A1: Regarding SG&A expenses, we restrained mainly strategic expenses temporarily, but since the sales performance in the fourth quarter was strong, we decided to relax restraints on these expenses in both the musical instruments and audio equipment business. Particularly, in the case of professional audio (PA) equipment, we accelerated the use of strategic expenses, and, as a result, SG&A expenses in the audio equipment business rose above the planned level.
Q&As on the Presentation of Performance Results for the Fiscal Year Ended March 31, 2018 (FY2018.3)
Q1: Could you please explain why the selling, general and administrative (SG&A) expenses in FY2018.3 were above your previous forecast?
Q2: In Slide 8, in your "outlook of operating income analysis" of FY2019.3, you appear to indicate that the margin of increase in operating income will be larger than the increase in real sales, excluding the impact of exchange rates. Could you explain this in somewhat more detail?
A2: The "actual increase in sales and production, product mix, etc.," will be the largest factor accounting for the increase in income. In addition to the increase in sales, the "product mix" and "revision of selling prices" are also factors that will contribute to the rise in operating income.
We will be implementing measures to revise selling prices to appropriate levels, including the setting of prices of new products.
Q3: With a view to the next phase following attainment of the goal of an operating income ratio of 12% under the current Medium-Term Management Plan, could you please explain your views of how the income ratio can be improved?
A3: In the medium-to-long term, under its Management Vision, Yamaha is aiming to be an "indispensable, brilliantly individual company" and has set the goal of a 20% operating income ratio. Yamaha is now implementing many measures to reach this figure. To attain this goal, I consider marketing measures to strengthen the Yamaha brand very important.
I believe that not only having strong products but also implementing marketing strategies with a long-term view for making Yamaha a premium brand can contribute to appropriate selling prices. Along with these initiatives, cost reductions will also lead to achieving further increases in profitability.
Q4: Yamaha’s guitar sales have shown major growth, and it appears that your initiatives in this business thus far are generating results.
On the other hand, bankruptcy of a competing company has also played a role. What is your view of the market environment? Also, please give us your views regarding the large guitar markets in Europe and the United States.
A4: Sales of guitars in China showed very high growth, and, especially in the fourth quarter, when they rose more than 50%. A major reason for this expansion has been the strength of Yamaha’s brand image in China, particularly supported by the trust placed in Yamaha pianos and other musical instruments. We have not had the impression that the guitar market was shrinking because of the bankruptcy of a competing company.
In Europe and the United States, Yamaha’s market share in the acoustic guitar business has been increasing gradually. In the electric guitar business, we have launched new models to raise market share in the future. Going forward, we plan to make the most of our business base in the United States to expand our global market share. In the case of electric guitars, there is a strong tendency for seniors to be loyal to the brands they are familiar with; so, we are working especially hard to promote the Yamaha brand among the young generations. In these promotional activities, rather than expecting results in one or two years, we are taking a somewhat longer-term approach to growing our guitar business.
Q5: Would you please comment on the medium-term prospects for the emerging markets, excluding China?
A5: Until fairly recently, the emerging markets were suffering from tough macroeconomic conditions, but there has been substantial improvement, and we are forecasting high growth for the coming fiscal year. In addition, in the emerging markets, we are currently taking measures to create new demand through our Music Time school project and other activities. We think activities of this kind will lead to further growth.
Q6: What is your outlook for the market environment during current fiscal year?
One factor in reducing the level of inventories of musical instruments and audio equipment in FY2018.3 was production adjustments in the fourth quarter. Could you please explain this in more detail?
A6: Our outlook calls for continued firm performance in FY2019.3. By regions, demand in China is expected to be robust, and favorable performance is likely to continue. In the emerging countries, sales are returning to previous levels, mainly in the resource-producing countries. In FY2018.3, more than half of Yamaha’s local subsidiaries of the emerging countries attained double-digit growth and are expected to report robust performances.
Performance in Europe also held firm.
In the Americas, growth is forecast to continue supported in part by an increase in population due to immigration into the U.S. and other factors.
On the production side, Yamaha is making adjustments, giving close consideration to the outlook for sales; however, in view of the level of inventories, Yamaha made some minor adjustments in production in Q4.
Q7: There will be a large difference in free cash flow from 52.5 billion yen in FY2018.3 to 12.0 billion yen in FY2019.3. Please provide an explanation of this differential.
A7: The principal reason for the difference in free cash flow between the previous year’s results and the current year’s forecasts was the sale of a portion of Yamaha Corporation’s equity holdings in Yamaha Motor Co., Ltd. in the previous fiscal year. In addition, Yamaha Corporation will pay taxes of about 8.0 billion yen in FY2019.3 related to the sale of a portion of Yamaha Motor stock that was unpaid as of March 31, 2018.
As a result of the construction of Yamaha’s new Innovation Center (R&D Center) and two new factories overseas, capital investments were at a relatively high level in the previous fiscal year, and will remain high during the current fiscal year. These investment outlays will decrease in the following year.
Q8: What were your initiatives in FY2018.3 aimed at revision of selling prices?
A8: We believe that, if we can offer products at prices that our customers think they are appropriate, we can reach customer satisfaction while revising selling prices.
In FY2018.3, there were mainly two reasons for delays in initiatives to reach appropriate price levels. One was some confusion caused by changes in selling conditions in Europe.
The other reason was that, since inventory levels were high in the United States, there was insufficient progress made in sales drives, especially in the second quarter, thus making it difficult to make a timely transition to appropriate sales price levels.
Regarding the changes in selling conditions in Europe, previously, many sales discounts were made on the basis of sales volume. Yamaha took the initiative in bringing about a qualitative business in the market and to begin a new era in the whole industry; however, gaining acceptance has required some time.
Q9: Last year, business was affected by natural disaster in the United States and changes in selling conditions in Europe. What is the current status of these factors?
A9: Because of the impact of natural disaster in the United States and the high levels of inventories, we did not make progress in our sales drives; also, it took some time to make adjustments in confusion created by changes in selling conditions in Europe. However, we believe conditions have now been normalized.
Q10: As customers’ tastes and likes become more diverse, we have heard that Yamaha has responded successfully in its marketing activities aimed at younger generations in China. What are your views concerning these activities?
A10: What customers find appealing varies according to region and age-group, but, at present, there are effective tools for identifying and reaching to these differences. By making use of digital marketing tool, principally SNS, it is possible to conduct pinpointed marketing activities, focusing on specific customer targets, which formerly was difficult. Since it is necessary for Yamaha to upgrade the use of these digital tools, Yamaha has newly formed a Marketing Division for this purpose.
Also, in China, taking into account the ideas and interests of young local staff members to approach young people through SNS channels is generating positive effect.
Going forward, Yamaha plans to extend these activities globally and further develop its marketing approaches.
Q11: Under the current Medium-Term Management Plan, it appears that cost reduction is progressing mainly through realignment of production systems in the acoustic musical instruments business. Looking ahead, what are the prospects for further reducing costs?
A11: One of our major cost reduction initiatives is making the transition to multi-product manufacturing factories. By shifting from single-product category to multi-product category manufacturing, we have been able to even out utilization rates and attain lower costs.
In addition, we made changes in our production phases, shifting the structural component production phase from Japan to overseas factories.
At present, we are also proceeding with mechanization in our overseas factories. In Japan, we mechanized operations along with wage increases, but had not made this shift to the same extent in our overseas factories. Going forward, by making this transition, we believe we can achieve some positive benefits. We are also looking to make some further drastic reforms in our production processes and continue our initiatives to reduce costs.