Q&As on the presentation

Q&As on the Presentation of Performance Results for the Fiscal Year Ended March 31, 2012 (FY2012.3) (Presentation Held on May 2, 2012)

Q1: In your forecast for the current fiscal year, you appear to be bullish on performance in the industrialized countries. What are your reasons for this?

  • A1: During the fiscal year ended March 31, 2012, we were unable to provide sufficient supplies of products to the market on time because of difficulties in procuring parts after the Great East Japan Earthquake. Therefore, we lost some sales opportunities for digital musical instruments, such as digital pianos and portable keyboards. During the current fiscal year, we are planning to make a comeback in digital pianos in Europe and the United States where we lost market share. In addition, we launched a new digital mixer in the professional audio equipment business in March this year, which has been well received in the market. This has led us to be more optimistic about launching a major new product for the first time in a number of years and attaining higher rates of sales growth in the industrialized countries.

    From the perspective of overall trends, we are anticipating moderate recovery in North America. Our outlook for Europe is somewhat bullish, but we aim to attain our forecasts. On the other hand, our outlook for China is somewhat more conservative.

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Q2: The ratio of changes in SG&A expenses to the changes in operating income that you are forecasting seems large. Could you please explain this and provide details on the content if cost reductions could be made?

  • A2: Our plans call for an increase in SG&A expenses of ¥7.4 billion in comparison with the previous fiscal year. The breakdown of this increase is ¥3.0 billion for publicity and advertising, ¥2.0 billion in IT expenses, and R&D expenditures of ¥1.0 billion.

    Thus far, we have been cutting our publicity and advertising costs, but, this fiscal year, we have formulated more-aggressive plans, looking to the launching of new products. However, we have to control our expenses with an eye to performance, and we believe it will be possible.

    In IT expenses, we have to disperse risk from the perspective of business continuity plans (BCPs), taking account of the possibility of a major earthquake in the Tokai region where our headquarters is located and other factors. We are planning to relocate our information system servers. We are planning on expenditures of ¥1.5 billion for this relocation, and this is one of the major reasons for the increase in SG&A expenses.

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Q3: Could you please provide some additional detail on your domestic business structural reforms?

  • A3: Our understanding is that improvement in nonconsolidated profitability accompanying the implementation of business structural reforms is an important issue. We believe that reducing fixed costs is one basic measure that will lead to improvement. Going forward, we are forecasting that between 200 and 250 persons will reach retirement age and leave the Company each year. In view of this outlook, we are considering a number of measures, including reductions in personnel expenditures through attrition in the workforce without hiring replacements for some retirees.

    In the semiconductor business, we are focusing on three key points to structural reforms. Regarding products, we will concentrate resources in magnetic sensors, graphics controllers used in amusement equipment, and automobile applications. Other initiatives in the current fiscal year will include reducing the production and sales of low-margin products, cutting fixed costs, and shifting production at Yamaha Kagoshima Semiconductor Inc. to focus on sensors.

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Q4: Regarding the reversal of deferred tax assets, how has your outlook for profitability changed?

  • A4: We made our decision on the reversal of deferred tax assets based on the criteria of whether Yamaha Corporation on a nonconsolidated basis could generate sufficient future taxable income. Formerly, our view was that the previous fiscal year was in the red, but this fiscal year the Company would move back into the black. However, because of the impact of yen appreciation and other factors, the outlook this year is for remaining in the red. Therefore, our judgment was that we had to reverse our deferred tax assets.

    Specifically, the main reason was that our calculations showed we would not have enough taxable income to offset the losses carried over from the years ended March 31, 2009, and March 31, 2010, during the nine-year period that we would be allowed to carry these losses forward.

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Q5: In implementing your domestic business structural reforms, what will be the impact on consolidated results of bringing your nonconsolidated results back into the black?

  • A5: We believe the issue is how to raise profitability in Japan against a background of trends in the domestic market and the expansion in our overseas production. We will, of course, take measures to attain a proper balance with consolidated and nonconsolidated results, but the basic idea behind our initiatives will include raising the operating income ratio in the musical instrument business to the proper level and generating a return that is appropriate for our corporate cost of capital.

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Q6: Are your domestic business structural reforms aimed at attaining the numerical targets under your current YMP125 medium-term management plan?

  • A6: Unfortunately, we will not be able to reach our profit targets under the current medium-term management plan YMP125 because the actual foreign exchange rates have differed widely from the rate assumed under the plan. Measures we are considering under our business structural reforms include ways of improving profitability this fiscal year, but, fundamentally, we see these measures to be positioned to achieve growth under our next medium-term plan, which will begin next fiscal year.

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Q7: Could you please describe more specifically what you mean by revising musical instrument prices?

  • A7: We made adjustments in musical instrument prices several times last year, taking into account the market environment and competitive condition, mainly in Europe and the United States. This year we will also continue to give careful consideration to prices of individual products and take proper measures. After taking action in January this year, we plan to raise prices of certain items as we watch developments going forward.

