Yamaha Corp

TSE:7951

Earnings Call Transcript 2019-Q3

[Satoshi Yamahata, executive]

Thank you very much for taking time out of your busy schedule to attend the conference call for the IR Result Meeting.

Without further ado, I will start my presentation in the order of the slides I believe you have in front of you.

First of all, this is the overview of the cumulative results of the first three quarters of the year. Sales and income both increased year-on-year. Performance was on target to meet our full year projections. Sales increased by 1.6%, driven by the musical instruments segment.

Operating income amounted to JPY 48.1 billion, up 16%, and the operating income ratio reached 14.4%, which was an improvement of 1.8 percentage points.

The full year outlook for sales is revised downward by JPY 2 billion from the previous projection due to the decline in sales in the IMC Business. Recent months have been tough for this business, and the strong sales from the musical instruments business will only cover the decline in sales partially.

The operating income projection is maintained at JPY 55 billion, up 12.6% year-on-year. The musical instruments business will offset the decline in profit from the IMC Business. Operating and ordinary incomes are projected to reach record levels.

Page 3. I will go over the numbers for the first 9 months. Net sales, JPY 333.9 billion; operating income, JPY 48.1 billion; operating income ratio, 14.4%; and net income, JPY 36.7 billion.

Sales and income both achieved positive year-on-year growth. The decline in net income is explained in the footnotes on the bottom of the page.

Last year, gains were posted from a partial sale of shares in Yamaha Motor. This year, the net income declined due to the absence of those gains. On the right bottom of the table, it tells you that if the impact of the exchange rate is excluded, the net sales grew by 2.2%.

Next, please turn to Page 4. The change in the operating income from JPY 41.5 billion last year to JPY 48.1 billion this year is shown in the waterfall chart. The biggest change was due to the increase in sales and production and change of model mix, which totaled JPY 7.9 billion. On the other hand, SG&A increased compared to the previous year. This was due to the increase in sales as well as some one-off expenses related to the construction of the R&D building and strategic expenses for future growth.

As a result, SG&A increased by JPY 2.8 billion. Furthermore, cost reduction, unfortunately, is not progressing as fast as we expected due to higher purchasing costs. We achieved JPY 0.6 billion in cost reduction while labor costs in overseas factories increased by JPY 0.8 billion.

The net amount dragged the operating income down by JPY 0.2 billion compared to the previous year. The impact of exchange rates was positive, totaling JPY 1.7 billion.

Page 5 shows the performance by business segment. The numbers are shown on the slide. Net sales and operating income in the musical instruments segment grew year-on-year, and the operating margin also grew by 3.2 percentage points.

Net sales and operating income in the audio equipment segment went down while they stayed almost flat in the IMC Business and others segment.

Page 6. This is the outlook for the full year. Net sales, JPY 440 billion; operating income, JPY 55 billion; operating margin, 12.5%; and net income, JPY 40 billion. Similar to the cumulative results through the third quarter, both sales and operating income will grow year-on-year, but the net income will decline due to the absence of the gain from sales of securities that we reported last year.

If we exclude the impact of exchange rates, the growth of net sales for the full year would be 2.5% year-on-year. The exchange rates are shown on the slide.

Page 7 shows the change in operating income compared to the previous year. The same trend that we saw through the first 9 months will continue until the end of the year. However, the impact of exchange rates will be just JPY 0.3 billion for the full year. Compared to the previous projection, the full year outlook for operating income is still JPY 55 billion, so no change was made.

Although we expect sales to decline in the IMC Business, which will lead to a decline in income, it will be offset by the reduction in SG&A expenses and positive impact from the exchange rate. Therefore, the JPY 55 billion outlook for operating income will be kept unchanged.

Page 8 shows the outlook by business segment. Net sales of musical instruments will grow to JPY 282.5 billion, and operating income will grow to JPY 41.5 billion.

The operating income ratio is expected to improve by 2.1 percentage points to 14.7%. This year marks the final year of the mid-term management plan. In the mid-term plan, the target for operating income ratio in the musical instrument segment was set at 15%, so the ratio we expect to reach this year is close to that level.

