Yamaha Corp

TSE:7951

Earnings Call Transcript 2019-Q1

[Satoshi Yamahata, executive]

Good morning, everyone. My name is Yamahata. Thank you for coming to our briefing session despite your busy schedule. Please allow me to take you through our First Quarter Results based on the presentation material in front of you.

Both our sales and income increased year-on-year during the first quarter, making solid progress in line with our full year projections. Sales were up 3.8%, driven by a strong performance in the Musical Instruments and Others.

Our operating income was JPY 13.3 billion, up 14.6% year-on-year, and the OP margin reached 12.6%, up 1.2%. As for our full year forecast, we maintain the same projections, which had been announced back in May 2018, which means JPY 442 billion in sales, JPY 55 billion operating income; and JPY 40 billion net income with an OP margin of 12.4%. The exchange rate assumptions remained unchanged for the second quarter and beyond at JPY 105 to the U.S. dollar and JPY 125 to the euro.

If you turn to the next page, this slide summarizes our first quarter results. Sales were JPY 105.1 billion, operating income was JPY 13.3 billion, with an OP margin of 12.6%. Ordinary income was JPY 13.5 billion, net income was JPY 9.4 billion, both sales and income grew year-on-year. The net income turned out to be comparable to that of the previous year as we accounted for the deferred tax assets in the first quarter 2017, and the figure in the first quarter this year appears to be lower for that reason.

The ForEx rates are shown in the bottom. The exchange rate against the euro has a large impact on the profits, and as you can see, the rate shifted from JPY 121 last year to JPY 132 this year, resulting in a foreign exchange gain.

Page 4 shows our operating income analysis to break down the variances between JPY 11.6 billion OP in March 2018, versus JPY 13.3 billion in March 2019.

The labor cost at our overseas factories continued to increase, which accounts for minus JPY 400 million, but this is in line with our expectations.

The increase in SG&A, including strategic expenses, which were also incurred last year, is another minus JPY 400 million. On the other hand, the topline increase as well as product mix changes, with the resulting JPY 1.3 billion impact. The ForEx impact is estimated to be JPY 1.2 billion. There is no description of cost reduction here, even though we have been implementing some cost-cutting measures, it was offset by other factors, such as the price increase of our electronic components as settler, so the net impact turned out to be 0.

Next is our performance by segment on page 5. In Musical Instruments, our net sales was JPY 69.1 billion, up JPY 3.5 billion year-on-year. Operating income was JPY 10.2 billion, up JPY 1.9 billion. OP margin was 14.8%, up 2.2% year-on-year. In Audio Equipment, net sales were JPY 26.2 billion, down JPY 300 million year-on-year. Operating income was JPY 1.6 billion, down JPY 400 million. The OP margin was 6%, which means minus 1.3% compared to the previous year.

As for Others, net sales were JPY 9.9 billion, up JPY 700 million year-on-year. Operating income was JPY 1.5 billion, up JPY 100 million. OP margin remains the same at 15.2%. In the footnote, we indicated that some of the cost associated with new business development on the full year basis had been revised. A part of the cost, which used to be categorized, under Musical Instrument is now allocated to Audio Equipment from this fiscal year, which means a JPY 200 million positive OP impact on Musical Instrument, whereas minus JPY 200 million impact on Audio equipment, which are all reflected in the figures above.

If you turn to page 6, here is our full year forecast. As I mentioned up front, we have made no revision whatsoever. Net sales are JPY 442 billion, operating income is JPY 55 billion with the OP margin of 12.4%, ordinary income is JPY 55 billion, net income is JPY 40 billion, both sales and profits are expected to increase year-over-year.

We realized a gain from the sale of our stake in Yamaha Motor in the previous fiscal year, which makes our net income to come down this fiscal year. However, this figure is in line with our midterm plan.

As you can see on page 7, net sales in Musical Instruments are expected to be to JPY 277.5 billion, with an operating income of JPY 39.5 billion and OP margin of 14.2%.

Audio equipment sales are JPY 125.5 billion with an OP of JPY 12 billion, an OP margin of 9.6%. In Others segment, net sales are JPY 39 billion, operating income is JPY 3.5 billion with an OP margin of 9%. Both sales and income are expected to rise across the board.

The segment overview is explained from page 9. On page 9, please take a look at the comment column. Both sales and income increased year-on-year across all categories in the first quarter. Sales grew double-digit in guitar and portable keyboard categories. New products drove brisk sales of digital pianos, which was close to a double-digit growth. Sales was strong in North America with an ongoing recovery. A double-digit growth was maintained in China. The results continue to be strong in the emerging markets.

If you look at the bottom charts, net sales in the first quarter was JPY 69.1 billion, up 4% year-on-year and the full year growth rate is expected to be 3%.

Operating income ratio in the first quarter was 14.8% and it is expected to be 14.2% on a full year basis. Our comments remain constant in saying that our full year growth rate should outperform that of the previous year across all categories.

