Bridge Report:（6250）YAMABIKO the First Half of Fiscal Year ending December 2020

President Yoshiaki Nagao	YAMABIKO CORPORATION(6250)

Company Information

Stock Information

* The share price is the closing price on September 11. The number of shares issued, DPS, EPS and BPS were taken from the brief financial report of the 2Q of FY 12/20. ROE was taken from the previous term results.

Earnings Trend

*Unit: Million yen or yen. Net income is profit attributable to owners of the parent. Hereinafter the same shall apply. FY December 2017 was a 9-month one. The DPS of 40 yen for FY December 2018 includes the 5yen dividend for commemorating the company‘s 10th anniversary.

This report introduces YAMABIKO CORPORATION’s earnings results for the First Half of Fiscal Year ending December 2020 and other financial details.

Table of Contents

Key Points
1.Company Overview
2.First Half of Fiscal Year ending December 2020 Earnings Results
3.Fiscal Year ending December 2020 Earnings Forecasts
4. Outline, Key Initiatives, and Progress of the 2022 Medium-term Management Plan
5.Conclusions
<Reference：Concerning corporate governance>

Key Points

• The sales for the second quarter of the term ending December 2020 were 67.9 billion yen, up 4.4% year on year. In Japan, outdoor power equipment sold well, and the performance of agricultural machinery, too, was strong. In overseas, the sales of outdoor power equipment grew considerably in the Americas. In other overseas areas, sales declined. Operating income was 6 billion yen, up 16.0% year on year. The temporary increase in depreciation of molds and the effects of exchange rates were offset. Both sales and profit hit a record high for the second quarter.

   

• Due to the impact of COVID-19, the full-year earnings forecast for the term ending December 2020 had been undetermined, but the company announced the earnings forecast, as the restrictions on economic activities were eased and the outlook for its production and sales activities became clear to some degree. The initial performance goal has not been revised.

   

• The sales for the term ending December 2020 are estimated to be 124 billion yen, up 2.5% year on year. In Japan, outdoor power equipment is performing well thanks to the effects of new products, etc., but its sales are projected to decline due to the recoil from the rush demand before the consumption tax hike in the previous term. In the Americas, the sales of industrial machinery are forecasted to drop, but the sales of outdoor power equipment in North America, which is the company’s mainstay, are expected to increase considerably thanks to the increase of sales for the leading home centers. In Europe and other overseas regions, sales are estimated to decrease. Operating income is projected to grow 1.6% year on year to 6.3 billion yen. SG&A will augment, due to the adverse effects of exchange rates (the yen appreciation against US dollar), increase of domestic direct selling costs, investment in R&D, enhancement of marketing activities, etc., but these will be offset by sales growth. The year-end dividend is to be 35 yen/share, the same as in the previous term. The estimated payout ratio is 33.0%.

   

• The impact of COVID-19 on the performance in the first half was limited, so the company announced the full-year forecast without revising the initial performance goal. As for the “2022 Medium-term Management Plan,” the company will “execute the plan steadily for attaining the goals set at the beginning of the term.”

   

• The impact of COVID-19 remains unpredictable, but it seems that the company comprehensively judged that it is possible to achieve their goals, if they implement key initiatives steadily while considering the situations of respective businesses and major markets. In this light, the quarterly progress of key initiatives set in the mid-term plan attracts our attention. Especially, the developments in Europe and Japan, where sales are estimated to decline this term, are important.

   

1. Company Overview

YAMABIKO CORPORATION develops, manufactures and sells outdoor power equipment (e.g. trimmers, chain saws etc.), agricultural machinery (e.g. pest control equipment, sloop mower), industrial machinery (e.g. generators, welders etc.) in Japan and overseas. The overseas sales occupy about 60% of their total sales. In terms of manufacturing and selling outdoor power equipment, the company not only has the top share in Japan but also a large share in the US. Its strength is owning unique production technology, a variety of product line-ups, and an excellent technical support system.

1-1 Corporate history

YAMABIKO CORPORATION started as a joint holding company established in December 2008 through a merger between KIORITZ CORPORATION (listed in the first section of the Tokyo, Osaka and Nagoya Stock Exchanges), which dealt with agricultural machinery in Japan and outdoor power equipment overseas, and Shindaiwa Corporation (listed in the second section of the Tokyo Stock Exchange), which dealt with outdoor power equipment and industrial machinery globally. In October 2009, YAMABIKO CORPORATION established its current business entity by merging both KIORITZ and Shindaiwa.

KIORITZ CORPORATION was established in 1947 in Tokyo and originally called KIORITZ AGRICULTURAL EQUIPMENT CORPORATION. It has been a leading company in both agricultural equipment business through which they developed “Japan’s first speed sprayers” and outdoor power equipment business through which they developed “Japan’s first motorized backpack trimmers” and “the world’s first handheld power blowers”. Furthermore, since its establishment, it has been focusing on self-development of engines for outdoor power equipment. The accumulative number of engines produced in 2008, before the merger, was about 40 million.

