Canon, Inc. (NYSE:CAJ) Fiscal Year 2015 Earnings Conference Call January 27, 2016 8:00 AM ET
Toshizo Tanaka - Executive Vice President and CFO
Shannon Cross - Cross Research LLC
Good day, everyone, and welcome to Canon, Inc.’s Fiscal Year 2015 Results Conference Call. Tonight’s presentation is for 30 minutes and the Q&A session is for another 30 minutes after the presentation. Just a reminder, today’s conference is being recorded. At this time, for opening remarks, I would like to turn the call conference over to your moderator for today, Mr. Toshizo Tanaka, Executive Vice President and CFO of Canon, Inc. Please go ahead.
Okay. Thank you very much. And good morning or good afternoon, ladies and gentlemen, and welcome to Canon’s conference call. Please note that all financial comparison made during my presentation will be on a year-only basis, unless otherwise stated. Please turn to Slide 3.
At the beginning of 2015, we expected a modest global economic recovery led by the United States. In the second half of the year, however, we saw further deceleration in emerging market economies as the slowdown in China become clear. As a result, the rate of global economic growth in 2015 was at its lowest levels since the collapse of Lehman Brothers, which was below our expectations.
Again, such a backdrop, the camera market remains churning [ph] resulting in posting lower revenues. Although the office equipment market was also impacted by the deceleration of emerging market economies, sales rose supported by continued growth of camera equipment and the production printers as well as the active launch of new products.
In industries and others, strong sales of lithography equipment, as well as network cameras, thanks to the consolidation of Axis drivers that led to overall sales growth. From a profit perspective, we achieved our record high gross profit ratio, thanks to effort to drive cost reduction and improved product mix.
Due to proactive investment in development to strengthen and marry new businesses and the impact of accounting for newly consolidated companies, however, operating expenses increased resulting in lower operating profit.
Please refer to Slide 4. This slide computes our fourth quarter and full year’s performances with those of last year’s. Compared with our projections, net sales and operating profit were below target by approximately ¥20 billion and ¥10 billion, respectively. This mainly reflects [indiscernible] issue sales of copiers in Asia [ph]. Other products such as laser printers and cameras were basically in line with what we expected.
Please turn to Slide 5. I will now compare our full year results with those of last year’s in more detail. Changes in the exchange rate had a positive impact on both net sales and operating profit. As for changes in sales variants with the industry and others, lithography equipment and the industrial product of Group companies achieved strong sales, as well as network cameras due to the consolidation of Axis.
Within other business segment, however, camera sales declined mainly due to lower sales of entry cross models. Sales of office equipment also declined reflecting the impacts of economic slowdown in the emerging market on sales of monochrome models. Changes in sales volume had a positive impact on the operating profit due to a significant improvement in product mix supported by ranges [ph] of new high value added office products and cameras.
As for others, we have limited [ph] price decline to ¥43.2 billion, almost half of last year’s ¥81.4 billion. Cost reduction was ¥37.2 billion, thanks to efforts to reduce cost through procurement. Expenses, however, increased due to proactive investment in development to strengthen and marry new businesses and the impacts of accounting for newly consolidated companies, resulting in lower operating profit.
Please refer to Slide 6. As I discussed in my year-only comparisons amidst decline in sales of cameras under the consumer product, we achieved an increase in total 2015 revenues, thanks to B2B businesses such as network cameras and lithography equipment.
In 2011, Canon embarked on Phase IV of the Excellent Global Corporation Plan. While core businesses continue to mature during Phase IV, we shifted our focus to expanding new businesses through horizontal expansions such as Cinema EOS and Machine Vision. Additionally, through M&A, we are expanding sales of production printers and network cameras.
As we look toward 2016, we also expect we can significantly erase the performance of industrial products of Group companies. Other than this, we are also making progress toward completing a mass production tool using nanoimprinted lithography and next generation semi-conductor production technologies.
Over the past five years, sales by this business have grown from 9% to 13% of total sales in 2015. And we expect this ratio to rise to 15% in 2016 as we will continue to strengthen this segment to develop them into core businesses.
