Canon, Inc. (CAJ)

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Canon Inc. (CAJ)

Q2 2011 Earnings Call

July 25, 2011 8:00 AM ET

Executives

Toshizo Tanaka – CFO and EVP

Analysts

Benjamin Lu – Seligman

Shannon Cross – Cross Research

Keith Bachman – Bank of Montreal

Presentation

Operator

Good day, everyone and welcome to Canon, Inc.’s Fiscal Year 2011 Second Quarter Results Conference Call. Canon’s presentation is for 40 minutes and the Q&A session for another 20 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 conference over to your moderator for today, Mr. Toshizo Tanaka, Executive Vice President and CFO of Canon, Inc. Please go ahead.

Toshizo Tanaka

Okay, 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 all financial comparison 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 discuss our second quarter results. Despite problems in the United States and Europe and downward pressures on manufacturing activity in Japan due to the earthquake, the global economies remained on a path of gradual recovery thanks to continued strong growth in key emerging markets such as China and India.

Our market also remained strong. As for foreign exchange rates, we saw a substantial appreciation of the yen, particularly against the U.S. dollar. Under these conditions, due to lower production linked to supply chain disturbances caused by the earthquake, our abilities to derive products was limited for all businesses.

During the quarter, however, we made a steady progress in returning to normal levels of production. We now feel that our supply chain issues will be resolved earlier than originally predicted.

In addition to continuous support by our vendors, this was made possible by the individual effort of each business group and each production base, as they took quick action to grasp the circumstances surrounding every part and component, and implemented major, to promptly gauge with each situation.

On a group-wide basis, we also put priorities on certain products, facilitating the sharing of common paths among the business groups. Our supply chain management activities, which we have continued to improve through our own production systems also played a significant role in the face of this emergency.

Although we posted lower sales and the profit due to the strong yen and the effects of the (inaudible), the profit we secured exceeded our own expectation. Please refer to slide four.

This slide summarized our second quarter performance. Our gross net sales decreased 13.8%. We achieved the gross profit ratio of 60%. This reflects our cost reduction effort amidst severe production conditions. It’s also representing our layers of profitabilities not seen since the third quarter 2007 when the yen was significantly weaker.

As we couldn’t clearly observe the effects of the strong yen and the impact of the disaster, operating profit decreased 30.9%. However, thanks to the rapid recoveries in production that exceeded our expectation and cost reduction efforts, we secured the profit levels close to that which we achieved in the first quarter. Please turn to slide five.

This slide shows the impact of the earthquakes on our second quarter. If we exclude the earthquake’s impact, net sales and operating profit actually increased, with the latter growing by nearly 30%. This is an indication that actual business condition remains strong.

Please refer to slide six. Next, I will compare our second quarter results with our results for the same period last year. Changes in exchange rates have a major negative impact on both the sales and the operating profit.

As for changes in sales volumes, amid favorable market conditions and increasing office and consumer orders, the total impact from both the sales and the operating profit was positive. However, when effects of the earthquakes are included, all business units would show a negative impact due to production delays and subsequent unfilled orders.

In the others categories, the negative figures under net sales represent price declines for cameras and other products. The positive figures under operating profit represent effort to absorb the impacts of price decline through cost reduction and marketing and other expense savings.

In summary, when the earthquake’s impact is excluded, net sales and operating profit increases ¥12.1 billion and ¥33.3 billion respectively. Because the impact of the disaster was concentrated in our second quarter, however, net sales decreased ¥133.8 billion to ¥836.6 billion and operating profit decreased ¥35 billion to ¥78.4 billion.

Please refer to slide seven, I will now discuss our projection for 2011. This slide shows our exchange rate and ¥1 current impact assumptions. Please turn to slide eight, this slide highlights some key points regarding our 2011 projections. As for the economic situation where there are concerns regarding the weak economic activity in the United States and the financial problems in Europe, we continues to see strong growth in the emerging market.

As a whole, we feel the global economy is on the recovery path.

In our market, although uncertainties remains regarding Japan, we expect global demand to continue to be strong. Under these conditions through our swift recovery in production, we’ll accelerate the enhancements of our products supply system.

We will realize the quick recovery in the second half of this year, minimizing the earthquake’s impact and work towards our target of realizing the net sales growth and then operating profit ratio of over 10%.

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