Q&A on the Presentation of Performance Results for the First Quarter of the Fiscal Year Ending March 31, 2024 (FY2024.3) (Held on August 3, 2023)

Q1: What are the reasons for the downturn in core operating profit in the first quarter and the revision of the full-year earnings forecast?

A1: We had expected a recovery in sales of digital pianos (DP) for entry-level models, for which demand had been weak in various regions, but the demand has not yet returned. The recovery in the Chinese market has also been slower than expected. The first point is that in China, not only piano sales in stores, but also EC sales were sluggish, and DP market conditions were tougher than expected worldwide, including China. The second point is that the impact of production cuts affected the performance more than the decline in sales. In particular, production of pianos made in China was significantly reduced in the first quarter. But it was not easy to change the production system for acoustic musical instruments so flexibly, and the factory profitability deteriorated more than expected.


Q2: Originally, the Company planned a 2% year-on-year decrease in musical instruments production for the current fiscal year. What kind of products are you going to reduce production additionally and to what extent?

A2: We have factored in additional production cuts of about 2%, mainly in the first half, centered on pianos made in China and DPs made in China and Indonesia, and we expect a total decrease of about 4% from the previous fiscal year.


Q3: What is the background behind the deterioration in the model mix?

A3: The background is that piano sales in China, where profit margins are high, and DP sales worldwide are falling.


Q4: Are sales in the mid- to high-end products steady?

A4: The lowest model in DP's mid-price products and entry-level pianos made in Indonesia have been affected, but in general, demand for mid- to high-end products continues to be firm. For some products, supply has not yet fully caught up.


Q5: I believe that the mid- to high-end products contribute more to profits than entry-level models. If sales of such products are strong, won't the impact on profit and loss be limited?

A5: While that is true for musical instruments as a whole, DP has a higher profit margin than other musical instruments, even for entry-level models, and pianos made in China also have a higher profit margin due to efficient development, production, and sales regionally, so the impact on profit and loss is not small.


Q6: Please explain DP's market environment and pricing policy.

A6: There is a large inventory of entry-level models on the market, including those of other companies, and competition is intensifying. Under such circumstances, we will put new, more competitive entry models on the market. Although we will temporarily discount prices to reduce inventories of our current product, we will continue to be conscious of the need to adjust prices, including passing on higher costs.


Q7: How do you see the timing of the normalization of market inventory?

A7: The recovery of sales of entry-level DP models and pianos in China has been slow, and market inventories have not decreased so much as our expectation and at this point, we expect it will take time until the end of the year for the situation to normalize.


Q8: What is your outlook for DPs, wind instruments, and B2C audio equipment?

A8: Sales of DPs are showing positive signs from Europe, where sales first became weak last year. We expect a gradual recovery in the second half of the current fiscal year, partly due to the effects of new product launches. Wind instruments are expected to remain firm due to the continuing effects of subsidies by the U.S. government. In audio equipment for individuals, we will introduce new competitive sound bar products, so we expect to stimulate demand through various measures and surpass the level of the previous year when we were forced to deal with difficult situations due to supply shortages.


Q9: Please allow me to confirm the amount of ¥3.4 billion impact on the core operating profit due to the year-on-year decline in sales and production, model mix, and price optimization in the first quarter on slide p4, broken down by each factor.

A9: Although we are not disclosing the exact breakdown, please understand that approximately ¥1.5 billion comes from sales decline, and the remaining ¥2.0 billion negative factors include the results of model mix, production cutback, and price optimization. Price optimization is a positive factor compared to the previous year.


Q10: Similarly, I would like to confirm the ¥5 billion year-on-year increase for the full year on slide p7.

A10: About ¥7 billion results from the increase in sales, and the negative factors of remaining ¥2 billion include the model mix, production cutbacks, and positive price optimization.


Q11: What about a fall of ¥9.9 billion compared to the previous projections?

A11: About ¥6.0 billion is due to lower sales, and the remaining approx. ¥4.0 billion comes from the deterioration of factory profitability resulting from reduced production, which is greater than the decrease in sales, model mix, and price optimization. Price optimization is a temporary discount, so it is negative compared to the previous forecast.


Q12: Please explain the background of the increase in inventories at the end of the fiscal year from ¥128 billion in the previous forecast to ¥136 billion in the updated forecast, which may be affected by foreign exchange rates.

A12: Excluding exchange rate effects, we expect an increase of about ¥5 billion. The breakdown consists of about ¥3 billion which indicates the movement of work in process and parts materials, and the remaining of about ¥2 billion which shows that of products. There will be no major change in musical instruments, with an increase in home audio, network products, and other audio equipment.