Yamaha Corp

TSE:7951

Earnings Call Analysis

Company Announces Stock Split and Dividend Increase

The company announced a 3-for-1 stock split effective September 30. In conjunction, the year-end dividend forecast was revised from JPY 37 to JPY 39, resulting in a full-year dividend of JPY 76, reflecting a JPY 2 increase. Additionally, the company will discontinue its special shareholder benefits program to ensure a fair return of profits. Recent developments include the buyback and cancellation of 6.3 million treasury shares and changes in governance, appointing a nonexecutive director as the new Chair of the Board and all Compensation Committee members being outside directors.

Quarterly Performance Overview

The company reported a revenue of JPY 112.1 billion for the first quarter, an increase compared to the previous year, primarily attributed to strong B2B sales in audio equipment. However, when adjusted for currency fluctuations, the revenue showed a real decrease of 3.2%. The core operating profit rose to JPY 9.2 billion, influenced positively by foreign exchange rates. Nonetheless, the overall profit from musical instruments saw a decline due to a struggling market in China.

Full Year Forecast Adjustments

The revised full-year forecast anticipates a total revenue of JPY 475 billion and a core operating profit of JPY 46 billion, translating to a core operating profit margin of 9.7%. This outlook is optimistic compared to last year's figures, despite a projected slight decline in revenue on a constant currency basis. The forecasts underscore potential challenges, primarily from ongoing sluggishness in the Chinese market.

Segment Performance Insights

A closer look at the segments indicates contrasting performances. Musical instruments are expected to decline with continuing market difficulties, with a full-year revenue forecast of only 82% for pianos and 102% for digital musical instruments. In contrast, audio equipment is projected for growth, with a core profit margin forecasted at 10.7%. The IMC business segment is also expected to see an increase in revenue, maintaining an 11.9% profit margin.

Impact of Costs and Expenses

While the overall core operating profit will improve from JPY 33.7 billion to JPY 46 billion year-over-year, rising procurement and ocean freight costs are expected to exert downward pressure on profits. Additionally, the company is addressing the inventory increase of JPY 10.3 billion, reflecting a seasonal effect but also showing efforts in inventory reduction.

Shareholder Returns and Structural Changes

For shareholders, the company plans to raise the annual dividend by JPY 2 per share to JPY 76, reflecting a commitment to returning value. A stock split at a 3:1 ratio will also take place, further enhancing shareholder equity. However, the special benefits program for shareholders will be discontinued, likely refocusing on more sustainable return strategies.

Innovations and Future Growth Plans

As part of its strategic growth, the company is introducing new products, notably the mid- to high-end digital piano series, CLP-800, which is intended to regain market share. Moreover, the establishment of Yamaha Music Innovations in Silicon Valley signifies a pivot towards innovation, enhancing ties with customers and fostering product development in new markets.

Sustainability and Education Initiatives

The company is actively pursuing sustainability as a key business strategy, focusing on expanding instrumental music education in emerging markets. Initiatives like introducing music education in schools in Colombia emphasize the company's commitment to social value while looking to enhance brand presence globally.

Earnings Call Transcript 2025-Q1

[Satoshi Yamahata, executive]

I'd like to start my presentation. Please refer to Page 1 on our first quarter performance. Revenue increased year-over-year due to strong B2B sales of audio equipment and the impact of exchange rates. However, in real terms, revenue decreased due to weak sales of musical instruments caused by prolonged sluggish market in China.

Core operating profit increased due to the impact of foreign exchange rates, offsetting the actual profit decrease of musical instruments. The full year forecast were revised due to China's slow market recovery despite the positive effects of structural reforms. We also included the impact of the early retirement program implemented at China's piano factory.

Page 3 provides the summary of the first quarter performance. Revenue, JPY 112.1 billion; core operating profit, JPY 9.2 billion; core operating profit ratio, 8.2%; and net profit, JPY 9.4 billion. Although both revenue and profit increased, as you can see on the right, revenue decreased by 3.2% on a constant currency basis.

Page 4 shows the factors behind Y-o-Y changes in core operating profit. Core operating profit increased from JPY 6.5 billion to JPY 9.2 billion. The impact of exchange rates was positive JPY 4 billion. There were also other positive and negative factors. Sales of IMC business and others decreased compared to the previous year.

