Yamaha Motor Co., Ltd. (7272) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. Thank you for attending the fiscal 2019 earnings briefing of Yamaha Motor Company. First, I will give an overview of the business results, and then Director Tatsumi Okawa will explain the details per business segment. Please turn to Page 4. Before reporting on the financial results in terms of numerical terms, I would like to summarize 2019. As for the existing businesses in the motorcycle business, developed markets improved their income due to increased sales in Europe and increased marginal profit at headquarters. While in emerging markets, sales and income of motorcycles declined due to a decrease in sales in Vietnam and Taiwan. In the Marine products business, sales increased due to improved product mix by increased sales of 200 horsepower or over outboard motors, but income decreased as a result of the foreign exchange effects. In the Robotics business, although sales increased due to the M&A of the Yamaha Motors Robotics Holdings, YMRH, income declined significantly due to the worsening market conditions. Structural reforms after M&As are progressing as planned. Overall, negative factors such as the sluggish Robotics business triggered by the U.S.-China trade friction and decrease in motorcycle sales in Vietnam and Taiwan outweighed the positive factors, such as improved profitability in motorcycle business in developed markets and Indonesia, resulting in lower sales and income. In the Marine products business, a shift to larger outboard motors continued, bringing about the results almost in line with the forecast. Regarding our growth strategy, steady progress was made toward new value creation and commercialization such as CASE support, robotics, solutions, new mobility development and active investment through investment funds, so as to realize our long-term vision are for human possibilities. Please turn to Page 5. The overall business figures. The chart shows, from the left, results for 2018, results for 2019 and the year-on-year comparison. For 2019, net sales were JPY 1,664.8 billion, 99% year-on-year; operating income was JPY 115.4 billion, 82% year-on-year. The operating income ratio was 6.9%, down 1.5 points from the previous year. Ordinary income was JPY 119.5 billion, 87% year-on-year; and net income attributable to owners of the parent was JPY 75.7 billion, 81% year-on-year. The actual exchange rates were JPY 109 to the U.S. dollar, JPY 122 to the euro and the emerging market currencies against the U.S. dollar were IDR 14,087 and BRL 3.9, respectively. Next, variance analysis of operating income. I will explain in terms of changes in each business, growth strategy expenses and the effects of exchange rates. Operating income in 2018 was JPY 140.8 billion. The Land Mobility business increased by JPY 10.8 billion as a whole. The breakdown was as follows: motorcycles in developed markets, plus JPY 9.3 billion mainly due to increased sales in Europe and an increase in factory operation rates. Motorcycles in emerging markets, minus JPY 3.3 billion due to decreased sales in Vietnam and Taiwan. Recreational vehicles, RV, plus JPY 4 billion due to increased sales in North America, mainly ATV. Smart power vehicles, SPVs, plus JPY 0.8 billion due to increased sales of E-kits for Europe and completed vehicles in Japan. Marine products business, up JPY 3.3 billion due to increased sales of large outboard motors, water vehicles and sports boats. The Robotics business, minus JPY 8.3 billion from the decrease in demand due to U.S.-China trade friction and the effects of the consolidation of the second half results of YMRH, which amounted to minus JPY 2.8 billion. The Financial Services business, minus JPY 3.8 billion due to the onetime impact of Brazil in the previous year and changes in accounting standards. Others, minus JPY 1.8 billion due to temporary quality costs for generators and golf cars. In addition, minus JPY 8.7 billion due to an increase in expenses related to growth strategy being promoted actively and minus JPY 16.9 billion as effective foreign exchange. Operating income in 2019 totaled JPY 115.4 billion. The improved profitability of the Land Mobility business, especially the Motorcycle business in developed markets, made up for the negative effects of the Robotics business and the Financial Service business, to bring about almost the same level of income as in the previous year when excluding foreign exchange effects and growth strategy expenses. In terms of business forecast for 2020, we aim to increase net sales mainly by recovering the Motorcycle business in the emerging markets and the Robotics business and aim to increase income by focusing on recovery -- recovering profitability of existing businesses. We aim at net sales of JPY 1,760 billion, 106% year-on-year; operating income of JPY 123 billion, 107% year-on-year; operating income ratio of 7%, up 0.1 point; ordinary income of JPY 128 billion, 107% year-on-year; and net income attributable to owners of parent of JPY 80 billion, 106% year-on-year. The assumed exchange rates for 2020 are JPY 108 to the U.S. dollar, JPY 120 to the euro. And as for emerging market currencies against the U.S. dollar, IDR 13,700 and BRL 4.1, respectively. Please note that this guidance does not factor in the impact of the novel coronavirus outbreak on business in China and business in other regions due to supply chain disruptions as it is still uncertain at this