Q&A on the Presentation of Performance Results for the First Quarter of the Fiscal Year Ending March 31, 2023 (FY2023.3) (Held on August 4, 2022)

Q1: Please tell us how you view the trends in the musical instrument market, including the reactionary decline in stay-at-home demand, the impact of changes in the economic environment, and the risk of an economic downturn.

A1: Inflation is rising in many regions and entry-level models are slowing down in Europe. This is especially true in Eastern Europe and in countries dependent on Russian energy. Outside of Europe, there are no clear signs of weakening demand, at this time. With the rapidly changing economic environment, there is a possibility that the impact may grow in the future, and we will continue to monitor the situation closely.

Q2: Your wind, string and percussion instruments business in North America is doing very well. What are the factors behind this?

A2: In addition to the reopening of schools, there is the ESSER Fund (Elementary and Secondary School Emergency Relief Fund), a financial assistance program by the US government, aimed at helping economic recovery from the COVID-19 pandemic. Since this support is for schools’ musical education, wind instruments will be the main focus in terms of equipment for purchase, with a possible boost to some pianos and guitars. North America has been experiencing inventory shortages and demand of musical instruments is continuing to remain strong while production has recovered.

Q3: Is there any change in your view of the amount of impact from the China lockdown and the Russia/Ukraine issue?

A3: There is no change in Russia and Ukraine. Regarding the lockdown in China, we had previously expected that production would be affected, but production has been steady since the lockdown ended, and we expect to recover the impact for the full year. Sales, on the other hand, were not expected to be affected for the full year, but due to the prolonged lockdown, it is expected to be difficult to catch up by about ¥5 billion. As a result, the amount of impact has not changed.

Q4: Given the potential growth rate of emerging countries, the forecast for the other regions in musical instruments seems to be quite low. Please comment.

A4: It was a 3% growth in the absence of sales to Russia and Ukraine, and considering the sales decline in both countries, we see this as an additional increase of about 5-6% in real terms, which is not bad at all.

Q5: Please tell us about the level and contents of the order backlog at the end of June and the outlook for its elimination in the future.

A5: The backlog of orders, which is added to the regular order backlog, decreased from about ¥50 billion at the end of December 2021 to ¥47 billion at the end of March 2022, and further decreased by about ¥5 billion at the end of June 2022. Acoustic pianos have the largest order backlog, followed by wind instruments, PA equipment, and digital pianos. Demand for mid-to- high-end products remains strong and the order backlogs are declining mainly for entry-level models. By region, more than half are for North America. There have been no major cancellations, and we expect production, especially for musical instruments, to proceed smoothly and the order backlog will gradually decline toward the end of the 2022 fiscal year.

Q6: With regard to the revision of the financial forecast, please explain the background behind the decision to leave profits unchanged while revenue increased to reflect foreign exchange rate fluctuations.

A6: The first quarter results were mostly favorable, and our understanding is that progress will continue as expected from the second quarter onwards. Factors which we take into account are: the prolonged impact of the Shanghai lockdown, a slowdown of entry-level models in Europe, and higher procurement and energy costs. We plan to absorb cost increases through price optimization, but we did not change profits considering that it is still the first quarter amid various changes in the environment.

Q7: The semiconductor supply-demand balance seems to be easing. What is the status of the semiconductor shortage?

A7: It depends on the component. There are two types: those that are improving and those that are not. In terms of products, PA equipment is improving slightly, but AV products remain in a difficult situation. Since we cannot manufacture a product if even one component is missing, we have not been able to make a significant improvement overall, and we expect a sales impact of about ¥30 billion in audio equipment this fiscal year. Although supply environment has eased for musical instruments, semiconductors are not available for unlimited production, and although we can make the planned number of instruments, it is still difficult to significantly increase production volume.

Q8: With regard to logistics, what is the status of disruption in transportation schedules and transportation costs?

A8: The container shortage is improving. It is still taking some time to transport containers, but congestion has been resolved. Transportation costs have not changed from our initial forecast, and we expect the current situation to continue for the time being.

Q9: With costs continuing to rise, what is your approach to price optimization in the future?

A9: We have not been able to pass on all of the cost increases in the previous fiscal year, and we plan to pass on all of the remaining costs and increases in this fiscal year. There is no change in our basic approach to price optimization, and we intend to continue price optimization even after the cost increase has been settled, on the basis of the concept that customers purchase our products based on their understanding of our value and brands.

Q10: Inventories are increasing. What is your view of inventory levels and what measures are you taking to reduce inventories toward the end of the period?

A10: Of the ¥18.1 billion increase, ¥7.5 billion is due to foreign exchange effects, the remaining half to products, and half to work-in-process and parts/materials. Products usually increase from the end of March due to the recovery of supply and seasonality. Work-in-process and parts/materials include the risk avoidance aspect, as well as the amount of other parts that has not been put into production due to the difficulty in procuring semiconductors. We will strive to optimize the order backlog by proceeding with the shipment toward the end of the fiscal year.

Q11: Please tell us about the background behind the significant increase in sales and profits in other businesses, and your outlook for the future.

A11: In electronic devices, the number of manufacturers adopting in-vehicle audio devices and the number of vehicles equipped with such devices are increasing, especially among Chinese automobile manufacturers. Although there is the impact of production cutbacks on the customer side, we expect shipments to be steady once the shortage of materials is resolved. Shipments of automobile interior wood components to overseas manufacturers, in addition to Japanese manufacturers, are also growing. Considering our customers' production cutbacks and development costs, we do not see much growth in earnings this fiscal year, but we believe that if sales grow, we can absorb the development costs and expect profit growth.