Yamaha Motor Co Ltd

TSE:7272

Earnings Call Transcript 2020-Q3

[Yoshihiro Hidaka, executive]

Hello, everyone. I am Hidaka. Before I give you the overview of our financial results, I would like to touch upon current business situations. Impact of COVID-19 on our business activity this year has been significant. However, thanks to policies of balancing infection control and economic activities implemented in different countries, we have started to see signs of bottoming out in our business performance.

In the meantime, as some countries are once again imposing restrictions on movement due to the second wave of COVID-19, we need to stay cautious. We will continue to put the highest priority on the health and safety of our employees and other stakeholders as we work to recover our performance.

I will now go over our business results for the first 9 months of fiscal year 2020. Please turn to Page 4. First, sales and market inventory level of our main products from July through September. This table shows our actual unit sales are forecast as of the end of second quarter and September-end inventory level versus last year in percentage term.

In almost all the markets, demand recovered more than we expected at the end of the first half. However, in Indonesia, while we performed better than our forecast, tough situations continued due to the increase in COVID-19 case count and tighter credit screening standards by financing companies.

Inventories became lower than last year in all the markets, especially inventories of ATVs and ROVs in North America and outboard motors in Europe and U.S. became quite low as we were not able to increase our supply to keep up with the rapid recovery in demand.

Next, Page 5 is a summary of our key financials. Starting from the left, first 9 months cumulative results in 2019, in 2020 and year-on-year change. Based on the sales results of third quarter that I just mentioned, sales reached JPY 1,067.1 billion, which is 84% of last year's result. Operating income was JPY 56.4 billion, 56% of last year. Operating income ratio was 5.3%, down by 2.6 points from a year ago. Ordinary income, JPY 59.7 billion or 58% against last year. And net income attributable to owners of the parent was JPY 40.1 billion or 53% of last year.

Both sales and profit were still down on a year-on-year basis. But during third quarter, on the quarterly basis, profit increased over the year, and our business is now recovering. ForEx assumptions of major currencies are as shown on the table.

I will next explain year-on-year change in operating income on the next slide. Please proceed to Page 6. Here, I will explain how business performance of each segment, growth strategy expenses and currency impact have changed over the year. For the first 9 months of the year, putting aside the impact of currency, operating income increased in the Financial Services business. However, in other businesses, profit declined. As indicated in the quarterly operating income result on the top right, impact of COVID-19 bottomed out in the second quarter, and our performance started to recover in the third quarter.

Against the operating income of JPY 100 billion as of the end of the third quarter in 2019, during the first 9 months of 2020, contribution from Land Mobility business declined by JPY 23.1 billion. To break it down, motorcycle business in developed market decreased by JPY 300 million year-on-year due to weaker sales and shutdown of European and head office factories. Motorcycle business in emerging market also dropped by JPY 21.9 billion due to decline in sales and shutdown of factory. Recreational vehicles and smart power vehicles also decreased by JPY 300 million and JPY 600 million, respectively.

Marine Products business down by JPY 9.1 billion due to decline in wholesale units attributable to production adjustment and factory shutdown. Robotics business declined by JPY 5 billion in total. In addition to the deterioration of model mix in surface mounter business, there was a negative impact of JPY 1.9 billion related to the consolidation of Yamaha Motor Robotics Holdings, or YMRH.

Financial Services was up by JPY 100 million due to the reversal of allowances for doubtful accounts that we provided through the second quarter and revenue increase backed by favorable product sales. Others declined by JPY 200 million.

In addition, there was a negative impact by JPY 1.8 billion due to increase in growth strategy expenses as well as currency deterioration by JPY 4.6 billion, resulting in operating income of JPY 56.4 billion as of the end of the third quarter in 2020.

Please turn to Page 7. Let me introduce to you new models that we launched to realize our growth strategies. While we have been quite thorough in reducing expenses to cope with the pandemic, we have not slowed down product development initiatives. Due to COVID-19, people's lifestyle and values have changed significantly, and we are acquiring more first-time purchases of personal commuters and products for outdoor family leisure purpose to avoid crowds as our new customers. Our new products successfully cater to these changes on the part of the consumers, and we believe we can capture more new demand.

