and equipment [ph], we could not offset the significant impact of turbulent market conditions surrounding LCD aligner. For the same reason, full year operating profit for Optical and Other Products decreased 49.2%.

Please refer to slide 16. Next, I will discuss sales of semiconductor production equipment in little more detail. In the fourth quarter, unit sales of LCD aligner increased three units to six units. Unit sales of IC Steppers however, were down significantly, reflecting high percentage of unit sales in the fourth quarter of 2006. As a result, fourth quarter net sales of semiconductor production equipment decreased 25.6%. For the full year, net sales of semiconductor production equipment decreased 17.9%, reflecting lower unit sales of LCD aligner in 2007. The market for LCD aligner was about half the size it was in 2006, due to weak or nil manufacturer investments.

As for IC Steppers, sales of our ArF versus the write tool, which we projected in the fourth quarter, now expect in 2008. However, it took slightly more time than expected for final adjustment.

Please turn to slide 17. Next slide we will discuss our full year projection for 2008. This slide shows our exchange rate assumptions and the projected impact thus warning change in these rate would have on our full year projections for net sales and operating profits.

Please refer to slide 18. This slide highlights some key points for the current fiscal year. Under our current projection we expect weak economic conditions to remain for a while on the significant appreciation of that into profit situation that we have not faced in recent years. Despite this, we expect to post our ninth consecutive year of net sales on the profit growth made possible by the launch of new product, of this all our product segments, thus significantly more competitive than last year.

Please turn to slide 19. This slide summarizes our projected results for fiscal year 2008. We expect the first half of this year to be challenging due to continued uncertainties challenging the economic environment, the end appreciation and impact from the change in depreciation method. However, based on the logical situation of our businesses, which remain strong; smaller impact from exchange rate and the change in the depreciation method and expectation that sales growth will recover in the second half. For the full year, we expect the first net sales and profit growth of around 6%.

I would now like to compare our full year projection with our projected result using the next slide. The overall impact of exchange rate changes on net sales and operating profit is projected to be minimum [ph], as foresaid is volume. The overall impact on net sales and the operating profit is projected to be positive, as we expect, unit sales growth of all core products, not only copying machine, printers and digital cameras, but also video camcoders and semiconductor production equipments.

As opposed to other category, the negative figure on the net sales represents price decline due to expectations, thus price competition will become severe. The negative figure under operating profit represents price decline and the increase in expenses to expand sales, which is partially offset by cost reductions. As for cost reduction in 2008, despite the rising raw material prices, we aim to achieve cost of savings here of 100 billion yen.

Please turn to slide 21. I will now discuss our 2008 projections by products, starting with office imaging products. As for the office-use copying machine market, although uncertainty regarding the economic environment remains, we expect double-digit growth on color models to continue, driven by the U.S. and Europe. And for office-use monochrome copying machine, we expect the market to be relatively flat as the shift to color in the growth to markets is projected to offset from the demand in emerging market.

Amidst this market environment, we will focus on further expanding sales of both high-speed and low-speed color copying machines, planning growth in hardware sales and the profitability. Also within the POD market, in addition to expecting continued strong sales of our imagePRESS C7000VT we are aiming to enhance our lineup this year to heighten our presence in the high-end color segment. As a result, we expect to realize color unit sales of over 20%, as we aim for our sixth consecutive year of double-digit growth in net sales.

As for monochrome models, we will work to improve product competitiveness in emerging markets. As a result, we project some increase in net sales of office imaging products of 3.3%.

Please refer to slide 22. Next slide we will discuss laser beam printers. In 2008, we expect the laser beam printer market to grow steadily in terms of units, supported by further advances in color adoption and the expansion of emerging markets. We also expect the shift to low-priced models and the severe price competition to continue. In this market environment, we aim to maintain the price premium of our product lineup, which is differentiated in terms of performance and to maintain high level of sales growth of consumables by expanding sales of high-print volume models, by further promoting the advantages of our full range of products such as is of use and durability and such features as on-demand fixing, which enables quick fast printout, low noise and low energy consumption, we aim to rate our run strongest [ph].

We will also work to further expand sales of tandem [ph] color models and mid range models with networking capabilities. As a result of this measure, we expect unit sales of monochrome models to be down compared with the high numbers for it in 2007, but also project significant growth of 27% in color models.

And for [indiscernible] amid the significant impact in appreciation, we project that net sales will increase 4.3%, thanks to continued steady sales of consumables.

Please turn to slide 23. Next slide will discuss inkjet printers. In terms of unit, the market for inkjet printers in 2008 is projected to be relatively flat as it was in 2007. Amidst this market environment, we will work to expand our base of high-print volume form and the business user by making advances in such areas as high-speed and high image quality of print technology, user friendliness and the design enables us to steadily launch differentiated new products.

