A1 : We lowered the forecast you mentioned for two reasons. Sales of musical instruments at the end of calendar 2007 faced tough conditions in the U.S. and Japanese markets. Therefore, to deal with the somewhat weighty backlog of inventories at the end of 2007, first we will conduct special sales campaigns, which will lead to a decline in operating income of between ¥0.4 billion and ¥0.5 billion. Second, we will increase sales promotion expenses about ¥1 billion over the forecast we had announced previously to stimulate market conditions.
Q&As on the Presentation of Financial Statements for the Third Quarter of FY2008.3, held on February 7, 2008
Q1 : Could you please explain why you have lowered the previously announced forecast for operating income in the musical instruments segment for the fourth quarter of the current fiscal year?
Q2 : What is your outlook for market trends in the next fiscal year, focusing especially on musical instruments?
A2 : We believe that, overall, tough conditions will persist in the U.S. and Japanese markets.
In the U.S. market, piano sales have become more difficult because of the impact of weakness in the number of housing starts. Furthermore the effects of the subprime loan and other issues began to spread as well in December 2007, and these are expected to continue for somewhat longer.
The market is showing signs of bipolarization. By that, we mean that conditions are becoming tougher in the low-priced categories, while conditions in the medium- and upper-priced categories are holding relatively firm. We are aiming to increase our market share, mainly in the digital piano field.
Conditions in the Japanese market were relatively firm through October 2007, but we have experienced a slowdown since November. We believe that similar conditions continued in January 2008 and, then, will continue through the end of the first half of this year.
On the other hand, although there is some concern about a slowdown in European markets, conditions there are holding generally firm. In addition, we are looking for continued favorable conditions in Asia outside Japan and other markets.
Q3 : How much influence does a one yen change in foreign exchange rates have on your profitability? Also, what measures will you take in the event that the yen strengthens?
A3 : Our imports and exports denominated in U.S. dollars are in balance. As a result, the impact of fluctuations in exchange rates is just about neutral. However, the impact of a one yen fluctuation against the euro affects our profitability by about ¥430 million. Therefore, if the current exchange rates continue, this will result in a decline in profitability in the coming fiscal year. For this reason, going forward, we want to maintain the increasing trend in profitability by expanding sales of high-value-added products and reducing costs.
Q4 : The U.S. market is slowing, but could you tell us about the most recent trends on a local-currency basis?
A4 : In December 2007, sales of musical instruments were about 92% of the level during December of the previous year. AV equipment sales in the United States in December 2007 were about the same as for December of the previous year. The weakness in musical instrument sales was due to the adverse impact on piano sales of lower housing starts and tough selling conditions for portable keyboards in mass merchandisers. According to preliminary data for January 2008, musical instruments were down about 2% from January a year earlier, but AV equipment sales were down about 10% year on year.
Q5 : As of December 31, 2007, what were Yamaha Motor’s holdings of Yamaha Corporation’s stock?
A5 : As of September 30, Yamaha Motor Co., Ltd. held 2.9% of Yamaha Corporation’s shares. We are not aware of any movements in holdings since then.
Q6 : Would it be correct to assume that the adjustment in inventories of musical instruments and AV equipment will be completed by the end of March 2008? What is your outlook for sales in the fourth quarter of FY2008.3? Also, what is your appraisal of inventories held by retail stores?
A6 : As of December 31, 2007, inventories were higher than we had assumed, because of lower sales and other factors. However, at present, we do not believe any sudden inventory adjustments will be needed. We are planning to make balanced production adjustments that will enable us to secure sufficient inventories to meet spring demand this year. Of course, we plan to eliminate inactive inventories by the end of March this year. In the fourth quarter of FY2008.3, we are expecting sales that, overall, are at about the level forecast previously. We believe sales in North America will experience a slight decline, those in Europe will show a slight increase, those in Japan will experience a decline, while sales in the Asia-Pacific region outside Japan will increase.
Regarding inventories in retail stores, while musical instrument retailers in the United States have some inventories, they are more cautious than they were previously. In addition, orders received this year at the U.S. national musical instruments trade show in January were relatively firm. We, therefore, think that the level of inventories in retail stores is not excessively high. In Japan, we believe the inventories held by musical instrument retailers are at an appropriate level.
Q7 : Sales of LSI sound chips for mobile phones are on the decline, especially overseas. What is your outlook for this business?
