We will now begin the Daikin Industries, Ltd. Q1 Financial Results Briefing for the Fiscal Year Ending March 31, 2026. Thank you for taking time out of your busy schedules to join us today. The explanatory material is available on the Company's website under Investor Relations and can be downloaded if necessary. Today's speakers are Koichi Takahashi, Member of the Board, Senior Executive Officer, Responsible for Finance, Accounting and Budget; Kota Miyazumi, Senior Executive Officer, Responsible for Corporate Communication; and Kazuhiro Matoba, Department Manager of Corporate IR Group, Corporate Communication Dept. I, Sakamoto of Corporate IR Group, will be your moderator. Thank you for your cooperation. Today, Mr. Takahashi will first give a 15-minute overview of the financial results, followed by a question-and-answer session. The entire meeting is scheduled to end at 17

30. Now, Mr. Takahashi, Senior Executive Officer, could you please?

My name is Takahashi. Thank you for taking time out of your busy schedules to attend today's financial results briefing. I would like to present an overview of the financial results for Q1 of the fiscal year ending March 31, 2026, in accordance with the presentation material. See page two. In Q1, we achieved an increase in net sales and operating profit in real terms, excluding the effect of foreign exchange rates. In the midst of a continuing difficult business environment, including the sluggish US housing market and the prolonged real estate recession in China, we have taken preemptive measures since last year. In addition to efforts to strengthen sales and marketing capabilities in each region, particularly in Europe and the United States, strategic selling price measures and cost reduction initiatives were promoted, resulting in record profits. The direct negative impact of the US tariff measures was approximately JPY7.5 billion on an operating profit basis, but this was fully absorbed by price increases and cost reductions. In order to regain earning power, the entire company is strongly conscious of profit- oriented budget management this fiscal year. In particular, as a result of efforts to expand sales of high value-added products, build up cost reductions, and improve efficiency of expenses in the air conditioning business, we were able to achieve an operating profit margin of 10% in Q1, exceeding our internal plan. Future outlook. The business environment is currently becoming increasingly severe. In addition to the slow recovery of the housing market in the US and the economic slowdown in Europe, Southeast Asian countries are experiencing the indirect effects of the US tariff measures, which have depressed demand for air conditioning. In spite of this, we have developed a series of measures, which have led to our first quarter results. Based on this fact, we are aiming for operating profit to further exceed our annual plan of JPY435 billion. From Q2 onward, in addition to the six group-wide themes being worked on directly by top management, we will accelerate the creation of results from the priority measures we have been working on since last year and take steps in response to changes in the business environment. Page three details the six group-wide themes being worked on directly by top management. This is reference information and will not be explained. Page four shows results by business segment. In the air conditioning and refrigeration equipment business, sales expanded in businesses where demand was strong, such as applied equipment and commercial use, amid declining demand for residential use in the Americas and China and the effects of economic stagnation and unseasonable weather in Asia. In addition, sales of high value-added products expanded in Japan and efforts were made to regain market share of residential unitary air conditioners in the Americas, and in China, resources were concentrated on sales of residential multi-split air conditioners, resulting in increased sales and profit in real terms excluding exchange rate effects. On the other hand, the chemicals business posted significant declines in both sales and operating profit. The environment surrounding our core business is very severe due to sluggish demand for semiconductors and delayed recovery of demand for automobiles. Through the development of new applications in this context, we worked to expand sales of wire coating materials for data centers and environmentally friendly oil repellents. The status of each business and the regional status of the air conditioning business will be explained later. Page five is an analysis of operating profit growth versus the previous year. Amid the significant impact of declining demand, the Company strived to increase its share of sales of high value-added products and to thoroughly implement its selling price policy. Along with this, we promoted total cost reductions, including manufacturing cost reductions and efficient management of fixed costs. The direct impact of the US tariff measures of approximately JPY7.5 billion was fully absorbed by the effects of measures to increase selling prices by approximately JPY5 billion and cost reductions by approximately JPY2.5 billion. See page six and page seven. At the time of our earnings announcement in May, we announced that the direct impact of the US tariff measures on our business results for the fiscal year ending March 31, 2026 would be approximately JPY47 billion. We are already implementing measures to fully absorb this impact amount. The situation surrounding tariffs is changing rapidly, and we currently expect the impact to be less than JPY47 billion. Although the situation is likely to change in the future, our policy remains unchanged