Shindaiwa Corporation was established in 1952 in Hiroshima and was originally called Asamoto Precision Manufacturer. It not only developed “Japan’s first electric chain saws” for the outdoor power equipment business, but also manufactured and sold engine generators and engine welders for the industrial machinery business. Its strength was high technological development capabilities, as can be seen in the development of the world’s first mixed fuel 4-cycle engine.

In the late 1990s, with growing concern about global warming caused by greenhouse effect gas, and as engine’s emission gas control became stricter in the Western countries, especially in the US, research and development expenses increased to comply with the new regulations. In the 2000s, the medium and small-sized companies that could not afford these expenses went through rapid industry restructuring on a global scale in the outdoor power equipment industry.
Moreover, the business environment became further uncertain due to a flood of cheaper products from newly emerging countries and diversification of customers’ needs.

Under these circumstances, the two companies concluded a business and capital alliance agreement in May 2007 on the premise of future business integration in order to strengthen the vitality to survive and win the intensifying competition.
In December 2008, YAMABIKO CORPORATION was established as a joint holding company to achieve better efficiency and expansion for all its businesses including development, manufacturing, logistics, sales and management. In October 2009, YAMABIKO CORPORATION conducted an absorption-type merger of KIORITZ and Shindaiwa and became the current business entity.

The company name “YAMABIKO” derives from the mountain god, “Yamabiko”. Its corporate philosophy is to “create the bridge that bonds people and nature with the future”. This expresses the company’s willingness to contribute to the conservation and improvement of the nature and environment.

1-2 Corporate philosophy, etc.

YAMABIKO Group’s corporate philosophy is formed from three elements: “Essence”, “Purpose of Existence” and “Code of Conduct”.
“Essence”, which incorporates both “Purpose of Existence” and “Code of Conduct”, expresses in a single word what YAMABIKO Group aims to be as a company, and the essence of its corporate activities.
“Purpose of Existence” sets out the role and responsibilities of YAMABIKO Group in society and makes a commitment to this.
“Code of Conduct” defines the attitude of each YAMABIKO Group employee in relation to their work.

(From the Company’s website)

<Essence>

<Significant Beliefs>

<Principles>

In addition, the company established 14 detailed measures that augment the Code of Conduct to facilitate the implementation of business activities in accordance with the corporate philosophy.
President Nagao disseminates messages that are based on “Essence”, “Purpose of Existence” and “Code of Conduct” at various occasions. They are also making daily efforts so that the corporate philosophy would lead to each employee’s actual activities in each workplace.

* Profile of President Yoshiaki Nagao
President Yoshiaki Nagao was born in February 1953 (Age 67). Since his childhood, he enjoyed “creation” such as building plastic models. When he was in the middle school, his interest grew in automobiles, especially those made in the US. He majored in “combustion engineering” in graduate school, where he studied engines. He began working at KIORITZ CORPORATION in April 1978.
At KIORITZ, he worked at the research department. He was involved with research and development of various engines, especially chain saws engines, under the corporate culture that supported the employees’ spirit to find and work on the issues of their interest. Instead of focusing on his research only in the lab, he went out to the mountains and interviewed woodsmen who were the users of their products to hear opinions and identify the demands in detail.

After working in the technology area for most of his time at KIORITZ, he was appointed as President and CEO of ECHO Incorporated, an affiliate of KIORITZ in the US in February 2006. His focus at ECHO Incorporated was to observe the actual situation of the emission gas control regulations in the US, to find measures to meet the regulations, and to enhance the users’ satisfaction. During the merger process of KIORITZ and Shindaiwa, he facilitated fast and drastic organization of the local sales routes. He recalled, “It was an important step to diversify my work”.
After the establishment of YAMABIKO CORPORATION, he managed to implement smooth integration as a board director / managing officer / industrial machinery division officer in Hiroshima where the head plant of Shindaiwa Corporation was located. In June 2011, he was appointed CEO and President of YAMABIKO CORPORATION.

1-3 Market environment

Although no detailed statistics about the outdoor power equipment market is available, it is known that the largest market is in North America including the US, followed by Europe. In Japan, about 1 million outdoor power equipment/tools are sold per year. The indicators that may impact the company’s trend in the earnings include “number of housing start”, “commodity (grain) price”, and “crude oil price” for the overseas market and “rice price” for the Japanese market.

The company recognizes that there are two global manufacturers of outdoor power equipment in Europe (Germany and Sweden).

1-4 Business contents

1. Segment
YAMABIKO Group operates businesses in three sectors: Outdoor power equipment, Agricultural machinery and Industrial machinery. These three segments are reported.

(Developed by us based on YAMABIKO CORPORATION’s financial report.)

