Yamaha Corporation (OTCPK:YAMCF) Q1 2023 Results Conference Call August 3, 2022 2:30 AM ET
Company Participants
Satoshi Yamahata – Director
Satoshi Yamahata
Now I’d like to start the briefing on the first quarter of FY March 2023.
Please turn to Page 1 of the presentation material. Here, we are showing the highlights of the first quarter results.
Even though we were impacted by the lockdowns in China and the semiconductor procurement difficulties, helped by the foreign exchange rates, the revenue increased year-on-year. As for the core operating profit, the cost increases were more than offset by the price optimization. But due to the decline in the actual sales and the limited impact of the exchange rate on the profit, it decreased year-on-year.
In the previous year, we enjoyed very good performances during the first quarter because the production activities were recovering with less impact of the COVID-19 and we were not yet impacted much by the semiconductor shortage. In fact, musical instruments and all the equipment businesses achieved a record high sales and profits a year ago. So compared against that, we suffered a decline in both the actual revenue and the core operating profit.
Regarding the full year outlook, as we revised the assumption for the U.S. dollar exchange rate, the revenue is expected to increase sharply, but the impact on the profit will be limited. Factoring in the prolonging lockdown in China, we are now forecasting the actual revenue to be slightly lower than the previous projection. The procurement cost and energy cost have been rising. But we will continually try to offset them through the price optimization.
Next, please turn to Page 3. Here are the numerical results for the first quarter.
The revenue was ¥105.9 billion. The core operating profit was ¥11 billion. The profit ratio was 10.4%, and the net profit was ¥8.6 billion. As you can see, the profit decreased year-on-year, but the revenue increased. However, excluding the exchange rate impact, the actual revenue also decreased by 5.9%.
As for the net profit, there was a gain from selling land in the previous year, but we did not have such an extraordinary factor this year.
Moving on to Page 4. Here, we are showing a year-on-year core operating profit comparison. In the previous year, the core operating profit was ¥13.4 billion, but it turned out to be ¥11 billion this year, declined by ¥2.4 billion. To give you the breakdown, the foreign exchange rates contributed well, but various costs were rising.
Now a bar for the increase in sales and production and model mix may seem to be missing, but let me explain the reason why. While various costs were rising, we worked on price optimization, and thereby absorbed the impact. But since we also faced a decline in the actual revenues, as I’ve been saying, they offset each other, and the net impact became 0. So we did not describe the bar for the sales and production. In any case, we have minimized the cost increase impact through the price optimization.
Now Page 5 shows the results by each business segment. The musical instrument achieved a revenue of ¥73.4 billion, the core operating profit of ¥9.6 billion and the profit ratio of 13%. So this segment achieved year-on-year increase in revenue and decrease in profit. But when you consider the exchange rate impact shown on the right, it was actually a decrease in both the revenue and profit.
The audio equipment marked a revenue of ¥22.8 billion and the core operating loss of ¥0.4 billion. So the segment fell into the red. Now I need to explain this. So please note the exchange rate impact on the right. In the audio equipment business, the U.S.
dollar-based cost is greater than the dollar-based sales. So in face of the dollar appreciation and yen depreciation, the foreign exchange rate would negatively impact the profit. So including the negative forex impact of ¥0.3 billion, the segment revenue and profit declined sharply year-on-year.
The industrial machinery and components, IMC business and others achieved a revenue of ¥9.8 billion, the core operating profit of ¥1.8 billion and a profit ratio of 18.5%, which shows an increase in both the revenue and profit.
Moving on to Page 6. I’d like to talk about the full year outlook. We are forecasting the revenue to be ¥460 billion, the core operating profit to be ¥50 billion, the profit ratio to be 10.9% and the net profit to be ¥37.5 billion, which will be a year-on-year increase in both the revenue and profits. Even excluding the impact of the exchange rate, we are expecting to achieve a 5.2% revenue increase.
Now since there has been drastic foreign exchange rate fluctuations, to answer to the question raised by many investors, we also described the currency sensitivity per ¥1 difference.
Page 7 shows the core operating profit analysis in a comparison against the previous year. It was ¥43 billion in the previous year, and we’re expecting this to be ¥50 billion this year, with an increase of ¥7 billion. One of the contributing factors will be the exchange rate impact, which is ¥4.3 billion.
Meanwhile, various costs are expected to rise. But even after reflecting such negatives, the increase in sales and production and model mix will be ¥14.1 billion, partially boosted by the price optimization. Since such an increase is expected to be substantial, we’re expecting the ¥7 billion increase of profit year-on-year.
