Q&A on the Presentation of Performance Results through the Third Quarter of the Fiscal Year Ending March 31, 2022 (FY2022.3) (Held on February 8, 2022)

Q1: What is the current status and outlook for the difficult semiconductor procurement conditions?

A1: The outlook is uncertain, but the impact of semiconductor supply shortage is mitigated for musical instruments, and we expect levels to be back near to normal during this fiscal year. However, conditions for audio equipment remain difficult. Audio equipment requires complex circuits and a large amount of large-scale integration (LSI). Professional audio (PA) equipment in particular, needs meticulous design changes because the design affects sound quality. Because of this, it takes some time to mitigate and we expect the impact from the semiconductor situation to continue into the first half of next fiscal year.

Q2: After the second quarter, the forecast was for the full-year impact on sales from the semiconductor shortage to be under ¥40 billion. Has the forecast changed?

A2: The estimate for the full-year impact on sales has not significantly changed.

Q3: How much of the increase in costs are being passed on to product prices?

A3: Total costs have increased by over ¥10 billion, with semiconductor costs up by about ¥4.5 billion and logistics costs up about ¥6 billion. We are adjusting product prices to absorb the costs but there is a time lag involved. We estimate that price revisions are now covering over half of the increase in costs.

Q4: How has the order backlog changed since it was ¥39 billion at the end of December?

A4: The backlog of orders above our usual backlog increased by about ¥10 billion and is now near ¥50 billion. The backlog is mainly focused in Europe and the United States and is mainly for digital pianos, pianos, and PA equipment for which demand is recovering.

Q5: To what degree will fulfilling the backlog affect the sales results?

A5: At present, we are not able to create a forecast with any level of certitude for how fulfilling the backlog will affect sales. We expect to gradually bring down the backlog as we raise production capacity.

Q6: The company is forecasting inventories to rise to ¥109 billion at the end of the fiscal year. Given that production will likely be higher than usual, will this generate operating profit?

A6: Inventories will increase from the previous fiscal year, that is due to an increase in raw material inventories, along with an increase in in-transit inventories of products on the way to local sales subsidiaries caused by disruptions in logistics. Production of musical instruments returned to normal in the fourth quarter, but we cannot increase output more than usual because of the semiconductor shortage, so the circumstances are preventing any additional increase in operating profit.

Q7: What are the reasons for the musical instruments sales that appeared to be sluggish in Europe in the third quarter?

A7: Sales were strong for pianos, but weak for digital musical instruments due to the difficulty in procuring semiconductors. The market for guitars was also strong, but supply shortages limited sales of electric guitars and amplifiers. Sales in North America and Europe are recovering at a roughly similar pace. In North America, sales of wind instruments for rental use were strong, but overall, we see the sales differences were dependent on the timing of product arrival.

Q8: What trends do you see in product market shares?

A8: We estimate our market share for digital pianos has contracted slightly, but we expect to regain market share now that production is recovering.

Q9: Are the musical instruments business results showing any differences by product or region?

A9: Market conditions are generally strong overall without any major differences. If I must choose one thing, wind instruments earnings in Japan are down because demand has not returned owing to schools not being able to restart extracurricular activities.

Q10: What changes in regional conditions do you expect in the fourth quarter for the musical instruments business?

A10: We expect slightly slower growth in piano sales in China because we do not have enough supply to meet the brisk demand. We expect sales to grow in Europe and the United States as in-transit products arrive.

Q11: What is the status of demand for audio equipment in terms of AV products, PA equipment, and ICT equipment, and how do you see it in the future?

A11: We believe demand is generally strong, although we cannot fully confirm this due to the lack of supply.
Demand remains firm for AV products, and demand is improving for PA equipment for live performances and concerts in the latter half of this year. In ICT equipment, the extremely strong demand for UC products (conferencing systems) has tapered a bit, but demand remains brisk for networking equipment.

Q12: What is behind the strong profits in the industrial machinery and components business and other business segments in the third quarter and the profit deterioration in the fourth quarter?

A12: In the third quarter, shipments to Chinese automobile manufacturers increased for branded audio products and were relatively brisk for FA equipment and automobile interior wood components. In the fourth quarter, we expect realization of the impact of production cuts by automobile manufacturers, changes in model mixes, and the delay of the impact from development costs all to adversely affect earnings. At the same time, we are taking steps to offset decline.

Q13: How do you perceive the current level of SG&A expenses?

A13: Last fiscal year during the COVID-19 pandemic, we reduced fixed costs in our SG&A expenses by about ¥10 billion. This year, we are purposely holding down SG&A costs due to the semiconductor shortage and other difficult conditions, with the result that fixed costs have not come back substantially, with an increase of only about ¥1 billion from last year. We expect fixed costs to grow as business activity recovers, but do not expect it to rise completely back to the ¥10-billion level. We are aiming to keep it lower than in previous years.

Q14: What is your cash allocation plan given the forecast for cash reaching ¥178 billion at the end of March?

A14: Our efforts in operation to hold down SG&A expenses as much as possible during the severe conditions with the pandemic and difficulty in procuring semiconductors have led to relatively steady cash generation. We will carefully examine how best to use the cash, including providing return to shareholders, in line with the new medium-term management plan that we will start in April.