Consolidated Results for the First Quarter Ended June 30, 2005

Q&A summary

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Information-Related Equipment

Electronic Devices

General


Information-Related Equipment

  • Q1First half operating income for information-related equipment was revised downward by 16 billion yen compared to the previous outlook. The main factor in this was temporary costs associated with advanced production of new inkjet printers. Was this included in the original plan? Please explain the ratio of such costs to the decrease from the previous outlook.
  • AInkjet printers are manufactured at plants in Asia. The cost of manufacturing them is accounted at the time of shipment from these plants and not at the time of sales. We determined that a 20% increase in production compared to the initial plan would be required to meet demand in the North American market in the second half. In order to respond to this requirement, we started advance manufacturing, thus resulting in a temporary increase in costs for production. One third of this 16 billion yen was the cost of the temporary manufacturing.
  • Q2Is it unusual to incur such temporary cost increases for advance manufacturing?
  • AManufacturing products in advance is common practice for us, and it had a big effect in the first quarter of the current year. We were unable to anticipate strong demand for new products in the North American market when we developed our initial plans. We started manufacturing products in advance in the first quarter in order to meet this demand and to ensure a sufficient supply of new products from the shipping release date.
  • Q3Can you explain how advanced production increases production costs temporarily in more detail?
  • AProfit from inkjet printer units is low, especially in the extremely tough North American market, where demand is strong. While new products manufactured in advance and stored at sales subsidiaries are listed in sales subsidiary accounts based on the purchase price, they are also factored into manufacturing company accounts based on the relatively high costs associated with a new product startup. We advanced production in the first quarter in response to a buoyant North American market, thus temporarily putting pressure on profit. Profit will be recovered as these new products begin selling from the second quarter. Further, advance production leads to higher cost at an earlier stage. However, we will see benefits in terms of cost reduction efficiency from the second quarter as we switch to volume production from advance manufacturing.
  • Q4What are the net sales and volume growth rate for inkjet printers and consumables for the first quarter and for the full year?
  • AIn the first quarter inkjet printer volume grew more than 2%, and net sales declined in the mid single digits. Consumables grew slightly less than 15% on a volume basis and the mid single digits on a net sales basis. We are continuing countermeasures against counterfeit products and products infringing our patents, and expect that such action will drive our business outlook. For the full year, consumables will grow more than 20% on a volume basis and in double-digits, percentage-wise, on a net sales basis. But inkjet unit volume for the full year is expected to grow more than 10%, while the percentage growth in net sales is expected to be in the mid-single digits due to the impact of sliding prices.
  • Q5Why can we expect growth of inkjet units on a net sales basis for the full year despite the fact that net sales growth was low in the first quarter?
  • AThe increase in consumables will exceed the increase in inkjet units. This is an important contributory factor. We expect consumables to grow more than 25% on volume and more than 15 % on net sales in the second half.
  • Q6The second half outlook has not changed, but inkjet printers may face a tough situation due to price downslides driven by fierce competition. Is this unchanged outlook a non-binding internal target or a commitment?
  • ANew inkjet products have been very well received at premarket dealer demos in the North American market, and strong demand is expected. In the Japanese market, our products exceeded a 50% share every month since October 2004 except April due to an increase of all-in-one unit sales. Meanwhile, in Europe, sales volume declined because of an increase in channel inventory caused by market weakness, but new products launched at the end of the year will overcome this weakness to increase net sales. Viewing these factors, we expect sales volume in the second half to follow the initial plan. Further, in consumables, we expect an increase in sales of our newly developed K3 ink for graphic art and continuous cost reduction efficiency. Therefore, the current target will be within reach.
  • Q7The current outlook for total first-half operating income in information-related equipment is 19 billion yen, with 4.2 billion yen in the first quarter and 14.8 billion yen in the second quarter The initial plan, however, showed 35 billion yen. When you developed the initial plan, how did you expect the ratio of first-quarter operating income to compare to that in the second quarter?
  • AThe second quarter ratio was expected to be a little higher than that of the first quarter. with the breakdown being about 45 to 55.
  • Q8Did you also revise the outlook of the second quarter downward?
  • AYes. We revised it downward a little since advanced manufacturing may continue until August.
  • Q9Was the current outlook trending downward compared to the previous outlook before you decided to advance production for the North American market?
  • AWe do not think that it was trending downward. The North American market is going well this year. New products for photo direct printing were launched in May and sold well.
  • Q10Your competitors are also launching new products. What do you see as the primary drivers of driving demand for Epson's new products?
  • AWe think that the main demand driver is the superior print quality offered by our all-in-one units and dedicated photo printers.
  • Q11Epson won litigation regarding consumables. Does this substantially affect the North American market?
  • AWe cannot make detailed comments about the litigation. The third party received an injunction as a result of the litigation that may contribute to an increase of genuine consumables. However, it is uncertain if this will affect printer sales. We will continue to take action against infringing products.
  • Q12Can you expect increased profitability due to upward fluctuation in consumables?
  • AConsumables are a reason for increased profit, but this profit was offset by expenditures for advance manufacturing of printers.
  • Q13A competitor recently introduced a newly developed print head. Will there be any substantial effect on your business?
  • AThe competitor may have a cost advantage, but our product has superior image quality. In short, the newly developed print head will have no substantial impact on Epson.

Printing Solutins

  • Q14What is the capacity utilization ratio at your major plants?
  • AOperating rates for displays are almost 100%. Semiconductor volumes have increased resulting in rising operating rates.

General

  • Q15Can you tell us which products increased and which products lost market share in the first half?
  • AIn information related equipment, our share of all-in-one unit printers improved worldwide. Volumes of single function printers shrank due to market contraction, but our share remains the same. Our shares of amorphous TFT, MD-TFD, and LTPS active display modules for use in mobile phone liquid crystal displays rose. Meanwhile, our color LCD driver share fell.
  • Q16The outlook of the first quarter was revised downward. Is it certain you will meet the outlook for the second half?
  • AWe think it is within reach. Information related equipment was explained earlier, electronic devices showed rapid recovery and we expect further improvement in the second half. But, the market environment shows uncertainty. Viewing these factors, we believe that the outlook is well within reach.
  • Q17You said that increases of net sales and profit were attainable in the original plan. Which do you believe is more accurate, the current outlook or the previous outlook ?
  • AIn the original plan, we were unable to anticipate the weakness in the European market or the sharp rise in demand in the American market. We factored these considerations into the current outlook, but there is always the possibility that unanticipated risks could materialize. For the current forecast we expect electronic devices to recover and we anticipate further improvement in the second half, yet we did not change the outlook. For this and other reasons, we believe that the current outlook is more accurate.