Q1: Your plans for the current fiscal year call for an increase in fixed costs of ¥3.1 billion due to higher depreciation and R&D expenses. Where is this increase included in the graph in Slide 17, which shows an analysis of increases and decreases in operating income?
A1: The increases in depreciation and R&D expenses are included in “Increase in actual sales and production.”
Q2: Does this mean that compared with the year-on-year increase in “actual sales” of ¥12.7 billion, the rise in income, or “Increase in actual sales and production,” was ¥6.0 billion on a gross basis?
A2: The figure of ¥3.1 billion for “Increase in actual sales and production” includes higher depreciation and R&D expenses as minus factors, but it also includes certain positive factors, such as decreases in pension costs. Therefore, the increase of ¥6.0 billion is not a simple rise in income.
Q3: What specifically is the minus ¥3.0 billion in “Increase in actual SG&A”?
A3: Basically, the largest part of this increase was accounted for by sales promotion activities. These expenditures include mainly investments for future growth accompanying activities to strengthen sales systems (an increase of 300 in personnel over three years) as announced in the Medium-Term Management Plan. The outlook also includes an increase in variable costs accompanying the rise in sales.
Q4: Are we correct in understanding that these expenses will not change from the amount set in the Medium-Term Management Plan?
A4: To attain growth objectives, basically, we intend to work to maintain the levels set in the Medium-Term Management Plan. However, if circumstances change substantially, there may be cases where we reconsider our response.
Q5: Please explain in more detail your plan regarding the concentration of income in the musical instruments business (Slides 32 and 34) in the second and third quarters and the zero income in the semiconductor business in all four quarters.
A5. Income in the musical instruments segment in the first quarter of the current fiscal year is below the level in the first quarter of the previous fiscal year. Since production levels were high in the first quarter of the previous year, this generated income; however, in the first quarter of the current fiscal year, production adjustments were continuing for certain wind instruments, and, as a result, this difference in production levels is reflected in income levels. The reason why income is high in the second and third quarters is the seasonality of Yamaha’s business activities. Since we increase production and sales during the year-end peak demand season, income also increases.
We are assuming that during the current fiscal year, unlike the two previous fiscal years, production and sales will show a normal pattern and that there will not be major unexpected fluctuations in production levels.
Regarding semiconductors, the level of income by quarter is actually not zero, and we are forecasting operating income or loss of several tens of millions of yen. Therefore, this rounds off to zero. At any rate, our plan is to aim for a return to the black in this business, although there may be some slight gaps from quarter to quarter depending on the timing of sales to customers.
Q6: Is the semiconductor business structured so that it will make a soft landing of close to zero income, even assuming sales are level? What level of effects should we look for in times when sales are fluctuating?
A6: As a factor supporting the return to profitability in the semiconductor business, we are expecting +¥1.1 billion in positive effects from structural reforms, and the remainder will be due to higher operating income owing to increases in sales. Therefore, returning to the black will be difficult if sales are level. However, even if sales are level, we will improve gross margins through subcontracting production and reductions in fixed costs through adjustments in personnel. We believe this business will not show the major losses it has reported in the past.
Q7: Could you please give us the reasons for selecting Mr. Takuya Nakata as Yamaha’s next president? Also, how closely involved was he in preparing the Medium-Term Management Plan?
A7: The principal reasons are that Mr. Nakata is highly capable and knowledgeable as well as fully dedicated to Yamaha as a company and to its work. Within Yamaha, he has had experience in a wide range of areas, including product planning, marketing, R&D, and in division management. He is knowledgeable about manufacturing excellence, which is key to the management of companies like Yamaha. Our judgment is that he is the best person to take the helm in the management of a manufacturing company in times when competition and change are becoming so severe.
Regarding his experience in formulating Yamaha’s Medium-Term Management Plan, Mr. Nakata was involved as senior executive officer from the initial stages of plan preparation. Therefore, there are no differences regarding the awareness of the plan with other members of management, and it is our understanding that he is fully committed to realizing the objectives of the plan.
Q8: Last fiscal year, you were successful in passing on the effects of yen appreciation to product prices. Do you plan to lower prices this fiscal year?
A8: The answer to your question varies depending on the market and type of product. Thus far, Yamaha has not generally reflected changes in foreign exchange rates directly in its market prices. In those product areas where the percentage of overseas production is high, such as digital musical instruments, rather than the yen to euro rate, instead, the U.S. dollar to euro rate has been the main issue.