Audio equipment business sales will reach JPY 123.5 billion; operating income, JPY 11 billion; operating margin, 8.9%. The target that was previously announced for this business was 9%. So again, we are very close to that number. The IMC Business and others segment is expected to achieve JPY 34 billion in net sales, JPY 2.5 billion in operating income and 7.4% in operating margin.

Reflecting the current tough conditions, we are expecting a decline in both sales and income. In the footnote below, we have explained the impact on operating income resulting from the revision in cost allocation of new business development expenses. As a result, JPY 900 million will be added to the musical instruments business and JPY 900 million will be reduced from the audio equipment business, so there will be some adjustments between segments.

The numbers above reflect these announcements.

Starting from Page 10, we have explained the business conditions for each segment. First, Page 10 starts with the musical instrument business. If you look at the bar chart on the left, net sales in the first 9 months grew by 4% compared to the same period last year. We also expect 4% growth for the full year.

Please look at the comment section. You will see that there was increase in sales in all product categories. If you look at the product categories, piano sales are very strong, double-digit growth is continuing in China, and robust sales are continuing in North America. Digital pianos are also strong, with growth driven by new product launches of entry-model digital pianos this year, which are selling briskly. Guitar sales grew by double-digit in China as well as North America. If we look at each market, China and North America both continued double-digit growth through the third quarter.

This is the outlook for the full year. Net sales are projected to increase in all product categories, and growth is expected to exceed the previous year. Meaning, last year, we grew by 3% year-on-year, while this year, the growth is 4%, which is 1% faster growth than the previous year.

If you look at each region, there's ongoing double-digit growth in China and continuing strength in North America, although we expect some correction in North America in the fourth quarter.

Emerging markets are projected to be robust despite sluggishness in some regions. The Middle East will be challenging due to the sanction against Iran, and Latin America will also be tough due to the currency depreciation in the emerging markets after the rate hike in the United States.

Different conditions would -- seen in different regions, but we expect sales to be steady on the whole. Unfortunately, sales are expected to decline in Japan and Europe.

Page 11 shows the sales by major product category. We are expecting 7% growth for pianos; 4% growth for digital musical instruments; 4% for winds; and 6% growth for strings and percussions, which will be driven by guitars.

Guitar sales are expected to grow by 8% in the full year, but the average growth of strings and percussions is expected to be 6% due to drums growing at a slower pace.

Page 12 shows the outlook for sales of musical instruments by region. Japan continues to trend downward, with the full year outlook being down by 1% year-on-year. North America is maintaining strong sales. In the 3 months of the third quarter, we grew by 12% and the first 9 months, grew by 11%.

The fourth quarter is expected to slow down somewhat so the full year growth is expected to be 8%. In Europe, 9 months cumulative sales went down by 2% year-on-year and is expected to end the year also at negative 2%.

Having said that, last year in Europe, in the third quarter of the year, we launched a new portable keyboard for the first time in 5 years. This new product was called Genos, priced at more than EUR 4,000. This product achieved very strong sales last year. This led to a drop off in sales this year, which is the reason behind the 2% decline this year. If we exclude the impact from the launch, this year would be almost flat year-on-year.

In China, we maintained 15% growth in the 3 months of the third quarter and achieved 16% growth for the first 9 months. We expect double-digit growth in the fourth quarter as well and expect 15% growth for the full year.

Other regions are expected to grow by 4% for the full year.

Page 13 shows the details of the audio equipment business. In the first 9 months, sales were 99% or 1% below the same period last year. However, we expect to regain momentum in the fourth quarter and are guiding for 2% growth for the full year.

Please look at the comment section. In the first 9 months, we saw robust sales of commercial audio or CA equipment. If you look at AV products, mass channel shipments were robust in the U.S. In the First Quarter Result Presentation, we said that first quarter sales were pushed back, but shipment has been steady since then with strong shipments, especially in the third quarter. Unfortunately, however, sales were below the same period of this previous year due to delays in responding to changes in demand.

With regard to PA equipment, commercial audio equipment sales were very strong, but audio engineering and installation projects were delayed in Japan, or in other words, a lot of the work was concentrated in the fourth quarter, so this business was slower in the third quarter this year compared to the same period last year.

With regard to ICT devices, network equipment was robust, but overall sales were down year-on-year due to the impact of lower OEM product sales, which was already anticipated. In total, this business, unfortunately, was down 1% year-on-year.

