Yamaha Corp

TSE:7951

Earnings Call Transcript 2019-Q2

[Takuya Nakata, executive]

Now let's review our second quarter results.

In summary, we had strong performance in the second quarter as both net sales and income grew year-over-year. Sales were particularly strong in the main musical instruments business. The profitability also improved in the musical instruments and operating income amounted to JPY 28.5 billion. However, due to some uncertainties in the second half, full-year projections remain unchanged from the previous plan.

Now let's take a look at some of the details. As I briefly touched upon the top line and operating income, here's a performance summary: net sales increased by 2.3% year-over-year, operating income was up 19% and net income increased by 11% year-over-year.

Here are the exchange rates: against the U.S. dollar, the yen appreciated by JPY 1; on the other hand, the yen depreciated against the euro by JPY 4 year-over-year. There's a wider gap in the rates applied to income.

Here is the operating income comparative analysis against the previous year. Starting from JPY 23.9 billion from the previous year, labor cost at overseas factories worsened, even though it was already factored in our plan. SG&A had a minus JPY 1.6 billion impact due to higher sales and strategic investments, which pushed down the profit. On the other hand, increased sales and production in addition to product mix changes and price revisions to proper levels had a positive impact by JPY 4.8 billion, with JPY 1.7 billion impact from the exchange rates. It adds up to JPY 28.5 billion operating income.

Here's a chart to illustrate the breakdown by segment. Musical instruments performed well in particular. Year-over-year results improved, especially on the operating income side due to a couple of reasons. For one thing, we stumbled in the first half of last year at the onset, and some temporary expenses were incurred, which led to a slowdown in musical instruments' profitability. However, the OP margin was recovered to 15.5% in the first half of this year.

Audio equipment suffered conversely. Audio equipment consists of 3 major categories, such as AV, professional audio and ICT. AV struggled in particular, pushing down sales as well as operating income slightly. But some of the cost was reallocated between musical instruments and audio equipment segments, as explained earlier during the first quarter results briefing.

If we discount those factors, the results in audio equipment were almost flat year-over-year, except for the ForEx impact, which was negative. We also had solid performance in others segment.

As for our full-year outlook, we maintain the previous projections, as I mentioned earlier. Even though we did not change any forecast, including net sales and operating income, there were some adjustments made in terms of sales and operating income between segments, which I will report to you later.

Here's the overall operating income analysis. Compared to the operating income from the previous year, which was JPY 48.8 billion, expenses such as labor costs and SG&A increased. Exchange rate assumptions were JPY 105 to the U.S. dollar and JPY 125 to the euro in the second half, which means a slightly negative ForEx impact if the actual rates turn out to be in line with assumptions.

On the positive side, increased production in sales in addition to the product mix changes and price revision should bring us a JPY 10.8 billion impact on operating income. On the other hand, we may not be able to achieve as much cost reduction as originally anticipated, although it is expected to be compensated by a higher SG&A cost reduction in order to achieve the same income target in the plan. As you can see in the bottom chart representing variances compared to the prior projections, the absolute amount of OP forecast has not changed even though the internal cost allocation leading up to JPY 55 billion is adjusted. The biggest portion is the cost reduction. Since the previous year, procurement cost improvement has been halted, and we try to revamp the initiative this fiscal year. However, the cost of electronic parts primarily, for example, keeps rising to the level that is difficult for us to offset by other cost reduction measures.

Originally, we had anticipated the cost reduction of about JPY 1.5 billion or JPY 1.6 billion. However, it turned out that cost was getting higher instead. So we have tried to compress the SG&A cost compared to the original plan as a main driver to offset the other cost hike. Furthermore, the impact of exchange rates turned out to be positive. The combination of those factors allowed us to maintain the original forecast of JPY 55 billion.

The ForEx assumptions have not been revised at all, so if we applied the current exchange rates, we understand that it could impact the results.

Here's a breakdown by segment. Musical instruments have performed strongly. Assuming the current trend will continue, it should result in the numbers indicated here. Operating income is expected to increase by JPY 1 billion compared to the prior projections. In audio equipment, the slowdown in so-called traditional receivers in the first half is not likely to be offset sufficiently, which is indicated as a negative factor. As a result, musical instruments is expected to secure 14.5% OPM versus 8.9% for audio equipment. 9% is expected for the others segment, maintaining the momentum of substantially improved margin from the previous year. The numbers shown here exceed the 12% OPM in totality as targeted in our midterm plan. Musical instruments are expected to be almost in line with our plan, even though audio equipment may fall a little short of achieving 9% as originally targeted. However, considering the adjusted cost allocation between audio equipment and musical instrument segment, the net result should be almost comparable to the plan. Others segment has outperformed our margin expectations, which drove the upside in excess of 12%.

