Q1: Your outlook for sales of musical instruments in Europe, the United States, and other regions is for a higher year-on-year growth rate for the full fiscal year than you actually reported for the first quarter. If the macroeconomy goes into a downturn, will you be able to maintain profitability by restraining expenses or other measures?
A1: Compared with the forecast we issued at the time of the announcement of performance results in May, we have slightly lowered our forecast for sales in Europe and the United States for the full fiscal year, by about 1% to 2%. However, we are also looking for recovery in sales due to a comeback from a temporary market share decrease last year because of product supply constraints and due to the positive impact of new product launches. If sales turn down because of changes in the market, we will take the necessary measures, including further cutting costs.
Q2: Do you have leeway for further reducing costs, such as selling, general and administrative (SG&A) expenses?
A2: Our outlook is for an increase in promotional expenses for the full fiscal year compared with the previous fiscal year. Since this includes an increase in the promotional costs of sales companies in Europe, the United States, and China, we believe there will be room for making further reductions in response to selling conditions in the market. We will also consider possible responses that may be necessary to secure gross profit to cope with foreign currency rate movements.
Q3: Could you please provide further details on the content of the ¥1.7 billion in business structural reform expenditures that you mentioned?
A3: Expenditures related to personnel adjustments will be ¥1.0 billion in domestic sales and marketing and ¥0.7 billion in the semiconductor business. We are planning to call for the voluntary retirement of 50 personnel in retail subsidiaries in domestic sales and marketing and 70 personnel in semiconductors at Yamaha Kagoshima Semiconductor Inc. We are also making preparations for support arrangements for employees who cannot go along with the closing of domestic sales and marketing locations and relocation. We think this will apply to about 200 personnel overall.
Q4: Do you think it will be possible to bring the semiconductor business back into the black just by implementing the measures you have announced this time?
A4: It will be necessary for us to consider related matters, including the specific content of structural reforms, in detail to decide how to develop the semiconductor business next fiscal year and beyond. We want to bring this business back into the black as quickly as possible. We are implementing these structural reforms as decisively as we can with the intent of reaching breakeven next fiscal year.
Q5: What will be the merits of splitting off the musical instruments manufacturing divisions into a separate company?
A5: At present, the domestic manufacturing divisions are within the business divisions. Therefore, it is difficult to adopt hiring, training, compensation, and other policies tailored specifically to the manufacturing divisions. By putting manufacturing in a separate company, we think that we can improve our cost-competitiveness by introducing personnel systems that are appropriate for the manufacturing divisions. We will also be better positioned to transmit skills to the younger generations, give guidance to our overseas factories, and attain other objectives. We are making preparations to introduce an original personnel management system, which we have developed, at the time these production activities are transferred to a separate company in 2014.
Q6: Is the main reason for introducing the new personnel system in the manufacturing subsidiaries to cut costs by lowering salaries?
A6: The reason is not simply to reduce personnel costs. We are planning to introduce a personnel system that is carefully tailored to the needs of the manufacturing divisions. As matters stand now, we feel there is a gap between the treatment we give our manufacturing personnel and the average level in the manufacturing sector. We are planning to bring our treatment up to the general level in the sector.
Q7: If you proceed with putting sales and manufacturing into a separate company, isn't there a risk that the supply chain connecting development, manufacturing, and sales will be broken?
A7: If this should happen, then the business structural reforms we are implementing would lose their meaning. Therefore, quite naturally, we are taking the initiative to ensure that this supply chain will not be broken. Under the new organization, the manufacturing subsidiaries will be placed under the business divisions, and we plan to ensure that development and manufacturing maintain close working relationships.
Q8: What were the positive benefits of raising prices of musical instruments as a measure to cope with the appreciation of the yen? Is there a possibility that you will raise prices further?
A8: Matters have virtually settled down since we made a round of price increases in January, March, and June in Europe, the United States, and Asia. There was no major impact that would have caused us to revise our sales forecast as a result of the price hikes, but the increases in prices of about 3% that we made on June 1 in Europe resulted in a surge in demand prior to the price rise, and there was a slight reactionary decline in demand in June. At the price levels following the increase, even if we continue sales through the season of strong demand at the end of the calendar year, we think there will be no major impact. Although who our competitors are depends on the instruments in question, in the case of digital musical instruments, which we are expecting will show good performance this fiscal year, our principal competitors are Japanese manufacturers. Therefore, the conditions they face, as a result of the appreciation of the yen, are the same as the ones we are facing. We do not see the emergence of a major competitive disadvantage for Yamaha.
We are looking for a positive impact on gross profit from the increases in the prices of musical instruments of ¥2.2 billion this fiscal year.
Q9: Please explain the factors behind the increase in operating income from ¥2.0 billion in the previous outlook to ¥4.3 billion in the first quarter.
A9: We reported positive impacts from foreign currency of ¥0.6 billion, ¥0.4 billion from higher sales and production levels, and ¥1.3 billion from reductions in SG&A expenses. This adds up to the total of ¥2.3 billion that we mentioned.
Q10: Since you are expecting a decline of ¥0.4 billion in real SG&A expenses for the fiscal year compared with your previous forecast, does this mean that expenses will rise in the second and subsequent quarters?
A10: Since some delays in expenditures were experienced in the real SG&A expenses for the first quarter, we expect these expenses will be carried forward into the second and subsequent quarters. However, even if there should be a downturn in sales due to changes in market conditions, we think it will be possible to respond flexibly, including making cost cuts.
