Canon Marketing Japan / 8060

COVERAGE INITIATED ON: 2012.08.06 LAST UPDATE: 2019.05.20

Shared Research Inc. has produced this report by request from the company discussed in the report. The aim is to provide an “owner’s manual” to investors. We at Shared Research Inc. make every effort to provide an accurate, objective, and neutral analysis. In order to highlight any biases, we clearly attribute our data and findings. We will always present opinions from company management as such. Our views are ours where stated. We do not try to convince or influence, only inform. We appreciate your suggestions and feedback. Write to us at [email protected] or find us on Bloomberg.

Research Coverage Report by Shared Research Inc. Canon Marketing Japan / 8060 RCoverage LAST UPDATE: 2019.05.20 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

INDEX

How to read a Shared Research report: This report begins with the trends and outlook section, which discusses the company’s most recent earnings. First-time readers should start at the business section later in the report.

Key financial data ------3 Recent updates ------4 Highlights ------4 Trends and outlook ------5 Quarterly trends and results ------5 Full-year company forecasts ------15 Medium-term strategy: Long-term and medium-term plan ------15 Business ------26 Description ------26 Strengths and weaknesses ------31 Market and value chain ------32 Historical performance and financial statements ------35 Financial statements ------35 Historical performance ------37 Other information ------65 History ------65 Major shareholders ------66 Dividends and shareholder benefits ------66 Top management ------66 News and topics ------67 Company profile ------68

02/69 Canon Marketing Japan / 8060 RCoverage LAST UPDATE: 2019.05.20 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Key financial data

Income statement FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Est. Sales 674,159 632,418 659,218 657,215 659,432 646,002 629,313 632,189 621,591 622,000 YoY -1.8% -6.2% 4.2% -0.3% 0.3% -2.0% -2.6% 0.5% -1.7% 0.1% Gross profit 227,543 222,892 220,884 220,209 233,536 233,104 226,007 223,771 218,173 - YoY -2.4% -2.0% -0.9% -0.3% 6.1% -0.2% -3.0% -1.0% -2.5% - GPM 33.8% 35.2% 33.5% 33.5% 35.4% 36.1% 35.9% 35.4% 35.1% - Operating profit 7,735 8,441 16,802 17,012 25,087 26,647 27,676 30,406 28,941 29,500 YoY 22.8% 9.1% 99.1% 1.2% 47.5% 6.2% 3.9% 9.9% -4.8% 1.9% OPM 1.1% 1.3% 2.5% 2.6% 3.8% 4.1% 4.4% 4.8% 4.7% 4.7% Recurring profit 9,480 10,668 18,108 18,210 26,553 28,040 28,717 31,491 30,519 30,700 YoY 15.3% 12.5% 69.7% 0.6% 45.8% 5.6% 2.4% 9.7% -3.1% 0.6% RPM 1.4% 1.7% 2.7% 2.8% 4.0% 4.3% 4.6% 5.0% 4.9% 4.9% Net income 3,724 6,763 10,578 10,167 16,030 15,670 18,161 20,679 20,826 20,900 YoY -185.7% 81.6% 56.4% -3.9% 57.7% -2.2% 15.9% 13.9% 0.7% 0.4% Net margin 0.6% 1.1% 1.6% 1.5% 2.4% 2.4% 2.9% 3.3% 3.4% 3.4% Per share data (JPY) Shares issued (year-end; '000) 151,080 151,080 151,080 151,080 151,080 151,080 151,080 151,080 151,080 - EPS 26.7 49.3 77.5 76.7 123.6 120.8 140.1 159.5 160.6 161.2 EPS (fully diluted) ------Dividend per share 20.0 20.0 24.0 24.0 40.0 45.0 50.0 60.0 60.0 - Book value per share 1,798.2 1,827.3 1,907.5 1,980.2 2,082.6 2,136.2 2,163.0 2,290.7 2,337.0 - Balance sheet (JPYmn) Cash and cash equivalents 110,574 102,522 108,435 102,282 120,607 99,573 107,285 136,979 135,571 - Total current assets 302,202 302,093 316,608 324,938 339,596 347,542 362,141 397,506 387,244 - Tangible fixed assets 86,127 91,928 99,564 99,684 100,059 99,310 96,701 75,090 71,987 - Investments and other assets 37,364 33,969 30,415 29,559 29,184 30,150 32,064 32,750 34,292 - Intangible fixed assets 23,736 20,435 15,986 12,894 10,906 9,499 6,819 5,485 5,265 - Total assets 448,592 447,765 462,574 467,076 479,747 486,502 497,727 510,832 498,790 - Accounts payable 102,849 100,046 104,162 108,498 101,337 101,834 102,662 100,940 75,831 - Short-term debt 02,73100000272100 - Total current liabilities 157,247 151,090 163,397 164,914 164,770 159,678 156,966 157,398 129,903 - Long-term debt 0624073000163116 - Total fixed liabilities 44,498 45,367 45,088 45,086 44,623 49,385 59,841 55,911 65,317 - Total liabilities 201,745 196,457 208,486 210,000 209,394 209,064 216,808 213,310 195,220 - Net assets 448,591 447,764 462,574 467,075 479,746 486,502 497,727 510,832 498,790 - Total interest-bearing debt 03,355073000435216 - Cash flow statement (JPYmn) Cash flows from operating activities 35,186 8,715 33,767 28,780 38,190 29,730 33,306 28,885 16,990 - Cash flows from investing activities -13,011 -12,107 -16,066 -25,757 -15,221 -44,536 -19,460 7,963 -10,526 - Cash flows from financing activities -8,171 -3,811 -11,813 -9,105 -4,544 -6,224 -6,086 -7,145 -7,838 - Financial ratios ROA (RP-based) 2.1% 2.4% 4.0% 3.9% 5.6% 5.8% 5.8% 6.2% 6.0% 6.2% ROE 1.5% 2.7% 4.2% 4.0% 6.1% 5.7% 6.5% 7.2% 6.9% - Equity ratio 55.0% 56.1% 54.9% 55.0% 56.4% 57.0% 56.4% 58.1% 60.8% - Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. Note: From FY12/13, some of sales promotion costs, previously booked under SG&A, are directly deducted from sales. Note: From FY12/14, some of CoGS are booked under SG&A, and rearranged FY12/13 numbers accordingly. Note: YoY comparison for FY12/13 is based on retroactively revised FY12/13 versus FY12/12 (without such revision).

03/69 Canon Marketing Japan / 8060 RCoverage LAST UPDATE: 2019.05.20 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Recent updates Highlights

On May 20, 2019, Shared Research updated the report following interviews with Canon Marketing Japan Inc. (CMJ).

On April 23, 2019, the company announced earnings results for Q1 FY12/19; see the results section for details.

On January 29, 2019, the company announced earnings results for full-year FY12/18.

For previous releases and developments, please refer to the News and topics section.

04/69 Canon Marketing Japan / 8060 RCoverage LAST UPDATE: 2019.05.20 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Trends and outlook Quarterly trends and results

Cumulative FY12/17 FY12/18FY 12/ 19 FY12/19 (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q4Q1% of FYFY Est. Sales 152,817 303,657 456,245 632,189 150,802 300,523 447,923 621,591 150,930 24.3% 622,000 YoY -2.0% -0.8% 0.6% 0.5% -1.3% -1.0% -1.8% -1.7% 0.1% 0.1% Gross profit 53,682 107,760 162,580 223,771 51,983 104,991 157,034 218,173 48,696 YoY -2.2% -2.0% -0.7% -1.0% -3.2% -2.6% -3.4% -2.5% -6.3% GPM 35.1% 35.5% 35.6% 35.4% 34.5% 34.9% 35.1% 35.1% 32.3% SG&A expenses 48,021 96,798 144,170 193,365 48,267 95,326 141,134 189,231 41,680 YoY -3.3% -2.8% -2.5% -2.5% 0.5% -1.5% -2.1% -2.1% -13.6% SG&A-to-sales ratio 31.4% 31.9% 31.6% 30.6% 32.0% 31.7% 31.5% 30.4% 27.6% Operating profit 5,661 10,961 18,409 30,406 3,715 9,664 15,899 28,941 7,016 23.8% 29,500 YoY 8.9% 6.3% 16.2% 9.9% -34.4% -11.8% -13.6% -4.8% 88.9% 1.9% OPM 3.7% 3.6% 4.0% 4.8% 2.5% 3.2% 3.5% 4.7% 4.6% 4.7% Recurring profit 5,738 11,829 19,334 31,491 4,101 10,996 17,306 30,519 7,251 23.6% 30,700 YoY 6.8% 5.4% 14.6% 9.7% -28.5% -7.0% -10.5% -3.1% 76.8% 0.6% RPM 3.8% 3.9% 4.2% 5.0% 2.7% 3.7% 3.9% 4.9% 4.8% 4.9% Net income 3,991 8,375 12,515 20,679 2,529 7,436 11,551 20,826 4,780 22.9% 20,900 YoY 34.1% 26.1% 25.2% 13.9% -36.6% -11.2% -7.7% 0.7% 89.0% 0.4% Net margin 2.6% 2.8% 2.7% 3.3% 1.7% 2.5% 2.6% 3.4% 3.2% 3.4% Quarterly FY 12/ 17 FY 12/ 18 FY 12/ 19 (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q4Q1 Sales 152,817 150,840 152,588 175,944 150,802 149,721 147,400 173,668 150,930 YoY -2.0% 0.4% 3.5% 0.2% -1.3% -0.7% -3.4% -1.3% 0.1% Gross profit 53,682 54,078 54,820 61,191 51,983 53,008 52,043 61,139 48,696 YoY -2.2% -1.8% 2.0% -1.8% -3.2% -2.0% -5.1% -0.1% -6.3% GPM 35.1% 35.9% 35.9% 34.8% 34.5% 35.4% 35.3% 35.2% 32.3% SG&A expenses 48,021 48,777 47,372 49,195 48,267 47,059 45,808 48,097 41,680 YoY -3.3% -2.4% -1.8% -2.5% 0.5% -3.5% -3.3% -2.2% -13.6% SG&A-to-sales ratio 31.4% 32.3% 31.0% 28.0% 32.0% 31.4% 31.1% 27.7% 27.6% Operating profit 5,661 5,300 7,448 11,997 3,715 5,949 6,235 13,042 7,016 YoY 8.9% 3.6% 34.6% 1.4% -34.4% 12.2% -16.3% 8.7% 88.9% OPM 3.7% 3.5% 4.9% 6.8% 2.5% 4.0% 4.2% 7.5% 4.6% Recurring profit 5,738 6,091 7,505 12,157 4,101 6,895 6,310 13,213 7,251 YoY 6.8% 4.1% 32.9% 2.6% -28.5% 13.2% -15.9% 8.7% 76.8% RPM 3.8% 4.0% 4.9% 6.9% 2.7% 4.6% 4.3% 7.6% 4.8% Net income 3,991 4,384 4,140 8,164 2,529 4,907 4,115 9,275 4,780 YoY 34.1% 19.6% 23.5% 0.0% -36.6% 11.9% -0.6% 13.6% 89.0% Net margin 2.6% 2.9% 2.7% 4.6% 1.7% 3.3% 2.8% 5.3% 3.2% Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.

Quarterly sales Quarterly operating profit

(JPYmn) (JPYmn)

700,000 35,000 632,189 621,591 622,000 30,406 29,500 600,000 30,000 28,941

175,944 173,668 500,000 25,000 11,997 13,042 400,000 20,000 152,588 147,400

300,000 15,000 7,448 6,235 150,840 149,721 200,000 10,000 5,300 5,949 100,000 5,000 152,817 150,802 150,930 5,661 7,016 3,715 0 0 FY12/17 FY12/18 FY12/19 FY12/17 FY12/18 FY12/19

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Source: Shared Research based on company data

05/69 Canon Marketing Japan / 8060 RCoverage LAST UPDATE: 2019.05.20 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Q1 FY12/19 results (out April 23, 2019)

Q1 FY12/19 results (January–March 2019)

▷ Sales: JPY150.9bn (+0.1% YoY)

▷ Operating profit: JPY7.0bn (+88.8% YoY)

▷ Recurring profit: JPY7.3bn (+76.8% YoY)

▷ Net income*: JPY4.8bn (+89.0% YoY)

*Net income is net income attributable to owners of the parent.

▷ Market environment: Business sentiment in the manufacturing industry has deteriorated, but capital investment by companies, including IT spending, has remained steady. Consumer confidence remains lackluster. Despite the unique environment of Q1 FY12/19 due in part to replacement demand for business computers relating to the expiration of Windows 7’s extended support, both large and medium-sized companies continued business system overhaul amid changes in the social environment such as chronic labor shortages and work style reforms.

▷ Sales: While the Consumer segment’s mainstay digital single-lens reflex camera sales declined along with sales in the corporate capex field (e.g., the Professional segment’s industrial equipment), sales in the IT solutions business grew for corporate clients of all sizes against a background of heightened demand for operational improvement and reform.

▷ Operating profit: Shared Research expects the earnings structure will change due to changing sales composition. Gross profit was boosted by an improved sales mix reflecting the increase in sales of IT solutions. Continued cost reductions also

contributed to operating profit growth. The operating profit margin improved 2.1 pp YoY.

▷ Signs of changing earnings structure: Shared Research thinks demand stemming from corporate operations review due to changes in the social environment will continue for the present. It is possible a transfer in the company’s revenue base from goods to services will accompany expansion of its sales in the IT service field (Enterprise, Area segments).

06/69 Canon Marketing Japan / 8060 RCoverage LAST UPDATE: 2019.05.20 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Operating profit by segment (top) gross profit and SG&A expenses (bottom)

(JPYbn) Business Solutions IT Solutions Imaging Systems Industrial and Medical Other Consumer Enterprise Area 14 13.0 11.8 12.0 10.9 12 3.8 3.3 9.2 9.1 10 8.6 7.4 7.4 7.0 8 7.2 2.3 2.9 3.2 7.6 5.9 6.2 5.5 5.7 5.1 5.2 5.1 5.3 2.6 3.7 6 4.3 6.9 7.6 3.6 3.3 3.2 3.8 3.7 3.3 3.5 3.5 2.0 2.1 1.8 3.5 1.9 4 3.1 7.0 2.7 7.0 2.5 3.5 2.2 2.0 1.6 4.5 2.6 1.9 2 0.4 3.4 3.9 3.5 2.7 2.4 2.7 2.0 3.1 1.6 1.8 1.5 1.7 2.2 2.0 2.3 2.2 1.3 0.8 0.7 1.4 1.0 1.5 0 -0.4 -0.3 0.3 -1.0 -1.3 -2.1 -2 Q1 Q1 Q1 Q1 Q1 Q1 Q1 FY12/13 FY12/14 FY12/15 FY12/16 FY12/17 FY12/18 FY12/19 (JPYbn) Gross profit GPM (right axis) (JPYbn) SG&A expenses SG&A-to-sales ratio (right axis) 38% 38% 65 56 36% 36% 60 34% 52 34% 55 32% 48 32% 50 30% 44 30%

45 28% 40 28%

40 26% 36 26% Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 FY12/11 FY12/12 FY12/13 FY12/14 FY12/15 FY12/16 FY12/17 FY12/18 FY12/19 FY12/11 FY12/12 FY12/13 FY12/14 FY12/15 FY12/16 FY12/17 FY12/18 FY12/19 Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. Note: Segment changes incorporated as appropriate (the same applies throughout)

07/69 Canon Marketing Japan / 8060 RCoverage LAST UPDATE: 2019.05.20 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Segment overview Consumer

Consumer FY12/17 FY12/18 FY12/19 (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q4Q1 Sales 26,800 34,200 35,300 57,000 26,822 34,208 35,313 53,901 25,907 YoY - - - - +0.1% +0.0% +0.0% -5.4% -3.4% Operat ing profit -2,100 1,000 1,500 7,000 -2,148 1,041 1,484 6,956 -1,286 YoY -----+4.1%-1.1% -0.6% - OPM -7.8% 2.9% 4.2% 12.3% -8.0% 3.0% 4.2% 12.9% -5.0% YoY Interchangeable lens digital cameras -17% -3% -21% -7% -28% -15% -7% -16% -14% (units) Single-lens reflex ---- -42% -34% -26% -30% -29% Mirrorless - - - - +24% +47% +94% +20% +12% Compact +20% -14% +39% +3% -44% +1% +19% +10% +8% Inkjet printers +1% +20% -10% -9% -12% -23% +3% -9% -26% Inkjet printer cartridges (value) -6% -8% +7% -9% -9% -2% -14% -1% -4% Dom. Interchangeable lens digital cameras 116 99 98 104 97 90 87 87 78 market Single-lens reflex 65 55 53 58 51 41 42 39 29 shippedMirrorless 514546464649475049 units Compact 207 200 184 184 173 151 147 147 130 ('000) Interchangeable lenses 246 216 188 197 184 173 171 173 157 YoY Interchangeable lens digital cameras +6.1% -8.0% +3.2% -18.4% -17.0% -9.6% -11.3% -16.2% -19.5% Single-lens reflex -9.3% -26.5% -14.4% -15.7% -22.5% -24.9% -20.5% -32.8% -42.3% Mirrorless +36.0% +29.4% +35.4% -21.9% -10.0% +9.1% +3.0% +8.1% +5.5% Compact -3.8% +2.3% +29.5% -7.5% -16.2% -24.7% -20.5% -20.0% -25.1% Interchangeable lenses +22.6% -7.7% -0.4% -17.4% -25.5% -20.1% -8.9% -12.5% -14.3% Dom. Interchangeable lens digital cameras 5,411 5,238 5,436 5,698 5,438 4,812 4,629 4,790 4,464 market Single-lens reflex 2,952 2,899 3,198 3,494 2,978 2,297 1,994 1,704 1,432 shipped Mirrorless 2,459 2,339 2,238 2,205 2,554 2,609 2,635 3,086 2,848 amount Compact 3,306 3,092 2,961 3,030 2,873 2,457 2,458 2,537 2,295 (JPYmn) Interchangeable lenses 5,199 4,716 4,475 4,773 4,673 4,458 4,420 4,634 4,452 YoY Interchangeable lens digital cameras +9.1% +5.1% +16.9% +3.2% +0.5% -8.1% -14.9% -15.9% -17.9% Single-lens reflex -8.9% -19.5% +5.0% +16.1% +0.9% -20.8% -37.7% -51.2% -51.9% Mirrorless +45.5% +67.1% +44.3% -11.7% +3.9% +11.5% +17.7% +40.0% +11.5% Compact -0.1% +11.6% +44.7% -8.6% -13.1% -20.5% -17.0% -16.3% -20.1% Interchangeable lenses +2.3% +0.8% +6.6% -7.0% -10.1% -5.5% -1.2% -2.9% -4.7% Source: Shared Research based on company data

▷ Q1 FY12/19 segment sales (January–March 2019): JPY25.9bn (+3.4% YoY); operating loss JPY1.3bn (versus an operating loss of JPY2.1bn in Q1 FY12/18). Cost savings helped to narrow the loss.

▷ Digital cameras: Sales of both interchangeable and compact lens cameras declined. In terms of interchangeable lens cameras, although demand has shifted from single-lens reflex cameras to mirrorless models, the shrinking market for digital single-lens reflex (DSLR) cameras has had a significant impact, driving down interchangeable lens camera sales 14% YoY. The company estimates the domestic market for interchangeable lens cameras will shrink 10% in FY12/19.

▷ Inkjet printers: While sales of inkjet printers for home use decreased due to the downturn in the market, sales of business inkjet printers grew on strong performance. Sales of ink cartridges dropped on falling print volume amid lower numbers of machines in operation, falling 4% YoY.

▷ IT products: Sales rose on solid demand from gaming computers and wireless earbuds.

▷ Although segment losses remained, continued cost reduction mitigated their extent.

08/69 Canon Marketing Japan / 8060 RCoverage LAST UPDATE: 2019.05.20 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Enterprise

Enterprise FY12/17 FY12/18 FY12/19 (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q4Q1 Sales 47,200 46,200 45,900 46,300 47,174 47,495 44,445 48,603 49,894 Canon IT Solutions 20,390 20,620 21,010 22,690 21,900 21,600 22,730 23,340 23,720 Other 26,810 25,580 24,890 23,610 25,274 25,895 21,715 25,263 26,174 Canon IT Solutions 27,400 27,300 26,200 - 30,600 29,900 28,700 - - Other 19,800 18,900 19,700 - 16,600 17,600 15,700 - - YoY ---- -0.1% +2.8% -3.2% +5.0% +5.8% Canon IT Solutions - - - - +7.4% +4.8% +8.2% +2.9% +8.3% Other ---- -5.7% +1.2% -12.8% +7.0% +3.6% IT solutions +12% +10% +10% - - Excluding IT solut ions -16% -7% -20% -- Operating profit 2,200 2,100 1,700 2,300 2,208 2,639 1,912 2,850 3,517 Canon IT Solutions 1,290 1,280 1,400 1,470 1,790 1,810 1,470 2,330 3,150 Other 910 820 300 830 418 829 442 520 367 YoY - - - - +0.4% +25.7% +12.5% +23.9% +59.3% Canon IT Solutions - - - - +38.8% +41.4% +5.0% +58.5% +76.0% Other ---- -54.1% +1.1% +47.3% -37.3% -12.2% OPM 4.7% 4.5% 3.7% 5.0% 4.7% 5.6% 4.3% 5.9% 7.0% Canon IT Solutions 6.3% 6.2% 6.7% 6.5% 8.2% 8.4% 6.5% 10.0% 13.3% Other 3.4% 3.2% 1.2% 3.5% 1.7% 3.2% 2.0% 2.1% 1.4% Canon ITS sales by division SI services - - - - +10% +7% +7% +10% +9% IT infrastructure service (data centers) - - - - +8% +1%+16% -1% +24% Engineering (embedded software, CAD) - - - - +2% +7% +2% -4% +8% Orders -3% -9% +21% +24% +8% +8% -16% +18% +53% Order backlog -11% -15% +7% +17% +21% +22% -1% +11% +41% Sales -0% +0% -1% +10% +7% +5% +8% +3% +12% Source: Shared Research based on company data Note: Figures for FY12/17 and later were retrospectively adjusted and shown in units of JPY100mn due to the transfer of a part of Imaging Solutions, previously a sub-segment of the Professional segment, in FY12/19.

▷ Q1 FY12/19 segment sales (January–March 2019): JPY49.9bn (+5.9% YoY); operating profit JPY3.5bn (+59.3% YoY). Sales grew on strong performance of high-margin businesses at the consolidated subsidiary Canon IT Solutions.

▷ Trends by client industry: Sales declined in the financial industry reflecting the dropout of large projects in Q1 FY12/18. Sales in the manufacturing industry increased due to growth in demand forecasting solutions for beverage manufacturers and migration projects for building materials manufacturers. Sales to the logistics industry also increased, boosted by point of purchase (POP) printers for retailers as well as large-scale office MFPs in the telecom industry.

▷ Canon IT Solutions: Data center services gave a robust performance. Client inquires over the new data center planned to open in summer 2020 have been substantial, with some clients already preordering services. New orders for large infrastructure systems and embedded systems greatly boosted Canon IT Solutions’ results, contributing to improved profits for the segment as a whole. In Q1 FY12/19, Canon IT Solutions had sales of JPY23.7bn (+12.2% YoY), operating profit of JPY3.2bn (+84.2% YoY), and OPM of 13.3% (+5.2pp YoY).

▷ Equipment: Sales of office MFPs declined due to the dropout of large projects in Q1 FY12/18. Sales of laser printers rose with a number of large orders received.

09/69 Canon Marketing Japan / 8060 RCoverage LAST UPDATE: 2019.05.20 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Area

Area FY12/17 FY12/18 FY12/19 (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q4Q1 Sales 66,800 63,400 61,800 64,400 66,802 62,581 61,404 65,123 67,608 Canon System & Support 32,140 28,840 29,210 28,790 30,570 29,130 28,510 29,160 31,320 Other 34,660 34,560 32,590 35,610 36,232 33,451 32,894 35,963 36,288 IT solutions 15,200 13,400 13,300 - 15,100 14,600 13,900 - - Excluding IT solutions 51,600 50,000 48,500 - 51,700 48,000 47,500 - - YoY - - - - +0.0% -1.3% -0.6% +1.1% +1.2% Canon System & Support -----4.9% +1.0% -2.4% +1.3% +2.5% Other - - - - +4.5% -3.2% +0.9% +1.0% +0.2% IT solutions -0% +9% +4% - - Excluding IT solut ions +0% -4% -2% -- Operating profit 2,700 2,800 3,000 3,300 2,690 3,324 3,221 3,792 3,783 Canon System & Support 1,220 430 690 1,060 800 930 950 1,170 1,250 Other 1,480 2,370 2,310 2,240 1,890 2,394 2,271 2,622 2,533 YoY ---- -0.4% +18.7% +7.4% +14.9% +40.6% Canon System & Support -----34.4% +116.3% +37.7% +10.4% +56.3% Other - - - - +27.7% +1.0% -1.7% +17.1% +34.0% OPM 4.0% 4.4% 4.9% 5.1% 4.0% 5.3% 5.2% 5.8% 5.6% Canon System & Support 3.8% 1.5% 2.4% 3.7% 2.6% 3.2% 3.3% 4.0% 4.0% Other 4.3% 6.9% 7.1% 6.3% 5.2% 7.2% 6.9% 7.3% 7.0% Source: Shared Research based on company data Note: Figures for FY12/17 and later were retrospectively adjusted and shown in units of JPY100mn due to the transfer of a part of Imaging Solutions, previously a sub-segment of the Professional segment, in FY12/19.

▷ Q1 FY12/19 segment sales (January–March 2019): JPY67.6bn (+1.2% YoY); operating profit JPY3.8bn (+40.6% YoY). Profit growth reflected higher sales of high-margin IT solutions and cost reductions.

▷ IT Solutions: Sales increased with replacement of business computers remaining strong as the extended period of support for Windows 7 expired. Sales of HOME, the cloud-based IT support service, and ESET anti-virus software remained steady. In the SME sector, shipments of software for work style reforms and business efficiency gains remained strong.