time. Next, market assumptions and the company's response, which are the basis of our forecast for 2020. Market conditions in each business are expected to be gradually or generally weak. We expect demand in the developed markets, Motorcycles and Marine products businesses to be at the same level as in the previous year. But in the Marine products business, we expect a continued decline in small- and medium-sized outboard motors. In the emerging market Motorcycle business, we expect gradual slowdown in the ASEAN in the second half of last year to continue. In the Robotics business, the market conditions are expected to bottom out, and the orders have recently been on a recovery trend. However, the impact of the coronavirus outbreak is uncertain and will be carefully monitored. Based on these market assumptions, the company will work on recovering net sales by launching new models and new products in the Motorcycle and Robotics businesses, and we'll continue to capture the shift to larger Marine products. We will also prioritize growth strategy expenses and control the total amount, aiming to increase sales and income with a focus on recovering profitability as a whole. Next, market condition forecast and our response for 2020 in numerical terms, separated by the changes in operating income by business, growth strategy expenses and foreign exchange effects. From operating income of JPY 115.4 billion in 2019, the Land Mobility business expects plus JPY 9.4 billion as a whole. The breakdown is as follows: developed markets motorcycles, plus JPY 6.3 billion mainly due to increased sales of new models in Europe; emerging market motorcycles, plus JPY 3.5 billion due to continued premium trend and recovery in Vietnam and Taiwan; RV and SPVs on par with the previous year; marine products business, minus JPY 1.4 billion, although 200 horsepower or over outboard motors are expected to increase, we expect impact of reduced production of 150 horsepower or under outboard motors and an increase in development costs in North America; Robotics business, plus JPY 3.6 billion due to rebounding demand and improvement of YMRH income; Financial Service business, plus JPY 4.3 billion due to the expansion in the in-house operation; others, minus JPY 100 million; in addition, minus JPY 2.7 billion from the increase in growth strategy expenses and minus JPY 5.6 billion as effective foreign exchange. Still, operating income is expected to increase to JPY 123 billion. Next, key financial indicators. ROE and its constituent elements are shown for 3 years from 2018 to 2020. In 2019, net income ratio decreased by 1 point to 4.5%. The total assets turnover decreased by 0.05x from the previous year to 1.13 turns. And equity capital increased by JPY 47.8 billion to JPY 705.2 billion. And the equity ratio decreased 0.3 points to 46%, resulting in the ROE of 11.1%. For 2020, total assets will increase significantly due to the in-house operations in the Financial Services business with total assets turnover at 1.1x, equity ratio of 44.3% and ROE of 11.1%. In the total assets turnover graph, the dash line excludes sales finance. As you can see, in 2020, we will enhance asset efficiency in businesses other than Financial Services. Please turn to Page 11. I will now explain cash flows, excluding sales finance. There are 2 bar graphs for each fiscal year. The bar on the left shows cash inflows, such as net income for the period and depreciation expenses. And the right bar shows cash outflow, mainly capital expenditure, shareholder returns and growth investment. As you can see, in 2018, working capital increased and cash outflows were larger. In 2019, working capital was kept at a slight cash outflow despite an increase in the inventory of small and medium-sized outboard motors and motorcycles in the Philippines compared to the initial plan. In 2020, we will improve earning ability and working capital for growth investment and shareholder returns. I will explain the shareholder returns. In this medium-term management plan, the company has set a dividend payout ratio of 30% of net income attributable to owners of the parent as a reference level. In 2019, we will exceed the reference level, but we will propose to the General Meeting of Shareholders to maintain an annual dividend of JPY 90 per share and pay JPY 45 for the second half. The annual dividend forecast for 2020 is to maintain JPY 90 per share. We will continue to strive for stable returns to our shareholders. Please turn to Page 13. The update of activities for realizing the long-term strategy, ART for Human Possibilities. In the industrial unmanned helicopter business, we have decided to make a full-scale entry into the forest surveying business in response to the growing need for forest surveying in Japan. We hope to increase sales in the future. We also announced an affiliation with Tokyo Robotics, a venture from Waseda University, aiming to enter the collaborative robot field. The market size of the collaborative robot field is expected to increase from the current tens of billions of yen to hundreds of billions of yen within the next 5 years. The following page summarizes executed items of medium- to long-term measures and prospects for commercialization. We have separated the CASE domain and the ART of the long-term vision, ART for Human Possibilities. Each has made steady progress. Although it is true that these investments under the growth strategy are one factor for lower income, some will be commercialized and turn into businesses generating sales during the current fiscal year. We will work at increasing speed for further commercialization and profitability. The company, which has grown as a company that creates condo and creates new value, will continue to focus on themes that need to be addressed today and continue to work on various measures so as to provide solutions to social issues in a unique Yamaha way while achieving sustainable growth. That's all from me.

