Yamaha Corporation (7951) Earnings Call Transcript & Summary

Now I'd like to present the new midterm management plan. This time, we're calling it Make Waves 2.0 as an extension from the previous Make Waves 1.0. Here, we are showing the review of the Make Waves 1.0. But since I already covered most of that in the results briefing earlier, I'm not going into the details. In short, we could not meet the financial targets, but we made steady progress in the key strategies and achieved the nonfinancial targets, even though some of the initiatives were impacted and delayed by the COVID-19. In the meantime, as we faced and tackled the crisis, we built up some strength. So we'd like to leverage the strength fully in achieving the targets that we are setting forth in the new midterm management plan. First, we must anticipate the business environmental changes. Yet these changes listed here are not too different from the ones that we mentioned in the previous midterm plan, rather under the pandemic, we feel such changes were accelerated further. So we will have to be more agile and speedy in responding to such changes. Aside from that, we are not thinking about doing anything different. Rather, with these changes, we believe the new society may provide us further opportunities. Under such circumstances, we came up with our new midterm plan and the main theme to enhance sustainable growth capability in the new society. We are aiming to realize a world where everyone can enjoy the sound and music, whenever and wherever. Since we could not meet the financial targets for 1.0, we would like to make another try to meet them. While there is a higher awareness towards sustainability, enhancing a sustainable growth capability will be our new theme for the Make Waves 2.0. The positioning of the new midterm plan is described in this slide. In the series of 3 mid-term plans since 2013, we have been trying to increase the profitability, increase the brand power and boost the value creation capabilities. We have upheld such main themes in each one of the past 3-year plans. And now our main theme is to enhance the growth capability as we believe this is the greatest challenge for us. In the post-COVID new society going forward, we'd like to especially enhance a sustainable growth capability. Of course, in the end, we'd like to become an Indispensable, Brilliantly Individual Company, as we have been envisioning this from before. And the ultimate mission is to contribute to the well-being of the people around the world. Our corporate philosophy has always been sharing the passion and performance, but since the mission is getting a greater attention nowadays, we have once again decided to highlight our mission, too. In other words, in order to realize the mission, we have the management vision to realize, and to realize such a vision step-by-step, we have the midterm management plan. And this time, in order to realize such a vision, we verbalize the material management issues as the materiality. There are 3 focal areas: one, the business foundation enhancement; two, the environment and society as the sustainability is becoming ever more important; and three, the human resources, which is newly added. For each of these, we have themes. The business foundation themes are customers' technology, manufacturing, quality, digital transformation and governance. The environment and society-related themes may seem common and generic, but one unique addition theme is culture, as Yamaha supports the music culture. In fact, what I mentioned so far were already included in the previous midterm plan to a certain extent. But this time, we also decided to focus on the human resources. Since sensibility is the key for the success of our business, human resources are the most important assets. Our working environment where our people can feel comfortable and find great job satisfaction would enable creative works. Therefore, we included human resources as a focus of the new midterm plan. These 3 materiality are the foundation for our basic policy stated below, and each one of them have 3 key themes. To further strengthen the business foundations, we will develop closer ties with the customers and create new values. Actually, these 2 were already included in the previous midterm plan, but what we newly added this time was to be more flexible and resilient. We felt that we needed more resilience during the previous midterm period. As so as to endure various different challenges, we must have greater physical strength and more flexible mindset. That is why we include having flexibility and resilience as a key theme. To be sustainable, we also have 3 key themes for the environment, society and culture. Likewise, to enable Yamaha colleagues to be more valued and engaged, we have identified 3 key themes. Now for each of these key themes, I'd like to explain the details. First of all, to further strengthen the business foundation, we shall develop closer ties with the customers. We have been working on this from before the previous midterm period, but this time to enhance the sales channels, we also decided to develop a direct sales channel. Of course, the conventional way to sell through the dealers would continue to be the main sales channel for us. But in case of some of the products and markets, selling the products directly to the customers may lead to building stronger ties with the customers and us providing greater benefit for the customers. Therefore, we would also like to proactively engage in the direct sales activities. As for the value communication shown on the right, we have already been conducting such communication using both the physical and digital means and have made some good progress throughout the initiatives, especially the digital marketing can be extended to the wider range of areas and the physical showcasing also proved to be effective and important, even during the pandemic. Again, the store which opened