▷ Canon System & Support: A consolidated subsidiary belonging to the Area segment. Operations consist of sales and

maintenance services aimed at small and medium-sized companies, plus varied solution support services including for HR,

key operations, and IT infrastructure. Changes in the business environment such as labor shortages and work style reforms

presented serious issues for small and medium-sized companies, causing increased demand in the operational

improvement field. In Q1 FY12/19, Canon System & Support sales were JPY31.3bn (+2.2% YoY), with operating profit of

JPY1.3bn (+58.2% YoY), and OPM of 4.0% (+1.4pp YoY). ▷ Business equipment: Sales of office MFPs fell due to downturn in the market despite new product introductions in January 2019. Laser printers showed sales growth in certain industries, but fell overall because of a decline in large-scale projects.

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Professional

Professional FY12/17 FY12/18 FY12/19 (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q4Q1 Sales 15,000 11,100 9,600 14,300 15,031 13,932 11,074 12,410 12,159 Canon Production Printing Systems 3,170 3,530 2,960 4,060 2,930 3,380 2,930 3,440 2,900 Canon Lifecare Solutions 3,930 2,910 4,060 2,770 3,410 2,740 2,440 2,790 3,110 Other 7,900 4,660 2,580 7,470 8,691 7,812 5,704 6,180 6,149 YoY - - - - +0.2% +25.5% +15.4% -13.2% -19.1% Canon Production Printing Systems ---- -7.6% -4.2% -1.0% -15.3% -1.0% Canon Lifecare Solutions ---- -13.2% -5.8% -39.9% +0.7% -8.8% Other - - - - +10.0% +67.6% +121.1% -17.3% -29.2% Operat ing profit 800 - - -700 803 -1,017 -411 -312 800 Canon Production Printing Systems -230 -20 -120 -70 -230 -40 -90 60 500 Canon Lifecare Solutions 150 -140 210 70 150 30 -60 110 110 Other 880 160 -90 -700 883 -1,007 -261 -482 190 YoY - - - - +0.4% - - - -0.4% Canon Production Printing Systems------Canon Lifecare Solutions ------+57.1% -26.7% Other - - - - +0.3% - - - -78.5% OPM 5.3% - - -4.9% 5.3% -7.3% -3.7% -2.5% 6.6% Canon Production Printing Systems -7.3% -0.6% -4.1% -1.7% -7.8% -1.2% -3.1% 1.7% 17.2% Canon Lifecare Solutions 3.8% -4.8% 5.2% 2.5% 4.4% 1.1% -2.5% 3.9% 3.5% Other 11.1% 3.4% -3.5% -9.4% 10.2% -12.9% -4.6% -7.8% 3.1% Production printing sales - - - - -7% -4% +1% -15% +1% Industrial equipment ----+125%+20%-33% -38% -34% Healthcare -----5% -8% -32% +10% -13% Video solutions - - - - -9% +12% -0% -- Source: Shared Research based on company data Note: Figures for FY12/17 and later were retroactively adjusted and shown in units of JPY100mn due to the transfer of Imaging Solutions, which had been a sub-segment of the Professional segment, to the Enterprise and Area segments in FY12/19.

▷ Q1 FY12/19 segment sales (January–March 2019): JPY12.2bn (+19.1% YoY); operating profit JPY800mn (-0.4% YoY)

▷ Production printing: Sales increased due to growth in color continuous printer-related business (+1% YoY).

▷ Industrial equipment: Sales declined in the semiconductor field as projects in Q1 FY12/18 dropped out. Sales were also

down in the non-semiconductor field following the termination of sales agency contracts with overseas suppliers (-34%

YoY). ▷ Healthcare: Sales declined because of a decrease in projects related to digital radiography and the absence of large-scale hospital information systems (-13% YoY).

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Domestic shipments of cameras with interchangeable lenses

Amount shipped: interchangeable-lens (Japan; right axis) YoY Average selling price YoY +80% 35 30.8 +60% 27.3 30 23.6 24.0 +40% 22.0 25 20.5 20.6 20.8 19.4 18.9 18.8 19.6 +20% 18.1 18.0 17.4 20 16.3 17.1 16.4 16.2 16.4 16.9 16.8 15.5 15.4 15.3 15.3 15.1 15.6 15.8 15.2 14.0 14.3 14.3 14.3 14.1 14.6 0% 13.1 13.7 15 11.4 -20% 8.8 10

-40% 5

-60% 0 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 FY12/09 FY12/10 FY12/11 FY12/12 FY12/13 FY12/14 FY12/15 FY12/16 FY12/17 FY12/18 (JPYbn)

+100% Amount shipped: interchangeable lenses (Japan; right axis) YoY 8,000

6,000 +50%

4,000

0% 2,000

-50% 0 Jan Jan Jan Jan Jan Jan Jan Jan (JPYmn) 2012 2013 2014 2015 2016 2017 2018 2019 Source: Shared Research based on Camera & Imaging Products Association data

Domestic shipments of single-lens reflex cameras

Amount shipped: single-lens reflex (Japan; right axis) YoY Average selling price YoY +80% 25

+60% 19.2 18.5 20 +40% 15.9 15.0 +20% 14.5 13.4 13.3 15 12.6 12.9 12.4 13.1 13.1 11.2 0% 10.4 10.8 10.5 10.5 10.3 10.1 9.6 10.0 9.0 8.7 8.7 10 -20% 7.4 6.4 5.6 -40% 4.6 5 -60%

-80% 0 Q1 Q1 Q1 Q1 Q1 Q1 Q1 FY12/12 FY12/13 FY12/14 FY12/15 FY12/16 FY12/17 FY12/18 (JPYbn) 100% Amount shipped: single-lens reflex (Japan; right axis) YoY 10

8 50%

6 0% 4

-50% 2

-100% 0 Jan Jan Jan Jan Jan Jan Jan Jan 2012 2013 2014 2015 2016 2017 2018 2019 (JPYbn) Source: Shared Research based on Camera & Imaging Products Association data

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Domestic shipments of mirrorless cameras

Amount shipped: non-reflex (Japan; right axis) YoY Average selling price YoY +100% 15

11.6 11.2 8.8 10.0 +50% 8.5 10 8.1 8.4 7.5 7.5 7.7 7.9 7.0 6.9 7.2 7.0 7.3 6.3 6.3 5.9 5.7 5.9 5.8 6.2 4.7 5.3 5.5 4.3 0% 4.3 5

-50% 0 Q1 Q1 Q1 Q1 Q1 Q1 Q1 FY12/12 FY12/13 FY12/14 FY12/15 FY12/16 FY12/17 FY12/18 (JPYbn) +150% Amount shipped: non-reflex (Japan; right axis) YoY 5

+100% 4

+50% 3

0% 2

-50% 1

-100% 0 Jan Jan Jan Jan Jan Jan Jan Jan 2012 2013 2014 2015 2016 2017 2018 2019 (JPYbn) Source: Shared Research based on Camera & Imaging Products Association data

Domestic shipments of interchangeable lenses for single-lens reflex cameras

出荷⾦額 前年同期⽐ 平均単価前年同期⽐ +80% 25

+60% 19.2 18.5 20 +40% 15.9 14.5 15.0 +20% 13.1 13.1 13.4 13.3 15 12.6 12.9 12.4 0% 11.2 10.8 10.4 10.3 10.1 10.0 10.5 10.5 9.6 9.0 8.7 8.7 10 -20% 7.4 6.4 5.6 -40% 4.6 5 -60%

-80% 0 Q1 Q1 Q1 Q1 Q1 Q1 Q1 FY12/12 FY12/13 FY12/14 FY12/15 FY12/16 FY12/17 FY12/18 （10億円） 100% Amount shipped: single-lens reflex (Japan; right axis) YoY 10

8 50%

6 0% 4

-50% 2

-100% 0 Jan Jan Jan Jan Jan Jan Jan Jan 2012 2013 2014 2015 2016 2017 2018 2019 (JPYbn) Source: Shared Research based on Camera & Imaging Products Association data

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Domestic shipments of compact digital cameras Amount shipped: compact (Japan; right axis) YoY Average selling price YoY +60% 50 42.8 +40% 38.8 38.7 40 34.4 35.3 32.8 32.9 +20% 31.2 28.3 26.6 26.3 30 24.1 23.4 0% 22.821.7 19.1 18.6 18.818.8 20 -20% 13.9 14.3 13.8 12.912.1 12.3 12.0 11.3 10.5 9.6 10.2 9.6 8.9 8.8 9.3 8.0 7.9 6.9 7.9 7.3 10 -40% 6.1

-60% 0 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 FY12/09 FY12/10 FY12/11 FY12/12 FY12/13 FY12/14 FY12/15 FY12/16 FY12/17 FY12/18 (JPYbn) Amount shipped: compact (Japan; right axis) YoY +80% 14,000

+60% 12,000

+40% 10,000

+20% 8,000

0% 6,000

-20% 4,000

-40% 2,000

-60% 0 Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 (JPYmn) Source: Shared Research, based on Camera & Imaging Products Association data

For details on previous results, please refer to the Historical financial statements section.

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Full-year company forecasts

FY12/19 company forecast (out January 29, 2019) The Japanese economy remains in a moderate recovery phase, but the company expects continued sources of uncertainty: a consumption tax hike in Japan and trade issues, economic developments, and fluctuations in financial markets overseas. CMJ thus expects sales and operating profit to be roughly unchanged YoY.

Segment outlook Consumer The company expects sales of JPY1.4bn (-8% YoY) and forecasts further growth in sales of mirrorless cameras and declining sales for digital single lens reflex cameras and inkjet printers. CMJ plans to focus on high value-added products and cost reduction, but still looks for operating profit of JPY6.9bn (-JPY400mn YoY).

Enterprise CMJ expects sales of JPY1.9bn (+1% YoY). The company projects falling hardware sales and continued growth in solutions for the financial and manufacturing sectors, as well as in the SI, data center services, and security businesses. CMJ expects operating profit of JPY9.7bn (up JPY1.0bn YoY). It plans to expand gross profit by offering high value-added solutions and increasing the share of recurring revenue in its IT solutions business.

Area CMJ expects sales of JPY2.6bn (+2% YoY) thanks in part to new office MFP products and expanding IT solutions sales. The company expects operating profit of JPY12.1bn (unchanged YoY). While it expects high-margin business such as IT maintenance services to grow, there may be an impact on the consumables business due to a lower number of operating days than in FY12/18. There is also likely to be a cost increase accompanying higher MFP shipments.

Professional The company expects a slight increase in sales. In production printing, CMJ plans to focus on expanding sales of continuous feed color inkjet printers. In industrial equipment, some semiconductor customers are deferring capex due to production adjustments. In healthcare, the company expects sales growth due to higher sales of new products and the acquisition of large contracts.

Medium-term strategy: Long-term and medium-term plan

The company’s medium-term strategy includes two layers. The medium-term plan is updated annually on a rolling basis and is informed by business strategies formulated from a long-term perspective.

FY12/19 falls within the boundaries of phase three of the long-term management plan (FY12/16 to FY12/20). However, the new medium-term plan starting in FY12/19 covers three years to FY12/21, and thus extends beyond phase three. Regardless, CMJ holds that its medium-term strategy fundamentally follows the strategies outlined in phase three of the long-term plan. Phase three of the long-term management plan (FY12/16 to FY12/20)

The company creates long-term plans that span a total of five years. Fiscal 2018 comes under phase three of the current long-term management plan (FY12/16 to FY12/20). Under this plan, business domains were classified into three categories and viewed as key management indicators, while growth strategies were created for each. The company releases an annual three-year medium-term plan in line with the basic management strategies of the long-term plan.

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Cycle between long-term plan goals and medium-term management plan

Source: Shared Research based on company data

Phase three of the long-term management plan CMJ is in phase three of the long-term management plan. The company reported that the following three issues have been carried over from phase two, which came to a close with FY12/15.

◤ A significant amount of resources was not effectively shared across the group

◤ Structural reforms for existing businesses are not complete, and the shift to new service businesses and growth sectors is not showing progress

◤ Changes to business processes are still in the “improvements” category; fundamental changes are necessary and utilization of new IT systems is a requirement, leaving much room for improvements in efficiency

Growth scenario under phase three of the long-term plans In light of the issues remaining from phase two, CMJ is focusing on growing sales of its own products and services with a particular emphasis on the shift to new growth sectors and the creation of new service businesses. Leveraging its strengths as a manufacturer and distributor, its established customer base, and its technical proficiency, the company plans to grow sales by solving its customers’ problems in imaging and IT solutions. In addition to this strategy, the company plans to systematically convert to a customer centric framework. Growth in the IT solutions business is a major pillar in phase three of the plan. Group IT solutions, including the Other segment, accounts for JPY77.9bn of the forecast increase of JPY154.0bn in sales over the long-term plan’s five years, or over half (at the time of the phase three announcement). In other areas, a full-scale entrance and market share expansion in the commercial printing sector of the production printing market and security solutions utilizing network cameras are areas for growth.

Medium-term plan positioned as a strategy to achieve numerical targets as long-term plan remains focus The medium-term plan is viewed as a concrete strategy to deliver on the aims of the long-term management plan. It is updated annually based on the latest prevailing conditions, but the fundamental thinking is unchanged. There was a stretch target element to previous numerical targets, including factors such as acquisitions, but the current medium-term plan is closer to reality, and includes initiatives to achieve the goals in the long-term plan.

Medium-term plan (2019–2021) Previous medium-term plan (2018–2020): Shift toward Independent Growth areas The company divided its businesses into three areas in this medium-term plan, and worked to meet forecasts in line with their respective business strategies. In 2018, the first year of the plan, the share of sales from Independent Growth areas rose to 36%, up from 33% in 2017.

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2018 results by area

2017 Act. 2018 Act. YoY change Independent Growth Areas +3pp 33% 36% (+JPY14.1bn) (It solutions, industrial equipment, medical (JPY207.6bn) (JPY221.7bn) imaging solutions, other) (＋6.8%) Canon's Growth Areas 7% 7% +0pp (Production printing, network cameras, other) (JPY46.0bn) (JPY46.2bn) (+JPY0.2bn) Canon's Profitability Growth Areas -3pp 60% 57% (-JPY24.9bn) (MFP, laser printers, digital cameras, ink jet (JPY378.6bn) (JPY353.7bn) printers, other) (-6.6%) Sales JPY632.2bn JPY621.6bn -1.7% Source: Shared Research based on company data

One feature of Independent Growth areas was the company’s ability to post significant growth in IT Solutions (in the Enterprise and Area segments), including SI for major companies, data center services and the security business. CMJ was also able to grow sales of industrial equipment (Professional segment), capitalizing on market growth.

In Canon Growth areas, network cameras grew (Professional segment) but growth in production printing (Professional segment) was less than initial forecasts due to delayed launches of new products.

In Canon Profitability Growth areas, there was significant growth in mirrorless cameras, but not enough to offset a decline in SLRs. The market for household inkjet printers was also sluggish.

Further details regarding the three areas at the time of announcement can be found below:

Strategy summary Strategy summary Key products and services Increase sales and profits  Realize and maintain top share in key products MFPs, LBPs, cameras, inkjet Existing areas (Canon)  Increase productivity through sales and service reforms printers, digital X-ray  Expand network camera business Network cameras, ・Cooperation with Axis and Milestone projectors, production Canon ・Strengthen solutions printers, business inkjet growth areas  Expand scope of production printing business printers, business imaging ・Processes before and after commercial printing equipment, DreamLab, ・Package printing, industrial printing sectors machine vision Growth areas  Strengthen and enrich IT solutions in all businesses IT solutions Transition from consigned development model to Industrial equipment  solutions proposal model (semiconductors and non- Independent  Expand cross-industry solutions semiconductors) growth areas (Security and outsourcing, etc.) Medical solutions  Commercialize technologies in industrial equipment Infection management,  Strengthen solutions in the medical business pharmacy equipment Source: Shared Research based on company data

Results for the three areas

700 657.2 659.4 646.0 629.3 632.2 621.6 600 190 197 194 198 208 500 222 40.1 42.1 44.0 400 46.5 46.0 46.2 300

200 426.9 420.6 408.2 384.9 379.3 353.7 100

0 FY13 FY14 FY15 FY16 FY17 FY18 (JPYbn) Canon profitability growth areas (prev."existing areas") Canon growth area (prev. "new target areas") Independent growth areas (Beyond Canon) Source: Shared Research based on company data

Canon Profitability Growth areas Canon Profitability Growth areas were previously referred to as Existing areas. This includes the documents business (MFPs and LBPs) in the Enterprise and Area segments and cameras and inkjet printers in the Consumer segment. While seeking improved sales and profits in each area, CMJ aims for stronger sales and profit generation through reforms in sales and services that utilize IT.

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The documents business falls under the Enterprise and Area segments, and the company is engaging in three initiatives aimed at expanding it:

▷ Stronger sales and product expertise in the SME market and expanded shares for machines in field and unit sales in the MFP market;

▷ Expanded sales of solutions materials in related IT and security fields;

▷ In LBP, promotion of business in important sectors such as logistics, retail, medical, pharmacy, and government, with the aim of growing the scope of the business.

▷ The company aims to maintain sales in MFP maintenance services, a recurring revenue business, and expects growth in print volume to offset declines in average prices. Falling print volume leads directly to falling profit, so declining demand is a major cause for concern. However, CMJ is currently No. 3 in the domestic market and thinks that its steadily growing market share will result in increasing print volume as it aims for the No. 1 market share. For LBPs, there is an ongoing transition to MFPs in the office sector, but the company plans to continue focusing on specific sectors that use specialized printers with large output volume.

Digital cameras and IJPs are in the Consumer segment. Digital cameras with interchangeable lenses have a hefty market share of over 40% and are responsible for a large share of segment profit. In this product line, the company will continue with the following measures:

▷ Promotion of “step up” campaigns in digital cameras (expanding entry-level customers and fostering photography enthusiasts);

▷ Expansion of market share by enriching product lineups for mid-range digital camera models, mirrorless models, and interchangeable lenses;

▷ Maintaining profitability in the home inkjet printer market.

The company plans to carry on with its strategy of maintaining the advantages of being one of the remaining players in the mature compact camera and inkjet printer markets, while expanding earnings from interchangeable lens cameras and interchangeable lenses. CMJ aims to achieve the No.1 share in mirrorless cameras, in terms of both number of units and sales.

In the mature markets of compact cameras and IJPs, the company aims to keep its focus on maintaining profitability. In compact cameras, CMJ aims to maintain its full lineup strategy while expanding the share of sales of higher-priced and high-magnification products. In IJP it aims to boost unit sales by expanding sales to the business sector. Advertising spending will be roughly unchanged as the company works to secure profits for individual product lines.

Canon Growth areas The Canon Growth area includes network cameras, projectors, production printing, business inkjet printers, and commercial imaging equipment.

Network cameras In network cameras the company is aiming to create a structure capable of responding to all markets by combining all group resources (Canon, AXIS, milestone) with the company’s customer base, sales power, maintenance support, and alliance partners. CMJ believes it should strengthen the sector, as it is a growth driver. To that end, the company wants to develop sales channels, acquire expertise in design and network construction, train personnel and recruit from outside to strengthen its workforce, as well as form alliances and collaborative partnerships with the aim of accelerating growth.

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Production printing Among production printing businesses, the company places the commercial printing market as a growth area and the industrial print market as new market entry area. The company is moving forward with preparations for this expansion. While the company had focused primarily on the business area of operations in the past, it has a plan to fully shift toward the commercial printing market.

The company aimed for a new beginning in 2017 focused on reaching the goals in the medium-term management plan by utilizing its vast product lineup enhanced by Océ products and strengthening the business structure by increasing personnel. However, in its existing business area of data printing services, there was a delay in launching sales of its monochrome continuous paper printer until Q1 FY12/18. However this product is a replacement for existing products with high MIF numbers, and sales are forecast to proceed steadily after launch. Note that given a tendency for profit contributions from maintenance services to lag product sales by six months to a year, profit contributions are unlikely until FY12/19.

In the commercial printing market, the company is focusing on areas where digital printing demand is rising. From the latter half of 2016, the company has strived to strengthen its sales network. In the industrial printing market, the company will focus on adding new products in the future and will consider making an entry into the signage and package printing and manufacturing printing areas.

Canon Independent Growth areas Independent Growth areas include IT Solutions (ITS, group-wide), industrial machinery (semiconductors, non-semiconductors), medical solutions, infection management, and pharmacy equipment.

Business strategies in ITS revolve around turning the ITS business into a growth driver as the company works to optimize use of group business resources. These are already commercialized and steadily growing results, but the company hopes for further acceleration. In addition to growth in the IT solutions segment itself, the company aims to establish proprietary solutions businesses through inter-segment cooperation.

In system integration services, the company has traditionally received orders from customers for individual projects. It plans to shift to developing solutions for various industries and sectors that can be rolled out across other segments. In its existing IT solutions business, the company seeks to improve its standing in the market, achieve growth through expansion into new areas, and improve profitability and efficiency.

The company is also working to develop methods to link project orders in SI services with consulting and operations and maintenance services for the cloud business. By enriching cloud-related services, CMJ hopes to create a stable revenue base through increased sales via value-added services such as system operations and maintenance. The company also aims to strengthen security. The company is considering ramping up its capex and acquisition activities to meet its targets, and plans to invest in the construction of its second data center (IT infrastructure services).

Medium-term plan (2019–2021) Strategy The company has three core strategies in its current medium-term plan: maintaining earnings in key Canon products; achieving sales and profit growth in growth areas such as IT solutions; and establishing earnings platforms in Canon businesses with growth potential. The main difference from the previous medium-term plan is that, under its previous slogan of becoming a “vibrant high profit company,” the company chased topline growth through hardware unit volume sales at the expense of other considerations, but currently places more importance on earnings.

“Maintaining earnings in key Canon products” applies to primarily hardware products, including interchangeable lens digital cameras, inkjet printers, multifunction printers, and laser printers. The second strategy, “achieving sales and profit growth in growth areas such as IT solutions,” applies to IT solutions and industrial equipment. CMJ wants to establish earnings platforms in Canon businesses with promising growth prospects: network cameras, production printing, and healthcare.

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Numerical targets As was the case in the previous medium-term plan, the current plan does not include growth strategies for the three business areas, but has set targets for existing segments.

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Medium-term plan (2017, 2018, and 2019 announcements)

Out Jan. 31, 2017 FY12/14 FY12/15 FY12/16 FY12/17 FY12/18 FY12/19 CAGR FY12/16 FY12/17 FY12/18 (JPYbn) Act. Act. Act. Target Target Target Vs. prev. Vs. prev. Vs. prev. Sales 659.4 646.0 629.3 645.0 670.0 700.0 3.6% -30.7 -41.0 -55.0 Canon's Profitability Growth Areas 420.6 408.2 388.2 387.2 384.0 381.7 -0.6% Canon's Growth Areas 42.1 44.0 44.5 55.1 64.6 75.2 19.1% Independent Growth Areas 196.7 193.8 196.6 202.7 221.4 243.1 7.3% Group IT Solutions 174.9 172.1 175.0 219.4 7.8% YoY +0.3% -2.0% -2.6% +2.5% +3.9% +4.5% -4.8pp -1.4pp +3. 9pp Canon's Profitability Growth Areas -1.5% -2.9% -4.9% -0.3% -0.8% -0.6% Canon's Growth Areas +5.0% +4.5% +1.1% +23.8% +17.2% +16.4% Independent Growth Areas +3.4% -1.5% +1.4% +3.1% +9.2% +9.8% Group IT Solutions -1.6% +1.7% Operating profit 25.1 26.6 27.7 28.8 30.6 34.0 7.1% +0.7 -0.3 -4.4 OPM 3.8% 4.1% 4.4% 4.5% 4.6% 4.9% +0.3pp +0.2pp -0.3pp Recurring profit 26.6 28.0 28.7 29.6 31.8 35.2 7.0% +2.1 +1.4 +1.6 Net income 16.0 15.7 18.2 19.8 20.7 23.0 8.2% +0.5 +0.7 -2.3 ROE 6.1% 5.7% 6.5% 6.8% 6.9% 7.1% +0.2pp +0.3pp -0.6pp FY12/14 FY12/15 FY12/16 FY12/17 FY12/18 FY12/19 FY12/20 CAGR FY12/17 FY12/18 FY12/19 (JPYbn) Act. Act. Act. Act. Target Target Target (avg. for ratios) Vs. prev. Vs. prev. Vs. prev. Sales 659.4 646.0 629.3 632.2 621.6 680.0 720.0 4.4% -12.8-48.4-20.0 Canon's Profitability Growth Areas 420.6 408.2 384.9 379.3 353.7 377.3 377.7 -0.1% -7.9 -30.3 -4.4 Canon's Growth Areas 42.1 44.0 46.5 46.0 46.2 69.1 78.8 19.7% -9.1 -18.4 -6.1 Independent Growth Areas 196.7 193.8 197.9 207.6 221.7 233.7 263.6 8.3% 4.9 0.3 -9.4 Group IT Solutions 174.9 172.1 177.0 183.9 9.0% Consumer 166.3 163.0 - 170.0 0.7% Enterprise 177.6 183.0 - 220.0 7.4% Area 257.9 261.0 - 280.0 2.8% Professional 54.1 61.0 - 80.0 13.9% Company-wide, eliminations 7.2 -23.0 - -30.0 -261.3% YoY +0.3% -2.0% -2.6% +0.5% -1.7% +9.4% +5.9% -2.0pp -5.6pp +4.9pp Business Solutions +0.9% -1.0% +2.4%+1.1% IT S olutions +4.5% -5.1% -8.8% +4.7% Imaging S ystems -3.3% -3.6% -10.9% -4.3% Industrial and Medical +7.3% -3.1% +18.6% +6.5% Canon's Profitability Growth Areas -1.5% -2.9% -5.7% -1.5% -6.8% +6.7% +0.1% -1.2pp -5.9pp +7.3pp Canon's Growth Areas +5.0% +4.5% +5.7% -1.1% +0.4% +49.6% +14.0% -24.9pp -16.8pp +33.2pp Independent Growth Areas +3.4% -1.5% +2.1% +4.9% +6.8% +5.4% +12.8% +1.8pp -2.4pp -4.4pp Group IT Solutions -1.6% +2.8%+3.9% Operating profit 25.1 26.6 27.7 30.4 32.0 35.0 38.0 7.7% +1.6 +1.4 +1.0 Consumer 12.7 11.6 11.5 -3.2% Enterprise 7.7 8.5 10.0 9.0% Area 11.4 13.2 14.0 7.0% Professional -1.9 -1.3 2.4 Company-wide, eliminations 0.4 - 0.1 OPM 3.8% 4.1% 4.4% 4.8% 5.1% 5.1% 5.3% +0.2pp +0.3pp +0.6pp +0.3pp Consumer 7.6% 7.1% 6.8% -0.3pp Enterprise 4.4% 4.6% 4.5% +0.1pp Area 4.4% 5.1% 5.0% +0.2pp Professional -3.5% -2.1% 3.0%+2.2pp Recurring profit 26.6 28.0 28.7 31.5 33.0 36.0 39.0 7.4% +1.9 +1.2 +0.8 Net income 16.0 15.7 18.2 20.7 21.7 24.2 26.1 8.1% +0.9 +1.0 +1.2 ROE 6.1% 5.7% 6.5% 7.1% 7.1% 7.7% 7.9% 25.0% +0.3pp +0.2pp +0.6pp FY12/14 FY12/15 FY12/16 FY12/17 FY12/18 FY12/19 FY12/20 FY12/21 CAGR FY12/18 FY12/19 FY12/20 (JPYbn) Act. Act. Act. Act. Target Target Target Target (avg. for ratios) Vs. prev. Vs. prev. Vs. prev. Sales 659.4 646.0 629.3 632.2 621.6 622.0 635.0 655.0 1.8% +621.6 +622.0 -165.0 Consumer 166.3 150.2 138.8 135.0 132.5 -4.1% Enterprise 177.6 187.7 190.0 199.0 210.0 3.8% Area 257.9 255.9 262.9 265.0 272.5 2.1% Professional 54.1 52.4 48.7 55.0 60.0 4.6% Company-wide, eliminations 7.2 7.0 -18.4 -19.0 -20.0 YoY +0.3% -2.0% -2.6% +0.5% -1.7% +0.1% +2.1% +3.1% -3,201.7pp -3,499.9pp Consumer -9.6% Enterprise +5.7% Area -0.8% Professional -3.1% Company-wide, eliminations -2.4% Operating profit 25.1 26.6 27.7 30.4 28.9 29.5 31.0 33.5 5.0% +30.2 +29.5 -9.0 Consumer 12.7 7.3 6.9 7.0 7.0 -1.5% Enterprise 7.7 9.6 9.7 10.3 11.5 6.2% Area 11.4 13.0 12.1 12.5 13.0 -0.1% Professional -1.9 -0.9 1.1 1.5 2.5 Company-wide, eliminations 0.4 0.0 -0.3 -0.3 -0.5 OPM 3.8% 4.1% 4.4% 4.8% 4.7% 4.7% 4.9% 5.1% +0.0pp +4.7pp +4.7pp -0.1pp Consumer 7.6% 4.9% 5.2% 5.3% -0.8pp Enterprise 4.4% 5.1% 5.2% 5.5% +0.3pp Area 4.4% 5.1% 4.7% 4.8% +0.1pp Professional -3.5% -1.8% 2.7% 4.2% +2.1pp Recurring profit 26.6 28.0 28.7 31.5 33.0 36.0 39.0 39.0 7.4% - - Net income 16.0 15.7 18.2 20.7 21.7 24.2 26.1 26.1 8.1% - - ROE 6.1% 5.7% 6.5% 7.2% 7.1% 7.7% 7.9% 7.9% +0.2pp - - Source: Shared Research based on company data