Page 5 provides a breakdown by segment. As you can see, the revenue and profit of musical instruments decreased despite the favorable exchange rates, with a core operating profit ratio of 5.8%. Audio equipment was driven by the strong B2B performance, achieving an increase in revenue and profit, with a core operating profit margin of 12.6%. IMC business and others recorded a decrease in revenue and profit, with a margin of 11.9%.

Page 6 provides the full year outlook. Revenue, JPY 475 billion; core operating profit, JPY 46 billion; core operating profit ratio, 9.7%; and net profit, JPY 35.5 billion. While our forecast may seem positive versus the previous year, revenue is down slightly on a constant currency basis, as you can see on the right.

Page 7 shows the factors behind changes in core operating profit. Please look at the bottom graph. Compared to the previous projections, core operating profit is up by JPY 1 billion. The impact of exchange rates is expected to be positive JPY 5.8 billion. However, increase in procurement cost is expected to be slightly negative.

Ocean freight charges, which have been going up, are also negative. Decrease in sales, primarily in China, is expected to be negative JPY 2.9 billion. Reduction in SG&A is positive JPY 800 million.

Compared to the previous year, core operating profit will improve from JPY 33.7 billion to JPY 46 billion. The impact of exchange rates is positive JPY 9.7 billion. The increase in procurement costs and ocean freight charges will persist, and negatively affect the profit.

Increase in sales, production and model mix, which includes the impact from last year's structural reform, is positive JPY 2.7 billion. The absence of onetime expenses we recorded last year is positive JPY 4.4 billion. SG&A is up due to office relocation, which negatively affects profit and loss.

Page 8 provides full year outlook by segment. Revenue and profit of musical instruments on a constant currency basis are expected to decrease, with a margin of 9.5%. Revenue and profit of audio equipment are expected to grow, maintaining its strong performance throughout the year. Revenue and profit of IMC business and others are expected to increase for the full year. The margins of audio equipment and IMC business are forecast to be 10.7% and 7.7%, respectively.

From here, I'll walk you through the details of each segment, starting from musical instruments on Page 10. In the first quarter, revenue decreased primarily due to the sluggish Chinese market. Sales of pianos and digital musical instruments decreased due to lower demand in China. Sales of wind, strings and percussion decreased due to robust demand. Sales of guitars decreased due to the worsening of market conditions.

Full year revenue is projected to decline due to continued weakness in China. Sales of pianos are projected to decrease due to market downturn, primarily in China. Sales of digital musical instruments are expected to increase due to improved channel inventory levels. Wind, strings and percussion are projected to decrease, as U.S. subsidies will expire. Guitars are projected to increase as market conditions recover.

As the graph shows, the recovery of revenue in the first quarter was 91%. But for the full year, we expect a higher recovery of 97%.

Page 11 provides revenue by major product category. Full year sales expectations for pianos are unfavorable and have been lower to 82%, down from the previous expectations. Digital musical instruments are 102%. Wind, strings and percussion are 97% due to the end of U.S. subsidies. Guitar sales in the first quarter were 92% due to the deterioration of market conditions, but we expect 105% for the full year.

Slide 12 provides revenue by region. Japan and North America are both 98%. Due to the expiration of subsidies, we expect revenue in North America to be slightly below that of the previous year. Europe is 101%. China continues to be very difficult. Our expectation for this market is 76% versus the previous year. Other regions are 104%.

Slide 13 provides details of audio equipment. In the first quarter, revenue increased due to strong B2B sales. As for the consumer business, home audio product sales decreased as we shifted to meet the high-end products. B2B product sales increased significantly due to continued robust demand.

For the full year, B2B sales are projected to increase due to strong demand. Consumer sales are expected to decrease due to the scaling down of the home audio business, despite strong demand for music production and live streaming products.

The strong performance of B2B is expected to continue. First quarter B2B sales were 119% compared to the previous year. Considering the possibility of a more moderate B2B demand, full year revenue is expected to be 105%.

Next, revenue projections by major product category. We're not very optimistic about consumer products, and our projection for this category is 98%. By contrast, B2B products grew strongly in the first quarter, achieving 147% year-over-year, driven especially by Europe. For the full year, our expectation for B2B is 113%.

