Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Canon, Inc. (CAJ)

Q2 FY08 Earnings Call

July 24, 2008, 08:30 AM ET

Executives

Masahiro Osawa - Group Executive Finance & Accounting


Presentation

Masahiro Osawa - Group Executive Finance & Accounting

Hello everyone and welcome to Canon's Conference Call. My name is Masahiro Osawa. I am in-charge of Finance and Accounting.

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 two. This slide outlines today's agenda. Please turn to slide three. I will now summarize our second quarter performance. In the second quarter, net sales and profits were lower than for the same period of last year. This was due to such external factors as lower than expected business confidence, particularly in developed countries, a greater impact from the Yen's appreciation compared with the first quarter, and the steep increases in raw material and oil prices.

Despite these factors, however, we maintain a high overall profitability, as we actively expand sales of new products and took aggressive measures to control costs. Despite the severe economic environment in local currency terms we achieved higher overall net sales and profit growth than we did in the first quarter, thanks to the underlying strengths of our business.

Please refer to slide four. Second quarter net sales decreased 1.29%, but increased approximately 5% on a local currency basis. Our results sales of monochrome copying machines and IC steppers decreased due to the economic slowdown in developed countries and the weak semiconductor market respectively. We were able to maintain strong sales of Laser [ph] color products.

Second quarter operating profit and income decreased 11.7% and 13% respectively. This reflects such negative factors as price declined due to intensified competition amidst weak market conditions, escalating raw material and oil prices as well as Yen's appreciation.

From a profitability perspective, we maintain a high gross profit ratio of just below 50%. This was accomplished through after measures to expand sales of high value added new products and printer consumables.

Please turn to slide five. I will now compare our second quarter results with our projections. Changes in exchange rates had a positive impact on both net sales and operating profit. There are four changes in sales volumes. Results for Office Imaging Products were below our projection as weaker than expected worldwide business confidence led to a decline in office equipment, investment, by major customers in Japan, the U.S. and Europe.

As for Computer Peripherals, results were basically in line with our projection. For Cameras, results were rightly below our projection, due to a stronger than expected shift in demand towards low price products. For Optical and Other Products, result was rightly below our projection for semiconductor production equipment due to a weak semiconductor market.

As for net sales within the Others category, this represents lower than projected price decline as we attached greater importance on profitability of mainly business machines.

As for operating profit within the Others category, this represents significantly lower cost reduction due to steep rises in raw material and oil prices and lower production volumes offset by lower than projected price decline, and a continuation of higher than projected SG&A savings.

Please refer to slide six. I will now discuss our second quarter results, by product growth, starting with Business Machines. Second quarter net sales of Business Machines decreased 4.6% but increased approximately 2% on a local currency basis. The decrease in sales of monochrome copying machines, namely in Europe and North America were offset by increased sales of printers.

Second quarter operating profit decreased 3%, reflecting the reduction in sales of monochrome copying machines, the Yen's appreciation and escalating raw material and oil prices.

Please turn to slide seven. I will now discuss Business Machines by product, starting with office imaging products. During the quarter, due to a prolonged economic shrink, we saw continued weakness in our coping machine business in developed countries. Amidst this conditions, we posted a 6% increase in unit sales of color machines, as we've worked to expand sales of the four new models we launched in February this year. This increased order flow reflects the strong acceptance of new imagePRESS models, which target the POD markets and the continued shipment of office use color models to convenience store chain in Japan.

As for monochrome copying machines, as sales of high-speed office models in developed countries struggled amidst weak business confidence and the shift to color, we worked to expand sales of lower price models mainly in Asia. As a result, unit sales increased 8%.

As for the others category, net sales increased 3.9%, boosted by strong solution-related sales and inclusion of Argo 21 in the in the Canon group. As a result, second quarter net sales of office imaging products decreased 4.7%, reflecting lower sales of monochrome related products, along with Yen's appreciation.

Please refer to slide 8. Next, I will discussion Computer Peripherals starting with laser beam printers. In the second quarter, the weak economic conditions had a negative impact on unit sales of laser beam printers. And we were not able to achieve our unit sales target for low-end models in Europe and Asia, regions in which we had expected strong growth. We have, however, maintained a high growth rate.

Unit sales of color models increased 18%, as we worked to expand of both new high end and low end models launched in April. As for monochrome models, we achieved an 8% increase in unit sales amidst low end market expansion in an efforts to increase sales of mid-to-high speed models, which generated even higher printer volumes. With the steady increase in unit sales and the expansion of installed base of our printers, we posted a double-digit increase in second quarter net sales of consumables on a local currency basis.

Accordingly, second quarter net sales of laser beam printers decreased 4.9% but increased approximately 6% on a local currency basis.

Next, I will discuss inkjet printers. Second quarter net sales of inkjet printers were basically in line with last year, but increased approximately 4% on a local currency basis. This reflects expanded sales of consumables and a significant 11% increase in unit sales as we expanded our line-up of business use models and continues to benefit from our competitive line-up.