21/69 Canon Marketing Japan / 8060 RCoverage LAST UPDATE: 2019.05.20 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Market view and forecasts by segment Consumer The company aims to keep segment profit roughly steady despite ongoing declines in sales through FY12/21. In mainstay interchangeable lens digital cameras, it expects sales for mirrorless models to grow while sales for SLR cameras shrink. The company aims to maintain profit levels that will allow it to expand its full-size mirrorless camera and interchangeable lens lineups. For inkjet printers, considering that the number of New Year’s postcards has declined from its peak by 50%, CMJ expects that consumer demand will continue to shrink overall despite growth in the business market and in large capacity ink tank models. The company plans to improve its previously insufficient business lineup and boost appeal to expand sales of inkjet and low-end laser printers.

Enterprise CMJ projects solid growth to continue throughout the medium-term plan. Forecasts show that the company expects an uptrend in OPM as well, thanks to growth in IT solutions.

The company expects the domestic market for IT solutions to continue trending upward.

Market forecasts for CMJ focus areas CAGR (2018–2021) Data centers ＋8.5％ IT security ＋5.5% Business process outsourcing (BPO) ＋4.9%

Source: Shared Research based on company data

Group IT solutions sales

(JPYbn)

350.0 300.0

300.0

CAGR 250.0 ＋5% 197.7 200.0 ＋8.6% ＋3% 20.6 ＋3%

150.0 58.1

230.0 100.0 ・・・ 172.1 176.8 182.0

119.0 50.0

0.0 2015 2016 2017 2018 2021 Next long-term plan target

Enterprise Area Other

Source: Shared Research based on company data

22/69 Canon Marketing Japan / 8060 RCoverage LAST UPDATE: 2019.05.20 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Conceptual outline of growth toward ITS3000 2019-2021 Keywords for ITS expansion me dium- t er m ITS3000 Main growth drivers plan - Expanding system integration packages

Enterprise - Creating businesses to offer services

Strategies by - Expanding solutions by business operation and by industry (incl. M&A) customer group - Expanding into partner channels

Area - Expanding coverage of maintenance support (CSS)

- Increasing solution lineup (including M&A)

- Expanding the scale of data center IT infrastructure - Developing businesses to support the full range of IT life cycle (operations and planning)

Crossover business areas Security - Establishing models for proposing total security

BPO - Expanding BPO specialized for target operations (including M&A)

Source: Shared Research based on company data

System integration for major companies

Source: Shared Research based on company data

CMJ thinks that IT investment in any industry is for the purpose of carrying out operations with as little labor as possible, and is thinking of conducting sales activities to uncover such business opportunities. The company plans to tap into its existing client base as much as possible.

The company plans to offer IT infrastructure services as a set with infrastructure building and subsequent support, rather than offering infrastructure building alone. CMJ plans to further acquire the technology and knowledge necessary to offer total packages that involve building infrastructure and follow-up services.

CMJ believes that demand for security and BPO will remain strong going forward, which will also make the ability to offer all-encompassing packages a necessity. The company plans to improve its ability to secure orders with the necessary personnel and in-house training, and procure necessary resources externally where there are shortcomings.

Service equipment ancillary to IT solutions is also likely to grow. The company considers a significant decline in MFPs to be unlikely. CMJ plans to encourage SME customers who generate large print volume to install the product. This customer

23/69 Canon Marketing Japan / 8060 RCoverage LAST UPDATE: 2019.05.20 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

demographic has traditionally been a weak area for CMJ. The company also plans to improve productivity in maintenance services which are growing in line with the number of machines in operation. In laser printers, the company forecasts that specialty applications will not decline despite the continuing shift to MFPs. Canon had the No. 1 market share in laser printers in FY12/18 as well. The company is encouraging existing users to join remote-monitoring service NETEYE as it aims to improve service efficiency.

Area The company plans to strengthen IT solutions in this segment as well. CMJ thinks it is important to be viewed as an “IT concierge,” somewhere the customers can bring all their IT troubles, by the target SMEs. The company is aiming to create systems that will enable optimal support proposals regardless of industry sector or operations.

IT solutions for SMEs

Source: Shared Research based on company data

Professional In this segment, the company plans to strengthen network cameras and production printing. In network cameras, AXIS products are already growing. However, CMJ is looking beyond cameras themselves as it considers the ideal shape the business should take in terms of profitability. It is focusing on the expansion of demand beyond cameras to include issues such as where to store imagery and how to use it. The company has expressed its intention to propose solutions centered on the video management system offered by milestone systems in an effort to move toward a more value-added business. In production printing, CMJ has long been aware that continuous feed printers are not in a healthy state. The company had thought that this market would shift from offset printing to inkjet and digital, but such trends are not forthcoming. Accordingly, CMJ plans to release color inkjet continuous feed printers and other new products to drive the shift to digital and inkjet. In healthcare, the company plans to leverage its strength in medical IT and move to bigger and primary projects.

24/69 Canon Marketing Japan / 8060 RCoverage LAST UPDATE: 2019.05.20 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Growth in the industrial equipment sector

Source: Shared Research based on company data

Profitability Growth areas: MFPs, LBPs, digital cameras, and inkjet printers. Canon Growth areas: production printing and network cameras. Independent Growth areas: IT Solutions and Industrial Equipment

Main group companies and segments

Enterprise Canon IT Solutions Professional PP Canon Production Printing Systems Canon BizAttenda Healthcare Canon Lifecare Solutions Area Canon System & Support Canon ITS Medical

Source: Shared Research based on company materials

Earnings model

Conventional revenue models Models for revenue growth in future

IT maintenance services MFP ＋ Maintenance services Cloud services

Data center services LBP ＋ Toner cartridges Security …

Inkjet printers Create and strengthen ＋ Ink cartridges recurring revenue businesses based on IT solution technologies

Source: Shared Research based on company data

25/69 Canon Marketing Japan / 8060 RCoverage LAST UPDATE: 2019.05.20 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Business Description A part of the Canon Group CMJ was formed in 1968 originally as Canon Office Machine Sales, which was founded from the Office Machine Sales Division of Canon Inc. (TSE1: 7751). The company got its current name in 2006 and is keen to get recognized as a separate brand, not just Canon’s subsidiary. Adding IT Solutions business is a step in realizing that ambition. At the same time, the main mission remains to enhance the power of the “Canon” brand.

As of September 2017, the parent Canon Inc. held 50.1% of CMJ’s shares. To a frequently asked question about why to list a subsidiary at all, CMJ comments that one of the motivations behind its IPO was to maximize its corporate value by developing independent businesses (e.g., IT Solutions) and acquiring companies through stock markets.

CMJ has exclusive distribution rights to Canon products in Japan while being responsible for maintenance and other support services, and all domestic marketing activities. Overseas sales and marketing are similarly supported by semi-independent local subsidiaries such as Canon USA in the US. Canon Inc. itself is engaged in development and manufacturing of Canon products but not in their sales (except for some of semiconductor manufacturing equipment).

By segment, while IT Solutions does not handle any Canon products, Business Solutions and Consumer Imaging operations are centered on Canon products. In Industrial Equipment, CMJ handles some non-Canon products such as imported products.

While the dependence seems obvious, CMJ counters that its relationship with the parent is intentionally designed to mimic that of an independent sales company and its supplier. The pricing is set through negotiations, i.e., parent Canon Inc. does not control pricing at CMJ. CMJ sets market share targets for each product, determines price points, sets the marketing budget (CMJ carries the burden of all non-corporate advertising and product promotions) and its own profit margins, and then negotiates its purchase prices with Canon based on that analysis.

26/69 Canon Marketing Japan / 8060 RCoverage LAST UPDATE: 2019.05.20 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Main business segments CMJ’s business consists of Business Solutions, Imaging Systems (mainly sale of digital cameras and inkjet printers), IT Solutions, and Industrial Equipment. Note: in January 2018, the company shifted its organizational structure from the previous product driven structure to a consumer driven one, and reporting segments changed.

The new segments are as follows; Consumer: Just as in the previous Imaging Systems business, this serves individual customers, Enterprise: Targeting large corporations, providing input/output devices and sector-specific IT solutions and services, Area: An SME version of the Enterprise business. In addition to selling I/O devices, provides one-stop security and other IT solutions, and Professional: Developing solutions businesses targeting customers in specific sectors (production printing, industrial equipment, healthcare, network cameras and other imaging solutions).

Note that there are changes to segment disclosure under the new structure. Announcements regarding profit targets and strategies for the new segments have been held over until the Q1 results briefing. An overview of the previous segments follows.

Main group companies and segments

Enterprise Canon IT Solutions Professional PP Canon Production Printing Systems Canon BizAttenda Healthcare Canon Lifecare Solutions Area Canon System & Support Canon ITS Medical

Source: Shared Research based on company materials Business Solutions Business Solutions encompasses multifunctional products (MFPs—devices that combine copier, printer, scanner, fax, and other functions), digital commercial printing, laser printers, large format printers (LFPs), consumables (toner and ink cartridges), and maintenance/support services. The company offers not only office equipment but also software and support aiming both to sell hardware as well as to help its clients boost operational efficiency

When the company’s sales staff sells hardware, the customers pay the price of the hardware units and from that point continue to pay for maintenance and consumables, major cash flow drivers. The company bills copy charges for each installed MFP, producing recurring monthly revenue. Copy charges are tracked by a counter and include the charges for consumables (e.g., drum, toner) and maintenance work (e.g., technical and visitation fees).

To provide appropriate customer support, the company hires support engineers nationwide. In addition, CMJ operates a remote-monitoring service called NETEYE to automatically detect low toner levels or other issues.

Source: Shared Research based on company data.

CMJ sells directly to larger companies but primarily uses partners (distributors) and group companies to sell to smaller customers.

When a partner distributes Canon products, it books the sales of hardware but only receives commission on the maintenance and support revenues. The support contract is concluded directly between CMJ and the end user.

27/69 Canon Marketing Japan / 8060 RCoverage LAST UPDATE: 2019.05.20 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

IT Solutions From FY12/12, CMJ reorganized the sub-segments within the IT Solutions segment, which now encompasses the system integration (SI), IT infrastructure and service, embedded system, and products businesses (these components are explained below). While the company develops 15% of its software to be included with Canon products or for systems used by Canon, the remaining 85% of CMJ software is targeting outside customers. To cope with volatility caused by the economic environment, the company has been focusing on outsourcing and other services capable of producing recurring revenues, and it began operating the Nishi-Tokyo Data Center in October 2012.

SI Service: In Scratch Development (i.e., new development as opposed to customization or adding functions) CMJ generally develops systems for companies in the financial, manufacturing, and distribution/services industries. The SI Solutions includes healthcare-related systems as well as CAD and ERP solutions for manufacturers.

IT Infrastructure and Services: Services range from system integration and virtualization to next-generation networks, data centers, and business process outsourcing (BPO).

CMJ built a new data center in Nishi-Tokyo with a lot area of 16,532m2 and space for the equivalent of 2,300 server racks. The new center opened in October 2012 as a core facility of the outsourcing service business and cloud services. The center has a base-isolated structure combining a seismic isolation system and oil dampers. This structure reduces the building’s seismic motion. The lots and building have seven up to layers of security. The entire building is covered by an electromagnetic shield effective in blocking mobile phones and other radio signals to prevent data leaks.

Data Center (Scheduled to Begin Operations in 2012)

Source: Shared Research based on company data.

Embedded System: CMJ develops embedded software for mobile phones, cars, etc.—both for Canon and third parties.

Products: Sales of (generally non-Canon) hardware and packaged software.

Imaging System In FY12/13, the segment name was changed from previous Consumer Imaging to Imaging System. The company acts as a wholesaler, directly supplying Canon consumer products such as digital SLR cameras, compact digital cameras, home-use printers, digital camcorders, etc., as well as commercial imaging equipment, to large electronics retailers and other retailers focusing on camera sales.

Major revenue sources for the company within the segment are inkjet printers (cartridges) and digital SLR cameras (as well as the cameras’ interchangeable lenses).

In FY12/12, the broadcasting equipment business was transferred from the Industrial Equipment segment to the Imaging System segment. CMJ sells HD-compatible lenses for TV cameras and such solutions as disaster-prevention surveillance camera systems for municipalities. In addition, CMJ entered the motion picture production market with the January 2012 launch of the Cinema

28/69 Canon Marketing Japan / 8060 RCoverage LAST UPDATE: 2019.05.20 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

EOS System (a family of motion picture production equipment), and the company is aiming to capture a share of the growing 4K market.

4K: Television technology that provides display resolution four times greater than full HD. The horizontal pixel count is approximately 4,000, hence the name “4K TV.”

Industrial and Medical In FY12/14, the name of the Industrial Equipment segment was changed. In semiconductor equipment, CMJ sells U.S.-based Mattson’s semiconductor manufacturing equipment (e.g., lamp anneal), as well as semiconductor inspection and measurement equipment (e.g., wafer inspection systems. In addition, it offers Canon-made precision-engineered components and Zygo-manufactured optical profilers.

In medical equipment, within the medical imaging field CMJ handles such equipment as medical imaging diagnostic equipment, preventive medicine (health check-up) support equipment (systems for facilities specializing in health check-ups), and image filing systems for private medical practices. In the healthcare field, the company handles equipment for infection prevention, healthcare-related equipment, dispensing pharmacy-related equipment, and ophthalmic equipment. Clients include medical equipment dealers that serve hospitals, clinics, health centers, health management centers, welfare facilities and fitness clubs nationwide, as well as pharmaceutical sales companies.

Following the acquisition of ELK Corporation (now Canon Lifecare Solutions Inc.) in 2011, CMJ has strengthened its capabilities in the area of healthcare-related solutions. The main business of the former ELK Corporation was the sale and manufacture of medical supplies and equipment. Consequently, ELK had built a broad client base nationwide, including large hospitals, private hospitals, clinics, and dispensing pharmacies.

On November 1, 2012, the company changed the name of ELK Corporation to Canon Lifecare Solutions Inc. In addition, the sales and maintenance department of CMJ’s medical equipment business was transferred to Canon Lifecare Solutions. This move was aimed at strengthening the sales capabilities of the business by integrating sales, maintenance, and support services. CMJ also announced its entry into the picture archiving and communication systems (PACS) business, and launched sales in January 2013. The business is targeting small- and medium-sized medical institutions.

29/69 Canon Marketing Japan / 8060 RCoverage LAST UPDATE: 2019.05.20 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Profitability snapshot, financial ratios

Financial ratios

Profit margins FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 (JPYmn) Cons.Cons.Cons.Cons.Cons.Cons.Cons.Cons.Cons. Gross profit 227,543 222,892 220,884 220,209 233,536 233,104 226,007 223,771 218,173 GPM 33.8% 35.2% 33.5% 33.5% 35.4% 36.1% 35.9% 35.4% 35.1% Operating profit 7,735 8,441 16,802 17,012 25,087 26,647 27,676 30,406 28,941 OPM 1.1% 1.3% 2.5% 2.6% 3.8% 4.1% 4.4% 4.8% 4.7% EBITDA 22,378 19,281 33,581 34,511 42,303 42,413 43,345 44,674 42,222 EBITDA margin 3.3% 3.0% 5.1% 5.3% 6.4% 6.6% 6.9% 7.1% 6.8% Net margin 0.6% 1.1% 1.6% 1.5% 2.4% 2.4% 2.9% 3.3% 3.4% Financial ratios ROA (RP-based) 2.1% 2.4% 4.0% 3.9% 5.6% 5.8% 5.8% 6.2% 6.0% ROE 1.5% 2.7% 4.2% 4.0% 6.1% 5.7% 6.5% 7.1% 6.9% Total asset turnover 1.50 1.41 1.45 1.41 1.39 1.34 1.28 1.25 1.23 Inventory turnover 19.3 17.5 15.9 15.3 15.2 14.3 13.4 12.8 12.1 Days of inventory 18.9 20.9 23.0 23.8 24.0 25.6 27.1 28.5 30.3 Working capital 36,567 49,313 52,312 52,431 54,950 54,077 51,792 58,556 74,230 Current ratio 192.2% 199.9% 193.8% 197.0% 206.1% 217.7% 230.7% 252.5% 298.1% Quick ratio 239.6% 237.7% 228.3% 229.9% 240.6% 238.3% 231.1% 275.9% 327.0% OCF / Current liabilities 0.23 0.06 0.21 0.18 0.23 0.18 0.21 0.18 0.12 Net debt / Equity -6.5% -6.3% -9.2% -7.8% -13.4% -13.3% -27.3% -22.2% -21.4% OCF / Total liabilities 0.2 0.0 0.2 0.1 0.2 0.1 0.2 0.1 0.1 Cash conversion cycle (days) -0.4 0.3 7.3 7.3 6.4 7.6 7.2 9.8 21.5 Changes in working capital -8,513 12,746 2,999 119 2,519 -873 -2,285 6,764 15,674 Cash conversion cycle FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 Cons.Cons.Cons.Cons.Cons.Cons.Cons.Cons.Cons. Accounts receivable turnover 5.5 5.2 5.3 5.0 5.0 5.1 5.0 5.1 5.1 Accounts receivable days 66.2 69.8 69.4 72.3 72.3 71.9 72.6 72.2 71.2 Inventory turnover 19.3 17.5 15.9 15.3 15.2 14.3 13.4 12.8 12.1 Days in inventory 18.9 20.9 23.0 23.8 24.0 25.6 27.1 28.5 30.3 Accounts payable turnover 4.3 4.0 4.3 4.1 4.1 4.1 3.9 4.0 4.6 Accounts payable days 85.5 90.4 85.0 88.8 89.9 89.8 92.5 91.0 80.0 Cash conversion cycle (days) -0.38 0.28 7.34 7.31 6.38 7.62 7.22 9.75 21.54 Source: Shared Research based on company data. Note: Figures may differ from company materials due to differences in rounding methods. Note: From FY12/13, a portion of promotion costs previously booked as SG&A expenses are deducted directly from sales (net method). Note: From FY12/14, a portion of CoGS is booked under SG&A expenses. FY12/13 figures have been adjusted to reflect this change. Note: FY12/13 YoY figures are based on retroactively adjusted amounts for FY12/13 and FY12/12.

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Strengths and weaknesses

Strengths

◤ Recurring revenue streams (recurring-revenue businesses): A high percentage of CMJ revenues are recurring thanks to maintenance services and toner cartridges in Business Solutions and consumables for inkjet printers in Consumer Imaging.

◤ Sharing a powerful Canon brand: CMJ strongly benefits from its association with Canon brand, one of the most recognized and powerful brands in Japan. Shared Research thinks this brand strength represents a substantial opportunity for CMJ in its push to grow its IT Solutions business.

◤ Strong balance sheet: The company has a substantial war chest to buy growth (the problem being finding the growth domestically and learning about overseas opportunities). It could also substantially enhance shareholder returns (the problem being a restrictively large Canon stake; as of 2012 this aspect should probably be valued for its option value not the immediate likelihood).

Weaknesses

◤ Limited domestic growth opportunities: While the company should be able to improve (restore) its profitability, the organic growth opportunities in Japan are severely limited by the lack of economic growth. It seems to Shared Research that the IT services business is the only one CMJ could buy some growth. However, there is a dearth of growing IT services of the quality and size that would match CMJ needs. In the core business only a sudden death of a competitor would provide a clear opportunity for a sustainable expansion.

◤ Inability to expand the core business overseas: Because of the traditional split of responsibilities within the Canon group, CMJ is restricted from pursuing business opportunities overseas in the core areas of Business Solutions and Consumer Imaging. That leaves the company mostly with industrial equipment (including medical imaging) and IT services.

◤ High volatility in IT services market: CMJ is pushing M&A in its IT Solutions segment. The IT services market constantly sees significant changes, such as the emergence of cloud services, resulting in dynamic changes in customer needs. Whether the companies acquired by CMJ will continue to be competitive along with changing times depends on the company’s ability to know what is happening and what should be done. Also, CMJ has the target of generating 30% of its total revenues from sources other than Canon and Canon group companies by FY12/15 (“Beyond CANON”). Given the company’s scale (fairly large) and sales levels (fairly high), the 30% mark seems ambitious. To grow the IT Solutions segment, finding the right acquisition targets would be indispensable, but most likely require patience and endurance.