Page 10 shows our sales by major product category. Pianos grew 3% year-on-year during the first quarter and expected to grow by 5% on the full year basis. The red figures shown here excludes the ForEx impact. Digital Musical Instruments actually grew by 7% in the first quarter and are projected to grow by 5% on the full year. Similarly, wind instruments grew 4% in the first quarter and their full year growth rate is expected to be 3%, strings and percussion grew by 12% in the first quarter and the full year rejected growth rate is 6%.

Page 11 shows our Musical Instrument sales breakdown by region. The first quarter sales were down 4% in Japan compared to the same quarter last year. They are also projecting a 2% decline in sales on the full year basis year-over-year. North American sales were up 12% in the first quarter, a 3% increases is projected for the full year. In Europe, a 3% down in the first quarter, but a 3% increase for the full year. In China, the first quarter results turned out to be better than expected with a 15% growth year-on-year, but the full year projections remain unchanged with a 10% growth. In Other regions, the sales increased by 6% in the first quarter, the full year growth is projected to be also 6%.

Page 12 shows the Audio Equipment segment. Please refer to the comments starting from PA. Professional audio equipment grew, although the overall segment sales declined slightly year-over-year. Commercial audio equipment and music production remained robust in PA segment. AV product sales declined year-over-year due to changes in demand for key AV receivers, the impact of a transitional period between old and new products, and lost orders from major mass channel customers in the U.S. ICT device sales dropped year-over-year due to a reduction in OEM in China, and network related product sales shift into next year.

Please take a look at the chart below. The net sales dropped by 2% in the first quarter compared to the same period last year, although we maintain the full year projections at a 6% growth.

OPM was 6% in the first quarter and it is projected to be 9.6% for the full year. We have not changed our full year projections, expecting to outperform the previous year by far.

Page 13 shows a breakdown by product category. AV products in the first quarter show a 7% decline due to lost orders from mass merchandisers in the U.S., but we're still projecting a 2% increase for the full year.

PA equipment sales grew by 5% in the first quarter and the full year projection is to grow by 10%. ICT devices sales dropped by 9%, which incorporates the OEM business that slowed down slightly in China. Excluding the OEM business, if you refer to the blue portion, which represents the business under Yamaha brand, the rate of decline was 5% in the first quarter. The full year sales projection is down 7%, but an 11% growth is expected excluding the OEM. Next is our sales breakdown by region in audio equipment. In Japan, the first quarter sales were down 5% year-over-year, although, the full year sales are projected to grow by 9%. In North America, the first quarter sales were down 4% year-on-year, but the full year forecast shows a 7% growth. In Europe, it was down 1% in the first quarter, but a 4% growth is expected for the full year. In China, it was down by 7% in the first quarter, a 14% decline is expected on a full year basis. However, as explained earlier, the figures would be no change year-on-year in the first quarter, and 11% growth for the full year, if you were to exclude the OEM business. In other regions, the sales grew by 4% in the first quarter, and it is expected to increase by 13% for the full year.

Page 15 shows the overview in other segment. Please refer to the comments. The first quarter results show brisk sales in factory automation equipment driven by strong orders since the previous year. Robust sales continued in automobile interior wood components due to expansion of customers. Please turn to the charts below. The first quarter sales grew by 8% year-on-year, and it is projected to grow at the same rate of 8% on a full year basis. The OP margin was 15.2% in the first quarter, and the full year projection is to grow by 9% year-on-year. Our full year projections remain unchanged. As you can see in the common column, we're expecting a double-digit growth in the electronic device, spurred by on-board communication module sales.

Page 17 shows the other financial figures. Here's a balance sheet comparison as of the first quarter end this year versus the previous year on the left. At the end of June 2018, our total assets were JPY 531.9 billion. The net assets of JPY 385 billion up JPY 3.5 billion compared to the same period last year. Despite the net income increase, our net assets only increased by JPY 3.5 billion, as a result of dividend payout and a share buyback of JPY 25 billion in the previous year. Even though our profits increased, the increase in net assets were limited to only JPY 3.5 billion due to shareholder returns among other things. Once again, our full year projections remain unchanged for the total assets to be JPY 563.4 billion, up JPY 11.1 billion year-on-year.

Total net assets are projected to be JPY 416.3 billion, up JPY 28 billion.

Our final page indicates capital expenditure and depreciation. The CapEx in the first quarter was comparable to that of the previous year, which was JPY 3.8 billion. We have not changed our full year projection of JPY 25.4 billion, which is slightly higher year-on-year. The high level of CapEx spending has been continuing since last year throughout this year due to the construction of R&D facilities and 2 fabs to be built overseas. But this is expected to come down from the next fiscal year onward. The R&D spending was JPY 6.1 billion in the first quarter, which was comparable to that of the previous year and JPY 27.1 billion is projected for the full year. So the original projection stand as they are. The light purple portion represents an increase in R&D expenditure for the Audio Equipment as we increase the number of products in our development pipeline. That is all for my presentation. Thank you.