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

Hello, everyone. This is Hidaka. Thank you for watching Yamaha Motors' online earnings briefing for fiscal year 2020. Let me start by expressing my deepest condolences to all the lives lost due to COVID-19 and my heartfelt sympathy to those infected in fighting the pandemic. I would also like to express my sincere gratitude to all essential workers, including medical care providers, for their dedicated efforts. Now I would like to give you the overview of the financial results, and Mr. Okawa will continue with explanation by business segment. Please turn to Page 4. First, here is the business summary in 2020. In 2020, the business environment changed drastically due to the unexpected adversities brought by COVID-19. While sales volume declined, expenses and inventory were also reduced. And in developed market, after the lockdowns were lifted, outdoor leisure and personal mobility demand recovered rapidly, which was a tailwind for us. As a result, sales and operating profit went down to 88% and 71% of the previous year's level, respectively. But we believe we were able to minimize the damage to our performance. Inventory decreased due to a rapid recovery in demand and temporary shutdown of factories. Free cash flow increased as a result of our decision to postpone or free some of our investment per ART priority. With regards to our balance sheet, assuming a prolonged period of low demand due to the spread of the pandemic, we took out loans in the first half to prepare for a crisis. During the second half, as we made some repayment, our balance sheet has been normalized from the crisis mode. Please turn to Page 5. This is our key financials. In 2020, net sales were JPY 1.4713 trillion or 88% of the previous year's level. Operating income JPY 81.7 billion or 71% of the previous year. OP margin, down by 1.4 points over the year to 5.6%. Ordinary income JPY 87.7 billion or 73% versus the previous year. And net income attributable to shareholders of the parent company was JPY 53.1 billion, 70% of the previous year. The actual exchange rates were as shown in the bottom table. Please turn to Page 6. This is the result of unit sales in December end inventory for our major products relative to the previous fiscal year in percentage term. Since the second half of the fiscal year, recovery became clear across different products and regions. In developed market, the business recovered to exceed the previous year. As for emerging market, impact of the pandemic was little in China. Thailand, India and Brazil started to recover in the second half, while other ASEAN countries saw a moderate recovery. Inventory became low in almost all the regions. Especially in developed market, our market inventory appears to be short. Therefore, in the first half of 2021, we will operate our plants fully to increase product supply. Please refer to Page 7. This is how our operating income changed over the year in 2020. As shown in the top right chart, due to lockdowns in various countries, profit declined significantly year-on-year during the first half. In the second half, after the lifting of lockdowns, we certainly took advantage of demand recovery and grew profit, but not enough to cover the decline in the first half. Reflecting the change from the operating income of JPY 115.4 billion in 2019 by business segment. In the Land Mobility business, overall operating income went down by JPY 20.6 billion. To break it down, Motorcycle business in developed market increased by JPY 6.2 billion due to improved profitability and lower expenses. However, emerging market Motorcycle business dropped by JPY 30.1 billion as the unit sales dropped significantly in our core Indonesian and other markets. RV was up by JPY 2.7 billion due to increased unit sales of ATVs and ROVs, mainly in North America. And SPVs or electric power-assisted bicycles increased by JPY 0.6 billion due to increased sales of E-kits. Marine Products business was down by JPY 5.2 billion as the unit sales of outboard motors, water vehicles and sport boats declined due to a lack of supply to keep up with the shortage of inventory in the market. Robotics business went down by JPY 4.1 billion. In addition to the deterioration of model mix in surface mounter business, there was a negative impact of the consolidation of Yamaha Robotics Holdings by JPY 600 million. Financial Services business was up by JPY 0.3 billion due to strong performance in developed market. Other products business was up by JPY 1.3 billion due to the absence of onetime quality expenses for generators and golf cars, which were recorded in the previous year. In addition, there was a positive impact of JPY 2.1 billion due to decrease in growth strategy expenses. Factoring in the negative impact of currencies by JPY 7.5 billion, operating income for 2020 became JPY 81.7 billion. Please go to Page 8 for our outlook in fiscal year 2021. We believe in 2021, on top of economic measures taken in various countries as vaccination progresses, the world will gradually return to the pre-pandemic situation. And as we expect all of our business to recover compared to 2020, we project both our sales and profit to increase year-on-year. In developed market, in Land Mobility and Marine business, increasing demand for personal