Let's breakdown by segment. Musical instruments sales and income increased across all product categories in the first half. By product, piano sales were strong across all regions except Europe. Last fiscal year, we introduced new mid- to high-end digital piano products. This year, we renewed our entry-level products, which contributed to robust sales of digital pianos.

Wind instrument sales increased across all regions. Guitar sales grew by double-digit in China, North America and emerging markets. We believe that this current trend will continue for the full year.

Here is our sales by major product category. The expected growth rate ranges from 3% to 5% in most segments and strength in percussion segment is expected to grow by 6%. So we believe it is possible to grow further.

Here's a sales trend by region. Japan has been trending down slightly for the past several years. On the other hand, North America and particularly China are expected to grow. Originally, we anticipated the growth rate in China to be around 10%. However, it turned out that it grew by 16% in the first half. So our revised forecast is to grow by 15% for the full year in China. On the other hand, we were hoping to grow further in Europe, but the geopolitical issues, such as the situation in Turkey, have been affecting us. In addition, our contractual terms and conditions have been revised, resulting in a shift of some customers to take a wait-and-see approach. So even though we have renewed most of the contracts, there are some purchase orders still pending. So on the whole, the sales in Europe is expected to remain flat.

I would like to take you through visual images of our product drivers contributing to our business. The first one is new TransAcoustic piano, which is a renewed hybrid model. New digital piano series are also making contribution. Another driver is drum recording that is made readily available by simple settings of equipment. Even though the amount of contribution may be small, it still helps us to boost the growth.

We received various good design awards, which may be an indication that we have been able to deliver new values. In order to grow the guitar business, we have transferred its headquarters to the U.S. We acquired Ampeg brand to be integrated as a part of our group, which is beginning to function already. We created a story to raise brand awareness of Yamaha as a new guitar brand.

In audio equipment, we were able to grow the professional audio sales. On the other hand, we mentioned that AV product sales had declined as we have lost some orders to mass channels in the United States during the first quarter. Some of the orders were reinstated with delayed shipments beyond the third quarter. We believe we should be able to recover from that, but traditional products such as receivers have continued to decline, dragging down on their performance, and we found it difficult to fully recover from that shortfall. That is why we lowered the overall forecast accordingly.

In the PA equipment category, brisk sales have continued, especially driven by flagship mixing systems boosting the performance because the development of high-end PM10 and PM7 were delayed in the previous fiscal year and our results were not as strong as we had wished. However, they were finally launched this year and very well received by the market driving the growth.

ICT devices sales dropped year-on-year as OEM orders declined more than our initial expectations. In the AV category, however, new connected audio sales are expected to grow and expand in Europe. A rebound from delayed shipments in the U.S. should result in further recovery in the second half, as I mentioned earlier. The robust sales in PA equipment should continue. In the ICT devices category, the new conference system product is gradually delivering results and we should expect to see a recovery trend in the second half.

Here's a breakdown by product category. The first half results show minus 7%, whereas the full-year forecast is flat year-on-year. PA equipment is projected to grow by 6% for the full year. It can be broken down to 2 pieces, so-called MI-PA or small-sized PA equipment sold at musical instrument stores have experienced fierce price competition, resulting in lower performance below our expectations. On the other hand, among the commercial audio equipment, mixing systems have performed well, which are indicated in those numbers. As I mentioned earlier, ICT devices declined due to OEM slowdown to be minus 3%, but excluding that impact, we should be able to secure a double-digit growth.

Here is our sales breakdown by region. China figures include the OEM portion, as I described earlier. But excluding the OEM, the growth rate is expected to be 2% year-over-year compared to musical instruments. Audio equipment such as AV product is struggling, and PA business also has a modest growth rate, affected by the compressed equipment demand in the audio equipment segment as shown in the figures here.

The growth in Japan may seem very high, but this has to do with the subsidiary company handling installation work in our group. The number of projects to be inspected seems higher compared to the previous year, showing positive growth.

Here's a product called connected audio, based on smartphones, which is expected to become another contributor. The market is undergoing a major transformation from the conventional way of listening to music with a large set of audio equipment with a lot of line connections to smartphone-based way of listening via Bluetooth, et cetera.