Please turn to Slide 7. Next, our projection for this year. Here are our assumption for exchange rate and the exchange rate sensitivities. Please refer to Slide 8. I will now discuss our 2016 projections.
We expect the global economies to remain on a path of modest growth driven by the input market, including the United States and Europe where employment is improving. We expect the situation to remain churning for some time; however, due to numerous uncertainties, such as the impact of degrading natural resources crisis on the emerging market economies, as well as China’s economic slowdown.
In our market, the recovery is expected to take time in sales production that are readily [ph] sold in the emerging market such as entry cross cameras and the single function laser printers. For copiers and production printers, however, demand is increasing. And the for lithography equipment, we expect the demand to remain at high levels.
Overall, we expect sales growth as we also project continued growth for both the industrial products of Group companies and network cameras. As for profit, we’ll promote continued cost reductions, as well as improvement in product mix. As for expenses, we launched effort to optimize development resources throughout the years. And this year, we aim to increase profit, implementing thorough measures to boost R&D productivities through a process of selection and concentration.
Please turn to Slide 9. This slide summarize our 2016 projections which are based on the assumption I just mentioned. Please refer to Slide 10. I will now compare our 2016 projections with our results of last year’s.
Changes in the exchange rate are expected to have a negative impact on both sales and profit. As for changes in sales bearings, overall sales growth is expected to be lead by industry and others. For lithography equipment, we expect the pre variable condition of last year’s to continue.
We also forecast significant growth in sales of industrial equipment of Group companies, such as Canon Tokki’s OLED and Canon Anelva’s semi-conductor device production equipment. On top of this, the network camera sales are also expected to increase and reflecting the first full [ph] year’s inclusion of Axis’ result.
For office, in addition to copiers, where unit sales growth is expected, we also project strong growth from Océ and solutions. In emerging systems also, our plan calls for the expansion of sales in marry and ready format in the printers. We expect the camera sales to decline. However, due to an expected improvement in product mix, through the strengthening of high-end models, we expect the impact on profit to be smaller than sales. And for others, price reduction is projected to be ¥50 million. We also focused ¥32.3 billion in cost reductions. And for expenses, although we project an increase due to consolidation of Axis and other companies, we’ve worked to boost around the productivities through our process of selection and concentration.
Please turn to Slide 11. I will now discuss each business units starting with office. Amidst the ongoing shift to colors in the color market in the copier market, we strive to raise our competitiveness through the expansion of our lineups.
In 2014, we launched an A4 color models and right production models. And in 2015, we pulled this up by launching an A3 models for small and medium size offices, as well as high speed production printers. In 2015, we achieved the double digit increase in color unit sales significantly outpacing the market. This increase is steadily being linked to consumable sales which grew again in 2015.
And for laser printers, 2015 was a year in which we focused on building a solid foundation for future profit. We launched a new toner and hardware based on new platform for the first time in seven years.
So how to - we are to launch forecast on color and MFP models where growth is expected and our sales effort to expand sales of these high-end models will connect to increase consumable sales in the future. The new product has been highly evaluated by the market since the launch and sales have been in line with our trend. However, existing models were significantly impacted by economic throw down in emerging countries. As a result printer sales and the consumable sales decreased.
And for production printing, amidst the ongoing shift from analogs to digitals and increasing need to hand those growing varieties of short-ranked print jobs, we strengthened our competitiveness, adding our first high-speed, cutsheet inkjet printers to our lineup. Capturing new demand coming from the printing books and catalogues, we are steadily increasing sales.
Please refer to Slide 12. Next our projection for this business unit, starting with copiers. This year, we plan to launch strategic new monochrome models as well. We are focused on product for which higher demand for consumables is expected such as high-speed copiers that address the need for high-volume output and printing equipment for high-speed outputs of forms from color systems.
Coupled with the colors which is expected to keep growing at double digit rate, we expect all of our unit sales to be up for the year.
And for solutions, we’ll promote global load outs of services that have been strengthened in each region through M&A activities and link this with overall copier sales growth.
And for laser printers, we’ll further strengthen our new product lineup adding among others single function models. We’ll also work to recover our sales driving penetration of the new models in emerging market.
