Yamaha Corporation

Takuya Nakata - President and Representative Director

Good morning everyone I am Nakata representing Yamaha. Thank you so much for coming to our briefing session despite your busy schedule.

I also appreciate your understanding and support for our corporate activities as well. Now, I would like to take you through our fiscal year results ended in March 2015.

First, here is an outline of our results for the year just ended. In summary our full year sales and income increased year-over-year.

As you can see here musical instrument sales and income were up year-on-year. In the audio equipment segment, although AV products continue to struggle, which I will elaborate in more detail later, professional audio equipment showed a double-digit growth for the first time in a while.

So we had a substantial growth in sales and income overall. Electronic device sales declined sharply year-on-year and incurred operating losses.

We just finished the second year of our mid-term management plan but as it turned out that we were able to achieve our mid-term plan targets for sales, operating income as well as OP margin one year ahead of schedule. Let me take you through some of the numbers for clarification, if you look at this chart here what is highlighted in blue in the middle represents the fiscal year results for March 2015 against the backdrop I explained earlier, we had net sales of ¥432.2 billion up 5.3% year-on-year with an operating income of ¥30.1 billion.

To achieve ¥430 billion sales and ¥30 billion operating income was a target we had aimed to achieve by the end of the final year in our mid-term plan but we were able to advance the timing by one year. Down below you see our ordinary income and net income figures which show some upside to the figures announced previously.

Some of the major reasons behind the OP upside had to do with increased income from dividend as well as IP licenses. In addition we increased our deferred tax assets and had a positive impact on the corporate income tax adjustments, resulting in higher net income.

Here is a chart showing a breakdown of net sales and operating income by segment. The middle bar represents the March 2015 results.

March 2014 results are shown on the left. The right hand side shows the projections previously announced for March 2015.

As you can see the revenue increased dramatically in musical instruments. Our net sales increased also in audio equipment.

On the other we had difficult results in electronic devices. In the bottom you see the impact of foreign exchange rates which was around ¥15 billion.

Our top line grew by about ¥20 billion which means that our net sales increased by ¥7 billion even after excluding the currency impact. Operating income is described on the right hand side.

Our OP increased by ¥4.1 billion compared to the previous year. We had a major profitability improvement especially in the musical instruments.

So our OP increased from ¥19.7 billion in March 2014 to ¥25.1 billion in March 2015. The percentage of our OP from musical instruments increased for the entire company.

This shows our operating income analysis compared to the previous fiscal year. There was an increase in cost as well as deteriorating profitability in electronic devices.

New consolidations referred to a large goodwill amortization for the two American companies we had acquired last year. On the other hand the impact of exchange rate was a tail wind [ph] for us in addition to top line increase and cost improvements which added up to ¥30.1 billion.

One of the notable variances from the previous projections is a major increase of SG&A cost. We forecasted that we could place a stringent control over the cost in the fourth quarter in our previous projections.

However virtually there was not much increase in our SG&A cost from March 2014 to March 2015. So that is a part that the result deviated substantially from our prior projections.

On the other hand there was a sales upside of about ¥2 billion in addition to the ForEx impact. The losses from electronic devices turned out to be better than expected.

As a result the net outcome was basically in line with the previous projections. Let’s take a look at each segment; in musical instruments operating income declined compared to the same period year-over-year.

Even though net sales from musical instruments increased from ¥44.3 billion in the prior year to ¥48.9 billion, operating income dipped slightly because there was lot of last minute demand which drove purchases of expensive items, such as pianos with high gross margins before the consumption tax hike in the prior year in Japan and that is why we had declined OP in the following year. On a full year basis however, both sales and income grew nicely.

In particular just on musical instruments, wind instruments and guitars performed well. Here is our sales breakdown by region.

In Japan you see minus 8% in the fourth quarter, which has to do with the last minute demand in the previous year before the consumption tax hike I explained earlier. All the other regions showed positive growth in the fourth quarter such as 12% in North America, 6% in Europe and 8% in other regions.

We have observed gradual improvements in other regions even though we had a negative growth year-over-year in the first quarter, but eventually recovered to a positive growth in the subsequent quarters. On a full year basis we managed to achieve a double digit growth in North America.

Both sales and operating income rose in the fourth quarter year-on-year in audio equipment, which was duplicated on a full year basis as well. In particular PA equipments had much higher sales by 19% in the fourth quarter, which means that a double-digit growth has finally come back to PA equipment business after a period of stagnation since the Lehman shock.

Here is our sales breakdown by region. You notice a very high growth rate of 15% in Japan during the fourth quarter.

Contrary to the consumption tax hike impact that we had last year there was a very active demand for our commercial audio equipment, probably driven by the preparation and refurbishment before the Olympics. North America also experienced a high growth of 18% as well.

Europe grew by 7%. Even though it was a tough year for audio equipment segment overall the robust performance of PA equipment, especially among those three developed regions compensated for the shortfall.