during the pandemic could not do much due to the constraints. But upon the easing of restrictions at some intervals of the pandemic attracted so many visitors who gave us positive feedbacks. We would like to do similar initiatives, not just in Japan, but also in overseas markets under the new midterm plan. Furthermore, so as to support such activities, we need the customer data platform. We have already been developing this from the previous midterm period. And since the platform is now established, we'd like to enhance it further so as to make it useful for the actual business activities. Specifically, we are targeting 5 million customer IDs to be registered in the platform during the new midterm period. The second key theme is the creation of a new value. Of course, we'd like to continue to evolve the products. Especially by introducing new concepts, we'd like to attract a greater number of customers to use our products. Moreover, we would like to enhance the services. We have already been offering various new services from the previous midterm period. For instance, during the pandemic, we launched SYNCROOM, which enabled people to play musical instruments remotely together and remote cheerer. But so far, all of these services were offered free of charge. We are now thinking about integrating such services and evolving them further into much more user-friendly services, which can be monetized. At the same time, by promoting such services proactively and getting the feedbacks, we hope to enhance the ties with the customers. So with these 2 wheels of products and services or goods and experiences, we would like to drive the creation of new values. Of course, to support such activities, we will further develop the AI technology and the network technology. The third theme is about resiliency. This is part of our attempt to incorporate what we learned during the pandemic into our plan. Enhancement of the resiliency is particularly important in the production technology development. We will strategically reduce the number of suppliers and types of parts. We will further promote multi-region production system for the same product category instead of fixing it to a specific factory to reduce the country risk. We will continue to expand the capacity of the existing factories. In Indonesia, we will provide adequate production capacity to meet the increasing demand. As we announced earlier, we plan to establish a new base in the Tokyo Metropolitan area, not just as a marketing base but also an R&D center. We want to utilize open resources in the area to promote open innovation. Digital transformation or DX, on the right side of the slide, is something many companies are promoting. Our approach is to use DX for both offense and defense. Defensive use of DX includes process transformation and efficiency enhancement and such. We also promote DX for offensive strategies, such as using digital technologies to create new value and using customer data to develop closer ties with customers from the standpoint of lifetime value. Another way to use DX for offensive is create new services. These are the 3 themes we addressed to strengthen our business foundation. Next, environment and sustainability. There are 3 themes: environment, society and culture. In environment, we want to make the most of our strength as Yamaha. Our particular focus is on sustainable use of timbers. Yamaha uses so much rare species of timbers. So we feel appraised to take initiatives. We are committed to preserving these 3 species with a strong determination, since neglecting to make efforts could lead to their extinction. We will also make a sustainable use of timbers in other areas to conserve environment. Another unique approach by Yamaha is to develop alternative materials that exceeds the performance of timbers we currently use instead of keep relying on what's available now. We will accelerate research on alternative materials so that we can launch such a product. We will also address other resource issues. The second theme is about society. The pandemic has raised the importance of remote or contactless technologies. Yamaha has a variety of such technologies to contribute for solving social issues. The third theme is about culture. Music culture played a significant role around the world during the pandemic. Our existing acoustic musical instruments are not necessarily good at producing regional traditional music. But the use of digital musical instruments can reproduce such sound with ease. So using such technology, we want to develop products rooted in local culture and expand local content. This is another area we can contribute. In addition to the provision of hardware, we want to support musicians, instructors, teachers who are working to maintain and develop music culture. This service policy is enabling Yamaha colleagues to be more valued, engaged and committed. The idea is value human resources. Engagement of people in creative work is a source of our competitiveness. The far right box shows a variety of measures to boost employee job satisfaction. This may sound similar to measures for good work environment, shown on the far right, but it requires a different approach. The middle box shows the diversity, equity and inclusion, or DE&I. We'll be promoting DE&I because that will help individuals to show their talent, which leads to creative work. We are particularly interested in raising the percentage of female managers to 90% by the end of the current medium-term management plan period. In this way, we have developed 3 specific themes for each of the 3 nonfinancial targets that we announced previous time. Our intent is to have clearer indicators to gauge our progress towards achieving goals. I have earlier listed 3 themes for each of the 3 goals, meaning there are 9 themes. This slide shows what activities that represents each theme best, and there is a corporate target. Some targets are very challenging, but we