First, in the motorcycle business, we launched TRICITY 300, the fourth model in our lean multi-wheel series in July. In Europe, this model belongs to the category of vehicles which can be enjoyed with automobile drivers' licenses as well, offering new value as a means of everyday mobility and touring pleasure on holidays. In the recreational off-road vehicle category, Wolverine RMAX 1000 is available since September. This is a product developed under our platform strategy, equipped with 1000 cc engine for the first time in our recreational vehicle category.

In Marine Products segment, we launched a next-generation steering system called Helm Master EX. This steering system has autopilot and full electric steering functions developed for the first time in-house, offering comfortable marine leisure experiences from beginners to seasoned experts.

We will reinforce our initiatives to ensure that new customers who purchase Yamaha products for the first time will enjoy convenient and pleasant experiences in this with and post-COVID-19 world and stay as Yamaha's customers for many years to come.

Next, let us go into more details by business segment. Please turn to Page 9. This is a breakdown of sales and operating income by business segment. In Land Mobility business, both sales and profit declined. Sales dropped across the board to JPY 682.4 billion and operating income down to JPY 8.9 billion.

In Marine Products business, both sales and profit decreased. Sales became JPY 247.4 billion, and operating income was JPY 40.7 billion.

In Robotics business, due to the consolidation of YMRH, sales increased to JPY 54.7 billion. However, operating income declined to JPY 1 billion after taking into account YMRH's operating loss of JPY 1.9 billion.

In Financial Services business, sales increased to JPY 34.3 billion, but operating income declined to JPY 5.8 billion due to negative impact of currencies.

In Others business, sales declined to JPY 48.4 billion, and operating income was JPY 20 million.

From the next slide, I will explain the business situation for major segments. Please proceed to Page 10 for Land Mobility business. Motorcycle sales in developed market recovered to JPY 172.3 billion in 2020, nearing JPY 176.7 billion in 2019, while operating income ratio deteriorated from negative 4.2% from a year ago to negative 5.3%. It still was an improvement from the second quarter. Along with demand recovery, partly due to the revenge spending, unit sales increased in Europe from July through September. Since inventory is low due to the rapid recovery in sales, we are working to restore our supply quickly.

Motorcycle sales in emerging market dropped from JPY 577.6 billion last year to JPY 425.7 billion this year. Operating income ratio deteriorated from 6.7% last year to 3.6%. It still was an improvement quarter-on-quarter, but as I indicated with unit sales review earlier, while India and Latin America are recovering quickly, we believe it will still take time for the ASEAN markets such as Indonesia and the Philippines to recover. While our sales activities are still restricted due to COVID-19, we're actively promoting digital marketing and Internet-based initiatives. In India, online bookings are available since August to offer enhanced convenience to customers.

Please go to Page 11 for recreational vehicle or RV and smart power vehicle, or SPV, business within Land Mobility segment. Sales in RV business dropped from JPY 59.3 billion last year to JPY 53.4 billion this year. Operating income ratio deteriorated from negative 1.9% from a year ago to negative 3.3% due to lower utilization rate in factories, but it's still improved from the second quarter.

Due to revenge spending after lockdowns, total demand for ATVs and ROVs recovered rapidly, resulting in a significant year-on-year increase in retail sales, but wholesale unit was weak due to lower utilization rate in factories. Going forward, we intend to make recovery by actively selling new ROV that we launched in September, while improving shortage on supply.

Sales of SPV business reached JPY 31 billion against JPY 31.9 billion last year. Operating income ratio declined from 16.4% from a year ago to 14.8%, but it's still improved from the previous quarter.

Demand is recovering, and unit sales of completed vehicles in Japan in July-September period exceeded the level a year ago. We will roll out campaigns to appeal to consumers that our products are effective means of transport to avoid crowds, aiming to capture new demand.

Please proceed to Page 12 for our Marine Products business. Sales came down from JPY 277.7 billion last year to JPY 247.4 billion this year, and operating income ratio, down from 18.7% to 16.4%.

Shown on the right is production and sales of outboard motors of 100 horsepower and above for the first 9 months of the year. In 2020, we put together production plans focusing on inventory optimization to cope with excessive supply during the past 2 years and due to lockdowns, we temporarily suspended our production. And after lifting of lockdowns due to revenge spending, which exceeded our expectations by far, market inventory became short all of a sudden. We are making our utmost effort at the moment to restore our supply.