Overall, the effect of new products are expected to gradually show up and increase the hardware and the consumable sales in the second half of the year.
And for production printing, continued market growth is expected. In addition to new products, we’ll take measures to expand sales of existing continuous feed and the right format printers to facilitate our aim to grow consumable sales.
Please turn to Slide 13. Next I will discuss the imaging systems business unit starting with cameras. And for the interchangeable ranges cameras market, in the first half of 2015, we started to see sign of recoveries in the United States. And in the year-end selling season, we saw our return to positive growth. In Europe, we saw a strengthening trend of recoveries in the second half. And in Japan, the market seems to have returned to stability. In China and South Asia, however, double digit to decline continued. In total, the global market decreased by 13% to 12.6 million units.
And for our sales, in addition to posting positive growth in the United States, the pace of decline in Europe’s growth was single digit figures showing progress toward the recoveries in major or developed countries.
In Asia, however, where entry course [ph] models as our mainstream, we posted the rollouts sales. As a result, total sales declined 12% to 5.7 million units.
As the market moved toward maturities, we strive to stimulate demand actively launching new products that clearly reflect users need. Responding to the demand of users that have strong intention to step up in interchangeable lenses camera class, we launched an entry class models that offers both ease of use and features that are appreciated by more advanced users.
We also increased our mirrorless cameras market shares, broadening our lineup of cameras and lenses. And for our 5D Series which features our highest resolutions, we are setting our sight on expanding B2B areas in the future possibilities using these cameras in industrial applications.
And for comfort cameras, the market shrank by 36% to 27 million units and our sales decreased by 27% to 6.56 million units due to ongoing market contractions for many low-end models. Within this market, however, sales of high-end models was solid. Under these situations, we worked to broaden our lineups, adding three models to our G Series 1 through 05 [ph] distinct to feature fit of each camera is one reason why they have been rated so highly by the market.
In addition to contributing to market share gain in major developed countries, they have also contributed to improve profitability.
And next, inkjet printers. Amidst the inkjet printers’ market contractions, we saw a favorable trend in sales of new product in the United States and the Western Europe. Global unit sales were down 5%, however, due to a greater than expected impact from weak market conditions in the emerging countries of Asia and other regions.
Hence with these market environments, we focused our effort on growing in B2B areas promoting global rollouts of MAXIFY, our line of inkjet printers designed for the SoHo market and the expanding sales of large format models. High demand for B2B printers contributed to solid sales of consumables.
Please refer to Slide 14. Next, our projection for this business unit. In developed countries, we expect interchangeable lenses camera market to continue showing sign of modest recovery.
In Asia, including China, however, we feel more time is necessary before we saw our recoveries. As a result, we expect the market to shrink by 9% to 11.5 million units and our sales to decline by 7% to 5.2 million units. In this challenging market environment, we’ll work to stimulate demand broadening and strengthening our lineup while also focusing on improving profitability.
This year, we’ll bring to market technology advancement that are appropriate for an Olympic year and we’ll work to capture replacement demand from professionals advanced amateur users.
As for compact cameras, we expect the market to shrink by 26% to 20 million unit and our sales to shrink by 24% to 5 million unit. In this market, manufacturers have made much progress in streamlining the low-end offerings. As a result, we expect the pace of market contractions go strong. We’ll implement images [ph] to improve our profitability continuing our focus on solidly performing high-end models.
Next, inkjet printers. In emerging market such as Asia, existing printers are starting to be replaced with models that incorporate barium ink tanks. And in November of last year, we also launched such models.
By strengthening our lineups and accurately responding to builder’s need, we expect to halt the decline in the emerging market and maintain overall unit sales in line with last year.
Additionally, we work to expand sales of more profitable consumables, strengthening effort to grow sales of large format printers in the market space, our line of inkjet printers designed for the SoHo market.
Furthermore, in the consumer space, we work to realize sales expansions, launching new product that meet customer’s need.