Next is details per business segment. In the Land Mobility business, sales decreased year-on-year at JPY 1,100.4 billion. While sales increased in RV and SPV, sales decreased in the Motorcycle business. Operating income decreased to JPY 41.8 billion due to the decline in motorcycles in emerging markets despite improvements in motorcycles in developed markets, RVs and SPVs. For 2020, we expect sales to increase in all businesses and aim for net sales of JPY 1,166 billion and operating income of JPY 46.5 billion, higher sales and higher income. In the Marine products business, net sales in 2019 increased to JPY 345.1 billion due to an increase in sales of large 200 horsepower or over outboard motors, water vehicles and sports boats. Operating income decreased to JPY 58.4 billion due to the effect of foreign exchange, higher sales and lower income. For 2020, outboard motors are expected to continue to grow in size with net sales projected at JPY 356 billion and operating income of JPY 54.5 billion due to factors such as the impact of foreign exchange rates and the increase in the development cost. In the Robotics business, higher sales and lower income in 2019. Net sales were JPY 75.6 billion, despite the worsening market conditions due to the effect of YMRH consolidation. Operating income was JPY 7.7 billion. For 2020, we aim to increase sales and income. Net sales of JPY 100 billion due to the recovery in market conditions and the effect of synergy with YMRH and operating income of JPY 11 billion due to the recovery of existing businesses and the reduction in loss in YMRH. In the Financial Services business, higher sales and lower income in 2019. Net sales were JPY 40.9 billion reflecting the temporary impact in Brazil in the previous year. Operating income declined to JPY 8 billion due to the one-off impact and the changes in accounting standards. For 2020, higher sales and income are expected with net sales of JPY 52 billion and operating income of JPY 12 billion due to the in-house operation in the U.S. In Others, net sales in 2019 were the same as in the previous year at JPY 102.7 billion. An operating loss of JPY 0.6 billion was recorded due to the temporary quality-related costs of golf cars and generators and the effect of additional U.S. and Chinese tariffs. For 2020, we forecast net sales of JPY 86 billion and operating loss of JPY 1 billion. Following pages explain the status of each major segment. Please turn to Page 17. Developed markets motorcycle business. The graph on the left shows sales by region. In 2019, sales declined in Japan and North America, but overall sales fell only slightly to JPY 223.1 billion due to an increase in new model sales in Europe. Excluding the effect of currency translation in Europe, sales increased year-on-year. As shown in the income improvement breakdown graph on the right, the operating income ratio was minus 6.4%, smaller loss year-on-year due to an increase in sales and an improvement in the profitability of factories in Japan and Europe. Regarding 2020, as will be explained in the next slide, sales are expected to grow significantly, mainly in Europe, with net sales of JPY 236 billion and an operating income ratio of minus 4.5% representing an improvement year-on-year. Please turn to Page 18. Shown here is the breakdown of the income improvement from 2019 to 2020. Despite several negative impacts, such as increased costs due to new regulations, increased selling expenses due to increased sales and effects of foreign exchange, we expect to increase the sales of new regulatory models as shown on the right, which will have a significant scale effect and further improve profitability. In addition to these 2 models, shown on the right, we plan to launch a series of new models. Please turn to Page 19. Emerging markets motorcycle business. The graph on the left shows sales and operating income ratio. As for the results for 2019, as shown in the graph of net sales variations in key markets on the upper right side, while sales increased in Indonesia's high price range and favorable sales continued in the Philippines, sales declined significantly in Taiwan and Vietnam. Overall, net sales were JPY 755.7 billion, and the operating income ratio fell to 6.9% due to the decline in sales in Taiwan and Vietnam where we enjoy higher profitability. Regarding 2020, we expect the continued trend of increase in high price range in Indonesia and a rebound in Taiwan and Vietnam. But factoring in the effects of declining aggregate demand in India, we expect net sales of JPY 799 billion. In terms of income, while we expect scale effect, the operating income ratio is projected to be 6.8%, taking into account the effects of the increase in EV models in Taiwan, the increase in SG&A expenses in Vietnam where we aim to increase the scale and the increase in marketing expenses for the new regulatory models in India. Please turn to Page 20. RVs and SPVs businesses in the Land Mobility segment. In the RV