A1: Sales in Japan declined after the hike in the consumption tax, with sales falling particularly sharply for higher-priced piano and wind instruments. In the United States, price revisions in response to the U.S.-China trade sanctions in September led to sales declines for some products. Subsequent price revisions extended these declines. Profitability was also impacted by the one-off elimination of existing music software inventories (-200 million yen) in Japan.
Q&A on the Presentation of Performance Results through the Third Quarter of the Fiscal Year Ending March 31, 2020 (FY2020.3)
Q1: There was a decline in core operating profit in the third quarter in the musical instrument business. What caused this drop in profitability compared to the second quarter?
Q2: What factors are behind the lowering the full-year core operating profit forecast from previous forecasts?
A2: The forecast was reduced to reflect the performance through the third quarter and also the anticipated impact from the novel coronavirus (COVID-19) outbreak in the fourth quarter. As shown on page 7 of the Analyst and Investor Briefing, the 4.9 billion yen decline in "Sales decreases and the model mix" was a main factor. This comprised a 2.3 billion yen decline for musical instruments and a 2.6 billion yen decline for audio equipment. The estimated COVID-19 impact represents 1.0 billion yen of the 4.9 billion yen.
Q3: Please discuss the impact on the company from the COVID-19.
A3: We expect to restart production facilities on February 17, a delay of two weeks after the end of the Chinese New Year holidays. Business sites will begin operating a week after the holidays, but we think it will take some time to return to full operations. As such, we anticipate roughly two weeks of declining sales.
We do not expect the outbreak to have an impact on sales outside of China if suspension of production is limited two weeks. The situation is still fluid, but at this point, assuming production is suspended for two weeks, we estimate negative impacts of 2.0 billion yen on revenue and 1.0 billion yen on core operating profit. At the same time, we must bear in mind that these numbers could increase depending on how the situation progresses.
Q4: What were the sales conditions in China for the third quarter, and what is the outlook for sales in the fourth quarter?
A4: In the second quarter, we were expanding our sales networks in fourth- and fifth-tier inland cities and we said sales had recovered in coastal areas. These conditions continued in the third quarter, and musical instrument sales experienced double-digit growth year-on-year for the quarter.
In the fourth quarter, we expect the COVID-19 impact to reduce revenue by 2.0 billion yen, which would bring sales down to the roughly the same level as a year ago.
Q5: Digital piano sales in the first quarter were impacted by cheap, low-quality online products during an e-commerce event in China; how are the conditions now?
A5: Unlike in the first quarter, we are now engaging in stronger marketing for our lineup of low-end products and are offering campaigns on our website, so the impact is not as significant as it was in the first quarter. We are still seeing some impact in some markets, but since the rival products are lower quality, we expect the impact to diminish over time.
Q6: What percentage of the Company’s global production takes place in China, and what percentage of the products made in China are for the Chinese market and for export?
A6: China represents about 30% of our total worldwide production. Roughly half of the products made in China are for the local market, and the other half are for export.
Q7: Although the market for AV receivers is shrinking, how were AV equipment sales in the third quarter and what is the outlook for the fourth quarter?
A7: As the ways people use AV is changing, the speed of the shift in receiver demand to other product domains was faster than we were anticipating, and AV equipment sales declined sharply year on year in the third quarter.
We expect sales to recover to a certain degree in the fourth quarter supported by the full-fledged shipments of new soundbar products, the new lineup of earphone launch started in the Japanese market, and ongoing shipments to mass merchandisers in North America.
As we presented in the medium-term management plan, anticipating a shrinking market for receivers, we are reforming our product portfolio for growth in the personal audio domain, which covers soundbars, wireless speakers, earphones, headphones, and other products. In Japan, the launch of a new line of earphone products has been very successful, and we plan to step up the launch of earphones and other new products in our global development strategy.
Q8: How did the hike in the consumption tax in Japan affect the Company’s performance?
A8: Rush demand prior to the consumption tax hike boosted sales by about 1.1 billion yen, and we expected a similar reactionary decline after the tax hike came into effect. However, the post-hike demand was actually weaker than expected, and we think the negative impact actually grew by about another 1.0 billion yen.
Q9: How is the performance of IMC Business and Others segment?
A9: In IMC Business and Others segment, the market for FA equipment has not recovered and the conditions remain harsh. The main cause is that demand for testing equipment with flexible boards has not returned. Also, sales of automobile interior wood components are being affected by a somewhat slow recovery in sales of vehicles that use the Company’s products.
Q10: What is the status of the new factory in India?
A10: Production of portable keyboards started without a hitch and the factory started shipping products in spring of last year. Production of guitars was a little behind schedule owing to some issues procuring wood materials, but production began in November and is generally progressing smoothly.
Q11: How are musical instrument sales in emerging countries?
A11: Tender sales are rapidly increasing in Russia, and sales are also relatively strong in Brazil. Sales have been a bit slow in India due to a macroeconomic impact; however, although sales have been less than we had hoped, we are still looking for double-digit growth.
Sales experienced sever conditions in South Korea, Australia, and the Middle East. More specifically these conditions included the status of Japan-Korea relations, the depreciation of the Australian dollar, and the embargo of shipments to Iran.
Q12: What were the impacts from the forex fluctuation of major currencies?
A12: Forex fluctuations had a total negative impact of 5.2 billion yen on core operating profit in the third quarter (nine months). The biggest impact came from the euro at 3.2 billion yen, followed by the Chinese yuan at 800 million yen, and 300 million yen each from the U.S. dollar, Australian dollar, and South Korean won, and the rest is from other currencies.