Q&As on the Presentation of Performance Results for the First Quarter of the Fiscal Year Ending March 31, 2017 (FY2017.3) (Held on August 3, 2016)

Q1 : The upswing in business results in Q1 was significantly stronger than projected. Was this due to transient factors?

A1 : There were no special, transient factors. The largest factor was a favorable trend in sales in each market.

Q2 : Sales in Q1 were extremely favorable, and you’ve explained that the trend will continue in Q2 and thereafter. However, if we look at year-on-year sales on a local-currency basis, the forecast for Q2 and thereafter seems to be weaker than the results in Q1. Is this a sign that sales are easing in comparison with Q1?

A2 : Shipments to dealers advanced in Q1, and the forecast factors in a slight decrease in dealer purchasing. We expect sales to continue to be favorable in Q2 and thereafter.

Q3 : What were the factors behind the favorable sales in Q1?

A3 :We believe that among the main factors were:
-Strong positive trends in market conditions in North America, Europe and China
-Favorable acceptances of Yamaha products
-In Europe in particular, an expansion in market share thanks to effective sales measures, coupled with a recovery in market conditions in Southern Europe

Q4 : You changed the exchange rates you use to ¥105 to the US dollar and ¥115 to the euro. Do you intend to use these rates for the full fiscal year?

A4 : The rates we expect to use are as follows:
Q1 results: US$1 = ¥111, €1 = ¥126
Q2–4 forecast: US$1 = ¥105, €1 = ¥115
(However, the exchange rate for the euro is hedged at ¥121 in Q2, and this value is reflected in the forecast of business results.)
Full-fiscal-year forecast: US$1 = ¥106, €1 = ¥120

Q5 : What impact do you expect from exchange rates with local currencies other than the US dollar and euro?

A5 : At our sales subsidiaries, we convert sales income in local currency into their equivalent in Japanese yen, so the appreciating yen has a negative impact.

Our manufacturing subsidiaries export in US dollars, so when local-currency prices decline against the US dollar, the impact is positive.

For the full fiscal year (compared to the previous fiscal year), the impact from manufacturing subsidiaries is expected to be slight. Our manufacturing subsidiaries in China are anticipated to have a positive impact on sales income (+¥600 million), while the impact from our Indonesian manufacturing subsidiaries is expected to be negative (–¥400 million).

Q6 : What factors should be considered to account for the strong growth in Q1 compared to the previous fiscal year? Shipments at the end of the previous fiscal year, for example?

A6 : In Europe, multiple factors were in play, as described earlier. Factors that impacted the growth rate in Q1 of the current fiscal year include:
-Loss of sales opportunities in Q1 of the previous fiscal year due to shortages of inventories of certain products
-Dampened sales in Q1 of the previous fiscal year due to restraint on sales prior to the introduction of our new digital-piano products.

Q7 : You explained that one of the factors behind favorable sales of PA equipment in Q1 was the transient effect of accelerating the commercial installed sound business in Japan. Can you provide an explanation separating actual factors from transient factors?

A7 : As indicated on slide 16 of our presentation, year-on-year sales of PA equipment in Japan rose 35% in Q1 due to the effects of acceleration. However, as you can see from the 5% growth forecast for the full fiscal year, we expect to see year-on-year growth on an actual basis as well.

Q8 : You explained that there was an actual increase in inventory at the end of Q1 when the impact of exchange rates was excluded. What factors were involved in this result?

A8 : By product category, inventories increased in pianos, digital pianos, guitars and AV products, among others.

The increase in digital pianos is no cause for worry as it is the result of an increase in purchases by various sales subsidiaries in preparation for sales-promotion drives.
Inventories in pianos and AV products, however, have been edging up, and we need to pay attention to this trend in tandem with actual sales trends. In AV products, production increases in preparation for sales of new products are a major factor in this trend.

Q9 : In light of this rising trend in inventories, what is your forecast for production and other indices in Q2 and thereafter? You’ve also indicated “increases in actual sales and actual production” as a factor affecting operating income. Do you expect the production-increase effect to continue?

A9 : Following the year-on-year increase in Q1 in production, we expect production of audio equipment to continue to increase in Q2 as well, and then decline in the second half of the fiscal year. In musical instruments, we anticipate a slight decline in production in the second half.
These trends will impact earnings, but their effects are already factored into the forecast of business results we presented to you.

