Yamaha Corp

TSE:7951

Earnings Call Transcript 2020-Q2

[Takuya Nakata, executive]

Let me express my deep appreciation for your continuous support and understanding of our business. Thank you also for taking time out of your busy schedule to attend our financial results briefing.

Let me explain our financial performance for the second quarter of the fiscal year ending March 2020. Starting with the performance summary.

As shown on slide, second quarter revenue and profit rose year-on-year, thanks to the continued strength in the musical instruments business. First half revenue and profit declined due to the significant impact by year-on-year drop in the first quarter. The main reasons are the significant impact of exchange rates and deteriorating market conditions in the industrial machinery and components, IMC business, which has continued from the first quarter.

Given the change in our ForEx assumption from JPY 125 to the euro to JPY 120 and the expected delay in the recovery of IMC business in the second half, full year projections were revised slightly downward. Despite the downward revision, revenue and profit are still projected to slightly exceed the previous year.

Now let me explain the numbers in more detail. First is the overview of the first half performance. Revenue was JPY 208.5 billion, down year-on-year, the large factor being the exchange rate impact of approximately JPY 6.7 billion. Core operating profit was JPY 26.1 billion, slightly down year-on-year. The exchange rate impact of approximately JPY 3 billion was significantly offset by the strong musical instruments business.

This is the core operating profit analysis versus the previous year. The impact of exchange rates was negative JPY 3.1 billion. And on the far right, negative JPY 2 billion in IMC business due to the absence of the strong demand we enjoyed the previous year. Those 2 main factors were offset by sales increase and model mix as well as progress in price optimization and cost reduction, resulting in JPY 26.1 billion.

Next is our performance by business segment. In musical instruments, the exchange rate impact of JPY 2.3 billion was offset and core operating profit was up by JPY 1.9 billion year-on-year. Core operating profit ratio rose to 16.1%.

In audio equipment, approximately half of the negative factors, mainly exchange rate impact, was offset but not entirely, resulting in a slight decline in core operating profit year-on-year.

IMC business and others was down by JPY 2 billion due to the sluggish FA equipment business as I explained previously.

Full year projection is shown here. We project revenue and profit to exceed the previous year, as musical instruments business is expected to stay strong and audio equipment business is expected to recover in the second half.

This graph shows the comparison against previous projections. The impact of exchange rates will increase by JPY 4.5 billion, mainly due to the change in the assumption of euro. In addition, U.S. dollar assumption has remained unchanged, but non-U.S. dollar currencies are depreciating against the dollar, resulting in negative JPY 4.5 billion.

This will be offset by sales increase and model mix, among others, but IMC business and others will deteriorate. Therefore, core operating profit is revised downward by JPY 2 billion. The main factors are the exchange rates impact and the expected delay in the recovery of IMC business.

The outlook by business segment is shown on this slide. In musical instruments, we expect the strong first half to continue into the second half. Core operating profit is projected to increase by approximately JPY 2 billion by offsetting the exchange rates impact of close to JPY 5 billion.

In audio equipment business, we project an increase in revenue, but core operating profit will increase only marginally due to the exchange rates impact, among others. IMC Business core operating profit is projected at 0 due to the expected delay in the recovery in the second half, as I explained earlier.

Next, let me explain the segment overview and updates, starting with musical instruments. Strong first half sales exceeded previous year's figures in all product categories, except for wind instruments.

Piano sales, always the focus of attention, were robust and achieved double-digit growth in China. Sales of digital musical instruments are growing in all regions. In addition, guitar sales achieved double-digit growth.

Wind instruments struggled in Japan and North America in the first quarter, but North America is recovering and Japan is struggling less. For the full year, growth is projected in all product categories and the details are listed here.

This slide shows the revenue by major product category. Piano recorded 111%, a very high growth in the second quarter. Digital musical instruments recorded a double-digit growth.

Winds were off to a slow start in the first quarter but made up for that in the second quarter. Second quarter alone was 105% and first half was 99%, almost flat year-on-year.

Strings and percussion, which includes guitars, marked 107% in the second quarter, a very healthy growth. As a result, all product categories are revised upward by approximately 1 percentage point on a full year basis.

This slide shows revenues by region. In Japan, second quarter was 105%, which was slightly pushed up by the last-minute demand before the consumption tax hike.

In North America, piano and winds fell significantly short of the previous year in the first quarter but second quarter recorded a high growth, thanks to the recovery, resulting in 104% in the first half.

