Q2 2020 Yamaha Motor Co Ltd Earnings Presentation

Shizuoka Aug 7, 2020 (Thomson StreetEvents) — Edited Transcript of Yamaha Motor Co Ltd earnings conference call or presentation Thursday, August 6, 2020 at 6:05:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Yoshihiro Hidaka

Yamaha Motor Co., Ltd. – CEO, President & Representative Director

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Presentation

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Yoshihiro Hidaka, Yamaha Motor Co., Ltd. – CEO, President & Representative Director [1]

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This is Hidaka. First of all, I would like to wish a swift recovery to the people who are suffering from COVID-19 and offer my condolence to those who have passed away. At the same time, I would like to offer my condolence to the victims of the torrential rain disaster in July this year.

Now let me explain the outline of the first half of fiscal year 2020. This is the comparison of the unit sales by main products compared to the previous year for the first half. Unit sales has started to recover with April to May at the bottom, but the pace of recovery is different region by region.

Motorcycles in Europe, U.S., Japan; hobby-related products such as ATV, ROV outboard motors in the developed countries has turned positive by June due to people engaging in so-called revenge consumption.

As the Chinese economy saw a recovery, motorcycles in China; surface mounters and motorcycles in Vietnam, which was not hard hit by COVID-19 turned positive year-over-year.

On the other hand, although motorcycle sales in emerging markets, such as the ASEAN region, excluding Vietnam and India, is recovering, the pace is very slow, especially India, which is a large market, still at 50% year-over-year as of June.

Indonesia was less than 20%. On the very right of the slide is the inventory as of end of June of each regions comparing it to the previous year. In April and May, we saw the evaporation of demand to suspension of factories happening at the same time due to lockdowns. Demand started to recover as some countries have started to lift lockdown. Against this backdrop, we are starting our factories while taking care to prevent infection and trying to normalize our global supply chain. However, supply has not been able to catch up but there’s sudden surge in demand in some products and countries. So currently, there are some regions that have seen a sharp decline in inventory.

I will explain about the overall performance metrics. Based on the aforementioned unit sales results for the first half of fiscal year 2020, net sales was 80% versus the previous year at JPY 685.5 billion. Operating income, 28% year-over-year at JPY 19.1 billion. Operating income ratio, minus 5.3 points at 2.8%. Ordinary income, 29% versus last year at JPY 20.7 billion. Net income attributable to owners of the parent company was minus JPY 2.8 billion compared to JPY 52 billion last year.

Due to the impact of COVID-19, sales decreased, except for the Robotics and Financial Services business. Although we are on a recovery track with April as a bottom, for the 3 months in the second quarter, we were loss-making and income decreased across the board. However, we were able to end at operating gain.

For net income, due to the reversal of DTA of JPY 10.2 billion, it ended in the red. The ForEx assumptions for this half is as shown in this slide.

I will explain about the factors impacting operating income in the next slide. I will first explain the difference of income from the previous year; next, about the growth strategy expenses; and finally, foreign exchange effects.

Operating income in the first half of 2019 was JPY 69 billion. For the Land Mobility business, overall, the decrease was JPY 25 billion. To break this down, developed market motorcycles went down by JPY 1.4 billion due to sales decrease and the shutdown of plants in Europe and head office.

For emerging market, motorcycles down JPY 21.7 billion due to sales decline and planned shutdowns. Recreational vehicles was minus JPY 1.2 billion. Small private vehicles was down by JPY 0.7 billion.

Going to the Marine Products business, production adjustment was conducted for outboard motors in first quarter, and this segment was impacted by COVID-19 in the second quarter. As a result, operating income declined by JPY 11.5 billion. The Robotics business declined by JPY 4.3 billion. This was due to the worsening of model mix in surface mounters and a negative JPY 2.2 billion impact coming from the consolidation of Yamaha Motor Robotics Holdings.

The Financial Services business was down JPY 3.3 billion, as there was an increase in allowance for doubtful accounts. The others was down by JPY 0.7 billion. There was an increase for growth strategy expenses, so this was a negative of JPY 2.2 billion. A JPY 3 billion negative impact came from ForEx FX. In total, operating income for the first half was JPY 19.1 billion.

