Yamaha Corp

TSE:7951

Earnings Call Transcript 2020-Q1

[Satoshi Yamahata, executive]

I'd like to start now. Please refer to the presentation titled Analyst and Investor Briefing on the First Quarter of Fiscal Year March 2020. I will explain using these slides.

First, the overview of the first quarter results. Both the revenue and profit declined year-on-year, mainly due to the deteriorating market conditions in the industrial machinery and components business and the impact of exchange rates. The revenue was JPY 99.5 billion, which was down 4.8% year-on-year, and the core operating profit was JPY 10.8 billion, which was down 13.2% year-on-year.

As for the full year outlook, the projection remains unchanged from the previous announcement, and we expect the revenue to be JPY 444 billion and the core operating profit to be JPY 55 billion. The revenue of the musical instruments is expected to remain robust, and audio equipment is predicted to rebound. Also as shown at the bottom of the slide, the figures described in this presentation for FY March 2019 or before are all based on IFRS.

Now please turn to Page 3. Here are the results of the first quarter. The revenue was JPY 99.5 billion. The core operating profit was JPY 10.8 billion. The core operating profit ratio was 10.8%, and the net profit was JPY 7.3 billion. As such, the revenue and profits declined year-on-year. The exchange rates were as shown here.

The core operating profit, which was JPY 12.4 billion in the first quarter of the previous year, declined JPY 1.6 billion to JPY 10.8 billion this year. And the breakdown of the factors are shown on Page 4.

First, on the right, there is a bar for the industrial machinery and components, IMC, business and others, which is shown separately from the other segments. That is because the nature of the IMC business and others is completely different from that of the musical instruments and audio equipment segments. The rest of the bars are indicating the detailed factors of the musical instruments and audio equipment.

The profit of IMC business and others declined JPY 1.4 billion. So this was the main detractor for total core operating profit, which declined JPY 1.6 billion year-on-year. The musical instruments and audio equipment also suffered an exchange rate impact of JPY 1.1 billion.

Moreover, according to the plan, we used an extra SG&A cost, so that was a negative impact of JPY 0.8 billion. And the labor cost at overseas factories were continually rising, so that was another JPY 0.3 billion.

On the other hand, we achieved a cost reduction of JPY 0.8 billion. During the previous fiscal year, it was difficult to cut the cost due to the rising purchasing prices, but we have successfully saved JPY 0.8 billion this year.

Moreover, the model mix and others contributed JPY 1.2 billion. Both the musical instruments and the audio equipment did not achieve much growth in the revenues but the changes to the model mix and the optimization of the prices worked well and result in a positive impact of JPY 1.2 billion.

Moving on to Page 5. Here are the results of each business segment. The musical instruments' revenue was JPY 67.5 billion. Core operating profit was JPY 9.8 billion, and the core operating profit ratio was 14.6%, which was an improvement of 0.5 points year-on-year.

Exchange rates impact is shown on the very right, and it was minus JPY 1.7 billion on the revenue. This means that the revenue of musical instruments actually increased year-on-year on the local currency basis. The same applies for the core operating profit. But even after absorbing the JPY 0.7 billion exchange rate impact, the profit increased JPY 0.2 billion year-on-year.

The audio equipment, its revenue was JPY 24.8 billion. The core operating profit was JPY 0.9 billion, and the core operating profit ratio was 3.5%. Unfortunately, in this segment, both the revenue and profit declined year-on-year. The core operating profit could not absorb the exchange rate impact of JPY 0.4 billion and suffered the drop directly.

And for the IMC business and others, due to the deteriorating market conditions, we saw a big decline in the revenue and core operating profit.

Please look at Page 6. This is the full year outlook. As described at the top, it remains unchanged from the previous announcement. We are expecting the revenue to be JPY 444 billion, the core operating profit to be JPY 55 billion, the core operating profit ratio to be 12.4% and the net profit to be JPY 42.5 billion. As such, we are expecting the growth of revenue and profits. The actual growth, excluding the impact of exchange rate, is expected to be 3% as shown at the right side bottom. Exchange rates are as shown here.

Page 7, the core operating profit, which was JPY 52.7 billion in the previous year based on IFRS, is expected to rise to JPY 55 billion this year. And here's the breakdown. Once again, the IMC business and others is shown separately, and it would be a drop of JPY 1.3 billion. All the rest are showing a similar trend as the first quarter, but the increased revenue and model mix is expected to give us a positive impact of JPY 6.4 billion.

Please turn to Page 8. Here is the full year outlook of revenue and core operating profit by business segment. As you can see, musical instruments and audio equipment are expected to achieve increase in both the revenue and profit despite the exchange rate impact. As for IMC business and others, the revenue is almost the same as the previous year, but the core operating profit is expected to decline JPY 1.3 billion due to the change in the model mix, especially the drop of factory automation equipment will drag down the core operating profit.

Next, please move on to Page 10. From here on, I'd like to give you the details of each segment. First, the musical instruments in the first 3 month achieved higher sales in almost all the product categories year-on-year, except the wind instruments. The piano sales were strong despite a slowdown in China, and the digital music instrument sales were also brisk. The wind instruments sales declined in Japan and North America, but the guitar achieved a double-digit sales growth in all the regions.

For each region, in North America, although the market conditions were good, the shipment delays caused mistiming. In Europe, we suffered some stagnation last year as we changed the contract with the dealers, but the sales are recovering this year. In China, even though we saw little slowdown, the sales increased year-on-year in all the product categories. The emerging markets were doing well. For the full year, we are expecting a good growth in all the product categories. The guitar will achieve a high growth. The piano and the digital pianos are also expected to grow strongly. In China, the double-digit growth is likely to continue. North America and emerging markets remain robust, and Europe is expected to recover.