In Europe, revenue is increasing steadily as the slowdown following the review of sales condition that continued until last year is completely resolved.

In China, piano and digital piano sales growth slowed down in the first quarter, but trended steadily in the second quarter. Growth is continuing in other regions. So as I mentioned earlier, musical instruments' full year revenue is revised upward from 103% to 104%.

The following slides show the musical instrument products we launched in the first half, which are selling favorably in general.

Our plant in India started the operation. Production volume is initially low, but the start of operation is expected to contribute to our growth further down the road.

Next is audio equipment business. AV product sales in the first half were down year-on-year due to fluctuation in some regions but sales of PA equipment were robust overall.

ICT shipment was slow in the first quarter due to inventory adjustment, but is recovering gradually in the second quarter. As we plan to launch new PA and AV products in the second half, the full year projection is slightly up year-on-year.

This slide shows the revenue by major product category. AV products saw some fluctuation, as I mentioned earlier, and receiver sales became more sluggish. It is offset by sound bars, but there are many regions that are not fully offset.

PA equipment is trending steadily and we expect further growth in the second half with new product launches, especially PA equipment for musical instruments.

In ICT devices, the blue numbers in parenthesis indicate the local sales excluding OEM. 69% in the first quarter rose to 92% in the second quarter, showing the progress in shipments following the end of inventory adjustment. We project 103% for the full year as these factors will disappear in the second half.

Next slide shows revenues by region. In Japan, second quarter showed a very high growth. In addition to covering the shortfall in the first quarter, we saw some last-minute demand before the consumption tax hike, resulting in a strong growth. Our full year projection is 109%.

North America was off to a slow start but is gradually recovering, and second quarter was 102%. Our full year projection is in line with that level.

Europe was off to a very strong start in the first quarter, but second quarter fell slightly below the previous year. This is because first quarter last year was down year-on-year and second quarter was up compared with the strong and weak quarters the year before, resulting in some fluctuations. However, our full year projection is 104%, in line with the first half level.

In China, we project 109%, excluding OEM. In other regions, the higher growth projection is revised slightly downward this time due to the delay in new product launch and fluctuations among regions.

Our new products are shown on the following 3 pages, so please take a look at them at your leisure. The first page is PA products. And the second page is AV products, where sound bar, including the surround system, is especially strong. The lower half of the page shows ICT equipment, including conference call systems. The third page is routers, which was awarded first place in the Customer Satisfaction Survey by Nikkei Computer magazine for 4 consecutive years.

Next is IMC business and others. Revenue projection is revised slightly downward. We expected the market to recover in the second half, but market conditions for FA equipment continue to deteriorate and are unlikely to recover significantly in the second half.

Full year projection is revised downward to 0, although sales in the electronic device category are expected to increase year-on-year, thanks to a rebound in amusement equipment sales.

Next is other financial figures. There is nothing to note in particular. Cash and cash equivalents are increasing steadily with cash inflow. The numbers here do not include our acquisition of treasury shares that we announced at the same time. So the amount subtracting JPY 15 billion for share buyback is the projection at the end of the fiscal year.

We are acquiring our treasury shares, as announced in the press release, to enhance shareholder returns and capital efficiency, as well as achieve our total return ratio target of 50% in the current medium-term management plan.

Normally, acquisition of treasury shares would be expected in the third quarter of the third year, but as cash is building up, we decided to acquire close to half of the assumed level, taking into account the share price in the market.

Next, capital expenditure and R&D expense have remained unchanged from the previous announcement. Depreciation increased somewhat due to the new plant construction and manufacturing facility upgrade, which will be used as scheduled. R&D expense is slightly delayed, but we have kept the amount unchanged.

The following slides are on our ESG initiatives. I will not go into detail, so please take a look at them later to see that our activities are progressing as planned. First slide is on environment, followed by social.

Next is topics. We are showcasing our technology, including our development of sound-related AI as a musical instruments and audio equipment manufacturer. This is not a product, but an example of us working with NHK to faithfully reproduce singing of Japanese vocalist, Hibari Misora.

And another example in Europe, where we use AI to reproduce the performance style of pianist, Glenn Gould. Of course, our purpose is not creating music automatically but enjoying music by leveraging our expertise or assisting the improvement of playing musical instruments.

Let me also mention that 3 sound-related products were registered as future technology heritage specimens.

That concludes my explanation on our financial performance for the second quarter of the fiscal year ending March 2020. Thank you very much for your attention.

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