Canon, Inc. (CAJ)

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Canon, Inc. (CAJ)

Q1 FY08 Earnings Call

April 24, 2008, 08:30 AM ET

Executives

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

Analysts

Caroline Sabbagha - Lehman Brothers

Benjamin Lu - Seligman

Matthew Troy - Citigroup

Shannon Cross - Cross Research

Presentation

Operator

Welcome to the Canon's Fiscal Year 2008 First Quarter Results Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions]. Today's call is being recorded. If you have any objections, you may disconnect at this time.

I would now like to turn the meeting over to Mr. Osawa. Sir, you may begin.

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

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 first quarter performance. During the quarter, we faced rapid and substantial appreciation of the yen and economic environment that was more challenging than we had originally expected as well. Higher depreciation charges due to a change in the depreciation method. As a result, we posted net sales and profit that were lower than the strong prior year period. Despite this, we maintained high level of profitability and on local currency basis, achieved an increase in sales verifying the underlying strengths of our business.

Please refer to slide four. Despite continued strong sales of printers and digital cameras, first quarter net sales decreased 3.1%, due to the significant impact of the strong yen and the economic environment that was more challenging than originally expected.

As for first quarter profit, which also reflect higher depreciation charges, resulting from a change in depreciation method, despite the 6.3% decline in gross profit, we secured our high gross profit ratio of nearly 50% by increasing the sales of higher profitability products and strong [ph] progress in cost reduction efforts.

Operating profit and the net income decreased 17.6% and 18.7% respectively, reflecting increased R&D spending towards the development of new business domain and the impact of the change in depreciation method.

In terms of profitability, operating profit and the net income as a percentage of net sales was 17% and 10.6% respectively, which is basically inline with the high profit ratios we achieved for the full year last year.

Please turn to slide five. I will now explain the factors that impacted first quarter net sales and operating profit in more detail. Compared with the same period last year, the yen's significant appreciation against the U.S. dollar had a major impact on both net sales and operating profit. The effect of the change in depreciation method on operating profit was a reduction of ¥17 billion. As for changes in sales volume, although improven by trading [ph] business confidence, the overall impact was positive on both net sales and operating profit as we expand unit sales of printers and digital cameras.

And for the other category, the negative figures under net sales reflects the unbearable [ph] price decline mainly for copying machines and digital cameras, due to aggressive pricing by competitors. As for operating profit categorized as others, although price decline was a negative factor, we were able to limit the impact through efforts aimed at reducing cost and expenses.

Please turn to slide six. I will now discuss our first quarter results by product group, starting with Business Machines. First quarter net sales of Business Machines decreased 3.3%, reflecting the yen's appreciation. In local currency terms, however, net sales increased about 3%. Some strong sales of printers offset sluggish sales of copying machine in North America [ph].

As for operating profit, although the yen's appreciation and the impact from the changing depreciation method was significant, strong sales of printer consumables continued or contributed to profit growth, enabling us to limit the decrease in profit to 7.6%.

Please refer to slide seven. I will now discuss Business Machines by product, starting with Office Imaging Products. First quarter, net sales of Office Imaging Products decreased 5.9%, mainly due to a weaker than expected U.S. market and yen's appreciation. As for monochrome copying machine, unit sales declined 1%, reflecting market shrink in Japan, significant drop in the Americas due to focus on color and expanded sales in Europe and Asia. Net sales however, declined 14%. As for color copying machines, unit sales increased 19% as well had a large order placed by a Japanese convenience stores [ph] have maintained stronger sales in [indiscernible]. Net sales, however, decreased 3.7% mainly due to the U.S. economic disturbance.

And for the other category, net sales increased 9.4%, due to steady growth in solution-related sales and inclusion of Argo 21 to the Canon Group.

Please turn to slide eight. Next, I will discuss Computer Peripherals, starting with laser beam printers. For the quarter, we posted unit sales basically inline with our projection, as demand for laser beam printers remained strong. And the unit sales were high during the first quarter of last year because our OEM partner decided to significantly accelerate purchasing. First quarter unit sales this year dropped by [indiscernible]. Despite the lower unit sales, however, we achieved positive net sales growth on a local currency basis, exceeding the high level of net sales that we achieved in the first quarter of last year. This reflects an improved product mix and significant growth in consumable sales. Due to the yen's appreciation however, net sales decreased 3%.

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