Q&As on the Presentation of Performance Results for the First Quarter of the Fiscal Year Ending March 31, 2019 (FY2019.3)

Q1: There were strong and weak points about sales of musical instruments by region in the first quarter. Could you explain in somewhat more detail your progress toward the outlook for the fiscal year?

A1: Sales in China in the first quarter were up 15% year on year, which was above our expectations. We have not changed our forecast for the full fiscal year, but we are expecting that recent sales growth will continue.

In North America, sales were weak in the first quarter of the previous fiscal year because of a reaction to a surge in shipments near the end of the fiscal year ended March 31, 2017. However, there was no surge in March this year, and sales this fiscal year were favorable. We have not changed our outlook for the full fiscal year.

In Europe, sales in the first quarter were below the level of the previous year, but sales in the year before last were quite favorable and rose 23% year on year. In contrast, sales last year decreased slightly, and this time were below those of the previous year, but we do not regard this as a bad level for sales.

As regards changes in sales conditions since last year, as of April this year, we had reached agreement with our dealers, but we believe it will require a little more time for this to be fully permeate the system.

Japan and other regions reported performance as expected.

Q2: In the first quarter, you explained that cost reductions did not have a positive impact because of increased costs of parts and components. What is the outlook going forward? Also, could you please give us your views on the effects of the recent trade frictions between the United States and China?

A2: Regarding procurement costs, prices of electronic components overall have risen and are at a high level.

We will persist in our efforts to reduce costs for the full year, but, in parallel with these efforts, we have begun to consider restraining SG&A expenses and other measures.

As regards the specific impact of trade frictions between the United States and China, musical instruments are not on the U.S. list of items that will be subject to additional tariffs, but some items among audio equipment are included; however, the impact will not be major. Our estimate of the total impact this fiscal year is an increase of about 100 million yen.

Q3: The operating income ratio for musical instruments is rising. What is the background for this and your outlook for the second quarter onward? Will the ratio continue to rise?

A3: The improvement in operating income is due to increases in sales, cost reductions, and revising sales prices to proper levels. Since our fixed costs are virtually stable, the effect of the increase in sales is bringing an improvement in the operating income ratio. Our cost reduction activities are not showing the planned results, but we are moving ahead with activities to revise sales prices to proper levels.

This fiscal year, we began shipments of a new entry-level digital piano model to all markets around the world in the first quarter. We are improving profitability through the introduction of new models.

We are also continuing our efforts to revise sales prices of existing products to proper levels in China and other markets, and this is bringing improvement in profitability.

Q4: In the audio equipment business, despite the positive impact of foreign currency fluctuations, the decline in income seems to be rather large. Could you please explain the reasons for this?

A4: The decline in income in the first quarter in the audio equipment business was due to a number of factors working together.

After excluding the effects of foreign currency fluctuations, income was down 800 million yen from the same period of the previous year. Breaking this down into components, about half was due to a decline in gross profit, and the remainder was due to an increase in SG&A expenses.

Among the latter, about half of this, or approximately 200 million yen was the result of a review of which segments should share the burden of new business development.

The remaining half was an increase in expenses related to strategic investments, mainly in the professional audio (PA) equipment segment, and resulted from the rise in personnel costs that preceded the increase in contribution from these businesses.

Turning to the decline in gross profit, on a companywide basis, the reduction in costs in the first quarter was zero. A more-detailed breakdown shows that activities to reduce costs in the musical instruments business resulted in a positive effect, while the increase in prices of electronic components had a negative effect on profitability for audio equipment business.

In addition to the decline in sales, another factor for deterioration in the profitability was the product mix. The combination of all these factors working together resulted in the decline in profitability in the audio equipment business.

Q5: Looking again at Slide 12 on the audio equipment business, could you please explain in more detail the three factors that were responsible for the decline in sales of AV products in the first quarter? Also, what will be the impact of these factors going forward?

A5: The main factor accounting for the decline in sales were failure to obtain orders from mass retail chains in the United States. Although we failed this time, we believe this will be temporary, and we will move forward with activities in the second quarter and later to try to capture orders.