Overall, second quarter net sales of Computer Peripherals decreased 3.7% or increased approximately 6% on a local currency basis.

Please turn to slide 9. Next, I will discuss cameras. Second quarter net sales of cameras increased 4.5% or approximately 12% on a local currency basis. Amidst severe price competition, we expanded sales of new compact digital and digital SLR cameras and also increased sales of interchangeable lenses and the video camcorders.

Second quarter operating profit decreased 12.9% due to severe pricing by competitors, the Yen's appreciation and the steep rises in raw material and oil prices.

Please turn to slide 10. Next slide, I will focus on second quarter net sales of digital cameras. As for compact models, despite continued severe price competition, we succeeded in steadily growing the unit sales, not only in emerging markets but also the U.S. and Europe, supported by strong acceptance for new models.

We also posted strong sales growth for digital SLR cameras, our [indiscernible] EOS Rebel XSi or EOS 450D in Europe. It very much remains strong and we enjoyed stronger than expected sales growth for EOS 40D, which we launched last year.

Please refer to slide 11. Next, I will discuss of Optical and Other Products. Second quarter net sales of Optical and Other Products were basically flat. Lower sales of semiconductor production equipment were offset by higher sales of other products, including large format printers.

Second quarter operating profit decreased 94.5%, mainly reflecting a reduction in sales of semiconductor production equipment and Yen's appreciation.

Please turn to slide 12. Next, I will discuss Optical and Other Products in more detail, focusing on semiconductor production equipment. Second quarter net sales of semiconductor production equipment decreased 3.5%, as we could not fully recover the drop in IC stepper sales with increased sales of LCD arenas.

As four ICS steppers, second quarter unit sales were down 21 units to 26, reflecting difficult market conditions, amidst declining prices for semiconductor devices. Despite this environment, however, we realized, ahead of schedule, the sales of one ArF Dry 2 based on new platform that has been highly evaluated by customers.

As for LCD arenas, as to the investment continues despite ongoing decline in market prices for panels.

Please refer to slide 13. Next, I will discuss our second half and the full year projection for 2008. This slide shows our exchange rate assumptions, and projected impact thus warning [ph] change in these rates would have projected second half net sales and operating profit.

Please turn to slide 14. This slide highlights some key points, regarding our current projection for the second half of 2008. In the second half of the year, we anticipate growth in emerging markets to remains strong, although at a slower pace than in the past.

We also expect the current economic strength mainly in developed countries to last longer than previously expected. With the Yen expected to remain strong and oil price high, we now feel the business environment will be more challenging than we originally thought. Despite these conditions, however, we project our ninth consecutive year of the net sales and profit growth.

We aim to achieve this by benefiting fully from new product launches in the first half, and by further enhancing our product line-ups through launches of competitive new products in the second half.

Another important factor will be realizing 60 billion yen in SG&A savings compared to our original from... announced during January, of which approximately 30 billion yen has already been used.

Please refer to slide 15. This slide summarizes our projected results for the second half and full year. In the second half, since the foundation of our business remains strong, we expect to return to positive net sales growth. Sales growth is not only expanded to come from business machines and digital cameras, but also from semiconductor production equipment, video camcorders.

We also expect to return to positive profit growth. Here, in addition to accelerated net sales growth from new products, we will strive to realize additional comprehensive cost reductions and expense savings.

Please turn to slide 16. I will now compare the current projection with our previous forecast.

Changes in exchange rate assumptions had a positively impact on currently projected net sales and operating profit.

As for changes in sales volume, within the Office Imaging Products segment, we lowered our projection as we expect investment in office equipment, mainly for high speed copying machines to remain weak in the second half.

As for Computer Peripherals, we lowered our projection for both laser beam hardware and the consumables. This reflects such factors as our belief that business climate will continue to remain weak. And the DDRs [ph] may move to reduce inventories.

As for cameras, we expect to achieve our previous projection. For Optical and Other Products, we lowered our projection, as increased sales of LCD arenas are not expected to offset the impact of the reduced unit sales of IC steppers due to weakening market conditions.

As for net sales within the others category, for the figure, this positive 10 billion yen figure represents lower price decline realized in the second quarter. As for operating profit within the others category, for the figure, this represents less than previously projected price decline of 10 billion yen and additional expense savings of 10 billion yen, absorbed by the 20 billion yen expected in reduced cost of reductions.

Please refer to slide 17. I will now discuss our second half projections by product group, starting with Office Imaging Products. We expect the difficult economic conditions in the copying machines sector to continue through the year. Amidst these market conditions, we lowered our projection. However, we are taking strategic steps to prepare for faster growth in the coming year and beyond.

As for color copying machines, we expect to expand our market share taking advantage of our free office product lineup. As for our POD business, an area in which we expect growth, the four imagePRESS models, we displayed at the Drupa trade fair in Germany last month, generated many sales opportunities. We plan to further strengthen our sales and service division as we target sales taking advantage of our strong product portfolio.