we will take countermeasures each time and absorb the impact by increasing selling prices, reducing costs, and changing suppliers and production sites. Page eight shows sales by region for the air conditioning business. Excluding the effect of foreign exchange rates, YoY sales in real terms were 102% in Europe, 93% in China, 104% in the Americas, and 90% in Asia. Page nine shows sales by region for the chemicals business. Excluding the effect of foreign exchange rates, real YoY sales in the Americas were 115%, in China 95%, and in Europe 99%. See page 10. From here, the regional overview of the air conditioning and refrigeration equipment business will be explained. First, in Japan, demand for both residential and commercial use was much higher than in the previous year due to high temperatures nationwide and a recovery in consumer confidence resulting from improved wages, as well as improved capital investment. Against the backdrop of rising electricity rates and expanding needs for energy conservation, we worked to strengthen our sales and marketing capabilities and expanded sales of high value-added products. In addition to this, as a result of a thorough sales price policy, sales were higher than in the previous year. As for the residential products, sales of high-end products were strong, but the emphasis on profitability resulted in a decline in market share in the volume zone, where price competition is intensifying. See page 11. The air conditioning and refrigeration equipment business in the Americas is facing a difficult business environment with sluggish residential industry demand due to prolonged inflation and high mortgage interest rates. Against this backdrop, we expanded sales in ductless and applied equipment, and sales in local currency terms exceeded those of the previous year. Sales of Daikin Comfort Technologies North America, Inc. (DNA) were 113% of the previous year's level on a local currency basis. As for the breakdown of factors contributing to DNA's sales increase, a decrease in volume was a negative factor of 8 points, while selling prices were a positive factor of 7 points, an improved product mix was a positive factor of 6 points, and M&A was a positive factor of 1 point. In addition, the fact that the Latin American air conditioning companies became part of DNA this fiscal year was a positive factor of 7 points. Sales of ducted unitary air conditioners for houses were significantly affected by the rush demand reaction due to changes in GWP regulations for refrigerants. However, the Company focused on developing new distributors and winning back customers (Win-Back), and increased its market share. The progress of Win-Back was approximately 45% as of the end of June. We will continue to raise this figure further by continuing to strengthen individual visits to dealers. Daikin Applied Latin America, L.L.C. (DAA) was able to increase sales thanks to continued strong equipment sales, especially for data centers, and steady expansion in the service solutions business. DNA's operating margin was 11%, a 2-percentage point improvement over the previous year, and DAA's operating margin was 9%, the same level as the previous year. See page 12. In the air conditioning and refrigeration equipment business in China, we focused on customer-direct sales activities amid a continuing difficult business environment, including a deteriorating real estate market and cooling consumption. As a result of efforts to expand sales of high value-added products, strengthen the solutions business, reduce costs, and cut fixed costs, operating profit remained at a high level. Residential multi-split air conditioner sales were 99% of the previous year's level. We believe that we were able to secure maximum sales by demonstrating the strength of our sales capabilities through our unique sales activities that combine offline and online sales, as well as by introducing a new series of system products to capture a wide range of customer needs. See page 13. Although the recovery in demand for heat pump heating in Europe lacked strength, the Company focused on residential and commercial sales, resulting in sales on par with the previous year. In the Middle East, sales were significantly higher than the previous year due to increased residential sales in Turkey and expanded commercial sales in Saudi Arabia. Demand for heat pump heating has remained flat since bottoming out in H2 of last fiscal year and has yet to fully recover. Against this backdrop, we have focused on dealer development and subsidy application support, and have increased sales in the UK and Germany, where demand is relatively strong. See page 14. In the air conditioning and refrigeration equipment business in Asia and Oceania, overall sales in the region were lower than the previous year due to the economic slowdown in the ASEAN region and unfavorable weather in India. In the residential air conditioning business, we worked to develop dealers and strengthen sales promotion measures for consumers. However, sales declined significantly due to sluggish demand in ASEAN countries and a temporary slowdown in demand in India due to the cool summer and early arrival of the rainy season. In the commercial air conditioning business, sales grew mainly in India as we focused on developing and nurturing dealers amid project delays and investment reviews. See page 15. In the chemicals business, sales were lower than the previous year due to sluggish demand in the semiconductor sector, delayed demand recovery in the automotive sector, and the resulting effects of inventory adjustments in distribution, as well as the negative impact of foreign exchange rates. In the fluoropolymers business, sales of coating materials for LAN cables and data center cables expanded, but sales for semiconductor manufacturing equipment were affected by a decline in demand. Sales in the fluoroelastomers business declined due to distribution inventory adjustments in the automotive sector. In the fine chemicals business, sales of surface antifouling coatings and oil and water repellants for textiles declined. See page 16. Although demand was generally firm in the filter business, sales were lower than the previous year due to a delayed recovery in the semiconductor market and the negative impact of foreign exchange rates. See page 17. The first quarter results of capital expenditures, depreciation and R&D expenses are as stated. We are executing investments in production capacity expansion, R&D, and digital investments for future growth and development as planned, and none of the annual plans have been changed. That is all I have to say. Thank you very much.

