Earnings Call: Q1 2020

Aug 2, 2019

I'd like to start now. Please refer to the presentation titled Analyst and Investor Briefing on the Q1 of fiscal year March 2020. I will explain using these slides. First, the overview of the Q1 results. Both the revenue and profit declined year on year mainly due to the deteriorating market conditions in the Industrial Machinery and Components business and the impact of exchange rates. The revenue was 99,500,000,000 yen which was down 4.8% year on year and the core operating profit was 10,800,000,000 yen which was down 13 point 2% year on year. As for the full year outlook, the projection remains unchanged from the previous announcement and we expect the revenue to be 444,000,000,000 yen and the core operating profit to be 55,000,000,000 yen The revenue of the musical instruments is expected to remain robust and the audio equipment is predicted to rebound. Also as shown at the bottom of the slide, the figures described in this presentation for FY March 2019 or before are all based on IFRS. Now please turn to Page 3. Here are the results of the Q1. The revenue was 99,500,000,000 yen the core operating profit was 10,800,000,000 yen the core operating profit ratio was 10.8% and the net profit was 7,300,000,000 yen As such, the revenue and profits declined year on year. The exchange rates were as shown here. The core operating profit, which was 12,400,000,000 yen in the Q1 of previous year, declined 1,600,000,000 yen to 10,800,000,000 yen this year and the breakdown of the factors are shown on Page 4. First on the right, there is a bar for the Industrial Machinery and Components, IMC Business and Others, which is shown separately from the other segments. That is because the nature of the IMC business and others is completely different from that of the musical instruments and audio equipment segments. The rest of the bars are indicating the detailed factors of the musical instruments and audio equipment. The profit of IMC Business and Others declined 1.4 The musical The musical instruments and audio equipment also suffered an exchange rate impact of 1,100,000,000 yen Moreover, according to the plan, we used an extra SG and A cost, so that was a negative impact of 800,000,000 yen and the labor cost at overseas factories were continually rising, so that was another 300,000,000 yen On the other hand, we achieved a cost reduction of 800,000,000 yen During the previous fiscal year, it was difficult to cut the cost due to the rising purchasing prices, but we have successfully saved 800,000,000 yen this year. Moreover, the model mix and others contributed 1,200,000,000 yen Both the musical instruments and the audio equipment did not achieve much growth in the revenues, but the changes to the model mix and the optimization of prices worked well and resulted in a positive impact of 1,200,000,000 yen. Moving on to Page 5. Here are the results of each business segment. The Musical Instruments revenue was 67,500,000,000 yen, core operating profit was 9,800,000,000 yen and the core operating profit ratio was 14.6% which was an improvement of 0.5 points year on year. The exchange rates impact is shown on the very right and it was minus 1,700,000,000 yen on the revenue. This means that the revenue of musical instruments actually increased year on year on the local currency basis. The same applies for the core operating profit, but even after absorbing the 700,000,000 yen exchange rate impact, the profit increased 200,000,000 yen year on year. The audio equipment revenue was 24,800,000,000 yen The core operating profit was 900,000,000 yen and the core operating profit ratio was 3.5%. Unfortunately, in this segment, both the revenue and profit declined year on year. The core operating profit could not absorb the exchange rate impact of 400,000,000 yen and suffer the drop directly. And for the IMC business and others, due to the deteriorating market conditions, we saw a big decline in the revenue and core operating profit. Please look at Page 6. This is the full year outlook. As described at the top, it remains unchanged from the previous announcement. We are expecting the revenue to be 444,000,000,000 yen the core operating profit to be 55,000,000,000 yen the core operating profit ratio to be 12.4% and the net profit to be 42,500,000,000 yen As such, we are expecting the growth of revenue and profits. The actual growth excluding the impact of the exchange rate is expected to be 3% as shown at the right side bottom. Exchange rates are as shown here. Page 7. The core operating profit, which was 52,700,000,000 yen in the previous year based on IFRS, is expected to rise to 55,000,000,000 yen this year and here is the breakdown. Once again, the IMC business and others is shown separately and it would be a drop of 1,300,000,000 yen All the rest are showing a similar trend as the Q1, but the increased revenue and model mix is expected to give us a positive impact of 6,400,000,000 yen. Please turn to Page 8. Here is the full year outlook of revenue and core operating profit by business segment. As you can see, audio equipment are expected to achieve increase in both the revenue and profit despite the exchange rate impact. As for IMC Business and others, the revenue is almost the same as the previous year, but the core operating profit is expected to decline 1,300,000,000 yen due to the change in the model mix, especially the drop of factory automation equipment will drag down the core operating profit. Next, please move on to Page 10. From here on, I'd like to give you the details of each segment. First, the musical instruments in the 1st 3 months achieved higher sales in almost all the product categories year on year, except the wind instruments. The piano sales were strong despite the slowdown in China and the digital musical instrument sales were also brisk. The wind instrument sales declined in Japan and North America, but the guitar achieved a double digit sales growth in all the regions. For each region in North America, although the market conditions were good, the shipment delays caused mistiming. In Europe, we suffered some stagnation last year as we changed the contract with the dealers, but the sales are recovering this year. In China, even though we saw a little slowdown, the sales increased year on year in all the product categories. The emerging markets were doing well. For the full year, we are expecting a good growth in all the product categories. The guitar will achieve a high growth. The Piano and the Digital Pianos are also expected to grow strongly. In China, the double digit growth is likely to continue. North American and emerging markets remain robust and Europe is expected to recover. Please look at the revenue chart on the left. These are the actual revenues excluding the impact of exchange rate. In