COVID-19 brought about a huge change in the way of life and sense of value to people around the world. This has had a complicated impact on the market environment of our businesses. For instance, after the lockdown has been lifted in developed countries, mainly in the U.S., there has been a trend for people wanting to enjoy nature in their surrounding environment instead of traveling. We have seen a sharp recovery for off-road bikes, ATVs and ROVs, marine products from the latter half of May, both in total demand and our retail sales as people consider these familiar outdoor products. We assume that out of these sales, 20% to 30% is going to first-time buyers. We will put initiatives in place so that these new customers will become loyal customers.

Globally, there is a tendency for people wanting to avoid crowded public transportation. And in Europe, there are moves to build dedicated bicycle lanes. After the lockdown being lifted in Europe, there is a growing demand for 125cc motorcycles as a transportation mode. The business environment where people have to live with COVID-19 has had a somewhat positive effect on us. But our analysis is that the sudden increase of demand in North America is due to the generous compensation provided by government, coupled with the fact that it was before summer vacation. Although there is a trend for people to avoid using public transportation globally, in the emerging markets, the pace of recovery is very slow as the impact of people staying at home. The rise of unemployment rates and shrinking retail finance had a major impact. It is difficult to foresee how the market will go, where we have to live with COVID-19. We will observe the impact into next year. And in the short term, we will establish an appropriate supply structure eyeing market recovery, with the safety of our employees and stakeholders in mind first and foremost. At the same time, we will steadily go forward with mid- to long-term initiatives.

Next, I would like to give the details by each business segment. Please turn to Page 9. Let me explain about the net sales and operating income by each business segment. For the Land Mobility segment, net sales was JPY 429 billion with sales going down in all businesses. Operating income was minus JPY 6.7 billion, so both sales and income decreased.

Going to the Marine Products, net sales went down to JPY 167 billion. Operating income was JPY 25.4 billion, a decline in both sales and income. Net sales increased to JPY 37.4 billion for the Robotics business, coming from the effect of consolidation of Yamaha Motor Robotics Holding, YMRH. Operating income was JPY 0.6 billion, including the operating loss of YMRH of JPY 2.2 billion. So sales increased but income decreased for this business. Net sales increased for the Financial Services segment at JPY 22.6 billion. Operating income was JPY 0.3 billion. Sales went up, but income decreased. Others saw a decline in net sales at JPY 29.4 billion. Operating income was minus JPY 0.5 billion. I will explain about the status of our major segments from the next page.

Please take a look at Page 10. This is developed markets Motorcycle business. The graph on the left shows sales and operating income ratio by each region. Sales went down from JPY 124.2 billion in 2019 to JPY 115.3 billion in 2020. Operating income ratio worsened from minus 3.6% to minus 6.7%. January and February were good months due to new EU5 regulation compliant models. However, from March, unit sales declined due to COVID-19 and factory operations were suspended, leading to a decrease in sales.

On the right, breakdown of income variances against the previous year is as follows: minus JPY 1.6 billion due to decrease in sales; minus JPY 2.4 billion due to operation closures at headquarters and European factories; there was a positive effect JPY 2.2 billion JPY coming from reduction in expenses, such as SG&A; minus JPY 1.6 billion coming from ForEx impact, resulting in total operating income of minus JPY 7.7 billion.

Especially from May onwards, demand has recovered sharply in developed countries such as in Europe and the U.S., but the decline in marginal profit due to factory operation suspension has had a major impact on this business.

Going to Page 11. This is the emerging markets motorcycle business. On the left-hand side is the first half sales and operating income ratio. For the emerging markets Motorcycle business, net sales went down from JPY 380 billion in 2019 to JPY 259.9 billion in 2020.

The graph on the right is a net sales variation in key markets. Total demand declined in Indonesia due to stricter credit screening for retail finance on the back of the worsening economy, while the impact of lockdowns was substantial and lingered more than expected in India and the Philippines. Operating income was impacted by the decline in sales units due to lockdowns and factory operation suspensions. As a result, operating income ratio worsened from 6.1% to 0.5%.