and outdoor leisure from the second half of 2020 is expected to continue and sales should increase. We will work to increase our production and unit sales. In the Motorcycle business in emerging market, while recovery in our core Indonesian market is expected to be slow, we expect many other emerging countries to recover to 2019 level. In the Robotics business, in addition to China, where sales increased last year, we also expect a gradual recovery in developed countries. In addition, we will thoroughly implement break-even point management and demand chain reforms and strengthen our business structure through expense, cost and inventory control. Furthermore, as part of our structural reforms, we have been reviewing our production system globally and we will now start reorganizing our domestic production structure. Through these efforts, we intend to restore our earnings capabilities and reallocate cash to growth investment and shareholder returns. In 2022, we will launch a new medium-term management plan. We will work on the 4 priority areas listed here in an accelerated manner to meet the expectations of our customers and society. We're planning to announce our new medium-term management plan in the latter part of this year. Please refer to Page 9. This is our forecast for 2021. In all business segments, sales are expected to increase compared to 2020 and exceed 2019 levels. Operating income is expected to be approximately the same as 2019 level due to the currency impact and the delayed recovery in Indonesia. Net sales are expected to increase by 16% year-on-year to JPY 1.7 trillion; operating income, up by 35% year-on-year to JPY 110 billion; and operating profit margin, up by 0.9 point to 6.5%; ordinary income, 25% increase year-on-year to JPY 110 billion; net income attributable to shareholders of the parent company, up by 36% over the year to JPY 72 billion. Our ForEx assumptions for 2021 are JPY 103 to the U.S. dollar and JPY 126 to the euro. As for currencies in emerging countries, we assume IDR 13,900 and BRL 5.2 to the U.S. dollar, respectively. Please refer to Page 10. This is the 2021 unit sales projections for our major products. The chart on the left shows the comparison against 2019. And on the right is a comparison against 2020. In the first half of the year, we expect unit sales to exceed 2019 levels for many products and regions. In the ASEAN market, we will continue our efforts to recover sales as further opportunities for improvement. Unit sales in the second half is uncertain and will depend on retail sales in the first half. But our assumptions within the full year budget is shown here. Please turn to Page 11. Society and market are changing due to COVID-19, which we believe is an opportunity for us to provide attractive products in each market and increase our presence with Yamaha's unique value proposition. In the U.S., even before the 2020 summer season began, demand for outdoor and family recreation activities surged and became a tailwind for Yamaha. Given our diverse product lineup, which includes motorcycles, ATVs, ROVs, outboard motors and water vehicles, the number of first-time Yamaha purchases has been increasing. In the off-road motorcycles, ATVs and snowmobile categories, sales of used models increased significantly by 52% year-on-year. And it was also notable that in the Marine business, the composition of new customers increased. While we continue to develop products that are unique to Yamaha, we will also provide occasions and services to familiarize customers with our products when they're still small and have them continue to enjoy our products with peace of mind throughout their lifetime. Please move on to Page 12. In Europe and Japan, value of personal mobility is revisited in light of a trend to avoid public transportation. In Europe, we launched Tricity 300 last year, which can be enjoyed with a car license in certain countries. This model is quite popular amongst people without a motorcycle license, accounting for half of all purchases of this model. In Europe, where awareness toward environment is high, demand for electrical power-assisted bicycles and e-bikes is also recovering rapidly. We believe that demand for motorcycles and e-bikes will continue to grow in the medium term, especially amongst commuters. In addition to vehicles, which provides fun and comfortable means of transportation, we will also offer customer-centric total services, including financing, accessories, parts and after-sales service. Please turn to Page 13. In emerging market, while rate of recovery is slower than in developed market, our focused market, i.e., premium segment is recovering relatively quickly. In the emerging market, along with income growth, upper-middle class is expected to grow going forward. As the market recovers towards next year, we intend to introduce highly distinctive personal mobility products targeting the upper middle class and expand our business. Please go to Page 14 for analysis of operating income movement in 2021. Against the operating income of JPY 81.7 billion in 2020, from Land Mobility business overall, we're expecting a positive contribution of JPY 18.7 billion. To break it down further, developed market Motorcycle business down by JPY 3.3 billion due to the rising cost and logistics costs, but