KAWAI MUSICAL INSTRUMENTS MANUFACTURING CO.,LTD.

The Musical Instrument Business has many overseas sales destinations, and it also depends on imports for key raw materials such as wood and instrument parts, so foreign exchange fluctuations affect performance in terms of both sales prices and raw material prices. The company faces a structural risk in which a weaker yen leads to increased import costs, while a stronger yen leads to a decrease in the yen value of overseas sales. As a countermeasure, the company has entered into hedging transactions such as forward exchange contracts for major currencies with financial institutions.

Geopolitical risks are increasing, including tensions in U.S.-China relations, the situation in Russia and Ukraine, and heightened tensions in the Middle East, and changes in political conditions such as war and regime change, as well as protectionist measures such as tariff policies, could directly affect business activities and the supply chain. Europe, the U.S., and China, which are major markets for musical instruments, and Indonesia and China, which are production bases, are particularly susceptible to such effects. The Annual Securities Report does not specifically describe countermeasures, and this is newly emphasized as a risk.

Increases in raw material costs due to fluctuations in market conditions for wood, metals such as copper, resin, and other materials, increases in logistics costs due to soaring crude oil prices, and increases in labor costs due to rising overseas personnel expenses may put pressure on business performance. If multiple cost factors deteriorate simultaneously, the impact on profitability could be significant. The company seeks to mitigate this risk through the selection and diversification of suppliers.

Since the company's major domestic facilities are concentrated in the vicinity of Hamamatsu City, Shizuoka Prefecture, if a Tonankai earthquake or tsunami were to occur, the impact on the head office, factories, and business activities could be particularly significant. The frequency and severity of natural disasters caused by earthquakes and climate change are increasing, and indirect impacts due to supply chain disruptions are also a concern. The company has established a system that specifies initial response, reporting methods, and the establishment and roles of an emergency response headquarters in the event of an emergency.

If Japan's declining birthrate progresses more rapidly than expected, a decrease in the number of students at Music School / Gymnastics School and a shrinking market for musical instrument sales could worsen business performance. The school business is largely dependent on the domestic child population, and thus faces a structural risk of declining demand. The company continuously considers expanding the target generations and responding to the needs of each generation.

Competition is intensifying in the popular price range for pianos and digital pianos, and if the company fails to continuously introduce competitive products, its business performance could deteriorate. In particular, price competition with overseas manufacturers is severe in the low-price segment, making it a challenge to maintain profitability. The company has adopted a policy of carefully examining competitiveness before bringing products to market.

If the functioning of information systems is disrupted due to computer virus infection or unauthorized intrusion, business activities may be suspended, potentially affecting business performance and financial condition. In addition, if personal information such as customers' names, addresses, phone numbers, and email addresses is leaked, there are concerns about the risk of violating regulations in various countries, including the GDPR, and a decline in business performance due to loss of trust. The company addresses this through the study and promotion of information security measures and the development of personal information management regulations.

Within an organizational structure with a high average age, securing and developing the next generation of talent has become an important challenge, and if the company fails to secure the necessary personnel or if the transfer of technical skills in the production division does not proceed smoothly, this could affect business performance. The risk of skill loss due to the aging of skilled technicians is directly linked to maintaining quality in musical instrument manufacturing. The company regularly conducts enhanced new graduate and mid-career recruitment as well as skill transfer training for young technicians.

Changes in the business environment in major markets such as Europe, the U.S., and China, changes in political conditions at production bases in Indonesia and China, and unexpected application of tax systems and laws unique to each country could affect business performance. In addition, along with overseas production expansion, there is also a risk of the leakage of production technology and the emergence of similar or counterfeit products due to intellectual property infringement. The company addresses this by confirming the views of accounting auditors and lawyers in each country and by establishing an intellectual property management department.

Retirement benefit obligations and retirement benefit expenses are calculated based on actuarial assumptions such as the discount rate, and if actual results deviate from these due to fluctuations in market interest rates, retirement benefit obligations could increase, potentially affecting business performance and financial condition. While a rise in interest rates leads to a decrease in obligations due to a higher discount rate, a prolonged low-interest-rate environment is a factor that increases obligations. The company seeks to minimize such deviations by conducting calculations based on appropriate information.