Earnings Call: Q2 2020

Nov 5, 2019

Let me express my deep appreciation for your continuous support and understanding of our business. Thank you also for taking time out of your busy schedule to attend our financial results briefing. Let me explain our financial performance for the Q2 of the fiscal year ending March 2020, starting with the performance summary. As shown on slide, 2nd quarter revenue and profit rose year on year, thanks to the continued strength in the musical instruments business. First half revenue and profit declined due to the significant impact by year on year drop in the Q1. The main reasons are the significant impact of exchange rates and deteriorating market conditions in the Industrial Machinery and Components, IMC business, which has continued from the Q1. Given the change in our ForEx assumption from to the euro to and the expected delay in the recovery of IMC Business in the second half, full year projections were revised slightly downward. Despite the downward revision, revenue and profit are still projected to slightly exceed the previous year. Now let me explain the numbers in more detail. 1st is the overview of the first half performance. Revenue was 208,500,000,000 yen down year on year, the large factor being the exchange rate impact of approximately 6,700,000,000 yen Core operating profit was 26,100,000,000 yen slightly down year on year. The exchange rate impact of approximately 3,000,000,000 yen was significantly offset by the strong Musical Instruments business. This is the core operating profit analysis versus the previous year. The impact of exchange rates was negative 3,100,000,000 yen and on the far right, negative 2,000,000,000 yen in iMC Business due to the absence of the strong demand we enjoyed the previous year. Those two main factors were offset by sales increase and model mix as well as progress in price optimization and cost reduction, resulting in 26,100,000,000 yen Next is our performance by business segment. In Musical Instruments, exchange rate impact of 2,300,000,000 yen was offset and core operating profit was up by 1,900,000,000 yen year on year. Core operating profit ratio rose to 16.1%. In Audio Equipment, approximately half of the negative factors, mainly exchange rate impact was offset, but not entirely, resulting in a slight decline in core operating profit year on year. IMC Business and Others was down by 2,000,000,000 yen due to the sluggish FA equipment business as I explained previously. Full year projection is shown here. We project revenue and profit to exceed the previous year as musical instruments business is expected to stay strong and audio equipment business is expected to recover in the second half. This graph shows the comparison against previous projections. The impact of exchange rates will increase by 4,500,000,000 yen mainly due to the change in the assumption of euro. In addition, U. S. Dollar assumption has remained unchanged, but non U. S. Dollar currencies are depreciating against the dollar, resulting in negative 4,500,000,000 yen This will be offset by sales increase and model mix among others, but IMC Business and others will deteriorate. Therefore, core operating profit is revised downward by 2,000,000,000 yen The main factors are the exchange rate impact and the expected delay in the recovery of IMC Business. The outlook by business segment is shown on this slide. In Musical Instruments, we expect the strong first half to continue into the second half. Core operating profit is projected to increase by approximately 2,000,000,000 yen by offsetting the exchange rates impact of close to 5,000,000,000 yen In audio equipment business, we project an increase in revenue, but core operating profit will increase only marginally due to the exchange rates impact among others. IMC Business core operating profit is projected at 0 due to the expected delay in the recovery in the second half, as I explained earlier. Next, let me explain the segment overview and updates, starting with Musical Instruments. Strong first half sales exceeded previous year's figures in all product categories except for wind instruments. Piano sales, always the focus of attention, were robust and achieved double digit growth in China. Sales of digital musical instruments are growing in all regions. In addition, guitar sales achieved double digit growth. Wind instruments struggled in Japan and North America in the Q1, but North America is recovering and Japan is struggling less. For the full year, growth is projected in all product categories and the details are listed here. This slide shows the revenue by major product category. Piano recorded 111%, a very high growth in the 2nd quarter. Digital Musical Instruments recorded a double digit growth. Wins were off to a slow start in the first quarter, but made up for that in the second quarter. 