emerging market Motorcycle is expected to go up by JPY 20.4 billion due to market recovery; RVs, positive JPY 2.8 billion due to new models; and SPVs, negative JPY 1.2 billion due to higher parts procurement costs. Marine Products business is expected to make a positive contribution by JPY 7.4 billion due to an increase in unit sales of outboard motors, water vehicles and sport boats. Robotic business, positive JPY 6.2 billion due to recovery in demand in developed market and the positive profitability at Yamaha Robotics Holdings. Financial Services, positive JPY 1.7 billion due to an increase in the balance of receivables. Other business, minus JPY 0.5 billion. Increase in growth strategy expenses will be negative by JPY 2.9 billion. Taking also into account the negative currency impact of JPY 2.4 billion, we are projecting the operating income of JPY 110 billion. Please refer to Page 15 for our key financials. This page shows the movement of our ROE, which is a key indicator of earnings power and its components over the course of 3 years from 2019 to 2021. In 2020, net income ratio declined by 0.9 point year-on-year to 3.6%. Total asset turnover, down by 0.2 to 0.93. Equity increased by JPY 9.4 billion over the year to JPY 714.6 billion. Equity ratio down by 2.5 points to 43.6%. As a result, ROE became 7.5%. In 2021, due to the projected increase in sales and profit, ROE is expected to recover to 9.7%. We will regain earnings power in existing business and improve capital efficiency. Please refer to Page 16, I'd like to explain about cash flow excluding sales finance. As you can see, in 2020, although lower profit was negative to cash inflows, improved working capital through inventory reduction was positive to cash inflows. Since we reduced our investment to mitigate cash outflows, our cash position increased significantly. In 2021, along with market recovery, we will shift from crisis mode to normal operation. We will improve our earnings power. And while giving due consideration to the balance with shareholder return, we intend to invest for future growth and establish digital infrastructure. Next, Page 17, for shareholder return. For 2020, based on the recovery of our business performance, we would like to revise the projection of full year dividend from the previous JPY 45 and propose JPY 60 to General Shareholders Meeting. And for 2021, we're planning to increase DPS to JPY 90. We will continue to strive for achieving stable returns to our shareholders. Please go to Page 18. In order to realize our long-term vision, we are advancing digital transformation that is uniquely Yamaha, including renewal of our management infrastructure and strategic use of the latest digital technologies and data. On the marketing front, in Indonesia, we launched NMAX that is equipped with connect function last year. Through a dedicated smartphone app, we can connect with customers, products and dealers and inform customers of the status of the products. This function also allows customers to call a Yamaha mechanic at home even if they are unable to go out due to the pandemic. In India, to cope with COVID-19 situation, we quickly renewed our website and established an e-commerce site, and we started to take bookings online since August. In the Marine business to support our outboard motor flagship model, F425, an optional unit enabled with IoT technology, helm link is now available. Helm link allows for monitoring the status of the running engine. And through failure diagnosis in production as well as enhanced customer services, it provides unparalleled reliability to our customers. At the production sites, we're promoting the smart factory initiative. By monitoring the status of operating equipment, centrally managing production data and data analysis using AI, we can identify issues that were not visible in the past. This is also helping us to shorten lead times and greater flexibility, leading to productivity and quality enhancement. Going forward, we intend to roll this initiative out in ASEAN first, but globally and centralize the management of various operating data on a global basis so as to spread best practices more easily and enjoy more benefits. Please refer to Page 19. This is a summary of the progress we made in 2020 to realize our long-term vision, ART for Human Possibilities, or AR and T, respectively. In addition to growth strategies for existing business, we're also working on new business development. For new business, we have narrowed down our focus to 4 areas: mobility service, low-speed autonomous driving labor-saving in agriculture and medical care field and we made certain progress even under pandemic situation. By promoting initiatives in these fields, we will aim to create 4 social values listed on the right. Also, to become carbon-neutral in 2050, we would like to accelerate electrification. After we launched electrical power-assisted bicycles back in 1993 and electric scooters in 2002, we have been expanding range of mobility products that use batteries and motors, including golf cars and electric wheelchairs. By combining accumulated technologies and experiences and through collaborations with other companies, we will continue to propose electric mobility that is uniquely Yamaha. This concludes my part. Thank you for your attention.

