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Canon, Inc. (NYSE:CAJ)

Q2 2012 Earnings Call

July 25, 2012 8:00 am ET

Executives

Toshizo Tanaka – Executive Vice President & Chief Financial Officer

Toshizo Tanaka

Thank you. Good morning or good afternoon ladies and gentlemen and welcome to Canon’s conference call. Please refer to today’s slide and note that our 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. In the second quarters, we noticed spread in the global economic slowdown. In Europe, we saw economic stagnations. In the United States, we saw only gradual recoveries. And in emerging markets, factors driving the economic expansion seems to have weakened. As for exchange rate, although the trend of Yen appreciation remain, the levels of appreciation was significant against the Euro.

Despite business environment, which become increasingly more challenging since our earnings announcement in April, we steadily expanded our market shares for such core products as cameras and copiers posting our first increase in net sales in three quarters. At the same time, we maintained profitability by promptly responding to changes in the external environment through such measures as expense reductions. This allowed us to post our fourth consecutive increase in operating profit.

Please refer to this slide to summarize our second quarter result. We achieved an increase in net sales of 7.5% in yen terms, and an increase of 12.7% on a local currency basis. As for gross profit, while we fell short of the ratios we posted in the same period last year, we saw an improvement of 1.8 point on a sequential basis. Operating profit increased 18.1% thanks to a 2 point improvement in our expense to sales ratios made possible by effort to streamline expenses. As for the decrease in net income, this mainly reflect lower effective tax rate last year due to the earthquakes and other factors.

Please turn to slide five. I will now compare our second quarter result with our results of last years in more detail. Changes in the exchange rate had a negative impact on both net sales and operating profit. As for changes in sales volumes, the effect was positive compared with the second quarter last year’s period, which reflects the impact of the earthquake.

In the other categories, the negative figures under the net sales represent price declines. This negative figures and the operating profit represents price declines and the increases in expenses to expand sales. Through this effort we achieved net sales and operating profit growth reserving the impacts of the Yen’s appreciations.

Please refer to Slide 6. This slide shows our exchange rate assumptions and their estimated impact on projected net sales and operating profit for the remaining six months of this year.

Please turn to Slide 7. This slide highlights some key points regarding our revised projections. From July on we expect a situation of economic stagnation in Europe and a gradual recovery in Japan and in the United States to continue. In emerging market, we forecast a relatively high growth to continue, but at a slower pace. As a result, global economic growth will be related through gradual recovery. As for exchange rate, we expect the basic trend of Yen appreciation to persist for the time being.

Under this outlook, marked by a business environment that is rapidly changing and becoming increasingly more challenging, we cautiously revised reference for the later half of this year. Even in this environment, we aim to expand our market shares leveraging our strong product competitiveness and maintaining the momentum we have recently generated.

In line with this, we’ve also enhanced our profitability making further advancement in the areas of manufacturing by improving our production technologies. Through these measures, we’ve overcome the challenging situation to finally achieve sales and profit growth.

Please refer to Slide 8. This slide summarizes our revised projection for the full year.

Please turn to Slide 9. I’ll now compare our current projections with our previous forecast. Changes in the exchange rate assumption had a negative impact on projected net sales and operating profit. As for changes in projected sales volumes, this had a negative impact on all segment and reflects our cautious outlook for the economic environment.

In view of the recent market trend, we revised our plan for laser printers with in our office business unit, and mainly compact and digital cameras in imaging systems. In the other categories some positive figures on the net sales represent this strange price decline. The positive figures on the operating profit represent this strange price decline and the comprehensive effort to streamline expenses.

As forecasted reductions due to rendering effect from the Thai flood in the second quarter and the impact of projected lower production volumes we revised our projection from 90 billion to 70 billion.

Please refer to Slide 10. I will now discuss each business unit starting with Office. In the second quarter, the copier market continued to gradually expand in the United States and Japan. In emerging market, office related demand continued to drive market expansion. In Europe, however, we saw weakness due to economic stagnation. Among this market environment, we look to expand copier sales enhancing our imageRUNNER ADVANCE series line up with new monochrome model.

