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

Q1: What are the current trends in demand.

A1: In China, it is taking time for demand to recover from the effects of the lockdowns. Demand for entry-level models has been slow, first in Europe and then similarly in North America and Japan. At the same time, demand for mid- and high-end products remains strong in all markets, particularly demand for wind instruments for all-price range products in the United States. Demand for PA equipment is improving with the recovery of capital investment for live performances and other events. In the industrial machinery/components and other businesses, demand was somewhat sluggish for electronic devices in the first half. Still, in the second half, we expect high demand for amusement equipment to in-vehicle devices. Demand for golf products has been very strong in South Korea, and we expect sales to increase substantially over the last year.

Q2: Do you have a figure for the impact on sales you are expecting from the lockdowns in China?

A2: Compared to our original estimate of ¥5 billion for the whole year, we have increased the forecast for impact to about ¥9 billion. Most of the increase is attributed to our forecast for acoustic pianos.

Q3: In addition to the lockdown, are the macroeconomic factors, like the economic slowdown and deteriorating real estate market conditions, also weakening demand?

A3: We believe the lockdown is the biggest factor for the substantial sales decrease because it is preventing customers from visiting stores. At the same time, demand for guitars, which account for a high percentage of e-commerce sales, continues to grow, and the need for musical instruments is not declining. As such, we do not think the macroeconomic factors are suppressing demand.

Q4: Wind instrument sales are strong in North America, partly due to financial support for educational institutions. Do you expect that trend to continue? Also, how is the demand for other types of acoustic instruments besides wind instruments?

A4: We understand the government financial assistance to be a two-year program to help normalize school situations from the impact of the pandemic and that the assistance would not be affected if the economic conditions worsened. In addition, demand for pianos remain strong, and we have a large backlog of orders. Demand is also strong for mid- and high-end guitars, and we expect that demand for musical instruments other than for wind instruments will also continue strong in the United States.

Q5: Sales of musical instruments in Japan seem to be weak. What types of measures will be needed to improve sales in the second half of the year?

A5: The rise in COVID-19 cases led to reduced foot traffic to musical instrument stores in the first half; however, numbers have been gradually increasing recently. We are planning various events and other campaigns to stimulate demand during the year-end sales season.

Q6: ICT equipment sales appear to be starting to grow overseas. What is the ratio of overseas sales for ICT equipment, and what has triggered this growth?

A6: In ICT equipment, network equipment sales are mainly in Japan, but UC product (unified communications, known as conferencing system) sales are now roughly 50% overseas. Sales of products installed in corporate conference rooms have grown significantly, especially in the United States. We believe that one of the factors involved is the stagnant supply at other companies while demand is expanding.

Q7: What was the value of the order backlog at the end of September, and which items have the biggest backlogs?

A7: The order backlog, in addition to the regular order backlog, was roughly ¥37.0 billion at the end of September, which was a decrease of about \5 billion from the end of June.
The biggest backlog is for pianos. Inquiries have been very strong for hybrid pianos, but we have not been able to meet demand because they use electronic components. We also have an order backlog for wind instruments and digital pianos, particularly mid- and high-end products. Most other product categories also have a backlog of orders.

Q8: What was the status of the rising costs and the price optimization in the first half? Also, when do you expect the company’s costs to begin declining now that ocean freight rates and prices for some parts appear to be decreasing?

A8: We are continuing to optimize our product prices to align with the higher costs. Ocean freight rates are stabilizing, but our current freight contracts are yearly, so the costs will not decrease right away. The costs of materials remain high, and we expect it to take a little more time to lower costs in that area. For this year, we are staying with our current cost plan; for next year, we will set a plan based on the trends in the second half of this fiscal year.

Q9: Has difficulty in procuring semiconductors changed from three months ago?

A9: Semiconductor procurement conditions are improving for musical instruments. For audio equipment, we are making some progress in spot procurements of semiconductors. In PA equipment, we expect to slightly improve sales of digital mixers. However, we estimate the total improvement will be about ¥2 billion, and expect the impact of the conditions to continue throughout this fiscal year.

Q10: What caused the large increase in inventory in the July-September quarter?

A10: Due to our business structure, we prepare for the year-end demand by increasing our inventory every year from July to September. There is also a strategic element of accumulating raw materials. Still, work-in-process and parts/materials are increasing because the difficulty in procuring semiconductors is causing us to suspend production of other parts. Logistics are improving but some transport routes require longer-than-usual lead times, which is causing in-transit inventory to increase.

Q11: How is the increase in inventories being affecting by the foreign exchange rates and other factors?

A11: Inventories were ¥156.5 billion at the end of the first half, up about ¥53 billion from the end of September last year. This can be broken down to roughly ¥20 billion from foreign exchange effects, ¥13 billion from work-in-process, parts/materials inventories at the factories, ¥10 billion from in-transit inventory, and ¥10 billion from on-site inventory at the local sales subsidiaries.

Q12: Have you changed your strategy in any way for the production sites now that the depreciation of the yen rate appears to be stabilizing?

A12: Since our business is characterized by a high portion of overseas sales and relatively small imports into Japan, we do not think it is necessary to quickly move our production sites based solely on the recent forex trends.

Q13: What will be your main areas for capital investment during the current fiscal year?

A13: In addition to expanding the capacity of our plant in China and the new plant in Indonesia, we plan to construct a headquarters building in Japan and an office building in Yokohama.