Q&As on the Presentation of Performance Results for the First Quarter of the Fiscal Year Ending March 31, 2020 (FY2020.3)

Q1: How did the core operating profit analysis for the first quarter compare to company expectations?

A1: Profits were slightly lower than expected due to: the impact of exchange rates being more severe than expected, a shortfall in audio equipment sales causing revenue growth to slow, the incurrence of up-front SG&A expenses, and the industrial machinery and components (IMC) business falling below expectations.

Q2: With reference to the core operating profit analysis forecast (Analyst and Investor Briefing, p. 7) for the year, could you please inform us of any changes in the IMC business or factors such as revenue increase or model mix for musical instruments and audio equipment businesses?

A2: In general, no big changes are envisaged. The year-on-year decrease in core operating profits in the IMC business for the first quarter was due to a downturn in FA (factory automation) equipment. We received special orders of FA equipment during the first half of last year, meaning that this year’s sales were appreciably lower than last year’s. Full-year forecasts are expected to be achieved as a result of shipments of FA equipment recovering and new categories of electronic devices beginning to ship in the second half of the year.

In addition, although there was no catalyst to produce an increase in revenue for the musical instruments and audio equipment business in the first quarter, improvements to the model mix and price optimization meant that an additional ¥1.2 billion yen was generated through factors such as model mix, showing its effectiveness. In line with the previous forecast, the increase in profits due to factors such as increased revenue and model mix is expected to reach ¥6.4 billion yen as this effect continues and as sales increase year on year for musical instruments (3% increase over the full year) and audio equipment (5% increase over the full year) from the second quarter onward.

Q3: Please tell us about the progress of procurement cost reduction in the first quarter and outlook going forward.

A3: The results were as expected for the first quarter. The outlook for the full year is also as expected in the previous forecast.

Q4: Sales in North America were down year on year in the first quarter. Please explain why this was and describe the outlook for the second quarter and beyond.

A4: Although musical instruments sales did not achieve the same year-on-year performance as last year (year on year increase of 12%), market conditions are not bad. Some products were affected by timing issues. Specifically, one cause of the shortfall was that piano shipments were moved forward to the fourth quarter of last year to take advantage of favorable market conditions, resulting in inventory shortages in the first quarter. We plan to increase production to catch up from the second quarter onward. Our efforts to actively promote sales of wind instruments, especially mid- and high-end products, was slow due to dealers carrying a large amount of inventory. However, the current inventory is at a healthy level and we plan to catch up starting from the second quarter.
With regards to audio equipment, expected shipments of AV products to large membership-based warehouse retailers has been delayed from the first quarter to the second quarter; however, since orders have already been received, there is no change in the full year outlook. PA equipment also saw a shortfall as a result of delaying the introduction of new products until the second quarter.

Q5: How is price optimization progressing in the musical instruments business?

A5: Price optimization is being implemented following detailed analysis of each market. This includes ensuring high added value for new products. The impact of this is included in “Model mix etc.” in the Core Operating Profit Analysis.

Q6: How are conditions in the piano market in China?

A6: Demand for high-priced products has slowed, particularly in bigger cities. However, the overall conditions are relatively stable with a successful expansion into fourth- and fifth-tier inland cities based on strong educational demand, meaning that upright piano sales are up 12% year on year and overall piano sales are holding at 9%.

Q7: What evolutions are taking place in terms of competition for pianos, digital musical instruments, and musical instruments in China?

A7: The piano market has continued its trend of consolidation into a few top companies. In addition, digital musical instruments sales are slightly sluggish, at a 5% increase above the previous year. The digital piano market is expanding rapidly, and non-instrument makers are offering cheap, low-quality products online. Although there has been an impact on sales recently, this is expected to be temporary as these products occupy a completely different market segment in terms of both quality and price. Other instrument markets have not seen any significant changes.

Q8: What impact will the imposition of List 4 tariffs on Chinese goods by the US have?

A8: If the tariffs come into effect from September 1st, tariff costs are expected to increase about ¥500 million yen for this period, with an annual impact in the billions of yen. Although this was not factored into our plans, countermeasures such as price pass-through and a review of production locations will be taken, and profits will not be directly affected.

Q9: Wind instrument sales were year-on-year 93% compared to last year. Is this something that was expected due to the current business climate?

A9: The slowdown in the North American and Japanese markets was more pronounced than expected.
Major dealers in North America were already carrying higher amounts of inventory due to our proactive shipping in the fourth quarter of last year, which impacted sales promoting activities. Dealer inventory has now been optimized and we expect to catch up from the second quarter onward. In terms of the domestic Japanese market, the implementation of labor reforms restricting overtime hours, including for teachers, has resulted in a limitation on brass band practice hours in junior high and high schools. As a consequence, sales to schools and individual students have been sluggish. The decline in demand from foreign tourists visiting Japan has also had an impact and we are monitoring the situation closely.

Q10: The year-on-year decrease in audio equipment sales was explained as being due to an adjustment in ICT device inventory; is this something that was expected? In addition, please give the outlook regarding the audio equipment business as a whole.

A10: ICT device sales in Japan are mainly for products relating to routers and a downturn in promoting sales was expected due to an inventory adjustment in the market. Recovery is expected from the second quarter, as per the full year forecast. In terms of audio equipment overall, progress has been slow in the first quarter as a result of timing issues relating to AV products in North America and the delayed introduction of new PA equipment. However, the full-year outlook remains unchanged and overall sales are expected to increase as those deferred until the second quarter and beyond are included.

Q11: Please describe the ¥1.1 billion yen negative impact due to exchange rates in terms of unrealized gains and losses and give a breakdown by currency.

A11: As the calculation method for unrealized gains and losses on inventories has been changed from the current fiscal year due to changing accounting standards, exchange rates did not have an impact on unrealized gains and losses. The breakdown of the ¥1.1 billion yen by currency is ¥0.7 billion yen in euros and ¥0.3 billion yen in renminbi.

Q12: The full year forecast for the impact of exchange rates remains unchanged; however, the yen is predicted to continue growing stronger. What measures do you plan to take to mitigate this?

A12: The exchange rate of euro against yen is expected to be worth ¥125 yen and has been hedged at ¥123.5 yen for the second quarter. We have not hedged the euro in the third quarter. If the current exchange rate situation continues, the total negative impact may be nearly ¥1 billion yen. We plan to achieve an overall full-year core operating profit of ¥55 billion yen through increased revenue, price optimization, and controlling SG&A costs.