Earnings Call: Q4 2020

May 27, 2020

Good morning. My name is Nakata. Thank you for taking time out of your busy schedule to participate in our financial results briefing today. I will start by explaining our financial results. Please refer to the presentation document. Please turn to Page 1. These are the highlights of results for the fiscal year ended March 31, 2020. There was a decline in both revenue and profit compared to the previous year. The negative impact from the new coronavirus was 13,700,000,000 yen and the negative impact from the foreign exchange was 13,100,000,000 yen These factors combined with the sluggishness of the IMC business resulted in a year on year decline in both revenue and profit. Sales of musical instruments were strong until the 3rd quarter, but the impact of the coronavirus in the 4th quarter was significant and resulted in a decline in revenue. The core operating profit also declined due to the significant impact from the coronavirus and additional one off expenses. Gross profit declined as a result of the lower core operating profit and loss due to the suspension of operations. With regard to the earnings forecast for the current fiscal year ending March 31, 2021, due to the high level of uncertainty about the impact from the novel coronavirus, it is not possible to make reasonable projections at this time. So I apologize that we cannot disclose the forecast today. Let's turn to Page 3. I would like to go over the numbers. Revenue was 414,200,000,000 yen down 20,000,000,000 yen from the previous year. Core operating profit was 46,400,000,000 yen In terms of core operating margin, it was 11.2%, which is a decrease from 12.1% in the previous year. Net profit was 34,600,000,000 yen a 14% decrease from the previous year. As for the exchange rate, as you can see below, it was 109 yen for the dollar and 122 yen for the euro. This is related to profit. The yen was stronger compared to the original estimate of 110 yen against the dollar and 125 yen against the euro. Next, please turn to Page 4. Here, I will explain the factors that led to the increase or decrease in profit in comparison to the previous year. The profit was 46,400,000,000 yen compared to 52,700,000,000 yen in the previous year. The biggest factor was the impact of the exchange rate, which amounted to 6,500,000,000 yen In addition, there was a decline in the IMC Business and Other segment as we had initially expected. In addition, there was a rise in labor costs for overseas production and other costs. The change in model mix, SG and A and cost reduction had a positive impact of 2,500,000,000 yen Overall, however, the impact of foreign exchange rates, slowdown of the IMC Business and Other segment were significant, resulting in a total of 46,400,000,000 yen This is the comparison with the previous forecast. Last time, we announced our target of 50,000,000,000 yen We were impacted significantly by the corn price, which led to the decline in sales and production cutbacks and ended the year at 46,400,000,000 yen Someone might ask this question later, but how much of the decline was actually due to the coronavirus? In terms of sales, we have been able to calculate the impact on sales to a certain degree by adding up sales numbers, but it is difficult to separate profits rationally. When we said 50,000,000,000 yen last time, as you can see here, we assumed that the corona impact will be about 1,000,000,000 yen The result was 46,400,000,000 yen so we can assume that the level of impact was roughly over 4,000,000,000 yen Page 5, revenue and profit by business segment. The results of the musical instruments, audio equipment and IMC business and other segments were negative compared to the previous year. On the other hand, in the musical instruments business and the audio equipment business, the core operating profit did not decline as much as the impact of foreign exchange rates. That means that if we were not for the exchange rate, we would have ended positive because various measures were effective. As for the revenue, the musical instruments business achieved almost 100% of the previous year's level. If we exclude the extremely difficult situation in the music school business, in particular, the product level revenue was up 2% despite the impact from corona. As for the audio equipment business, we achieved 100% of last year's sales if we exclude OEM. If it weren't for the impact from the coronavirus, this business would have ended in positive growth. Page 6. This is a summary of the impact of the novel coronavirus on revenue. These figures are the same as those we announced on May 7. The impact in Japan, North America and China was especially significant. China, in particular, has been affected since February and experienced a large decline in February March. In North America, the impact was seen from March and in Japan from the end of February. The closing of music schools has had a significant impact. Page 7. Since this is the full year earnings presentation, I want to review the KPIs. As I mentioned earlier, the core operating margin was 11.2%, ROE was 10.1% and EPS was 195. All these numbers were below the previous year's level. On the lower right, we have listed the non financial indicators. We have set targets for various non financial indicators, including those related to ESG. First of all, we are working to promote musical instrument education in Asia and elsewhere. We are making good progress toward our target of 1,000,000 people achieving almost 400,000 in the previous year. However, there has been a slight slowdown recently due to the coronavirus. We have also made great progress in the utilization of certified timber, achieving 28% compared to the target of 50%. This year's target is 46%. Since we placed orders ahead of time, we believe that