“Outdoor power equipment business”
YAMABIKO CORPORATION manufactures and sells handheld or backpack-style forestry and landscape maintenance machinery powered by small internal combustion engines. The main products include chain saws, trimmers, power blowers, hedge trimmers, etc.
In Nov. 2014, the company acquired “Belrobotics SA,” a Belgian venture company, which develops, manufactures, and sells robotic mowers for professional use. (In Jan. 2017, Belrobotics SA was renamed “Yamabiko Europe SA” for the purpose of enhancing sales in Europe.)

Based on the accumulated experiences and know-how and excellent development capabilities that meet the customers’ needs, YAMABIKO CORPORATION continues to produce high performance, highly durable and high-quality engines.

<Chain saws>	<Trimmers>
<Power blowers>

(Gasoline engine system)
The engines for outdoor power equipment such as chain saws and trimmers are mainly 2-stroke gasoline engines. As described later, the company’s excellent capability to develop engines is one of their most important features/strengths.
Brief information concerning the company’s engines is provided below because knowing the gasoline engine system and characteristics of each engine type helps to understand the business of the company,

Basically, a gasoline engine generates power by moving the piston down with the combustion of gasoline through the following 4 steps.

Reciprocating motion of the piston is converted into revolution by a crankshaft. The rotating motion turns the rotating shaft of axel of a car or revolving shaft of chain saws.
The gasoline engine is largely categorized in two types (2-stroke engine and 4-stroke engine), depending on the number of reciprocating motions by piston to complete “1 cycle” of the 4 steps.

“2-stroke engine”
One power cycle is completed by 2-stroke. In other words, a power is generated by “1 piston reciprocating motion, 1 crankshaft revolution”.
First stroke (piston moving up): “Intake” and “compression” of air-fuel mixture occurs.
Second stroke (piston moving down): Piston moves down due to the “expansion” of air-fuel mixture and “exhaust” occurs later.

“4-stroke engine”
One power cycle is completed by 4-stroke. A power is generated by “2 piston reciprocating motions, 2 crankshaft revolutions”.
First stroke (piston moving down): “Intake” of air-fuel mixture occurs.
Second stroke (piston moving up): “Compression” of air-fuel mixture occurs.
Third stroke (piston moving down): Piston rapidly moves down as a result of “expansion”.
Fourth stroke (piston moving up): Combusted gas is “exhausted”.

The advantage of the 4-stroke engine is the easy control of intake and exhaust. However, its structure is complicated compared to a 2-stroke engine, because the intake/exhaust valves of a 4-stroke engine are installed at the cylinder head, while intake and exhaust of a 2-stroke engine occur at the port that is located on the body of the cylinder. Because of this structure, the weight of a 4-stroke engine is heavier than a 2-stroke engine.

On the other hand, a 2-stroke engine has a larger ratio of burning engine oil and fuel in order to make smooth piston motion and blow-by of air-fuel mixture. This means it releases more harmful substances in the exhaust gas as compared with a 4-stroke engine. However, because of its simple structure and smaller number of parts, the 2-stroke engine can be smaller and lighter. The overhaul is also easier for the same reasons. Therefore, a 2-stroke engine is the most appropriate engine for outdoor power equipment.

“Agricultural machinery business”
YAMABIKO CORPORATION manufactures and sells pest control equipment for Japan and agricultural harvesting equipment for North America.
Its major products include pest control equipment (speed sprayers, mounted equipment for cropland pest control, power sprayers), sloop mower, soy and potato harvesters, etc.
YAMABIKO CORPORATION’s technological strengths in this business segment are KIORITZ’s blowing, spraying, and pumping technology as well as technology to create small and light equipment. These technological capabilities have been built up over many years at KIORITZ.

<Mounted equipment for cropland pest control>	<Speed sprayers>
<Sloop mowers>

“Industrial machinery business”
YAMABIKO CORPORATION manufactures and sells equipment for construction, civil engineering and iron works.
Its major products include generators, welders, lighting equipment, cutting machines and high-pressure washers.

Technological strengths in this business segment are established by the R&D knowledge accumulated since YAMABIKO CORPORATION started business as Shindaiwa, and such strengths can be found in alternator designing capability enhanced by their efforts for alternative current motor development, as well as technologies for electronic control and noise prevention.

<Generators>

<Welders>

“Others”
The company manufactures and sells accessories and the parts for after purchasing service for various machines and equipment.
The profitability in this segment is the highest among all segments.

<Maintenance kit>

<Nylon trimmer line>

<Fuel/Oil>

2. Brand
YAMABIKO CORPORATION was established based on the integration of two companies. The products of both companies are well recognized both in Japan and overseas for many years. Therefore, YAMABIKO CORPORATION maintains the brand names as KIORITZ, Shindaiwa, and ECHO.
YAMABIKO CORPORATION is proactively investing in marketing activities as well as exploring new sales routes to enhance its brand values.

