Yamaha Corp

TSE:7951

Earnings Call Analysis

Yamaha Navigates Market Challenges; Adjusts Projections

Yamaha has faced a complex half-year marred by a sluggish Chinese market and a downturn in digital piano sales, forcing revenue and profit declines. Despite foreign exchange gains bolstering revenue, the company's half-year revenue saw a minute 0.7% increase to JPY 219.6 billion, with operating profit plunging due to higher costs and decreased sales and production. The FY March 2024 outlook is cautious, cutting revenue forecasts by JPY 5 billion to JPY 465 billion, a 2.9% rise from the prior year, and reducing operating profit projections by JPY 8 billion to JPY 42 billion, reflecting restrained Chinese recovery and additional production cutbacks, even as the dividend aims to remain at JPY 74 per share. While the musical instrument sector, especially pianos, endures contraction, the company's audio equipment, led by B2B sales, is growing with anticipated positive sales growth in all regions except China, which expects a steep 16% drop.

Financial Outlook Amidst Market Challenges

Facing headwinds, the company has revised its full-year profit expectations to JPY 42 billion. A significant cause of concern is the slower than anticipated recovery of the Chinese market, particularly impacting the musical instruments segment, led by a downturn in piano sales. Despite favorable exchange rate impacts, the company must navigate a JPY 1.5 billion reduction in the IMC segment and return JPY 1 billion to customers after price negotiations due to foreign exchange fluctuations. The goal is to bolster segments showing promise, like audio equipment, which is slated for year-on-year growth, driven by strong B2B products performance.

Segment Deep Dive: Musical Instruments and Audio Equipment

The company is grappling with contrasting fortunes in various sub-segments. While digital piano sales are on a declining trajectory globally, wind, strings, and percussion instruments exhibit sustained momentum with rising sales. The addition of Cordoba has bolstered guitar sales. For the full year, a 17% growth in guitar sales is expected. Regionally, markets such as Japan, North America, and Europe anticipate overall growth, in stark contrast to China, where a 16% decrease is projected. The audio equipment segment paints a brighter picture with an expected 4% increase in revenue, thanks to a robust B2B business and new product successes in the live entertainment market.

Mitigating Operational Risk

Inventory management remains a critical focus area, with the company aiming to reduce the balance from JPY 170 billion to approximately JPY 140 billion by the next fiscal year-end. The mitigation plan includes continued production cutbacks, mainly for high-inventory items like pianos. The company also faces a multi-year endeavor of scaling down parts inventories, which ballooned during shortages and supplier discontinuations during the pandemic, necessitating higher than usual stocks to cushion production risks.

Investing in the Future

Investments remain steady, with capital expenditure only slightly down from prior plans. A significant outlay has gone into developmental projects such as new office buildings expected to be completed this fiscal year. Meanwhile, R&D expenditure will hover around the standard JPY 25 billion mark, ensuring innovation stays on course. Alongside these financial deployments, non-financial strides include renovating and reopening flagship stores and showrooms, integrating speaker units into more car models, and placing sustainability at the core of value creation—progress that's essential for long-term competitiveness and customer engagement.

Earnings Call Transcript 2024-Q2

[Takuya Nakata, executive]

This is Nakata. I'm pleased to see you. Thank you very much for sparing your precious time to attend Yamaha's briefing on the second quarter of FY March 2024. I'd also like to express my sincere gratitude for your continued support and understanding of our business. Now I'd like to start a briefing on the first half results.

Please turn to the next page for the highlights. First, regarding the results of the first half. Due to the slow recovery in the Chinese market and the weakness of the digital pianos market, the musical instruments saw a big decline of sales.

Yet with the recovery of B2B audio equipment and the positive impact of foreign exchange rates, the overall revenue increased. However, reflecting the revenue decline of the musical instruments and the production adjustments to reduce the inventory, the profit declined.

Regarding the full year forecast for FY March 2024, as shown in the bottom half of the page, we have 3 key points. We further counted in the impact of the slow recovery in Chinese market and decided to revise the revenue downward.

Moreover, in addition to the impact of the revenue decline due to the lower factory profitability from the additional production cutbacks, we revised the core operating profit downward. Yet, we are hoping to keep the annual dividend per share at JPY 74. I'd like to provide the further details from hereon.

The revenue in the first half was JPY 219.6 billion, which was an increase by 0.7% year-on-year. But as it is described below, if the impact of exchange rates was excluded, it was actually a decline year-on-year. The core operating profit was JPY 15.3 billion, which was a substantial decline from the previous year. The net profit also declined accordingly.

In a comparison against the previous year, the core operating profit, which was JPY 24.4 billion in the previous year, saw some improvements from the impact of exchange rates and ocean freight charges. However, there were greater negative factors such as the cost increase, including the rise of labor cost and procurement cost, and most of all, the decrease in sales and production, which pushed down the profit by JPY 6 billion.

