Earnings Call: Q2 2021

Nov 4, 2020

This is Nakata. Good morning to you all. Thank you very much for participating in Yamaha's results briefing sparing your precious time. I would also like to express my gratitude to your understanding of our business taking this opportunity. Now, I would like to start the presentation on the results of the first half of FY March 2021. Please turn to page 1. Here are the highlights of the first half results. During the first half, which was from April to September, we have been helped by the continuous steadiness of the stay at home demand and the market has been on the recovery trend with the resumption of operations at the stores. However, there's been restrictions in the factory operations, especially in Indonesia, which led to continued supply shortage to date. Therefore, both the revenue and profit declined. The revenue amounted to 164,800,000,000 yen which was down 21% year on year. The core operating profit was 13,000,000,000 yen down 50% year on year. The core operating profit ratio was 7.9%, which was a great improvement from the Q1. As for the full year outlook, as we announced already, we are achieving quite a good business recovery with the market conditions improving and the supply shortages being resolved. However, there was a fire at a part suppliers last month and it may have a substantial impact on us hereafter. Also at this point in time, it is difficult to estimate the impact of the fire on our financial results accurately. So we decided not to revise the full year forecast. Now please turn to page 3 for the first half summary. As I mentioned earlier, both the revenue and the core operating profit are showing recovery trend as shown here in the actual figures. Also, the net profit, which was negative during the Q1, has turned positive, reflecting the improved performances during the Q2. The year on year revenue decline is 21%, as I said earlier, but it would be less than 20%, excluding the foreign exchange rate impact. So we made quite a good improvement. Upon the announcement of the Q1 results, we mentioned that the Q2 is likely to see the similar trend as the first quarter, but compared against such assumption, we actually saw more upsides. Moving on to the core operating profit analysis on Page 4, The most notable factor was the decrease in sales and production and the model mix change as it dragged down the profit 22,100,000,000 yen out of which the first quarter's drop was 14,000,000,000 yen So by subtracting it, you can tell that the 2nd quarter's drop was 8,000,000,000 yen. In a quarter on quarter comparison, the negatives are shrinking. Regarding the SG and A, we had assumed that more activities would resume from the 2nd quarter and that we would be spending more expenses. But since the COVID-nineteen impact continue to prevail, the level of business activities turn out to be about the same as that of the Q1. At the same time, we have been trying to reduce expenses in various areas, and we achieved a greater progress than what we assumed. As a result, the SG and A reduction during the second quarter was about the same as that of the Q1. So throughout the 1st 6 months, we achieved an improvement of 11 point 2,000,000,000 yen year on year. With the contribution of such factors, the core operating profit of the first half turned out to be 13,000,000,000 yen Please turn to Page 5. Here are the performances by business segments. Both the musical instruments business and audio equipment business achieved positive core operating profits. It is especially noteworthy that the musical instruments achieved the core operating profit ratio that exceeds 10%. The profit ratio of the audio equipment was 3.5%, still much lower than a year ago level. But this business's profitability has improved steadily from the previous quarter. As for IMC, the industrial machinery and components business and others, the performance was almost as the same as the previous quarter. Moving on to Pages 6, 7 and 8 are showing the full year outlook. However, as I said earlier, due to the fire at a supplier whose impact on our performance is still unknown, The forecast remains unchanged from the previous announcement. Please kindly understand that we decided not to change the full year forecast. For the full year, we are estimating the revenue to be 355,000,000,000 yen the core operating profit to be 25,000,000,000 yen and the net profit to be 16,000,000,000 yen We decided to keep the guidance because it is difficult to estimate the second half performance at the moment. Now, I'd like to give you further details on the performances of each segment, starting from the Musical Instruments business. Please refer to Page 10 for the detailed summary of the Musical Instruments. Overall, the first half revenues declined 21% year on year. The pianos are showing signs of recovery as the stores reopened. Especially in China, the business recovered steadily and it contributed well to the total revenues. On the other hand, the digital musical instrument sales declined even though the stay at home demand continued because of the supply shortage issues. Yet, the demand is continually robust, so we are seeing an increase of back orders. As for the wind, string and percussion instruments, due to the delayed reopening of schools, especially in North America, the demand has been continually sluggish. Meanwhile, the guitars are enjoying very robust demand and the sales exceeded last year's level. By regions, China market has been recovering well, especially with the pianos. As for the other regions, the demand itself has been recovering overall, but the supply shortage of the digital musical instruments impacted the results substantially. As for the full year forecast, we have not revised the numbers, but to give you some color, the pianos are likely to recover steadily and the guitars are expected to grow further. On the other hand, the digital musical instruments and the wind, string and percussion instruments