we can achieve these numbers this year as well. I will give you more details about each of our business segment. First of all, in the musical instruments business, revenue was almost flat year on year as you can see on Page 9. As I mentioned earlier, if we just look at our musical instrument hardware business, it achieved 2% growth. Until Q3, each instrument was growing steadily and contributed to the growth of the business. Pianos showed steady growth until Q3, but in Q4, sales in physics stores dropped dramatically in China and other parts of the world. On the other hand, in the digital music instruments business, e commerce sales were very strong and this resulted in an increase in revenue. With regard to wind instruments, the revenue was sluggish due to the declining birth rate in Japan. So this was expected. But in other areas, revenues increased. In addition, we were able to increase sales of guitars steadily. On a regional basis, revenues increased in all regions except Japan. Next page, please. The charts show the revenue by major product category. As I mentioned earlier, sales of pianos and wind instruments were down slightly year on year, but sales of digital music instruments and strings and percussion instruments increased. In particular, the growth of digital music instruments and digital pianos was 4%, and we were able to accelerate the growth of digital music instruments. As for the strings and percussion instruments, which include GIPAS and other products as well, if you just look at Guitar sales, we believe achieved double digit growth. Page 11, revenue by region. As I mentioned earlier, Japan was down 10% year on year. Especially in the Q3, as I shared at the time we announced Q3 earnings, the impact of the consumption tax hike was significant. We assumed that the impact would be reduced in the Q4, but we were impacted by the coronavirus and sales of musical instruments were sluggish. In addition, the income from music schools almost disappeared in March. On the other hand, in Europe, revenues were very strong up to the Q3. And in the Q4, we were able to almost stay flat compared to the previous year, resulting in an overall growth of 4%. In China, revenues were steady until the Q3. But in the Q4, the impact of the coronavirus was significant, especially on pianos, resulting in these figures. The next page starts talking about the various products we launched last year. The digital piano, CVP-eight hundred Series is a product in the high price range. These big ticket products also made a significant contribution to the revenue growth up to the Q3. In particular, sales in North America have been strong. We also developed a new mini keyboard and launched it on the market. It has been very well received. Sales are steadily increasing, especially for the stay at home demand. Page 13. These are the new guitar products. In addition to acoustic guitars, new products for electric guitars are also doing very well. On the right is an acoustic electric nylon string guitar. We used Yamaha's proprietary technology to create new values. On the right side is a silent base. These are so called silent instruments based on the technology that Yamaha has developed over the years. It's a soundless instrument. This is an instrument that's getting a lot of attention from people staying home. Page 14. We want to introduce to you this product, which is being praised not just for its functionality, but also because of its design. Especially the kitas in the middle and the acoustic guitar on the right are getting positive reception from women in particular because of the new design that is different from conventional guitars. Page 15. This is an overview of our audio equipment business. The sales were down slightly by 2%. But if we exclude the OEM business of ICT devices, which we already anticipated would decline, we ended the year almost flat year on year. As for AV products, the receiver market declined and shipments were suspended due to the coronavirus in North America, which resulted in declined sales. The PA equipment for the live market struggled very much. On the other hand, sales of home recording equipment and speakers were strong, probably due to people staying home. In the ICT business, we saw the impact from the decline in OEM business in China. On the other hand, sales of UC equipment or unified communications equipment was very strong, especially for telework equipment. We managed to keep with our previous announcement of 8,500,000,000 yen in core operating profit. Page 16 reviews the business by product. As I mentioned earlier, in the AV product segment, AVR or receivers were sluggish and resulted in a negative year on year sales. The PA equipment ended in these numbers, reflecting the slump of the commercial audio and live market in particular. As for the ICT devices, this blue figure is the year on year change excluding OEMs. Especially in Q4, it grew 10%. As I mentioned earlier, speaker microphones for Telework have contributed to this performance. Turning to Page 17. This is the situation by region. Japan showed a high growth rate of 10%, unlike musical instruments. There was a significant increase in the PA equipment installation work. In addition, we grew by 15% in the 4th quarter. This was the result of the increase in sale of AV headphones, which we had high expectations for after the portfolio change in AV product business. In North America, the slump in receivers, which are the main products in AV, is concentrated in this region. In addition, the negative impact of PA equipment for the life market is also seen here. On the other hand, Europe showed steady growth. Please turn to Page 18. You can see the fully wireless Bluetooth earphones on the left side of the screen. We launched this model in Japan first, and it has