Please turn to Slide 15. Next, the industry and others. For IC, our lithography equipment, capital investment is on the rise, thanks to increasing demand for memory devices on broad devices for automobiles and communication-related devices. This contributed to our sales of izine on QRIF [ph] equipment which grew to 80 unit.
For FPD lithography equipment, unit sales this year exceed those of last year thanks to significant growth in sales of equipment used in the production of large panels. In the market for small and medium size panels, since launch of our new tool in 2014, our unit sales steadily increased.
And for others, net sales significantly increased mainly due to the consolidation of Axis that lead us in the expanding network camera market. As a result, net sales for this business unit increased 31.6%.
And for operating profit, increased sales over lithography equipment, whereas profit contribution, Axis helps to decrease operating loss of this segment which was due to investment in new businesses and further technologies.
Please refer to Slide 16. Next, our projection for this business unit. And for the business environment, we expect our customer’s capital investment to remain at higher levels amidst the growing trend to incorporate even higher resolution LCDs and OLED panels into mobile devices where demand is expected to remain solid.
Under these assumptions, we project our sales of IC lithography equipment to increase to 86 unit. And we expect to maintain our high market shares for high-end equipment and grow sales of tariff-free [ph] equipment, thanks to industry rating productivities and strengths in accuracy alignment.
And for FPD lithography equipment, by further expanding sales of tools used in the production of high resolution small to medium size panels, we expect sales to increase to 37 unit. We also expect sales of OLED production equipment produced Canon Tokki to increase significantly.
Additionally, in the field of fine pattern IC processing, we are developing next generation production tools based on nanoimprint technologies and continuously making improvement in performance. We saved [ph] our first tools to be used in mass production last year as the trend [ph]. And this year, we have planned to save more [ph].
We are also working to expand sales of lightweight cameras. This year, we expect Axis to contribute ¥100 billion to sales for the three years. We are already promoting joint product development with Axis. In the feature, we will work to further expand this business focusing on systems that include milestones, BDO management softwares.
In total, net sales of this business unit is projected to increase 18.9%. From a profit perspective, despite continued investment in new businesses and the future technologies, we expect to move into the block for the first time in four years. We’ve accomplished this through increased sales of lithography equipment on the group companies.
Please turn to Slide 17. Next, our financial situations. Inventory turnover was 47 days at the end of December, 10 days shorter than the end of September and three days shorter than the end of December last year.
We are able to keep the inventories held by sales companies at an appropriate level [indiscernible] activities over that yearend selling season rollout in line with the trend. The turnover period for working process inventory was also shortened by three days to 13 days compared with end of December 2014. We have continuous effort to reduce working process inventories to our target of 10 days.
Please turn to Slide 18. For capital expenditures and the cash flow, please refer to this right. We’ll maintain our financial health keeping capital expenditures below depreciations and continuing the effort to ensure through cash flow management.
In 2015, investing cash flow was ¥454 billion, much higher than past years due to the acquisition of Axis and other companies. As a result, free cash flow was only ¥21 billion.
Please refer to Slide 19. Next, cash-on-hand. At the end of December, cash-on-hand was ¥634 billion or approximately two months of net sales. Similar revenues is expected in 2016. For 2015, we plan to pay a year-end dividend of ¥75 past years, bring the year total to ¥150. Going forward, with a continuous effort to provide stable returns and actively return profit to shareholders, taking into consideration medium term profit projects, along with planned future investment, cash flow and other factors.
At the beginning of 2016, the global economy is being negatively impacted by various factors such as decline in oil prices and the worsening situation in China. Consequently, the start of this year for us have been even more challenging than last year’s. 2016 is a year full of excellent global corporation plan [ph] Phase V. We see it as the important year to overcome the adversity we face and connect this to future growth.
Looking back, Canon has proven its methods, accepting challenges such as global recessions and the great East Japan earthquake and consistently moved forward. Although there are many trials ahead, we’ll concentrate the total power of the Canon Group, thoroughly review our earnings structures and make all our efforts to strengthen and expand our new businesses to achieve our aim of sales and profit growth.
This concluded my presentation. Now, I’m very happy to answer any question you may have as long as time permits. Thank you so much.