business, sales remained strong in North America in 2019, centering on ATVs. Net sales were JPY 77.5 billion, and the operating income ratio improved to minus 3.3%. In 2020, we expect net sales to increase to JPY 83 billion. In terms of income, the operating income ratio is projected to be minus 4.3% due to the effects of exchange rates and temporary increase in mold costs and depreciation costs in relation to new models. In the SPV business, the 2019 both exports of E-kits to Europe and sales of completed vehicles in Japan increased resulting in sales of JPY 44.1 billion and an operating income ratio of 14.6%. In 2020, sales volume increase is expected to continue, both in Japan and overseas. Net sales are projected at JPY 48.1 billion, and the operating income ratio is expected to be 13.6% due to intensifying competitive environment for E-kits and aggressive investments made in new unit development. Please turn to Page 21. Marine products business. The graph on the left shows the sales of each Marine product. Sales in 2019 were JPY 345.1 billion due to increased sales of 200 horsepower and over outboard motors and all other businesses, including water vehicles and sports boats. The operating income ratio was 16.9% due to the effect of foreign exchange rates and others. As for 2020, as shown in the upper right graph, the 200 horsepower or over outboard motors are to continue to increase and sales are projected to increase on a value basis to JPY 356 billion. And the operating income ratio, as shown in the lower right graph, is projected at 15.3% despite a scale expansion due to the impact of foreign exchange, a decrease in marginal profit due to production adjustment of small and medium 150 horsepower or under outboard motors and an increase in development costs in relation to aggressive development efforts for new models and steering systems in North America. Please turn to Page 22. Robotics business. In 2019, investment in machinery and equipment fell sharply in each region, affected by the trade friction between the U.S. and China. In particular, sales of mounters related to subcontractors and devices, where we enjoy strength, declined sharply. And sales of existing businesses decreased to JPY 63.6 billion. However, with the effect of YMRH consolidation, net sales overall increased to JPY 75.6 billion. The operating income ratio fell to 10.2% due to the decline in existing businesses from deterioration in market conditions and the consolidation of operating loss at YMRH of minus JPY 2.8 billion. As for 2020, in the immediate terms, it is true that the impact of the coronavirus outbreak is difficult to predict, but the market conditions are showing signs of recovery, as mentioned in the third quarter earnings briefing, such as in 5G-related base station and mobile device-related investments and automotive CASE-related areas. Although exact timing has yet to be defined, we plan to capture the recovery in demand and launch new models and pursue synergy effect with YMRH through package propositions and shared distribution channels so as to realize net sales of JPY 100 billion. In terms of income, we aim for an operating income ratio of 11% from recovery in existing businesses and improvement in loss at YMRH. Today, we announced that the company made YMRH, a wholly owned subsidiary through TOB. We will strengthen a series of unity or sense of unity by making it a wholly owned subsidiary and accelerate structural reforms and turning to profitability. Please turn to Page 23. Lastly, but not the least, the Financial Services business. The graph on the left shows receivables balance and their breakdown by region, and the graph on the right shows net sales, mainly interest income and operating income ratio. As shown in the left graph, receivables balance steadily increased, mainly in North America, to JPY 304.9 billion at the end of 2019. In 2020, the scale is expected to increase further to JPY 413 billion. As shown on the right, net sales or interest income increased to JPY 40.9 billion in 2019. In terms of income, as there was a temporary factor to increase income in Brazil in the previous year, year-on-year decrease was recorded in 2019. The operating income ratio fell to 19.6%. As for 2020, we will increase scale and reduce costs through in-house operations in North America, while promoting full-fledged business expansion in Europe, so as to expand both in terms of geographical coverage and customer base while providing highly convenient services unique to Yamaha, we will aim at net sales of JPY 52 billion and operating income ratio of 23.2%. That's it for details per business segment. In summary, as was mentioned by the President at the outset, 2019 results, excluding growth strategy expenses and foreign exchange effects were on par with the 2018 results in terms of operating income, but it is true that figure-wise year-on-year decline in income was recorded. With 2019 as the bottom, we aim at increasing sales and income in 2020, leveraging recovery in sales in Motorcycle business in developed and emerging markets and Robotics businesses. Even with the effects of foreign exchange included, we project the operating income ratio to improve from 6.9% to 7% this year. The management is committed to improving operating income ratio by controlling expenses. That concludes our presentation. Thank you for your attention. [Statements in English on this transcript were spoken by an interpreter present on the live call.]