Please go to Page 12. This is about the Land Mobility business. This is our RV and SPV business. As for the RV business, sales was JPY 37.4 billion in 2019. It was JPY 33.5 billion in 2020. Demand for ATV and ROV sharply recovered on the back of revenge consumption and new demand after lockdowns being lifted, but the unit sales of ROV declined year-over-year due to suspension in factory operation and lower operating rates. Currently, demand is still strong, but the operating rate of the U.S. factory has been slow to ramp up, leading to supply shortages. As a result, operating income ratio worsened from minus 3.5% to minus 8.4%. On the right, going to the SPV business, such as PAS. Sales of E-kits for Europe and vehicles in Japan decreased due to production delays impacted by COVID-19 and voluntary restrictions on sales activities. As a result, sales was JPY 20.3 billion in 2020 compared to JPY 21.1 billion in 2019. And operating income ratio went down from 16.0% to 12.6%. Global demand for bicycles is strong. Towards the second half, we want to tap into this demand.

Please turn to Page 13. This is the Marine products business. On the left is the sales of marine products in the first half. Net sales was JPY 199.6 billion in 2019. It was JPY 167 billion in 2020. We saw a decline in sale of outboard motors and water vehicles due to boat builders and dealers suspending their operation in North America. Additionally, there was production adjustment for outboard motors in the first quarter, and the head office factory operation was suspended for a certain period in the second quarter. Operating income ratio declined from 19.5% to 15.2%.

On the right is the production and sales status for outboard motors over 100-horsepower for the first half. Production exceeded shipment in 2018 and 2019, but through production adjustment, inventory was brought to an appropriate level, which means demand and supply is balanced in 2020. We will ramp up our operating ratio and strengthen our supply capability in line with demand recovery.

Next is Page 14. This is the Robotics business. Sales of surface mounters increased in China. However, the model mix worsened due to the automobile industry curbing investment impacted by COVID-19. In the incumbent business, sales went down from JPY 32.3 billion in 2019 to JPY 28.9 billion in 2020. Overall, net sales increased JPY 37.4 billion with the consolidation of YMRH. The operating income ratio worsened from 16.2% to 1.5%. However, excluding the impact of YMRH, which is loss-making, the ratio of the incumbent business was approximately 10%. The graph on the right-hand side is the sales of surface mounters by region. China, Taiwan and South Korea have recovered more than the previous year. However, sales declined in Japan and Europe as the auto sector curbed their investment. It will take some time for these areas to recover. YMRH initially was aiming for operating profit from the second half. However, market conditions has worsened due to COVID-19. So this target will be pushed back. We cannot be too optimistic about the outlook. But due to subsidies and demand stimulus measures in China, demand in China is recovering. We want to make sure to tap into this opportunity.

Please go to Page 15. Lastly, this is the Financial Services business. On the left, the graph shows receivable balances by region, and on the right is net sales and operating income ratio. Receivable balances increased due to developing our own financial programs for the U.S. prime sector. As of the end of June 2019, the balance increased from JPY 292.8 billion to JPY 362.4 billion in 2020. On the right is net sales, it increased from JPY 20.4 billion in 2019 to JPY 22.6 billion. But income decreased due to an allowance for doubtful accounts, and the operating income ratio decreased to 1.3%. This is a result of conservatively increasing allowances by anticipating risks related to COVID-19 using a strict criteria.

Next, I would like to talk about the future outlook. This shows the unit sales outlook of main products by region. It shows the results for the first half and the forecast for the second half and compares it on a quarterly basis against the previous year. We are anticipating the recovery of total demand in many regions from the second half, but we think the pace will vary. There are some products and regions that we forecast unit sales at the same level or above the previous year, but recovery in ASEAN will be slow. In Indonesia, which is our main market, we think recovery will take time. For outboard motors, due to the unexpected level of revenge consumption, market inventory is declining. We’re trying to build up our production and supply system as soon as possible so that we in time to answer demand recovery in the second half. Based on this unit sales forecast, we will revise full year forecast as follows: net sales, JPY 1.370 trillion, 82% versus last year; operating income, JPY 20 billion, 17% versus last year, as the decline of the emerging market Marine Products business will put a drag on business; operating income ratio, 1.5%, down by 5.4 points; ordinary income, JPY 24 billion, 20% versus last year; net income attributable to owners of the parent will be 0 compared to JPY 75.7 billion of last year.