Now as for the difference from the previous projection, there is none for the total profit as we kept the initial projection of ¥50 billion. There will be an uplift of ¥3.7 billion from the exchange rate impact, but various costs arising in the meantime. Although some of that cost increase would be absorbed by the price optimization, we are now anticipating the revenues to be slightly lower than the initial projection. So we are assuming a negative impact of ¥0.7 billion from the decrease in sales and production and model mix.
On Page 8, you can see the full year outlook by each business segment.
The musical instruments projected revenue is ¥315 billion. The core operating profit is ¥43 billion and the profit ratio is 13.7%. The audio equipment’s projected revenue is ¥105 billion. The core operating profit is ¥3 billion and the profit ratio is 2.9%. The IMC business and others projected revenue is ¥40 billion. The core operating profit is ¥4 billion and the profit ratio is 10.0%.
For each one of the segments, since we revised the foreign exchange rate assumptions, the revenue forecasts were revised upward from the previous projection, but we did not change the profit forecasts for any of the segments. Since we have only seen the first quarter results so far and we may get impacted by various factors hereafter, we decided not to change the profit forecasts for the moment.
Please turn to Page 10. From here on, I’d like to give you the details of each segment.
First, the musical instruments segment revenue declined in the first quarter due to the impact of lockdowns in China.
The sales of the pianos and the digital music instruments decreased due to the lockdowns in China. The guitar sales decreased as a whole despite the double-digit growth in China.
The demand for the wind, string and percussion instruments remained robust and the sales increased, especially in North America. In North America, there was a governmental subsidy given to the school music activities, and that boosted the growth of the wind, string and percussion instruments. For each area, the sales were brisk in North America and other regions, but it fell sharply in China. In Europe, the demand declined slightly for the entry models, including the keyboards and guitars.
As for the full year projection, we are expecting the supply to recover and all the regions to achieve higher sales. The pianos are expected to achieve the same level of sales as the last year due to the impact of lockdowns in China, but all the rest of the categories are expected to achieve higher sales year-on-year. The impact of the semiconductor procurement difficulties are beginning to ease, and the supply is expected to improve.
The numbers are as shown here. As for the revenue in the first quarter, as you can see in red letters, it was 97% of the previous year, which means down by 3%. Yet for the full year, we are expecting an increase of 6% year-on-year.
Next, on Page 11, you can see the breakdown of the revenues by major product categories for each quarter. First of all, please note that piano’s results in the first quarter of FY March 2022, it grew 72% year-on-year. The digital musical instruments also grew 27% during the same period. So as I said earlier, the performances were very good during the first quarter of last fiscal year, and that is evident from these numbers, too.
In contrast to such results last year, the piano saw a drop of 24% in the first quarter this year. It was mainly due to the impact of lockdowns in China and also due to the extra high comp in the previous year. As a result, it turned out to be 76% of the previous year, but we are expecting the full year sales to be the same level as the previous year.
As for the digital musical instruments, the sales dropped 6% year-on-year, but we’re expecting it to increase 6% for the full year. The wind, string and percussion instruments achieved a 31% increase year-on-year in the first quarter, reflecting the strong performances of this category in the United States. The full year growth is expected to be 18%. The guitar sales decreased by 3% in the first quarter, but is expected to increase by 11% in the full year.
Next is the revenue breakdown by regions. In Japan, the sales dropped 7% in the first quarter, but the full year growth will be 1%. Since the supply shortages of the mid- and high-end models were still affecting us, even though we are now increasing the inventory, we were still behind our plan in the first quarter.
North America has been doing very well, especially driven by the wind, string and percussion instruments. But all the other categories were also performing well. Therefore, 27% increase was achieved in the first quarter and 15% increase is expected for the full year.
Now Europe saw a decline of 3%. As I said earlier, the entry model market has been softening a little. And therefore, the sales dropped 3% year-on-year, but we are expecting a growth of 6% for the full year. In China, due to the lockdowns, we faced very severe situations in the first quarter. Thus the sales dropped 33%, but we are expecting a 5% increase full year.
As for the other regions, the first quarter sales grew 5% and the full year growth is expected to be 3%. However, since we are unable to ship to Russia and Ukraine, that volume has been lost completely. Considering that, the performances were not so bad.
The next is the audio equipment as shown on Page 13. The first quarter sales declined as the impact of semiconductor procurement difficulties continued. The AV and PA sales decreased as the semiconductor supply shortages continue to affect these categories. By the way, it was the same for the musical instruments, too, but all of these comments are on the local currency basis. The ICT continued to enjoy healthy demand for the network devices. But since the extra strong demand for the conference systems peaked out, the category sales decreased year-on-year.