are likely to struggle continually due to the supply shortage and the school demand contraction. As we anticipate such negative impacts, the sales are likely to decline. What I just mentioned is further What I just mentioned is further described on Page 11 as the revenue breakdown of each product category. During the Q2, the pianos achieved a steady recovery, but the digital musical instruments were struggling further and suffered a sales drop year on year. This is mainly because of the supply issue. Usually, the sales would grow during the Q2, but we were unable to achieve such growth this year. Likewise, the wind instruments usually achieve good growth during the Q2, but we failed to achieve any growth this year, especially in North America. Therefore, the wind, string and percussion instrument category sales declined 23% year on year. Meanwhile, the demand of the wind instruments in Japan has been recovering, so that contributed to the quarter on quarter category sales improvement. The guitars are doing well and achieved a good sales growth of 3% year on year. On Page 12, you can see the revenue by region. In North America, due to the reasons that I just mentioned, the year on year sales decline in the 2nd quarter became even greater than that of the Q1. In China, the sales grew year on year during the Q2, especially the strong recovery of the pianos made a great contribution. Page 13 shows some of the distinctive products that we developed and launched in spite of the pandemic, especially the Digital Piano CLP700 Series were highly appreciated by the market. On the other hand, the supply has become very tight. Prior to the launch of the new model, we tried and succeeded in selling off the old models in the inventory down to 0, which was good, but that eventually led to the shortage of the supply. The amplifiers for guitars are also selling well, driven by the stay at home demand. As for something new, the digital saxophone has been getting good response and inquiries ever since we announced the launch. On Page 14, we are showing our achievement in winning a design award. This must be an evidence of our competitive edge in the musical instruments market. The next is audio equipment business. First, regarding the revenues in the first half, it was down 16% year on year, which was an improvement from the Q1. The PA equipment has been seeing a growing demand in the personal music production items, but the still ongoing stagnation in the live performance market affected the revenues. On the other hand, the AV products performed well with the very good sales of newly launched earphones. The wireless speakers and the sound bars were also doing steadily well, so we could secure a certain level of revenues from the category. As for the ICT equipment, we were helped by the telework practice that became normal. And especially the sales of conference phones were remarkably robust. In fact, the sales of conference phones in Japan more than tripled from a year ago level. As the revenues exceeded our expectations, we could also achieve positive core operating profits for the first half of the year. Page 16 shows the revenues by major product categories. As you can see at a glance, the PA equipment is continually struggling in the year on year comparison. On the other hand, the ICT equipment achieved 64% growth year on year during the 2nd quarter, excluding the sales of OEM products. The ICT equipment performances have been robust around the world. The revenues of AV products declined slightly year on year, but that is because the launch of a new product was delayed a little and the shipments of some of the products were carried out in advance during the Q1. Due to such timing differences in booking the revenues, it seems to have declined. Page 17 shows the revenues by regions. In Japan, during the Q1, we marked a 25% growth year on year, because we enjoyed an extraordinary sales increase from the engineering and installation. In North America, like I've been saying, the sales seems to have dropped remarkably in the 2nd quarter from the 1st quarter because of the AV equipment for 1. Some of the receivers were shipped in advance during the Q1 and the new high end receivers which were supposed to be launched during the Q2 had some troubles in the development and the launch was postponed to the Q3. Due to such timing differences, the 2nd quarter sales dropped. In addition to that, the PA equipment struggled very much with the continued stagnation in the live performances market and it dragged down the sales further. On the other hand, Europe has recovered quite well compared against the Q1. The other regions are struggling overall because many of the markets are still unable to hold various events and that is continually stagnating that PA equipment sales. On Page 18, we are showing some of the new audio equipment products. Among the digital mixing systems, we have had the high end series called RIVAGE PM10 and 7. Now, we have newly added 53 to the lineup. The products are highly acclaimed by the users, but because the live performance market is continually stagnant, the sales contribution is still very small. The ones on the right are the earphones. Prior to this model, we had launched the wireless earphones without the neckband. And this time, we launched the one with the neckband as an additional lineup. It was first launched in Japan and especially the model called TWE3A, which is less than 10,000 yen has been rated very highly and selling well beyond our expectation. In the bottom half, you see the speaker system, soundbar and AV receivers. Especially, the soundbar has been growing steadily with the stay at home demand. Continually on Page 19, we have shown some of the communication facilitating products. The conference phone YVC 330 on the right has been selling very well. In the same series, there are also 201,000 the highest end. And all of these three models are highly appreciated by the market with a robust