Q&A on the Presentation of Performance Results through the Second Quarter of the Fiscal Year Ending March 31, 2024 (FY2024.3) (Held on November 2, 2023)

A1: Profitability at our plants has deteriorated due to a significant production cutback. It will take a certain amount of time to adjust manpower, but we took various measures during the first half of the current fiscal year, and the impact of lower profits due to production cutback will decline toward the second half of the year.

A2: Inventories increased at the end of the second quarter mainly due to seasonality in preparation for sales in the second half of the year. But in the third quarter, as in the second quarter, production of musical instruments as a whole will be reduced by more than 10% from the previous fiscal year in order to cope with declining sales and reducing inventories. The production decline will be even larger for pianos, but some products such as wind instruments are performing well. The production in the fourth quarter will be on an upward trend compared to the previous year, but the production output will be almost the same level in the third quarter and fourth quarter.

A3: Many of the pianos, wind instruments, and professional audio equipment still remaining in our order backlog are made in Japan, and our Japanese factories are almost at full capacity. While, China has a very tight production plan.

A4: In the first quarter, dealers purchased many items in anticipation of a recovery in market conditions, and we were also expecting a solid recovery. However, market conditions have remained sluggish since then and there are no signs of recovery, so we believe that a recovery during this fiscal year will be difficult, and we have considerably revised our plan.

A5: In the second quarter, sales in Europe and the U.S. exceeded the previous year's levels, and current business confidence is steadily recovering. Inventory of digital pianos is gradually being cleared, and with the introduction of new products, we expect sales to increase in the third quarter.

A6: We expect full-year sales of guitars, excluding Cordoba, to increase by 6% year on year. Although we have not been able to show our ability in the first half of the year due to high inventories in the market, market conditions have been recovering except in China.

A7: We are reorganizing our plan based on the assumption that it will take a certain amount of time for the Chinese market to recover and that this will have an impact on the next fiscal year. In light of changes in education policy and the declining birth rate, we need to take a harsher view on the demand for education than in the past. We will not assume that growth will be piano-oriented, as we have done in the past, but will seek growth in digital pianos, which are growing rapidly, as well as in guitars and wind instruments. We are also considering focusing on entertainment demand. We will also review our production strategy accordingly. Until now, we have increased the ratio of production in China in anticipation of an increase in the number of pianos sold in China and have continued to make capital investments, but we will review this approach by, for example, shifting to factories in Japan, taking into account the weak yen factor. However, rather than changing everything at once, we are considering diverting the core of our resources gradually out of China, without placing a burden on factories, and pivoting our focus a little more to growth outside of that market.

A8: In musical instruments, production was cut immediately after the plan was launched based on the assumption that sales would increase this fiscal year, so cost reductions were not able to keep pace in the first half, but the effect of the adjustments should be greater in the second half and gross profit margins at factories should recover. In digital pianos, where profit margins are high, we expect to be able to achieve this goal as new product launches are progressing and business confidence is recovering in all regions except China. In the audio equipment business, demand for consumer products is skewed toward the Christmas shopping season, and profits are originally larger in the second half of the year. In addition, we expect profit improvement in the high-margin B2B sector due to strong sales of new products.

A9: The ¥142.0 billion forecast at the end of the period is about ¥27.0 billion larger than before COVID-19 due to foreign exchange effects. Excluding this, there is about ¥10 billion is excess, roughly half of which is products and half of which is parts. The products are mainly Chinese pianos, and the parts are mainly electronic components.

A10: We had been doing business with an overseas business partner at an exchange rate set when the yen was quite strong. Against the backdrop of the prolonged depreciation of the yen, the supplier requested a review of the terms and conditions. After negotiations, we agreed to revise the prices retroactively going back to January of this year, with a view to maintaining and strengthening our relationship in the future.