We will now have time for questions and answers. Due to time limitations, please limit your questions to two at a time and keep your questions brief. Thank you for your cooperation. Mr. Isayama of Goldman Sachs, could you ask your question?

My name is Isayama from Goldman Sachs. Thank you. First, please let me ask you about the United States. Mr. Takahashi, Senior Executive Officer, mentioned that you have regained some market share through Win-Back. However, DNA's figures of minus 8 points due to volume decline, plus 7 points due to selling price, and plus 6 points due to the product mix are similar to those published by Lennox. Lennox's figures are minus 9 points due to a volume decrease and plus 12 points due to selling prices and product mix combined; so, I have the impression that there is not much difference. I had expected a little more top-line growth in the US this past quarter because the supply and demand for R454B would be tight and R32 equipment would sell, because there would be still a little inventory of R410A equipment left, so sales would improve a bit, and because the heat wave would give you a winning opportunity. However, the figure does not appear to differ much from the competitor's result. Once again, please tell us about the sales trends of DNA in the US, especially for the ducted unitary products. I would love to hear about the heat wave and Win-Back, or whether the supply and demand for R454B was so tight that there was an opportunity for R32 equipment.

Thank you very much. As you just asked, I personally thought the top line would grow more. However, as for the demand for residential air conditioners in the US, there was still some distribution inventory in the industry, probably mainly R410A equipment. We estimate that industry demand, mainly manufacturer shipments, was about 84% to 85% in Q1, and the industry as a whole was in a difficult situation. In this context, our growth outpaced the industry. As a factor, the Win-Back achievement rate was about 45% at the end of Q1, which is in line with expectations. In addition, the supply and demand for R454B had been tight since the beginning of the year, but by the end of Q1, according to information from other companies, it had been eliminated to a large extent. We had hoped to increase our market share, but our market share did not increase as much as we had expected. However, we have been able to increase our market share compared to the previous year, and we hope to maintain this trend in Q2 and beyond.

Thank you, Mr. Takahashi. Since the price increase for R32 is less than the price increase for R454B, I thought that the increase in revenue due to selling price and product mix factors would be much larger in your company, considering the original prices as well. Was this figure as planned? I would appreciate your comments on whether it was better or worse than planned.

Basically, this figure was as planned. We basically raised the selling price of our R32 equipment by about 5% in April and about 5% in May due to the Trump tariffs. However, taking into account the individual product mix and other factors, we estimated that the impact on sales would be about 7 percentage points.

Thank you very much. The second question is about the company-wide inventory. Given the strong yen, the inventory level of products seems quite high. Will you increase the operation? Rather, I thought it might be necessary to stop operations and clear inventory. I would like to ask you about your assessment of current inventory levels and your outlook for future production.