We were in the process of switching from older to new models, and although we had already begun to ship new models of AV receivers in the first quarter, movement of inventories of older products in retail stores that were shipped at the end of the previous period was sluggish, especially in the United States. As a result, our efforts to actively promote new products lagged somewhat.

Changes in demand trends in the AV receiver market are part of long-term trends in the market as a whole toward purchasing systems that are simple and easy to operate. The reasons I have just mentioned were the factors behind the decline in sales in the first quarter.

Q6: On the balance sheets shown in slide 17, inventories are somewhat lower than at the end of the first quarter of the previous year. Could you please comment on the composition of these inventories?

A6: Examining the figures for the first quarter this year in comparison with the same period of the previous year shows that inventories were down 800 million yen, but, after excluding the effects of foreign currency fluctuations, the decline was 100 million yen, which was at the same level as in the previous fiscal year. Specifically, product inventories, mainly musical instruments, were substantially lower than in the previous year, but it was offset by relatively large inventories of work in progress and raw materials from the factory automation (FA) business which enjoyed favorable shipments. As a result, the decline from the previous year was about 100 million yen.

Q7: Sales of musical instruments in China in the first quarter were better than expected. Was this because of factors in the external environment or because of Yamaha’s management policies?

A7: In the acoustic piano business, we have increased our market share especially for these years and this was not confined just to the first quarter of this year. Previously, there were many small to medium-sized local piano manufacturers in China, but many of these have gone out of business, and their share of the business has shifted to the top manufacturers, including Yamaha. Another factor at work here is that, compared to the past, customers are able to gather more-accurate information through SNS sources and are demanding higher quality. Rather than the piano market expanding in size, we believe that the main factor has been our increased ability to take market share.

Another factor is that sales of digital pianos and guitars have increased more than 30% over the previous year, and, thus, markets other than acoustic pianos are expanding. We have a superior position in digital pianos, and, in the guitar business, we can draw on our local production capabilities in China, and, as a result, sales of musical instruments other than acoustic pianos are growing.

Q8: Looking ahead, what initiatives will you be taking to reduce procurement costs of electronic components?

A8: In the past we have procured through our respective factories. By concentrating leadership in this function to the Headquarters, we are already adopting the approach of procuring from a global perspective and, thereby, achieving lower costs. We are planning to further realize benefits from this mode of procurement.

Also, combined with cost reductions at the plant level, we are relocating production processes that are somewhat behind. The reason why some relocation are behind schedule is linked to the fact that conditions in the Chinese market are very favorable, and we fell behind as we focused mainly on expanding production capacity to the market there.

Q9: Performance in China is favorable, but what are your views of the outlook in China going forward and the competitive environment?

A9: We believe that favorable piano sales in China will continue for the time being. However, from a long-term perspective, we believe that in the Chinese market, there will be a shift from acoustic pianos to digital pianos as was in the Japanese market. Digital pianos is an area where Yamaha is even stronger, and we are anticipating future growth.

At present, sales of digital pianos are added to acoustic pianos, but in the long term, we are assuming that the market will shift to digital pianos. In any event, we think sales of musical instruments as a whole will sustain some level of growth. As regards competition in the digital piano market, our main competitors are other Japanese companies rather than local Chinese manufacturers.

Regarding competition in the acoustic piano market, market share is shifting toward the leading manufacturers, including Yamaha.

Q10: Could you please explain your views of the prospects for musical instruments in other regions, including current conditions and future trends? In particular, what is your view of conditions in India?

A10: In India, sales in the first quarter posted strong 15% growth, and we have not changed our outlook for the full fiscal year at a same level. At present, we are constructing a factory in India, and it is scheduled to go into operation next year. We are expected to report growth at a different, higher level when this factory goes into operation.

Among other regions where we have causes for concern, we can cite Iran. We hold the view that the economic sanctions being imposed on that country will have serious effects. Also, in Latin America, we see some countries may be faced with difficulties, depending on trends in their macro-economies.

