Q1: Yamaha's results for musical instruments through the third quarter show a relatively large decline in operating income in comparison with the margin of decline in sales. Was this due to special cost increases resulting from adjustments in production or other factors?
A1: Sales of the musical instruments segment on a real basis, after adjustment for foreign currency fluctuations, were down ¥5.0 billion compared with the previous outlook. On the other hand, production was virtually the same as in the previous outlook and was up +¥0.2 billion. As a result of the decline in real sales, gross profit on sales was down ¥3.1 billion. However the decline in selling expenses was +¥1.2 billion, operating income of the musical instruments segment as a whole was ¥1.9 billion lower than in the previous outlook.
Q2: What is your outlook for the effects of the downturn in China and other emerging countries on performance in the next period?
A2: In China, even though consumption is said to be slowing, sales of musical instruments are holding firm. However, in October, immediately after the anti-Japanese demonstrations and other events in that country, there was some effect. Nevertheless, in November, on a local currency basis, sales have gone back to double-digit or higher growth year on year on a monthly basis, thus returning to the previous pace of growth. In addition, although January of 2012 corresponded to the Chinese New Year, thus making comparisons inappropriate, sales were quite strong, rising 150% year on year. We think this suggests that there have not been any major changes in conditions in the Chinese market and that anti-Japanese sentiment has not had a significant effect. However, in the case of piano sales, the market has expanded, and it is becoming more difficult to sustain such past rates of growth as 120% on an annual basis. Despite this, our view is that growth in the market for musical instruments in China will continue for the time being, and our basic approach will continue to be to market not just pianos but also a wide range of other instruments aggressively, further develop our sales network, and expand our music schools business.
In other emerging markets, conditions differ by country and region. For example, in the Middle East, conditions have been influenced by political instability in Iran and Syria as well as Africa. In Latin America, growth rates have slowed in Argentina and Brazil. Indonesia and Thailand are reporting growth as we had assumed, but, elsewhere in Asia, including Taiwan and South Korea, which are mature markets, as in the markets of the industrialized countries, it will be difficult to attain high rates of growth.
In the market as a whole, it will be difficult to achieve a rapid recovery, but various markets still have potential because of the rise of the middle classes and other developments. Therefore, our awareness is that growth will continue.
Q3: Could you please provide detailed information on the content of inventories in the musical instruments business?
A3: The rise in inventories has been due to higher stocks of digital musical instruments. Inventories of portable keyboards and digital pianos are expanding around the world. Inventories at the dealer and distribution chain levels have increased because sales in November and December did not reach the anticipated levels. In view of this situation, we decided to adjust production during the fourth quarter.
In the piano business in China, sales at the wholesale level in November and December were steady, but they showed little growth at the retail level. As a result, inventories in the stores remained at a higher level than usual. Since we are continuing to expand our dealer network, overall sales increased, but the rate of growth in sales at existing stores decreased.
Q5: Regarding your cost reductions in the semiconductor business next fiscal year, please provide information on the amounts and content of these.
A5: We are anticipating positive benefits from business structural reform of the semiconductor business amounting to ¥1.9 billion. This is expected to include ¥0.9 billion in reductions of fixed costs, including personnel expenses.
Q6: When musical instrument dealers dispose of inventories they have on hand, does this have any effect on Yamaha's profitability?
A6: When dealers dispose of their inventories through special sales and other measures, basically, this should not have a major impact on Yamaha's performance. However, when Yamaha's sales subsidiaries dispose of inventories, this will have an effect on Yamaha's performance, but this has been taken into account in our outlook for the fourth quarter.
Q7: Are you planning to reflect the benefits of the favorable movements in foreign exchange rates in your pricing policy? For example, will you lower prices?
A7: This fiscal year, as part of our measures for dealing with the effects of yen appreciation, we implemented price increases in various markets. Through the second quarter, this did not have a major impact, but from the third quarter, because of changes in market conditions, these higher prices tended to restrain sales, especially in the emerging markets, and we were aware of a slight slowdown in sales. Reducing current prices may be difficult in some respects, but for newly launched products, it will be possible to set price levels appropriate for current exchange rates. Therefore, we believe it will be possible to increase sales. In any event, going forward, we want to proceed with caution in setting our pricing policy.
Q9: Please provide an analysis of the change in operating income in the musical instruments business for the full fiscal year, comparing your current forecast with the previous forecast.