A7 : We believe that domestic demand for LSI sound chips for mobile phones will be at about the same level as during the previous year. However, looking overseas, manufacturers in Korea and elsewhere are accelerating their shift to software. Going forward, we expect this trend to continue without any major changes. For this reason, we are planning to expand sales of LSI chips for digital amplifiers, and pachinko machines and other uses.
Q8 : We understand that the development of your silicon microphone is behind schedule. What are the reasons for this delay?
A8 : Shipments of silicon microphones have been delayed because it has taken somewhat more time than anticipated to put the finishing touches on these products, including confirming their reliability, principally their durability. However, these microphones have already cleared durability tests, and we are scheduled to move forward with full-scale volume production in March.
Q9 : Is it correct that inventories have increased in Japan and the United States? If so, what products increased? Also, is the increase in inventories due to competitive conditions? Or is the buildup owing to lower demand for the overall market?
A9 : The increase in inventories is not due to competitive conditions, but has resulted from a misreading in our forecasts of future demand. Shipments of musical instruments were on track through November, but were off target in December, and this led to the rise in inventories.
Stocks of pianos and portable keyboards are up in the U.S. market. Even though overall piano sales in that market have declined 20% year on year, our understanding is that sales of Yamaha pianos there have held relatively firm.
Another factor has been the lower-than-anticipated demand for portable keyboards from mass merchandisers.
Separately from musical instruments, inventories of AV equipment have increased as growth in sales in Europe and North America has slowed.
Q10 : You are aiming for further increases in profitability in the musical instruments segment next year. Could you please explain the direction growth will go, taking into account the impact of your M&A activities?
A10 : Rather than relying on the positive impact of M&A deals for growth, we are planning to maintain sales growth from the introduction of new products and through growth in Eastern Europe and other newly emerging markets.
Q11 : Although musical instrument sales, after excluding the effect of foreign currency exchange rate movements, were ¥1.1 billion lower than in your previously announced outlook, operating income was actually ¥1.3 billion higher than the previous forecast. Could you please explain the factors accounting for this?
A11 : Factors included growth in sales of digital pianos and medium- to high-end wind instruments with high profit margins as well as reductions in manufacturing costs and other expenses.
Q12 : You have revised your previously issued outlook for operating income of the musical instruments segment upward by ¥0.5 billion, but, while the third quarter fluctuated upward, should we assume that operating income in the second half of the fiscal year will be according to forecast?
A12 : During the fourth quarter, we will incur costs in reducing the increase in inventories that occurred in December 2007, and we will be making strategic expenditures for growth in the coming fiscal year. Therefore, overall, the upward fluctuation in the third quarter will be offset in the fourth quarter.
Q13 : In the musical instruments segment, over the past two years, you have made improvements in profitability of about ¥8 billion per annum. Will it be possible to make improvements in profitability in the coming fiscal year through cost-cutting and the continuation of the current growth of existing products categories? Or will it be necessary to adopt policies that are discontinuous with ongoing measures?
A13 : Going forward, we are looking for a positive impact on profitability from a number of factors, including reducing costs through review and improvement in production methods, lowering material costs, standardizing parts, and adopting other measures as well as declines in personnel costs owing to attrition of employees reaching retirement age and other factors.
In Japan, for the time being, one-time costs associated with the consolidation of our piano manufacturing plants are temporarily running ahead of the benefits of this consolidation, but we are expecting the positive benefits to emerge in FY2010.3 and subsequently.
We are also looking toward positive benefits that will arise from the realignment of our operations in Europe and the integration of our information systems. Accordingly, for the time being, we believe that improvement in profitability will be possible without adopting any policies discontinuous with ongoing measures.
Q14 : Please explain the measures you will adopt to improve profitability in the piano and string and percussion instrument businesses.
A14 : As we announced in our medium-term business plan, we intend to aim for growth by implementing our “Total Piano Strategy,” a comprehensive strategy for pianos, covering acoustic pianos and digital pianos.
We are aiming to expand our guitar business especially in the field of electronic-acoustic guitars, and, for that purpose, we are moving forward with the development of sound generating technologies, including pick-ups.
In the drum field, we are proceeding with the development of a new electronic drum, and our view is that this new product will contribute to growth in the next fiscal year and subsequently.
Other initiatives we are taking include further developing the facilities for the musical artists to deepen our relationships with music professionals and taking further steps to lower costs.