As you just pointed out, inventories increased slightly in real terms, excluding exchange rates, compared to the end of June of the previous year. The areas of increase are somewhat limited. For one thing, as I mentioned earlier, demand in the Asian region has been very sluggish, which has slightly delayed production adjustments and increased inventories. Secondly, the chemicals business also replenished its inventory in the US due to slightly sluggish demand and the impact of the Trump tariffs. Another point is that DNA had considerably increased its production in order to significantly increase its market share this year, but due to slightly weak sales in Q1, inventories have built up a bit. However, as Mr. Isayama pointed out, we believe that R32 equipment will sell better than 454B machines, so we are intentionally building up inventory of R32 equipment without reducing production to prepare for Q2 and beyond. In other countries, such as Europe and China, we are adjusting production and reducing inventories in real terms compared to the previous year. A comparison with our internal management plan, which we do not disclose, shows that overall inventories at the end of Q1 were slightly lower than in the management plan, although as I mentioned, there are differences by business division. Therefore, we do not consider inventory to be a major problem for the entire company.

Is it only in the US that there is still a clear excess of inventory in distribution? You have explained the inventory of the entire company, and I would now appreciate if you could add a few words about the distribution inventory.

We do not have statistics on distribution inventories, but as far as we are currently aware, US distribution inventories of residential products remain high. In the chemicals business, inventories for mold manufacturers are increasing for use in semiconductor manufacturing equipment, automobiles, and other applications. We see the distribution inventory of these two businesses as a bit high.

I understand very well. Thank you very much.

Thank you very much. Mr. Maekawa of Nomura Securities, could you ask your question?

My name is Maekawa from Nomura Securities. Thank you very much for your explanation. Let me ask you two questions. First, I am sorry to ask again about the Americas. You told us that there are still a lot of inventories of R410A equipment in circulation. You mentioned that as of the end of March 2025, the level was about 20% more than usual. Which level does this stand at? The July-September period is also a demand period due to the heat. Will the Win-Back accelerate after this July-September period as the distribution inventory of R410A equipment runs out?

Regarding the level of distribution inventory, as I mentioned at the beginning, we judge that demand for manufacturer shipments is very severe and actual sales are not very strong. On a YoY basis, we do not see much improvement in the level of distribution inventories. As for Q2 and beyond, as Mr. Isayama said "heat wave," the weather in some areas was fine in June and July. As you pointed out, from now on, all manufacturers, including us, will be releasing equipment with new refrigerants. Therefore, we are visiting dealers to appeal the superiority of the R32 equipment, and we hope to make up for the inventory level by doing so. However, overall demand has weakened somewhat, and rivals also expect somewhat weaker demand for residential equipment. The distribution inventory will change according to the relationship between demand and our increased market share.

Regarding shipments from your company, of course you can no longer produce the older models, so are sales from distributors gradually changing to the newer refrigerant models?

Almost all shipments from manufacturers are already R32 equipment, and we try to have our distributors sell those as much as possible. However, there is still a stock of R410A equipment in circulation, so we presume that they will be sold together.

So, you are saying that it is impossible to say for sure whether the distribution inventory of R410A equipment will disappear in the July-September period, since there are many variables such as the housing market and weather factors?

Yes. However, there are no new R410A equipment being supplied at all anymore. As a result, actual sales will decrease, and we estimate that the inventory of R410A equipment will approach almost zero at the end of September or later.

I understand. Thank you very much. My second question is regarding tariff impacts. You said that the impact would be less than the JPY47 billion announced in May. I believe that the local production ratio is high in your company. So, even if the tax rate on goods brought from Japan goes down, for example, the tax rate on aluminum goes up, the overall impact will be only slightly less than planned, is that correct? However, you said that selling prices were raised and all the impacted amount was absorbed in the April-June period as well. In the remaining period, the quarterly impact would exceed JPY7.5 billion. You mentioned that this can be recovered through additional price increases in the future, etc. Could you tell us specifically what kind of price increases you are considering?

First of all, we mentioned in May that the impact would be JPY47 billion. The subsequently announced 50% tariffs on steel and aluminum will be an aggravating factor. Tariffs on copper will also increase by 50%, but this is on ingots and not on fabricated products. Since DNA secures much of its volume in the US, we believe that the impact of the copper tariff was less than anticipated. On the other hand, as a beneficial factor for us, the provisional tax rates in the EU, Thailand, and Malaysia will be reduced. As a result, the impact was reduced from the previously announced JPY47 billion. Information changes every day, so there is a possibility, in my opinion, of large reduction, not just a slight one. The impact of the mutual tariff review being settled is significant. As I mentioned, we would like to increase the selling price of steel, aluminum, and copper additionally to compensate tariff impacts. As for applied equipment, we will address this on a per-order basis, but as for DNA, we are talking with our local representative about making additional price changes. However, we would like to decide what percentage we will raise, while keeping an eye on demand and the price revisions of our rivals. Currently, the amount of impact is lower than we had originally anticipated, and we believe that if we can make some additional price revisions, we will be able to make a significant improvement.