the Q1, we achieved an actual growth of 101% and in the full year, we are expecting 103% growth. Please turn to Page 11. Here are the sales by each product category. The pianos achieved a good growth of 103% in the Q1. The digital musical instruments also grew 104%. The wind instruments suffered a sales drop in Japan and North America and the growth was negative at 93% in the Q1. The strings and percussions, which is mainly the guitars, achieved a double digit growth in all the regions, so the total growth was 111% in the Q1. Moving on to Page 12, here are the sales by each region. In Japan, the wind instruments were very weak and some other instruments are also facing a declining trend. So it stayed at the negative growth of 94% year on year. North America was 98%. This is because during the Q1 last year, as some of you might remember, the business was extremely good and the year on year growth in the previous year was 112%. So this year's Q1 was a little lower than that level at 98%, but the market conditions are not bad at all and we also had a little mistiming for the shipment delay. Europe is recovering and achieved 105 percent. As for China, the previous year's Q1 year on year growth was very high at 115%, but this year it was not as high as that. Still yet, we are expecting 110% growth for the full year and the Q1 was 109% on the local currency basis. So it was almost in line with the plan. The other region, namely the emerging markets, achieved a growth of 106% continually sustaining favorable business. Next, Page 13 shows the auto equipment business. During the Q1 in North America, the shipment delays of AV products caused a mistiming. In Europe, the sales were good. In the AV product category, the delays in shipment to mass retailers in North America caused a substantial impact. In the PA equipment category, the music production software in Europe and North America drove the sales. The ICT devices category was sluggish, especially due to the decline in the OEM product sales and the network equipment sales in Japan where the increased inventory 2nd quarter and on. Next is the full year projection. With the increased sales of PA equipment and AV products, we are expecting a good growth. AV is expected to recover due to the MusicCast customer interface enhancement and the launch of new products. PA, namely the PA for musical instruments called MiPA, will have new products launched from the Q2 and on. So we have high hopes. ICT is expected to achieve a growth of the network equipment, but the OEM of the conference system is anticipated to decline. As for the figures, the total Audio Equipment segment growth in the Q1 was negative at 98%. But for the full year, we are expecting a positive growth of 104%. Page 14 shows the sales of each product category. EV products were driven by Europe and achieved 103% growth in the Q1. The PA equipment growth was 103%. Considering that we are expecting 109% growth for the full year, the Q1 growth was a little weak. But since some of the new product launches were postponed, the Q1 remained at 103%. As for ICT devices, the blue figures are showing the year on year change for Yamaha brand products, excluding the sales of OEM products and it was 69%. The detractor was the router in Japan. As I mentioned earlier, the inventory level at the domestic distributors became a little too high and there was an adjustment. Moving on to Page 15, here are the sales by region. In Japan, as I just said, the router was the main cause for this negative growth of 86%. North America was 95%, mainly due to the shipment delay of AV products. Europe was performing very well and achieved 112% growth in the Q1. China was 103%, excluding the sales of OEM products. The other regions were 97%. The emerging markets in these other regions are having a greater mix of PA for musical instruments and the delay of the new product launches negatively impacted the sales growth in the Q1. However, for the full year, we are expecting 112% growth. Page 16 shows the IMC business and others. In the Q1, factory automation equipment sales declined year on year as expected because we enjoyed an extraordinary demand in the previous year. For the full year in the electronic device category, we are expecting the in vehicle communication modules to grow. We are also anticipating a temporal drop in the profitability due to the deteriorating market conditions and the upfront investments to shift to the in vehicle device domain. As for the revenue growth, the Q1 was negative at 72%, but we are expecting 101% for the full year. The other financial figures are shown on Page 18. This is the balance sheet as of the end of June 2019. The total assets were 493,700,000,000 yen and the total equity, which is the net asset in JCAP was 342,200,000,000 yen The difference from the end of March is also shown here. The cash and cash equivalents decreased 8,900,000,000 yen This is because starting from this February, we conducted a share buyback amounted to 20,000,000,000 yen and continuing to April, we kept on repurchasing some of our remaining shares. So the cash and cash equivalents decreased. The non current assets also declined 9,400,000,000 yen due to the fair market valuation of the stock holdings. The total equity decreased 16,800,000,000 yen Now although it is not described here, this includes the shareholders' equity in JGAAP terms, which decreased 6,100,000,000 yen This is because we paid out the dividend according to the increase of the net income and we conducted the share buyback. Other components of equity, which is the accumulated other comprehensive income declined 10,000,000,000 yen. This is due to the fair market valuation mentioned earlier. Also because the Japanese yen is becoming stronger, the foreign exchange translation difference had a negative impact of about 5,000,000,000 yen. These were the components of the 10,000,000,000 yen decline and therefore the total equity declined 16,800,000,000 yen As of the end of March 2020, the total assets are expected to be 550,000,000,000 yen and the total equity is expected to be 391,500,000,000 yen Finally, the capital expenditure and R and D expense. The first quarter's CapEx was almost about the same as the previous year. The full year plan for the CapEx is 22,000,000,000 yen which is much higher than 16,000,000,000 yen of the previous year, but this amount may decline as the years go, as it is usually the case. However, we budgeted a higher CapEx in the last year because we must invest in a new plant in Indonesia and for capacity increase in the plant in China. The R and D expenses in the Q1 was about the same as the previous year. In the full year, we have budgeted 26,500,000,000 yen which is slightly higher than the previous year. That is all for my quick presentation. Thank you very much.