been selling very well. However, although we had planned to release 3 models, production of the high end model has been delayed due to the impact of the coronavirus. So the market launch has been delayed until this season. Page 19 shows the product portfolio to respond to a variety of needs. On the left is software, which is used to produce music at home. This did very well in the previous fiscal year. The one in the middle is also software. On the right side of the screen is the interface. These devices did very well due to strong demand. On the bottom of the slide is the Unified Communications speakerphone. This equipment is very effective for telework and remote work and has garnered strong praise. It is so popular that our production cannot catch up with demand. Page 20. The NIKE Computer Partner Satisfaction Survey is conducted every year, and we were once again awarded 1st place last year. We will continue to build our business on the back of these high ratings. Page 21, revenue of the IMC Business and Others. We had a very difficult time. First of all, sales were down by 12% year on year. This is the part that was tough. The automobile interior wood components business and the FA equipment business, We thought we could make up for this in the Q4 in March, but the launch of new car models were postponed and the FA business was also greatly affected by the coronavirus. There was a big decline due to low installations. As a result, we recorded a core operating profit of 0, although we achieved 2,300,000,000 yen in profit the previous fiscal year. Electronic devices, on the other hand, showed a recovery that exceeded the previous year's level. That is all for the overview of each business. Lastly, I would like to confirm the financial figures. This is the balance sheet on Page 23. Compared to the previous fiscal year, there was a large decline in non current assets. This is mostly due to the decline in the valuation of Yamaha Motors stock. In addition, liabilities and shareholders' equity or the total equity went down significantly as a result. On the other hand, there has been almost no change in the equity attributable to owners of the parent, although it's not shown here. This is because almost all the profit contribution 2 years ago was used for dividends and share buyback. So there was almost no gain or loss. As a result, the revaluation of Yamaha Motors stock was negative, and this is how it ended up. Page 24. This refers to capital investment, depreciation and research and development. The Q3 ended in line with our forecast. In the year ended March 31, 2020, it went up by about 4,000,000,000 yen from the previous year. As we already announced, this increase is due to the cost of land and construction of the new office building in Yokohama. There were also investments made in factories in Indonesia, India and also in China. Please turn to the next page. I would like to touch on ESG related topics. First, on Page 26, we made steady progress in the procurement of certified timber, as I mentioned earlier. The ECO products, which are environmentally friendly products according to our company's criteria, is increasing. Page 27, contribution to society. We mentioned the school project earlier. We are making steady progress in promoting instrumental music education, especially in emerging countries. We are working in Russia, India, Vietnam, Malaysia and Indonesia in particular, and we have also added Egypt as a new country. Please look at Page 28 Page 29. This is about Yamaha's sound technology. We are actively promoting this technology by integrating it with Internet related technologies for using remotely for telework or other areas where social distancing is required. Page 28. It's a bit small, but please look at remote cheerer in the middle on the right. This connects your home with stadiums or other venues where they are playing soccer, for example, and delivers people's cheers from their homes to the stadium. We conducted a demonstration experiment in May this year and found that it is highly effective. Page 29 shows a system that allows people in remote areas to play music with each other via the Internet connection. It can be realized by embedding a certain software. It will be released under the name Sync Room. We are currently getting customer registrations that far exceeds our expectation. We hope to use these ideas and build a strong business in the future. Please turn to Page 30, enhanced governance. I would like to introduce you to the new audit officers who have been appointed from this fiscal year. As mentioned above, we will newly establish positions of audit officers who will be members of the management team with equivalent status as an executive officer in order to strengthen the auditing function. We are a company with compensation and nomination committees, and we will also have an audit committee that will supervise the audit. The purpose of the auditors is to supplement the functions of the company. I would like the auditors to use their strong authority and positions sufficiently to carry out proper audits. Lastly, I would like to confirm the section on shareholder returns, which is on Page 32. In the year ended March 2020, we repurchased our own shares and the total number of shares repurchased is as shown here. This fiscal year, we are planning to pay a dividend of 66 yen per share for the full year, although this is still subject to resolution at the general meeting of shareholders. The dividend payout ratio will be in excess of 33% in March 2020, and we will continue to pay dividends properly for the current fiscal year. Lastly, I would like to remind you that we have supplementary documents that I hope you will review when you have time. This concludes my presentation of the summary of the financial results.