I understand. Thank you very much.

Thank you very much. Mr. McDonald of Citigroup Global Markets, could you ask your question?

At the beginning of the meeting, Mr. Takahashi commented that you managed the budget with an emphasis on profitability, which gave me the impression that things have changed since three months ago. I think it is very important that the system has changed. Could you comment on how much the profitability of the air conditioning and refrigeration equipment business in Japan has improved and how much it is likely to improve in the future?

Thank you very much. In the Japanese air-conditioning market, while various companies were selling room air conditioners, especially for home use, at considerably reduced prices, we did not compete with them and expanded our sales focusing on mid- to high-end models. This has greatly increased profitability. Although I do not think it is meaningful to discuss the profit margin only for Q1, compared to the same period last year, the profit margin increased considerably.

What was the original plan for the operating margin of the air conditioning and refrigeration equipment business in Japan?

We had planned that the annual margin would be 7% to 8%. We now expect that it will exceed that.

Good to hear. Another noticeable thing this time is the declines in ASEAN and India. Are the declines in India only due to weather factors and temporary?

Thank you very much. Factors contributing to the weak demand in India were the cool summer and the early arrival of the rainy season. According to the local corporation, even if the temperature is 34 to 35 degrees Celsius, which is extremely hot for us, it is cool summer in India. It seems that in India, only a summer with temperatures of 38 to 40 degrees Celsius is considered a hot summer, and this year's temperature did not rise that high. In India, we recognize that the situation was similar the year before last. Sales in Q1 were lackluster due to weather factors. However, from Q2 onward, we continued our efforts to increase our market share through dealer development, and we were able to offset Q1's negative impact for the year. We believe that this situation this year is also a temporary phenomenon in Q1.

I understand. That's all from me. Thank you very much.

Thank you very much. Next, Mr. Sasaki of UBS Securities, could you ask your question?

My name is Sasaki from UBS Securities. Let me ask you two questions as well. First, can you tell us how this first quarter performance ended up against the Company's plan? From your previous comments, it sounded like sales were tough, but earnings were good due to your efforts to improve the mix and raise prices. I would be interested to know how the internal evaluation was compared to the plan.

Thank you very much. As for progress in Q1 against the plan, sales fell slightly short of the plan. Demand was very tight in all major regions except Japan. So, our market share increased as planned, but sales fell slightly short of our plan. On the other hand, operating profit and other profits were slightly higher than planned.

Could you give us a summary of the factors behind the profit exceeding the plan?

We were very conscious of profitability and focused on sales of high gross margin products and improvement of gross margin. We thoroughly implemented sales price measures in each region, and gross profit margins for both commercial and residential air conditioners significantly exceeded the management plan. In addition, Daikin Comfort Technologies North America did not generate gross profit compared to the volume last year due to poor management of selling prices. However, in this fiscal year, we have not only raised the selling price, but we are also following up on our commitment to ensure adherence to that selling price level. As a result, gross profit at DNA also slightly exceeded the plan. Although sales volume did not reach the plan, gross profit exceeded the plan, which is a common event in each region.

Understood. Thank you very much. The second point is exactly about profitability. Daikin has been rather sales growth oriented, and I think there are some in the stock market who see the declining profit margins as a problem. Does Daikin have a strong sense of crisis regarding the decline in profit margins, and is going to change its policy and focus on profit-oriented business operations? Since the competitiveness of your products is very strong to begin with, do you feel that you can achieve results if you conduct such profit-oriented management, as you have already shown to a certain extent in Q1? I would be very interested to know any response you have gotten and thoughts at this point.