We have started to make some enhancements since about 2 years ago to accommodate to this trend shift. Finally, we have been able to gain share in Europe from a very fine line to a sizable block. We have launched this new offering of a very nostalgic long-play record player from olden days with connected audio. This is how we are trying to catch up with the trend.

Here's a top-of-the-line digital mixing system as the contributor that I touched upon earlier. In the area of ICT, we believe that we may be able to achieve double-digit growth, excluding the OEM part. We have been awarded the first place for the third consecutive year in the network device category of the Nikkei Computer Customer Satisfaction Survey. By leveraging this kind of recognition, we hope to grow in the area particularly related to products for Soho.

In others segment, microprobers, PCB inspection equipment for smartphones grew strongly, especially in the first half. In terms of automobile interior audio components, net sales grew nicely by increasing contracts from U.S. customers in addition to traditional Japanese automakers. In the second half, FA orders are dropping rapidly now, but we still have some saving from the first half, which should allow us to maintain the same level year-over-year on a full-year basis.

Finally, I'd like to touch upon ESG topics. Nowadays, ESG has become a hot topic everywhere. Among various initiatives we have, sustainability of forestry resources is an environmental initiative we have been working on as we use wooden materials in our business. We announced a joint research agreement on sustainable use and growth of forestry signed with Kyoto University the other day. We aim to secure sustainability of forests through the research and collaboration, which will enable us to use wooden materials continuously. We hope to be able to contribute to the global society by sharing our passion and enriching their culture through music.

In Central and South America, juvenile delinquency has become a serious problem. We have been involved in new activities to encourage young people to find new goals with the power of music. In a sense, it is almost like a culmination effect of what we have been working on. We launched the I'm a HERO project. We provided new Venova wind instruments to children who ultimately played at the opening ceremony of a football game of Primera A, Colombia's premier football league. They say that the experience changed their lives, with new goals to reach out for, which made us very happy as well.

Similarly, music in emerging countries could lead to future business opportunities for us. At the same time, we believe it is important for the people in emerging countries to get to know new culture, and that is why we have continued to carry out these activities which are expanding substantially.

We have launched various school projects initially targeting 100,000 people, and the progress has been better-than-expected in our plan. This program has been deployed in various regions not only in Asia, but also in Middle East and Africa recently. We are receiving a lot of inquiries and hope to put more efforts into this program going forward.

Finally, here's some of the techniques cultivated through OMOTENASHI GUIDE, and they have been utilized at stations and through public transportation. In many cases, we believe that broadcast contents can be converted to text form, and we have been exploring the possibility of expanding our services through our collaboration with TV and radio stations recently.

That is all I have for the ESG-related topics.

Finally, let me follow up on financial figures. Here is our balance sheet. This is year-over-year comparison for the first half. Even though there are no major changes, the amount of fixed assets decreased due to selling a part of our stake in Yamaha Motors last year. Inventories increased slightly. Finished products decreased mildly year-over-year, but work-in-process materials and parts inventories increased instead.

We have carried higher inventories than usual as material prices are rising and procurement has become so difficult. As for work-in-process, containers from China to the United States are very congested, so some inventories are put on hold at our factories. Due to Brexit-related concerns, we have shifted more inventories than usual to U.K., but the inventories are properly managed at the finished goods level.

This is our balance sheet projections at year-end and year-over-year comparisons. There should be no outliers. Fixed assets referred to here are through authentic inventories, which increased due to construction of R&D facilities and new factories, which increased our assets.

All of those factors are implied in these numbers. Aside from that, the assets may increase in line with the income growth. There is no change from the prior announcement with respect to CapEx. It is estimated to be around JPY 25 billion. The ordinary level of CapEx is around JPY 12 billion or JPY 13 billion. CapEx has increased due to the construction of our R&D facilities and new factories in the past few years.

The R&D exceeded JPY 27 billion according to the last announcement, with insufficient progress made in cost reduction measures. We have tried to reduce our R&D expenditure as much as possible after conducting due diligence. We have shifted from conventional annual report and CSR report to integrated report, which is topical nowadays. We just finished printing the report, which was just distributed to you today. Both financial and nonfinancial information is available.

Here are some of the main contents, such as vision and value creation, management strategy, foundation for growth. What is important is sustainability and corporate governance. Both financial and nonfinancial information is available for you to review in your spare time. Very briefly, that is all I have for the second quarter results.

Thank you very much.