Q1: Please explain why you think that, on a quarter-to-quarter basis, the sales and operating income of the musical instruments segment will move into the positive range in the third and fourth quarters.
A1: This is because we are anticipating an increase in sales along with the recovery from the effects of the earthquake.
Q2: Could you please explain your reasons for thinking that, in contrast to past performance, you will report income in the fourth quarter for the musical instruments segment?
A2: Previously, in the fourth quarter, reporting of certain expenses was delayed into fourth quarter and there were other circumstances, including the fact that this is not a high demand season. These factors, combined with seasonal declines in sales and production, acted to weaken performance. However, this fiscal year, we are planning for an increase in production, partially due to recovery from the earthquake, and, because we are continuing to restrain expenses, we are looking to a return to profitability in the fourth quarter.
Q3: It appears that the performance in the piano business held strong through the end of the second quarter (accumulated). Could you please explain the status of profitability? Also, please provide information on income by geographical area, including China.
A3: Through the second quarter, we secured an operating income ratio of 2% in the piano business. Since operating income in the first quarter was slightly positive (+0.0 billion), we believe profitability is continuing on a rising trend.
Going forward, to raise profitability to the breakeven point for the full fiscal year, we still have to overcome a number of hurdles. We cannot state with confidence that we will move out of the red this fiscal year because of concerns regarding the rise in personnel costs related to the increase in head count at overseas factories, including Indonesia, and higher material costs.
Since performance in emerging countries is steadily rising, the ratio of operating income to sales through the second quarter in China and other areas is higher than in the European, U.S., Japanese, and certain other markets.
Q4: Please explain why operating income in the AV/IT segment was above target through the end of the second quarter (accumulated). Also, do you think income in the third and subsequent quarters will show a decelerating trend?
A4: The main reason behind the performance through the second quarter, which was characterized by lower sales but higher profits, was the positive impact of cost reductions. In the second half, we are expecting a decline of close to 10 percentage points in the income ratio because of lower profitability in karaoke equipment compared with the previous year and the discounting of existing audio products in advance of the introduction of new models. For these reasons, we do not think that income will be at the level we reported in the first half of the fiscal year.
Q5: What was the impact of the earthquake in monetary terms during the first half of the fiscal year?
A5: Sales of musical instruments were down ¥7.5 billion, and overall net sales were ¥10.1 billion lower than they would have been if the earthquake had not occurred. Similarly, operating income was ¥3.9 billion lower and production was ¥6.4 billion below the sans earthquake scenario.
In the second half, we are expecting comebacks of ¥600 million in net sales, ¥400 million in operating income, and ¥2.4 billion in production.
Q6: What is your appraisal of the risk related to the impact of the floods in Thailand?
A6: The impact will be felt mainly in the procurement of semiconductors, condensers, and other electronic parts and components. There is particular concern about the impact on AV products and the effects may be felt quite broadly on professional audio equipment, golf products, hybrid pianos, and certain other products.
Unlike the case of the earthquake, the parts and components that we are no longer able to procure are mainly general-purpose items. Therefore, we are considering how we can minimize the effects of the flooding by substituting alternative parts for those used previously.
Q7: What measures are you taking in response to the appreciation of the yen?
A7: The appreciation of the yen has been sudden and substantial, and we believe that we will have to consider some price increases. Already in August this year, we have raised the prices of wind instruments by about 3% in Europe. In North America, we increased the prices of wind instruments by 3% in January and implemented price hikes of between 3% and 5% for pianos beginning in October. We are considering further increases of about 3% in Europe and North America early next year.
Q8: What were your reasons for revising upward the forecast for the musical instruments segment in the second half of the fiscal year?
A8: Although there will be some factors acting as a drag on operating income in the second half of the fiscal year, including foreign currency effects (minus ¥800 million), higher material costs (minus ¥300 million), and higher SG&A expenses (minus ¥100 million), we are expecting an increase totaling ¥900 million as a result of the ¥2.1 billion rise in sales. Accordingly, we have increased the outlook for operating income from ¥5.5 billion to ¥6.4 billion.
In the digital musical instruments business, production has been pushed forward into the second half of the fiscal year, and this is having a major impact. For the full fiscal year, the outlook is for an increase in operating income of ¥1.6 billion accompanying the rise in sales.
Production increased in September, but we are assuming that this will translate into higher sales in the second half of the fiscal year.