Thank you very much. We recognize that investors and others in the market have made severe comments about the recent decline in profitability. Our major policy of steadily implementing our growth strategy and reaping the rewards of our investments over the medium to long term remains unchanged. However, based on the reflection that our consciousness went too far toward sales expansion, we are now thinking of shifting to management with an awareness of improving profitability and capital efficiency. With regard to profitability, we are thoroughly managing each region with an awareness of gross profit margins, especially since operating profit margins have been declining. Naturally, efficient management of expenses and streamlining of indirect operations are also being promoted throughout the Company. In addition, I believe the declining ROE is causing concern to everyone, although you have not asked about this. This means that in addition to a decline in profit margins, capital efficiency is also declining. In addition to thoroughly reinforcing earning power with an awareness of profits, as I have just mentioned, we should also place more emphasis on ROE in our capital policy. We cannot give specific details today, but we would like to discuss it thoroughly within the Company and announce it externally when it has been decided to some extent.

Thank you very much. OP margins improved to 10% in Q1, and in general, profitability is returning. Could you tell us about your response to it and your evaluation of it?

Looking at Q1 results, I feel that awareness of earnings is taking root more than expected. So, we would like to continue this.

I understand very well. Thank you very much.

Thank you very much. Next, Mr. Taninaka from SMBC Nikko Securities, could you ask your question?

My name is Taninaka from SMBC Nikko Securities. Thank you. Let me ask you two questions. I believe that in Q1 there was talk of a shortage of supply of R454B equipment from the competing US manufacturer. Did such a competitive situation contribute to your company's Win-Back in Q1? If it did, how will you regain market share as that advantage disappears in the future? Can you reiterate the certainty of this?

Thank you very much. As you indicated, at the beginning of the period, there was talk of supply shortages related to the R454B equipment. However, our competitors have also taken countermeasures, and the shortage was resolved more quickly than we had anticipated. In the financial results explanations of rival manufacturers, it was reported that the problem of supply shortages has largely been resolved. There were concerns among some customers about the supply of R454B equipment, so the supply shortage contributed to our Win- Back. However, we also visited dealers one by one to emphasize the quality of our R32 equipment and the reliability of our supply system, which led to the resumption of business with Daikin. The tailwind from the supply problem of the R454B equipment will probably disappear in the future. We have been making a strong case for the superiority of the R32 equipment and its inherent strength of supply stability, and the Win-Back process is proceeding as planned so far. We would like to continue our efforts to recover our market share.

Thank you very much. The second point is the progress of sales volume against the full-year plan. It is planned to increase US residential unitary sales by 11% YoY. Q1 results were down 13%, and residential sales in China were also down 2% in Q1 versus the annual plan of a 3% increase versus the previous year. It seems to me that the hurdle for achieving the annual plan is high, at least in terms of sales volume. How do you plan to achieve positive YoY results in the Q2 and beyond?

Thank you very much. In the US, we honestly feel that it will be very difficult to cover the impact of this decrease in demand, as overall demand is becoming very severe. However, we would like to regain market share as planned, and in Q1 we were able to increase our market share YoY. From Q2 onward, we intend to continue to promote the superiority of the R32 equipment in order to substantially recover our market share for the year. Although the sales volume may be slightly below the plan, as I mentioned earlier, we are able to generate more gross profit than planned. So, we are not too worried about the revenue aspect. In China, I believe that industry demand for residential products is just over 80%. Among them, sales of residential multi-split air conditioners, our mainstay product, remained almost on a par with the previous year. Although the business environment is difficult, we are doing our best to maintain the same level of sales as the previous year by leveraging our strengths in products and online and offline sales.

I understand very well. Thank you very much. That's all from me.

Thank you very much. Next, Mr. Ito of Mizuho Securities, could you ask your question?

My name is Ito from Mizuho Securities. Thank you for your time today. I have two questions. The first question is regarding profitability. I would like to get some more background on your efforts to increase gross margins. Earlier you mentioned that the profit margin seems to be increasing, and I have the same impression. Do you have an internal target for how much you would like to raise it by region or by product? Also, when did you start these measures internally and when did they actually start to have an effect? For example, have you already done all of the initiatives and are they currently having some effect? Or are there still measures that you are trying to do, and there is still room for growth in H2 of the year and into the next fiscal year to further increase the profitability of products?

