Canon, Inc. (CAJ)

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Canon, Inc. (CAJ)

Q4 FY07 Earnings Call

January 30, 2008, 08:00 AM ET

Executives

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

Analysts

Presentation

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.

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