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Market and value chain

Market statistics

Specified Service Industry YoY Activity Index

+30% Office equipment System integration (SI) sales

+20%

+10%

0%

-10%

-20%

-30%

-40% Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18

Source: Ministry of Economy, Trade and Industry data, and Shared Research data

Changes in Monthly Domestic Shipment values – digital cameras with interchangeable lenses

Amount shipped: interchangeable-lens (Japan; right axis) YoY Average selling price YoY +80% 35 30.8 +60% 27.3 30 23.6 24.0 +40% 22.0 25 20.5 20.6 20.8 19.4 18.9 18.8 19.6 +20% 18.1 18.0 17.4 20 16.3 17.1 16.4 16.4 16.9 16.8 15.5 15.4 15.3 15.3 16.2 15.6 15.8 15.2 14.0 14.3 14.3 15.1 14.3 14.1 14.6 0% 13.1 13.7 15 11.4 -20% 8.8 10

-40% 5

-60% 0 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 FY12/09 FY12/10 FY12/11 FY12/12 FY12/13 FY12/14 FY12/15 FY12/16 FY12/17 FY12/18 (JPYbn) Source: Shared Research based on Camera & Imaging Products Association data

Changes in Monthly Domestic Shipment values—interchangeable lenses for single-lens reflex cameras

Amount shipped: interchangeable lenses (Japan; right axis) YoY Average selling price YoY +60% 25 20.7 19.8 +40% 19.0 19.2 20 18.3 17.7 18.2 18.2 18.3 16.9 15.8 15.8 15.4 15.0 15.4 14.7 14.7 14.3 14.3 13.6 13.9 +20% 12.8 13.0 12.9 13.3 13.4 13.1 15 10.8 0% 10

-20% 5

-40% 0 Q1 Q1 Q1 Q1 Q1 Q1 Q1 FY12/12 FY12/13 FY12/14 FY12/15 FY12/16 FY12/17 FY12/18 (JPYbn) Source: Shared Research based on Camera & Imaging Products Association data

Changes in Monthly Domestic Shipment values—compact digital cameras

Amount shipped: compact (Japan; right axis) YoY Average selling price YoY +60% 50 42.8 +40% 38.8 38.7 40 34.4 35.3 32.8 32.9 +20% 31.2 28.3 26.6 26.3 30 24.1 23.4 0% 22.821.7 19.1 18.6 18.818.8 20 -20% 13.9 14.3 13.8 12.912.1 12.3 12.0 11.3 10.5 9.6 10.2 9.6 8.9 8.8 9.3 8.0 7.9 6.9 7.9 7.3 10 -40% 6.1

-60% 0 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 FY12/09 FY12/10 FY12/11 FY12/12 FY12/13 FY12/14 FY12/15 FY12/16 FY12/17 FY12/18 (JPYbn) Source: Shared Research based on Camera & Imaging Products Association data

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Domestic Digital Camera Shipment, shipment value and average unit price

('000 units) 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 201620172018 Digital Still Camera Total 8,547 8,443 9,424 10,988 11,111 9,748 10,573 9,509 9,154 7,929 5,784 4,897 3,520 3,521 2,846 with Built-in Lens 8,174 7,892 8,707 9,922 9,860 8,677 9,072 8,040 7,322 5,595 3,977 3,269 2,237 2,303 1,786 with Interchangeable Lens 373 551 717 1,066 1,251 1,071 1,501 1,469 1,832 2,334 1,807 1,628 1,283 1,219 1,060 Interchangeable Lenses 810 1,008 1,086 1,665 1,902 1,822 2,634 2,696 3,191 3,959 3,279 3,178 2,511 2,480 2,072 Y oY Digit al St ill Camera T ot al +1.3% -1.2% +11.6% +16.6% +1.1% -12.3% +8.5% -10.1% -3.7% -13.4% -27.1% -15.3% -28.1% +0.0% -19.2% with Built-in Lens -1.2% -3.4% +10.3% +14.0% -0.6% -12.0% +4.5% -11.4% -8.9% -23.6% -28.9% -17.8% -31.6% +2.9% -22.5% with Interchangeable Lens +126.1% +47.7% +30.1% +48.6% +17.4% -14.4% +40.2% -2.1% +24.7% +27.4% -22.6% -9.9% -21.2% -5.0% -13.0% Interchangeable Lenses +10.4% +24.5% +7.8% +53.2% +14.2% -4.2% +44.5% +2.4% +18.3% +24.1% -17.2% -3.1% -21.0% -1.3% -16.5%

(JPYmn) 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Digit al St ill Camera T ot al 243,199 232,472 244,300 273,012 263,077 207,704 198,136 162,143 164,102 164,163 138,377 121,658 94,534 102,346 87,575 with Built-in Lens 213,914 194,058 199,036 209,420 190,437 153,079 133,744 105,201 87,114 70,077 52,260 46,878 33,955 36,728 29,963 with Interchangeable Lens 29,285 38,415 45,264 63,592 72,640 54,625 64,392 56,943 76,988 94,086 86,116 74,780 60,579 65,618 57,612 Interchangeable Lenses 20,638 25,020 30,533 41,962 47,284 38,931 51,461 47,407 57,695 73,153 65,631 73,919 56,742 56,933 54,552 Y oY Digit al St ill Camera T ot al -0.7% -4.4% +5.1% +11.8% -3.6% -21.0% -4.6% -18.2% +1.2% +0.0% -15.7% -12.1% -22.3% +8.3% -14.4% with Built-in Lens -6.1% -9.3% +2.6% +5.2% -9.1% -19.6% -12.6% -21.3% -17.2% -19.6% -25.4% -10.3% -27.6% +8.2% -18.4% with Interchangeable Lens +72.0% +31.2% +17.8% +40.5% +14.2% -24.8% +17.9% -11.6% +35.2% +22.2% -8.5% -13.2% -19.0% +8.3% -12.2% Interchangeable Lenses +28.4% +21.2% +22.0% +37.4% +12.7% -17.7% +32.2% -7.9% +21.7% +26.8% -10.3% +12.6% -23.2% +0.3% -4.2%

(JPY) 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Digital Still Camera Total 28,454 27,534 25,923 24,846 23,677 21,307 18,740 17,052 17,927 20,705 23,925 24,843 26,853 29,064 30,772 with Built-in Lens 26,170 24,589 22,859 21,106 19,314 17,641 14,743 13,085 11,898 12,525 13,140 14,338 15,178 15,950 16,781 with Interchangeable Lens 78,512 69,718 63,130 59,668 58,074 51,001 42,888 38,752 42,020 40,310 47,663 45,945 47,208 53,840 54,332 Interchangeable Lenses 25,486 24,825 28,104 25,204 24,861 21,362 19,538 17,584 18,083 18,476 20,014 23,260 22,595 22,959 26,331 Y oY Digit al St ill Camera T ot al -2.0% -3.2% -5.9% -4.2% -4.7% -10.0% -12.0% -9.0% +5.1% +15.5% +15.6% +3.8% +8.1% +8.2% +5.9% with Built-in Lens -5.0% -6.0% -7.0% -7.7% -8.5% -8.7% -16.4% -11.2% -9.1% +5.3% +4.9% +9.1% +5.9% +5.1% +5.2% with Interchangeable Lens -23.9% -11.2% -9.4% -5.5% -2.7% -12.2% -15.9% -9.6% +8.4% -4.1% +18.2% -3.6% +2.7% +14.0% +0.9% Interchangeable Lenses +16.3% -2.6% +13.2% -10.3% -1.4% -14.1% -8.5% -10.0% +2.8% +2.2% +8.3% +16.2% -2.9% +1.6% +14.7% Source: Shared Research based on Camera & Imaging Products Association data

Customers

In Business Solutions, the company makes direct sales to larger corporate clients, while sales to smaller companies are usually through partners.

In IT Solutions, many CMJ customers are in the manufacturing and financial industries. The segment’s core (Canon IT Solutions Inc.) is made up of Sumitomo Metal Systems Solutions, a subsidiary previously affiliated with Sumitomo Metal Industries. As such, the expertise was in metal production control systems, leading to strength in manufacturing solutions in general. Argo 21 (now part of Canon IT Solutions) had ties with Nomura Research Institute (strong in IT services for financial institutions) and that means a relative strength in the financial sector.

In Consumer Imaging, CMJ sells wholesale to electronics retailers and other retailers focusing on camera sales as well as to Amazon and other online shopping sites.

Competition

In the copier market, the company’s main competitors include Ricoh Co., Ltd. (TSE1: 7752), Fuji Xerox (FUJIFILM Holdings Corporation, TSE1: 4901), Sharp Corporation (TSE1: 6753) and Konica Minolta, Inc. (TSE1: 4902). There are only eight players competing in the domestic market. Canon Marketing Japan ranks third in the market after Ricoh and Fuji Xerox (FY03/13), and appears to have room to grow its market share.

In IT Solutions (future growth driver), the company is facing countless industry players. In February 2014 the number of members of the Japan Information Technology Services Industry Association (JISA) stood at more than 500 companies. The structure of the industry resembles that of the construction industry. At the top are primary contractors such as NTT Data (TSE1: 9613), NRI (TSE1: 6701), NEC (TSE1: 6701), Fujitsu (TSE1: 6702), and Hitachi (TSE1: 6501). These contractors undertake development projects by working with subcontractors.

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In the interchangeable lens digital camera market, Canon is the leader with more than half of the single-lens reflex market. Its share in mirrorless cameras is in an uptrend, rising from No. 4 in 2014, to No. 3 in 2015, and No. 2 in 2016 and 2017 (No.1 in Q4 standalone). In the compact digital camera market, the competition includes Sony (TSE1: 6758), Casio (TSE1: 6952), Nikon (TSE1: 7731), and Panasonic (TSE1: 6752). However, Canon remains the market leader.

Seiko Epson Corp. (TSE1: 6724) is the core competition for consumer inkjet printers. The company has maintained the No. 1 position for four consecutive years since 2014.

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Historical performance and financial statements

Financial statements

Due to changes in accounting policy from FY12/13, the company restated FY12/12 sales after deducting sales promotion costs However, past financial data listed below have not been adjusted.

Income statement

Income statement FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 (JPYmn) Cons.Cons.Cons.Cons.Cons.Cons.Cons.Cons.Cons. Sales 674,159 632,418 659,218 657,215 659,432 646,002 629,313 632,189 621,591 YoY -1.8% -6.2% 4.2% -0.3% 0.3% -2.0% -2.6% 0.5% -1.7% Cost of sales 446,616 409,526 438,334 437,006 425,896 412,898 403,306 408,418 403,417 Gross profit 227,543 222,892 220,884 220,209 233,536 233,104 226,007 223,771 218,173 YoY -2.4% -2.0% -0.9% -0.3% 6.1% -0.2% -3.0% -1.0% -2.5% GPM 33.8% 35.2% 33.5% 33.5% 35.4% 36.1% 35.9% 35.4% 35.1% SG&A expenses 219,807 214,450 204,082 203,197 208,448 206,457 198,331 193,365 189,231 SG&A ratio 32.6% 33.9% 31.0% 30.9% 31.6% 32.0% 31.5% 30.6% 30.4% Operating profit 7,735 8,441 16,802 17,012 25,087 26,647 27,676 30,406 28,941 YoY 22.8% 9.1% 99.1% 1.2% 47.5% 6.2% 3.9% 9.9% -4.8% OPM 1.1% 1.3% 2.5% 2.6% 3.8% 4.1% 4.4% 4.8% 4.7% Non-operating income (expenses) 2,135 2,722 1,764 1,650 1,756 1,770 1,405 1,328 1,807 Non-operating expenses 391 495 458 453 290 376 363 244 229 Recurring profit 9,480 10,668 18,108 18,210 26,553 28,040 28,717 31,491 30,519 YoY 15.3% 12.5% 69.7% 0.6% 45.8% 5.6% 2.4% 9.7% -3.1% RPM 1.4% 1.7% 2.7% 2.8% 4.0% 4.3% 4.6% 5.0% 4.9% Extraordinary gains 615 4,507 364 629 679 559 1,473 1,482 830 Extraordinary losses 1,512 4,203 944 1,785 1,374 1,102 1,287 2,054 641 Income taxes 4,770 4,204 6,925 6,848 9,794 11,769 10,707 10,222 9,815 Implied tax rate 55.6% 38.3% 39.5% 40.2% 37.9% 42.8% 37.0% 33.1% 32.0% Minority interests 89 325383357331566 Ne t in c o me 3,724 6,763 10,578 10,167 16,030 15,670 18,161 20,679 20,826 YoY -185.7% 81.6% 56.4% -3.9% 57.7% -2.2% 15.9% 13.9% 0.7% Net margin 0.6% 1.1% 1.6% 1.5% 2.4% 2.4% 2.9% 3.3% 3.4% Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. Note: From FY12/13, some of sales promotion costs, previously booked under SG&A, are directly deducted from sales. Note: From FY12/14, some of CoGS are booked under SG&A, and rearranged FY12/13 numbers accordingly. Note: YoY comparison for FY12/13 is based on retroactively revised FY12/13 versus FY12/12 (without such revision).

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Balance sheet

Balance sheet FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. ASSETS Cash and deposits 15,975 19,303 23,406 20,082 36,107 36,773 76,785 66,479 65,071 Notes and accounts receivable 118,886 123,027 127,648 132,696 128,473 125,906 124,475 125,626 117,041 Operational investment securities 94,599 83,219 85,029 82,200 84,500 62,800 30,500 70,500 70,500 Inventories 20,530 26,332 28,826 28,233 27,814 30,005 29,979 33,870 33,020 Others 147,320 133,646 136,958 144,115 147,315 155,059 131,023 171,629 172,203 Allowance for doubtful accounts -509 -215 -230 -188 -113 -201 -121 -98 -91 Total current assets 302,202 302,093 316,608 324,938 339,596 347,542 362,141 397,506 387,244 Total tangible fixed assets 86,127 91,928 99,564 99,684 100,059 99,310 96,701 75,090 71,987 Total intangible fixed assets 23,736 20,435 15,986 12,894 10,906 9,499 6,819 5,485 4,940 Investment securities 4,133 4,084 4,108 5,303 6,292 7,789 7,422 9,027 7,985 Long-term loans 153023111110102936 Guarantee deposits 8,624 7,857 6,202 5,571 5,338 5,274 4,824 4,880 4,423 Others 33,545 30,301 26,785 24,638 23,238 22,649 24,976 24,021 26,703 Allowance for doubtful accounts -329 -446 -501 -393 -357 -298 -344 -327 -432 Investments and other assets 37,364 33,969 30,415 29,559 29,184 30,150 32,064 32,750 34,292 Total fixed assets 146,899 146,332 145,965 142,137 140,151 138,959 135,585 113,325 111,545 Total assets 448,592 447,765 462,574 467,076 479,747 486,502 497,727 510,832 498,790

LIA BILITIES Notes and accounts payable 102,849 100,046 104,162 108,498 101,337 101,834 102,662 100,940 75,831 Short-term debt 0 2,731 0 0 0 0 0 272 116 Others 54,398 48,313 59,235 56,416 63,433 57,844 54,304 56,186 53,956 Total current liabilities 157,247 151,090 163,397 164,914 164,770 159,678 156,966 157,398 129,903 Long-term debt 0 624 0 73 0 0 0 163 75 Deferred tax assets 29 Others 7,992 7,484 7,288 6,780 6,761 6,563 6,273 6,144 65,213 Total fixed liabilities 44,498 45,367 45,088 45,086 44,623 49,385 59,841 55,911 65,317 Total liabilities 201,745 196,457 208,486 210,000 209,394 209,064 216,808 213,310 195,220 Net assets Capital stock 73,303 73,303 73,303 73,303 73,303 73,303 73,303 73,303 73,303 Capital surplus 82,819 82,819 82,819 82,819 82,819 82,820 82,820 82,820 82,820 Retained earnings 112,914 116,933 124,624 131,331 143,864 151,036 163,363 176,911 189,957 Treasury stock -22,191 -22,189 -26,891 -31,896 -31,905 -31,911 -31,914 -31,921 -31,924 Shareholders' equity 246,845 250,866 253,855 255,557 268,081 275,248 287,572 301,113 314,156 Valuation difference on marketable securities Foreign currency translation adjustments Others -165 -195 8 1,237 1,980 1,760 -7,099 -4,081 -11,128 Minority Interests 166 636 225 281 291 430 446 490 542 Total net assets 246,846 251,307 254,088 257,075 270,352 277,438 280,919 297,522 303,570 Total liabilities and net assets 448,591 447,764 462,574 467,075 479,746 486,502 497,727 510,832 498,790 Working capital 36,567 49,313 52,312 52,431 54,950 54,077 51,792 58,556 74,230 Total interest-bearing debt 0 3,355 0 73 0 0 0 435 191 Net debt -15,975 -15,948 -23,406 -20,009 -36,107 -36,773 -76,785 -66,044 -64,880 Source: Shared Research based on company data. Note: Figures may differ from company materials due to differences in rounding methods.

Cash flow statement

Cash flow statement FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cash flows from operating activities (1) 35,186 8,715 33,767 28,780 38,190 29,730 33,306 28,885 16,990 Cash flows from investing activities (2) -13,011 -12,107 -16,066 -25,757 -15,221 -44,536 -19,460 7,963 -10,526 Free cash flow (1+2) 22,175 -3,392 17,701 3,023 22,969 -14,806 13,846 36,848 6,464 Cash flows from financing activities -8,171 -3,811 -11,813 -9,105 -4,544 -6,224 -6,086 -7,145 -7,838 Depreciation and amortization (A) 14,643 10,840 16,779 17,499 17,216 15,766 15,669 14,268 13,281 Capital expenditures (B) -16,725 -15,601 -18,520 -17,203 -13,685 -15,386 -12,431 -13,300 -9,905 Working capital changes (C) -8,513 12,746 2,999 119 2,519 -873 -2,285 6,764 15,674 Simple FCF (NI + A + B - C) 10,155 -10,744 5,838 10,344 17,042 16,353 21,123 11,104 8,528 Source: Shared Research based on company data. Note: Figures may differ from company materials due to differences in rounding methods.

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Historical performance

Full-year FY12/18 results (out January 29, 2019)

Full-year FY12/18 results

▷ Sales: JPY621.6bn (-1.7% YoY)

▷ Operating profit: JPY28.9bn (-4.8% YoY)

▷ Recurring profit: JPY30.5bn (-3.1% YoY)

▷ Net income*: JPY20.8bn (+0.7% YoY)

*Net income is net income attributable to owners of the parent.

Corporate capex on IT and other areas was trending upward amid changes in business environment, including labor shortages and work style reforms. Meanwhile, consumer confidence remained weak. In this environment, IT solutions (in the Enterprise and Area segments) drove growth. However, overall sales declined. In addition to a drop in the Consumer segment, which markets digital single lens reflex cameras and inkjet printers, sales of production printing and industrial equipment (mainly to the semiconductor sector) dropped in the Professional segment. The Q1 operating loss in the Consumer segment was a major drag on annual results.

In January 2018, CMJ shifted to a market and customer-driven organizational structure and changed reporting segments in line with the basic strategies of its long-term management plan phase three. In order to strengthen its BPO services, from Q3 FY12/18 the company established a BPO headquarters and changed the reporting segment for BPO service business provider Canon BizAttenda from the Enterprise segment to the Other segment.

Operating profit declined as reductions in SG&A expenses were not enough to compensate for lower gross profit due to falling sales. The main factor in lower sales was the slump in the market for digital single lens reflex (SLR) cameras, which was worse than CMJ expected. Sales of the company’s interchangeable lens digital cameras fell significantly. Mirrorless camera sales increased, but not enough to offset the overall slump in SLR cameras.

Segment overview Consumer FY12/18 results

▷ Segment sales: JPY150.2bn (-9.6% YoY)

▷ Operating profit: JPY7.3bn (-42.1% YoY)

Segment sales and profit both dropped. The major drag on profits was a slump in interchangeable lens digital cameras that was largely due to the shrinking market. In non-cumulative Q4, operating profit recovered to be roughly in line with Q4 FY12/17 due to the shift to high-priced models and SG&A cost cuts. However, a segment loss in Q1 due to increased sales promotion expenses accompanying disposal of inventory from the end of the previous year was the primary factor contributing to the drop in full-year profit.

The market for interchangeable lens digital cameras, the key earner in the Consumer segment, continues to shrink amid a shift from digital SLRs to lightweight, compact, mirrorless cameras. In response to market trends, CMJ launched the EOS Kiss M mirrorless camera, capturing the No. 1 market share in Japan. Also contributing to growth in mirrorless cameras was the company’s launch of the full-size mirrorless EOS R. However, overall results from interchangeable lens digital cameras were down YoY. In compact digital cameras, slumping conditions continued due to the ongoing decline in the market.

In inkjet printers, business printer sales were strong, but the market slumped due to declining demand driven by the shrinking volume of New Year’s greeting post cards. With fewer machines in operation, ink cartridge sales also dropped on falling print

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volume. These conditions weighed on profit. IT product sales were up thanks to solid demand from game computers and mobile batteries.

Sales up on solid demand from game computers and mobile batteries

Enterprise FY12/18 results

▷ Segment sales: JPY187.7bn (+5.7% YoY)

▷ Operating profit: JPY9.6bn (+24.3% YoY)

IT solutions markets were generally solid in FY12/18. Major SI projects for credit card and securities companies were key drivers in the SI services area. Furthermore, form design solutions for life insurance companies and cloud systems aimed at boosting the efficiency of research activities for nonlife companies were solid, and CMJ received a new order for a BPO project designed to reduce trust service processes for a bank.

Looking at the manufacturing sector, key sales growth drivers were a production management system for an electronics manufacturer and a large office construction project for a chemical company. Also contributing to sales growth were strong sales from migration projects for systems upgrades.

In the logistics sector, a document management system for an airline and a large office MFP project helped drive sales growth. However, in the education sector (mainly universities), sales declined due to the influence from a large order recorded in FY12/17.

In the education sector (mainly universities), sales were down due to the impact of a large order recorded in FY12/17.

Canon IT Solutions posted solid growth with annual order value up 4% YoY and sales up 6%.: In addition to previously mentioned industry-specific solutions, database center services and security solutions such as ESET antivirus software and embedded automotive software were solid. For Q4 alone, Canon IT Solutions achieved a hefty OPM of over 10%.

In office MFPs, sales were up due to demand from a megabank and major distributor while laser printer sales fell due to lower selling prices despite a major life insurance order.

Gross profit rose on higher sales. In addition to growth in industry-specific solutions, primarily for the financial and manufacturing sectors, the SI business and data center business also continued to post solid growth. Cuts to SG&A expenses also contributed to profit growth.

Area FY12/18 results

▷ Segment sales: JPY255.9bn (-0.8% YoY)

▷ Operating profit: JPY13.0bn (+14.0% YoY)

In the IT Solutions business, IT product sales were up, despite a slump in key hardware products, receiving a boost from the replacement of business PCs. Other positive factors were strong sales of IT installation support and maintenance services, and solid sales of IT support services and antivirus software for SMEs. On a parent company basis, office MFPs (including rentals) were down 5% (based on unit numbers) YoY in FY12/18 and laser printers were down 1% (unit numbers).

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On the profit front, growth in IT Solutions offset the slump in hardware, enabling full-year profit growth. Also contributing to profit growth were lower SG&A expenses.

Professional FY12/18 results

▷ Segment sales: JPY52.4bn (-3.1% YoY)

▷ Operating loss: JPY937mn (loss of JPY1.9bn in FY12/17)

Production printing sales fell due to a slump in high-speed cut sheet printers and high-speed continuous feed printers. Industrial equipment sales increased 8% YoY. In 1H, gains were made in installations at key semiconductor sector customers and sales to non-semiconductor customers were strong thanks to a distribution agreement with a customer overseas. However, in 2H, sales slowed down due to a lull in demand from the semiconductor sector and the expiration of a distribution agreement outside the semiconductor sector. In imaging solutions, sales were mostly unchanged YoY as declining demand for network cameras offset increased demand from broadcasters that was due to the start of 4K and 8K satellite transmission.

Segment losses improved thanks to an improvement in gross profit and lower SG&A expenses.

Q3 FY12/18 results (out October 24, 2018)

▷ Cumulative Q3 FY12/18: Operating profit was down JPY2.5bn (-13.6% YoY). Robust B2B results did not compensate for weakness in B2C. Enterprise (+JPY1.3bn), Area (+JPY1.2bn), and Professional (+JPY500mn) recorded increases in operating

profit while operating profit in Consumer dropped JPY5.3bn, impacting overall operating profit negatively. Sales of digital single-lens reflex (SLR) cameras and inkjet printers (IJPs) were sluggish in the Consumer segment. Full-year targets were revised in light of results, with operating profit set at JPY27.0bn, down JPY1.5bn for the second time from the previous forecast and

down JPY3.4bn YoY

▷ Revised forecast: CMJ has taken into account the greater-than-anticipated Consumer market stagnation and delays in Area and some parts of Professional. Company has high hopes for EOS R System

 JPY1.4bn of the JPY1.5bn decrease in the operating profit forecast comes from Consumer. A greater than expected slump in the SLR market is heavily affecting the mid-priced range, a key earnings source

▷ Consumer: Sales of mirrorless cameras were upbeat and the company maintained its No.1 share. Sales of SLR cameras, IJPs, and cartridges dropped, hitting performance

▷ Enterprise: Sales from services for financial, manufacturing, and distribution industries were all up in IT Solutions business. Increased MFP shipments to major distributors contributed to an increase in sales

 The decline in margins stemmed from a large low gross profit LBP project and temporary unprofitable projects. The LBP impact is set to continue in Q4, but business structure is positive

▷ Area: IT solution and security services for SMEs saw stable growth, while sales of mainstay hardware such as for MFPs were weak and sales from maintenance service fell

 Operating margin secured by lower SG&A expenses and expansion in high-margin products, such as LBP cartridges

▷ Professional: Industrial equipment was a main driver of this segment. Sales in production printing (with flat sales of high-speed continuous paper printers) and healthcare businesses were down

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Operating profit by segment (top) gross profit and SG&A expenses (bottom)

(JPYbn) 14 Business Solutions IT Solutions Imaging Systems Industrial and Medical Others Consumer Enterprise Area Professional Others 11.8 12.0 12 10.9 3.3 9.2 9.1 10 8.6 7.4 7.4 8 7.2 2.3 3.2 7.6 5.9 6.2 5.5 5.7 3.7 6 5.1 5.2 5.1 5.3 2.6 4.3 6.9 3.6 3.7 7.6 2.0 3.1 3.2 3.3 3.5 3.5 1.8 2.1 3.5 1.9 2.9 4 3.1 7.0 2.5 3.5 2.2 2.0 1.6 4.5 2.4 1.9 2 0.4 3.4 3.9 3.1 2.7 2.4 2.2 2.7 2.0 2.3 2.5 1.6 1.8 1.3 1.4 1.5 1.7 2.0 1.5 0.8 0.7 0.3 1.0 0 -1.0 -0.4 -0.3 -2.1 -2 Q1 Q1 Q1 Q1 Q1 Q1 FY12/13 FY12/14 FY12/15 FY12/16 FY12/17 FY12/18 (JPYbn) Gross profit GPM (right axis) (JPYbn) SG&A expenses SG&A-to-sales ratio (right axis) 65 37% 56 36%

60 36% 52 34%

55 35% 48 32%

50 34% 44 30%

45 33% 40 28%

40 32% 36 26% Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 FY12/11 FY12/12 FY12/13 FY12/14 FY12/15 FY12/16 FY12/17 FY12/18 FY12/11 FY12/12 FY12/13 FY12/14 FY12/15 FY12/16 FY12/17 FY12/18 Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. Segment changes incorporated as appropriate (the same applies throughout)

Earnings overview Cumulative Q3 FY12/18 sales were JPY447.9bn (down JPY8.3bn, -1.8% YoY) and operating profit was JPY15.9bn (down JPY2.5bn, -13.6%). B2B business contributed to operating profit, primarily in Enterprise (JPY1.3bn growth YoY in operating profit). However, B2C business (Consumer, down JPY5.3bn) saw weak results, with, SLR cameras and IJPs performing poorly and below plan in a continuation of trends from Q2. Full-year targets were revised again in light of Q3 results, with operating profit set at JPY27.0bn, down JPY1.5bn from the previous forecast and down JPY3.4bn YoY. CMJ left the year-end dividend unchanged at JPY60.

