Q&As on the Presentation of Performance Results for the First Quarter of the Fiscal Year Ending March 31, 2018 (FY2018.3)

Q1: Please break down the factors by market for the shortfall in sales versus the initial projections, particularly in North America, on a local-currency basis in the musical instruments and audio equipment segment?

A1: First quarter sales in North America were affected by higher-than-expected store inventories in response to the strong sales in the previous fourth quarter leading to slow sales in April and May. Sales have since been improving.

Q2: Which components are causing the rise in procurement costs for electronic parts? Are the price increases based on their current levels or do you prospect prices to rise further?

A2: The increase in procurement costs is mainly for memory chips. Our full-year profit guidance takes into account the current conditions and the anticipated trend in procurement costs, including price negotiations up to this point, through the full fiscal year.

Q3: What is behind the strong overshoot to the initial projections for operating income in the others businesses in the first quarter? In your raised guidance for full-year operating income, what is your outlook for conditions in the second quarter and beyond?

A3: The overshoot in operating income was due to sales of electronic components exceeding our expectations for the first quarter. Sales were also better than we anticipated for golf products, as the sales continued to be strong for new products introduced in the previous term. Our outlook for full-year operating income does not assume electronic component sales will continue at the same level through the year.

Q4: Do you prospect SG&A or other costs to increase for golf products?

A4: We do not anticipate a particular increase in SG&A costs from higher sales of golf products.

Q5: The previous guidance called for increasing operating income by 2.5 billion yen by revising selling prices. How much progress was made in the first quarter toward attaining that target? Are you also taking steps for selling price revisions in response to the rising procurement costs?

A5: We progressed as planned in the first quarter toward increasing full-year operating income by 2.5 billion yen in operating income by revising our selling prices. Our price revision strategy is to maximize profits by astutely responding to market and competitive conditions without compromising the competitiveness of our products, and not by hastily incorporating higher costs into our product prices.

Q6: Digital piano sales appear to have been below the initial projection even though I assume the Company planned to introduce new products during the quarter. What caused the shortfall?

A6: We have begun introducing the new CLP series of digital piano, but the launches are coming at different times in the various markets due to remaining store inventories of the previous series, and other factors. We expect the CLP series to begin fully contributing to earnings in the second quarter when we are able to offer all of the models in the series. We began offering full product lineups in Europe in June and in North America in July. We have not yet introduced the series in China.

Q7: How will the delays introducing the new digital pianos affect Yamaha's standing versus its competitors?

A7: Our new digital pianos incorporate newly developed keyboard mechanisms that have been highly lauded in the market, and we believe the new products will further differentiate our products from the competitors. The delay releasing the new products should only have a slight impact on our status, and we consider our products to be highly competitive versus those of other companies in the first quarter.

Q8: Please break down the elements behind the 500 million yen increase in the full-year operating income forecast for the musical instruments segment.

A8: Compared to our former forecast for the musical instruments segment, we expect an increase in the foreign exchange rate impact by 1.2 billion yen and a decrease in actual SG&A costs by 500 million yen. We expect a shortfall of component procurement costs of 400 million yen not achieving the original projection and an actual decrease in sales and production, etc. of 800 million yen than previously planned.

Q9: What was the background behind the 21% year-on-year rise in instrument sales in China in the first quarter? What is the outlook for the second quarter and beyond?

A9: Sales were sometimes suppressed by excessive market inventries in the past. We believe inventories are at healthy levels this year, and this is enabling smooth shipments. In addition, sales are strong not just for pianos but for other instruments as well. We expect the sales growth to slow in the second quarter and subsequent quarters and are taking a cautious outlook on the sales growth from the second quarter because assuming the 20%-plus growth in the first quarter to continue would present risk of underperformance.

Q10: How does the foreign exchange rate impact break down, including the impact from an unrealized profit or loss for inventory in the first quarter?

A10: The negative 1.8 billion yen foreign exchange rate impact included a 1.5 billion yen unrealized profit or loss for inventory. For the full fiscal year, we expect the foreign exchange rate impact to be a positive 1.6 billion yen, with just an unrealized profit or loss of a relatively small 200 million yen and it is estimated minor effect for the full fiscal year.

Q11: In the audio equipment segment, what is the outlook for market conditions for professional audio equipment, and what are your sales forecasts for the MusicCast in the AV products?

A11: For professional audio equipment, we fell a little behind schedule for the reorganization of the sales structure for the North American market but have mostly caught up with the plan. Sales of audio equipment systems have also started to grow in other markets. Sales are also strong for audio equipment through our instrument sales channels.

In AV products, even though a competing manufacturer has a strong market share for being the first in the network audio product domain, we are aggressively marketing through in-store displays and promoting our MusicCast products, which we believe are highly competitive products. The promotions have already been successful in Europe, and in-store displays in North America are also starting to generate results.

Q12: What are the market conditions for the musical instruments segment in China, where it appears that you have raised piano prices?

A12: In China, the prices for our pianos are up by about 5% from two years ago. The average price for all piano models in China is up by 3%-4%, and we believe that the higher market price is appropriate because our products are sold primarily in the high-end price range.

Q13: How are store inventories in Europe and North America?

A13: We do not believe store inventories are increasing substantially in North America, not just for us but for other companies as well. However, we started the fiscal year with slow digital piano shipments because of somewhat high inventories of our previous digital piano models, which were shipped at the end of the previous fiscal year. The situation has been improving.

Q14: Why do you expect strong growth for the musical instruments segment in the second quarter in other regions? Which products do you expect to drive the growth?

A14: We expect the currently strong sales in India and Russia to continue. We anticipate improving conditions in Latin America, where we had been struggling to generate sales, and strong sales in Australia. We are modifying our sales strategy in Indonesia and sales are in a brief lull there, but we expect sales to start picking up again soon.

By product, we anticipate digital pianos and portable keyboards to lead sales and also see sales growing for guitars.

Q15: Musical instruments segment earnings seem to have had some fluctuation overall since the third quarter last year. How do you see the segment's earnings performance going forward?

A15: Our overall outlook for the market is unchanged. We anticipate expanding markets in China and developing countries in the medium-to-longer term and expect the market to remain strong overall, including in developed countries.

Q16: Why did you revise down the plan for capital expenditures from the previous outlook?

A16: There is no specific single factor behind the decrease from our previous plan. Our plan to build a new factory is still moving ahead. A few of the numerous steps involved in preparing the property have slightly delayed as we initially anticipated, but there have been no substantial delays. We lowered the plan because we expect some of the planned investments to cross over into next year.

Q17: How did the factory utilization rate this year compare to the first quarter last fiscal year?

A17: Production of musical instruments in the first quarter continued at roughly the same pace as in our previous outlook although output was slightly less than a year ago.

Production of audio equipment was up year on year in the first quarter. This was because of the need to provide inventory as part of business negotiations with a major distributor in North America. This slowed inventory turnover and led to a brief rise in inventory levels.