Yamaha Corp

TSE:7951

Earnings Call Transcript 2018-Q3

[Takuya Nakata, executive]

Now I will begin the briefing. Please refer to the presentation in front of you. This is the overview of performance in the first 3 quarters. Sales increased by JPY 20.4 billion year-on-year, which includes JPY 14.2 billion impact from exchange rates. Operating income was up by JPY 4.1 billion, including JPY 2.6 billion impact from exchange rates. Sales and operating income rose in all business segments. Musical instruments sales trended upward in developed markets. There was some slowness in the first half of the year, but we are now seeing a recovery. The Chinese market maintained double-digit growth and business remained robust in all regions as well. In audio equipment, sales of AV products and professional audio equipment fell short of expectations, but still sales were higher than the previous year in all regions. For the others segment, factory automation equipment showed brisk sales. Compared to previous projections, sales were higher by JPY 1.2 billion, partly due to the impact of exchange rates. Operating income was slightly lower than the previous projection of JPY 42 billion, due to an increase in business-size-based tax related to the gain on partial sale of shares of Yamaha Motor. This amount is included in administrative expenses.

Net income jumped year-on-year due to the posting of gain from a partial sale of shares in Yamaha Motor. Please turn to Page 3. Let me take you through the numbers. Net sales JPY 328.7 billion, operating income JPY 41.5 billion, net income JPY 49.6 billion. If you look at the changes from the same period of the previous year on the column on the right, it shows positive growth in sales and income. On the very right column, we show changes from the previous projection. Sales and income increased with the exception of operating income, which was 1.3% lower than the previous projection. Page 4. Net sales by business segment is on the left and operating income on the right. Impact of exchange rates is described below.

For net sales, musical instruments grew by 6.2% year-on-year, which includes the impact of exchange rates. Audio equipment grew by 8.6% and the others segment grew by 3.1%, and total net sales grew by 6.6%. Operating income grew by JPY 41.5 billion year-on-year, which includes a JPY 2.6 billion impact of exchange rates.

Please turn to Page 5. This is the analysis of the difference in the operating income compared to the previous year. Compared to last year's result of JPY 37.4 billion, there was a net increase of JPY 4.1 billion. This is the breakdown of the difference. Labor costs at overseas factories are still increasing. This is mainly increasing in Indonesia and China. Also, SG&A expenses are rising due to investment for future growth, that amount is JPY 1.3 billion. There was a JPY 1.3 billion negative impact from other factors.

In the first half of the year, this number was minus JPY 1 billion due to reporting rebates from China as well as other expenses. The business size related tax, I mentioned earlier, added another JPY 0.3 billion amounting to minus JPY 1.3 billion, which we consider as one-off expenses. On the other hand, positive factors include JPY 2.6 billion impact of exchange rates, JPY 3.3 billion of actual increase in sales and production, including better product mix and JPY 1.7 billion in cost reduction. The net increase was JPY 4.1 billion compared to the previous year. Compared to the previous projections, we were short by JPY 500 million. This was mainly due to actual decline in sales including product mix, which had a total negative impact of JPY 1.8 billion. There was an actual decline in SG&A spending, which had a positive effect of JPY 1.6 billion. Other extraordinary factors had a negative impact of JPY 0.3 billion. As a result, we were short by JPY 500 million.

From Page 6, we will discuss each business segment. The first 9 month cumulative results for musical instruments was net sales of JPY 208.8 billion and operating income of JPY 28.1 billion. Both net sales and income grew year-on-year. By product category, the third quarter was up 4% year-on-year, which does not include the impact of exchange rates. In the first 9 months, there was year-on-year growth for almost all product categories. Overall results were driven by digital piano and guitar sales in particular. If we look at each region, there was some slowness in North America and Europe in the first half of the year, but in the 3 months of the third quarter, North America sales were up 4% year-on-year and in Europe 2%, showing a trend toward recovery. Growth in Europe was slightly low because in October there was still confusion from the revisions of selling terms and conditions. This situation normalized in November, but still growth was only 2%, which is lower than North America. 9 months cumulative sales over the first 3 quarters were down compared to the same period of the previous year in both regions.

In the Chinese market, there was strong expansion in sales of pianos, digital pianos and guitars, which maintained double-digit growth. In addition, we saw strong performance in other regions or developing markets, including Middle East, India and Russia. Although it's not mentioned here, Latin America sales also continued to be strong. Please turn to Page 7. This is the 9-month cumulative result of audio equipment. Net sales was JPY 92.3 billion and operating income was JPY 10.1 billion, which is a year-on-year growth for both sales and income.

