Earthquake Forces Canon and Ricoh To Revise Earnings Forecasts Downward
It’s been nearly two months since the horrific 9.0-magnitude earthquake struck northeastern Japan, triggering a massive tsunami that destroyed large swaths of the coastline north of Tokyo. Manufacturers have reacted swiftly and have been largely successful in their attempts to restore operations, although damaged infrastructure and disruptions in the power grid continue to limit production at some sites. Canon and Ricoh each told their respective investors recently that the disaster has affected both sales and manufacturing domestically and trimmed billions of yen from their bottom lines. They also warned of potential supply-chain disruptions and lowered previous earnings projections for the year as a result of the earthquake. More bad news related to the quake is expected from other Japanese hardware manufacturers in the upcoming weeks.
Canon reported on April 26 that its operating profits during the period from January 1 through March 31 slipped to ¥82.50 billion from ¥86.84 billion the year prior. The bottom-line hit came despite the firm’s ability to grow top-line revenue about 11 percent, up from ¥755.5 billion during the first quarter of last year to ¥839.2 billion during the same period this year. Regardless of the increase, the firm estimates it lost ¥21.4 billion in net sales because of the earthquake. Prior to the disaster, Canon said it expected to rack up ¥860.8 billion in net sales during the first quarter with an operating profit of ¥103.7 billion for the period.
Ricoh reported earnings results for its fiscal year the day after Canon released its quarterly numbers. On April 27, Ricoh said it recorded ¥1.942 trillion in net sales during the period from April 1, 2010, through March 31, 2011, which represented a nearly 4 percent drop in revenue from the same period the year prior. Ricoh’s operating income fell 8.8 percent to ¥60.1 billion, while net income tumbled 29.5 percent from the previous fiscal year to ¥19.6 billion. In February, Ricoh indicated revenue for the fiscal year just ending would total ¥2.020 trillion, while operating income and net income would stand at ¥85.0 billion and ¥35.0 billion, respectively. In a Form 6-K filed with the U.S. Securities and Exchange Commission (SEC) on April 27, Ricoh explained the shortfall, saying it “suffered damage to its equipment in manufacturing, sales, service, and R&D sites … [and] sales and shipments of products were delayed widely in Japan due to the shattered transport systems and the shortage of gasoline.”
Canon and Ricoh each detailed for the investment community last month how the earthquake disrupted their businesses. In its SEC 6-K, Ricoh indicated it sustained ¥9.4 billion of damage from the quake. Both firms were forced to close facilities in northeastern Japan, the region hardest hit by the quake. Canon executive vice president and CFO Toshizo Tanaka said the disaster caused “serious delays in production and shipment.” In a prepared text accompanying Ricoh’s financial presentation, the firm’s director, deputy president, and CFO Zenji Miura was quoted as saying domestic sales were especially hard hit. Even outside of the impact zone, Miura said Ricoh’s Japanese sales force didn’t pursue sales aggressively because “it was a particularly difficult time to talk business with customers and each company was reluctant to make additional investments.”
Canon and Ricoh’s toner and toner cartridge manufacturing capacity was restricted due to the earthquake and the impact of that diminished capacity has the potential to felt into the foreseeable future. Word has circulated since early last month that there are currently shortages of Canon consumables. On April 7, Canon’s channel partner Image Star announced it was raising prices on all Canon cartridges because they were “becoming increasingly difficult to come by.” Image Star said it expected the situation to worsen over the “next few months.” On April 11, one of Canon’s most famous—and influential—customers, Hewlett Packard, told its channel partners that dozens of toner cartridge SKUs would only be available in limited quantities because of pending shortages. In a note to the channel, HP also warned “The availability of select toner cartridges and LaserJet devices may be impacted going forward.”
I have yet to confirm any actual shortages of Ricoh toner, but there are strong indications that shortages are all but inevitable. While toner production resumed on May 10, the toner plant at the Tohoku Ricoh facility was offline for almost two months, which is bound to limit the availability of certain toners. Ricoh has told clients that it is shifting production to factories not affected by the earthquake because of interruptions at plants located in the quake-damaged region. On April 4, Ricoh Europe issued an update on the earthquake indicating that things were relatively normal at many sites and the firm was “shifting production to other parts of Japan, reviewing our production processes, and finding alternative suppliers where applicable.” Perhaps reallocating production allowed Ricoh to dodge a bullet, but I suspect shuffling production along with the loss of the Tohoku Ricoh facility has substantially strained Ricoh’s supply chain. You should expect shortages.
I should also point out that while Canon and Ricoh have worked hard to overcome production issues related to damaged factories and warehouses and limited access to electricity, they also must cope with the restricted availability of certain essential raw materials, especially toner resins. Two of Japan’s largest fine-chemical suppliers to the digital imaging industry, Kao and Sanyo, sustained serious damage as a result of the tsunami at their resin facilities located along the northeastern coast of Japan. In addition to the damage to Kao and Sanyo’s physical plants, access to the area by rail and by sea is being severely hampered. So, even if the companies can get lines up and running, it questionable if they can get supplies in or finished product out their factories.
Although I’ve read a number of reports recently in the mainstream press that the overall situation in Japan is quickly getting back to normal, I’m skeptical about how relevant those claims are to our industry. When speaking to investors recently, both Canon and Ricoh warned that uncertainty lingers about their ability to procure raw materials and secure a stable source of electricity. Moreover, in northeastern Japan the ability of Canon or Ricoh—or any other manufacturer—to move freight and ship product overseas is extremely limited. Over the next few weeks, we will learn how other manufacturers like Konica Minolta and Oki are doing when they report their earnings. I expect that in many ways, most Japanese OEM will echo much of what Canon and Ricoh said last month and underscore the fact that the situation remains strained.
Posted by Charlie Brewer on 05/11/2011