demand. The mass production line has been ramped up to improve the supply, but we are still trying hard to satisfy the rising demand. In addition, there is a new ceiling solution, Adichia, shown on the left. It is a one stop conference solution to be installed in a meeting room ceiling to facilitate seamless remote conferences. In the bottom half, we have shown our achievement in winning a Nikkei Computer Magazine Award. In the network device category of the customer satisfaction survey, we were awarded the 1st place for 5 consecutive years. Moving on to Page 20, I would like to talk about the IMC business and others. In the first half, the electronic devices and automobile interior wood components declined year on year because the production has not recovered well enough yet. Meanwhile, the factory automation equipment, especially Prestea machines, achieve a sales increase year on year. For the full year, we are expecting an improvement since the in vehicle audio devices are likely to recover steadily in the second half of the year. On Page 21, we are showing the new products in the IMC business and others. As we had already announced to the 2 Chinese automobile manufacturers, Geely Group and SAIC Motor, we are going to supply the automotive sound system and the speaker system. Finally, we are beginning to see the materialization of our efforts in this area. We included some pictures, so please note the one on the far right. It is the speaker to be embedded in the door and the speaker grill will have the Yamaha brand logo. This is another evidence that Yamaha's brand value in China, which we try to build up over many years, especially through the pianos, have become prominent enough with the quality image. Now the brand is getting recognized in the automotive sound system area too. I also hear that the customers' feedback has been very good. So this is a business area where we have great expectations. Now, as for the other financial figures, please turn to page 23. Here is the balance sheet summary. The sum of total assets has not changed much, but there were changes in the line items, especially while the trade and other receivables as well as the other financial assets decreased drastically. The cash and cash equivalents increased at about the same level. Throughout the first half, in terms of the cash flow, the operating cash flow decreased on one hand, but the inventory and the trade and other receivables declined on the other. So the overall cash flow increased. Moving on to Page 24, Let me touch on the capital expenditure. During this fiscal year, we minimized the capital expenditure by postponing some projects that were not so urgent. So the amount is much lower than the last fiscal year. As for the R and D expenses, even though we decreased it a little, we are spending as much as we need in order to develop new products properly. So we did not cut it down so much. Furthermore, we are also engaged in various ESG related activities. So let me briefly touch on those. Please turn to Page 26. Since Yamaha is hoping to contribute to the sustainable development of the music culture and society, we are working on various initiatives. Especially this year, social distancing is called for in face of the COVID-nineteen pandemic. So we're trying to contribute to the society in the area of sound. For instance, by connecting the player piano to the Internet, we support the remote entrance exams of a musical university. Also, as shown at the bottom right, we launched Sound UD, which we had been developing from before. This is something like a QR code of the Sound. And by using this module, you can do the cashless payment on a taxi for instance. This is also useful for remote cheering. So we are contributing to the society in that way too. Moreover, in the emerging countries, we have been promoting various school projects. They were suspended temporarily, but we resumed activities by using the face masks and shields to prevent infections. Now regarding the topics, so as to exhibit our technical skills, we have the Vocalode AI reproducing the legendary singer Hibari Misora using the voice synthesis technology. This project won the Minister of Internal Affairs and Communications award. Furthermore, not just in the area of remote cheering, we have been trying to enable live performance stages overcoming the physical distance. Now such live performances including the stage lighting and everything can be reproduced through the distance viewing as shown here. Perhaps in the future, in the post COVID era, we might be able to package this as a solution to reproduce live performances regardless of the time and space. It may be a new business opportunity for us. Finally, please turn to Page 28. We talked about opening some brand shops, but we had to suspend the construction works. However, the Ginza shop renovated some floors and reopened them as the brand experience areas to provide interactive musical experiences for the customers. Moreover, as a new initiative, we recently released a prototype of the singing communication robot. We would like to finalize the development together with the customers. So we began to invite monitors who are interested in giving us the feedback. In face of the pandemic and the new set of values, we would like to continue to work on such initiatives and take on new challenges. Lastly, please note the appendix from Page 30. Usually, we would not refer to this much, but since there were a lot of changes between the Q1 and the Q2 this year, you might be interested in the quarterly performances as well. As you can see, the 2nd quarter revenue improved to about 85% of last year's same quarter. Likewise, please note that the core operating profit improved to nearly 80% of the year ago level. Page 31 is showing the segment performances for the 2nd quarter. The core operating profit ratio of the musical instruments improved and exceeded 15%. That was all for the briefing on the first half results. Thank you.