A1: The extension of the Zero-COVID policy and the disruption that followed its lifting exceeded our expectations by a considerable margin. Currently, all our dealers have resumed store operations and the number of customers is returning. We expect demand to recover in the future, but the disruption has weighed on market inventories, and sell-in may not normalize until the first quarter of the next fiscal year, or even a little longer. We, too, are carrying inventories, and we expect it will take even more time for production to return to normal.
Q&A on the Presentation of Performance Results through the Third Quarter of the Fiscal Year Ending March 31, 2023 (FY2023.3) (Held on February 8, 2023)
Q1: What is the impact of the Chinese Zero-COVID policy and the disruption that followed its lifting?
Q2: What are the market conditions and future prospects in Europe and the United States, and what is the dealer inventory situation?
A2: In Europe, the trend of weak sales of entry-level models are extending to low-priced acoustic pianos and lower-end models of mid-range digital pianos. In North America, there is also a trend of weak sales for entry-level models. Although there is a possibility that the aforementioned trend will spread to regions other than Europe, at present, mid- to high-end products are performing well. Recovery will depend on macroeconomic conditions. In Europe and the United States, dealers and we have a certain amount of inventory of entry-level digital piano models and guitars.
Q3: Could you kindly provide an update on the current status of the order backlog at the end of December?
A3: The order backlog, which had built up in addition to the regular order backlog, is about ¥30 billion, down about ¥7 billion from the end of September, and its contents are mostly pianos, wind instruments, and PA equipment. Currently, there is a mix of products for which supply is not keeping up with demand and, conversely, for which there is an excess inventory. By region, inventories in North America are large.
Q4: What is the background for the expected deterioration in the profit margin of the musical instruments business in the fourth quarter?
A4: There are two factors. One is a decrease in piano sales in China, where profit margins are high. The other is the effect of exchange rates. The dollar rate has a considerable impact on sales revenue, but its effect on core operating profit is limited, so if the yen depreciates against the dollar, sales will increase while profits will be less affected, which is a factor that will lower the profit margins.
Q5: The core operating profit of industrial machinery/components and other businesses has been revised upward; please explain the situation.
A5: The impact of the semiconductor procurement difficulties for electronic devices has gradually dissipated, and sales, including in-vehicle brand audio, have remained steady. In automobile interior wood components, the shortage of parts in the automotive industry is expected to gradually improve, although it depends on the trends of our customers. In factory automation (FA) equipment, the demand trend of smart phones will affect the sales of PCB inspection machines. We were a little cautious about core operating profit due to uncertainty, but since we were able to record a certain level of profit through the third quarter, we have revised our full-year forecast upward.
Q6: Please provide an update on the amount of negative impact on annual sales due to semiconductor procurement difficulties.
A6: Our full-year outlook has improved from a negative impact of ¥29 billion at the end of the second quarter, mainly in PA equipment and electronic devices, and is now expected to be a negative impact of ¥26 billion.
Q7: What is the status of production by country?
A7: In China, production is down, mainly for pianos. Production will normalize as sales recover, but it will take some time. Factories in Japan have a backlog of orders, and it is likely that production will not be able to keep up for the time being, especially for pianos and wind instruments. The demand for Indonesian-made pianos and guitars is weak, so we will adjust production at the Indonesian plant in line with the recovery of market conditions. Our plant in India is increasing production due to strong sales in the Indian market as well as in other emerging countries.
Q8: Which of the factors, such as an increase in sales and production, model mix, and price optimization, had a greater impact on the change in core operating profit compared to the previous fiscal year and compared to the previous forecast, respectively?
A8: When compared to the previous fiscal year, price optimization and compared to the previous forecast, revenue decrease were the major factors that had a greater impact on the change in core operating profit.
Q9: It seems that ocean freight rates are declining. What is your view on the future?
A9: Ocean freight rates were around ¥3.5 billion prior to the COVID-19 pandemic. However, they were about ¥10 billion in the previous fiscal year, and we expect them to be about ¥11 billion this fiscal year. We are currently negotiating for the next fiscal year, and we expect a considerable decrease in the ocean freight rates next fiscal year.
Q10: What is your current view of the medium-term management plan target of ¥70 billion in core operating profit?
A10: There are factors such as the elimination of negative factors that have occurred over the past two to three years, including soaring ocean freight rates and difficulties in procuring semiconductors. Therefore, we do not see the profit target set in the medium-term management plan as requiring revision at this time.
Q11: In the medium-term management plan, you mentioned growth in digital musical instruments and guitars. Have there been any changes in your view on this?
A11: There are no changes in our view that digital musical instruments and guitars will be the growth drivers in the medium to long term. Demand for digital musical instruments will expand in emerging countries such as India, ASEAN and Latin America, and in China, as in Europe, the United States and Japan, we see a possibility that a shift from acoustic pianos to digital musical instruments will eventually occur. Guitars have the largest market size among musical instruments and demand is growing. Our market share is only about 10%, so we believe there is much room for growth.
Q12: You announced the acquisition of Cordoba in the United States. What is the purpose of this M&A?
A12: Cordoba is a renowned guitar manufacturer, focusing on classical guitars and ukuleles, including the Guild and other brands. The acquisition has three objectives: First, to expand our product portfolio and customer coverage. Second, to accelerate our guitar business by leveraging the company’s knowledge, design philosophy, and manufacturing methods, and by creating synergy with the Yamaha guitars. And third, to take advantage of the company’s highly skilled U.S. factory. With “Made in U.S.A.” guitars, we will expand our business together with Yamaha, LINE 6, and other brands. Since the profit margin is high, we believe that the contribution to earnings will emerge relatively quickly.