Q&A on the Presentation of Performance Results through the Third Quarter of the Fiscal Year Ending March 31, 2024 (FY2024.3) (Held on February 7, 2024)

Q1: Was the deterioration of the performance in China the result of some structural factors as well?

A1: There were two factors: first, an overall worsening of economic conditions, then the impact of the education policy. We initially thought that the impact of the Double Reduction Policy would be minimal due to the exclusion of music and sports. However, the general demand for enrichment lessons declined, which we must admit also had a certain impact on our Company’s business.

Q2: I believe personal consumption in the U.S. is strong. How do you explain the weak performance of musical instruments in North America?

A2: We revised our sales forecast downward by ¥ 4 billion in North America, with a focus on digital pianos and guitars, but the market, including competing companies, is plagued by bloated inventories. While all companies have supplied products in the context of the post-COVID-19 recovery of supply, the stay-at-home demand is gone, leaving the market with a build-up of inventory.

Q3: Can you explain the discrepancy between expectations and results regarding the demand and distribution inventory for digital pianos?

A3: The recovery in sales in our key Europe and North America market has been delayed. In Europe, the South European market was in the process of recovering in the second quarter, but results feel short of expectations notably due to a worsening of market conditions in Germany. Another explaining factor was the remaining of old products in the market disturbing sales of our more competitive new products.

Q4: How long will the normalization of market inventory in musical instruments take?

A4: The answer partially depends on the evolution of market conditions, but the focus is on pianos in China and digital pianos in Europe and North America. In China, there is still no sign of recovery, and piano inventory remains quite high in the market, including at our competitors. We estimate it will take approximately two years to normalize this inventory while maintaining a certain level of operations in factories. Regarding digital pianos, market inventory is still somewhat excessive since all companies have strengthened their supply in response to the resolution of disruptions in the supply chain and difficulties in procuring semiconductors. We estimate this surplus will last approximately until the first half of the next fiscal year.

Q5: How has the forecast for production output in 4Q changed in the current forecast?

A5: We have reduced the expected production output for pianos and digital musical instruments compared to last time. The forecast for the well-performing wind, string and percussion instruments has been increased and the outlook for guitars is roughly unchanged. In the audio equipment business, the forecast for consumer products was lowered but we revised our expected output for B2B products upward by approximately the same amount, so the overall forecast remains almost the same as the previous forecast.

Q6: The forecast for inventory at the end of the fiscal year is ¥ 157 billion, and it appears that the next fiscal year will also start with a rather high level of inventory. Are there any measures to avoid the same risk of production cutbacks that was present in the current fiscal year?

A6: Excluding the impact of exchange rate fluctuations, we expect a year-on-year decrease in inventory at the end of the period. In the current period, we reflected on the shortage of supply in the face of the previously high demand associated with the resolution of the COVID-19 pandemic. This contributed to our aggressive stance at the outset, which backfired. While we cannot eliminate unexpected risks, our approach for the next fiscal year is to start with a restrained production plan and increase production as needed.

Q7: Please explain the contents of the ¥ 3.2 billion of one-time expenses mentioned on slide 7.

A7: First, approximately ¥ 1.3 billion are dedicated to piano-related claims. Since the same level of allocation as in the past is likely to prove insufficient considering given conditions of occurrence in recent years, we are recording additional provisions to avoid a deferment to the next fiscal year. Secondly, we anticipate a devaluation about ¥ 1.8 billion in electronic components within the audio equipment business. We were forced to purchase components at a time when procuring semiconductors was difficult, but sales fell below our expectations, especially in the home audio category. The devaluation corresponds to the resulting write-down on the expected excess materials. We are still in the process of carefully assessing future risks based on the current business environment, yet we have incorporated these risks into our full-year forecast because they are likely to occur towards the end of the current fiscal year. The remaining ¥ 100 million relates to personnel adjustments. All these expenses will be treated at the end of the fiscal year to avoid any deferment to the next fiscal year.

Q8: Should we still expect events such as the booking of impairment in China, in line with your ongoing review of the manufacturing strategy? And what effects did the structural reforms have this time?

A8: No specific event of this nature is expected currently. With respect to the effects of structural reforms, we estimate that personnel adjustments at overseas factories are bringing costs down by about ¥ 2 to 3 billion overall.

Q9: Given the deteriorating business environment this fiscal year, were you unable to secure profits through cost reductions?

A9: In 1Q, we anticipated a recovery in China during this fiscal year and therefore did not work on reducing fixed costs. In 2Q, we moved forward with cuts expecting a drawn-out struggle, which led us to implement limited cost reductions. Furthermore, this fiscal year, we resumed strategic investments which had been curbed during the COVID-19 pandemic, and costs increased, especially in IT-related expenses. We started system development at the beginning of the period and are proceeding with this effort, since quitting halfway through would conversely result in greater expenses. However, we are controlling the related costs to the extent possible.

Q10: Using the core operating profit analysis on slide 7, could you share the trends for the next fiscal year?

A10: We think overseas labor costs will continue to increase, but procurement and energy costs are not expected to significantly rise in the near future. However, ocean freight rates might slightly increase. We do not foresee the booking of one-time expenses and will control the rise of SG&A expenses. In the industrial machinery components business and others business segment, we anticipate improvements regarding the impact of profit loss in golf products.