My name is Okawa. I would now like to give you explanation of each business. Please refer to Page 21. Here is sales and operating income by business segment. In Land Mobility business in 2020, RV sales increased, but Motorcycle sales declined and net sales dropped to JPY 946.5 billion. Operating income was JPY 18.5 billion due to the decrease in motorcycle sales volume in emerging markets despite improvements in motorcycles, RVs and SPVs in developed market. In 2021, as we expect sales to increase across the world, sales are expected to go up to JPY 1.121 trillion and operating income to JPY 37.5 billion. In the Marine Products business, sales in 2020 dropped to JPY 328.3 billion due to a decrease in sales volume associated with lockdowns and temporarily planned shutdowns. Operating income also declined to JPY 50.6 billion. In 2021, in order to replenish market inventory, we're planning to increase production and shipments at full capacity, and we expect sales to increase to JPY 364 billion and operating income, JPY 53 billion. In the Robotics business, sales in 2020 increased to JPY 83 billion due to strong sales in the Chinese market. But operating income declined to JPY 3.3 billion, including the impact of Yamaha Robotic Holdings consolidation. In 2021, we expect sales to increase to JPY 95 billion due to recovery of demand in developed market. Operating income is expected to grow to JPY 9.5 billion, thanks to an improved product mix and Yamaha Robotics Holdings achieving positive profitability. In the Financial Services business, sales in 2020 grew to JPY 46.1 billion due to strong performance in developed market, and operating income declined to JPY 7.6 billion due to an increase in allowance for doubtful accounts. In 2021, while the balance of receivables is expected to grow steadily, we expect net sales to stay almost flat year-on-year at JPY 46 billion due to currency impact and operating income to increase to JPY 9 billion. In Other products business, in 2020, sales declined to JPY 67.4 billion and operating income increased to JPY 1.7 billion. This is due to onetime quality-related expenses for golf cars and generators booked in the previous year. For 2021, we project sales of JPY 74 billion and JPY 1 billion operating income. From the next page onwards, I will go over the business situation of major business segments. Please turn to Page 22. This is the Motorcycle business in developed market. The graph on the left shows sales by region and operating income ratio of the business overall. In 2020, we were able to offset the decline in the first half with the demand recovery in the second half and sales reached JPY 219.5 billion, almost flat year-on-year. As for operating margin, as you can see in the breakdown of profit improvement on the right, due to the significant effect of cost reduction, the margin improved from the previous year. In 2021, sales are expected to increase to JPY 238 billion due to the expected continued sales growth. But because of cost increase associated with increase in sale, part of the development cost that were temporarily suspended last year but to be booked this year, and more importantly, as a negative factor, higher logistics costs due to container shortages, we expect operating margin to be negative 4.2%. We will execute break-even management thoroughly in order to achieve positive profitability. Please refer to Page 23, Motorcycle business in emerging market. The graph on the left shows sales by region and overall operating income ratio of this business. Two charts on the right show movement in sales in major countries. As for 2020, as shown in the upper right chart, sales increased in Taiwan and China but decreased in other countries due to the impact of COVID-19. Especially in our core market, Indonesia, due to quite strict lockdowns and tighter credit, sales declined significantly. As a result, sales of emerging market Motorcycle business declined to JPY 604 billion, and operating profit margin was 3.4%. For 2021, based on the expected unit growth in various countries, sales are projected at JPY 730 billion, approaching 2019 level. But in Indonesia, recovery is slower than in other markets and we can only expect the market to recover to 2019 level in and after 2022. As a result, overall operating income ratio is not expected to recover to 2019 level yet and remain at 5.5%. Given these circumstances, we will continue to focus on the premium category in each market to recover and improve our profitability. Please refer to Page 24 for RV and SPV business within the Land Mobility segment. In the RV business, due to increase in demand, sales in 