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)

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.