Takuya Nakata - President
Yamaha Corporation (OTC:YAMCF) Q1 2014 Earnings Conference Call July 31, 2013 9:00 PM ET
I'm Nakata of Yamaha. I have been appointed President at the annual shareholders' meeting in June. It has been a month since, and through this month I have been implementing various measures to execute my mission, which is to achieve the targets of the midterm business plan. It is still early to see the actual outcomes, but I will do my best to achieve my objectives. I will appreciate your ongoing support.
Let me turn to the results of the first quarter of 2014. As you can see in this summary, in a nutshell, with the (following) of the weaker yen, we were able to achieve increase in both sales and income against the previous year. Against the previously announced projections announced on April 30, again, both sales and income exceeded expectations. However, in terms of actual results, with the worldwide slowdown in both economic growth and consumption, Musical Instruments and Audio Equipment sales were down year-over-year.
We were able to achieve increase both year-over-year, and against previous projections for operating income the positive income coming from the weaker yen and a decrease of actual SG&A.
Net sales increased by ¥7 billion year-over-year reaching ¥97 billion yen a growth of 7.7% against the previous projections it was an overshoot of ¥3 billion yen up by 3.2%.
Operating income was ¥6.2 billion, 45% rise year-over-year and 146.6% over the previous projections. Ordinary income was ¥6.3 billion, 65.9% above the previous year. It was above the previous projections by 214.5%.
Net income was ¥5.8 billion. The reason of these major increases was mostly due to the exchange rate. This quarter, the exchange rate was ¥99 to the dollar and ¥ 129 to the euro in sales and ¥98to the dollar and ¥121 yen to the euro in operating income. Based on this currency rate, we were able to generate aforementioned results.
These are the results by business segments. I have mentioned this when I touched upon our net sales. But in this slide, the currency impact is mentioned. Year-over-year the positive impact coming from the exchange rate was ¥10.4 billion. Net sales grew by ¥7 billion and exchange rate contribution was ¥10.4 billion, so if you do some math the difference is ¥3.4 billion is actually the decline in sales we saw in our actual business. Against, previous projections, currency contributed to an increase of ¥6.8 billion.
So while sales was above the target ¥3 billion, if you subtract this ¥6.8 billion increase coming from the exchange rate, actually it was below the target by ¥3.8 billion.
Operating income grew from ¥4.3 billion to ¥6.2 billion but the impact coming from the exchange rate was ¥2.6 billion. This means in reality operating income declined slightly. The exchange rate impact is shown here by each segment such as musical instruments, audio income et cetera. I would like to explain in more detail by each segment later.
The next slide is analysis of changes in operating income for the overall businesses. It starts with ¥4.3 billion, the operating income of the previous year’s first quarter. Manufacturing cost increase was mainly due to labor cost which accounted for ¥0.7 billion increase in cost.
As I said earlier net sales declined in local currency. Decrease in production to match sales decline was negative factor of ¥1.1 billion. This was offset by the ¥2.6 billion gains coming from the exchange rate. Another ¥0.5 billion contribution came from structural reform, while ¥0.5 billion came from improvement in manufacturing cost. Decrease in actual SG&A was ¥0.1 billion, which brings us to ¥6.2 billion for this first quarter.
As for the difference versus the previous projections, the exchange rate and actual decrease of SG&A were major factors.
Next, let me explain the situation by each segments. Net sales grew by ¥158.8 billion to ¥62.6 billion year-over-year in the musical instruments segment. However, if you consider the ¥6.6 billion positive impact coming from the exchange rate, sales actually declined year-over-year. Especially, while we were anticipating a major increase in the other markets in China, the result was a decline in sales.
By product line, digital piano sales grew on actual basis although for other instruments actually declined.
Operating income is shown on this slide. Going to the audio equipment segment, sales grew year-over-year from ¥20.5 billion to ¥23.5 billion. But, again, ¥3.5 billion of positive impact came from the exchange rates. So, if you strip this out, actual sales declined year-over-year.
The three major areas in the segment area are PA equipment, AV products and routers. Sales grew strongly in North America, Europe and other region for PA equipment has struggled in Japan and China. Operating income decreased although the top line grew. This is due to the forward investment in development of professional audio equipment, which led to a decrease in operating income.
Next is electronic devices segment. Net sales surpassed both the previous year’s result and the previous projections. Geomagnetic sensors and codec product sales were brisk due to the robust smartphone businesses, which led to increase of sales.