In addition, the SG&A increased as we resumed various business activities that were suspended during the pandemic. the IMC, Industrial Machinery and Components business, and others are also dragging down the profit because of the rebound decline from the extraordinary golf product demand that we enjoyed in the previous year, and a special arrangement that we had to make for the automobile interior wood components. I will explain this in more details later.

Next is the results of each business segment. The musical instruments revenue was JPY 148.2 billion. Even though there was a positive impact of exchange rates, the revenue declined year-on-year. Without the FX impact, the revenue was actually down by JPY 7.5 billion.

The audio equipment segment performed well overall, especially with the good sales of B2B products and the revenue increased from a year ago level. As for IMC business and others, like I said earlier, we no longer have the extra demand from golf products. So the revenue and profit declined year-on-year.

Moving on to the full year outlook. The revenue is expected to be JPY 465 billion, which is an increase of JPY 13.6 billion from the previous year, but it was lowered by JPY 5 billion from the previous projection. This is mainly because the Chinese market recovery cannot be expected much until after the end of this fiscal year.

The core operating profit is now expected to be JPY 42 billion, which is lower by JPY 8 billion from the previous projection. This is because in addition to the expected revenue decline, we will have to anticipate further production cutbacks. The net profit is expected to be JPY 34.5 billion.

As for the assumed exchange rates for the revenue, as described here in the bottom, a U.S. dollar is JPY 141 and a euro is JPY 152. The assumed exchange rates for the profit are also shown here. Based on such assumptions, we revised our outlook.

As regards to the core operating profit, the profit, which was JPY 45.9 billion in the previous year, is now expected to decrease to JPY 42 billion this year. Although the exchange rates and ocean freight charges would be positive, the cost increase, the decrease of sales and production and the increase of SG&A would be negative.

As it was the case in the first half, the same negatives are likely to prevail in the second half. So we are now expecting the full year profit to be JPY 42 billion. The bottom half shows the changes from the previous projection.

The impact of exchange rates would be even more positive than we thought. But most of all, since we cannot expect the Chinese market recovery until after the end of this fiscal year, the decrease in sales and production would be the greatest.

Also, the IMC business and others would drop by JPY 1.5 billion. This is including JPY 1 billion, which, as a result of the price negotiations, we had to return the differences from the change of foreign exchange rates to the customers. This is 1 special factor that we had to add this time.

Now let me explain the forecast by each business segment. As for the musical instruments, like I said earlier, the revenue would actually drop year-on-year without the FX impact. This is mostly because of the sluggishness in China.

The audio equipment is expected to achieve growth year-on-year. The contribution of the well-performing B2B products has been great, and that is reflected in the full year forecast as well.

The forecast of IMC business and others is as shown here. The greatest difference from the previous projection is in the music instruments. The recovery in China is taking longer than we thought, especially in the pianos business, and that is dragging down the segment sales.

Now I'd like to provide further information on each business segment. First, the musical instruments in the first half struggled with not just the pianos, but also with the sluggish sales of digital pianos worldwide and the segment revenue declined.

In the meantime, the wind, strings and percussion instruments are continually enjoying good momentum and the sales increased. The guitars faced challenging market conditions. But with the addition of Cordoba sales, the category sales increased.

The full year forecast is basically an extension of the situations in the first half. So the piano sales are expected to decline. As for the digital musical instruments, the market inventory adjustments are progressing gradually.

And since we are launching some new products in the second half, we expect some recovery. The wind, strings and percussion instruments are expected to perform well continually, and the guitars are expected to improve in all the regions, except China.

The next page shows the revenue by product categories. As you can see, the P&L and the digital musical instruments are likely to achieve negative growth year-on-year. Meanwhile, the wind strings and percussion instruments, which achieved a great sales growth year-on-year in the previous year, is expected to achieve further growth this year.

The guitars, with the addition of Cordoba, is expected to achieve 17% growth for the full year. Here is the regional sales breakdown. In Japan, North America and Europe, we are expecting positive growth overall.

But 1 exception is China, where we are expecting 16% drop year-on-year for the full year. We have very severe outlook for China. As for the other regions, we think it will be almost the same level as the previous year.

The next slide is about the audio equipment segment. The revenue is growing year-on-year. A 4% increase is expected for the full year and a 7% increase was achieved in the first half. The growth is mainly driven by the B2B products.

In fact, the consumer product sales declined, but it was more than offset by the B2B product sales growth, especially the so-called PA equipment for the live entertainment market, which we launched some new products, performed very well. As a result, the segment revenue increased.