Thank you, Mr. Tanaka. [Operator Instructions] Our first question comes from Mr. James Crawford [ph] from Eco Research [ph]. Please go ahead.
Good evening and thank you very much for your time. Can I ask first just a slightly technical question on foreign exchange? On Page 5, you quote a foreign exchange impact for the full year of ¥20.4 billion. Can I note that from Q1 to Q3, it was ¥30.7 billion and when we look at your quoted sensitivities for last year or even this year, we come up with a number of more like ¥50 billion to ¥60 billion, so a lot bigger. Could you explain why that number appears to be so low?
Sorry to keep you waiting. The answer for your question that exchange rate for the fourth quarter was negative figures because of the euro, euro depreciated. So that’s the reason why, as you mentioned, that the annual figures is less than on the accumulated figures until the third quarter because the effect of the fourth quarter become negative because of the euro. That completed my answer.
Right, okay. Can I ask one follow-up, please? I note for the forecast for the new year, you’re expecting a volume expansion positive impact from the office area of ¥53.2 billion. And obviously for the last couple of years, compared to your original estimate, the volume impact from office has been not so good because the market has been tougher. And I just wondered, if we take a more conservative view this year and if the office impact is smaller than this, what ability do you have to compensate for this by, for example, increasing cost-cutting or reducing expenses? Because when I look at your forecast, the assumptions behind office look a little optimistic, but perhaps you have some buffer elsewhere that you could offset any shortfall.
Answering your question that the total of this segment, the office is consisted by the regular copiers and the laser printers plus Océ professional printings and solutions. And the main areas of growth is come from the Océ, the professional printers and solution. So that means the regular copiers and the printers is not so increasing a lot. Océ printers and solution is contributed to this big jump. This completed my answer.
Okay. Thank you very much.
We will now move to our next question from Ms. Shannon Cross from Cross Research. Please go ahead.
Thank you very much and thank you for taking my question and good evening. I wanted to talk, and I apologize for my voice. I seem to have lost it this week. I wanted to talk a bit about the laser printer business and your expectations. 30% year-over-year decline in hardware in the fourth quarter, clearly a worsening situation, and yet you expect a 2.7% constant currency decline, I believe it is, in 2016. So perhaps you can talk a little bit about first what you saw during the quarter in terms of supply sales and hardware pricing.
And then if you can talk a bit about what are the drivers for the improvement in 2016, specifically I’m curious if you cleared out channel from HP during fourth quarter so now there is good opportunity next year or this year or what’s sort of behind that expectation of improvement? Thank you, and then I have a follow-up.
Sorry to keep you waiting. Answering your question, as I mentioned in my presentation, the laser printers, we introduced 10 new products. But among 10, 7 of them we introduced in October or November, almost the end of the year. So it didn’t contribute to the sales of last year’s, same as the cartridges. But this year, of course, we will try our best to sell this new hardwares, including the cartridges. So there’s a very big jump from the fourth quarter of last year to the annual figures for this year. This completed my answer.
Can you provide us with your supply’s growth during fourth quarter and what you’re expecting now within your estimates for 2016? Thank you. Also inkjet and laser. Thanks.
Answering your question, the fourth quarter last year’s for lasers in local currency basis minus 8%. And this year’s, minus 4%. Same figures for inkjet printers. Fourth quarter is minus 1% and this year, plus 1%. This completed my answer.
Sorry, just one more. And what’s expected within your 2016 guidance for both inkjet and laser? Thank you and then I’ll see the floor.
Unidentified Company Representative
Shannon, that was our 2016.
Oh, the 2016 was the this year? Okay, I’m sorry. Yes, got it. Okay, thank you.
It appears there are no further questions at this time. I will now hand the call over to Mr. Tanaka for any additional or closing remarks.
Okay, thank you very much for everybody for your kind cooperation. In Canon, we try our best effort to meet your requirement in these very challenging business conditions. We ask your continued support and understanding of our business. Thank you very much again.
This concludes today’s conference. If you have further questions, please send them to Canon’s email address, email@example.com [ph]. Canon will respond as soon as possible. Thank you everyone, for your participation.
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