3. Development structure
Each business segment is working on development with a focus on the following priority issues.

The exhaust gas regulations are expected to be further tightened in the future. Therefore, addressing them is of paramount importance.
In addition, the company is conducting research on control technology in the field of electronic control.

4. Production structure
The company has 3 plants (Yokosuka, Morioka, and Hiroshima) and 4 production related subsidiaries in Japan and a total of 10 production related subsidiaries in the USA, Belgium, China and Vietnam.

5. Sales route and sales methods
The company supplies its products in over 90 countries for about 28,000 stores.
More than 60% of the sales are from overseas sales.

<Domestic market>
Seven sales subsidiaries, which were separated mainly by region, were merged into YAMABIKO JAPAN CO., LTD. in April 2017, with the aim of allocating management resources in a more efficient manner, strengthening sales capabilities, and improving customer services through a unified management system and integral operation of business assets.

YAMABIKO JAPAN CO., LTD sells the products to distributors, ZEN-NOH (National Federation of Agricultural Cooperative Associations), home centers, and construction machinery rental companies, etc. Through them, the products are supplied to the end users including farmers/foresters, companies in the construction, civil engineering and iron industries and landscapers.
The company presents their products in exhibitions in collaboration with dealers and distributors and facilitates sales through demonstration and test drive.
Furthermore, the company accompanies dealers to visit end users to understand their needs and utilize the information for product development.

<North American market>
ECHO Incorporated Group, one of the company’s subsidiaries, sells the products to The Home Depot (*) and other distributors, through which the products are supplied to the end users such as landscapers, homeowners, farmers/foresters, and companies in the construction/civil engineering industry.

*The Home Depot: The Home Depot, Inc. is the world’s largest home center and construction products and services. It was established in 1978. Sales in 2019 were US$110.2 billion and net income was US$11.2 billion. It has over 2,291 stores in the US, Canada and Mexico. It is listed on the New York Stock Exchange. (Excerpted from the company’s website)

The Home Depot classifies their products into GOOD, BETTER and BEST in accordance with the quality. It is only YAMABIKO CORPORATION that supplies the high-quality BEST products to The Home Depot. This is one of the proofs that the company’s products are highly reputed in the North American market.

In the Central and South American market, ECHO Incorporated, one of the company’s subsidiaries, sells the products to the distributors of each country, and made their products supplied to the end users through dealers.
Yamabiko Europe SA in Europe and ECHO MACHINERY (SHENZHEN) Co., Ltd. in China, both of which are subsidiaries of Yamabiko, sell products to distributors in their respective countries
Asia and other areas, YAMABIKO CORPORATION sells the products to the distributors in each country.

The overseas dealers display the products by brand, and salesperson conducts person-to-person sales while understanding the needs of the end users.
The home center also displays the products by type and price. The end users purchase the products based on the needs, budget and image they have from advertisement, etc.

1-5 Characteristics and strengths

①Unique production and technological capabilities and vertically integrated production
The most important characteristics and strengths of the company are the “unique production and technological capabilities and vertically integrated production capabilities”.
Their mainstay 2-stroke engines that are mounted to the outdoor power equipment are manufactured by an integrated production system solely by the company from development, procurement of aluminum, molding, parts production, processing to assembly, which is said to be unique anywhere in the world. The power sources for the products of agricultural machinery and industrial machinery are also engines, but they are mostly procured externally.

The company have solved various issues with their unique technologies including iron plating and electric discharge processing. This results in the quality improvement and production capacity improvement of the company.
Specifically, the company has established the following technologies.

<Example 1: Iron plating>
Plating is a surface covering method in which the surface of a metal is covered by a thin layer of another metal. For engine production, inside of the cylinder should be plated to avoid abrasion caused by dispute with a piston.
The conventional method is to use chrome plating from durability and cost perspectives. However, chrome plating gives negative impact on the environment. Its production efficiency is also low. Therefore, there was an increasing demand for different materials for plating.

The company has been working on “iron plating” since 1978 to reduce environmental load.
Initially, they could produce only hundreds per day. However, as a result of enhanced productivity, enhanced plating precision, and reduction of environmental load, the company now has the iron plating technology that does not require finish processing. Their technology has drastically smaller environmental load. Furthermore, their daily production capacity increased significantly, reaching thousands.
The company holds 5 patents related to iron plating.

<Example 2: Electric discharge processing>
As described above, a 2-stroke engine requires a smaller number of parts and has a simpler structure as compared to a 4-stroke engine. Therefore, it is most suitable for the “handheld” and “backpack-style” outdoor power equipment. However, it releases some fuel mixed gas. In order to respond to the increasingly strict exhaust gas regulations globally, the company was faced with a challenge to control the flow of the fuel mixed gas for efficient burning.
In order to achieve it, the company explored the production methods to modify the internal shape of the cylinder (by installing a wall between the fuel mixed gas passage and internal shape of the cylinder).