As for the full year outlook, we expect the B2B business to be continually robust, and we think we can supply to the market without any issues. So we are expecting the revenue to increase.

In the consumer products, we think the decline of demand will continue, but we can expect a much greater increase of sales from the B2B business. The core operating profit would also increase as the B2B business that provides us higher margin is likely to grow further. Hence, the profit margin has been improving and the full year margin with a dramatic recovery from the previous year is expected to be 5.2%.

The next slide shows the sales breakdown by product categories. First, the consumer products that dropped very much year-on-year in the first quarter recovered a little during the second quarter, but it is still lower than a year ago level. Therefore, the full year sales are expected to be slightly lower than the previous year.

On the other hand, the B2B products have been doing very well, with 22% increase in the first quarter and 36% increase in the second quarter. Since we can expect this momentum to continue into the second half, the full year growth is expected to be 14%.

For each region, Japan's full year sales are likely to be slightly lower than the previous year, but North America, Europe and the other regions are likely to achieve big growth year-on-year. However, China is struggling due to the severe domestic market conditions, even though the rest of the world are outperforming, and we are anticipating a year-on-year drop for the full year, too.

Next is the IMC business and the Other segment. During the first half, driven by the automotive sound systems, the IMC sales increased. For the full year, since the automotive sound systems are likely to achieve further growth, we're expecting the sales of IMC to grow year-on-year.

But since the rebound decline of the golf products, which we enjoyed an extraordinary demand in the previous year, would be greater. We are expecting the segment revenue to drop year-on-year. The core operating profit is also expected to be lower than the previous year, and this is including the JPY 1 billion impact of the automobile interior wood components, where we had to make special arrangements with the customers, as I mentioned earlier.

Let me also explain about the other financial figures. Regarding the balance sheet, the inventories that rose very much is noteworthy for the first 6 months. Other than this, there is not much change that is worth mentioning.

So the balance of inventories exceeded JPY 170 billion as of September 30, 2023, but we are determined to lower this to around JPY 140 billion by March 31, 2024. So as to achieve this, we need to continue the production cutbacks, but the inventories can actually be split into 2 groups: parts and finished products, namely, the inventory parts had piled up much more than usual times during the pandemic.

In face of the shortage of semiconductors and other supplies amidst the pandemic turmoil, we had to stock some extra inventory at hand. Furthermore, some of the suppliers announced to discontinue certain parts and anticipating the unavailability of such parts in the future, we had to place front-loaded orders before they were discontinued.

All of these things led to the increase of parts in the inventory. As for the finished products in the inventory, except for the pianos, we believe they can be lowered to the acceptable level by the end of the fiscal year. However, the inventories of pianos are likely to be still high in the next fiscal year, and we may have to control the production level continually.

With regards to the inventories of parts, we will take several years to reduce the level. But we also feel a greater necessity to stock some extra parts to avoid the production risk, so it will not be lowered to the pre-COVID level either.

As for the capital expenditure and depreciation, the figures have not changed much from the previous plan. They were only slightly reduced. The reason why there is a big increase of CapEx from the previous year is because of the investments in the head office building and an office in Minato Mirai, Yokohama, which will be completed soon. Such one-off expenditure is planned to be concluded this fiscal year.

As for the R&D expense, it will be kept at the usual level of around JPY 25 billion this fiscal year. Finally, with regards to the topics, we're showing the nonfinancial achievements and progress that we made for the priority themes of the midterm plan. I will not go into the details, but to develop closer ties with the customers.

In addition to the domestic stores in Ginza, Osaka and Nagoya, that were renewed, we recently renewed and reopened the flagship store in London. Also, as I mentioned earlier, the showroom in Minato Mirai, Yokohama will be reopened as a new type of music instrument store to offer hands-on brand experiences for the future users.

In expanding the business domain, we are happy to report that Yamaha speaker units are installed in many more car models. Also, in the efforts to create new value and be more flexible and resilient, we made some progress. So as to set sustainability as a source of value, as described here, we have been making progress in various initiatives.

Especially the school project has been achieving great progress, not just in line with the midterm plan, but also with the actual changes implemented at the local schools. In Vietnam, the instrumental music education has become a part of the national curriculum, and music lessons are given at public schools.

In Malaysia, keyboards were introduced at some schools in addition to recorders or vertical fluids to step up the musical education. We believe such efforts will grow to become great assets for our future. We also made further progress in enabling Yamaha colleagues to be more valued, more engaged and more committed. So please check them out when you have time.

Finally, in the appendix, we included performance data for the second quarter alone for your reference later. China seems to be taking a longer time to recover still, but all the other regions are gradually recovering, and we could actually see it from the second quarter results.

The rest of the pages are for your reference and may not need further explanation. So that concludes my presentation. Thank you very much for your attention.