A1 : The reasons for the performance shortfall are sluggish domestic sales and a rise in personnel expenses.
In fiscal 2005, we will further step up our cost-cutting and productivity boosting measures in the musical instrument segment. Moreover, the entire Company's pension funding burden will be lightened and a reduction in the number of employees will also cut our overhead. This is projected to boost operating income to ¥14.0 billion.
Q&As on the Presentation of Financial Statements for FY2004
Q1 : Please explain the reasons why the business performance in the musical instrument segment was below the fourth quarter projection announced in February and why this performance is expected to recover in fiscal 2005, ending March 2005.
A1 : The reasons for the performance shortfall are sluggish domestic sales and a rise in personnel expenses.
Q2 : Within the electronic equipment and metal products segment, what is the current situation regarding semiconductor operations?
A2 : During the first quarter of the current fiscal year, the electronic equipment and metal products segment is projected to record somewhat improved profitability compared with the same period of the previous year.
Last year, the impact of SARS caused semiconductor operations to bottom out in May and June, but the state of operations in the same period of this year should be relatively similar to the situation in March and April of this year.
Q3 : Could you explain how, in fiscal 2005, the use of asset-impairment accounting with regard to the recreation business will have a positive effect and also what the impact of shifting from the straight-line depreciation method to the declining balance method will be?
A3 : In fiscal 2004, depreciation expense for all recreation operations amounted to ¥2.85 billion. Asset impairment accounting will cut that to ¥1.45 billion, but the shift to the declining balance method will boost depreciation. In the first year, the two changes will offset each other, so depreciation is projected to remain at ¥2.9 billion in fiscal 2005. However, it is projected to fall to ¥2.0 billion in fiscal 2006 and ¥1.6 billion in fiscal 2007, which is the final year of our current medium-term management plan.
Therefore, compared with fiscal 2004, depreciation expense is projected to remain unchanged in fiscal 2005 while falling about ¥0.8 billion in fiscal 2006 and about ¥1.3 billion in fiscal 2007.
Q4 : In fiscal 2005, income accounted for by the equity method is projected to amount to ¥7.0 billion. However the upcoming change in the fiscal year-end of YAMAHA MOTOR CO., LTD., from March 31 to December 31, will mean that company's current fiscal year will be a nine-month period. Is your performance projection based on forecasts of YAMAHA MOTOR-related income (accounted for by the equity method) for this shorter period, or do you include projected income for the period from January through March of 2005?
A4 : Our projections are based on calculations of YAMAHA MOTOR-related income for the nine-month period only.
Projections for subsequent years are based on projections of YAMAHA MOTOR-related income for a full fiscal year extending from January through December
Q5 : What is your plan for increasing the manufacturing output of semiconductor operations?
A5 : The renovation of our Kagoshima factory has been in response to the aging of the facilities rather than to increase production capacity. Future increases in manufacturing output are to be handled through collaboration with outside foundries.
While the outside foundries face challenges such as those stemming from the rising production of consumer electronics products, they are pleased to meet our requirements, and we expect that they will continue to precisely meet our requirements in the future.
Q6 : Regarding LSI sound chips for mobile phones, do you foresee any changes in market share?
A6 : Regarding our mobile phone LSI sound chip market share, we do not see major changes.
Q7 : You are projecting ¥32.0 billion in losses on write-downs. This figure seems fairly high compared with the total balance of tangible assets in the recreation segment. Could you explain the nature of the write-downs?
A7 : The ¥32.0 billion figure is mostly associated with recreation operations, although it does also cover some idle land assets associated with other sectors.
The total value of fixed assets in the recreation segment is roughly ¥50.0 billion, of which about two-thirds is depreciable assets and the remainder is land. In line with this proportion, we are projecting write-downs of about ¥20.0 billion for depreciable assets and ¥10.0 billion for land.
The switch from the straight-line depreciation method to the declining-balance method applies only to recreation operations, and it is designed to strengthen those operations.
Q8 : Your operating profitability in fiscal 2004 was quite close to the announced projections. However, it appears that you might have voluntarily recorded some discretionary expenses to make performance appear to coincide with projections. Did you take any special steps regarding discretionary expenses or increasing your liquidation of excess inventory?
A8 : Reflecting the June disbursal of performance-linked bonuses, personnel expenses in fiscal 2004 were up ¥2.0 billion. This had a negative effect on operating profitability.
Moreover, because 60% to 70% of the bonus payments were allocated to the musical instrument segment, the operating income of that segment declined to ¥10.5 billion, from the ¥12.0 billion in the previous projections.