JPY1.4bn of the JPY1.5bn decrease in the operating profit forecast comes from Consumer, and JPY100mn from Professional. In Consumer, a greater than expected slump in the single-lens reflex camera market is heavily affecting the mid-priced range, a key earnings source. The forecasts for Professional were trimmed owing to slower than expected progress in healthcare. Note that the company expects Q4 Consumer operating profit to be JPY7.6bn, up JPY600mn YoY from JPY7.0bn in Q4 FY12/17. It expects profit growth due to the long-awaited launch of its full-size mirrorless EOS R and aggressive measures to expand sales of its interchangeable lenses. Shared Research thinks that the Consumer profit forecasts are ambitious, but that the company may augment results in the Enterprise and Area segments

The company made sweeping changes to its segment reporting from FY12/18. It shifted its organizational structure to fit its customers and markets, moving away from the traditional product and service focus to a customer-oriented focus. At Q1, CMJ unveiled segment operating profit forecasts for the first time. The company reviewed its full-year forecasts at the time of the Q2 results.

40/69 Canon Marketing Japan / 8060 RCoverage LAST UPDATE: 2019.05.20 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Consumer

Consumer FY12/16 FY12/17 FY12/18 FY12/17 FY12/18 FY12/17FY12/18 YoY chg (JPYmn) Q1*Q2*Q3*Q4*Q1Q2Q3Q4Q1Q2Q3Est. Q4Cml. Q3* Cml. Q3* Act. Est. Q3 YoY chg Est. Q2 Vs. Est. Q2 Cml. Q3 Sales 32,667 37,964 38,698 57,000 26,822 34,208 35,313 54,657 109,329 96,343 166,300 151,000 -15,300 154,500 -3,500 -12,986 YoY ------17.9% -9.9% -8.7% -4.1% --11.9% --9.2% -7.1% Operating profit 2892,267 3,135 7,000 -2,149 1,042 1,484 7,623 5,691 377 12,700 8,000 -4,700 9,400 -1,400 -5,314 YoY ------54.0% -52.7% +8.9% - -93.4% --37.0% -26.0% OPM 0.9% 6.0% 8.1% 12.3% -8.0% 3.0% 4.2% 13.9% 5.2% 0.4% 7.6% 5.3% -2.3pp 6.1% -0.8pp -4.8pp YoY Interchangeable lens digital cameras ---- -17% -3% -21% -7% -28% -15% -7% -9% -12% -14% -10% -4pp (units) Single-lens reflex ------42% -34% -26% -36% --34% -32% -2pp Mirrorless ------+24%+47%+94%+61% -+55% +65%-10pp Compact ----+20%-14% +39% +3% -44% +1%+19%+10% +8% -7% -4% -3pp Inkjet printers ----+1%+20%-10% -9% -12% -23% +3% -5% -3% -8% -8% - Inkjet printer cartridges (value) -----6% -8% +7% -9% -9% -2% -14% +1% -5% -5% -3% -2pp Dom. Interchangeable lens digital cameras 304 297 306 376 323 273 316 307 273 265 912 1,219 - 1,060 market Single-lens reflex 200 198 198 210 182 146 170 177 126 120 497 674 - 470 shipped Mirrorless 104 98 108 167 141 127 147 130 147 146 415 545 - 590 units Compact 662 551 420 605 636 563 544 560 481 423 1,743 2,303 - 1,770 ('000) Interchangeable lenses 622 579 594 716 762 534 592 591 511 525 1,889 2,480- YoY Interchangeable lens digital cameras -26.8% -33.0% -18.2% -4.8% +6.1% -8.0% +3.2% -18.4% -15.4% -2.8% +0.5% -5.0% -13.0% Single-lens reflex -24.5% -25.0% -3.3% -14.0% -9.3% -26.5% -14.4% -15.7% -30.5% -17.9% -16.7% -16.4% -30.3% Mirrorless -30.9% -44.8% -36.3% +10.1% +36.0% +29.4% +35.4% -21.9% +4.1% +14.6% +33.7% +14.3% +8.3% Compact -18.4% -36.6% -49.6% -20.2% -3.8% +2.3% +29.5% -7.5% -24.4% -25.0% +6.8% +2.9% -23.1% Int erchangeable lenses -19.1% -33.5% -19.0% -11.1% +22.6% -7.7% -0.4% -17.4% -33.0% -1.7% +5.2% -1.3% Dom. Interchangeable lens digital cameras 14,284 15,069 14,346 16,880 15,586 15,841 16,776 17,415 15,216 13,658 48,203 65,618 - market Single-lens reflex 9,553 10,787 9,998 9,006 8,705 8,687 10,502 10,460 7,407 6,374 27,894 38,354 - shipped Mirrorless 4,731 4,282 4,349 7,874 6,881 7,154 6,274 6,955 8,371 7,284 20,309 27,264 - amount Compact 9,622 8,008 6,100 10,226 9,612 8,938 8,828 9,350 7,890 6,852 27,378 36,728 - (JP Y mn) Interchangeable lenses 15,017 12,839 13,045 15,841 15,356 12,938 13,909 14,730 13,306 13,441 42,203 56,933 - YoY Interchangeable lens digital cameras -27.0% -27.7% -20.2% +2.9% +9.1% +5.1% +16.9% +3.2% -2.4% -13.8% +10.3% +8.3% Single-lens reflex -28.6% -19.1% -2.8% -10.6% -8.9% -19.5% +5.0% +16.1% -14.9% -26.6% -8.1% -2.5% Mirrorless -23.3% -42.9% -43.4% +24.2% +45.5% +67.1% +44.3% -11.7% +21.6% +1.8% +52.0% +28.4% Compact -20.3% -35.1% -49.2% -2.2% -0.1% +11.6% +44.7% -8.6% -17.9% -23.3% +15.4% +8.2% Interchangeable lenses -17.6% -33.0% -28.2% -13.6% +2.3% +0.8% +6.6% -7.0% -13.3% +3.9% +3.2% +0.3% Source: Shared Research based on company data

Consumer: Sales of mirrorless cameras were upbeat. Worse-than-expected slump in SLR market, falling sales in IJPs and cartridges hit performance In Q4 FY12/17 the company launched an entry-level mirrorless camera, which helped propel its market share to No. 1 in Q1 and drive sales volume growth. Still, this was not enough to offset the greater-than-expected decline in single-lens reflex cameras which suffered from a shrinking market and excess distributor inventories (as of Q1). Home-use inkjet printers and ink cartridges were also sluggish. The combined effect caused cumulative Q3 sales to fall by 11.9%. The segment posted an operating profit of JPY400mn (-JPY5.3bn YoY). The company reduced its full-year operating profit forecast by JPY1.4bn in Q2 to JPY8.0bn (-JPY4.7bn YoY).

For Q4 alone, the company forecasts Consumer operating profit of JPY7.6bn, up from JPY7.0bn in Q4 FY12/17. It expects profit growth due to its new mirrorless EOS R and expanded sales of related interchangeable lenses. Note that Q4 FY12/17 impacted distributor inventories in Q1 FY12/18, so reported results may appear to be higher than actual demand. The impact of excess distributor inventories on SLR cameras and IJPs ended in Q1, and the situation appears to have returned to normal in Q2. The following is the status of individual product categories and the outlook for Q4.

Mirrorless cameras In mirrorless cameras, the entry-level EOS M100 launched in October 2017 (body was selling for JPY49,920 tax included on Yodobashi.com as of October 26, 2018) has been doing well. It gained a top market share in Q4 FY12/17 (in terms of units sold) and maintained the top position in Q1 FY12/18. In Q2, with the help of the EOS Kiss M (JPY79,100), launched near the end of March 2018, market share jumped, creating a 10pp lead on the second position. The company maintained its No.1 spot in Q3, and hoped to increase its lead in Q4 with the mid-priced EOS R launched on October 25, 2018.

CMJ aims to maintain a share similar to the Q2 level for the full year. In cumulative Q3, new entry-level products performed well because they responded to consumer demand, and by enhancing the lineup in Q4 with its first ever full-size mirrorless camera EOS R and interchangeable lenses, the company plans to capture even more of this demand. It will work aggressively as a challenger, since it was actually a latecomer to the mirrorless camera market. The EOS R is a strategic product that marks the company’s entry into the full-sized market, and will be used to launch a new imaging system, the EOS R System. EOS R will be available at Yodobashi.com for a price of JPY256,500 (including tax). EOS R is priced higher than EOS Kiss M (JPY79,100) and EOS M5 (JPY87,410), and at the same price range as high-end SLR cameras for highly skilled amateurs. The company looks to boost its market share by strengthening its lineup in the full-sized market.

The company said the EOS R has been well received since its launch in September, with brisk orders, and it expects sales to be in line with forecasts. The camera is in the mid-price band among cameras for highly skilled amateurs, and has high gross profit

41/69 Canon Marketing Japan / 8060 RCoverage LAST UPDATE: 2019.05.20 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

margins. The company said it would broaden its lineup of interchangeable lenses suitable for the EOS R system. Depending on developments including interchangeable lens demand, EOS R could become a driving force for FY12/19 earnings results.

EOS R System: The essence of expression through photos and videos lies in light manipulation. EOS R System strove to achieve high resolution by increasing the degree of freedom in lens design, a vital element in light manipulation. With a large mount diameter and short back focus (i.e., when a lens is focused to infinity, the distance between the vertex of the rearmost glass of the lens to a camera’s image plane is short) that enable increased degree of lens design freedom and a new mount transmission system between the lens and camera body, EOS R System realized even higher resolution and enhanced usability. When used with a dedicated mount adapter, EOS R can also be used with a rich lineup of existing EF and EF-S lenses.

SLR cameras and interchangeable lenses The SLR market is likely to continue contracting for the time being. CMJ has again revised down its market outlook for 2018. The company’s initial outlook for number of units sold was a 24% decrease YoY, but it revised this down to a 32% decrease in Q2 and a 34% drop in Q3. CMJ’s share of the SLR market is above 50% and the number of competitors in this area is actually quite small, so rather than haphazardly chasing market share in terms of units sold, the company has been focusing on earnings and plans to enhance sales efforts primarily for mid-level models and interchangeable lenses. However, the company moved to cut forecasts as mid-level models were heavily impacted by the shrinking market. Although it appeared to be taking a wait-and-see attitude ahead of the launch of the mid-level mirrorless EOR R, the company expects conditions to remain tough in Q4 with an expected decline of 36% YoY.

In terms of the interchangeable lenses for its best-selling telephoto zoom EF70-200 lenses, the company is updating its f/4.0 model (JPY177,180, on sale from late June) for the first time since November 2006 and its f/2.8 model (JPY291,600, on sale from mid-September) for the first time since March 2010. Due to the popularity of these lenses with consumers, the company stated it received a large number of advance orders for the model set for release in September, which promised to generate a large volume of sales. CMJ appears to be aiming to expand earnings by effectively leveraging interest from past customers despite the market slowdown. For Q4, the simultaneous launch of the EOS R system camera body and interchangeable lenses (which make best use of EOS R system features) is worth keeping a close eye upon.

IJPs CMJ is focusing on business IJPs because the home-use market is approaching saturation. In cumulative Q3, business IJPs continued their growth, but the number of units and cartridges sold remained small, insufficient to absorb the decline in the home-use market. Note that there is no change to the full-year forecast since Q2 of an 8% decline in unit volume, but the company appeared to be prioritizing market share acquisition in FY12/18, so there is a high probability of falling sales. In addition, the company has revised down its IJP cartridge sales forecast for the full year from -3% in Q2 to -5%, and expects it to be a drag on profits.

The company thinks conditions will remain tough as it believes that print volume (PV) for home-use IJPs are unlikely to grow significantly hereafter, and as there are moves to cap in-store inventory as well. However, as with SLR cameras, CMJ plans to give priority to capturing earnings instead of chasing market share in terms of units sold in the IJP business. We will be watching closely as the business is large.

Compact cameras The compact camera market continues to contract, and major domestic digital camera manufacturer Casio Computer Co., Ltd. (TSE1: 6952) announced in May 2018 that it is withdrawing from the compact digital camera business. CMJ believes the market will continue to stagnate and is therefore working to maintain earnings by focusing on sales promotions for higher-priced, high magnification models. The company appears to have secured profit in cumulative Q3 that was level with Q3 FY12/17. It appears that its low-cost operations are steadily flowing through to results.

Casio Computer’s digital camera business: Casio officially announced on May 9, 2018, that it is withdrawing from the compact digital camera business. According to Nikkei, Casio’s camera business had FY03/18 sales of JPY12.3bn (-34% YoY) and a final loss of JPY4.9bn (versus a loss of JPY500mn in FY03/17). Casio sold 550,000 cameras worldwide in FY03/18 (670,000 in FY03/17, 1.9mn in FY03/14).

42/69 Canon Marketing Japan / 8060 RCoverage LAST UPDATE: 2019.05.20 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Domestic shipment volume for interchangeable lens cameras (excluding mirrorless, left), mirrorless (center), compact (right)

Units shipped: single-lens reflex Units shipped: non-reflex Units shipped: (Japan; right axis) interchangeable lenses +60% +40% (Japan; right axis) 450 +40% 1,600 YoY YoY (Japan; right axis) +50% 500 YoY +30% 400 +30% 1,400 +40% +20% 350 +30% 400 +20% 1,200 +10% 300 +20% +10% 1,000 +10% 300 0% 250 0% 800 0% -10% 200 -10% 200 -10% 600 -20% 150 -20% -30% 100 -20% 400 -30% 100 -30% 200 -40% -40% 50 -50% 0 -50% 0 -40% 0 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 ('000) FY12/13 FY12/15 FY12/17 ('000) FY12/13 FY12/15 FY12/17 ('000) FY12/13 FY12/15 FY12/17 Domestic sales amounts for interchangeable lens cameras (excluding mirrorless, left), mirrorless (center), compact (right) Amount shipped: single-lens reflex Amount shipped: non-reflex Amount shipped: (Japan; right axis) (Japan; right axis) interchangeable lenses +60% 25,000 +80% 14,000 +60% 25,000 YoY YoY (Japan; right axis) +50% +50% YoY +60% 12,000 +40% 20,000 +40% 20,000 +30% +40% 10,000 +30% +20% 15,000 +20% 15,000 +20% 8,000 +10% +10% 0% 10,000 0% 6,000 0% 10,000 -10% -20% 4,000 -10% -20% 5,000 -20% 5,000 -40% 2,000 -30% -30% -40% 0 -60% 0 -40% 0 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 FY12/13 FY12/15 FY12/17 (JPYmn) FY12/13 FY12/15 FY12/17 (JPYmn) FY12/13 FY12/15 FY12/17 (JPYmn) Source: Shared Research based on company data

Enterprise

Enterprise FY12/16 FY12/17 FY12/18 FY12/17 FY12/18 FY12/17FY12/18 YoY chg (JPYmn) Q1*Q2*Q3*Q4*Q1Q2Q3Q4Q1Q2Q3Est. Q4Cml. Q3* Cml. Q3* Act. Est. Q3 YoY chg Est. Q2 Vs. Est. Q2 Cml. Q3 Sales 44,241 44,934 41,967 46,300 47,127 47,542 44,445 45,886 131,142 139,114 176,900 185,000 +8,100 185,000 - +7,972 Canon IT Solutions 20,390 20,620 21,010 - 21,900 21,600 22,730 - 62,020- Other 23,851 24,314 20,957 - 25,227 25,942 21,715 - 69,122 - - - - Canon IT Solutions 27,400 27,300 26,200 - 30,600 29,900 28,700 - 79,600 87,900 Other 16,800 17,600 15,800 - 16,500 17,600 15,700 - 51,500 51,200 YoY ------+6.5%+5.8%+5.9%-0.9% - +6.1% - +4.6% +4.6% - Canon IT Solutions ------+7.4%+4.8%+8.2%------Other ------+5.8%+6.7%+3.6%------IT solutions +12%+10%+10%- Excluding IT solutions -2% - -1% - Operating profit 1,955 1,625 1,898 2,300 2,494 2,353 1,912 1,741 5,478 6,759 7,900 8,500 +600 8,500 - +1,281 Canon IT Solutions 1,290 1,280 1,400 - 1,790 1,810 1,470 - 3,960 5,070 Other 665 345 498 - 704 543 442 - 1,518 1,689 - - - YoY ------+27.6% +44.8% +0.7% -24.3% -+23.4% -+7.6% +7.6%- Canon IT Solutions ------+38.8% +41.4% +5.0% - - +28.0% - - - Other ------+5.9%+57.4%-11.2% - - +11.3% - - - OPM 4.4% 3.6% 4.5% 5.0% 5.3% 4.9% 4.3% 3.8% 4.2% 4.9% 4.5% 4.6% +0.1pp 4.6% - +0.7pp Canon IT Solutions 6.3% 6.2% 6.7% - 8.2% 8.4% 6.5% - 6.4% - - - - Other 2.8% 1.4% 2.4% - 2.8% 2.1% 2.0% - 2.2% - - - - Sales by Financial Up Up Down Up indust ry Manufacturing Up Up Up Up Logist ics Up Up Up Up Education, other Up Up Up Up Sales by MFP (units) Up Up Down Up product MFP (value) Up Maintenance (value) Up Down LBP (units) Down Down Up Up LBP (value) Down Cartridge (value) Up Up Up Canon ITS sales by division SI services ----+10%+7%+7%+2% -+6% +6%- IT infrastructure service (data centers) ----+8%+1%+16%-10% -+3% +3%- Engine ering (embedded software, CAD) ----+2%+7%+2%-0% -+3% +3%- Orders -3% -9% +21% +24% +8% +8% -16% - +6%- - Order backlog -11% -15% +7% +17% +21% +22% -1% - +17%- - Sales -0% +0% -1% +10% +7% +5% +8% - +2% - - Source: Shared Research based on company data New customer driven segment Enterprise is a customer driven segment targeting large corporations with at least 1,000 employees. The segment was created as its customers’ needs are different from the medium-sized corporations and SMEs that the Area segment targets. It is comprised of systems integration (SI) services provided by subsidiary Canon IT Solutions, and CMJ handles sales and maintenance of multifunction products and other business equipment, and IT solutions. Canon IT Solutions is the main operator of SI services, with revenues supported by the recurring revenue data center business. A major factor in profits is engineering, which is centered on high-margin embedded software.

Characteristics of individual quarters: In Enterprise, there is little seasonality related to IT Solutions, including Canon IT Solutions, but there is a tendency for cartridge sales to be concentrated in the quarter that includes the final month of companies’ financial years. Since Q1 includes February, in which sales from the distribution sector are concentrated, and March, which is the financial year-end for public bodies and many general companies, earnings tend to be higher in Q1. In the preceding table, this refers to the Other portion of sales (total sales minus Canon IT Solutions portion).

43/69 Canon Marketing Japan / 8060 RCoverage LAST UPDATE: 2019.05.20 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Cumulative Q3 results and Q4 outlook Canon IT Solutions and CMJ both posted solid profit growth. In Q3, there were temporary unprofitable projects in both a major LBP project for the life insurance sector and Canon IT Solutions, leading to a decline in gross profit margin and operating profit margin. Excluding this, it appears that margins for both the segment and Canon IT Solutions maintained levels in line with Q1 and Q2. The impact of the major LBP project will continue in Q4 (less than in Q3), but the impact of the unprofitable project at Canon IT Solutions will be absent, and the company does not expect to book any such projects.

In cumulative Q3, sales of large-scale SI services for the financial sector were robust, and there was also sales growth in the manufacture, distribution, and education sectors. There was progress in terms of shipment of office MFPs for a wide range of industries, with contributions from large orders for the distribution sector also making progress. LBPs continue to be focused on office-use, and unit prices declined despite volume growth under the major LBP project for the life insurance sector; as a result, sales declined.

Improvement in both profit amount and margin at Canon IT Solutions is worth noting. As can be seen in the preceding table, operating profit at Canon IT Solutions was just under JPY1.3bn in Q1 and Q2 FY12/17, with an OPM of just above 6%, but this improved to around JPY1.8bn in Q1 and Q2 FY12/18, with an OPM of more than 8%. In Q3, operating profit was nearly JPY1.5bn and OPM 6.5%, so operating profit was maintained but the OPM declined versus JPY1.4bn and 6.7% in Q3 FY12/17 due to the unprofitable projects mentioned above. Excluding the impact of unprofitable projects, CMJ appears to have maintained margins in line with Q1 and Q2 so there is no particular cause for concern.

Underpinning the good results, there has been an increase in primary projects (development projects, which are more profitable than secondary projects under contract) for development directly with clients, and a favorable market environment has made it possible to capture projects that are worth more. Structurally speaking (the share of hardware in sales has declined, and solutions sales are growing), it is likely this trend will continue from Q4 onward.

The status of orders at Canon IT Solutions is as shown in the preceding table, but it is worth noting that orders and order backlog for the data center business are trending upward. The company said the decline in orders and order backlog in Q3 was because the data centers were operating at full capacity, and excluding this impact orders were roughly in line with the previous year, and the order backlog is growing. In 2019 a major development project for a credit card company will enter a new phase and CMJ expects solid progress with migration projects for the manufacturing industry and the public sector. The company expects profit growth on higher sales and the absence of factors that dragged on profit in Q3.

Migration project provides services including detailed analysis of the current status and comprehensive testing to enable smooth transition from an old to a new system, such as moving from a mainframe to open system, between open systems, and between different models. CMJ has a track record of working with manufacturers such as Daikin Industries, Asahi Group, LIXIL, and Mitsubishi Electric, and public entities such as Kyoto City Hall.

By sector:

▷ Financial (sales up YoY in 1H): In 1H, large development projects related to credit cards moved from Phase I to Phase II, so the sector has yet to peak out and is likely to remain robust. The company has begun offering investment product sales support cloud services for credit unions nationwide. Although sales temporarily dipped in Q3 due to being in a transition phase, full-year results look set to remain strong.

▷ Manufacturing (sales up YoY in 1H): In 1H, a system migration project for a construction material manufacturer and a demand forecasting solution for a beverage manufacturer contributed to earnings. The company expects sales growth for the full-year, and in Q3 it expects solid trends due to a sales support system for a car manufacturer, a large office construction project for a chemical company, and increased production management projects for electronics companies.

▷ Distribution (sales up YoY in 1H): Document management system projects for airline companies drove sales growth.

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▷ Other (education and public sector, sales up YoY in 1H): The delivery of several large IT infrastructure projects progressed, including the in Campus IT infrastructure system for universities. A large system migration project in Kyoto (ordered in 1H) also contributed.

In terms of business equipment, the company won multiple orders for office MFPs in 1H, so shipments increased. Q3 saw a reactionary falloff of sales due to the absence of a major project booked in Q3 FY12/17, although cumulative Q3 sales grew YoY. LBP sales are likely to continue their sluggishness due to the shift to MFPs, but the company received some large orders in 2H (concentrated in Q3), so turned to growth in Q3 and cumulative Q3 shipments rose, although cumulative Q3 sales declined due to lower prices. In terms of recurring-revenue business, maintenance service sales increased in 1H, as did shipments of cartridges, primarily for the distribution sector. The former was the result of higher print volume (PV) accompanying an increase in the number of machines in field (MIF), while the latter was the result of specific sectors with high PV. In Q3, sales fell as an increase in PV was unable to offset falls in maintenance service prices. Cartridges maintained 1H trends and sales continued to grow. In regard to cartridges, it should be noted that after shipment of large renewal orders, related demand temporarily declines.

In IT Engineering, sales to major customers declined, but trends for automotive sectors and 3D-CAD software were solid, so sales remained in an uptrend.

Q4 outlook In Q4, CMJ expects sales to fall by 1% YoY. Although the company expects IT Solutions sales to grow, primarily to the manufacturing sector, there will be a reactionary falloff from a major education sector project and a major office MFP project from Q4 FY12/17. The company expects operating profit of JPY1.7bn (-JPY500mn YoY) due to a low-margin LBP project from Q3 (albeit with a smaller impact in Q4) and a temporary decline in cartridge sales.

Area

Area FY12/16 FY12/17 FY12/18 FY12/17 FY12/18 FY12/17FY12/18 YoY chg (JPYmn) Q1*Q2*Q3*Q4*Q1Q2Q3Q4Q1Q2Q3Est. Q4Cml. Q3* Cml. Q3* Act. Est. Q3 YoY chg Est. Q2 Vs. Est. Q2 Cml. Q3 Sales 68,092 63,047 62,276 64,400 66,372 63,011 61,404 64,213 193,415 190,787 260,600 255,000 -5,600 256,500 -1,500 -2,628 Canon System & Support 32,140 28,840 29,210 - 30,570 29,130 28,510 - 90,180 88,210 Other 35,952 34,207 33,066 - 35,802 33,881 32,894 - 103,235 102,577 -- - IT solutions 15,200 13,400 13,300 - 15,100 14,600 13,900 - 42,000 43,600 Excluding IT solutions 52,900 49,600 49,000 - 51,300 48,400 47,500 - 151,400 147,200 YoY -----2.5% -0.1% -1.4% -0.3% --1.4% --2.1% -1.6% -0.6pp Canon System & Support -----4.9% +1.0% -2.4% - - -2.2% -- - Other -----0.4% -1.0% -0.5% - - -0.6% -- - IT solutions -0% +9% +4% - - +4% Excluding IT solutions -3% -2% -3% - -3% Operating profit 3,461 1,994 2,552 3,300 2,946 3,068 3,221 2,565 - 8,007 9,235 - 11,200 11,800 +600 11,800 - +1,228 Canon System & Support 1,220 430 690 - 800 930 950 - 2,340 2,680 Other 2,241 1,564 1,862 - 2,146 2,138 2,271 - 5,667 6,555 - - - YoY -----14.9% +53.9% +26.2% -22.3% -+15.3% -+5.4% +5.4%- Canon System & Support -----34.4% +116.3% +37.7% - - +14.5% - - - Other -----4.2% +36.7% +22.0% - - +15.7% - - - OPM 5.1% 3.2% 4.1% 5.1% 4.4% 4.9% 5.2% 4.0% 4.1% 4.8% 4.3% 4.6% +0.3pp 4.6% +0.0pp +0.7pp Canon System & Support 3.8% 1.5% 2.4% - 2.6% 3.2% 3.3% - 2.6% 3.0% - - - Other 6.2% 4.6% 5.6% - 6.0% 6.3% 6.9% - 5.5% 6.4% - - - Sales by MFP (units) Down Down Down Down product Maintenance (value) Down Down Down Down LBP (units) Down Down Flat Down Cartridge (value) Up Up Up Up Source: Shared Research based on company data New customer driven segment Area is a customer driven segment targeting small and medium-sized corporations with up to 999 employees. Subsidiary Canon System & Support handles direct sales, while CMJ is in charge of partners (agents). Due to strong demand for IT solutions by SMEs, the company is rebuilding its business model to suit the scale of its customers. The idea is to gradually roll out the business model developed by Canon System & Support to partner companies. Because direct sales and partner companies cover the same regions, CMJ aims to unify direct sales and partners to develop planning and execution of sales strategies by customer demographic when it reforms its medium-term plan.