A “wall” can be created by die-casting (*), but it requires a horizontal hole to lead the fuel mixed gas to a combustion chamber. With die-casting, it was impossible to create a horizontal hole. It was also difficult to carry out machining due to small space in the chamber.
The company came up with the idea of using “electric discharge processing (*)” to create a form while taking advantage of die-casting.

Although electric discharge processing enabled to create complicated forms, it was costly due to long processing time and high electrode consumption. The company conducted research on processing conditions for a large volume production and developed designs of special electrode form. As a result, it succeeded in producing a large volume of products, by shortening processing time, saving personnel, lowering the cost of electrode and enhancing efficiency.
Having obtained three patents related to electrode processing, the company has established the unique technology that cannot be imitated by other companies.

(*) Die-casting
Die-casting is one of the metal mold casting methods. By injecting melted metal in a metallic mold, a large amount of casting with high precision can be produced within a short period of time. It enables to create a thin product at low cost.

(*) Electric discharge processing
Electric discharge processing is a machine processing method to remove a part of the surface of a non-processed workpiece through repeated electrode discharge at short cycles between electrode and the non-processed workpiece. It enables to cut out complicated outline on extremely hard steel.

With “advanced capabilities for creation” such as the above-mentioned technologies, the Company not only complies with exhaust gas regulations but also responds to various needs including weight reduction, enhancing durability and cost reduction. It succeeded in developing and mass-producing “a light weight and highly durable 2-stroke engine that meets the exhaust gas regulations”.
While many companies in the world are forced to leave the industry because they cannot address these issues, YAMABIKO CORPORATION continues to make further development as a leading manufacturer.

②Unique research and development capabilities for each business segment
The company’s capability to address environmental issues is high. The company possesses one of the highest number of US Environmental Protection Agency (EPA)-accredited engines in the world.
Furthermore, not only for outdoor power equipment, the company also has unique research and development capabilities for the agricultural machinery and industrial machinery. Based on the technological capacities that have been accumulated by KIORITZ and Shindaiwa for many years, the company is further brushing up the capabilities.

③Extensive product lineup and expansion of sales network and domestic services network
The company has an extensive lineup of products that meet various needs of the customers in each of the three business segments.
It also currently supplies the products to about 28,000 stores in more than 90 countries across the world.
As a result of merging KIORITZ and Shindaiwa, YAMABIKO CORPORATION’s product lineup and sales network were further expanded.
With the aim of improving the satisfaction level of diversifying users, the company established “Yamabiko Service Shop” inside Japan in 2013, and is operating service systems for maintenance, repair a failure, etc., which are not offered by competitors, throughout Japan. The number of affiliated shops is 342 as of Mar.2020.

④Excellent technical support system
The company also provides excellent technical support in order to enhance credibility of the products and strengthen the relationships with distributors and dealers.
In addition to offering about 40 service schools annually both in Japan and abroad, in 2018, the company started to provide a new e-learning course using its originally developed teaching materials targeted at overseas distributors in an attempt to enhance their repair skills and deepen their understanding of the mechanism of the engines.
Furthermore, the European subsidiaries of the company recently organize road show-style education and training sessions for nurturing trainers at distributors, and lecture classes designed for distributors’ salespersons, endeavoring to further fortify its service capabilities.

⑤High product share
By demonstrating the above-mentioned characteristics and strengths (1-5-1) to (1-5-4) in an integrated manner, the company is becoming highly competitive at a global level. For the outdoor power equipment business, the company has the top market share (more than 30%) in Japan and is ranked high in North America, the largest market.

1-6 Return on Equity (ROE) Analysis

ROE has been decreasing over the past two years, mainly due to the decline in margin. For this term, net income margin is estimated to be 3.55%, and ROE is projected to be at the same level as that in the previous term or the term before it, but we would like to expect that ROE will increase through further improvement in profitability.

2. First Half of Fiscal Year ending December 2020 Earnings Results

2-1 Consolidated Business Results

*Unit: million yen. Net income means profit attributable to owners of parent.

Domestic sales and overseas sales were strong. Sales and profits increased.
The sales for the second quarter of the term ending December 2020 were 67.9 billion yen, up 4.4% year on year. In Japan, outdoor power equipment sold well, and the performance of agricultural machinery, too, was strong. In overseas, the sales of outdoor power equipment grew considerably in the Americas. In other overseas areas, sales declined. Operating income was 6 billion yen, up 16.0% year on year. The temporary increase in depreciation of molds and the adverse effects of exchange rates were offset. Both sales and profit hit a record high for the second quarter.

2-2 Trends by Segment and region

*Unit: million yen. The composition ratio for operating income means the ratio of operating income to sales.

◎ Outdoor power equipment

*Unit: million yen

(Japan)
As for trimmers, which are the company’s mainstay, the sales of mainly new products and products for the home centers increased considerably thanks to favorable weather. Chain saws (for professional use), accessories, and spare parts sold well, too.