Next, Page 13. I will touch upon Robotics business first. Following the second quarter, sales of surface mounters for China increased, but due to drop in automotive-related sales, model mix deteriorated from the perspective of profitability. As a result, sales of our organic business decreased from JPY 47.3 billion last year to JPY 42.4 billion this year. Due to the effect of YMRH consolidation, sales totaled JPY 54.7 billion. Operating income ratio declined from 11.9% to 1.8%. Excluding the impact of YMRH, operating income ratio of our organic business was approximately 10%.

We will consolidate our efforts across sales, manufacturing and procurement to enhance our profitability, keeping an eye on recovery of demand in developed market and automotive-related demand, which positively contributes to our profit.

Next, Financial Services business. As shown at the top, receivables outstanding increased from JPY 284.5 billion to JPY 340.8 billion, as we are now running the financing program for U.S. prime customers independently. As indicated at the bottom, sales increased from JPY 30.8 billion to JPY 34.3 billion. Operating income ratio declined from 20.1% to 16.9%, but it's still improved significantly from the second quarter. This is because of partial reversal of the provisions we made to allowances for doubtful accounts through the second quarter and increased revenue associated with favorable product sales. We will continue to identify risks and opportunities to capture demand properly to earn revenue stably going forward.

Lastly, I would like to share with you our business outlook. Please turn to Page 15. This is our forecast on major products unit sales by region. This table shows actual results of the first 3 quarters as well as our forecast for the fourth quarter on a year-on-year basis. We continue to assume that it will take longer before the ASEAN market to normalize compared to developed market. Especially in our core market, Indonesia, we believe market recovery will take more time.

As for motorcycles in developed market and ATVs and ROVs in North America, due to revenge spending, market inventory came down significantly. So we will ramp up our supply capabilities in the fourth quarter to increase unit sales. Outboard motors are expected to recover to somewhere near last year's level as we are also going to increase our supply.

While revenge spending in developed market is expected to become more moderate going forward, we believe we will continue to acquire more new customers. As we will increase market inventory, unit sales are expected to grow further into the first half of next year. As for surface mounters, as unit sales are expected to increase for the Chinese market, we are running our production capacity fully.

Please refer to Page 16. Based on the unit sales forecast, we made revisions to our forecast for 2020 as shown here. Sales are expected to reach JPY 1.480 trillion or 89% of last year. Operating income, JPY 70 billion or 61% of last year. Operating income ratio of 4.7%, down by 2.2 points from the previous year. Ordinary income, JPY 71 billion or 59% of the previous year, and net income attributable to owners of parent, JPY 44 billion or 58% of last year's result.

We also revised our guidance on annual dividend to JPY 45 per share. Currency assumptions for fourth quarter and full year are as shown in the table.

Please turn to Page 17. Here are the drivers behind the expected change in operating income over the year in 2020. First, within Land Mobility segment, motorcycle business in developed market is expected to decline by JPY 1.9 billion from the previous year. And motorcycle business in emerging market is projected to decrease by JPY 22.3 billion due to the prolonged impact of COVID-19 in our core market Indonesia. RV business, up by JPY 1.3 billion and SPV is expected to remain the same as last year. In total, Land Mobility business as a whole is expected to come down by JPY 22.8 billion.

Marine Products business is expected to decrease by JPY 13.9 billion. While we expect production to recover, there will be a negative impact of some of the products remaining in inventory, given the lead time to the market.

Robotics business is expected to decline by JPY 4.1 billion due to the delayed recovery of the automotive-related market as well as the impact of the consolidation of YMRH. Financial Services expected to stay flat year-on-year, and Others to decline by JPY 300 million.

Growth strategy expenses will decrease by JPY 1.3 billion, while currency impact is expected to be negative JPY 5.4 billion. All in all, we forecast operating income of JPY 70 billion for 2020.

On Page 18, this chart analyzes how our full year forecast on operating income for 2020 has changed from our previous forecast. Across all the business, we are now projecting faster recovery in sales. And we have reduced expenses quite thoroughly. Thanks to these 2 factors, we have raised our profit projections across all the business. In particular, we are expecting significant recovery in Motorcycle business in emerging market and Marine Products business.

Please proceed to Page 19. Last but not least, I would like to touch upon our shareholder return. We have revised the guidance on annual dividend to JPY 45 per share. As we made upward revisions to profit guidance, we intend to bring the payout ratio back to our traditional level. Going forward, we will continue to strive for a stable dividend. This concludes my presentation.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]