Canon, Inc. (CAJ)

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Canon, Inc. (CAJ)

Q2 FY08 Earnings Call

July 24, 2008, 08:30 AM ET

Executives

Masahiro Osawa - Group Executive Finance & Accounting

Analysts

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.

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