In addition, especially in the digital musical instruments business, when we simply reduce sales prices, we have to be very careful to avoid running into problems of the consistency of pricing between existing inventories in retail stores and the prices of new products. Notwithstanding this, conditions in the European market are quite severe, and we may make price adjustments for certain products, but, basically, we are responding by providing backup for selling out stocks, including providing support for retailers.
Q9: Have inventories decreased to normal levels? Has digital piano production moved back to normal levels in the first quarter?
A9: We believe that inventories of digital musical instruments, principally of digital pianos, have come down to within the appropriate range. However, although there are issues related to foreign exchange rates, we think the ¥82.0 billion level of inventories at the end of the previous fiscal year is still between ¥1.0 billion and ¥2.0 billion higher than the appropriate level. The principal reason for this is inventories of wind instruments, and we are scheduled to continue to implement production adjustments, mainly in the first quarter.
Q10: Operating income seems to be high in the first half of the fiscal year. What are your views regarding income in the first and second quarters?
A10: Because of the seasonality of sales of the main musical instruments, profit tends to be high in the first half of the fiscal year. However, for the current fiscal year, since we are making plans that take account of production adjustments in the musical instruments business during the first quarter, the level of income in the first half and second halves of the fiscal year will be relatively more even.
Q11: To what extent is it your view that the change in operating income (Slide 17) was due to the adoption of emergency policies to reduce expenses in the actual levels of the previous year? What will be the extent of the effects on costs for the current fiscal year?
A11: The ¥1.5 billion reduction in costs in the previous fiscal year included the effects of some emergency policies. However, we believe we were able to move forward with cost-cutting without almost no change in normal operations. Not all cost reductions in the previous fiscal year will be shifted into the current fiscal year.
Q12: The structure of the acoustic musical instruments business makes it difficult to show a profit. How do you see income by product category changing along with the implementation of structural reforms?
A12: In the piano business, we have been implementing measures to move into the black thus far and were able to report an operating income ratio of 1% in the previous fiscal year. The outlook is for an operating income ratio of 4% in the current fiscal year, including the positive effects of improvements.
In the wind instruments business, we reported an operating income ratio of 2% in the previous fiscal year and expect this to rise to 3% for the current year. Part of the reason for this is that shifting a portion of production overseas as part of structural reforms is time consuming. However, for acoustic musical instruments as a whole, we are aiming to report a higher level of profitability during the course of the Medium-Term Management Plan.
Q13: Do you think dividends will rise in FY2015.3 and FY2016.3, if Yamaha’s EPS increases and you apply the dividend payout ratio of 30%?
A13: We have said, basically, that if income rises according to our plans, we will aim for a dividend payout ratio on a consolidated basis of 30% or more. We believe this indicates that the return to shareholders will rise. We will make judgments as we monitor conditions.
Q14: Your assumptions about foreign exchange rates now diverge from the actual prevailing rates. Could give us your views on this issue as well as the sensitivity of Yamaha performance to exchange rates? Please also comment on what forward cover you have arranged to hedge against exchange rate fluctuations.
A14: Current exchange rates diverge from our assumptions. That is because we adjusted our exchange rates to make them same as those in the Medium-Term Management Plan. Also, the sensitivity of Yamaha’s income to changes in the value of the euro is higher than its sensitivity to changes in dollar exchange rates. Our understanding is that European markets will remain unstable. Therefore, we will proceed with caution, taking account of a review of the previous Medium-Term Management Plan.
We have arranged for forward cover for our exposure in euros, Australian dollars, and Canadian dollars. For example, we have forward exchange contracts for euros at about the ¥120 to one euro level in the first quarter. If this rate prevails, there is a possibility that we will review our assumptions during the period, but, at present, we are proceeding under the assumptions of ¥85 to one U.S. dollar and ¥115 to one euro.
Regarding sensitivity to exchange rates, for a one yen change in the exchanges rates, Yamaha’s U.S. dollar denominated operating income varies the equivalent of ¥60 million and operating income in euros varies the equivalent of ¥380 million euros.
Q15: With the realignment of business segments involving a shift in the PA equipment business (Slide 10), will there be changes in sales and income?
A15: Revenues from installation of professional audio equipment handled by a domestic subsidiary are not included in the ¥31.9 billion in sales of PA equipment. If we add in these revenues for the previous fiscal year, the total rises to ¥37.2 billion. The amount of operating income transferred to the audio equipment business would be about ¥1.7 billion.