Regarding inventory liquidation, we did not plan any special measures, but we did write off roughly ¥0.7 billion in inventories of semifinished magnesium components for mobile phones (goods in process), resulting in an operating loss for the others segment.
Q9 : If there have been any changes regarding the February projection of fiscal 2005 operating income, please explain them.
A9 : Compared with the February projection, we have made changes to projections for the musical instrument and electronic equipment and metal products segments.
We have revised the operating income projection for musical instruments down from ¥15.5 billion to ¥14.0 billion. Although the projection of the musical instrument segment’s performance is unchanged, we have revised upward our estimate of the overhead attributable to that segment.
The operating income projection for the electronic equipment and metal products segment has been revised upward from ¥15.5 billion to ¥18.5 billion to reflect the effects of present situation on performance in the first two quarters of 2004.
Q10 : Looking at the breakdown of operating income in fiscal 2005, one notes that there is an expected ¥3.0 billion rise in SG&A expense. What segment is this rise primarily attributable to, and what is the reason for the rise? Also, looking at segment projections, it appears that the profitability of electronic equipment and metal products is dropping while that of musical instruments is rising, could you explain the factors behind these trends?
A10 : Roughly speaking, we are projecting rises in SG&A expenses of ¥2 billion in musical instruments and ¥1 billion in AV/IT.
Looking at items within SG&A expenses, factors pushing them up are surging shipping prices and an expansion in shipping volume as well as growth owing to higher marketing promotion expenses.
Marketing promotion expenses are basically investments being made in line with the policy of proactively undertaking advertising campaigns and other marketing promotion activities.
Most of the ¥4.6 billion overall drop in gross profit is due to semiconductor operations. We are projecting a ¥3.5 billion rise in gross profit from musical instrument operations, but this is expected to be more than offset by a ¥9.0 billion drop in semiconductor operations.
Q11 : Could you explain why 4Q net sales of musical instruments were lower than the February projection?
A11 : Musical instrument sales were somewhat below the February projection, reflecting the implementation of inventory adjustments.
Profitability also was somewhat below the February projection due to such factors as lower production volume and higher personnel expenses.
In the future, as explained in the medium-term plan, we are expecting increased sales in China, an expansion in the professional audio equipment business, and an upturn in the Japanese market. Moreover, we are working to reduce costs throughout our manufacturing and materials procurement operations in a way that will promote steady progress toward our performance goals. Profitability is to be increased from two directions―through increases in the profitability of individual business sectors and through reductions in overall corporate overhead. We see the current fiscal year as extremely important regarding the attainment of these goals.
Q12 : Please explain your new product development strategy for musical instruments. Also, could you explain progress to date and future goals regarding strategies targeting adults, along with projections regarding conditions in the professional audio equipment market?
A12 : Looking at new products, in the wind instrument sector there is our “Xeno” series of products for professionals. We just launched a new Electone model, the “STAGEA,” that can connect directly to the Internet. We have an order backlog for this product of three to four months.
In addition, we have introduced new portable keyboard and electronic piano products and are continuing to prepare content for our content distribution business.
We are implementing strategies targeting adult customers that center on such measures as the creation of instrumental practice and learning facilities in major cities. We currently have completed about 50 such facilities as an initial business development stage, and in three years we aim to double this number.
Moreover, we plan to establish about 200 “unistyle” sites to serve both children and adults. Another initiative is a practice-facility business for adults, which we have already introduced in Sapporo and are planning to expand to include facilities in Tokyo and elsewhere throughout Japan.
In addition, we are planning to expand our musical instrument rental business, through which we have already rented about 4,000 instruments in the last fiscal year, and a figure that we are aiming to boost to the 6,000 to 7,000 range in the current fiscal year.
In Japan, people now in their 50s and others who have already retired are seeking productive ways to use their time in their next stage of life. These are the people we are offering our practice facilities to and organizing performance events for―helping to create social groups united by common interests. We are doing this by providing opportunities, products, and venues.
In the professional audio equipment business, the nature of the market varies somewhat from country to country. In the United States we have had particular success providing churches and other customers with digital mixers, speakers, amps, and whatever else is required, cooperating in this regard with other companies when necessary. These operations have been highly evaluated by customers, and we are planning to further strengthen them.
In Japan, we are naturally strengthening our business involving such facilities as music halls and music studios. In Europe our business strength varies among countries, but we are creating a system for comprehensively strengthening our presence.
We project that the scale of the global market for professional audio equipment is between ¥300 billion and ¥400 billion, and we are aiming to boost our annual sales in that market from the current level of ¥20 billion to ¥30 billion in three years.