    From the end of last year through the beginning of this year, in general, we raised prices of all genres of products between 3% and 5% in Europe and the United States. Our understanding is that these increases have been accepted by the market thus far and that they have not had a braking effect on sales.

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Q8: Your outlook is for a sales increase in the current fiscal year in the others segment of ¥4.0 billion compared with the previous fiscal year, but you are only forecasting an increase in operating income of ¥100 million. Please explain this difference.

  • A8: Although we are expecting recovery from the earthquake disaster during the current fiscal year, the principal reason is that we are taking a harsher view than in the previous year regarding margins in the recreation business and the factory automation (FA) business. However, we are aware that our outlook is somewhat conservative.

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Q9: A large number of companies are assuming an exchange rate of ¥80 to one U.S. dollar. Why have you set your outlook at ¥75 to the dollar?

  • A9: When we were preparing the budget for the current fiscal year and the outlook for the fourth quarter of last fiscal year, ¥75 to one dollar and ¥105 to one euro were appropriate levels. Thereafter, exchange rates have been unstable, but we went ahead and prepared our budget plans with the previously assumed rates, and, as a result, our view of the yen/dollar rate is somewhat on the severe side.

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Q10: Could you please provide us with some estimates of the sensitivity of your results to changes in foreign exchange rates by currency?

  • A10: For the U.S. dollar, a ¥1 change in the exchange rate results in a change of ¥70 million, and, for the euro, it results in a change of ¥380 million in operating income.

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Q11: Why have musical instrument sales in North America not returned to the levels prevailing before the Lehman crisis?

  • A11: As an all-round manufacturer of musical instruments, we handle a wide range of items, from grand pianos to guitars, wind instruments, and other products. The reason for the revival of demand in North America has been the comeback in large product markets, including electric guitars and electric acoustic guitars. Yamaha also is expanding sales of these products, principally of electric acoustic guitars, but our market share is still relatively small, and we are still continuing to work to catch up with leading brands, such as Fender and Martin.

    On the other hand, sales of keyboard instruments, such as grand pianos with player piano functions, where Yamaha is strong, expanded substantially during the time of the IT and housing bubbles in the United States. After that, however, following the bursting of these bubbles, the composition of demand has changed significantly, and sales right now are stagnant.

    Since market conditions differ from product to product, we believe it will be difficult for demand to return to pre-Lehman crisis levels.

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Q12: What is the remaining balance of deferred tax assets, and is there a possibility that you may reverse the remaining balance going forward?

  • A12: We reversed a total of ¥32.1 billion in deferred tax assets in the fiscal year that just ended. That is almost the full amount, with the exception of between ¥1.0 billion and ¥2.0 billion in deferred tax assets related to local taxes in certain domestic subsidiaries. In addition, we have about ¥2.0 billion in deferred tax assets in overseas companies, but our current view is that it will not be necessary to reverse those deferred assets.

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Q13: Please explain how you could have a balance of about ¥10.0 billion in deferred tax assets at the end of the previous year, and then reverse ¥32.1 billion in deferred tax assets in the following year.

  • A13: The balance of deferred tax assets on the balance sheets at the end of the previous fiscal year is about ¥23.0 billion, net of liabilities. Therefore, the actual balance of deferred tax assets is not shown. Deferred tax liabilities are related to valuation differences on available-for-sale securities and the valuation reserve for land and are not subject to reversal.

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Q14: Your R&D expenses in the semiconductor business during the current fiscal year will be ¥3.0 billion, or 20% of sales. Is this amount the bare minimum level necessary for this business?

  • A14: The recognition of some development expenses was brought forward into the fourth quarter of the previous fiscal year, and that is the factor accounting for the decline in R&D expenses in the current fiscal year. As a basic approach, we are scheduled to consider how to view the level of development expenses in business structural reform projects going forward. Looking ahead, as we implement measures to focus and concentrate our product mix, we believe it will be necessary to differentiate between the portion of in-house personnel costs and the portion that can be outsourced.

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Q15: Can you make a commitment to returning to profitability by cutting R&D expenses sufficiently?

  • A15: To return to profitability, we will be dealing with the issues of reducing R&D expenses and lowering manufacturing costs at Yamaha Kagoshima Semiconductor. To reduce R&D expenses, we have already started to take measures to reallocate about 30 personnel from R&D to other divisions.

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Q16: In your quarterly forecast for the current fiscal year, you are looking for a sharp recovery beginning in the second quarter. What are the reasons for this?

  • A16: A comparison of the first quarter of the last fiscal year and the first quarter of the current fiscal year shows that we are facing tough going as regards profitability in the electronic devices segment. The plans we have formulated call for increases in income beginning in the second quarter because we took into account the fact that in the second and third quarters of this year we will be looking for improvements following the earthquake as well as the schedule for new product launches.

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