We are planning to pay JPY 15 per share for cash dividends annually. The assumption for ForEx for the second half and for the full year is shown in this page.

These are the factors impacting our operating income based on our revised forecast. For the Land Mobility business, developed markets motorcycles income will go down by JPY 4.7 billion year-over-year. The impact of COVID-19 is lingering in emerging markets Motorcycle business in our main markets, Indonesia, the Philippines, so minus JPY 45 billion. RV, minus JPY 1.2 billion. SPV, minus JPY 2.3 billion. The total business will be down by JPY 53.1 billion. Currently, demand is recovering in the Marine Products business. But as this business has seasonality, we think it will be difficult to fully recover in this fiscal year, so minus JPY 27.6 billion. We’ll continue to see a tough market condition for robotics. In addition, we have to account for the consolidation of Yamaha Motor Robotics Holdings, so minus JPY 5.4 billion. Financial business will decline by JPY 2.4 billion. Others, a decline by JPY 2.3 billion. We are planning to spend less on growth strategic expenses, and this will be a plus JPY 1.2 billion. Our ForEx impact will be minus JPY 5.8 billion. As a result, the forecast of operating income for fiscal year 2020 will be JPY 20 billion.

Next is about our shareholders return policy. As for dividends, we will conduct shareholders return within our cash flow. On the right is a graph for our cash flow. The bar on the left is our cash inflow, such as net income and depreciation. On the right, our cash outflows, such as CapEx, growth investment and shareholders return. Although our forecast for net income for fiscal year 2020 is 0, we will reduce spending in growth investment and CapEx. We plan to pay a dividend of JPY 15 for the year.

Next is about the midterm management plan. As the business environment has changed drastically due to COVID-19 since we first made our midterm management plan, we will withdraw the numerical targets for the 2021 medium-term management plan. We consider it necessary to set appropriate targets and midterm KPIs in this kind of environment, which is changing dramatically, and we are deliberating about these targets. However, we will continue to work on growth strategies and structural reform. We will accelerate our efforts to our digital transformation to realize these initiatives. The impact of COVID-19 on markets and products are complicated. They are not only negative impacts but positive impacts as well. It is very difficult to foresee the business environment from the second half to next fiscal year. Currently, we are taking actions where we can, such as cutting costs, controlling risks and normalizing the supply chain and strengthening our capability to respond to the changing market. At the same time, we will execute initiatives where we can tap into the positive impacts under this environment. Lastly, let me introduce the overall picture of our structural reform and growth strategy. Under the tough market impacted by COVID-19, we are cutting costs. But as for initiatives beyond the current situation, we are progressing steadily while allocating our managerial resources in a focused manner. First, we will enhance our initiatives on digital transformation globally and focus on renewing our ERP system. At the same time, we recognize the issue of facing our customers during lockdown. So we are quickly trying to build a digital contact point with our customers. As for structural reform, we are developing a global production system step by step. We have completed the consolidation of factories in Northern India and start factory consolidation in Taiwan. Plans for production reform in Europe is progressing as planned. In ASEAN, towards the implementation of the next-generation platform model, we are trying to make our parts production system more efficient, at the same time, reviewing our supply chain.

Going to our growth strategy, we are creating new businesses and developing new domains. Progress is steadily being made in areas such as commercializing mobility service in Africa and starting the operation of the joint venture in low-speed mobility in Japan. We are focusing in these 4 domains in total, including smart, agriculture and medical. These 4 domains will be where we’ll be focusing on. We think we can create new value through our technology, so we will continue our challenges in these domains. This ends my presentation.