AV product sold briskly, especially in the sound bar and network audio categories. However, some sales were delayed until the fourth quarter and sales were up by only 3%. Professional audio equipment sales were robust in the Chinese market and other regions. The North American market trended higher showing us recovery and ended 3% higher than the previous year. The ICT device category includes unified communication devices or conference systems, which was strong. The entire category remained robust.

This is the 9-month cumulative result for the others segment. Net sales JPY 27.7 billion and operating income JPY 3.3 billion, meant positive year-on-year growth for net sales and significant growth for income. Strong sales of factory automation equipment contributed to ongoing year-on-year double-digit growth in the industrial machinery and components category.

The impact of new products contributed to brisk sales in the golf category.

From Page 9, we discuss the outlook for the fourth quarter and full year. With regard to the fourth quarter, we are expecting the recovery in the European and North American markets to continue for musical instruments. Ongoing strength is anticipated in the Chinese market and other regions. For audio equipment, although postponement of audio engineering and installations in Japan until next fiscal year will have some impact, product sales are likely to expand. For others segment, slight slowdown is expected as some electronic device purchases are postponed until the next fiscal year. Exchange rate assumptions have been revised from JPY 110 to JPY 105 for the dollar, and JPY 125 to JPY 130 for the euro. Our full year outlook for sales, operating income and ordinary income remain unchanged from the previous projection, and the revised net income projection remains unchanged since November 28, when we announced the partial sale of shares of Yamaha Motor.

Let me take you through the numbers on Page 10. Net sales JPY 432 billion, operating income JPY 50 billion and net income JPY 57 billion. We are projecting positive growth in sales and income compared to the previous year.

Net income is also projected to grow significantly. The increase of 46.2% from the previous projection refers to change from November 1. This growth is due to the partial sale of shares of Yamaha Motor. Next please refer to Page 11. This is the full year forecast of net sales and operating income by business segment. The full year impact of exchange rates is noted below. Musical instruments is expected to grow by 6.1% year-on-year, audio equipment by 6.1% and others by 2.6%, which amounts to 5.8% overall growth in net sales. Operating income is projected to grow to JPY 50 billion, up by JPY 5.7 billion compared to the previous year's result of JPY 44.3 billion. This includes JPY 4 billion positive impact from exchange rates. Please refer to Page 12 for more details. This is the breakdown of the JPY 5.7 billion increase from JPY 44.3 billion in the previous year to JPY 50 billion projected for this year. The trend is similar to the first 9 months. There is increase in labor cost at overseas factories and increase in SG&A and increase in other expenses for one-off reasons. While on the other hand, positive effects include JPY 4 billion impact from exchange rates, JPY 5 billion from actual increase in sales and production and product mix as well as JPY 2 billion in cost reduction. This amounts to JPY 5.7 billion increase in operating income.

Compared to the previous projection, we fell short of achieving the projected cost reduction due to higher purchasing costs. This trend is still continuing. The negative effect from slower cost reduction is JPY 800 million. Actual decrease in sales and product mix will have a negative impact of JPY 2.2 billion, and other factors will negatively impact income by an additional JPY 0.3 billion. On the other hand, there will be some positive impact from exchange rates and JPY 2.1 billion less spend in SG&A. The net result of these factors will leave us at the same level as the previous projection. From Page 13, we discuss the full year projection by segment. In musical instrument, full year net sales is JPY 273.5 billion and operating income is JPY 35.5 billion, meaning growth in both sales and income. Strong sales are likely to continue in the Chinese market and other regions. Sales are projected to surpass previous projections by JPY 2 billion due to the impact of exchange rates. Previous projections for operating income remain unchanged, however, partly due to increased procurement costs. As always, we are showing the actual results and forecast for net sales by region as you can see on Page 14. On the left bar, we show the last year's results and on the right bar, we show this year's Q1, Q2, Q3 and Q4 numbers. The numbers in parentheses indicate actual year-on-year growth, excluding the impact from exchange rates. For the full year, Japan sales will be 98%, which is a slight decline. North America is 100% and Europe also 100%. Although we expect recovery to be strong in the second half of the year, we don't expect it to be strong enough to completely cover the softness in the first half and achieve positive year-over-year growth.

Our expectation is flat growth compared to the previous year. China sales will be 116% for the full year and other markets will be 107%. China market is revised upward once again compared to the previous projection. Next please look at Page 15. This is the full year projection for audio equipment. Net sales JPY 122.5 billion, operating income JPY 12 billion, meaning positive growth in both sales and income year-on-year. However, sales are likely to be lower by JPY 2 billion compared to previous projections. Musical instruments will exceed previous projections by JPY 2 billion and audio equipment will be below projections by JPY 2 billion, so the net effect is 0. Sales are expected to be JPY 2 billion less than previous projections due to postponement of audio engineering and installation in Japan until the next fiscal year. Previous projections for operating income remain unchanged. Page 16. This is the sales forecast by region for audio equipment similar to the page for musical instruments. Domestic sales will be 97% due to the construction of facility audio equipment being pushed back to the next fiscal year. North America will be 102%, Europe 104% and China 102%. As I have explained before, this growth of 2% in China is due to slow sales of OEM products made in our Chinese factory.

