Questions and Answers for the Analyst Briefing of Q1 FY2020 Financial - - PDF document

1 April 23, 2020 Canon Marketing Japan Inc.

Questions and Answers for the Analyst Briefing of Q1 FY2020 Financial Results

[Date and Time] April 22, 2020, 16:30 to 17:30 [Format] Conference Call [Responders]

• Shiro Hamada, Director and Vice President
• Hatsumi Hirukawa, Director and Vice President

―――――――――――――――――――――――――――――――――――――――― [Q1] In maintenance services, how much was the reduction in print volume from January to March? [A1] While we are not disclosing any quantitative figures, it was actually mid-March and onwards that was affected. There is not such a large change from the basic trends seen last year. The number of Canon office MFP units in operation has increased and as we have managed to maintain print volume, this was seen as a slight drop. ―――――――――――――――――――――――――――――――――――――――― [Q2] What was the scale of the decline looking only at mid-March onwards? [A2] The situation varies depending on the customer and region. ―――――――――――――――――――――――――――――――――――――――― [Q3] As a general idea of the overall decline in print volume, was it around 5%, 10% or 20%? [A3] To reiterate, as we began to see the impact from mid-March onwards, the timing of invoicing differs by customer and we have seen little to no impact for invoices completed before March

• 20th. Sharing figures as trend variables without looking at the results up to April or May might

cause incorrect determinations to be made. We stand by the response that the situation varies depending on the customer. ―――――――――――――――――――――――――――――――――――――――― [Q4] Mirrorless camera sales in the first quarter were down 54% year on year. How were actual sales of DSLR and mirrorless cameras from January to March? [A4] The slump in the market for DSLR cameras and mirrorless cameras in February to March in particular exceeded the sluggish market that began last year. ――――――――――――――――――――――――――――――――――――――――

2 [Q5] Is that an issue with the timing of product launches? [A5] We see it as an issue with the overall market. ―――――――――――――――――――――――――――――――――――――――― [Q6] Have there been any significant changes in market share? [A6] There have not been any significant changes. ―――――――――――――――――――――――――――――――――――――――― [Q7] Although mirrorless sales are down 54%, it seems that the overall market has not declined that much. What are your thoughts on this? [A7] For us, there has also been a reactionary decline from the release of the EOS RP last year. ―――――――――――――――――――――――――――――――――――――――― [Q8] How much have actual market sales dropped from March onwards? [A8] They have fallen more than last year. ―――――――――――――――――――――――――――――――――――――――― [Q9] I think the main reasons for the 42% increase in inkjet printer shipments is a reactionary boost from last year and good offerings for business users, but has the rise in remote work and school closures had an impact? [A9] The year before last, we released a number of inexpensive models on the market but we held off on their sales last year. The reactionary boost to that is a major factor. Looking at the progress of store sales, performance appears to be slightly improved from the downturn of last year, and we believe this may be in part due to demand from people working at home, albeit slightly. ―――――――――――――――――――――――――――――――――――――――― [Q10] What are the new products that have been particularly effective in producing favorable gross profit margins in the Consumers segment? [A10] The EOS-1DX Mark III that went on sale in February has driven up unit price. Unit prices for entry-level cameras have also seen a slight rise, and these factors have contributed to the rise in gross profit. ―――――――――――――――――――――――――――――――――――――――― [Q11] Are there any products or services seeing an effective upside due to the COVID-19 coronavirus? [A11]