are committed to achieving them. These are financial goals, we believe we can achieve. We are successful in carrying out activities described in the previous slide. In the previous 3-year management plan, our financial indicators were core operating profit ratio, ROE and EPS. We dropped EPS as it has strong correlation with ROE. Now that higher growth is a key target in the current 3-year plan, we added revenue growth rate target of 20%. It may take longer to achieve it, but we want to plan around this target. ROIC is a similar indicator to ROE, but they are different. ROE is a net profit on the cost of shareholders' equity, whereas ROIC is a core operating profit on invested capital, so we kept both as important indicators for our targets. Our targets also include exceeding weighted average cost of capital, or WACC. The chart on the right shows how we spend funds based on our cash flow. JPY 40 billion for regular investment is our traditional level of investment. And strategic investment of JPY 65 billion is spent on the expansion of production equipment on top of the regular investment, such investment is needed to enhance resilience. Strategic investment is also includes work style innovation and office reorganization as we need to invest in human resources. It also includes cash flow completing in an office in Minato Mirai, Yokohama, by the end of the current 3-year plan period and for the promotion of sustainability in our business. Furthermore, we will be also investing in new businesses and marketing. If we come across a good deal for M&A, we are ready to invest. With regard to shareholder return, our target total return ratio remains the same as the previous time at 50%. This slide shows a growth trajectory we envisioned. First, revenue by business segment, musical instruments, audio equipment and the industrial machinery components and others. Audio equipment is expected to show the highest growth, partly due to a significant drop in revenue during the previous 3-year plan period. Next, revenue by region. Mature countries together generate a significant share of total revenue, so they naturally contribute most to revenue in terms of yen amount. But in terms of growth rate, China and emerging economies are expected to be higher. The bottom chart shows the core operating profit. Audio equipment, in particular, is expected to lead a higher growth in core operating profit if its revenue grows. We've been strengthening our governance, and we'll continue to do so. This time, we included business portfolio and direction, so you can have better understanding of our portfolio. The X axis represents earnings ratio and the Y axis shows growth rate, not of the market but of our company. The positioning of each product category shown is during the previous 3-year plan period. Product categories are classified into 4 quadrants. Those in the upper right quadrant are most desirable. Digital musical instruments fall in this quadrant. It has high earnings ratio and can expand the customer base further by a little bit of tweaking. Product groups in the lower right quadrant have high earnings ratio, but can expect no big growth. We will launch more value-added products in these groups to boost growth. Pianos and wind and stream instruments fall in this quadrant. We also want to further enhance their earning power. Guitars and electronics devices are in the upper left quadrant. They have high potential for growth, but there is a lot of room for improvement in terms of profitability. We intend to invest more to expand the business scale to improve profitability. Electronic devices and new devices in other business also fall in this quadrant. We intend to grow these businesses through our budding automotive sound system. These new businesses or what's been referring to as the experiences may not be fruit by the end of this 3-year plan period, but we will still want to foster them through adequate investment. Audio equipment in the lower left quadrant is currently struggling because of various issues. This business used to be listed as a growth area, but now an area to be rebuilt. We will expand the domain of this business and expand sales to recover high profitability. Our goal is to bring it to the upper right quadrant. For your reference, CAGR for different product categories are shown. You may find CAGR of 7% for wind, strings, percussion instruments too high. We intend to make recovery from the pandemic. We just want you to get the idea of where we are aiming for. Now we dig deeper into business strategies for individual businesses based on the strategies that I've just outlined. In musical instrument business, we will cultivate growth areas and expand them. We regard China and the emerging economies as growth markets as we did in the previous 3-year plan. This time, we synced out of Philippines among emerging economies. The country's per capita GDP has improved, and the market present a high potential for growth for us. We will, therefore, focus on the market. The growth of pianos has been impressive in China, leveraging our brand recognition in the country, digital musical instruments saw a growth. In addition, guitar and wind instruments also grew in the previous 3-year plan period. Our goal for these pieces of instrument is a 33% growth over the 3-year period so that they will establish a solid position like pianos in the Chinese market. The right box shows new concept products. We have identified issues with these products and made improvements. We will continue to make proposals for new services. Our priority is to increase the population of instrumental players and offer them new products and services. To support closer and everlasting ties with customers, we need to provide good services. We need to deliver comprehensive services to customers as a package. We want to provide a new value, a service tentatively called Yamaha Music Connect will enhance connections with customers. On the