(Overseas)
In North America, which is the company’s main market, the sales of trimmers and chain saws for the leading home centers increased significantly. Accessories and spare parts sold well, too. In other overseas regions, such as Europe, sales nosedived temporarily due to the restrictions on sales activities, etc. caused by the spread of COVID-19, and started recovering as restrictions were eased, but sales volume declined.
Total overseas sales increased, thanks to the favorable sales in North America.

◎Agricultural machinery

*Unit: million yen

(Japan)
There was an increase in sales of not only mowers and equipment for high-place work, whose demand is growing for saving labor and improving efficiency, but also speed sprayers, which became subject to the government project for subsidizing fruit farmers, and mounted equipment for pest control, for which the company implement pricing strategies.

(Overseas)
In North America, the sales of soybean harvesters dropped, but potato-related products performed well, and overseas sales increased.

◎Industrial machinery

*Unit: million yen

(Japan)
Due to the delay in construction work caused by the spread of COVID-19, etc., the sales of welders and cutting machines declined, but the sales of generators, which are the company’s core products, increased from the previous year, as the sales to construction machinery rental companies were strong, despite the recoil from the demand for installation of private power generators for emergencies in Hokkaido in the previous year.

(Overseas)
Sales plummeted due to the restrictions on economic activities caused by the spread of COVID-19.

◎Others

*Unit: million yen

Sales dropped, mainly because the sales of prototype parts for autos decreased.

2-3 Financial standing and cash flows

◎Main Balance Sheet

*Unit: million yen. Trade payables include electronically recorded accounts payable.

Due to the increases in cash, receivables, etc., current assets increased 8.2 billion from the end of the previous term. Noncurrent assets decreased 900 million yen from the end of the previous term. Total assets grew 7.2 billion yen to 110.1 billion yen.
Due to the increases in payables, long-term loans payable, etc., total liabilities augmented 5.2 billion yen to 51.8 billion yen.
Net assets grew 1.9 billion yen to 58.2 billion yen, due to the increase in retained earnings, etc.
As a result, capital-to-asset ratio decreased 1.8% from the end of the previous term to 52.9%.
The balance of short and long-term loans payable increased 800 million yen to 16.2 billion yen.

◎Cash Flow

*Unit: million yen

The cash position enhanced.

3. Fiscal Year ending December 2020 Earnings Forecasts

3-1 Earnings forecasts

*Unit: Million yen. The forecast was those released by the company.

*Exchange assumptions

*The dollar is based on a rate assumed by YAMABIKO CORPORATION

Sales and profits are estimated to rise
Due to the impact of COVID-19, the full-year earnings forecast for the term ending December 2020 had been undetermined, but the company announced the earnings forecast, as the restrictions on economic activities were eased and the outlook for its production and sales activities became clear to some degree. The initial estimates have not been revised.

The sales for the term ending December 2020 are estimated to be 124 billion yen, up 2.5% year on year. In Japan, outdoor power equipment is performing well thanks to the effects of new products, etc., but its sales are projected to decline due to the recoil from the rush demand before the consumption tax hike in the previous term. In the Americas, the sales of industrial machinery are forecasted to drop, but the sales of outdoor power equipment in North America, which is the company’s mainstay, are expected to increase considerably thanks to the increase of sales for the leading home centers. In Europe and other overseas regions, sales are estimated to decrease. Operating income is projected to grow 1.6% year on year to 6.3 billion yen. SG&A will augment, due to the adverse effects of exchange rates (the yen appreciation against US dollar), increase of domestic direct selling costs, investment in R&D, enhancement of marketing activities, etc., but these will be offset by sales growth. The year-end dividend is to be 35 yen/share, the same as in the previous term. The estimated payout ratio is 33.0%.

3-2 Impact and situation of COVID-19

Outdoor power equipment business
* In North America, which is the main market of the company, sales declined due to the temporary closure of distributors, but started recovering in May. Thanks to the Coronavirus Aid, Relief, and Economic Security (CARES) Act (2.2 trillion dollars), the sales of products mainly for the leading home centers grew considerably.
* In Japan, sales activities were restricted due to the declaration of a state of emergency, but the payment of government “special cash payments” (12.8 trillion yen), etc. made the environment favorable.
* In the European market, sales plummeted due to the restrictions on sales activities, such as lockdowns, but local sales are recovering.

Agricultural machinery business
In Japan and North America, events, such as exhibition and spot sale fairs, have been cancelled, but its impact on demand is limited.

Industrial machinery business
Inside and outside Japan, events, such as exhibition and spot sale fairs, have been cancelled. In addition, projects related to construction, resources, such as petroleum and natural gas, and entertainment have been delayed or suspended. There is concern that this situation will linger.

