A1: As you might think, these two factors are at work determining the final outcome. Perhaps it is more important that our market share is increasing than the market as a whole is expanding. By expanding sales volume in quantity across our broad product lineup, we think we can drive overall growth.
Q&As on the Presentation of Performance Results through the Second Quarter of the Fiscal Year Ending March 31, 2019 (FY2019.3)
Q1: It appears that sales in China are proceeding smoothly, but consumption in China as a whole is declining. Please explain what factors will be decisive in determining the outcome: Will Yamaha's strengths prevail or will consumption of musical instruments be less likely to decline?
Q2: In the first half of the fiscal year, performance of acoustic pianos was highly favorable, but, on the other hand, it appears that growth in digital musical instruments has been slow over the previous year. What are the factors accounting for the difference in rates of growth in pianos versus digital musical instruments?
A2: In recent years the 5% growth rate over the previous year in pianos has remained unchanged, while we are forecasting that growth in digital instruments for the full year will be about one percentage point lower than the 5% in the previous year. This view is based on the fact that sales of Electone™ electronic organs have declined in the Japanese market and the fact that the high-priced portable keyboards that we launched last year are entering their second year and are showing some signs of weakness. Therefore, there will be no major changes in trends.
Q3: It appears that your forecast for foreign exchange rates in the second half of the fiscal year is conservative. Please provide us with some estimates of the sensitivity of performance (operating income) to changes in exchange rates.
A3: A change of one yen in the US$ to yen exchange causes a change of 200 million yen in operating income, while a change of one yen in the euro to yen rate causes a change of 450 million yen. Also, a change of one yen in the RMB will cause a change of 660 million yen in operating income. In addition to these exchange rates, the RMB to US$ exchange rate may also have an impact, along with changes in the value of other currencies against the U.S. dollar.
Q4: Please give us your views of the impact of tariffs that may be imposed due to trade frictions between the United States and China.
A4: Musical instruments will not be affected, but some audio equipment products may be impacted. The overall effect on profit will not be major.
Q5: Please provide an explanation of the measures that Yamaha will take under its growth strategy for guitars.
A5: We have transferred our strategic functions for the guitar business to the United States. By building a strong position in the U.S. market, we are aiming for a global ripple effect or "blanket coverage" effect and have begun activities to achieve this. We are currently discussing a number of ways to convey the excellence of Yamaha guitars through a specific story and message from the standpoint and sensitivities of Americans.
Q6: Could you provide a somewhat more detailed explanation of your progress in cutting costs?
A6: There are a number of aspects to cutting costs, including reducing procurement costs, improving manufacturing processes, and lowering fixed costs, but we are making progress in line with our plans aside from those to cut procurement costs. Looking at cutting procurement costs alone, our initial forecast was that the reductions in these costs would be between 1.5 billion yen and 1.6 billion yen for the year, but, as a result, costs are likely to increase. Regarding overall costs reduction, for the current fiscal year as a whole, we estimate that we are behind targets by about 2.6 billion yen.
Q7: You will be making major investments toward launching the next Medium-Term Management Plan. However, as the macroeconomic environment changes, please tell us your views regarding strategic investments and the start-up of production at your new factories in Indonesia and India.
A7: At present, Yamaha's production facilities are operating at almost full capacity. Basically, our capital expenditure is to expand facilities in line with the development of our businesses. However, to prepare for the future, we are working to secure some leeway for future expansion in our land holdings.
The buildings that will house our plants in India and Indonesia have almost been completed, and the plant in India will go into operation this fiscal year. On the other hand, the startup of production in Indonesia is expected to be delayed by three to four months as a result of the implementation of revisions in a portion of production plans in response to recent strong demand for pianos in China.
Q8: In the musical instruments business, performance in the United States is favorable, while performance in Europe has been somewhat slow. This is due to factors in those specific markets. Could you explain your views of market conditions in individual markets? Also, please explain the current status of inventories.
A8: Market conditions in the United States are extremely favorable. In the first half, we have shown major increases in sales in this region, in part because of tough conditions in the previous fiscal year.
We are forecasting that performance will return to normal levels in the second half of the fiscal year.
There are uncertainties in the European market, including the impact of Brexit in Europe and uncertain factors in Turkey. However, we believe that the outlook for the impact of reviewing sales conditions will settle down, and we will report sales at about the same level as in the previous fiscal year.
Regarding inventories, in view of our reconsideration of the issues that arose in getting a good grasp of inventories last year in the United States, we are working to better acquire information from the dealers, especially large-scale dealers. At present, our understanding is that channel inventories are not a major issue.
Q9: What are your views regarding the sustainability of sales growth in China over the coming three to five years? Also, how do you think profit margins will change going forward?
A9: Although growth in the piano market as a whole is slowing, we are seeing Yamaha's market share continue to rise. We believe that there will be further room for us to grow. On the other hand, the markets for digital pianos and guitars are expanding and we can expect growth in these businesses. In addition, in the wind instrument business, the Yamaha brand is becoming widely known, and growth in this business is continuing. In the past, pianos were the first pillar of our business, but the markets for other instruments are also expanding. We think this growth will continue.
Profitwise, digital musical instruments are more profitable than pianos. Another positive factor is that sales in unit volume terms of wind instruments and guitars, which have high marginal profitability, are expanding. Therefore, we are not expecting any major change in profitability.
Q10: As Yamaha aims to attain an operating income ratio of 20% in the long-term, at present, an issue is the difficulty of dealing with the rising cost of procurement to achieve cost reductions. Could you explain the measures that Yamaha will take to address this issue?
A10: Under our current Medium-Term Management Plan, we aim to improve profitability by one percentage point each year through cost cutting as the major measure. However, our understanding is that cost reductions cannot be continued forever and that it will become more important to optimize sales prices to appropriate levels. Although this cannot be accomplished quickly, we are seeing gradual results begin to emerge at present as we change prices in increments that will not change demand.
In addition, since fixed costs remain unchanged, profit ratios will improve as we increase sales. We believe that by using these various approaches in combination, we can further improve our operating income ratio through steady efforts.
Q11: Could you please review developments after your implementation of changes in sales conditions in Europe last year?
A11: We were convinced that all of the dealers have agreed and understood the new sales conditions as we took the time to explain them carefully. On the other hand, on a purchase orders basis, there are factors that depend on features of our products. While this process is taking time, we are actively receiving orders from our dealers for our products with a competitive edge. As regards the direction of the business, the dealers' margins will rise under the new sales conditions and we believe that developments are moving in a favorable direction both for us and for our dealers.
Q12: You have not changed the outlook for the full fiscal year for the others business segment. At present, in part because orders for factory automation (FA) equipment have declined, we would appreciate it if you could explain how you took account of risk for the full year results when you decided to leave the forecasts unchanged.
A12: In brief, we left the forecasts unchanged because we believe that there were not sufficient elements to justify a modification in the outlook. To begin with, business performance, including the FA equipment business, was quite favorable in the first half of the year, but we prepared a weaker performance outlook for the second half. For the full year, our forecast is little changed from the previous forecast.
Q13: In the forecast for the full year, you plan to reduce SG&A expenses by 1 billion yen compared to the initial plan. Please explain specifically what costs you are planning to reduce.
A13: In the current forecast for the fiscal year, SG&A expenses are up 4.3 billion yen compared with the previous period. Since our original outlook was for SG&A expenses to rise 5.3 billion yen compared with the previous fiscal year, we are restraining these costs. Since this result came from a more specific review of the respective items, we did not suspend any major projects.