right is the support for everlasting ties. The point of sales for musical instruments should not be the end of customer relationships, rather it should be the beginning. By providing a wide variety of support, we want to deepen ties with customers. After sales services are not limited to maintenance. For example, we want to offer add-on functions to a piano that a customer has bought. We believe this will help establish deep and long-standing relationships with many customers. This slide lists key points to address by product, aside from strategies for the entire musical instrument business. Simply put, we will focus on premium products of pianos, winds, strings, percussion instrument to enhance our brand value and raise their unit prices. Targets for each product categories are shown in the slide. Our target for premium pianos is a 30% sales growth and the growth in the sales of winds, strings and percussion instruments in mid- to high price ranges and in expanded sales and higher unit prices for guitars. In the digital musical instrument space, we aim to cultivate new customers by using digital technologies and their flexibility in responding to customer needs. Next, key strategies for audio equipment business. Traditionally, this business has had 3 pillars: audio visual or AV product, professional audio or PA equipment, and information and communication technology or ICT equipment. Since the pandemic started, these pillars are getting intertwined. So we are considering to merge them and divide the audio equipment business from a different perspective, those for individual customers and for business clients. We can now offer a combination of AV products and part of PA equipment to individual customers and PA and ICT equipment to corporate clients. We have telecom equipment for conference rooms, such technology should be harnessed to make a new proposal or develop a new channel for expanding business. For example, we are proposing live events and entertainment accessible by traditional audio equipment. The pandemic has given rise to demand for new services. Likewise, for corporate clients, new businesses emerged as we adapt to life with COVID. We will make sure we can satisfy emerging demand. We will strengthen traditional areas such as live entertainment events and home-used audio systems, but we also need resources to cultivate new businesses. So we need to improve development efficiency so that we can expand our business domain without adding fixed cost. To increase efficiency in our development work, we will promote joint development project using a common platform. We will also combine digital signal processing, special acoustic control and network technology for joint development. These 3 areas were previously independently utilized. We've already made the necessary organizational changes to do that. We intend to reap fruit of the initiative during the current 3-year plan period. In audio equipment for business use, we will offer solutions for live entertainment events and the newly added area of nonentertainment for enterprises and educational institutions. There are many exciting themes that I'd like you to take a look when you have time. The idea is to combine technologies we have to respond to emerging needs. One example of the emerging needs during the COVID years is to create physical live events and live streaming at the same time. We classified PA equipment and network technologies in the audio equipment business thinking that they may generate synergy. We are just seeing the need for such combined technologies finally emerging. We need to think outside the box to capture the opportunity. Remote services are growing in importance for companies and schools. They require a line of products for sound input as well as output. We have both technologies. By combining them with network technology, we are sure to perform to our potential. As shown in the lower right, we traditionally use installers specializing in audio equipment for our audio equipment, while the sales channel for network equipment involve those who are not audio equipment specialists. By removing a barrier between the 2 groups of installers, we can increase the number of installers available. We will leverage strength of each group of installers while providing support in the area where they are not good at. Such compartmentalization is not unique to Japan. The same thing has happened at our overseas subsidiaries. We want to make organizational changes so that we can implement these measures. Look at the box on the right for the strategies for audio equipment for consumer use. We launched a new product for content distribution last month. There has been emerging demand for distributing games and user-generated content. We can make a proposal for equipment necessary for such applications. We can combine hi-fi technology, high-quality sound technology that we noticed through PA business with simple solution to come up with offerings. We believe effective sales channels for new ideas is e-commerce whereas, direct sales enhance customers' convenience, as I said earlier. I would like to start direct sales initiative in this area first. Lastly, strategies for Industrial Machinery and Components business. We have seen a strong growth in electronics devices for the automotive sound system and for vehicle space voice solution. These applications began bearing fruit in the previous 3-year plan period. We will continue to work on them, so more companies, in addition to the current 5, will adopt these systems. We will make necessary investment in these growth areas. On the right shows FA equipment and automotive interior with components. New customers and new technologies are trickling in. This is an area where we want to see some success during the current 3-year plan period. With this, I will conclude my rather quick presentation on the main points of each business segment. Thank you very much for your kind attention.