The incredible growth you see in China has to do with a newly consolidated subsidiary, Revolabs, which I may have mentioned previously. Here is our sales breakdown by product category in musical instruments and audio equipment.

As for pianos the performance was pretty much comparable to that of the previous year despite the fact that we had difficulties compared to the previous fourth quarter due to the demand driven by the consumption tax hike in Japan. Speaking of digital musical instruments, digital pianos performed very well in the first half and we were able to achieve a 7% growth for the full year.

We anticipated some struggle in the wind instruments business in the fourth quarter due to the consumption tax hike in Japan in the fiscal year just ended. But North America performed rather well and it showed some resilience later on as the tax hike impact seemed to be mitigated in Japan and ended up achieving 100% of the previous fourth quarter and the full year growth turned out to be 2% overall.

In string and percussion instruments we had a strike in Indonesia in the previous year resulting in supply shortage which was eased in the year just ended. As we were able to fully supply this year especially in the second half you see much higher numbers, which do not necessarily mean pure growth but they represent a rebound from the constraint that we had in the previous year.

Next is our Audio Equipment business. AV products suffered as I explained earlier.

Conventional products such as receivers had difficulties. As we looked at the overall market the spread of new technology such as smartphones expanded the variety of utilizing audio equipment across the world, driving the market growth.

As for PA equipment the growth rate has recovered to a double-digit for the first time in a while on a full year basis which is quite encouraging. The fourth quarter results in electronic devices were broadly in-line with the previous projections.

We have observed some improvements in profitability. Our full year net sales dropped sharply year-on-year which was caused by the sluggish amusement market throughout the year and the shipment of our devices was dragged down as a result.

Our customers for geomagnetic sensors, for smartphones continue to struggle which led us to these results. Other segment had higher sales and income year-on-year on the whole, especially the automobile interior components as well as FA equipment, which are handled by one of our subsidiaries called Fine Tech, performed well.

In particular the demand for FA equipment came back in the second half and the robust demand levels still continues at this point. We have some competitive advantages in the area of precision machinery to test PCB especially ultrathin PCB for smartphones in terms of the speed and accuracy of testing.

The strong demand in testers [ph] have resulted in favorable performance. Here you see a full year results I just explained about.

Operating income increased year-on-year boosted by higher income from every equipment and automobile interior wood components. That’s all for the performance of the fiscal year just ended.

Let me move on to talk about our forecast for this fiscal year. We intend to realize steady growth across all markets.

In musical instruments we plan to increase our sales and income. In audio equipment we will launch new major products, such as digital mixers, so that we can continue our growth.

In electronic devices we implemented a structural reform in the year just ended and officially signed an agreement to sell our semiconductor fab in Kagoshima. Starting from October this year we should be able to expect a substantial improvement in profitability under the new structure.

Speaking of music schools, as we made an announcement yesterday there will be no change to how we operate, not only directly around music schools as well as classes at dealers. However the recruitment of students would be transferred to Yamaha Music Foundation.

We project ¥12.4 billion decline in sales as we exclude that recruiting part of the revenue from our consolidated sales in our budget as announced yesterday. Despite the top line decline however, we expect only a minimum net impact on profitability and income as a result.

Compared to the previous year our exchange rate assumptions have changed to ¥120 to the US dollar and ¥130 to the euro, which should result in increasing our sales and negatively impact our income. As we factor in those assumptions despite the ¥12.4 billion decrease of sales we still expect the projected sales as indicated.

We expect the operating income to grow by ¥3.9 billion due to the top line growth as well as structural reform. We also plan a positive growth on our ordinary income as well as net income.

We expect that our musical instruments business will have a solid performance and plan to increase our income across all the segments. Especially in the semiconductor business as we implemented the structural reform we would expect turning this business to be profitable.

Here is a variance analysis. In addition to the effect of musical school transfer which is ¥12.4 billion and impact of exchange rate as well as actual increase in sales we project our sales to be ¥435 billion.

We would expect the foreign exchange rate to negatively affect our income year-on-year. On the other hand by implementing structural reforms in electronic devices in addition to top line growth and cost reduction activities our plan is to increase our profits by ¥4 billion year-on-year.

In musical instruments sales are expected to decline slightly due to the change of music school operations, although we expect higher sales of musical instruments as well as operating income on the whole. Here is our sales by region.

The drop you see in Japan has to do with the music school business I explained earlier. What we mean by 100% in blue at the top is that the sales remains flat, excluding the impact from the music schools.

Furthermore China business is expected to be on the mild growth track again. In audio equipment I explained about how AV conventional market has been shrinking, while there has been a new way of utilizing AV products by smartphones which is a growth market.

Finally we should be able introduce new products by leveraging Yamaha’s strength to match the needs of growing market. We expect some recovery this year.

We also expect to launch new products in products in PA equipment such as large scale digital mixers to aim for top line growth. As for karaoke equipment we expect declined sales but this is due to the change of our OEM supply structure and only for this model to sell PCB instead of the whole karaoke machines.