Furthermore, thanks to the business structural reform that we conducted in the prior year, we were able to reduce fixed costs. We were forecasting break-even for the segment in the previous projections but have been able to achieve ¥400 million of profit.
For the other business, sales and income were slightly below the previous year and against previous projections but it is not the case that the businesses are weak. This is due to the situation in the last year whether automotive interior wood component sales grew strongly with model changes taking place while none of this happened in this quarter.
FA equipment businesses were robust in the overseas market leading to increase of sales year-over-year. Both product sales grew in the overseas market. But remain sluggish in Japan leading to a decrease in sales year-over-year. The reserve business sales grew slightly year-over-year.
Next I would like to explain about the outlook from the second quarter for the fourth quarter and the full year. In the context of our outlook from the second quarter to the fourth quarter, I would like to first mention about the China market. In the first quarter, we saw a distribution inventory increasing especially for pianos and sales struggled in this market.
However, we think that inventory adjustment has more or less runs its course. So we are anticipating increase in sales and also contribution coming from new products. However, although we had quite a bullish outlook for the musical instruments and audio equipment business in China, we will certainly revise our growth projections for China downwards.
The situation is different country-by-country in other markets as media has been reporting there is some concern in the interest rate environment in the United States and we recognize the environment continues to be challenging. We have no choice but to accept the situation.
The North American market seems to be gradually recovering despite some volatility. The European market continues to be challenging. However, new digital musical instruments perhaps have had solid sales in Europe are going to be launched in the second half. We expect growth coming from these products.
Let’s turn to our full-year forecast. First of all, we have reviewed our currency assumptions to ¥95 to the dollar and ¥125 to the euro. Our previous assumptions were ¥85 and ¥115 but we took into account the actual exchange rate. Although, it’s currently a bit higher than device assumptions, considering that there is a lack of visibility going forward, we decided on the new assumptions. As a result, our revised forecast is ¥408.6 for sales operating income ¥20 billion.
Specific figures are shown in this slide, the previous projections for the net sales of ¥390 billion has been revised to ¥408 billion, so it is a 4.6% upward revision, the previous projections for operating income was ¥18 billion but it is now ¥20 billion.
Ordinary income was revised up as well by ¥2 billion to ¥18.5 billion; we also revised net income upwards by ¥3 billion to ¥16.5 billion.
I also mentioned that we changed our ForEx assumptions to be used from the second quarter to the fourth quarter to ¥95 to the dollar and ¥125 to the euro. If this is circulated to reflect the results for the first quarter for the full year, the exchange rate for sales would be ¥96 to the dollar ¥126 to the euro and for operating income ¥96 and ¥124 respectively. Our vision for the full year forecast was made based on these assumptions.
I would like to explain in more detail by each segment. The previous ¥390 billion forecast has been revised to ¥408 billion. The underlying business environment being tough actual sales underwent a downward revision. To see the impact of the exchange rate in the slide, these are ¥34.6 billion plus year-over-year and ¥25.9 plus against the previous projections. We had revised operating income up by ¥2 billion but the currency impact announced were ¥11.8 billion year-over-year and ¥5.8 billion against the previous forecast.
The factors are shown on this slide. It starts with ¥9.2 billion, a negative impact is coming from the increase in manufacturing cost ¥2.7 billion, decrease in actual production ¥1.3 billion and actual SG&A increased inline with the increase of sales by ¥2.1 billion. On the positive side, we have ¥11.8 billion coming from the impact of exchange rate ¥2.5 billion from the effects of structural reform and ¥2.6 billion due to the improvement in manufacturing cost, which brings us to the projection of ¥20 billion.
A lower part of this slide is comparison against previous projections, the previous projection was ¥18 billion but a decrease in actual sales in production is minus ¥4.7 billion, while the ¥5.8 billion impact coming from the exchange rates more than offsets this decline.
We are planning to reduce actual SG&A by ¥0.9 billion, which brings us to ¥20 billion for the revised projection up by ¥2 billion compared to the previous one.
Let me explain by segment. First, there is the musical instrument segment, sales and income projections have been revised by reconsidering exchange rates in market conditions. This means that although on the surface sales seem to be growing, but in reality we are projecting a decline.
I had touched upon the European market previously, but our projection is that a rebound is going to be made to previous year’s level as new digital music instruments products are launched. Although, the markets were continuing to be challenging, we think we will be able to make a recovery in the digital musical instruments business. We think that we can expect the natural growth in the Chinese market on a full year basis as the coverage around the piano distribution inventory adjustment ends. Sales are expected to recover in other markets especially for digital musical instruments.