Please look at the revenue chart on the left. These are the actual revenues, excluding the impact of exchange rate. In the first quarter, we achieved an actual growth of 101%. And in the full year, we're expecting 103% growth.

Please turn to Page 11. Here are the sales by each product category. The pianos achieved a good growth of 103% in the first quarter. The digital musical instruments also grew 104%. The wind instruments suffered a sales drop in Japan and North America, and the growth was negative at 93% in the first quarter. The strings and percussions, which is mainly the guitars, achieved a double-digit growth in all the regions, so the total growth was 111% in the first quarter.

Moving on to Page 12. Here are the sales by each region. In Japan, the wind instruments were very weak, and some other instruments are also facing a declining trend. So it stayed at a negative growth of 94% year-on-year. North America was 98%. This is because during the first quarter last year, as some of you might remember, the business was extremely good, and the year-on-year growth in the previous year was 112%. So this year's first quarter was a little lower than that level at 98%, but the market conditions are not bad at all, and we also had a little mistiming for the shipment delay.

Europe is recovering and achieved 105%. As for China, the previous year's first quarter year-on-year growth was very high at 115%. But this year, it was not as high as that. Still yet, we're expecting 110% growth for the full year. And the first quarter was 109% on a local currency basis, so it was almost in line with the plan. The other region, namely the emerging markets, achieved a growth of 106%, continually sustaining favorable business.

Next, Page 13 shows the audio equipment business. During the first quarter in North America, the shipment delays of AV products caused a mistiming. In Europe, the sales were good. In the AV product category, the delays in shipment to mass retailers in North America caused a substantial impact. In the PA equipment category, the music production software in Europe and North America drove the sales. The ICT devices category was sluggish, especially due to the decline in the OEM product sales and the network equipment sales in Japan, where the increased inventory at the distributors led to an inventory adjustment. However, the inventory adjustment is already finished, so we are expecting a smooth shipment from the second quarter and on.

Next is the full year projection. With the increased sales of PA equipment and AV products, we're expecting a good growth. AV is expected to recover due to the MusicCast customer interface enhancement and the launch of new products. PA, namely the PA for musical instruments called MI-PA, will have new products launched from the second quarter and on, so we have high hopes. ICT is expected to achieve a growth of a network equipment, but the OEM of the conference system is anticipated to decline. As for the figures, the total audio equipment segment growth in the first quarter was negative at 98%. But for the full year, we're expecting a positive growth of 104%.

Page 14 shows the sales of each product category. AV products were driven by Europe and achieved 103% growth in the first quarter. The PA equipment growth was 103%. Considering that we are expecting 109% growth for the full year, the first quarter growth was a little weak. But since some of the new product launches were postponed, the first quarter remained at 103%.

As for ICT devices, the blue figures are showing the year-on-year change for Yamaha brand products, excluding the sales of OEM products, and it was 69%. The detractor was the router in Japan. As I mentioned earlier, the inventory level at the domestic distributors became a little too high, and there was an adjustment.

Moving on to Page 15. Here are the sales by region. In Japan, as I just said, the router was the main cause for this negative growth of 86%. North America was 95%, mainly due to the shipment delay of AV products. Europe was performing very well and achieved 112% growth in the first quarter. China was 103%, excluding the sales of OEM products. The other regions were 97%. The emerging markets in this other regions are having a greater mix of PA for musical instruments, and the delay of the new product launches negatively impacted the sales growth in the first quarter. However, for the full year, we are expecting 112% growth.

Page 16 shows the IMC business and others. In the first quarter, factory automation equipment sales declined year-on-year as expected because we enjoyed an extraordinary demand in the previous year. For the full year, in the electronic device category, we're expecting the in-vehicle communication modules to grow. We are also anticipating a temporal (sic) [ temporary } drop in the profitability due to the deteriorating market conditions and the upfront investments to shift to the in-vehicle device domain. As for the revenue growth, the first quarter was negative at 72%, but we are expecting 101% for the full year.

The other financial figures are shown on Page 18. This is the balance sheet as of the end of June 2019. The total assets were JPY 493.7 billion, and the total equity, which is the net asset in J GAAP, was JPY 342.2 billion. The difference from the end of March is also shown here. The cash and cash equivalents decreased JPY 8.9 billion. This is because starting from this February, we conducted our share buyback amounting to JPY 20 billion. And continuing into April, we kept the repurchasing some of our remaining shares, so the cash and cash equivalents decreased.

The noncurrent assets also declined JPY 9.4 billion due to the fair market valuation of the stock holdings. The total equity decreased JPY 16.8 billion. Now although it is not described here, this includes the shareholders' equity in J GAAP terms, which decreased JPY 6.1 billion. This is because we paid off the dividend according to the increase of a net income, and we conducted a share buyback.

Other components of equity, which is the accumulated other comprehensive income, declined JPY 10 billion. This is due to the fair market valuation mentioned earlier. Also, because the Japanese yen is becoming stronger, the foreign exchange translation difference had a negative impact of about JPY 5 billion. These were the components of the JPY 10 billion decline. And therefore, the total equity declined JPY 16.8 billion. As of the end of March 2020, the total assets are expected to be JPY 550 billion, and the total equity is expected to be JPY 391.5 billion.

Finally, the capital expenditure and R&D expense. The first quarter's CapEx was almost about the same as the previous year. The full year plan for the CapEx is JPY 22 billion, which is much higher than JPY 16 billion of the previous year, but this amount may decline as the years go as it is usually the case. However, we budgeted a higher CapEx over the last year because we must invest in a new plant in Indonesia and for capacity increase in the plant in China. The R&D expenses in the first quarter was about the same as the previous year. In the full year, we have budgeted JPY 26.5 billion, which is slightly higher than the previous year. That is all for my quick presentation. Thank you very much.

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