Yamaha Corp
TSE:7951
Earnings Call Analysis
Q3-2024 Analysis
Yamaha Corp
As an investor peering into the fiscal narrative of a company after its first three quarters, there is a natural curiosity about how previous performances chart the course for the year ahead. In such a tale, adjustments to forecasts are early indicators of strategy shifts, particularly when they involve a reduction in expected revenue and core operating profit due to market sluggishness and one-time expenses. This story unfolded with a year-on-year decline in revenue and profit, which conversely appeared as an increase initially buoyed by favorable exchange rates. A closer look revealed an actual decline, prompting downward adjustments in financial forecasts.
Not all chapters of the narrative have the same tone; within business segments, some thrived while others faced adversities. While the musical instruments sector felt the pressure with declining revenue and profit margins, the audio equipment segment experienced a positive swing bolstered by strong B2B sales. As for the Industrial Machinery Components (IMC), sluggish performance dragged down overall profits. The company's projection indicated caution, forecasting a revenue dip by JPY 5 billion accompanied by profit shrinkages across core operating and net figures by JPY 8 billion and JPY 5.5 billion, respectively.
In the face of challenging market shifts and a depreciating yen, our protagonist opted for a major pivot—reducing overseas headcount by 10%, translating to 2,000 fewer personnel, and revamping its manufacturing strategy to enhance flexibility and risk management. This overhaul stresses the importance of resilient procurement and consolidating production in Japan, which especially impacts the piano manufacturing processes given the severe market outlook in China.
The plot thickens as we dive into specifics. The musical instruments sector expects a year-on-year drop of 4%, with particular concerns over declining piano sales and a slower than hoped recovery in the digital piano demand from North America and Europe. However, wind, string, and percussion instruments look to spring an uplift, indicating resilient pockets within the segment. In contrast, the audio equipment division anticipates revenue growth of 5%, riding on the coattails of thriving B2B product sales. Yet, consumer products forecast a larger-than-initially-expected dip, demonstrating diverging fortunes within even prosperous divisions.
An investor's gaze inevitably falls on the balance sheet and shareholder policies when foretelling the company's stability and commitment to its investors. Total assets and equities remained robust, although a high inventory balance raised eyebrows. Further bolstering investor confidence, a share buyback plan was unveiled—7 million shares, to be precise—expanding capital efficiency and shareholder value. All purchased treasury shares will be canceled.
Mindful of returns, the company seeks to navigate through disappointing revenue and profit with an eye firmly on the Return on Equity (ROE), aspiring for an ROE surpassing the cost of shareholders' equity. This commitment also translates into a slow but steady decrease in cross shareholdings, demonstrating a strategic move towards optimizing shareholder returns and enhancing stock value.
A forward-looking chapter details efforts to build a stronger business foundation by creating customer-centric touchpoints, like the establishment of a local sales subsidiary in the Philippines. This narrative speaks to an intention for greater market penetration and closer customer interactions, an endeavor that marks the pursuit of long-term value and customer loyalty.
You don't have any saved screeners yet
I'd like to start a briefing on the results of the first 3 quarters and the forecast of the fiscal year ending March 2024. Please refer to the presentation material at hand and turn to Page 1. Here are the highlights of the first 3 quarters due to the slower-than-expected recovery of the digital pianos in North America and Europe and the continued sluggishness in China, the musical instruments revenue decreased. However, the overall revenue increased due to the brisk sales of B2B audio equipment and the positive impact of exchange rates. Yet the profit decreased due to the revenue decline of the musical instruments and the production adjustments to reduce inventory. As we decided to consolidate the Piano frame production process in China to Japan, an impairment loss of JPY 2.1 billion was posted.
Regarding the full year forecast, considering the slow recovery of the digital piano demand in North America and Europe and the continued sluggishness of the Chinese market that are dragging down the sales as well as the onetime expense to post, we revised down the revenue and core operating profit forecast. The expected annual dividend per share will remain unchanged at JPY 74. Please turn to Page 3. Here is the summary of the figures. The revenue for the first 9 months was JPY 341.8 billion. The core operating profit was JPY 27.8 billion, and the net profit was JPY 20.7 billion. It seems like a year-on-year increase of revenue, but it was lifted up by the impact of exchange rates. So as you can see on the right, it was actually a decline in both the revenue and profit. Next, Page 4 shows how the core operating profit, which was JPY 38.7 billion in the previous year had dropped to JPY 27.8 billion this year in a waterfall chart. There were positive factors such as the impact of exchange rates and the improvement of ocean freight charges, but the impact of continued increase of cost and the decrease in sales, production and model mix were greater.
Moreover, the SG&A expenses increased year-on-year. These so far were the impacting factors of the musical instruments and audio equipment. But in addition, the IMC, Industrial Machinery Components business and others dragged down the overall profit. Moving on to Page 5. Please find the results of each business segment. The musical instruments, even with the great uplifting effect of the exchange rates shown on the right, the revenue and profit declined year-on-year. The segment continued to face very tough situation, so the profit margin also dropped by 4.3 points. The audio equipment performed well overall, especially with the remarkable sales of B2B products and even beyond the exchange rate impact, both the revenue and profit increased year-on-year. The profit margin also improved by 2.5 points. The IMC business and others continue to be sluggish, and the revenue and profit declined year-on-year. The profit margin also deteriorated by 9.3 points.