However the PCB profitability is so much higher. So it will still contribute to our profit despite the sales decline in equipment.

Here is our sales breakdown by region. We had a substantial growth in commercial audio equipment in March 2015 in Japan, and that is why we forecast a mild decline in FY’16.

In other regions however we do project sales growth. To look at the sales breakdown by product category we expect sales of pianos to pick-up slightly in China; digital musical instruments are not projected to grow as much as the previous year because the new Electone model was introduced in the fiscal year just ended and the initial demand is expected to slow down by this fiscal year and that is why we have the figures as indicated here for the entire segment.

On PA equipment we projected a 9% growth here even though we actually hope for a double-digit growth. We have signed an agreement to complete the sale of our fab in electronic devices by the end of this first half which allows us to proceed with the structural reform.

However our customers for geomagnetic sensors are struggling and the amusement business has not fully recovered yet. Therefore our performance is expected to be flat year-on-year.

In Others segment FA equipment in particular is expect to have higher sales and operating income slightly driven by strong demand in testers as I explained earlier. Inventory amount appears to be higher but this is basically due to exchange rates.

Excluding the ForEx impact it seems to be the optimal level. As for this fiscal year end we should be able to control the inventory level at the same level even though the sales are expected to grow.

Capital expenditure is expected to be comparable year-on-year. R&D expenses will be slightly down because of the new product development, and semiconductor are expected to come down.

On our balance sheet our net assets have increased substantially due to the mark-to-market valuation of securities that we own as the stock prices have risen on top of the profits generated in the fiscal year just ended. The total assets have grown to be ¥530 billion.

In FY March 2016 we are expecting about the same level of total assets. Here are some of the key financial figures highlighted such as the results from fiscal year March 2015 as well as our projections for this fiscal year.

To the furthest right you see our final goals in the three year mid-term plan. As I mentioned upfront we were able to achieve the net sales of ¥430 billion with ¥30 billion OP and OP margin of 7% in the second year of mid-term plan.

We have been able to generate adequate free cash flows of ¥45 billion after factoring in our M&A transactions. On the other hand even though we targeted 10% ROE the figure still remain as shown here, partially due to the appreciation of stocks we own as well as a foreign exchange rates which inflated our asset and equity values.

Therefore the denominator became larger which lowered our ROE. We aim to achieve higher ROE by raising numerator with higher profits and we realize the need to work on various measures to improve the denominator in the future.

As for shareholder returns we were able to generate higher net income than the plan in the fiscal year just ended. We will propose ¥36 dividend per share at the shareholder meeting even though it is slightly below the 30% payout ratio target that we have.

As the same level of net profit is assumed for the March ending 2016 we announced the same amount of ¥36 per share as dividend. Finally there are two final points I would like to address.

There will be a variety of new products to be introduced this year, which are included in the appendix. Let me introduce a new product from musical instrument as well as from audio equipment.

TransAcoustic Piano is to be launched in musical instruments. We have produced a large quantity of Acoustic Pianos and quite a few of them are already placed in Japanese households.

Digital pianos are quite handy and continue to be popular. This TransAcoustic Piano offer more values added to customers by providing benefits of both Acoustic and Digital pianos.

Yamaha has introduced so called hybrid pianos by combining the strength of both in the past decade. This TransAcoustic Piano is a very best of hybrid because it covers all the functionalities available for Acoustic Pianos while being able to control the volume at the same time.

Even though there have been Acoustic Pianos with volume control and keyboards but TransAcoustic even has strings attached. So you can play this piano just like any other acoustic pianos but if you wanted to lower the volume at night it can transmit vibrations to the sound board allowing digital sound to be produced directly from the sound board without using speakers.

Because the vibration spread throughout the sound board it can generate natural sound. We hope to be able to cultivate the new market by launching this new product as customers who already own pianos may wish their children to have this new type of pianos, as we propose new values added.

Secondly this is a new state of the art flagship digital mixing system for commercial use launched for the first time in more than 10 years with a price point of more ¥10 million. The prior model was called PM1D which was used in a variety of theaters and live shows.

This new product will be finally ready in the market by this summer as more than 10 years have passed since the last model launch. We have fully leveraged the technological advancements in the meantime.

We have always named professional mixing systems as PM series at Yamaha and we are confident that this new product will be quite appropriate for PM. By introducing this new PM we are hopeful that it will bring innovation to the live sound scene in professional mixing operations.

Down below you see a low price digital mixers. There used to be a very strong product called O1B in this category.

It has been a while since we have developed a new product but finally we plan introduce a new model in June of this year. We are confident we should be able to deliver a large quantity of this model for general users.

As you see a panel here you can use swiping or pinching just like ordinary smartphone operations. This allows functions of switching channels or enlarging screens in a flexible manner.

By being able to offer not only high end but also affordable price points for the new product launches we definitely aim to achieve a double digit growth in PA equipment. That is all from my presentation and thank you very much for listening.