Moving on to the breakdown of revenue by region. Full year projections for Japan and North America are both 102%. Europe, in the first quarter, performed exceptionally well, achieving 138%. The full year expectation for Europe is 112%. Chinese business is still small. To make up for the difficulties in musical instruments, we'll grow audio equipment in China, and our forecast is 104%. Other regions is 103%.

Page 16 provides details of IMC business and others. In the first quarter, sales of electronic devices increased, driven by automotive sound systems. By contrast, sales of automotive interior wood components, FA and golf products decreased. Full year revenue is projected to increase, driven by automotive sound systems. The first quarter revenue was 86%, but our full year revenue expectation is 103%.

Let's look at other financial figures. Please turn to Page 18. This is the balance sheet as of the end of the first quarter. Total assets stood at JPY 677.5 billion, up JPY 10.7 billion compared to the end of March. The biggest factor contributing to this change is inventories, which increased by JPY 10.3 billion. However, around JPY 8 billion is the impact of exchange rates. So effectively, there was only a slight increase in inventories.

Generally, we're working to reduce the level of inventories. This slight increase is due to seasonality. And we're not seeing any major deviation from our plan. Total assets at the end of next March are expected to be JPY 678.5 billion. Inventories are expected to be JPY 145 billion. Again, we're not anticipating any major changes here.

Page 19 provides the trends of ROE, ROIC and shareholder returns. ROE forecast is 6.8%, and ROIC forecast is 6.5%. They are both lower than the cost of equity of 7.9% and WACC of 7.9%. We apologize for the inconvenience. As you can see in the comments below, we aim for an ROE that exceeds the cost of equity by improving revenue and profit and steadily providing returns to shareholders.

In terms of shareholder returns, we plan to increase our dividend by JPY 2 per share, up from JPY 74 to JPY 76. I will talk about this in more detail later. We will also continue to unwind cross shareholding.

Page 20 provides details on capital expenditure and R&D expenses. There is no change to the previous forecast. Last year's capital expenditure was high because of office relocation. Our CapEx expectation for this year is around JPY 20 billion.

Please turn to Page 22 for recent topics. To further strengthen our business foundation, we will develop closer ties with our customers. To this end, we've just opened a brand store, Yamaha Music Minato Mirai. Many customers have visited the store since the opening.

We will also create new values by developing products with individuality. I'd like to focus on the digital piano in the middle of the slide, the CLP-800 series. We are working to regain market share in the low-end category, and our activities are starting to pay off.

Furthermore, this summer, we will launch a new mid- to high-end product of the CLP-800 series. With this launch in summer, we intend to increase our share in the digital piano market and increase our sales volume. This new product will be crucial for our digital piano business going forward.

As you can see on the right, we have set up Yamaha Music Innovations in Silicon Valley, and have invested in a U.S. venture capital.

Moving on to Page 23. We see sustainability as a source of value. We have been working to expand instrumental music education in emerging countries. The example shown here is our project to introduce music education using recorders in public elementary schools in Colombia. It's going very well so far. Please refer to other details at your leisure.

Page 24 provides our new management team. As described in the parenthesis at the top of the page, the key change to the governance structure is that a nonexecutive director is the Chair of the Board and all the members of the Compensation Committee are outside directors.

The details of Page 25 have already been disclosed. As you know, we bought back treasury shares from February to May, and canceled 6.3 million shares on June 3. This is just to remind you of our recent developments.

Please turn to Page 26. Today, we made 2 new announcements. Let me first start from the announcement on a stock split. Each share of common stock will be split at a ratio of 3:1, and the record date is September 30.

As you can see on the bottom left, the dividend forecast has been revised in conjunction with the 3-for-1 stock split. The year-end dividend was initially projected to be JPY 37. The fractional share caused by the 3-for-1 split will be rounded up to 1 whole share or JPY 13 per share. If you convert this back to before the stock split, the year-end dividend will be JPY 39 and the full year dividend will be JPY 76. So the stock split effectively increases the dividend by JPY 2. That's the background of the dividend increase by JPY 2.

The second announcement is regarding the discontinuation of the special benefits for shareholders, which is summarized on the right. From the viewpoint of fair return of profits to shareholders, we decided to discontinue the special benefit program.

That brings us to the end of my presentation. Thank you very much.

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