As for the full year, although the semiconductor procurement difficulties will continue, the sales are expected to be higher than the last year. Yet the AV products are likely to be affected by the semiconductor shortage and the outlook is still grim, so we are projecting a sales decline.
PA equipment will also see some impact of the semiconductor shortages. But since the situation is improving a little and since the market is recovering, we are forecasting higher sales. The ICT equipment is enjoying the strong demand for network devices, so the full year sales are expected to rise.
As for the figures, the first quarter revenue was down 14% year-on-year, but it is expected to increase 2% for the full year.
Now moving on to the next part. Please turn to Page 14. Here is the revenue breakdown by major product categories. The AV products were already suffering from a severe situation in the previous year, but it is continuing and getting worse. So the first quarter sales dropped 27% year-on-year, and it is projected to be 8% lower in the full year, too.
The PA equipment had achieved 42% increase in the previous year’s first quarter, driven by a great recovery of the shipment. So compared against that, this first quarter was down 9% and the full year is expected to be 6%.
It is likewise for the ICT equipment. The previous year’s first quarter had achieved a 68% increase year-on-year. So in a comparison against that, this year’s first quarter was down 14%. But for the full year, we are expecting a good 20% increase.
The next page shows the regional breakdown. In Japan, the first quarter resulted in a 13% decline, but the full year growth is expected to be 6%. This is because the main market for the ICT equipment is Japan, and we are expecting the contribution to be greater in the full year. North America saw a decrease of 7% because of the sluggish AV products, and the full year growth will be 1%. Europe was down 18% in Q1 and will be down 1% in the full year. China was down 45% in Q1, but it will be up 12% full year.
The other regions were down 4% in Q1 and will be down 4% in the full year. Again, the impact of no sales in Russia and Ukraine are included in here.
Moving on to Page 16 for the IMC business and the other segment. In the first quarter, due to the reduced production on the corporate customer side, the sales of our electronic devices, automobile interior wood components and factory automation equipment all declined.
For the full year, we’re expecting recovery in the sales of automotive-related products and factory automation equipment. The segment revenue in the first quarter declined 4%, but we expect this to be higher by 7% in the full year.
Now please move on to Page 18. Here is the balance sheet summary. As of the end of this June, the total liabilities and equity was ¥577 billion and the total equity was ¥430.3 billion. We are showing the difference from the end of March.
And you can see that the cash balance decreased very much. This is because we sold the portion of Yamaha Motors shares in the previous year and the corporate tax for the gain was not yet paid as of the March end, but we paid it during the first quarter, so the cash balance declined. Moreover, the inventory also increased a little, and that is another reason for the cash balance decrease.
And speaking of inventory, it increased by ¥18.1 billion, including some foreign exchange impact. The increase was driven by both the finished products and the work in process. The current liabilities decreased by ¥17.5 billion as we paid the corporate tax that I mentioned earlier.
As for the increase of the total equity, it was partially due to the increase of the shareholders’ equity, but it was more due to the foreign exchange adjustment gains. Since the yen has been depreciating, we had a substantial extra gains. Regarding the BS forecast at the end of March 2023, the total liabilities and equity is expected to be ¥605 billion. It may seem like a big increase, but the initial plan has not been changed much. Only because we changed the foreign exchange rate assumptions, the total liabilities and equity will be expanded largely.
Moving on to Page 19. The capital expenditure and depreciation have not changed from the initial plan. I would also like to touch on some recent topics. So please turn to Page 21. There are 2 ESG topics, as shown here.
One of them is the promotion and development of music culture. In Egypt and Brazil, we have been engaged in a project to introduce instrumental music education. And it was certified by Japan’s Ministry of Education and Culture as the 2022 EDU-Port Japan Supported Project to introduce Japanese-style education abroad.
The one on the right is our inclusion in the ESG indices. Japan’s GPIF is adopting 5 major ESG investment indices, and Yamaha has been newly selected for the second one, FTSE Blossom Japan Sector Relative Index. With this, Yamaha is now included in all of the 5 major indices adopted by GPIF.
Finally, I’d like to refer to one more thing, regarding the governance. It was included in our midterm plan, but it is about the compensation of directors and officers. It is composed of the fixed compensation which is 50% and the bonus linked to results which is 30%. There is also a compensation by shares, with the restriction on transfer, which will be provided every 3 years at the beginning of a midterm plan, and this is 20%. And this restricted stock compensation was previously linked to only the financial target.
But it will also be linked to nonfinancial targets and TSR from here on. With this revision, we made sure that the directors and officers will be more mindful about the nonfinancial targets and sustainability of the business.
That was all for the briefing of the first quarter results and outlook. Thank you very much.
Question-and-Answer Session
End of Q&A
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