Q11: I have a question about the investment you will make at Kagoshima Semiconductor Inc. to convert its plant to focus on the sensor manufacturing processes. Are you sure there will be enough demand to justify this investment?
A11: The demand for geomagnetic sensors is currently developing in the smartphone market, and we have been adversely affected to some degree by declines in unit prices. However, we are anticipating that the market for these devices will spread to other product areas outside the smartphone field. As these devices evolve to their next stage and provide a range of other functions, including acceleration sensors and gyrosensors, we are looking to draw on Yamaha's strengths in this area and have decided this investment will be necessary.
Q12: You are going to begin production adjustments to reduce your inventories of musical instruments. What effect will this have on profitability going forward?
A12: In comparison with our previous forecast, in the first quarter, production was ¥0.3 billion above target, and the positive effect of real increases in sales and production levels was ¥0.4 billion. However, in the second quarter, our outlook is for a decline of ¥2.0 billion in production levels and a decrease in operating income of ¥1.4 billion due to lower sales and production levels.
Compared with the previous year, we are planning for an increase in production levels year on year of about ¥0.2 billion in the second quarter, since second quarter production in the previous year fell after the earthquake. In the third quarter, we are expecting a decline year on year in production levels of ¥2.0 billion, since production was increased in the third quarter of the previous year. We will, therefore, proceed with production restraints with the aim of adjusting inventories by the end of the fiscal year.
Q13: What is the status of “sell through” in musical instruments? Are you somewhat bullish about the growth rate of sales on a local currency basis?
A13: In Europe, in part because of the price increases, at present inventories held in retail stores have increased slightly. Therefore, we believe that “sell through,” or supporting sales activities down to the retail level, will be very important going forward. Thus far, we have focused on selling to dealers, but, from now on, we will work to strengthen our support for dealer sales activities, and we want this to have results during the important selling season from September through the end of the calendar year. Please note that in Europe, where there are concerns about an economic downturn, we are looking for relatively firm conditions in Germany, which is a major market for us.
In the digital musical instruments field, where we were constrained by the shortage of supplies last year, the reason for our bullishness is that we are looking to taking back the market share we lost.
Q14: How much of a reduction in personnel costs are you anticipating as a result of natural attrition of staff?
A14: Natural attrition of staff for the Company as a whole, including personnel reaching retirement age, is between 200 and 250 each year. This is expected to bring a reduction in personnel expenses of between ¥1.5 billion to ¥2.0 billion on an annual basis.
Q15: Could you give us your sense of the goal for improvement in non-consolidated profitability that you are aiming for?
A15: Of the total ¥2.7 billion in positive effects of structural reforms expected in the next fiscal year, ¥1.7 billion of this will be on a non-consolidated basis, and the parent company is expected to move into the black in the next fiscal year. However, we do not think that just moving into the black is sufficient as a profitability goal. We think it is necessary to make it clear that the parent company is a “going concern” and that it shows an appropriate level of income that is sufficient for paying cash dividends. Therefore, for the present, we will give maximum priority to eliminating the operating loss, but, going forward, we intend to consider not only the functions the parent company should play for the Group but also what will be an appropriate earnings structure and level of income.
Q16: In the semiconductor business, will your policy be to attain the break-even point (BEP) of ¥20.0 billion through increasing sales?
A16: We are implementing a range of measures to lower the break-even point of this business, but we are aware of the importance of moving toward the further development of this business and raising its top-line sales.
Q17: Could you give us a breakdown by segment of the ¥2.7 billion in improvements you are expecting from structural reforms?
A17: We are estimating that the improvement, on an annual basis, in the musical instrument business will be ¥1.5 billion and ¥1.2 billion in the semiconductor business.
Q18: We believe that it is unlikely that you will move the semiconductor business back into the black just by implementing the structural reforms you have mentioned. Do you think these reform measures will be sufficient?
A18: Basically, we intend to continue this business as we implement the following policies. We have concentrated our resources on product groups where we can add value. These are sensors and graphic controllers used in amusement equipment. Regrettably, we cannot give a 100% certain outlook that this will quickly secure profit next year or the year after next. However, we intend to consider other specific measures. Our policies for this will first be to take further steps toward “fablight,” or lightening our commitments to facilities and relying more on outsourcing to obtain a better outlook for the future of this business.
Q19: Can't you speed up the structural reforms? As you take your time to implement the reforms, won't the operating environment change?
A19: We are aware of the importance of responding to changes in the operating environment and want to place a high priority on speedy reforms. However, our plans take account of the time needed to implement specific measuring, including putting the necessary infrastructure in place. Our attitude will be to continue doing our very best to implement reforms speedily, and, if there are changes in the operating environment, we will naturally consider additional measures.
Q20: Please give us your reasons for continuing in the semiconductor business.
A20: Yamaha's main businesses are musical instruments and audio products, but, from a global perspective, these are niche markets and special business domains that are somewhat distant from cutting-edge technological innovation. On the other hand, in the semiconductor business, it is essential to be sensitive to cutting-edge movements in technological development, alliances, and other areas. We believe that the technologies and information that we gain from the semiconductor business are contributing indirectly to our musical instruments and audio product businesses.
In addition, the semiconductor business is a field where we can draw on the technology development capabilities that we have accumulated thus far. We, therefore, have decided to continue in this business, implementing the policies we have described in our presentation.