As for monochrome copying machines, we just launched for mid speed models, which we believe will contribute to further growth of sales. We also plan to continue expanding sales of the low end models in emerging markets by strengthening our sales and service infrastructure in these regions.

As a result, net sales of Office Imaging Products are projected to increase by 0.7% in the second half, despite economic condition and the foreign exchange, thanks to expanded sales of color copying machines and the solutions.

Please turn to slide 18. Next I will discuss Computer Peripherals, starting with laser beam printers. Second half net sales of laser beam printers are expected to increase 6.4% or approximately 15% on a local currency basis. In view of the current conditions, we feel it is necessary to carefully to look at future demand trends, including the rate of growth rate... growth rate may slow due to weakening business confidence worldwide.

On the other hand, we also feel that demand for laser beam printers will steadily increase amidst growing use of color in the office and growth in emerging markets. Amidst this conditions, we trimmed our sales front for both hardware and consumables compared with our previous projection.

As for color laser beam printers, in addition to the new products we launched in the first half, we plan to further enhance our lineup to drive sales growth. As for monochrome laser beam printers, in addition to expanding sales of low end models in emerging market, we will also strive to grow sales of mid-range and high end models with networking capability to drive future print volume expansion.

Through steady growth in our installed base of printers, along with such other factors as expanded sales of color products that are expected to have a positive impact on printer volume. We expect to continue the double-digit growth of consumable sales on a local currency basis.

Next, I will discuss inkjet printers. Second half net sales of inkjet printers are expected to increase 7.3% or approximately 10% on a local currency basis. The inkjet printer market has demand basically flat as growth in emerging markets offset the decline in North America.

As for pricing, the trend of gradually declining prices continues. Amidst this market condition, we aim to further expand print volume in the home and business market by expanding sales through the launch of several new products with enhanced competitiveness in such areas as, speed, image quality and user friendliness.

With our broad and a competitive lineup, we aim to execute our sales strategy to realize our target of 8%, unit growth for the full year. Additionally, by pricing our product with customers who tend to print more, we expect to steadily grow consumable sales in the second half.

Overall, we expect second half net sales of Computer Peripherals to increase 6.6% or approximately 13% on a local currency basis.

Please refer to slide 19. Next, I will discuss cameras. As for digital cameras, despite market concern, we still expect the market to reach around 129 million units, including 8.8 million digital SLR cameras, thanks to growth in emerging markets.

In the second half, we plan to actively continue launching the unique high value added compact digital and digital SLR cameras. As for compact models, we plan to release a range of new high grade, high image quality cameras featuring advanced designs and improved image processing capabilities.

As for SLR cameras, in addition to the two new highly competitive interim [ph] models we introduced, we expect to further strengthen our lineup by launching appealing new products that leverage our strengths in such areas, as proprietary device development and the manufacturing. Through such measures, we feel confident in achieving our full year sales target of 29.4% or 4 million units, including 4.4 million SLR cameras.

As for video camcorders, through new high definition Flash memory models, we plan to enhance our lineup to achieve, our faster increase in sales in two years. Through such measures, we project second half net sales for cameras to increase 9.2%, or approximately 14% on a local currency basis.

Please turn to slide 20. Next, I will discuss semiconductor production equipment, starting with IC steppers. This year due to the expanded jump in semiconductor device prices, we expect the market for IC steppers to be right way less than 380 units. Reflecting these market conditions, we expect our full year sales to decline by 73 units to 106.

As for LCD arenas, this year, we expect the market to expand to around 130 units, boosted by continued active investment by premier manufacturers. Amidst these market conditions, we expect to more than double our full year unit sales to 73 by focusing on leveraging the competitiveness of our new next generation 2 [ph].

Overall, we expect second half and the three year net sales for the semiconductor segment to increase 40.9% and 13.5% respectively as the strong sales of LCD arenas offset lower sales of IC steppers.

Please refer to slide 21. I will now discuss operating profit by product growth, for the second half and the full year. As for business machines, despite the negative impact of the weak economic environment, through continued strong sales of consumables and appeal of the new products, we expect full year operating profit and profitability to be in line with last year.

As for cameras, result of the competitive environment will likely remain challenging. We expect to maintain our high level of profitability and increase operating profit in the second half. We aim to achieve these through accelerated benefits of new products and improving our product mix through expanded sales of SLR cameras and interchangeable lenses.

For the full year, however, we expect profit to be slightly lower.

As for Optical and Other Products, we project operating profit to increase by almost 50% for the full year, as we expect full scale LCD arena market recovering in the second half.

Although many uncertainties exist, particularly this year, we will devote all our energies toward achieving our ninth consecutive year of sales and profit growth. This ends my presentation.

Copyright policy: All transcripts on this site are copyright Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

Source: Canon, Inc. Q2 2008 Earnings Call Transcript
This Transcript
All Transcripts