4. Outline, Key Initiatives, and Progress of the 2022 Medium-term Management Plan

As for the “2022 Medium-term Management Plan” announced in May, the company mentioned that they would research the business environment, etc. when COVID-19 is expected to subside, and if it is considered necessary to revise medium-term goals, etc., they would announce them swiftly, but COVID-19 is still spreading and the outlook remains unclear. Accordingly, the company plans to continue steady efforts to achieve their initial goals.
They will keep monitoring the situation, and if there is a significant change, they will have a reconsideration.

(1) Policies and Key initiatives set in the Mid-term Management Plan 2022

① Basic policy
The basic policy set in the previous Mid-term Management Plan will be continued.

② Goals and strategies in each segment
As to the major market environment, the demand for engine products is expected to remain strong in the professional market for outdoor power equipment where long-lasting products that can tolerate heavy loads are demanded, the company will shift to the professional market further.
As for agricultural machinery and industrial machinery, the Japanese agricultural and construction industries are seeing the shortage of manpower and the aging of workers, so labor-saving and energy-saving products are in demand.

◎Outdoor power equipment business
The priority measures are (1) to develop engine products ahead of the strict environmental regulations, (2) to monetize the robot business, and (3) to augment the lineup of DC products.

＊Efforts to each region

*The parenthesis represents the growth rate from the term ended Dec. 2019.

(North America)
The company will enhance marketing strategies targeted at professionals, strive to grow sustainably, expand its presence in the market of engine products, and aim to expand its market share, which has been increasing steadily.

As priority measures, the company will augment the lineup of “X Series,” which is a highly functional product lineup for professionals and continue to enhance digital marketing activities. The company will strive to enhance its brand recognition, by diffusing professionals’ comments on the latest products via social media, optimizing marketing activities for each generation, and posting ads in baseball (MiLB) and football (MSL), which attract users.
At The Home Depot, which is the primary sales route, the company will concentrate on the sale of flagship products, expand sales area, and continue effective expansion of product sales for a limited period of time.
In addition, the company will put energy into the cultivation of the U.S. market for robot products.

(Europe)
The company will promote the sales of products –conforming to the needs of the market and enhance its brand recognition level.

As priority measures, the company will promote the sales of “X Series,” which is the lineup for professionals, and augment the lineups of battery products and engine products that comply with regulations on emissions, promote the sales of robot products, cultivate the relative market, and enhance the market recognition through digital marketing activities, etc.
In order to enhance the performance of robot products further, the company will reorganize Quimesis S.R.L. into an equity-method affiliate (capital contribution rati 24.9%) and proceed with software development.

(Japan)
As priority measures, the company will launch top handle chain saws as a new DC product, continue effective campaigns, promote the launch of labor-saving, efficient products (robotic mowers), and enhance the sales via home centers.

◎Agricultural machinery business

*The parenthesis represents the growth rate from the term ended December 2019.

In detail, the company will reduce production costs and enhance profitability through close collaboration between the development, manufacturing, and sales department, and expand sales routes, continue effective sales campaigns, and adapt to smart agriculture, etc.

◎Industrial machinery business

*The parenthesis represents the growth rate from the term ended December 2019.

(Japan)
As there is the initiative of investment in infrastructure for preventing and mitigating natural disasters and promoting national resilience, the company will continue effective sales campaigns and enhance the sale to rental companies, so as to meet the increased demand adequately.

(Overseas)
The company will build a market on a full scale targeting at wide-area rental companies in North America, promote sales of welders targeted at resource markets in Russia, and build new sales networks in Asia and Africa.

③ Key initiatives
◎Total cost reduction and product quality improvement
The company will keep improving production efficiency for further cost reduction.
The company will aim to establish a new production system for shortening manufacturing lead time and reducing inventory of products and also improve quality control continuously for actualizing “absolute quality.”

◎Strengthening of service capabilities
The company will strive to enhance its service capabilities, which would lead to the improvement in profitability.
The company will concentrate on the augmentation and expansion of sales of highly profitable service parts and accessories, the augmentation promotion of service materials for each product, the strengthening of training systems, the reduction of total logistics costs, the decrease of inventory, etc.

(2) Recent progress

The activities and progress of each business in the second quarter of the term ending December 2020 are as follows.

Outdoor power equipment
North America
* Landscapers, who are their primary end users, have been designated as essential business for daily life amid COVID-19 crisis. Such designation is unique to the U.S., where landscaping is rooted in culture, and favorable for the company, which focuses on strategies targeted at professionals. The company is promoting customers to replace competitors’ products with Yamabiko’s products by allowing them to try Yamabiko’s products.

* In digital marketing activities, the company disseminates professionals’ reviews of the latest products via social media, and optimized marketing activities for each generation. For enhancing brand recongnition, the company posts ads in the fields of baseball (MiLB) and football (MLS), which attract the attention of users.
* For X Series, the company will launch CS-7310P, a large machine of 73 cc, to augment the product lineup. It is expected to contribute to the business results in this term or the next term.