Please turn to Page 6 for the full year forecast. The projected revenue is JPY 460 billion. The core operating profit is JPY 34 billion. The profit ratio is 7.4%, and the net profit is JPY 29 billion. We regret to inform you that we had to revise down the forecast of revenue by JPY 5 billion, core operating profit by JPY 8 billion and the net profit by JPY 5.5 billion. Now Page 7 shows the comparison of the full year profit forecast against the previous year's result, which looks almost the same as the first 9 months. even though there are some positives from exchange rates and ocean freight charges, the negatives, such as the cost increase, the sales and production decrease and the SG&A increase are greater and will drag down the profit. Please note the onetime expenses mentioned here. There are some expenses that we are scheduled to post at the end of the fiscal year. So they have been taken into consideration for the full year forecast. As for the SG&A expenses, the year-on-year increase level is smaller than the first 9 months, which is a proof of efforts that we are making, but it will still be greater than the previous year. The bottom half shows the changes from the previous projection. The core operating profit, which was expected to be JPY 42 billion, is now revised down by JPY 8 billion to JPY 34 billion. There are some positives from the exchange rates and SG&A that the actual decrease in sales and production and the model mix deterioration are especially significant. Moreover, there will be the onetime expenses that I just mentioned and the IMC business and others performances are deteriorating further. Moving on to Page 8. Here is the full year forecast by each business segment. The general trend is the same as that of the first 9 months and the musical instruments and IMC business and others are struggling. As for the audio equipment, even though the absolute amount is still small, we can expect an improvement year-on-year. Page 9 is a new slide that we inserted here to highlight our manufacturing strategy revision and the fixed cost reduction schemes. As shown here, we revised our manufacturing strategy and are conducting a major headcount reduction at the overseas manufacturing sites. In face of the environmental changes and challenges, we felt a greater need to properly react to the market with flexible procurement production. Moreover, the benefits of overseas production has declined on relative terms. Of course, the greatest reason is depreciation of the yen, but there are also geopolitical risks and changes in the Chinese market. And we cannot dismiss such environmental changes. We must also manage the risk of dispersing our technologies and skills and not passing on to the next generation. On the right, we have listed the measures to address such concerns. The first is to enhance the procurement resilience. So we established a semiconductor procurement company in Malaysia. With this, we will work on consolidating the parts, shortlisting the suppliers and enhancing the cost reduction negotiating capabilities. The second is to reinforce the production functions in Japan as the mother site. In the past, we had turned the domestic manufacturing functions into subsidiaries, but we are once again consolidating them into Yamaha Corporation so that we can integrate the technologies and skills of development and production. Also, the head office will lead the efforts to ensure the technology transfer and to drive the global production system. One another thing is to consolidate the piano frame manufacturing processes to Japan. This is partially related to the overall manufacturing strategy, but we were especially concerned about the recent sluggishness of the piano business in China and the less promise for the future recovery. In fact, we have had the piano frame manufacturing sites in Japan and China, but we came to realize the environmental changes and challenges. As a result of careful considerations of our many aspects, including the cost, we concluded that the best thing for us is to consolidate the manufacturing process to Japan. Accordingly, we will need to dispose the manufacturing facilities in China. So we booked an impairment loss during the third quarter. Furthermore, as highlighted at the bottom, while working on such big revisions in the mid- and long-term strategy, we must also address the imminent production issue, which led to the excessive fixed cost burden. Therefore, we decided to drastically cut back the manufacturing capacity, mainly overseas and reduced the headcount by 10%, which accounts to 2,000 personnel. During the third quarter, which means by the end of December 2023, we already conducted the majority of the restructuring efforts, and we are going to complete this by the end of the fourth quarter. Now I'd like to give you the overview of each business segment. Please turn to Page 11. I First, the musical instruments revenue in the first 9 months declined as the pianos and the digital piano sales decreased. The sales of the digital musical instruments declined as the digital pianos entry model demand was slow to recover in North America and Europe. The wind, string and percussion instrument sales were continually favorable as the demand in Japan and Europe recovered. The guitars faced difficult market conditions for the acoustic guitars, especially in North America, but the sales increase with the addition of Cordoba. As for the full year forecast is the market conditions in China and the digital pianos are severe, we are expecting the segment sales to decline year-on-year. We continually anticipate the sluggishness of the pianos in China. The digital musical instruments were seeing the size of recovery in North America and Europe, as we mentioned after the first 6 months, but the momentum was lost before it reached the full recovery or the recovery has been slower than expected. So we are projecting the sales to decline. The wind, string and percussion instruments are expected to achieve increase due to the robust demand, and the guitars are also expected to see the sales increase with the addition of Cordoba. The segment revenue as a whole is projected to drop 4% year-on-year. Page 12 shows the revenue by product categories. The full year sales of the pianos are expected to decrease by 