2020 increased to JPY 79.8 billion; and operating margin improved to negative 0.5%, almost turning to positive profitability. In 2021, unit sales of ATVs and ROVs is expected to increase continuously. And along with increased sales of the new Wolverine RMAX, which we introduced to the market in the latter part of last year and execution of break-even management, we will aim to return to positive profitability, with net sales of JPY 108 billion and an operating income margin of 1.4%. SPV business was affected by delayed production in the first half due to the impact of COVID-19 and decreasing sales volume of finished vehicles in Japan due to voluntary restraint of sales activities, and sales dropped to JPY 43.2 billion. The operating margin, on the other hand, improved to 16.2% due to increase in sales volume of E-kit. In 2021, sales volume will increase, both in Japan and overseas, and we project net sales to reach JPY 45 billion. In terms of profit, taking into account higher part procurement cost, operating margin is expected to be 13.3%. Next, please turn to Page 25 for Marine business. The left chart shows sales breakdown by product and operating margin of the segment overall. For 2020, due to the planned shutdown of both builders and business suspension of dealers in North America during the first half related to the pandemic, sales volume declined. On top of that, due to the shutdown of our headquarter's plant and the U.S. plant for a certain period of time, we could not catch up with the rapid recovery of total demand since June with our supply. As a result, net sales decreased to JPY 328.3 billion. Operating income margin was 15.4% due to the decrease in marginal profit caused by lower production. In 2021 due to the expected increase in unit sales for both outboard motors, water vehicles and sport boats, net sales and operating income are projected to increase to JPY 364 billion and JPY 53 billion, respectively. However, the operating income ratio is projected at 14.6% due to currency impact. Please refer to Page 26 for Robotics business. In 2020, due to strong sales of surface mounters in China, net sales increased from JPY 75.6 billion in 2019 to JPY 83 billion in 2020. Operating profit margin declined from 10.2% in 2019 to 4% in 2020 due to deterioration of sales mix caused by the decline in sales to the automotive industry and the impact of Yamaha Robotics Holdings consolidation. Excluding the impact of Yamaha Robotics Holdings, the operating margin of existing business was maintained at approximately 10%. In 2021, demand for developed market will recover gradually, and net sales and operating profit are expected to increase to JPY 95 billion and JPY 9.5 billion, respectively, with operating income ratio of 10.0%. Structural reform of Yamaha Robotics Holdings is progressing as planned, and we expect to achieve positive profitability in 2021. Please refer to Page 27, lastly, Financial Service business. The left chart shows the balance of receivables. And on the right, you can see net sales, which mainly consists of interest income and operating income ratio. As shown on the left, the balance of receivables increased as we are now running the U.S. prime lending program independently and reached JPY 350.4 billion as of the end of 2020. As shown on the right, due to strong performance in developed market, which includes Canada and Australia, net sales increased to JPY 46.1 billion in 2020. However, due to some allowances for doubtful account, which we kept on the book, operating margin became 16.4%. In 2021, as receivables from both wholesalers and retailers are going to expand, the outstanding balance is expected to increase to JPY 416 billion, but this increase is mainly to support replenishment of inventory at dealers. And also because of the currency impact, sales or interest income is expected to remain almost flat from 2020. However, profit is expected to increase as we should be able to enjoy the benefit of becoming a full service provider in the U.S. This is the situation of each business. To wrap up, in 2021, while recovery is expected to be slow in some regions, including Indonesia, we will aim at increasing both sales and profit across all the business segments to return to 2019 level. In 2020, we controlled our expenses for crisis management and we will continue this effort as much as we can in 2021 to surely transform our operations and establish a resilient business platform toward new medium-term business plan. This concludes my presentation. Thank you for your attention. [Statements in English on this transcript were spoken by an interpreter present on the live call.]