We also made good progress in expanding sales of A4 monochrome models in market outside Japan. As a result, we achieved positive growth in all regions for both monochrome and color copiers and recoveries in market shares. In total, second quarter net sales of copiers increased 12.2% in a local currency basis. In yen terms, this increased 6.4%.

As for Laser Printers, despite stagnant economic conditions, the market remained firm, thanks to mainly emerging market. In this market environment, we achieved significant growth in color unit sales. As a result, overall laser printer sales increased 3% in terms of unit. Consumable sales decreased 4% in a local currency basis due to measures taken to adjust inventory that started last year. As a result, we posted an 8.4% decrease in the net sales of printers. For the office business unit, net sales and operating profit decreased to 2.6% and 3.6% respectively.

Please turn to Slide 11. Next I will discuss our full-year production for this business unit. We expect copier market to remain challenging in Europe; in the United States and Japan, our outlook for gradual growth to continue. And in emerging market, we foresee continued strong market expansion.

In this market environment, we will further enhance competitiveness of our product portfolio focusing on our imageRUNNER ADVANCE series. Through these measures, we will further accelerate the momentum we generated in the first half in regions where our sales were favorable, such as in Japan, in the United States and Asia.

In the area of commercial printing, we will work to access rate synergies with Océ. At Drupa, the world’s largest printing equipment exhibition held in May of this year, Canon and Océ jointly exhibited our broad portfolio, which was very well received. We will use this to steadily expand sales in the second half of this year.

Through active measures to promote sales, we aim to increase previous unit sales by 14%, which is in line with our previous predictions. As for non-hardware sales, although actual demand remains steady, we lowered our previous projection from 3% in the local currency basis to 2% due to delays in hardware sales and other factors. In total, previous copier net sales are projected to increase 3.4%. As for laser printers, we are seeing excessive price competition within certain segments of the market resulting in a downward trend in our market shares.

Taking into consideration the stagnant global economic climate and the result from a 4D examination of our market trend, we decided to revise our business plan for this year. As for hardware, we will take into consideration the balancing of market shares and profitability focusing on gaining market shares in segment that will lead to future consumable sales growth.

As for consumables, we revised our projection for shipment in the third quarter due to an expected delay in economic recoveries and the subsequent need for further channel inventory adjustment. As a result, we now predict full year hardware unit sales to decrease 11% and the sales of consumables to decrease 9% in the local currency basis.

Accordingly, we now expect full year net sales of printers to decrease 12.7%. Since out in 2010, we have been steadily launching new product, which have contributed to a significant market share gains in the low-end color MFP market. In the second half of this year, we will take additional steps to enhance our lineup launching new mid-to-high end color MFDs. We expect our new product portfolio to contribute significantly to recovering lost market shares due to the superiorities in areas such as environmental performance and the user friendliness.

Over the midterm, we expect the laser printers market to continue to gradually expand due to a shift towards color MFDs and the expansion of emerging market. We anticipate MFDs in particular to continue to grow at a double-digit rate. Looking at entire office business unit, we now expect full year net sales and operating profit to decrease 5.2% and 19.7% respectively.

Please refer to Slide 12. Next I will discuss Imaging Systems starting with cameras. Global demand in the interchangeable lens in the digital cameras remains strong, thanks to high growth in emerging market and an expanding user space in developed countries. In this market environment, we realized unit sales growth of 47% supported by our broad product lineups and continued strong sales of entry level and advanced armature models. We also realized continued strong sales for the interchangeable lenses.

As for compact digital camera although market growth has weaken reflecting global economic stagnation, we realized our unit sales growth of 31% expanding shares in key regions, thanks to the release of new models in the first half of this year. As a result, we posted a 29.6% increase in the sales of cameras.

As for inkjet printers, despite solid demand in emerging market, the overall market remained flat due to continuing weakness in Europe. Amid this market environment, we realized the unit sales growth of 2%, thanks to our production system in Thailand, it’s returning to normal and the removal of the supply constraint. However, consumer sales decreased due to lower printer sales during last year’s year-end selling season reflecting the impact from the Thai flood.

Other results, we posted a 4% decrease in net sales of inkjet printers. For the business unit, net sales and operating profit increased 22.3% and 23.6% respectively.