Characteristics of individual quarters: In Area, as with Enterprise, there is a tendency for sales to be concentrated around client companies’ financial year-ends, centering on consumables. For this reason, sales are typically more sluggish in Q2 than in Q1. However, in FY12/18, due to organizational changes and a shift in client base in Q1 toward companies with a large number of employees, a portion of MFP-related sales has shifted from Q1 to Q2.

Cumulative Q3 results and Q4outlook In cumulative Q3, solutions for SMEs, security-related solutions, and LBP cartridges for specific sectors were robust, but mainstay hardware such as office MFPs were sluggish and maintenance service sales were down as maintenance prices fell. Operating

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profit declined YoY in Q1, but increased again in Q2, helped by increased sales of high-margin products such as cartridges and lower SG&A expenses, and these trends persisted in Q3.

Behind the Q2 and Q3 increase was a focus on profit margin. Aiming to recover in Q2 from a drop in profit in Q1, all BUs shifted their priority to profit and managed individual business negotiations with a focus on margin, centering on IT solutions and security services. Further, it has more personnel than other segments, and made major SG&A expense cuts, primarily amid personnel with performance-linked bonuses.

In business machines, sales of office MFPs and LBPs fell YoY. In recurring-revenue business, maintenance service sales fell, but shipments of cartridges for certain sectors were robust, producing an increase in sales. For business machines, investment at SMEs takes into consideration work style reform, improvement in business efficiency, and cost reductions, so interest in replacing machines is low, and the response to conventional sales methods (proposal of replacement with new machines at the same cost as previous leasing) has not been favorable. However, in regard to the MIFs that are the basis of recurring-revenue business, there has been no decline because of clients’ high evaluation of the company’s stable quality and service efficiency. Per-unit service fees have fallen, but this has not had much of an impact on total earnings.

Thinking on maintenance services Maintenance services (Enterprise and Area) sales were -3% YoY in Q1, flat YoY in Q2, slightly down (-1% YoY) in Q3, and forecasted to be down by 2% in Q4. While price falls appear to have settled down, the slowdown in PV growth rates reflects the impacts of work style reforms among other factors so the outlook is uncertain. Still, CMJ said it aimed to maintain profit levels with an increase in the number of machines looked after per employee by improving efficiency, and through expanding the penetration of its NETEYE online support offering.

Q4 outlook In Q4, SMEs’ desire to invest in IT is likely to remain high, so CMJ plans to work on promoting its IT solutions (including cloud services) and security services. CMJ forecasts sales of JPY64.2bn, in line with the previous year. In addition to continued growth from IT solutions, the company expects growth in its mainstay business equipment shipments, but is also factoring in a decline in maintenance services and a reactionary decline in cartridges which saw a surge in demand in Q3. Note that the company raised cartridge prices by an average of 1.8% from September 2018. It said that the price raise had only a neutral impact on profit as it represented a pass through of rising logistics costs. The company forecasts operating profit of JPY2.6bn, down JPY900mn due to lower sales in its recurring businesses and costs incurred in growing office MFP products.

The company reduced its full-year sales forecast by JPY1.5bn and maintained its operating profit forecast. The downward revision to sales forecast was heavily impacted by lower sales of business equipment such as office MFPs. For the profit forecast, the company has factored in lower-than-expected costs for growing sales in Q3 due to a decline in office MFPs and lower SG&A expenses (it has lowered its companywide operating profit forecasts twice from its initial forecast, and performance-linked bonuses are set to decline).

Area business, business model restructuring Solutions provided Leverage solutions built for large enterprises specific solutions specific Sector/process- General Mission-critical solutions

Business Document Find opportunities at existing customers 100–999 Security solutions and expand sales

IT Concierge Account Sales 30–99 solutions Expand sales centering on IT solutions

Inside sales Area Sales Less than 29 Increase sales efficiency Successively introduce business models built at Canon System & Support to partners Source: Shared Research based on company data Note: General Business (GB) is the name for the sales team dedicated to medium-sized corporations in Canon System & Support.

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Professional

Professional FY12/16 FY12/17 FY12/18 FY12/17 FY12/18 FY12/17FY12/18 YoY chg (JPYmn) Q1*Q2*Q3*Q4*Q1Q2Q3Q4Q1Q2Q3Est. Q4Cml. Q3* Cml. Q3* Act. Est. Q3 YoY chg Est. Q2 Vs. Est. Q2 Cml. Q3 Sales 13,533 12,186 14,295 14,300 16,469 12,494 11,074 14,363 40,014 40,037 54,500 54,400 -100 55,500 -1,100 +23 Canon Production Printing Systems 3,170 3,530 2,960 4,060 2,930 3,380 2,930 - 9,670 9,240 Canon Lifecare Solutions 3,930 2,910 4,060 - 3,410 2,740 2,440 - 10,900 8,580 Other 6,433 5,746 7,275 - 10,129 6,374 5,704 - 19,444 22,217 - - - YoY ----+21.7% +2.5% -22.5% +0.4% - +0.1% - -0.2% +1.8% -2.0pp Canon Production Printing Systems -----7.6% -4.2% -1.0% - - -4.4% -- - Canon Lifecare Solutions - - - - -13.2% -5.8% -39.9% - - -21.3% -- - Other ----+57.5% +10.9% -21.6% - - +14.3% - - - Operating profit -235 -723 -203 -700 297 -511 -411 -675 -1,161 -625 - -1,900 -1,300 +600 -1,200 -100 +536 Canon Production Printing Systems -230 -20 -120 -70 -230 -40 -90 - -370 -350 Canon Lifecare Solutions 150 -140 210 - 150 30 -60 - 230 120 Other -155 -563 -293 -377-501 -261 - -1,021 -395 -- - YoY ------Canon Production Printing Systems ------Canon Lifecare Solutions ------47.8% -- - Other ------OPM -1.7% -5.9% -1.4% -4.9% 1.8% -4.1% -3.7% -4.7% -2.9% -1.6% -3.5% -2.4% +1.1pp -2.2% -0.2pp +1.3pp Canon Production Printing Systems -7.3% -0.6% -4.1% -1.7% -7.8% -1.2% -3.1% - -3.8% -3.8% -- - Canon Lifecare Solutions 3.8% -4.8% 5.2% - 4.4% 1.1% -2.5% - 2.1% 1.4% - - - Other -2.4% -9.8% -4.0% -3.7%-7.9% -4.6% - -5.3% -1.8% -- - Production printing sales ------7% -4% +1% -1% --3% -3% - Industrial equipment ------+125%+20%-33% -33% -+8% +8%- Healthcare ------5% -8% -32% +33% -+2% +2%- Video solutions ------9% +12% -0% +10% -+3% +3%- Source: Shared Research based on company data New customer driven segment Professional is a segment targeting customers in specialist domains. This contains divisions that will drive growth in the future such as production printing and network cameras. The key subsidiaries are Canon Production Printing Systems, which handles production printing, and Canon Lifecare Solutions, which deals in medical equipment and systems and solutions overall. In the medical field, Canon ITS Medical is engaged in sales and operations maintenance of medical information systems such as electronic records and medical fee billing systems. Production printing, industrial equipment, and healthcare each accounts for a roughly similar share of sales (with quarterly fluctuations), and it appears that industrial equipment generates most of the operating profit.

Q3 results and Q4 outlook Performance in Professional, along with Consumer, was part of what led to another downward revisions of the forecasts. The revised forecasts lowered sales by JPY1.1bn from the previous forecasts (-JPY100mn YoY) and widened the operating loss forecast by JPY100mn to JPY1.3bn (+JPY600mn YoY). The shortfalls in Q3 and Q4 forecasts were primarily owing to slow progress in healthcare. In Q4, the company expects a slight increase in sales and profit because some negotiations in healthcare were delayed until Q4 and has a large order for 4K displays in imaging solutions. Going towards 2019, CMJ expects sales growth from the launch of its mainstay monochrome continuous paper printer (with a solid contribution to profit delayed by about one year), and network camera sales.

Production printing Sales were 7% lower YoY in Q1, 4% lower YoY in Q2, and 1% higher in Q3. Sales were down in cumulative Q3. The increase in Q3 sales was due to the installation of a combined printing equipment line comprising a high-speed digital printing machine for business and a post-processing machine at Canon Medical Systems. Late inspection and shipping of high-speed continuous paper printers has caused ongoing delays, and products to be launched in the latter half of 2018 were delayed until 2019, which means consumables demand is likely to be delayed somewhat (by a few months). In light of this, CMJ lowered its full-year sales forecast from the initial +13% YoY to -3% at the time of its Q2 downgrade. It also lowered the sales forecast for commercial printing as a whole (including related products from other segments) from an initial +8% to +0%, with a further downgrade to -2% in Q3. There appears to be a significant impact from high-speed continuous printers.

Industrial equipment Sales were up 125% YoY in Q1 and another 20% in Q2. Newly handled products contributed to the increase as the semiconductor-related market remained favorable. In Q3 sales were down 33% YoY and appear to have suffered a significant drop at first glance, but this was largely because agency contracts with overseas business partners ended outside the semiconductor sector. We note that this was as expected and incorporated into initial company forecasts. Cumulative Q3 sales grew, and CMJ still expects an 8% YoY increase in sales (initial forecast was +9% YoY). CMJ reached an exclusive distribution agreement for electrolytic plating equipment in Japan with ClassOne Technology (US), and launched sales of the equipment on October 25, 2018. Because units are priced at JPY200mn or higher, they could contribute to profits depending on sales trends.

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Healthcare Sales were 5% lower YoY in Q1, 8% lower YoY in Q2, and 32% down YoY in Q3. Sales declined in cumulative Q3. This was due to the absence of a large contract booked in Q3 FY12/17, and the impact of sluggishness in modalities for hospitals. However, there was growth in retinal cameras and medical IT solutions. CMJ expects a 2% YoY increase in sales for the full year (initial forecast was +9%). It expects sales to grow by 33% YoY in Q4 due to previously delayed negotiations flowing through.

Imaging solutions Sales were 9% lower YoY in Q1, but 12% higher in Q2, and flat YoY in Q3 and in cumulative Q3. On the other hand, network cameras overall, including other segments, increased 8% in Q1, declined 7% in Q2, and rose 5% in Q3. CMJ revised down its full-year sales forecast from +25% to +3% in Q2. This is because it revised down the sales forecast for network cameras overall from +25% to +5%. The company projects just under 10% YoY growth in the domestic network camera market considering that it is taking more time than expected to develop new customers and sales routes and the unit price for the cameras has fallen.

The domestic network camera market can be roughly broken down into two submarkets: a) camera and recording equipment and b) camera and recording equipment with big data collection and image analysis. CMJ feels the former submarket is fairly large, but the latter has yet to expand significantly. Although market share itself has not changed, the company revised down forecasts because of falling prices and a revised sales strategy.

The company is subject to competition from low-priced products from Chinese manufacturers in small camera and recording equipment projects, but has high hopes for the high-end monitoring market in Japan, and will continue to focus on this area. The company said that it would look to build up the number of small projects while improving efficiency, and install large capacity cameras and imaging platforms from Milestone in large new buildings. Further, it thinks that it is important to develop a centralized management platform that is close to SIs for already installed cameras. It plans to distinguish itself by incorporating advanced monitoring software and image analysis software from BriefCam (Israel) that the parent company purchased. CMJ said it plans to be on a solid growth path in FY12/19 through maintaining a balance between sales, profit, and unit volume. It appears that CMJ has already received major orders that include Milestone’s imaging platform in the advanced monitoring market.

Reference The following table shows the performance of business equipment under the previous product classifications (companywide basis, numbers across all segments) as reference material as of Q1. Note that in MFP maintenance services, sales in Area are larger than those in Enterprise. Maintenance services in Q1 (average daily print volume (PV) x average price x operating days) declined by a significant 3% in Q1, but a lower number of operating days (down two days YoY) had a major impact, and PV growth was also slower than the previous year. There do not appear to have been any particular changes in status in Q1, Q2, or Q3. While the downtrend in average prices continues, it appears that they have reached a reasonable level. CMJ said that efforts to control price declines in combination with solutions are starting to show results.

Business equipment YoY

Business equipment FY12/16 FY12/17 FY12/18 FY12/17 FY12/17 FY12/17FY12/18 YoY chg (JPYmn) Q1*Q2*Q3*Q4*Q1Q2Q3Q4Q1Q2Q3Est. Q4Cml. Q3* Cml. Q3* Act. Est. Q3 YoY chg Est. Q2 Vs. Est. Q2 Cml. Q3 Office MFP (sales value; incl. rental) -----3% +7% +2% +2% +2% -7% -10% +7% +2% +1% -1pp +1% - Maintenance service (sales value) ----+0%-0% -1% -0% -3% +0% -1% -2% -0% -1% -1pp -1% - LBP (units) -----0% -3% -5% +2% -6% -12% +12% -3% -2% -1% +1pp -1% - LBP cartridge (sales value) ----+1%+2%-2% +1% -2% +3% +4% -4% +1%+0%-1pp +0% - Commercial printing (sales value) ----+3%+4%+1%-15% -6% -5% -0% +4% -3% +0% +3pp +0% - Network cameras (sales value) - - - - +31% +13% +8% +33% +8% -7% +5% +12% +22% +5% -17pp +5% - Source: Shared Research based on company data

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SG&A expenses SG&A expenses FY12/15 FY12/16 FY12/17 FY12/18 (JPYbn) Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4 SG&A expenses 50.8 52.8 50.2 52.6 49.7 50.0 48.2 50.5 48.0 48.8 47.4 49.2 48.3 47.1 45.8 Advertising 2.6 3.4 2.3 3.5 2.2 2.2 2.1 2.5 1.8 2.3 1.9 2.4 1.9 1.9 2.0 Sales promotion 1.3 1.1 1.2 1.9 1.2 1.3 1.1 1.9 1.2 1.2 1.1 1.8 1.1 1.1 0.9 Product warranties 1.8 1.9 1.9 1.7 1.5 1.4 1.4 1.6 1.4 1.3 1.2 1.3 1.3 1.1 1.2 Other direct expenses 5.3 5.2 5.1 5.6 5.3 5.3 5.2 5.5 5.1 5.2 4.9 5.2 4.8 4.9 4.7 Personnel 31.3 32.4 31.4 31.4 31.3 31.6 30.6 30.5 30.9 31.0 30.6 30.6 31.5 30.4 29.6 Depreciation 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.4 0.3 0.3 0.3 Ot her selling expenses 8.1 8.3 7.8 7.9 7.7 7.5 7.3 7.9 7.2 7.4 7.1 7.5 7.3 7.3 7.0 YoY change -1.0 +2.4 -1.2 -2.2 -1.2 -2.8 -2.0 -2.2 -1.7 -1.2 -0.9 -1.3 +0.2 -1.7 -1.6 Advertising +0.2 +1.7 -0.4 -0.4 -0.4 -1.2 -0.2 -1.1 -0.3 +0.0 -0.2 -0.1 +0.1 -0.4 +0.1 Sales promotion +0.2 -0.0 +0.0 +0.1 -0.0 +0.2 -0.1 -0.0 -0.1 -0.1 +0.0 -0.2 -0.0 -0.0 -0.2 Product warranties -0.0 +0.2 +0.1 -0.4 -0.4 -0.4 -0.6 -0.1 -0.0 -0.1 -0.2 -0.3 -0.1 -0.2 -0.0 Other direct expenses +0.0 +0.1 -0.0 +0.0 +0.1 +0.1 +0.1 -0.1 -0.3 -0.2 -0.2 -0.3 -0.3 -0.2 -0.2 Personnel -0.6 +0.9 -0.1 -0.7 -0.0 -0.7 -0.7 -0.9 -0.4 -0.7 -0.0 +0.1 +0.7 -0.6 -1.0 Depreciation -0.1 -0.1 -0.1 -0.1 +0.0 +0.0 +0.0 -0.0 -0.0 -0.0 -0.1 -0.2 -0.2 -0.2 -0.2 Ot her selling expenses -0.7 -0.3 -0.7 -0.7 -0.4 -0.8 -0.5 +0.1 -0.5 -0.1 -0.1 -0.4 +0.1 -0.1 -0.1 YoY -1.9% 4.7% -2.3% -4.0% -2.3% -5.3% -4.0% -4.1% -3.3% -2.4% -1.8% -2.5% 0.5% -3.5% -3.3% % of sales 32.7% 33.2% 32.3% 29.8% 31.8% 33.3% 32.7% 28.7% 31.4% 32.3% 31.0% 28.0% 32.0% 31.4% 31.1% Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.

Market share by sales volume in FY12/17 (company estimation) Single-lens reflex Interchangeable Mirrorless Single-lens reflex Entry model SLR market lens

23% 45% 41% 55% 61% 56%

Mirrorless SLR Canon Others Canon Others Canon Others Canon Others Source: Shared Research based on company data

Domestic shipments of cameras with interchangeable lenses

Amount shipped: interchangeable-lens (Japan; right axis) YoY Average selling price YoY +80% 35 30.8 +60% 27.3 30 23.6 24.0 +40% 22.0 25 20.5 20.6 20.8 19.4 19.6 +20% 18.1 18.9 18.8 18.0 20 17.1 16.4 16.4 16.9 16.8 17.4 15.5 16.3 15.4 15.3 16.2 15.6 15.8 14.3 15.3 14.3 15.1 14.3 15.2 0% 14.0 13.1 13.7 15 11.4 -20% 8.8 10 -40% 5 -60% 0 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 FY12/09 FY12/10 FY12/11 FY12/12 FY12/13 FY12/14 FY12/15 FY12/16 FY12/17 FY12/18 (JPYbn) Shipment value (right axis) YoY +80% 14 +60% 12 +40% 10 +20% 8 0% 6 -20% 4 -40% 2 -60% 0 Jan Jan Jan Jan Jan Jan Jan Jan Jan 2010 2011 2012 2013 2014 2015 2016 2017 2018 (JPYbn) Source: Shared Research, based on Camera & Imaging Products Association data

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Domestic shipments of single-lens reflex cameras

Amount shipped: single-lens reflex (Japan; right axis) YoY Average selling price YoY +60% 25

+40% 19.2 18.5 20 15.9 14.5 15.0 +20% 13.4 13.3 15 12.6 12.9 12.4 13.1 13.1 11.2 10.4 10.8 10.5 10.5 10.3 10.1 9.6 10.0 0% 9.0 8.7 8.7 10 7.4 6.4 -20% 5

-40% 0 Q1 Q1 Q1 Q1 Q1 Q1 Q1 FY12/12 FY12/13 FY12/14 FY12/15 FY12/16 FY12/17 FY12/18 (JPYbn) +100% Shipment value (right axis) YoY 9 +80% 8 +60% 7 +40% 6 +20% 5 0% 4 -20% 3 -40% 2 -60% 1 -80% 0 Jan Jan Jan Jan Jan Jan Jan 2012 2013 2014 2015 2016 2017 2018 (JPYbn) Source: Shared Research, based on Camera & Imaging Products Association data

Domestic shipments of mirrorless cameras

Amount shipped: non-reflex (Japan; right axis) YoY Average selling price YoY +80% 14 11.6 +60% 11.2 12

+40% 8.8 10 8.1 8.4 7.5 7.5 7.7 7.9 +20% 7.0 6.9 7.2 7.0 7.3 8 6.2 6.3 6.3 5.9 5.7 5.9 5.8 5.3 5.5 0% 4.7 6 4.3 4.3 -20% 4 -40% 2 -60% 0 Q1 Q1 Q1 Q1 Q1 Q1 Q1 FY12/12 FY12/13 FY12/14 FY12/15 FY12/16 FY12/17 FY12/18 (JPYbn) +150% Shipment value (right axis) YoY 5

+100% 4

+50% 3

0% 2

-50% 1

-100% 0 Jan Jan Jan Jan Jan Jan Jan 2012 2013 2014 2015 2016 2017 2018 (JPYbn) Source: Shared Research, based on Camera & Imaging Products Association data

Domestic shipments of interchangeable lenses for single-lens reflex cameras

Amount shipped: interchangeable lenses (Japan; right axis) YoY Average selling price YoY +60% 25 20.7 19.8 19.0 19.2 +40% 18.3 17.7 18.2 18.2 18.3 20 16.9 15.8 15.8 15.4 15.0 15.4 14.7 14.3 14.3 13.6 13.9 +20% 12.8 13.0 12.9 13.3 13.4 15 10.8 0% 10

-20% 5

-40% 0 Q1 Q1 Q1 Q1 Q1 Q1 Q1 FY12/12 FY12/13 FY12/14 FY12/15 FY12/16 FY12/17 FY12/18 (JPYbn)

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Shipment value (right axis) YoY +100% 8,000 +80% 7,000 +60% 6,000 +40% 5,000 +20% 4,000 0% 3,000 -20% 2,000 -40% 1,000 -60% 0 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 (JPYmn) Source: Shared Research, based on Camera & Imaging Products Association data

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Domestic shipments of compact digital cameras Amount shipped: compact (Japan; right axis) YoY Average selling price YoY +60% 42.8 45 38.8 38.7 40 +40% 34.4 35.3 32.8 32.9 31.2 35 28.3 +20% 26.6 26.3 30 24.1 23.4 22.8 21.7 25 0% 19.1 18.6 18.8 18.8 20 13.9 14.3 13.8 -20% 12.9 12.1 12.3 12.0 15 11.3 10.5 10.2 9.6 9.6 8.9 8.8 9.3 8.0 7.9 6.9 10 -40% 6.1 5 -60% 0 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 FY12/09 FY12/10 FY12/11 FY12/12 FY12/13 FY12/14 FY12/15 FY12/16 FY12/17 FY12/18 (JPYbn) Shipment value (right axis) YoY +80% 14,000 +60% 12,000 +40% 10,000 +20% 8,000 0% 6,000 -20% 4,000 -40% 2,000 -60% 0 Jan Jan Jan Jan Jan Jan Jan Jan Jan 2010 2011 2012 2013 2014 2015 2016 2017 2018 (JPYmn) Source: Shared Research, based on Camera & Imaging Products Association data

1H FY12/18 results (out July 25, 2018)

▷ 1H FY12/18: Operating profit was down JPY1.3bn (-11.8% YoY). Robust B2B results did not compensate for weakness in B2C. Enterprise (+JPY1.3bn), Area (+JPY600mn), and Professional (+JPY700mn) recorded increases in operating profit while

operating profits in Consumer dropped JPY3.7bn, impacting overall operating profit negatively. Sales of digital single-lens reflex cameras and inkjet printers (IJPs) were sluggish in the Consumer segment. Full-year targets were revised in light of 1H results, with operating profit set at JPY28.5bn, down JPY3.5bn from the previous forecast and down JPY1.9bn YoY

▷ Revised forecast: Consumer had greater market stagnation than anticipated, and CMJ deemed it difficult to recover from delays in some areas of Professional

 CMJ reduced the operating profit forecast for Consumer by JPY2.2bn and for Area by JPY1.4bn (on added sales promotion expenses). Dividend forecast remains unchanged

▷ Consumer: Sales of mirrorless cameras were upbeat. Amid excess inventories, sales of single-lens reflex cameras, IJPs, and cartridges dropped, hitting performance

▷ Enterprise: Sales from services for financial, manufacturing, and distribution sectors were all up in IT Solutions business, and the expansion of MFPs to a wide range of industries contributed to an increase in sales

▷ Area: IT solution and security services for SMEs saw stable growth, while sales of mainstay hardware such as for MFPs and LBPs were weak and sales from maintenance service fell

▷ Professional: Industrial equipment was a main driver of this segment. Sales in production printing (with flat sales of high-speed continuous paper printers) and healthcare businesses were down

▷ 2H: B2B, centered on IT Solutions, is likely to remain robust. Sales promotion trends for mirrorless cameras in Consumer should be watched

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Operating profit by segment (top) gross profit and SG&A expenses (bottom)

(JPYbn) Business Solutions IT Solutions Imaging Systems Industrial and Medical Others Consumer Enterprise Area Professional Others 14 11.8 12.0 12 10.9 3.3 9.2 9.1 10 8.6 7.4 7.4 8 7.2 2.3 3.2 7.6 5.9 5.5 5.7 3.7 6 5.1 5.2 5.1 5.3 2.5 4.3 6.9 3.6 3.7 7.6 2.0 3.1 3.3 3.5 3.5 1.8 2.1 3.5 1.9 2.9 4 3.1 7.0 2.5 3.5 2.2 2.0 1.6 4.5 3.9 2.4 2 0.4 3.4 3.1 2.7 2.4 2.2 2.7 2.0 2.3 2.5 1.6 1.8 1.3 1.4 1.5 1.7 2.0 0.8 0.7 0.3 1.0 0 -1.0 -0.4 -0.3 -2.1 -2 Q1 Q1 Q1 Q1 Q1 Q1 FY12/13 FY12/14 FY12/15 FY12/16 FY12/17 FY12/18 (JPYbn) Gross profit GPM (right axis) (JPYbn) SG&A expenses SG&A-to-sales ratio (right axis) 65 37% 56 36%

60 36% 52 34%

55 35% 48 32%

50 34% 44 30%

45 33% 40 28%

40 32% 36 26% Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 FY12/11 FY12/12 FY12/13 FY12/14 FY12/15 FY12/16 FY12/17 FY12/18 FY12/11 FY12/12 FY12/13 FY12/14 FY12/15 FY12/16 FY12/17 FY12/18 Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. Segment changes incorporated as appropriate (the same applies throughout)

Earnings overview In 1H FY12/18, sales were JPY300.5bn (down JPY3.1bn, -1.0% YoY) and operating profit was JPY9.7bn (down JPY1.3bn, -11.8%). B2B business contributed to operating profit, primarily in Enterprise (JPY1.3bn growth YoY in operating profit). However, B2C business (Consumer, down JPY3.7bn) performed poorly and below plan, partly due to excess inventories of single-lens reflex cameras and inkjet printers at the start of the year. It posted a segment operating loss. Full-year targets were revised in light of 1H results, with operating profit set at JPY28.5bn, down JPY3.5bn from the previous forecast and down JPY1.9bn YoY. In addition, CMJ announced a JPY25 interim dividend (unchanged YoY), but left the year-end dividend unchanged at JPY60.