This slide is a sales by region for musical instruments. From the left, they are Japan, North America, Europe, China and other regions. The upper part is the first quarter results, the bottom half is the full year projections. The actual sales in each of the regions declined for the first quarter.
We think that overall, this trend will continue for the full year. As for the North American market, sales decreased on a year-over-year basis but we are projecting it to grow 3% for the full year.
Europe is expected to grow by 1% for the full year due to reasons I have mentioned before. The Chinese market used to grow at a double-digit pace, so growth will not be as strong. But that said, we are forecasting a 5% growth for the full year. Other regions are expected to grow by 4%.
Next are the full year projections for the audio equipment segment. Sales and income are expected to rise year-over-year and operating income will be inline with the previous projection. Exchange rates are likely to have a positive impact on sales by ¥11.8 billion and an operating income by ¥3.3 billion respectively.
Karaoke equipment sales were strong in the first quarter. However, for the full year it is expected to decline because of adjustment taking place. Router sales were weak in the first quarter but it is expected to increase with the market recovery.
This is the sales break down by region for audio equipment. First, let’s look at the first quarter results. As I explained at the beginning of the presentation, the North America and European markets were robust with a year-over-year growth as well as other regions. However, sales declined in both Japan and China especially in China sales were stagnant for political reasons and the current policies taken by the Chinese government.
As for the full year projection, the Japanese market will recover but will not be able to go back to the previous year’s level. But, for North America, Europe, China and other regions we anticipate that we will be able to maintain an increase in sales. The sales declined substantially in the Chinese market for the first quarter, for the full year, we think growth would be just slightly over the previous year. Other regions full year sales growth trend will be the same level as in the first quarter. We anticipate that growth in North America and Europe will not be as strong as in the first quarter but will be able to maintain growth for the full year.
This slide is about the status of major product categories in the musical instruments and audio equipment category. The bar on the left represents the first quarter results, while on the bar on the right is the projection from the second quarter to the fourth quarter. I think this is quite self-explanatory for pianos because of sluggish sales in China and Japan first quarter results were weak. But we are expecting this to go back to the previous year’s level for the full year.
We are forecasting 2% growth for the full year for digital musical instruments based on the recovery in the European and other regions market.
For wind instruments, we are expecting a recovery from the second quarter to the fourth quarter which leads to the projections on this slide. The same goes for the string and percussion instruments.
For the AV products, we are projecting that the same trend will continue from the second quarter to the fourth quarter as the first quarter. We are forecasting a 4% growth for the PA equipment business. This will be realized by overall growth in sales offsetting the weak sales we experienced in Japan and China in the first quarter.
Next is electronic devices segment. We have strived to increase sales and have said that we will aim to generate profit for this business for this fiscal year. We have been able to generate profit in the first quarter but due to the lack of visibility in the second half, we will not change our full year projections.
In any case, we have not changed our stance that we will stop the loss being generated from the business this year and move to the next step.
We are projecting a rise both in sales and income for the other business. In the FA equipment business as overseas market is robust, we will strive to continue to maintain this momentum for the full year.
We are forecasting a recovery in the overseas market for golf products business. These are sales projected to increase partly due to enhance initiatives to attract guests. We are maintaining the full year projection for operating income.
Capital expenditure declined slightly against our plan but this is due to some spending being pushed back. The previous projection was ¥15.4 billion but we have revised this down slightly to ¥14.8 billion.
R&D for the first quarter was basically inline with the plan. It is expected to go up by ¥0.5 billion for the full year. A part of this is due to the exchange rate impact when converting R&D conducted overseas back into Japanese yen, ¥0.2 billion is due to the acceleration of R&D we are conducting for new products.
Inventories rarely struggled last year. On the surface, you may see that inventories have gone up considerably in the first quarter against the plan. But, if you discount the exchange rate impact actual inventories decreased by ¥3.1 billion. The situation of inventories by the end of this fiscal year is forecasted to be ¥79.4 billion. The impact of this exchange rate is ¥1 billion year-over-year and ¥5.2 billion against the previous projections. This means that actual inventories will be lower in both counts.
The last slide is a balance sheet. I think there are no major points that I have to make here. However, let me just reiterate that the reason why inventories are going up is due to the exchange rate. The increase of fixed assets is due to the revaluation of equities. Most of the changes in the balance sheet can be attributed to the highest stock prices and the weaker yen.
This ends my presentation for the first quarter results. Thank you for your attention.
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