A9: The various components accounting for the change from the previous outlook were (1) declines in real sales and production, –¥5.4 billion, (2) a shortfall from the targeted effect of price increases, –¥0.1 billion, (3) foreign currency fluctuations, +¥0.6 billion, and (4) reductions in selling expenses, +¥1.9 billion. This comes to an overall effect of –¥3.0 billion.
Compared with the previous year, the various components accounting for the change were (1) foreign currency fluctuations, –¥2.5 billion, (2) declines in real production, –¥2.9 billion, (3) increases in selling expenses, –¥0.6 billion, (4) lower materials costs, +¥0.1 billion, (5) projected retirement benefit obligations, +¥0.7 billion, (6) positive effects of the integration of operations into Saitama, +¥1.1 billion, and (7) price increases and the positive effects of newly consolidated subsidiaries, +¥2.9 billion. This comes to an overall effect of –¥1.2 billion.
Q10: Did your delay in making the decision to cut production make the impact larger than it would have been otherwise?
A10: We would have to say that we did not hit the brakes as quickly as we should have in the third quarter. The third quarter is not only important because it is the peak selling season but also because it is a time when we are in the midst of producing and launching new products. As a result, our response was somewhat weak.
We were aware that inventories were on a rising trend at the end of the second quarter, but the outlook of the sales departments was that the market would recover from the effects of the shortage of products experienced after the March 11, 2011 earthquake. The sales departments were, therefore, expecting substantial growth. We are fully aware that one of the issues we must address looking ahead is making quick responses in our production activities to the level of real demand.
Q12: Was the delay in adjusting production due to the bullish view of management regarding the increase in sales in December? Or was it because of delays in receiving information?
A12: It is certainly a fact that one of the things in our minds was that we were anticipating meeting our year-end sales objectives. But more than this, we are aware that the cause was that our analysis of the expected recovery from the earthquake and market conditions as regards growth were somewhat too optimistic.
Q13: Assuming that you have not made arrangements for forward foreign exchange contracts, how much operating income will you be able to report at current exchange rates?
A13: As regards our transactions in U.S. dollars, our selling and buying transactions are in balance, so we will confine our comments to transactions in euros. We are assuming the yen/euro rate in the fourth quarter will be ¥115, but our forward contracts provide for ¥105 to one euro and we calculate operating income based on this (¥105) rate. In the event that we have not arranged for forward cover, the sensitivity to a ¥1 change in the exchange rate is equivalent to ¥0.37 billion x ¥10 x 1/4 (one quarter) = approximately ¥0.9 billion. However, since sales in the fourth quarter are usually lower than in other quarters, we believe the correct estimate of the impact would be about ¥0.7 billion. If we make this calculation at the most recent prevailing rate of about ¥125, which represents another ¥10 difference, the differential would be approximately another ¥0.7 billion.
Q14: If you use the current exchange rates, what is your estimate of Yamaha's underlying capability for generating operating income for the full fiscal year?
A14: The current yen/euro exchange rate is ¥125 and the average for this fiscal year is estimated at ¥103. Therefore, this capability would be approximately ¥22 x ¥0.37 billion. If we make this calculation for next fiscal year, assuming the rate stays where it is at present, income on an operating income basis would increase.
Q15: There has been a substantial decline in income compared with the initial forecast. Has Yamaha lost the capability of reporting ¥20 billion in operating income?
A15: We believe that operating income of ¥20 billion is a level that Yamaha should reach as quickly as possible. To do this, we must continue to work to make fundamental improvements in the profit ratios in our musical instruments business.
Q16: When sales go into a downturn, are you not able to respond flexibly to secure profitability by controlling selling expenses?
A16: Looking just at the current fiscal year, real sales increased and selling expenses rose in tandem with sales. Compared to other musical instrument manufacturers, Yamaha's fixed costs are higher because, for example, it has sales subsidiaries in many countries around the world, and these companies have deep rooted marketing activities in these areas. Our understanding is that it is precisely because we have this marketing structure in place that we have been able to maintain market share and performance. In this sense, you might say that, when business conditions are tough, Yamaha may have less flexibility in adjusting selling expenses than other companies in the same industry.
In markets like Japan, where it is clear that the pie is shrinking, this time, we are working to reduce fixed costs, including offering early retirement arrangements. Going forward, we are aware that giving careful consideration to developing the optimal systems––as we maintain our basic policies of offering top quality products and services appropriate for the Yamaha brand––will be a major theme.