A1 : As of November, we saw our way clear to obtaining sufficient supplies of parts and began to increase our production substantially. However, the workers we recruited were less experienced and production yields declined. Also, labor costs rose because of overtime and work time on holidays. This mainly affected the production of digital pianos and portable keyboards in Indonesia. Our understanding is that these adverse effects had almost run their course in the third quarter. Another point is that work at our factory in Indonesia stopped for several days in January because of a strike, but, by the end of January, we had made up for lost time, and believe there will be no adverse effects in the fourth quarter.
Q&As on the Presentation of Performance Results for the Third Quarter (Ended December 31, 2011) of FY2012.3 (Held on February 3, 2012)
Q1 : Could you please provide more details on the ¥1.5 billion shortfall from your outlook that you provided last time, which were due to production delays caused by the earthquake? Will there still be adverse effects from the earthquake in the fourth quarter?
Q2 : Please explain your reasons for lowering the sales outlook for the electronic devices segment for the full fiscal year from ¥20 billion to ¥16.5 billion. Also, what is your outlook for next fiscal year and thereafter?
A2 : We have lowered our sales forecast for almost all products. We were looking for a recovery in sales to the amusement equipment industry in the fourth quarter, but the market has cooled off and sales are not up to the level we had expected. In addition, because of the effects of severe competition among manufacturers of finished products, sales have been below expectations. Also, among other applications, sales of finished product manufacturers have weakened, and the drop in unit prices had a major impact on our sales. The full year outlook for sales of magnetic sensors has been revised downwards to ¥1.9 billion, which is far below the initial expectation.
We cannot provide specific figures at this time because we are in the midst of formulating plans for the next fiscal year, but our view is that a sudden recovery in the market will be difficult.
Q3 : You explained that there would be a decline of ¥4.4 billion in operating income due to the decline in actual sales in the musical instruments segment compared with your previous outlook. The adjustment in income seems to be too large compared with the revision in sales. Please explain.
A3 : The delays in production after the earthquake had a major impact on the high-margin, digital musical instruments business. The breakdown of the ¥4.4 billion decline is as follows: ¥1.5 billion due to a drop in gross profit because of the delay in the production of digital musical instruments, a decrease of ¥1.5 billion in gross profit because of deterioration in sales of other products of ¥3.2 billion, and a decline of ¥1.4 billion because of losses related to lower production capacity ratios and other factors.
In addition, we were looking for improvement in profitability in the fourth quarter for wind instruments, but production costs did not decline as much as expected because of parallel production through the integration of manufacturing bases and other measures, and these circumstances brought a deterioration in profitability.
Q4 : Compared with the previous outlook, inventories have increased and profitability has weakened. Was this because of the delay in supplying goods, or were selling conditions difficult? Can you really explain this relatively large downward revision in income by giving production delays as the reason rather than real demand?
A4 : Manufacturing costs were higher than we had anticipated. The supply of products that we had planned on during the year-end high demand season did not arrive in time, inventories increased, and the resulting unrealized gains had a negative impact. Also, as a result of the delays in production, work in process increased.
As to whether real demand had an impact, strictly speaking, there are some aspects in the European market and other areas where this issue is not clear, but, basically, our understanding is that sales opportunity losses because of delays in production were the cause.
Q5 : If ¥7.5 billion is the level of operating income that the musical instruments segment can generate after the decline, what level of income are you looking for next fiscal year?
A5 : This fiscal year, in the digital musical instruments business, where we experienced sales opportunity losses, we were unable to secure the operating income ratio we have in the past, and profitability and other indicators in the piano business are still currently improving. Therefore, we believe that figures that simply exclude the effects of the earthquake do not indicate the actual profit-generating capacity.
We are in the midst of formulating plans for next fiscal year and are not at the stage where we can provide specific figures.
Q6 : The outlook for sales in the electronic devices segment in the fourth quarter is substantially lower than the outlook you provided at the time of the announcement of second quarter results. Also, you have lowered your forecast for the full fiscal year to an operating loss of ¥3.0 billion. Please explain the reasons for this and the scenario you see unfolding going forward. What will be the timing of implementation of the response you have formulated that assumes the worst possible case?