In order to expand the future sales of consumables, we plan to increase hardware sales mainly in emerging market, where market growth is very strong. As a result, we project an increase of 8% in unit sales of inkjet printers. Through that measure, we are expecting strong gross in consumable sales, leading to a 7.1% increase in inkjet printer sales although.

Please refer to slide 24. Next slide will discuss cameras. As for digital cameras, we project the market in 2008 will reach 129 million units, representing year-on-year growth of approximately 10%, fueled by increased demand in emerging market. As for the digital retail portion of the market, we project 18% growth and 8.8 million yen unit in volume. Amidst this market condition, by launching the strategic new compact and SLR digital cameras as well as video camcorders with higher than ever levels of competitiveness, we aim to solidify our overwhelming number one position in the digital cameras... camera market, while securing a strong presence in the video camcorder market, similar to digital cameras.

As such, we project digital camera sales volume of 29.4 million units, representing 20% increase over last year. Our growth rate just exceed, just for the market overall. In volume terms however, we expect net sales growth to be limited to 7.4%, due to an appreciation.

As for video camcorders, we are aiming for significant growth of 14.9% in net sales value and over 20% growth in volume. Overall, we project net sales of cameras to increase 6.9%.

Please refer to slide 25. This slide shows some of the strategic new products that we recently announced and plan to launch during the first quarter. Although names maybe different in your region, this is just some product we plan to offer in 2008.

Please turn to page 26. Next, I will discuss semiconductor production equipment. With regard to IC Steppers, in 2008, we expect the market for ArF immersion tools to expand. In terms of volume however, we expect the market to decline significantly compared with last year. As a result, we project sales volume for IC Stepper will be limited to 130.

Faced with this market environment, we aim to strive toward our target of gaining 30% share of ArF immersion tool market in 2010. As for LCD aligners, we expect significant market expansion in 2008, due to unified large scale investment by panel manufacturers. As such, we project our sales volume of 60 unit, more than double that of last year, reflecting strong unit sales of the new age generation model. This product has received high marks from users for its productivity and the short installation speed of time.

As for result, we project net sales of semiconductor production equipment will increase by 17.7%.

Please refer to slide 27. This slide summarizes our projection for full year operating profit by product group. For Business Machines, in addition to benefiting from increased sales volumes of all products, through competition for cost reduction, we are projecting increase in both sales and profit. And for profitability, we expect temporary increase in depreciation expense, due to the strategic growth of investment including automated production. However, we expect to maintain the same high level of profitability as last year, thanks to expanded consumable sales.

As for cameras, we plan to increase profit and to improve upon the current high level of profitability again. In addition to expanding sales of strategic new products, we expect to accomplish through the maintenance of our price premium, improvement of our product mix, and drastic measures to reduce cost through such means of furthering in-house production of the parts and automation of production.

As for Optical and Other Product, we are projecting significant improvement in profit, almost double that of last year due to significant increase in unit sales of LCD aligner and the contribution of ArF tool that have high unit prices.

For the company overall, amidst uncertain economic environment and the expectation for significant in appreciation, along with plan to increase R&D expense, aims at further future growth, we expect to either maintain or improve the profitability of each product group, enabling us to post 16.9% in operating profit, the same high level as last year.

Please turn to slide 28. Finally, I would like to comment on our financial position. In 2007, capital expenditures totaled a high level of around 430 billion yen, mainly to augment facility in response to strong demand for Business Machine consumables despite this high level of capital investment as a result of our ongoing management report focusing on profit and cash flow. We are able to record over 400 billion yen in free cash flow, an all-time high for the company.

Please refer to slide 29. As a result, as you can see here, cash on hand at the end of 2007 was just under 1 trillion yen. And we are also taking into account around 450 billion yen used to purchase our own shares. In the future, we plan to expand profit under... through implement cash flow management using the funds to actively invest in R&D to realize further growth and enhance the competitiveness and among the means to achieve everlasting improvement in corporate volume.

As for shareholder returns, our primary focus is to continuously improve corporate volume and dividend. Regarding the dividend, as you can see, in stead with steady expansion of profit, we have been able to consistently raise our dividends above the profit to growth rate, this resulting in payout ratio increase. Going forward, we will steadily raise our payout ratio towards our stated targets of consolidated payout ratio of 30%. In 2008, although we are currently projecting dividend per share amounting to 110 yen, we intend to review this in accordance with our performance.

Additionally, regarding the acquisition of own shares, we would continue our aim of improving capital efficiency and ensuring our flexible capital strategy that provides for such future transaction of the share exchanging.

This year, although many uncertainties exist, we will devote all our energy for achieving our ninth consecutive year of sales and profit growth. This ends my presentation. Thank you.

Question-and-Answer Session

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Source: Canon, Inc. Q4 2007 Earnings Call Transcript
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