11% year-on-year. In the previous forecast, we projected a 6% drop, but we are now anticipating a further decline. Likewise, the digital musical instruments are expected to decrease by 11%, while the previous forecast was a decrease of 6%. The forecast for the wind, string and percussion instruments is unchanged at 2% growth. The guitars are now expected to increase by 11%, which is lower than the previous forecast of 17% increase. Page 13 shows the regional sales breakdown. Japan is expected to achieve a flat growth, and North America is expected to suffer a drop of 5%. Europe is expected to grow by 4%, but China's situation is continually very severe. In the previous year, the sales dropped by 21% year-on-year, but we are anticipating a further drop of 18% this year. The sales of other regions are expected to decline by 5%. Please turn to Page 14. This slide is about the Audio Equipment segment. During the first 9 months, the B2B products continually performed well. Although the sales of consumer products dropped in the sluggish market, the B2B products, which enjoy the robust demand and the new product effect achieved a significant sales growth. The full year forecast is basically the extension of the first 9 months. But as you can see in the third bullet point, the segment profit will increase year-on-year, driven by the robust B2B sales growth. The segment revenue is expected to grow 5%. The core operating profit, which was JPY 3.5 billion in the previous year, is expected to grow to JPY 5 billion this year. Page 15 shows the breakdown. The sales of consumer products are expected to drop 9%. Previously, we estimated a decline of 2%, but we lowered the projection further. Meanwhile, B2B products are expected to grow 23%, which is higher than the previous projection, a 14% increase. Page 16 shows the audio equipment sales forecast by regions. We expect Japan to drop 1% and North America to rise 14%. As for the Audio Equipment, North America is likely to perform well continually. Europe is expected to rise 2%. China is expected to drop 13%, and the other regions are expected to rise 16%. Page 17 shows the IMC business and the others segment. During the first 9 months, as the automotive sound systems and the automobile interior wood components performed well, the IMC sales increased. For the full year, since the automotive sound systems are growing further, we are expecting the IMC sales to increase year-on-year, but the rebound decline of the golf products, which we enjoyed a special demand in the previous year is significant. Therefore, the year-on-year decrease of the segment revenue and profit is mostly caused by the golf products. For the other financial figures, please turn to Page 19. According to the balance sheet at the end of December 2023, the total assets were JPY 627.2 billion and the total equities was JPY 482.9 billion. Compared against the end of March, there was some seasonality involved as well, but inventories rose by JPY 17 billion. So the balance at the end of December was JPY 170.7 billion. We must regretfully admit that we could not reduce the inventories as much as we had hoped. By the end of March 2024, the total assets are expected to be JPY 636 billion, including the inventories of JPY 157 billion. The inventory balance will be higher than what we had projected after the first 6 months. The total equity is expected to be JPY 492 billion. Now please turn to Page 20. At the Board of Directors meeting held the other day, we passed the resolution to conduct a share buyback. The objective is to enhance the shareholder returns and the capital efficiency. From February 7 to July 31, we are going to acquire up to 7 million shares or JPY 15 billion worth of our own shares from the market. All the treasury shares that we acquired from the market would be canceled. Page 21 is another slide that we added from this quarter to show our determination to manage the company ROE. We see ROE and share price improvement in mind. Of course, we have always been mindful about them from before, but we added this slide to our IR presentation to communicate the situation better. The ROE for this fiscal year is expected to be 6.1% since the revenue and profits are deteriorating. We must foresee a severe outlook. While the cost of shareholders' equity is 8.4% according to the latest calculation, the ROE will be far below that level. Most of all, we must improve the revenue and profit, but we would also like to provide steady returns to the shareholders to achieve an ROE that exceeds the cost of shareholders' equity at the earliest possible timing. In the charts below, you can also see the historical ratio of shareholder returns and trend of cross shareholdings. The ratio of cross shareholdings in the total assets have increased a little as the stock prices rose in the market. But we'd like to continually stick to our policy to reduce the cross shareholdings gradually. Page 22 shows the capital expenditure, depreciation and R&D expenses. Regarding the topics, please refer to Pages 24 and 25 for the progress of the priority themes in our midterm plan. First, to further strengthen the business foundation, we are trying to develop closer ties with the customers by creating more touch points. As shown at the bottom left, we established a local sales subsidiary in the Philippines. Previously, we just relied on local importer. But by setting up our own company in the Philippines, we are hoping to enhance the activities. For a start, the Yamaha exclusive store was renewed. As shown in the middle, we are trying to create new value. And as shown on the right, we are trying to be more flexible and resilient. As I mentioned earlier, we established a procurement subsidiary in Malaysia. Page 25 shows our efforts to set sustainability as a source of value. One example is the diversity Clarinet and the other is the instrumental music education initiatives. We also held a concert called the Dare Demo Dakeru which enabled the amateurs with disabilities to play Beethoven's Ninth Symphony on the piano. We would like to continually engage in such initiatives. We also described our efforts to promote the respect for human rights and DE&I.
Page 26 and on are the appendix. And with that, I'd like to conclude my quick presentation. Thank you very much.