Q9: In the second half of the fiscal year, would it be correct to expect a deceleration in the piano business and recovery in the string and percussion instruments business?
A9: Piano sales in China are continuing to expand steadily at double-digit rates, but there is a feeling of uncertainty in Europe and the Americas, especially in North America.
In the string and percussion instruments business, we have dealt with the cosmetic coating issue that arose, and, since the supply of medium-priced electric acoustic guitars is proceeding, we are looking for an increase in sales. Also, even though there were some parts procurement issues that were unrelated to the earthquake in the mass-market electronic drums business, production is assumed likely to proceed smoothly in the second half of the fiscal year, and we will be able to fill our backlog of orders.
Q10: What are your expectations regarding the costs versus the benefits of measures in the second half of the fiscal year of upgrading your sales network and consolidating plants?
A10: We are not looking for major expenditures on upgrading our sales networks in China and newly emerging markets. Development of relationships with keyboard instrument shops and guitar and drum stores and the preparation of store displays will require some expenditures, but we expect our local subsidiaries to make judgments on these factors in their management plans.
In the wind instruments business, we are expecting expenditures of ¥500 million this fiscal year due to the consolidation of factories in Japan and are planning on capital investments related to consolidation amounting to ¥800 million. After the consolidation of factories, we are anticipating improvements in profitability totaling ¥450 million on an annual basis. However, since there will be some reduction in personnel and other factors to consider, we believe the real positive benefits in the next fiscal year will remain at around ¥250 million.
Q11: Your semiconductor business appears to have settled into a loss position. Could you please explain what you will be doing going forward to develop this business?
A11: In addition to developing products that appeal to users because of their unique value, we are aware that strengthening our marketing capabilities will be necessary. We intend to make an appeal in overseas markets for the superiority of our semiconductors, especially by strengthening our marketing systems in China and other emerging country markets. Also, we want to develop products for use in a wider range of applications than previously.
We are planning to restrain investment at Yamaha Kagoshima Semiconductor Inc. and continue our “fab-light” policy of using subcontractors for more of production and lighten up on the use of Group fabricating facilities.
Q12: Do you think that there is a risk that sales in the semiconductor business in the fourth quarter might fall below the forecast of ¥7.5 billion?
A12: Discussions with our customers indicate that recovery is in sight in the amusement equipment market. Although there are factors in the overall external environment to be considered, including conditions in the consumer electronics business, we do not think there will be a major drop in sales.
Q13: We understand that sales via the Web are increasing in Europe. What, in your view, will be the effect of this trend?
A13: Although Web sales have some merit in expanding overall sales, there is a risk that our dealers might be battered by price competition. We believe that the point is whether the message we want to send out to customers as a manufacturer is being delivered properly. There are cases where the Web is being used effectively and the true value of our products is being communicated, such as in the case of the leading dealers in Germany. On the other hand, there are also cases where new products and used products are being treated in the same way. Therefore, the effects of Web marketing may be both positive and negative.
Q14: What is your sales target for geomagnetic sensors?
A14: We were aiming for sales of ¥5.0 billion for this fiscal year, but unit prices are on the decline, and, for this and other reasons, our outlook is now for sales of about ¥2.6 billion. Accordingly, we have revised our sales target downward.
A16: We cannot reply with a specific figure that would indicate our overall overseas procurement ratio because the figures vary by product. However, our ratio of overseas production is 53.6% in musical instruments and 48.9% overall. As we have indicated in our medium-term management plan, in the acoustic instruments businesses, we are moving forward with initiatives to actively introduce parts and components from Yamaha factories overseas into our factories in Japan. We are also moving in the direction of expanding our local procurement ratio at our overseas manufacturing plants, and we think this will be one measure that will improve profitability.
Q17: A look at your balance sheet suggests this would be a good time for M&A. What are your plans in this area?
A17: We are continuing to consider possible M&A deals in product domains where we have not established a solid presence in comparison with the size of the market. These include professional audio equipment, electric guitars, and guitar amplifiers. Our policy will be to continue discussions with the aims of expanding sales and strengthening our overall business position.
Q18: Yamaha’s ROE is improving. What is your outlook going forward for this indicator?
A18: We have not set specific targets as a company for three or five years from now, but our target for the time being is between 6% and 7%. Thereafter, we are aiming to raise ROE to double-digit levels. We are taking initiatives to improve our ROE as quickly as possible, and we consider it, including our capital policy, to be a major management theme.