The B2B business, centered on IT Solutions, is likely to remain robust in 2H. In the Area segment, CMJ plans to increase spending for promotion of equipment linked with solutions. Due to a shrinking market, the company revised down its full-year forecast for Consumer, but still expects profit to increase YoY in 2H on enhancement to its lineup of mirrorless cameras and related sales promotion.

The company made sweeping changes to its segment reporting from FY12/18. It shifted its organizational structure to fit its customers and markets, moving away from the traditional product and service focus to a customer-oriented focus. At Q1, CMJ unveiled segment operating profit forecasts for the first time. However, these did not incorporate actual Q1 results but were merely forecasts made at the start of the year. The company reviewed its full-year forecasts at the time of the Q2 results.

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Consumer Consumer FY12/16 FY12/17 FY12/18 FY12/17 FY12/18 FY12/17 FY12/18 YoY chg (JPYmn) Q1*Q2*Q3*Q4*Q1Q2Q3Q4Q1Q21H1HAct.Est. Q2YoY chg Est. Q1 Vs. Est. Q1 1H Sales 32,667 37,964 37,000 57,000 26,822 34,208 70,631 61,030 166,300 154,500 -11,800 163,000 -8,500 -9,601 YoY ------17.9% -9.9% --13.6% --7.1% -2.0% Operating profit 2892,267 3,100 7,000 -2,149 1,042 2,556 -1,107 12,700 9,400 -3,300 11,600 -2,200 -3,663 YoY ------54.0% -- --26.0% -8.7% OPM 0.9%6.0%8.4%12.3%-8.0% 3.0% 3.6% -1.8% 7.6% 6.1% -1.6pp 7.1% -1.0pp -5.4pp YoY Interchangeable lens digital cameras -----17% -3% -21% -7% -28% -15% -12% -10% -2% -8pp (units) Single-lens reflex ------42% -34% --32% -24% -8pp Mirrorless ------+24%+47% -+65% +76%-11pp Compact ----+20%-14% +39% +3% -44% +1% +8%-4% -10% +6pp Inkjet printers ----+1%+20%-10% -9% -12% -23% -3% -8% -5% -3pp Inkjet printer cartridges (value) -----6% -8% +7% -9% -9% -2% -5% -3% -1% -2pp Dom. Interchangeable lens digital cameras 304 297 306 376 323 273 316 307 273 265 596 538 1,219 1,060 -159 1,170 -110 -57 market Single-lens reflex 200 198 198 210 182 146 170 177 126 120 328 246 674 470 -204 530 -60 -81 shipped Mirrorless 104 98 108 167 141 127 147 130 147 146 268 292 545 590 45 640 -50 24 units Compact 662 551 420 605 636 563 544 560 481 423 1,200 903 2,303 1,770 -533 1,880 -110 -296 ('000) Interchangeable lenses 622 579 594 716 762 534 592 591 511 525 1,297 1,036 2,480 -261 YoY Interchangeable lens digital cameras -26.8% -33.0% -18.2% -4.8% +6.1% -8.0% +3.2% -18.4% -15.4% -2.8% -0.8% -9.6% -5.0% -13.0% -4.0% Single-lens reflex -24.5% -25.0% -3.3% -14.0% -9.3% -26.5% -14.4% -15.7% -30.5% -17.9% -17.8% -24.9% -16.4% -30.3% -21.4% Mirrorless -30.9% -44.8% -36.3% +10.1% +36.0% +29.4% +35.4% -21.9% +4.1% +14.6% +32.8% +9.1% +14.3% +8.3% +17.5% Compact -18.4% -36.6% -49.6% -20.2% -3.8% +2.3% +29.5% -7.5% -24.4% -25.0% -1.1% -24.7% +2.9% -23.1% -18.4% Interchangeable lenses -19.1% -33.5% -19.0% -11.1% +22.6% -7.7% -0.4% -17.4% -33.0% -1.7% +8.0%-20.1% -1.3% Dom. Interchangeable lens digital cameras 14,284 15,069 14,346 16,880 15,586 15,841 16,776 17,415 15,216 13,658 31,427 28,874 65,618 -2,553 market Single-lens reflex 9,553 10,787 9,998 9,006 8,705 8,687 10,502 10,460 7,407 6,374 17,392 13,781 38,354 -3,611 shipped Mirrorless 4,731 4,282 4,349 7,874 6,881 7,154 6,274 6,955 8,371 7,284 14,035 15,655 27,264 1,620 amounCompact 9,622 8,008 6,100 10,226 9,612 8,938 8,828 9,350 7,890 6,852 18,549 14,742 36,728 -3,807 (JPYmn)Interchangeable lenses 15,017 12,839 13,045 15,841 15,356 12,938 13,909 14,730 13,306 13,441 28,294 26,747 56,933 -1,547 YoY Interchangeable lens digital cameras -27.0% -27.7% -20.2% +2.9% +9.1% +5.1% +16.9% +3.2% -2.4% -13.8% -3.2% -8.1% +8.3% Single-lens reflex -28.6% -19.1% -2.8% -10.6% -8.9% -19.5% +5.0% +16.1% -14.9% -26.6% -1.8% -20.8% -2.5% Mirrorless -23.3% -42.9% -43.4% +24.2% +45.5% +67.1% +44.3% -11.7% +21.6% +1.8% -4.9% +11.5% +28.4% Compact -20.3% -35.1% -49.2% -2.2% -0.1% +11.6% +44.7% -8.6% -17.9% -23.3% -6.5% -20.5% +8.2% Interchangeable lenses -17.6% -33.0% -28.2% -13.6% +2.3% +0.8% +6.6% -7.0% -13.3% +3.9% -9.3% -5.5% +0.3% Source: Shared Research based on company data Consumer: Sales of mirrorless cameras were upbeat. Amid excess inventories, sales of single-lens reflex cameras, IJPs, and cartridges dropped, hitting performance In Q4 FY12/17 the company launched an entry-level mirrorless camera, which helped propel its market share to No. 1 and drive sales volume growth. Still, this was not enough to offset the decline in single-lens reflex cameras which suffered from a shrinking market and excess distributor inventories. Home-use inkjet printers and ink cartridges were also sluggish. The combined effect caused sales to fall by 13.6%. The segment posted an operating loss of JPY1.1bn (down JPY3.7bn YoY). The impact of excess distributor inventories on SLR cameras and IJPs ended in Q1, and the situation appears to have returned to normal in Q2. The following is the status of individual product categories and the outlook from Q2 onward.

Mirrorless cameras In mirrorless cameras, the entry-level EOS M100 launched in October 2017 (body was selling for JPY46,490 tax included on Yodobashi.com as of July 27, 2018) has been doing well. It gained a top market share in Q4 FY12/17 (28% in terms of units) and maintained the top position in Q1 FY12/18 (25%). In Q2, with the help of the EOS Kiss M (JPY67,370), launched near the end of March 2018, market share jumped to 35%, creating a 10pp lead on the second position.

CMJ aims to maintain a share similar to the Q2 level for the full year (an ambitious target according to the company). In 1H, new entry-level products performed well because they responded to consumer demand, and by enhancing the lineup in 2H the company plans to capture even more of this demand. It will work aggressively as a challenger, since it was actually a latecomer to the mirrorless camera market.

SLR cameras and interchangeable lenses The SLR market is likely to continue contracting for the time being. CMJ has revised down its market outlook for 2018. The company’s initial outlook for number of units sold was a 24% decrease YoY, but it revised this down to a 32% decrease. CMJ’s share of the SLR market is above 50% and the number of competitors in this area is actually quite small, so rather than haphazardly chasing market share in terms of units sold, the company is focusing on earnings and plans to enhance sales efforts primarily for mid-level models and interchangeable lenses. In terms of the latter, for its best-selling telephoto zoom EF70-200 lenses, the company is updating its f/4.0 model (JPY179,820, on sale from late June) for the first time since November 2006 and its f/2.8 model (JPY291,600, on sale from mid-September) for the first time since March 2010. Due to the popularity of these lenses with consumers, the company says it has already received a large number of advance orders for the model set for release in September. CMJ appears to be aiming to expand earnings by effectively leveraging interest from past customers.

IJPs CMJ is focusing on business IJPs because the home-use market is approaching saturation. In 1H, business IJPs continued their growth, but the number of units and cartridges being sold remains small, insufficient to absorb the decline in the home-use

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market. The company believes it unlikely that print volume (PV) for home-use IJPs will grow significantly hereafter, so it aims to increase unit sales and PV overall by shifting to high value-added models and focusing on business IJPs and large volume ink tank models. However, as with SLR cameras, CMJ plans to give priority to capturing earnings instead of chasing market share in terms of units sold.

Compact cameras The compact camera market continues to contract, and major domestic digital camera manufacturer Casio Computer Co., Ltd. (TSE1: 6952) announced in May 2018 that it is withdrawing from the compact digital camera business. CMJ believes the market will continue to stagnate and is therefore working to maintain earnings by focusing on sales promotions for higher-priced, high magnification models. The company appears to have secured profit in Q2 that was level with Q2 FY12/17.

Casio Computer’s digital camera business: Casio officially announced on May 9, 2018, that it is withdrawing from the compact digital camera business. According to Nikkei, Casio’s camera business had FY03/18 sales of JPY12.3bn (-34% YoY) and a final loss of JPY4.9bn (versus a loss of JPY500mn in FY03/17). Casio sold 550,000 cameras worldwide in FY03/18 (670,000 in FY03/17, 1.9mn in FY03/14).

Q1 results (reference): CMJ attributed the profit downturn to excess inventories, which increased expenses to grow sales of store inventory, and dropping the sales method of selling old single-lens reflex models (mainly entry-level) cheaply to boost market share, which delayed new product launches. Further, in Q1 FY12/17, strong sales of the EOS 5DMark4, a mid-priced single-lens reflex volume seller launched in Q4 2016, pushed up profit, and such effect was absent in Q1 FY12/18. Inventory disposal is normally a drag on Q1 profit, but it appears that have had a larger than usual impact in FY12/18. The company has maintained its full-year and segment forecasts, but it appears that the market shrank more than expected, and results came in under forecasts.

Outlook for Q2 onward (reference as of Q1): By the end of March, excess market inventories of single-lens reflex cameras had neared appropriate levels. The reactionary fall off from EOS 5DMark4 sales was just a matter of the product cycle, and CMJ thinks it can make up for this with new product development. New mirrorless products launched in late March should make a full contribution from Q2 onward, and the company also plans to bulk up its lineup of mid-price cameras as well. The new selling methodology will remain in place.

 Single-lens reflex cameras (Q1, -42%; initial full-year forecast for unit sales, -24%): A recovery is in prospect in the short term as store inventories were largely appropriate at end March, but it is likely to suffer impact of sluggish market  Mirrorless cameras (+24%; +76%): Entry-level EOS Kiss M launched in late March and aggressive promotion should boost sales. The company aims to bolster the product lineup and have No. 1 market share for the year (maintained this position in Q1 in tough battle)  Compact cameras (-44%; -10%): Amid slumping market, CMJ aims to offset declining unit sales by growing sales of higher-priced, high magnification models  Inkjet printers (-12%; -5%): Store inventories are appropriate, but demand is concentrated in Q4, and because average prices were high through Q3 FY12/17*, there is a structural demand decline and the outlook is for conditions to remain tough. The company plans to focus on business IJPs in combination with consumer products for growth and improved margins overall. It realizes it is lagging in the SOHO market and aims to boost its position there. CMJ forecasts the value of IJP cartridge sales to fall by 1% in the full-year after 9% in Q1

According to CMJ’s estimates, in Q4 FY12/17 it had a leading domestic market share of 28% in mirrorless cameras (No.2 over the full year at 23%), and maintained the leading share in Q1 FY12/18 at 26%. CMJ aims to have the number No.1 share in full-year FY12/18.

*IJP: The company was successful in raising average prices for its 2016 models, but not for its 2017 lineup. It aims to once again raise average prices for the new 2018 lineup

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Domestic shipment volume for interchangeable lens cameras (excluding mirrorless, left), mirrorless (center), compact (right)

Units shipped: single-lens reflex Units shipped: non-reflex Units shipped: (Japan; right axis) interchangeable lenses +60% +40% (Japan; right axis) 450 +40% 1,600 YoY YoY (Japan; right axis) +50% 500 YoY +30% 400 +30% 1,400 +40% +20% 350 +30% 400 +20% 1,200 +10% 300 +20% +10% 1,000 +10% 300 0% 250 0% 800 0% -10% 200 -10% 200 -10% 600 -20% 150 -20% -30% 100 -20% 400 -30% 100 -30% 200 -40% -40% 50 -50% 0 -50% 0 -40% 0 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 ('000) FY12/13 FY12/15 FY12/17 ('000) FY12/13 FY12/15 FY12/17 ('000) FY12/13 FY12/15 FY12/17 Domestic sales amounts for interchangeable lens cameras (excluding mirrorless, left), mirrorless (center), compact (right) Amount shipped: single-lens reflex Amount shipped: non-reflex Amount shipped: (Japan; right axis) (Japan; right axis) interchangeable lenses +60% 25,000 +80% 14,000 +60% 25,000 YoY YoY (Japan; right axis) +50% +50% YoY +60% 12,000 +40% 20,000 +40% 20,000 +30% +40% 10,000 +30% +20% 15,000 +20% 15,000 +20% 8,000 +10% +10% 0% 10,000 0% 6,000 0% 10,000 -10% -20% 4,000 -10% -20% 5,000 -20% 5,000 -40% 2,000 -30% -30% -40% 0 -60% 0 -40% 0 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 FY12/13 FY12/15 FY12/17 (JPYmn) FY12/13 FY12/15 FY12/17 (JPYmn) FY12/13 FY12/15 FY12/17 (JPYmn) Source: Shared Research based on company data

Enterprise Enterprise FY12/16 FY12/17 FY12/18 FY12/17 FY12/18 FY12/17 FY12/18 YoY chg (JPYmn) Q1*Q2*Q3*Q4*Q1Q2Q3Q4Q1Q21H1HAct.Est. Q2YoY chg Est. Q1 Vs. Est. Q1 1H Sales 44,241 44,934 43,000 46,300 47,127 47,542 89,175 94,669 176,900 185,000 +8,100 183,000 +2,000 +5,494 Canon IT Solutions 20,390 20,620 - - 21,900 21,600 41,000 43,490 +2,490 Other 23,85124,314--25,22725,942 48,17551,179 -- - +3,004 Canon IT Solutions 27,40027,300--30,60029,900 54,70060,500 +5,800 Other 16,800 17,600 - - 16,500 17,600 34,500 34,200 -300 YoY ------+6.5%+5.8% -+6.2% -+4.6% +3.4% Canon IT Solutions ------+7.4%+4.8% -+6.1% -- - Other ------+5.8%+6.7% -+6.2% -- - IT solutions +12%+10% +11% Excluding IT solutions -2% - -1% Operating profit 1,9551,6251,9002,3002,4942,353 3,5804,847 7,900 8,500 +600 8,500 - +1,267 Canon IT Solutions 1,290 1,280 - - 1,790 1,810 2,560 3,600 +1,040 Other 665345--704543 1,020 1,247 - - - +227 YoY ------+27.6% +44.8% -+35.4% - +7.6% +7.6% Canon IT Solutions ------+38.8% +41.4% -+40.6% -- - Other ------+5.9%+57.4% -+22.3% -- - OPM 4.4%3.6%4.4%5.0%5.3%4.9% 4.0%5.1% 4.5%4.6% 4.6%-0.1pp +1.1pp Canon IT Solutions 6.3%6.2%--8.2%8.4% 6.2%8.3% -- - +2.0pp Other 2.8%1.4%--2.8%2.1% 2.1%2.4% -- - +0.3pp Canon ITS sales by division SI services ----+10%+7% -+6% +4%+2pp IT infrastructure service (data centers) ----+8%+1% -+3% +6%-3pp Engineering (embedded software, CAD) ----+2%+7% -+3% +5%-2pp Orders -3% -9% +21% +24% +8% +8% +6% - - Order backlog -11% -15% +7% +17% +21% +22% +17% - - Sales -0% +0% -1% +10% +7% +5% +2% - - Source: Shared Research based on company data New customer driven segment Enterprise is a customer driven segment targeting large corporations with at least 1,000 employees. The segment was created as its customers’ needs are different from the medium-sized corporations and SMEs that the Area segment targets. It is comprised of systems integration (SI) services provided by subsidiary Canon IT Solutions, and CMJ handles sales and maintenance of multifunction products and other business equipment, and IT solutions. Canon IT Solutions is the main operator of SI services, with revenues supported by the recurring revenue data center business. A major factor in profits is engineering, which is centered on high-margin embedded software.

Characteristics of individual quarters: In Enterprise, there is little seasonality related to IT Solutions, including Canon IT Solutions, but there is a tendency for cartridge sales to be concentrated in the quarter that includes the final month of companies’ financial years. Since Q1 includes February, in which sales from the distribution sector are concentrated, and March, which is the financial year-end for public bodies and many general companies, earnings tend to be higher in Q1. In the preceding table, this refers to the Other portion of sales (total sales minus Canon IT Solutions portion).

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1H results and 2H outlook Canon IT Solutions and CMJ both posted solid results. Sales of large-scale SI services for the financial sector were robust, and there was also sales growth in the manufacturing, distribution, and education sectors. There was progress in terms of shipment of office MFPs for a wide range of industries, with contributions from large orders for the distribution sector also making progress. LBPs continue to be focused in office-use, and orders have been largely flat, so sales declined.

Improvement in both profit amount and margin at Canon IT Solutions is worth noting. As can be seen in the preceding table, operating profit at Canon IT Solutions was just under JPY1.3bn in Q1 and Q2 FY12/17, with an OPM of just above 6%, but this improved to around JPY1.8bn in Q1 and Q2 FY12/18, with an OPM of more than 8%. Specifically, there has been an increase in primary projects (development projects, which are more profitable than secondary projects under contract) for development directly with clients, and a favorable market environment has made it possible to capture projects that are worth more. Structurally speaking, it is likely this trend will continue from Q3 onward.

The status of orders at Canon IT Solutions is as shown in the preceding table, but it is worth noting that orders and order backlog for the data center business are trending upward. Even excluding this impact, orders for most sectors steadily accumulated in 1H.

By sector:

▷ Financial (sales up YoY in 1H, expected to increase for full year): In 1H, large development projects related to credit cards moved from Phase I to Phase II, so the sector has yet to peak out and is likely to remain robust. The company has begun offering investment product sales support cloud services for credit unions nationwide, and development projects in insurance and securities look set to remain strong in 2H.

▷ Manufacturing (sales up YoY in 1H, expected to increase for full year): In 1H, a system migration project for a construction material manufacturer and a demand forecasting solution for a beverage manufacturer contributed to earnings. In 2H, the

company expects an increase in projects for system migration and production management and demand forecasting systems, bringing an increase in sales.

▷ Distribution (sales up YoY in 1H): The number of development projects for retail sales support systems is increasing.

▷ Education (sales up YoY in 1H): In 1H, the delivery of large IT infrastructure projects progressed, including of the in Campus IT infrastructure system for universities. The company expects a large system migration project in Kyoto (ordered in 1H) will contribute in 2H.

In terms of business equipment, the company won multiple orders for office MFPs in 1H, so shipments increased, but it expects 2H sales to be down YoY, resulting in little change for the full year. LBP sales are likely to continue their sluggishness due to the shift to MFPs, but the company expects some large orders in 2H (concentrated in Q3). In terms of recurring-revenue business, maintenance service sales increased in 1H, as did shipments of cartridges, primarily for the distribution sector. The former was the result of higher print volume (PV) accompanying an increase in the number of machines in field (MIF), while the latter was the result of specific sectors with high PV. The same basic trends are likely to continue in 2H. However, in regard to cartridges, it should be noted that after shipment of large renewal orders, related demand temporarily declines.

Q1 results (reference): Growth in Canon IT Solutions was driven by the following services:  SI services (+10% YoY): The company won solid orders among key finance customers and posted sales growth in the manufacturing, distribution, and education sectors  IT infrastructure services (+8%): Solid performance by data center business, with phase 2 building scheduled for completion in Q4 FY12/19, and solid performance by security products  Engineering (+2%): Growth, primarily in CAD

CMJ also made solid progress in sector-specific solutions, and won a major public sector contract in business equipment, with significant growth in rental MFP shipments. We plan to provide an updated overview as of Q2 following interviews with the company.

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Outlook for Q2 onward (reference as of Q1): CMJ expects solid results. In the mainstay SI services business, following are expected in each industry:  Finance industry: Major development contracts had been the driver, but these are likely to peak out. Aims to grow sales by winning development contracts for banks and online brokers, as well as proposing financial solutions in areas where its strengths lie  Manufacturing: Expects solid results versus previous year as it meets demand for greater speed and efficiency in design and development operations  Education: Aims to grow sales by increasing original solutions such as in Campus. The strategy is to accelerate the shift from hardware to solutions across all industry sectors

In IT infrastructure services, data centers should continue to drive growth. In engineering, the company plans to continue its shift to external sales in areas such as automotive control systems in the high-margin embedded software area.

In business equipment, the company expects a reactionary fall off in MFPs following a good Q1 and several major contracts for the distribution industry in the previous year. It expects a slight YoY decline in annual shipment numbers. CMJ won major contracts for LBPs for the finance sector, and expects growth on an annual basis.

In its medium-term plan, CMJ is aiming at a transformation from a contracting based to a solutions based business. Growing orders while engineering a transformation is a thorny issue, and the company intends to exploit its customer base advantage as much as possible, and plans to leverage synergies between its direct sales force and the sales force of Canon IT Solutions.

Area Area FY12/16 FY12/17 FY12/18 FY12/17 FY12/18 FY12/17 FY12/18 YoY chg (JPYmn) Q1* Q2* Q3* Q4* Q1 Q2 Q3 Q4 Q1 Q2 1H 1H Act. Est. Q2 YoY chg Est. Q1 Vs. Est. Q1 1H Sales 68,092 63,047 62,100 64,400 66,372 63,011 131,139 129,383 260,600 256,500 -4,100 261,000 -4,500 -1,756 Canon System & Support 32,140 28,840 - - 30,570 29,130 60,970 59,690 -1,280 Other 35,95234,207--35,80233,881 70,16969,693 -- - -476 IT solutions 15,20013,400--15,10014,600 28,60029,700 +1,100 Excluding IT solutions 52,900 49,600 - - 51,300 48,400 102,500 99,700 -2,800 YoY -----2.5% -0.1% --1.3% --1.6% +0.2% Canon System & Support -----4.9% +1.0% - -2.1% -- - Other -----0.4% -1.0% --0.7% -- - IT solutions -0% +9% +4% Excluding IT solutions -3% -2% -3% Operating profit 3,461 1,994 2,500 3,300 2,946 3,068 - 5,455 6,014 - 11,200 11,800 +600 13,200 -1,400 +559 Canon System & Support 1,220 430 - - 800 930 1,650 1,730 +80 Other 2,241 1,564 - - 2,146 2,138 3,805 4,284 - - - +479 YoY -----14.9% +53.9% -+10.2% -+5.4% +17.9% Canon System & Support -----34.4% +116.3% -+4.8% -- - Other -----4.2% +36.7% -+12.6% -- - OPM 5.1%3.2%4.0%5.1%4.4%4.9% 4.2%4.6% 4.3%4.6% 5.1%-0.5pp +0.5pp Canon System & Support 3.8%1.5%--2.6%3.2% 2.7%2.9% -- - +0.2pp Other 6.2%4.6%--6.0%6.3% 5.4%6.1% -- - +0.7pp Source: Shared Research based on company data New customer driven segment Area is a customer driven segment targeting small and medium-sized corporations with up to 999 employees. Subsidiary Canon System & Support handles direct sales, while CMJ is in charge of partners (agents). Due to strong demand for IT solutions by SMEs, the company is rebuilding its business model to suit the scale of its customers. The idea is to gradually roll out the business model developed by Canon System & Support to partner companies. Because direct sales and partner companies cover the same regions, CMJ aims to unify direct sales and partners to develop planning and execution of sales strategies by customer demographic when it reforms its medium-term plan.

Characteristics of individual quarters: In Area, as with Enterprise, there is a tendency for sales to be concentrated around client companies’ financial year-ends, centering on consumables. For this reason, sales are typically more sluggish in Q2 than in Q1. However, in FY12/18, due to organizational changes and a shift in client base in Q1 toward companies with a large number of employees, a portion of MFP-related sales has shifted from Q1 to Q2.

1H results and 2H outlook In 1H, solutions for SMEs, security-related solutions, and LBP cartridges for specific sectors were robust, but mainstay hardware such as office MFPs were sluggish and maintenance service sales were down as maintenance prices fell. Operating profit declined YoY in Q1, but increased again in Q2 to achieve a YoY increase for 1H as a whole, helped by increased sales of high-margin products and lower SG&A expenses. Behind the Q2 increase was the impact of organizational changes—with changes in top management at business units (BUs) and key subsidiary Canon System & Support in Q1 with a shift to a new customer-centric framework—and a focus on profit margin. Aiming to recover in Q2 from a drop in profit in Q1, all BUs shifted their priority to profit and managed individual business negotiations with a focus on margin, centering on IT solutions and security services.