3 In terms of positive impacts due to the coronavirus, there has been a slight impact on inkjet printer sales due to more people working from home, and this segment has performed better than expected. Some customers involved in distribution have also been securing greater inventory of laser printer cartridges out of concern that distribution networks could be interrupted due to the coronavirus. In addition, we have seen greater-than-expected sales of business PCs and accessories. ―――――――――――――――――――――――――――――――――――――――― [Q12] Is there still demand for IT-based proposals aimed at small and medium enterprises or the building of office environments in the near term? [A12] There have been a lot of requests from small and medium enterprises, particularly for IT support, such as last year’s replacements associated with the end of Windows 7 support. To coincide with business PC sales, software and other accessories are also being added. Our understanding is that the immediate situation has not changed. ―――――――――――――――――――――――――――――――――――――――― [Q13] Reductions in personnel expenses look significant. While the impact of expenses for retirement benefits is large, were there special factors in the first quarter? What was the actual reduction? [A13] Regarding the decline in retirement benefits expenses, the negative legacy had continued for a long time since the Lehman shock, and by eliminating that, things will change for the better year-round. The first quarter incorporates three months of such reductions, and the reduction is expected to continue from the second quarter onwards. As total personnel have also declined through natural attrition, that has also contributed to the lower personnel expenses. ―――――――――――――――――――――――――――――――――――――――― [Q14] On demand related to people working from home, Canon Marketing Japan is also having some employees work from home. Do we need to be concerned about bottlenecks such as delayed delivery or sales even when orders are received? [A14] Circumstances differ between regional areas and cities, but that is the situation arising. Canon Marketing Japan is also encouraging employees to work from home, and we have already had requests from customer to postpone deliveries. In either case, we think we will be able to post these as sales, but we may see an impact in the second quarter. ―――――――――――――――――――――――――――――――――――――――― [Q15] What are the factors behind the increased profits in the Consumers segment? Of the 1.3- billion-yen improvement in operating income, can you offer an image of how much of that is improvement in gross profit, and how much as reductions in SG&A expenses? [A15] In terms of the factors behind the improvement, the reductions in SG&A expenses are significant, followed by improved gross profit. ―――――――――――――――――――――――――――――――――――――――― [Q16] As factors behind the improved gross profit, apart from digital interchangeable lens

4 cameras, is there an impact from inkjet printers or laser printers? [A16] For both inkjet printers and digital interchangeable lens cameras, we have been working to reduce distribution stock as a management policy. We believe this policy is having an effect. ―――――――――――――――――――――――――――――――――――――――― [Q17] There was mention of office MFP supply shortages. What should we expect in terms of product supply in the second quarter and beyond? [A17] Domestically, the impact on product supply began from mid-March, and since supply was steady in January and February, there was not a significant impact in terms of the first quarter. Moving forward, due to the impact of coronavirus, rather than being unable to make products, with more employees working from home we expect the impact will be felt in terms of late

• deliveries. We are currently gathering more information about that impact.

―――――――――――――――――――――――――――――――――――――――― [Q18] To date, in the short term supply has been tight in terms of supply demand balance, but going forward, demand will be tight. Is that understanding correct? [A18] Yes. ―――――――――――――――――――――――――――――――――――――――― [Q19] Regarding inkjet printers, we have heard reports of shortages in some regions due to the increase in people working from home. Has Canon experienced this? Additionally, it appears that overall you are moving in the direction of increasing the number of models with high-capacity ink tanks to increase unit selling prices. How did this strategy fare in the first quarter? [A19] For inkjet printers, the products themselves are not in short supply. Regarding unit selling prices, we are raising the proportion of higher-priced models in our lineup. ―――――――――――――――――――――――――――――――――――――――― [Q20] I would like to ask about advertising expenses. This year CP+ was cancelled and we heard that advertising expenses have declined. As the Olympics have also been postponed until next year, do you expect SG&A expenses to decline over the full year? [A20] If the Olympics had been held as scheduled, we expected to incur various advertising expenses for things like the installation of service booths and running of television commercials, so expenses related to those activities will decrease. Regarding specific amounts, we will carry out a detailed examination that includes cancellation fees moving forward. ―――――――――――――――――――――――――――――――――――――――― [Q21] Aside from the impact due to the Olympics, do you expect SG&A expenses will decline in the second quarter as they have in the first?