Q11: In the other business segment, performance was favorable in the first quarter, but could you give us your outlook going forward, especially your ideas about generating the operating income?

A11: Shipments of FA equipment in the first quarter were highly favorable. Orders have been strong since the previous year, but current order conditions in the FA industry as a whole have become quite severe. For this reason, our forecasts have been calling for a decline in sales in the second half of this fiscal year. Usually, there are many orders for FA equipment in the first half of the fiscal year, and this is followed by a decline in the second half. Last year was an exception, and orders did not decline in the second half.

In the automobile interior wood components business, in addition to ongoing sales in Japan, shipments to North American automobile manufacturers are advancing as a result of our winning new customers in that region.

Q12: What will be the impact of trends in the Chinese currency in the second and subsequent quarters?

Fluctuations in the yuan/yen exchange rate have an impact when the statements of income of our Chinese subsidiaries are converted to yen. The average yuan/yen exchange rate in the first quarter of last year was 16.2 yen per yuan, but, in contrast, the rate moved to 17.1 yen per yuan this quarter because of weakening of the yen. This had a positive impact of about 100 million yen.

We have not changed our outlook for the full fiscal year. The rate last year was 16.7 yen per yuan, and we are assuming the same rate for this fiscal year. The impact of foreign currency fluctuations will be minor.

Yuan/US dollar
The yuan/U.S. dollar rate has an impact on the export and import transactions of our Chinese subsidiaries. The average yuan/dollar exchange rate during the first quarter of this fiscal year was 6.37 yuan per dollar compared with 6.85 yuan in the previous year, reflecting the strengthening of the yuan. The impact of this change on exports and imports was small in the first quarter. We have not changed our forecast for the full fiscal year. We are assuming 6.3 yuan this fiscal year versus 6.63 yuan for the previous fiscal year because of the strengthening of the yuan. This will have a negative impact of about 200 million yen.

Q13: What is your view regarding the point in time when the rise in prices of parts and materials diverged from your expectations?

A13: Although we became aware of increases in the prices of parts last fiscal year, our outlook was for prices to settle down early this fiscal year. In fact, however, they are continuing to remain high.

Q14: In Europe, sales of musical instruments in the first quarter were down 3% from the same quarter of the previous year. Could you please explain the impact of changes in sales conditions?

A14: In Europe during the first quarter, sales were slightly below our expectations, but performance was not so bad. We had expected that some time would be needed for the changes in selling conditions to be accepted by the market but, in fact, it is taking longer than we had anticipated.

Our European headquarters, which is located in Germany, covers the entire European region, and acceptance of our sales condition measures is taking some time. Last year, gaining the understanding of our dealers took longer than expected. We did obtain the agreement of our dealers by April this year, and we are making progress in gaining understanding at the local level. However, since the terms and conditions for dealers has changed, our understanding is that the permeating is required taking time.

Q15: I believe you explained that of the 5.3 billion yen increase in SG&A expenses in the initial plan, about one-half would be accounted for by strategic expenses and the other by SG&A expenses. Could you please give us the breakdown of the 400 million yen you mentioned this time as well as the progress toward using these expenses?

A15: We are looking for an increase of 5.3 billion yen in SG&A expenses for the full year. In addition to the increase in variable costs accompanying the increase in sales, we are also expecting to use slightly less than 2.0 billion yen for strategic expenses. We have also taken into account temporary increases in expenses (for the construction of the Innovation Center and the overseas factories) in these figures. From the second quarter onward, we are expecting that SG&A expenses will move above the levels in the same period of the previous year.

Q16: It seems that the positive impact of cost reductions was offset by higher prices of electronic components. What is your outlook for this over the full fiscal year?

A16: In the area of procurement cost reductions, prices of electronic components have risen and are remaining at a higher level, but we are continuing our efforts to reduce costs. In the event that we cannot fully reduce these costs, we will be considering restraints in SG&A expenses and other approaches.

With our objective of 55.0 billion yen in operating income in mind, we will work to absorb this shortfall in cost reduction through measures such as cutting SG&A expenses to attain the goal.