In business machines, sales of office MFPs and LBPs fell YoY. In recurring-revenue business, maintenance service sales fell slightly, but shipments of cartridges for certain sectors were robust, producing an increase in sales. For business machines, investment at

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SMEs takes into consideration work style reform, improvement in business efficiency, and cost reductions, so interest in replacing machines is low, and the response to conventional sales methods (proposal of replacement with new machines at the same cost as leasing) has not been favorable. However, in regard to the MIFs that are the basis of recurring-revenue business, there has been no decline because of clients’ high evaluation of the company’s stable quality and service efficiency. Per-unit service fees have fallen, but this has not had much of an impact on total earnings.

2H outlook In 2H, SMEs’ desire to invest in IT is likely to remain high, so CMJ plans to work on promoting its IT solutions (including cloud services) and security services. In terms of business machines, it plans to strengthen negotiations that link into IT solutions in an effort to achieve a recovery in office MFPs (with an increase in sales for the full year).

In its revised forecasts, CMJ lowered its sales and operating profit targets for Area by JPY4.5bn and JPY1.4bn respectively. The main negative impacts on sales were delayed progress on business machines and the focus on profit margin, while the main impact on operating profit was the increased expenses targeting enhanced sales as described earlier.

Q1 results (reference): A decline in Canon System & Support weighed on profits. The subsidiary is in the midst of organizational reform as it shifts its customer demographic focus toward companies with more employees, so profit slumped in Q1. Still, the medium-sized corporations and SME market is buoyant, so structural reform should set the groundwork for new growth. CMJ saw solid growth in demand for LBP cartridges for specific sectors, but a dip in MFP shipments and decline in operational days for maintenance service saw revenue and profit decline.

Outlook for Q2 onward (reference as of Q1): The company expects growth in shipment numbers by proposing situations where office MFPs can be linked with cloud services for wider use. It aims to grow the number of production MFP machines in field by developing new customers. CMJ expects ongoing growth in LBPs for specific uses, which should drive demand in cartridges. It appears that the benefits of structural reorganization at Canon System & Support will flow through gradually over time but the company is aiming at sales growth through its own IT solutions offerings.

Area business, business model restructuring Solutions provided Leverage solutions built for large enterprises specific solutions specific Sector/process- General Mission-critical solutions

Business Document Find opportunities at existing customers Security solutions 100–999 and expand sales

IT Concierge Account Sales 30–99 solutions Expand sales centering on IT solutions

Inside sales Area Sales Less than 29 Increase sales efficiency Successively introduce business models built at Canon System & Support to partners Source: Shared Research based on company data Note: General Business (GB) is the name for the sales team dedicated to medium-sized corporations in Canon System & Support.

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Professional Professional FY12/16 FY12/17 FY12/18 FY12/17 FY12/18 FY12/17 FY12/18 YoY chg (JPYmn) Q1*Q2*Q3*Q4*Q1Q2Q3Q4Q1Q21H1HAct.Est. Q2YoY chg Est. Q1 Vs. Est. Q1 1H Sales 13,533 12,186 14,400 14,300 16,469 12,494 25,719 28,963 54,500 55,500 +1,000 61,000 -5,500 +3,244 Canon Production Printing Systems 3,170 3,530 2,960 4,060 2,930 3,380 6,700 6,320 -380 Canon Lifecare Solutions 3,930 2,910 - - 3,410 2,740 6,830 6,150 -680 Other 6,433 5,746 - - 10,129 6,374 12,189 16,493 -- - +4,304 YoY ----+21.7% +2.5% - +12.6% -+1.8% +11.9% Canon Production Printing Systems -----7.6% -4.2% --5.7% -- - Canon Lifecare Solutions -----13.2% -5.8% --10.0% -- - Other ----+57.5% +10.9% -+35.3% -- - Operating profit -235 -723 -200 -700 297 -511 -958 -214 -1,900 -1,200 +700 -1,300 +100 +744 Canon Production Printing Systems -230 -20 -120 -70 -230 -40 -240 -260 -20 Canon Lifecare Solutions 150-140 --15030 10180 +170 Other -155 -563 - - 377 -501 -728 -134 -- - +594 YoY ------Canon Production Printing Systems ------Canon Lifecare Solutions ------Other ------OPM -1.7% -5.9% -1.4% -4.9% 1.8% -4.1% -3.7% -0.7% -3.5% -2.2% -2.1% -0.0pp +3.0pp Canon Production Printing Systems -7.3% -0.6% -4.1% -1.7% -7.8% -1.2% -3.6% -4.1% -- - -0.5pp Canon Lifecare Solutions 3.8%-4.8% - - 4.4% 1.1% 0.1% 2.9% - - - +2.8pp Other -2.4% -9.8% --3.7%-7.9% -6.0% -0.8% -- - +5.2pp Production printing sales ------7% -4% --3% +13% -16pp Industrial equipment ------+125%+20% -+8% +9%-1pp Healthcare ------5% -8% - +2% +9% -7pp Video solutions ------9% +12% - +3% +25% -22pp Source: Shared Research based on company data New customer driven segment Professional is a segment targeting customers in specialist domains. This contains divisions that will drive growth in the future such as production printing and network cameras. The key subsidiaries are Canon Production Printing Systems, which handles production printing, and Canon Lifecare Solutions, which deals in medical equipment and systems and solutions overall. In the medical field, Canon ITS Medical is engaged in sales and operations maintenance of medical information systems such as electronic records and medical fee billing systems. The ranking of sales in order is production printing, industrial equipment, and healthcare, and it appears that industrial equipment generates most of the operating profit.

1H results and 2H outlook Performance in Professional, along with Consumer, was part of what led to the downward revisions of the forecasts. The revised forecasts lowered sales by JPY5.5bn from the previous forecasts (+JPY1.0bn YoY) and improved the operating loss by JPY100mn to JPY1.2bn (+JPY700mn YoY). In terms of sales, delays regarding high-speed continuous paper printers in the area of production printing and falling prices for network cameras and the pushing back of orders had a negative impact. CMJ sees the operating loss shrinking slightly despite a lower sales target than at the time of the previous forecast. This is in part due to companywide reductions in SG&A expenses.

Production printing Sales were 7% lower YoY in Q1 and 4% lower YoY in Q2. Late inspection and shipping of high-speed continuous paper printers has caused ongoing delays, and products to be launched in the latter half of 2018 were delayed until 2019, which means consumables demand is likely to be delayed a year further. In light of this, CMJ lowered its full-year sales forecast from the initial +13% YoY to -3%. It also lowered the sales forecast for commercial printing as a whole (including related products from other segments) from +8% to +0%, but excluding the impact of high-speed continuous paper printers, other segments’ printers including light models for creative use seem to be performing favorably.

Industrial equipment Sales were up 125% YoY in Q1 and another 20% in Q2. Newly handled products contributed to the increase as the semiconductor-related market remained favorable. Outside the semiconductor sector, agency contracts with overseas business partners ended, but CMJ still expects an 8% increase YoY in sales (initial forecast was +9% YoY).

Healthcare Sales were 5% lower YoY in Q1 and 8% lower YoY in Q2 due to the impact of sluggishness in modalities for hospitals (regenerative medicine and biopharmaceuticals via base techniques including low molecular weight compounds and antibodies). However, there was growth in high-margin retinal cameras and medical IT solutions. CMJ expects a 2% increase in sales for the full year (initial forecast was +9%).

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Imaging solutions Sales were 9% lower YoY in Q1, but 12% higher in Q2. On the other hand, network cameras overall, including other segments, increased 8% in Q1 and declined 7% in Q2. CMJ revised down its full-year sales forecast from +25% to +3%. This is because it revised down the sales forecast for network cameras overall from +25% to +5%. The company projects just under 10% YoY growth in the domestic network camera market considering that it is taking more time than expected to develop new customers and sales routes and the unit price for the cameras has fallen.

The domestic network camera market can be roughly broken down into two submarkets: a) camera and recording equipment and b) camera and recording equipment with big data collection and image analysis. CMJ feels the former submarket is fairly large, but the latter has yet to expand significantly. Although market share itself has not changed, the company revised down the percentage by which it expects sales to rise because of falling prices and the increasing weight of existing sales channels and customers.

Q1 results (reference): As shown in the previous table for Canon Production Printing Systems, production printing sales were down 7%, and network cameras turned in poor results due to deferred contracts and a reaction to major contracts won in the previous year (LEGOLAND®). Meanwhile, in industrial equipment, the semiconductor market remained brisk so devices performed well, and outside the semiconductor sector, industrial components performed well, for significant growth in sales and profit.

Outlook for Q2 onward (reference as of Q1): The company revised sales forecasts for each specialist area in light of Q1 results. It downgraded the outlook for production printing in light of the Q1 slump, but expects to tap into in-sourcing demand from color light printers and the shift to color in continuous paper printers. It expects 13% sales growth (18% initial forecast). Industrial equipment should benefit from ongoing strength in the semiconductor market, but in other areas, the agency contract with some overseas business partners is ending and it expects 9% growth (3%). CMJ has bumped up its healthcare forecast slightly from +8% to +9%, and lowered its forecast for imaging solutions from +43% to +25%. In network cameras it said it would focus on growing sales to customers with multiple locations.

Reference The following table shows the performance of business equipment under the previous product classifications (companywide basis, numbers across all segments) as reference material as of Q1. Note that in MFP maintenance services, sales in Area are larger than those in Enterprise. Maintenance services in Q1 (average daily print volume (PV) x average price x operating days) declined by 3% in Q1, but a lower number of operating days (down two days YoY) had a major impact, and PV growth was also slower than the previous year. There do not appear to have been any particular changes in status in Q1 and Q2. While the downtrend in average prices continues, it appears that they have reached a reasonable level. CMJ said that efforts to control price declines in combination with solutions are starting to show results.

Business equipment YoY

Business equipment FY12/16 FY12/17 FY12/18 FY12/17 FY12/17FY12/18 - YoY chg (JPYmn) Q1*Q2*Q3*Q4*Q1Q2Q3Q4Q1Q21H Act.Est. Q2Est. Q1 1H Office MFP (incl. rental and sales) -----3% +7% +2% +2% +2% -7% +2%+1% +2%-1pp Maintenance service sales - - - - +0% -0%-1%-0%-3%+0% -0% -1% -1% - LBP (units) -----0% -3% -5% +2% -6% -12% -2% -1% +0% -1pp LBP cartridge sales ----+1%+2%-2% +1% -2% +3% +1%+0% +0%- Commercial printing (sales) - - - - +3% +4% +1% -15% -6% -5% -3% +0% +8% -8pp Network cameras (sales) - - - - +31% +13% +8% +33% +8% -7% +22% +5% +25% -20pp Source: Shared Research based on company data

SG&A expenses

SG&A expenses FY12/15 FY12/16 FY12/17 FY12/18 (JPYbn) Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4 SG&A expenses 50.8 52.8 50.2 52.6 49.7 50.0 48.2 50.5 48.0 48.8 47.4 49.2 48.3 47.1 Advertising 2.6 3.4 2.3 3.5 2.2 2.2 2.1 2.5 1.8 2.3 1.9 2.4 1.9 1.9 Sales promotion 1.3 1.1 1.2 1.9 1.2 1.3 1.1 1.9 1.2 1.2 1.1 1.8 1.1 1.1 Product warranties 1.8 1.9 1.9 1.7 1.5 1.4 1.4 1.6 1.4 1.3 1.2 1.3 1.3 1.1 Other direct expenses 5.3 5.2 5.1 5.6 5.3 5.3 5.2 5.5 5.1 5.2 4.9 5.2 4.8 4.9 Personnel 31.3 32.4 31.4 31.4 31.3 31.6 30.6 30.5 30.9 31.0 30.6 30.6 31.5 30.4 Depreciation 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.4 0.3 0.3 Ot her selling expenses 8.1 8.3 7.8 7.9 7.7 7.5 7.3 7.9 7.2 7.4 7.1 7.5 7.3 7.3 YoY change -1.0 +2.4 -1.2 -2.2 -1.2 -2.8 -2.0 -2.2 -1.7 -1.2 -0.9 -1.3 +0.2 -1.7 Advertising +0.2 +1.7 -0.4 -0.4 -0.4 -1.2 -0.2 -1.1 -0.3 +0.0 -0.2 -0.1 +0.1 -0.4 Sales promotion +0.2 -0.0 +0.0 +0.1 -0.0 +0.2 -0.1 -0.0 -0.1 -0.1 +0.0 -0.2 -0.0 -0.0 Product warranties -0.0 +0.2 +0.1 -0.4 -0.4 -0.4 -0.6 -0.1 -0.0 -0.1 -0.2 -0.3 -0.1 -0.2 Other direct expenses +0.0 +0.1 -0.0 +0.0 +0.1 +0.1 +0.1 -0.1 -0.3 -0.2 -0.2 -0.3 -0.3 -0.2 Personnel -0.6 +0.9 -0.1 -0.7 -0.0 -0.7 -0.7 -0.9 -0.4 -0.7 -0.0 +0.1 +0.7 -0.6 Depreciation -0.1 -0.1 -0.1 -0.1 +0.0 +0.0 +0.0 -0.0 -0.0 -0.0 -0.1 -0.2 -0.2 -0.2 Ot her selling expenses -0.7 -0.3 -0.7 -0.7 -0.4 -0.8 -0.5 +0.1 -0.5 -0.1 -0.1 -0.4 +0.1 -0.1 YoY -1.9% 4.7% -2.3% -4.0% -2.3% -5.3% -4.0% -4.1% -3.3% -2.4% -1.8% -2.5% 0.5% -3.5% % of sales 32.7% 33.2% 32.3% 29.8% 31.8% 33.3% 32.7% 28.7% 31.4% 32.3% 31.0% 28.0% 32.0% 31.4% Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.

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Market share by sales volume in FY12/17 (company estimation) Single-lens reflex Interchangeable Mirrorless Single-lens reflex Entry model SLR market lens

23% 45% 41% 55% 61% 56%

Mirrorless SLR Canon Others Canon Others Canon Others Canon Others Source: Shared Research based on company data

Domestic shipments of cameras with interchangeable lenses

Shipment value (right axis) YoY Average selling price YoY +80% 35 30.8 +60% 27.3 30 23.6 24.0 +40% 22.0 25 20.5 20.6 20.8 19.4 18.9 18.8 19.6 +20% 18.1 18.0 17.4 20 17.1 16.4 16.4 16.9 16.8 15.5 16.3 15.4 15.3 16.2 15.6 15.8 14.3 15.3 14.3 15.1 14.3 15.2 0% 14.0 13.1 15 11.4 -20% 8.8 10

-40% 5

-60% 0 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 FY12/09 FY12/10 FY12/11 FY12/12 FY12/13 FY12/14 FY12/15 FY12/16 FY12/17 FY12/18 (JPYbn) Shipment value (right axis) YoY +80% 14

+60% 12

+40% 10

+20% 8

0% 6

-20% 4

-40% 2

-60% 0 Jan Jan Jan Jan Jan Jan Jan Jan Jan 2010 2011 2012 2013 2014 2015 2016 2017 2018 (JPYbn) Source: Shared Research, based on Camera & Imaging Products Association data

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Domestic shipments of single-lens reflex cameras

Shipment value (right axis) YoY Average selling price YoY +60% 25 +50% +40% 19.2 18.5 20 +30% 15.9 14.5 15.0 +20% 13.4 13.3 15 12.6 12.9 12.4 13.1 13.1 11.2 +10% 10.4 10.3 10.8 10.5 10.5 10.1 9.6 10.0 0% 9.0 8.7 8.7 10 7.4 -10% -20% 5 -30% -40% 0 Q1 Q1 Q1 Q1 Q1 Q1 Q1 FY12/12 FY12/13 FY12/14 FY12/15 FY12/16 FY12/17 FY12/18 (JPYbn) +100% Shipment value (right axis) YoY 9 +80% 8 +60% 7 +40% 6 +20% 5 0% 4 -20% 3 -40% 2 -60% 1 -80% 0 Jan Jan Jan Jan Jan Jan Jan 2012 2013 2014 2015 2016 2017 2018 (JPYbn) Source: Shared Research, based on Camera & Imaging Products Association data

Domestic shipments of mirrorless cameras

Shipment value (right axis) YoY Average selling price YoY +80% 14 11.6 +60% 11.2 12

+40% 8.8 10 8.1 8.4 7.5 7.5 7.7 7.9 +20% 7.0 6.9 7.2 7.0 8 6.2 6.3 6.3 5.9 5.7 5.9 5.8 5.3 5.5 0% 4.7 6 4.3 4.3 -20% 4

-40% 2

-60% 0 Q1 Q1 Q1 Q1 Q1 Q1 Q1 FY12/12 FY12/13 FY12/14 FY12/15 FY12/16 FY12/17 FY12/18 (JPYbn) +150% Shipment value (right axis) YoY 5

+100% 4

+50% 3

0% 2

-50% 1

-100% 0 Jan Jan Jan Jan Jan Jan Jan 2012 2013 2014 2015 2016 2017 2018 (JPYbn) Source: Shared Research, based on Camera & Imaging Products Association data

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Domestic shipments of interchangeable lenses for single-lens reflex cameras

Shipment value (right axis) YoY Average selling price YoY +60% 25 20.7 19.8 +40% 19.0 19.2 20 18.3 17.7 18.2 18.218.3 16.9 15.8 15.8 15.4 15.0 15.4 14.7 14.0 14.314.3 14.7 +20% 13.6 13.9 13.3 15 12.513.0 12.5 12.813.0 12.9 11.611.2 10.5 10.8 9.7 10.3 10.4 0% 10 7.3

-20% 5

-40% - Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 FY12/09 FY12/10 FY12/11 FY12/12 FY12/13 FY12/14 FY12/10 FY12/16 FY12/17 FY12/18 (JPYbn) Shipment value (right axis) YoY +100% 8,000 +80% 7,000 +60% 6,000 +40% 5,000 +20% 4,000 0% 3,000 -20% 2,000 -40% 1,000 -60% - Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 (JPYmn) Source: Shared Research, based on Camera & Imaging Products Association data

Domestic shipments of compact digital cameras Shipment value (right axis) YoY Average selling price YoY +60% 42.8 45 38.8 38.7 40 +40% 34.4 35.3 32.8 32.9 31.2 35 28.3 +20% 26.6 26.3 30 24.1 23.4 22.821.7 25 0% 19.1 18.6 18.818.8 20 13.9 14.3 13.8 -20% 12.912.1 12.3 12.0 15 11.3 10.5 9.6 10.2 9.6 8.9 9.3 8.0 8.8 7.9 10 -40% 6.1 5 -60% 0 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 FY12/09 FY12/10 FY12/11 FY12/12 FY12/13 FY12/14 FY12/15 FY12/16 FY12/17 FY12/18 (JPYbn)

Shipment value (right axis) YoY +80% 14,000

+60% 12,000

+40% 10,000

+20% 8,000

0% 6,000

-20% 4,000

-40% 2,000

-60% 0 Jan Jan Jan Jan Jan Jan Jan Jan Jan 2010 2011 2012 2013 2014 2015 2016 2017 2018 (JPYmn) Source: Shared Research, based on Camera & Imaging Products Association data

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Other information

History

In 1968, the company’s predecessor, Canon Office Machine Sales, was founded from Canon Inc.’s Office Machine Sales Division. In 1971, the company was combined with Canon Office Machine Services and Canon Camera Sales to form Canon Sales.

At the start, the company was engaged in the domestic sales of Canon’s office equipment (e.g., copiers, calculators) in addition to consumer products (e.g., cameras). In 1983, it entered into an agreement with Apple Inc. (NASDAQ: AAPL) for the sale of Apple products in Japan. Later, alliances with IBM (NYSE: IBM), HP (NYSE: HPQ) and Sun Microsystems followed. The company then expanded sales in system solutions, an area primarily focused on hardware that combines Canon products with computers, servers, and other third-party hardware.

In 1981, the company was listed on the Tokyo Stock Exchange’s (TSE) Second Section, moving to the First Section in 1983.

In the 1990s, sales of computers and Canon products such as printers and steppers accelerated. However, from the late ’90s to 2000, sales of computers and other products were sluggish, resulting in stagnant performance.

In 2003, the company acquired Sumitomo Metal Systems Solutions (renamed Canon System Solutions, now Canon IT Solutions Inc.), a system integrator that was until then affiliated with Sumitomo Metal Industries, thereby fully expanding into the IT Solutions business. In 2006, the company was renamed Canon Marketing Japan. In 2007, the company made a subsidiary of Argo 21, which was listed on the TSE First Section at the time. In April 2008, Canon System Solutions and Argo 21 merged to form Canon IT Solutions.

In 2011, Showa Information Systems Co., Ltd. was made a subsidiary through a tender offer. In 2012, the company bolstered the foundation for overseas development by establishing Canon Advanced Technologies Taiwan Inc.

In 2011, CMJ acquired ELK Corporation (now Canon Lifecare Solutions Inc.) and Showa Information Systems Co., Ltd. through tender offers.

In 2012, the company integrated its medical equipment sales department and the medical equipment maintenance and support department of Canon System & Support in ELK Corporation. The name of ELK Corporation was subsequently changed to Canon Lifecare Solutions Inc.

Overseas, in 2012 CMJ established Canon Advanced Technologies Taiwan Inc. In January 2014, CMJ acquired Material Automation (Thailand) Co., Ltd. (MAT), with the aim of further strengthening its IT services business in Southeast Asia.

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Major shareholders

Shares held Shareholding Top shareholders ('000) ratio Canon Inc. 75,708 58.39% Canon Marketing Japan Group Employee Stock Ownership Association 5,705 4.40% The Master Trust Bank of Japan, Ltd. (Trust account) 3,250 2.51% Japan Trustee Services Bank, Ltd. (Trust account) 2,243 1.73% The Bank of New York Treaty Jasdeq Account 1,890 1.46% (Standing prox: MUFG Bank, Ltd.) State Street Bank and Trust Company 505001 1,646 1.27% Canon Marketing Japan Group Business Partner Stock Ownership Association 1,157 0.89% Japan Trustee Services Bank, Ltd. (Trust account 5) 1,102 0.85% BNYMSANV RE BNYMIL RE LFMORANT WRITE NIPPON YIELD FUND 1,050 0.81% (Standing proxy: MUFG Bank, Ltd.) Mizuho Bank, Ltd. 1,001 0.77% SUM 94,755 73.08% Source: Shared Research based on company data. Excluding treasury stock (As of December 31, 2018)

Dividends and shareholder benefits

As part of its medium-term plan (2018–2020), the company targets stable dividends with a payout ratio of 30% as a baseline, while taking into account the cash flow from expected medium-term profits and investments. In FY12/14, the company paid a dividend of JPY60 per share, with a payout ratio of 37.6%.

Top management

President and representative director: Masahiro Sakata Born in 1953, from Tokyo. He entered the company in 1977, became the assistant director of the BC financial department in 1998, general manager of the finance department in 2002, manager of the M&A marketing business department in 2003, a director in 2006, and a managing director in 2009. He became managing executive officer in 2011, president of the Business Solutions business and senior managing executive officer in 2013, and president and representative director of the company on March 27, 2015. He holds 20,700 of the company’s shares.

Mr. Sakata wants to expand the company’s customer base, and aims to strengthen the company’s sales and make it resistant to economic fluctuations. He emphasizes concentrating on new business areas and increasing profit pillars, thus continuing the growth strategies of chairman Murase and former president Kawasaki. This involves new focus areas such as commercial printing, network cameras, and commercial imaging equipment, as well as independent businesses including IT solutions, and industrial and medical equipment. He also plans to promote M&A and overseas expansion to accelerate growth.

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Employees

Employees

25,000 Business Solutions IT Solutions Consumer Imaging Industrial and Medical Others Total

19,034 19,165 20,000 18,571 18,861 18,490 18,409 18,378 17,823 18,101 17,887 17,647 15,813 15,000

10,000

5,000

0 FY12/06 FY12/07 FY12/08 FY12/09 FY12/10 FY12/11 FY12/12 FY12/13 FY12/14 FY12/15 FY12/16 FY12/17 Source: Shared Research based on company data

News and topics

September 2018 On September 5, 2018, the company announced the launch of a new imaging system EOS R System and its plan to release products for the new system from late October.

The company announced that it plans to release EOS R System comprising the EOS R mirrorless camera, four types of RF lenses, and four types of mount adapters from late October.

The company gained a top market share in the domestic mirrorless camera market in Q4 FY12/17 (28% in terms of units) and maintained the top position in Q1 (25%) and Q2 (35%) FY12/18. In Q2, the company was able to accelerate the pace of its share expansion with contributions from EOS Kiss M launched in late March. At its 1H earnings briefing, the company stated that it aimed to maintain the rate of share expansion at the Q2 level throughout FY12/18 by expanding its product lineup. Launch of the EOS R System is a strategic move to achieve that goal. EOS R will be available at the Canon online store for a price of JPY237,500 (tentative). EOS R is priced higher than EOS Kiss M (JPY88,500) and EOS M5 (JPY98,600), and at the same price range as high-end SLR cameras for highly skilled amateurs.

EOS R System: The essence of expression through photos and videos lies in light manipulation. EOS R System strove to achieve high resolution by increasing the degree of freedom in lens design, a vital element in light manipulation. With a large mount diameter and short back focus (i.e., when a lens is focused to infinity, the distance between the vertex of the rearmost glass of the lens to a camera’s image plane is short) that enable increased degree of lens design freedom and a new mount transmission system between the lens and camera body, EOS R System realized even higher resolution and enhanced usability. When used with a dedicated mount adapter, EOS R can also be used with a rich lineup of existing EF and EF-S lenses.

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Company profile

Company Name Head Office CANON S TOWER Canon Marketing Japan Inc. 16-6-2 Konan Minato-ku Tokyo, Japan 108-8011 Phone Listed On +81-3-6719-9072 Tokyo Stock Exchange 1st Section Established Exchange Listing January 6, 1950 August 24, 1981 Website Financial Year-End http://cweb.canon.jp/eng/corporate/index.html December IR Contact IR Web - http://cweb.canon.jp/eng/ir/index.html

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