5 [A21] There are difficult aspects regarding sales promotion activities, and we expect a decline in sales in the second quarter. To ensure profits, we will also be looking to reduce advertising expenses without exception where possible. ―――――――――――――――――――――――――――――――――――――――― [Q22] While sales of inkjet printers have grown due to the expansion of people working from home, at the same time, the rate of operation at offices is falling. Are contracts themselves decreasing under these circumstances? [A22] For office MFPs and laser printers, fortunately the number of operating units has increased. In other words, that means the number of contracts has increased. We consider this to be a result of the sales activities we have conducted to date. [Q23] Should we consider the operation rate and number of operating units in the near term separately? [A23] The number of operating units has increased, but print volume has decrease slightly. ―――――――――――――――――――――――――――――――――――――――― [Q24] With the Olympics postponed by a year, are there concerns that you will be unable to capitalize on the expected demand, such as an impact on sales of the EOS-1D X Mark III? [A24] The EOS-1D X Mark III is a model designed for professional photographers and we were not expecting the Olympics to prompt non-professional, general users to buy this model in large

• numbers. For that reason, we do not think there will be a large impact on sales of the EOS-

1D X Mark III due to the postponement of the Olympics. Rather than that, we are more concerned about a slump in sales of products aimed at general consumers because the general public will travel less due to requests to stay at home in connection with the coronavirus outbreak. ―――――――――――――――――――――――――――――――――――――――― [Q25] I would like to ask about sales trends in maintenance services for business equipment. Up until January and February, there was a fall of 1-2% on a par with the situation last year, but in the latter half of March there was a significant drop, and as a result, first-quarter sales ended with a 4% decrease. Is my understanding correct? [A25] Yes, that is correct. ―――――――――――――――――――――――――――――――――――――――― [Q26] That being the case, has print volume decreased by 10-15% in the latter half of March? [A26] While I cannot give specific figures, your line of thinking is correct. ――――――――――――――――――――――――――――――――――――――――

6 [Q27] In April, the national government started taking more actions, telework in urban areas expanded, and even in regional areas similar circumstances have gradually become more

• widespread. Would it be correct to assume that circumstances from April onwards will be no

better than late March? [A27] We are working under those assumptions to focus on how we can reduce costs and how we can cater to newly emerging customer needs. ―――――――――――――――――――――――――――――――――――――――― [Q28] I would like to ask about inkjet printers in the Consumers segment. First quarter shipments saw a significant increase of 42%, in contrast to the same quarter last year for which you posted at 26% decrease. Generally, the first quarter is immediately after the year-end sales season, and relatively speaking demand contracts and is more volatile. Looking at sell-out data for the first quarter this year, my understanding is that domestically, performance was

• n par with or slightly down from the previous year. Am I correct to assume that the 42%

increase is the year-on-year sell-in figure for Canon Marketing Japan, that the market was better than expected and on par with the previous year? [A28] That is correct. ―――――――――――――――――――――――――――――――――――――――― [Q29] Does that then mean that the market has not grown significantly? [A29] That is correct. ―――――――――――――――――――――――――――――――――――――――― [Q30] At 39.1 billion yen, SG&A expenses in the first quarters of this year have been curbed

• significantly. Will there be additional cost reductions from the second quarter and beyond?

Additionally, what kinds of cost-cutting activities do you expect to implement? Are there costs such as business travel expenses that will decrease naturally? Will it be difficult to cover expenses unless you aggressively cut costs? [A30] A nationwide state of emergency has been declared and we have cancelled off-site activities and business travel, including for back-office divisions. Additionally, since we are unable to meet directly with customers, entertainment expenses, etc., are not being incurred. Some of

• ur employees are put on leave, which also means a decrease in overtime expenses. By

carrying out business operations efficiently, we will thoroughly reduce everyday expenses. Sales promotion expenses and distribution costs will also decline in connection with lower

• sales. We will also reduce inventory and cut down on incidental expenses as much as

possible to reduce expenses even more than in the first quarter. ―――――――――――――――――――――――――――――――――――――――― [Q31] Are there any additional costs associated with employees transitioning to different workstyles, such as the expanded number of employees teleworking in the Tokyo metropolitan area? [A31] From the outset we had planned to invest in environments enabling employees to work from

7 home during the Olympics. We may have to bring that plan forward a little, but at this point we do not expect costs to rise significantly from what was initially planned. ―――――――――――――――――――――――――――――――――――――――― * Disclaimer The projected business results and predictions described in these materials are forecasts determined by Canon Marketing Japan based on the information available at the time of publication, and include potential risks and uncertainties. For this reason, please note that changes to various factors could lead to business results that differ significantly from the future outlook.