* The sales to The Home Depot, which is one of the company’s major sales channels, decreased 30% year on year in April, but the demand from homeowners grew during the stay-home period. In May, monthly sales hit a record high, and remained strong in June.
The selling spaces for chain saws, trimmers, etc. had been categorized for respective models in the U.S., but they have been newly categorized for respective brands, to increase sales. As for engine products, the ECHO brand is newly categorized. Remodeling of the selling spaces was completed in 40% of stores, exceeding the initial estimate 30%, by April.
As for the e-commerce, “Home Depot.com,” the sales of trimmers and chain saws are growing, and it started handling the products of the Shindaiwa brand, too.

* The performance of robotic mowers is sluggish, because marketing activities are stagnant. The company is striving to increase new customers by holding web seminars, etc.

* The sales of engine products are strong, and the market share is increasing steadily.

Europe
* The company has added the first battery product “DCS-2500T” to “X Series” for professional use, to augment the product lineup.

* In digital marketing, the company built a unified brand site in Europe, continuously disseminated information via SNS, and supported the digital marketing activities of distributors.

* As for robotic mowers, the company met new demand in airports in Belgium, etc., and sales grew year by year, although the sales are still small.

Japan
* The company launched new products (engines and batteries) that are lightweight and high-power. As competitors withdrew from this business of engine products, the number of business inquiries is strong. The sales channel of the home centers is performing well, too.

* Activities for selling robotic mowers began. The company carries out PR activities while giving top priority to the enhancement of its market recognition. As sales on a trial basis has been scheduled, the existence of demand has been confirmed.

Agricultural machinery business
* The company expanded the business of maintenance service for large-sized machinery.

* The company launched large-sized pest control equipment for smart agriculture. It is equipped with the world’s first function to automatically extend and contract the slide boom in addition to the automatic control system of spray volume.

Industrial machinery business
* The company is expected to see an expansion of sales of generators for local service stations added in this fiscal year in accordance with the government Plan for National Resilience.

（3）Capital investment, R&D costs, and depreciation

（Source: the company）

Capital investment is estimated to be 12.4 billion yen, exceeding the total amount in the previous Mid-term Management Plan: 10.4 billion yen. While in cost control, the company will invest in R&D as planned.

（4）Numerical goals

The company aims to achieve “sales of 134 billion yen and an operating income of 8 billion yen” in the term ending December 2022.
While monitoring the situation of COVID-19, the company will make continuous efforts.

（Source: the company）

（Source: the company）

5. Conclusions

The impact of COVID-19 on the performance of the company in the first half was limited, so the company announced the full-year forecast without revising the initial performance goal. As for the “2022 Medium-term Management Plan,” the company will “execute the plan steadily for attaining the goals set at the beginning of the term.”
The impact of COVID-19 remains unpredictable, but it seems that the company comprehensively judged that it is possible to achieve their goals, if they implement key initiatives steadily while considering the situations of respective businesses and major markets. In this light, the quarterly progress of key initiatives set in the mid-term plan attracts our attention. Especially, the developments in Europe and Japan, where sales are estimated to decline this term, are important.

<Reference：Concerning corporate governance>

*Composition of the organizational structure, directors and auditors

◎Corporate Governance Report
Last update date: March 30,2020

<Basic policy>
YAMABIKO CORPORATION (“the company”) actively promotes various measures to enhance the corporate value of the entire Group, including an optimization strategy and supervision function at the Group level, as well as the allocation of resources in order to achieve the Group’s global management strategy and growth.
To realize these objectives, the company implements sound and highly transparent Group management in order to deliver value to all of its stakeholders, including regional companies, shareholders, customers and employees. We do this by building a robust corporate culture based on our Corporate Philosophy and Code of Conduct, while enhancing and strengthening a system of corporate governance focused on Group compliance and risk management.

Our board of directors is composed of 7 directors, including 2 outside ones, and makes important decisions regarding our group’s management policy and strategy, and the guidance and supervision for business administration of group companies. In the board of directors, directors monitor and oversee the work of other directors and report their own performance regularly at their meetings. In order to put resolutions of the board of directors into action accurately and swiftly, the management strategy council deliberates them to a sufficient degree.

Our company adopted the auditor system, organizing the board of auditors with a total of 4 auditors, composed of 2 corporate auditors and 2 outside ones.
Auditors participate in the meetings of the board of directors, the management strategy council, and operating officers, and other important in-house meetings, to audit the business execution of directors, and secure the effectiveness of audit in cooperation with accounting auditor and the internal audit section, in accordance with the regulations for the board of auditors and the standards for auditors’ audit.

＜Reasons for Non-Compliance with the Principles of the Corporate Governance Code (Excerpts)＞

<Disclosure Based on the Principles of the Corporate Governance Code (Excerpts)>

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