Please turn to Slide 14. Here I’d like to briefly discuss the Mirrorless Cameras we announced the other day focusing on its background. Since, its initial development, the concept for this product has remained the same. We wanted to develop a product that maintains a high image quality [and power of] EOS cameras and also realize the compact and lightweight design at the same time.

We are always advancing the EOS systems continuously creating and launching strategic projects that become a source of growth and profit for the company. The EOS M is the new product that fit into this category. We have been preparing our technologies as a way to expand the range of the interchangeable lenses in Digital Camera market. And through our investigation of the broader market, we expect our EOS M concept to be well received by the market, which is focused on users who want to easily taking better pictures in their daily lives.

We decided to launch the EOS M as a product that's offer high-speed and ease-of-use for photography in studious and as a product that we guide users to our EOS systems, which also offer an extensive lineups of interchangeable lenses. And with the special adapters, users have the ability to use our broad range of more than 60 interchangeable lenses. Going forward at the new entries models in the EOS systems, we aim to further expand sales of EOS systems and the EF lenses with users who desire to easily take and preserve high-quality pictures. Please refer to slide.

Next, I'll discuss our full year’s projection for inkjet printers. As for inkjet printers, we expect the market to remain challenging in Europe, and the global inkjet printers market to be basically flat in terms of unit. Canon’s product have been well received by customers after spray constraint were removed this was particularly noticeable in Japan, where we have held the top market sales position on a moderate basis. We will leverage this trend to maintain strong sales in the second half of this year. This autumn, we will further enhance the competitiveness of new product, stimulating greater demand for our offerings and ranking this to sales expansion.

Additionally, we'll take steps to capture growth opportunities in the emerging market, expanding sales models, designed especially for emerging markets, and taking advantage of our top markets sales position in Asia. As a result, we plan to increase [full-year’s] unit sales by 1%, recovering in the second half was declines in unit sales caused by the Thai flood. In total, we expect the inkjet printer net sales to be flat in Yen terms and grow approximately 3% in the local currency basis.

For the business unit, overall net sales is projected to increase 16.5%. As for operating profit, we project 26.8% increase and a 1.4 point improvement in profitabilities. Please refer to slide 15.

Next, I will discuss industry and others. Second quarter IC stepper sales increased significantly from eight to 19 units. This reflects favorable demand for i-line equipment used in the production of image sensors.

Second quarter sales of flat panel display arenas also increased from 2 to 7 units. As a result, net sales and operating profit of this business unit increased 7.8% and 31% respectively.

Please turn to slide – next I will discuss our full year’s projection for this business unit. As for IC steppers, we project sales to be 53 units, which is basically in line with 53 units we sold last year. This reflects solid demand for final product that incorporates parts such as image sensors and LED elements.

As for flat panel display arenas, panel manufacturers are being cautious in the year 2012 capital expenditures due to deteriorating profit. This trend is particularly noticeable in the large panel segment and areas where we are particularly strong. As a result, full year sales of flat panel display arenas are projected to fall from 25 units last year to 16 units this year.

As for others, the increasing sales reflected increased orders for Turkey order to display and manufacturing equipment, and addition by new consolidations such as ELK and other companies.

In total, net sales of industry and others is projected to increase 2.6%. Operating profit however is projected to decrease 49.8% reflecting lower unit sales of flat panel display arenas.

Please turn to slide 17. finally, I’ll discuss our financial conditions. At the end of June, inventory turnovers were 57 days. taking into considerations, our aim is to avoid growth sales opportunity we considered these levels to be appropriate.

Please refer to slide 18, this slide highlights capital expenditures and free cash flow. Going forward, we’ll maintain our financial health promoting the more full cash flow management.

Please turn to slide 19. next, I will discuss cash on hand. Year-to-date, we used approximately 100 billion yen to repurchase our own shares. Through cash flow management however, we expect cash on hand at the end of the year to be 700 billion yen, an amount equal to 2.1 months of net sales.

As for this year’s dividend from the standpoint on maintaining a stable dividend, we have decided to pay an interim dividend of 60 yen per share. As for our plan for the year end dividend, we make our decision after taking into account our future performance and cash plans. Also, we expect severe business environment to continue. we work in consorted effort to overcome this difficult situation.

This concludes my presentation. Thank you very much.

Question-and-Answer Session

[No Q&A session for this event]

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