A6 : Our view is that drastic measures will have to be taken to deal with the deterioration in profitability in the semiconductor business.
The only thing we can say is that the best timing will be as soon as possible. The initial sales outlook has undergone major change, including the negotiations which previously had virtually reached a conclusion. Our understanding is that the biggest issue for the time being will be to increase the competitiveness of all processes, including development, manufacturing, and sales.
Q7 : Please provide further details on the breakdown of the ¥5.7 billion decline in income due to decreases in actual sales and production, which will bring the drop in operating income that you are now forecasting for the full fiscal year.
A7 : The changes in the outlook for operating income are due to the following: A reduction of ¥4.4 billion in the musical instruments segment, an upward revision of ¥1.0 billion in the AV/IT segment, a reduction of ¥2.1 billion in the electronic devices segment, and a decrease of ¥0.2 billion in the others segment.
Q8 : Please explain the factors that led to the strike in Indonesia and the current status of the situation.
A8 : The labor representatives requested a 20%-or-more increase in the minimum wage. In response, the group on the management side objected to this and made an appeal. The labor side called on workers of the companies in the industrial park to participate in a demonstration as they entered the gate and thus caused a disruption of the movement of the workers into the park. To avert any unexpected circumstances, including the entry of demonstrators into the plant, Yamaha's Indonesian subsidiary ceased operations for several days. Our understanding is that, finally, the president of Indonesia presented a plan for the minimum wage to settle the dispute, and the situation has been brought under control.
Q9 : If the minimum wage is assumed to rise 25%, what will be the impact on production costs?
A9 : The outlook is for annual cost increases, but even with an increase in the minimum wage, personnel costs will not rise across the board. We are planning to incorporate annual personnel cost increases of between 7% and 8% in Indonesia into our plans.
Q10 : Was there any surge in demand in North America and Europe in the third quarter prior to your price increase?
A10 : In December and January, we made price increases in the various regions on a product-by-product basis. There was a surge in demand before the price increase in some parts of Europe, but there was almost none in North America. Our understanding is that the increases have been accepted by the market.
Q11 : Did the growth in Yamaha's piano sales in China exceed the rate of growth in the overall market?
A11 : Our sales of pianos are growing at more than 20% annually, but we estimate that in the market as a whole in China, the growth rate is not that high. We believe that we are taking market share from other piano manufacturers to attain this high rate of growth.
Q12 : Please indicate what factors will be responsible for the substantial operating loss of ¥1.7 billion on sales of ¥4.6 billion in the electronic devices segment in the fourth quarter.
A12 : The new factors that will lower profitability that we are taking account of in the fourth quarter are as follows: usage of R&D budgeted cost of ¥400 million ahead of schedule, repair expenses of ¥150 million at the Kagoshima manufacturing base, declines in inventory valuations of ¥250 million, and decreases in unit prices of Codec, magnetic sensors, and certain other products.
Q13 : Why is the loss on the valuation of inventories so large?
A13 : The decrease in unit prices has been quite steep.
Q14 : The margin of decline in the AV/IT segment in the fourth quarter is significant. Please explain the reasons for this.
A14 : The drop in shipments of karaoke equipment in the fourth quarter will be a major factor. As a result of inventory adjustments among customers, shipments in the fourth quarter, which were ¥2.5 billion in the previous fiscal year, are expected to drop to ¥200 million in the fourth quarter this fiscal year.
Q15 : You are forecasting an operating loss of only ¥300 million in the fourth quarter in the musical instruments segment. Will this be due to smaller production adjustments than in the fourth quarters of previous years and an appropriate level of inventories?
A15 : There will not be any special factors causing increases or decreases in production and inventories in the fourth quarter. We will continue to reduce selling, general and administrative expenses and are looking for a comeback, after previous delays in the production of digital musical instruments. These factors are likely to make improvements in profitability in the fourth quarter.
Q16 : What is the level of sales in the electronic devices segment necessary for breaking even?
A16 : At present, our guideline for breakeven in annual sales in that segment is ¥20 billion (or ¥5 billion on a quarterly basis).