2nd quarter alone was 105% and first half was 99%, almost flat year on year. Strings and percussion, which includes guitars, marked 107% in the 2nd quarter, a very healthy growth. As a result, all product categories are revised upward by approximately 1 percentage point on a full year basis. This slide shows revenues by region. In Japan, 2nd quarter was 105%, which was slightly pushed up by the last minute demand before the consumption tax hike. In North America, Piano and Winds fell significantly short of the previous year in the Q1, but second quarter recorded a high growth, thanks to the recovery resulting in 104% in the first half. In Europe, revenue is increasing steadily as the slowdown following the review of sales condition that continued until last year is completely resolved. In China, Piano and Digital Piano sales growth slowed down in the Q1, but trended steadily in the second quarter. Growth is continuing in other regions. So as I mentioned earlier, Musical Instruments full year revenue is revised upward from 103% to 104%. The following slides show the musical instrument products we launched in the first half, which are selling favorably in general. Our plant in India started the operation. Production volume is initially low, but the start of operation is expected to contribute to our growth further down the road. Next is Audio Equipment Business. AV product sales in the first half were down year on year due to fluctuation in some regions, but sales of PA equipment were robust overall. ICT shipment was slow in the 1st quarter due to inventory adjustment, but is recovering gradually in the second quarter. As we plan to launch new PA and AV products in the second half, the full year projection is slightly up year on year. This slide shows the revenue by major product category. AV Products saw some fluctuation, as I mentioned earlier, and receiver sales became more sluggish. It is offset by sound bars, but there are many regions that are not fully offset. PA equipment is trending steadily, and we expect further growth in the second half with new product launches especially PA equipment for musical instruments. In ICT devices, the blue numbers in parenthesis indicate the local sales excluding OEM. 69% in the first quarter rose to 92% in the 2nd quarter, showing the progress in shipment following the end of inventory adjustment. We project 103% for the full year as these factors will disappear in the second half. Next slide shows revenues by region. In Japan, 2nd quarter showed a very high growth. In addition to covering the shortfall in the Q1, we saw some last minute demand before the consumption tax hike, resulting in a strong growth. Our full year projection is 109%. North America was off to a slow start, but is gradually recovering. And second quarter was 102%. Our full year projection is in line with that level. Europe was off to a very strong start in the Q1, but Q2 fell slightly below the previous year. This is because Q1 last year was down year on year and second quarter was up compared with the strong and weak quarters the year before, resulting in some fluctuations. However, our full year projection is 104%, in line with the first half level. In China, we project 109%, excluding OEM. In other regions, the higher growth projection is revised slightly downward this time due to the delay in new product launch and fluctuations among regions. Our new products are shown on the following three pages. So please take a look at them at your leisure. The first page is PA Products and the second page is AV Products where soundbar including the surround system is especially strong. The lower half of the page shows ICT equipment including conference call systems. The 3rd page is routers, which was awarded 1st place in the customer satisfaction survey by Nikkei Computer Magazine for 4 consecutive years. Next is IMC Business and others. Revenue projection is revised slightly downward. We expected the market to recover in the second half, but market conditions for FA equipment continue to deteriorate and are unlikely to recover significantly in the second half. Full year projection is revised downward to 0. Although sales in the electronic device category are expected to increase year on year, thanks to a rebound in amusement equipment sales. Next is other financial figures. There is nothing to note in particular. Cash and cash equivalents are increasing steadily with cash inflow. The numbers here do not include our acquisition of treasury shares that we announced at the same time. So the amount subtracting 15,000,000,000 yen for share buyback is the projection at the end of the fiscal year. We are acquiring our treasury shares as announced in the press release to enhance shareholder returns and capital efficiency as well as achieve our total return ratio target of 50% in the current medium term management plan. Normally, acquisition of treasury shares would be expected in the Q3 of the 3rd year, but as cash is building up, we decided to acquire close to half of the assumed level taking into account the share price in the market. Next, capital expenditure and R and D expense have remained unchanged from the previous announcement. Depreciation increased somewhat due to the new plant construction and manufacturing facility upgrade, which will be used as scheduled. R and D expense is slightly delayed, but we have kept the amount unchanged. The following slides are on our ESG initiatives. I will not go into detail, so please take a look at them later to see that our activities are progressing as planned. First slide is on environment followed by social. Next is topics. We are showcasing our technology including our development of sound related AI as a musical instruments and audio equipment manufacturer. This is not a product, but an example of us working with NHK to faithfully reproduce syncing of Japanese vocalist Hibari Misora and another example in Europe where we used AI to reproduce the performance style of pianist Glenn Gould. Of course, our purpose is not creating music automatically, but enjoying music by leveraging our expertise or assisting the improvement of playing musical instruments. Let me also mention that 3 sound related products were registered as future technology heritage specimens. That concludes my explanation on our financial performance for the Q2 of the fiscal year ending March 2020. Thank you very much for your attention.