This is our full year outlook. We expect strong sales to continue for commercial audio equipment and network devices. AV product sales are projected to decline slightly year-on-year despite the fourth quarter recovery in Europe and the United States. With regard to professional audio or PA equipment, commercial audio equipment sales are projected to exceed the previous year in all regions and grow by double digits. In ICT devices, we are expecting strong sales from network equipment.

Page 14 shows the outlook of sales by major product category. AV will be down 1%, and PA will be up 6% in the full year. If you look at the breakdown of PA equipment, commercial audio or CA equipment is expected to show double-digit growth of 10%. However, PA equipment sold through the musical instrument channel, which we call MI-PA, will not grow as fast. Therefore, we are expecting 6% growth on average. ICT devices, which are shown in blue, will grow by 5% if we exclude the OEM business.

Page 15 shows the sales by region and outlook for the full year. Domestically, the first 9 months was down 2%. This is because engineering and installation work is concentrated in the fourth quarter. So for the full year, we are expecting 4% growth. In North America full year expectation is plus 1% year-on-year and in Europe, 2%. In China, there are few number of open bids for audio equipment, and we are also struggling in the AV business. That's why we are expecting 98% or 2% decline year-on-year, even after excluding the OEM business.

Other regions are expected to grow by 7% for the full year.

Page 16. IMC Business and others segment grew by 1% in the first 9 months and is expected to end the year at minus 7% year-on-year.

Please look at the comment section for the first 9 months. Electronic device sales declined year-on-year due to a fall in the sales of the amusement equipment and slowdown in sales to China. Although factory automation equipment sales slowed as expected in the third quarter, cumulative results of the first 3 quarters were up year-on-year due to strong sales in the first half. Overall sales are expected to be down year-on-year due to a decline in electronic device sales.

Page 18 shows the balance sheet summary. On the left is the situation at the end of December and the comparison with the previous year. On the right is the estimate for the end of March and the comparison with the previous year.

Please look at the tables for the numbers. The estimate for the end of the year is JPY 524.1 billion in total assets; JPY 391.1 billion in total net assets; and 75% net asset ratio.

We are maintaining a very healthy position. We have issued a separate news release about our conscious efforts to carry out shareholder returns in order to improve capital efficiency.

Cash and deposits are down by JPY 10.1 billion from last year. This is because we paid more corporate income tax this year. Last year, we sold the shares of Yamaha Motors, and the associated income tax was paid in June of this year. That raised the total amount we paid for income tax.

We have built an R&D center as well as 2 factories overseas. The capital expenditure was high for us last year, and the payment for those investments this year are quite large. Due to these factors, we estimate that the cash and deposit level will be significantly lower than the previous year.

Next, we will go to Page 19. Please look at the graphs for capital expenditure on the right top. Last year, the level of CapEx was JPY 24.6 billion. This was due to the building of our R&D center and 2 factories, as I mentioned before, which raised the CapEx level to a high level than what we have seen in the past. This year, that is eliminated. So CapEx is expected to go down to JPY 17.7 billion. Until the last results meeting, we expected that the CapEx level would be similar to last year's level. We have been expecting to add capacity in other factories, but we ended up spending a lot of energy on ramping up the 2 factories, and that has kept us from investing in other factories. That is why we have revised down the numbers for CapEx this time.

Please turn to Page 20, which is our last slide. This is related to ESG. We are showing some information related to corporate governance on this page. We were selected as the Grand Prize Winner of the Corporate Governance of the Year 2018 Award. So I would like to take this opportunity to share this information with you. The announcement was made on the 1st of February. The organizer is the Japan Association of Corporate Directors. The awards ceremony will be held on the 21st of February, and we expect to issue a news release on the 22nd.

The announcement has already been made by the Japan Association of Corporate Directors, so we are using this timing to share this news with you. Please refer to the lower section for the names of the other winners. We received the grand prize, and 2 other companies also received prizes.

In addition, one company received the Minister of Economy, Trade and Industry prize, and another company won the Tokyo Governor Prize.

Previous grand prize winners are listed on the right bottom of the page.

That is the end of my presentation. Thank you very much.