Yamaha brands' overall sales in China, however, is projected to show strong growth of 8%. Other regions will grow by 6%. Page 17 shows similar bar charts by major product categories as we saw earlier. Full year sales of pianos will be 105% year-on-year, digital musical instruments 105%, wind instruments 102%, string and percussion instruments are expected to grow to 107%. For audio equipment, AV is projected to be at 104% and PA 104%. This is the full year projection for the others segment.

Net sales JPY 36 billion and operating income JPY 2.5 billion. This is positive year-on-year growth for both sales and income. No changes have been made since the previous projections. In the industrial machine and components category, strong sales of factory automation equipment, such as for smartphone testing machineries, are expected to drive double-digit year-on-year growth despite postponement of electronic device purchases to the next fiscal year.

Page 19, inventories. On the left, we have the situation at the end of Q3 or end of December, which was JPY 99.6 billion. There was a JPY 2.2 billion increase from the previous year, but as noted below, there was a JPY 1.8 billion impact from exchange rates. So the inventory level was similar to the previous year. At the fiscal year-end, inventories will total JPY 96.9 billion, which is JPY 3.8 billion higher than last year's level of JPY 93.1 billion, however, the impact from exchange rates will be slight. So the projection is for inventories to rise slightly on actual terms; one reason is because of the strong performance of FA products, which will require a higher inventory level, and musical instruments related inventories will be higher in order to prepare for the next fiscal year.

Page 20, capital expenditure. The actual spend in CapEx during the first 9 months was JPY 15.2 billion. The full year expectation is JPY 25.3 billion, which is significantly higher than last year's CapEx for the first 9 months and for the full year. This is due to the construction of a research and development building in the head office, which will be completed in May. In addition, we are building new factories in both India and Indonesia, which will drive up CapEx significantly compared to the previous year.

However, these numbers are slightly lower than the previous projections. R&D expenses amounted to JPY 18.3 billion in the first 9 months and are estimated to total JPY 25.2 billion for the full year. This is basically the same amount of spend in R&D as the previous year. There is a slight increase, but still basically similar to last year. Page 21 shows the balance sheet summary. The left side refers to the third quarter and the right side is the full year projection. In the third quarter, total assets amounted to JPY 609.7 billion, which is JPY 81.8 billion higher than that of last year. Cash and deposits increased by JPY 41 billion due to irregular reasons. There was a gain in partial sale of shares of Yamaha Motor, but the tax against this gain has not been paid yet. It is recorded as tax payable and there has been no cash out yet.

In addition, we are planning to do share buyback of JPY 25 billion. As of the end of December, we've only executed JPY 6.8 billion in share buyback, so we are still in the process of achieving our plan. Since we haven't paid cash for the remaining amount, it is still on the balance sheet as cash and deposits, so this is an irregular matter.

Fixed assets have grown by JPY 27.7 billion. This is due to mark-to-market valuation of securities. Although we did a partial sale of shares of Yamaha Motor, there was an appreciation of stock prices and therefore, there was net growth. Other liabilities have increased by JPY 12.7 billion. This includes payable corporate tax of about JPY 10 billion. The tax payable related to the sale of shares that I mentioned earlier is recorded in this line. Net assets have increased by JPY 66.1 billion due to retained earnings, valuation of securities and currency translation effect from the weaker yen. The year-end situation will be similar. However, with regard to cash, there will be more share buyback executed by then. There will be tax payment, and so the increase compared to the previous year will be JPY 14.8 billion. Other lines show a similar trend. Our net assets are projected to total JPY 406.6 billion. Lastly, we are showing the situation of return to shareholders on Page 22. Total share buyback from December 1 to May 31 will be 7 million shares. The maximum amount is JPY 25 billion, and the buyback program is currently ongoing. In addition to the partial sale of shares of Yamaha Motor, we are planning to acquire JPY 25 billion of our own shares. As for dividends, the annual dividend of JPY 56 has been maintained. The payout ratio is 18.3% due to increase in net income after the partial sale of shares of Yamaha Motor. By calculation, it translates into a lower payout ratio. However, we will conduct share buyback, so the total return ratio is expected to be 62.2%. That concludes the quick briefing of the cumulative results for the first 9 months and full year expectations. Thank you very much.