Q10 : What exchange rate do you assume for the Chinese yuan, and what is its impact on earnings?

A10 : We are assuming a rate of ¥15.4 to the Chinese yuan for Q2 and thereafter.
The impact of this exchange rate is a decrease in operating income of ¥1.7 billion year-on-year for the full fiscal year.

Q11 : If exchange-rate fluctuations impact negatively on the plan for operating income you submitted at the beginning of the fiscal year, you expect to cover it by reducing SG&A or adjusting sales prices. But if the operating environment changes further, can you afford to compensate with further reductions in SG&A or sales-price adjustments?

A11 : As we showed you on slide 12, SG&A expenses are forecast to decline ¥200 million against the previous fiscal year. However, there is a decrease in goodwill amortization of ¥2 billion, so in effect we expect to use relatively more SG&A than in the previous fiscal year. This means that in some cases there still is room to decrease SG&A. However, we plan to make full use of strategic expenses prioritizing where necessary, based on measures in the medium-term management plan.

On the topic of sales-price adjustments, we have actually been adjusting sales prices gradually since the previous fiscal year and have been seeing some effects. We will continue to move forward cautiously with these adjustments, taking into account decreases in sales volume as well as market-environment factors such as demand and competition.

Q12 : In slide 12, you indicated that you had achieved ¥4.5 billion in cost reductions against the previous fiscal year, which is ¥300 million more than in the previous forecast. Can you elaborate?

A12 : The main factors in these cost reductions were reductions in purchasing costs, improvements in productivity, and a shift of production processes from Japan to other countries. Essentially, our cost-reduction efforts are moving ahead as planned.

Q13 : Please explain about the piano situation in the Chinese market.

A13 : Factors such as the normalization of inventories at the dealer level and changes in customers’ tastes are boosting our sales, and, as a result, we are gaining market share.
With regards to the projects we are bidding on, the number of major contracts has declined from the previous fiscal year. Fortunately, the number of small-to-medium-sized contracts has risen, so favorable conditions are continuing.

Q14 : Slide 17 indicates that the growth rate for pianos and digital musical instruments increased in Q1. Can you explain what’s going on here?

A14 :
In Q1 of the previous fiscal year, we had inventory shortages of certain models, resulting in a loss of sales opportunities. We solved that problem in Q1 of the current fiscal year. That was one factor in the 12% year-on-year increase.
We also won a major bid in Q2 of the previous fiscal year and as such, we expect Q2 results to be lower year-on-year.

Digital musical instruments:
In Q2 of the previous fiscal year, we introduced a new digital-piano product. Since Q1 occurred just before this model change, shipments declined somewhat in Q1 and rose again in Q2. As a result, growth was 10% year-on-year in Q1 of this fiscal year but only 2% year-on-year in Q2.

Q15 : Is it correct to say that you wrote down your goodwill in the previous fiscal year, rather than the current fiscal year?

A15 : Yes, that is correct. The figures mean that we wrote down our goodwill in the previous fiscal year, so amortization expenses are lower in the current fiscal year. The write-down will have a positive effect on income of ¥2 billion for the full fiscal year and ¥600 million for Q1.

Q16 : Tell us about major new products coming this fiscal year and when you plan to introduce them.

A16 :
-New Disklavier player piano product
・We are planning a major model change in player pianos.
・We expect the effects of this new product introduction to become evident in Q2 and Q3, particularly in North America.

-New portable keyboard product
・This product should expand sales in Q3, particularly in the year-end/Christmas selling season.

-New MusicCast product
・We plan to expand our lineup of network-ready AV products.
・We will carry out promotions for this product, centering on Europe, which should boost sales in Q2 and Q3.

Q17 : Income growth in Q1 was stronger than forecast, but for Q2 and thereafter you have revised your forecast downward. Please explain the reasons and thinking behind your forecasts for each quarter.

A17 : The main factor behind the decline in income in Q2 and thereafter will be due to the impact of exchange rates.

In Q3, we expect increasing sales to offset the exchange-rate effect to a degree. In Q2 and Q4, however, we expect sales to be roughly in line with previous forecasts, so we expect that the impact of exchange rates will restrain sales and income in those periods.