Thank you very much. With regard to the focus on profitability, our top management has been concerned for the last year that earning power has been declining. Therefore, we have been working internally to re-enforce that power. We have been thoroughly implementing a policy in all of our businesses not to easily sell at low prices and to increase the percentage of high value-added products as much as possible if the overall quantity does not increase. We hope to continue this in Q2 and beyond. On the contrary, we have achieved that in Q1, and if we continue to do so, we should be able to achieve the same in Q2. The entire group is thoroughly committed to never selling at low prices, or chasing volume and cheap products. We do not believe that our efforts to increase profitability have gone far enough. So, as I mentioned at the beginning, for example, we have listed further cost enhancement as one of the six themes to be led by top management. Cost improvement targets are challenging and have not yet been fully incorporated into the management plan. However, if this can be achieved, gross profit margins will increase as a result. We are also making considerable digital investments as part of our business process reforms. As efficiency gains are made through these efforts, we are trying to increase output by focusing on value-added creation in priority themes. If these efforts bear fruit in figures in the second and third quarters, we will be able to offset the negative impact of the severe demand environment. The Company's current overall policy is to achieve results that exceed the annual plan through this type of management plan.

Thank you. Second, I would like to ask about the heat pump. How would you rate your company's efforts in the heat pump heating business in Europe compared to the current market? Is it likely that demand for heat pumps during the year will be in line with the plan at the beginning of the period? If not, how do you consider profitability and quantity? Do you want to aim for market share growth above the market? What is your perception of the current situation?

Regarding heat pump hot-water heating, demand bottomed out around the end of last year, but the recovery from that point on has been weak. At the beginning we expected demand to be about the same as the previous year, but not much has changed from there in the current period. In this context, we are continuing our efforts to increase our lineup by offering equipment that uses a new propane refrigerant, and to sell heating equipment to air conditioning dealers who had not previously handled heating. As a result, heat pump heating sales in Q1 were 110% of the previous year's level. Probably industry-wide sales are about the same as the previous year, so we believe our market share is increasing. For the year, we expect demand to be in line with or slightly below our original plan. In this context, we have put together a very challenging management plan based on the policy of securing the volume by increasing our market share. We do not expect much in the way of demand.

I understand very well. Thank you for your explanation. That is all.

Thank you very much. Mr. Tai of Daiwa Securities, could you ask your question?

My name is Tai. First, I think it was mentioned earlier that the inventory level of residential unitary in the US is about 30% higher than normal. How much R410A and R32 do you have in stock for each? Second, regarding the battle between R454b and R32, you mentioned that you are focusing on shipping R32. However, from the standpoint of distributors and dealers, if the R410A purchased by last summer is not sold out by the end of the year, it will have to be disposed of. I think that unless the R410A inventory is cleared, it may be difficult to sell the R32. What are your thoughts on this?

Thank you very much. First of all, we do not know the distribution inventory of R410A and R32, or the inventory level of the new refrigerant, as we do not have the figures at hand right now. However, we assume that there will be a certain amount of R410A in circulation. You pointed out that dealers have to sell R410A and may not sell much R32 or the new refrigerant. I think this is true for dealers, since R410A is inexpensive and if they do not sell out it, they will have no choice but to throw it away at the end of this year. However, probably later this year, only the new refrigerant will be available in the market. So, I think the distributors will be forced to sell that as well. As we have said in the past, the battle between the rival R454B and our R32 will begin in earnest from Q2 onward. So, naturally, we will provide support for the expansion of R410A sales, but we would also like to engage in the fight against R454B in earnest.

You mentioned that you are cooperating with dealers to reduce R410A inventory. Really, I think the dealers and Daikin would feel a lot better if it sold out with Daikin's support. When is it likely that we will no longer need to discuss R410A? Do you expect to be done talking about R410A from about October, when this summer is over?

With expectation, as you just pointed out, we hope to reach that state by the end of Q2.

I understand. By the way, what is the difference in R410A inventory held by your company and your competitors, respectively? Does your company carry more inventory or is it healthier?

As I mentioned earlier, we do not know the status of the distribution inventory of R410A and the new refrigerant equipment. My guess is that our company lost the R410A competition last year and our rival put more on the market, so more of their inventory is in circulation. However, there is no quantitative data, so this is just my speculation.

I understand. That is all. Thank you very much.

Thank you very much. Finally, Mr. Pan of Macquarie Capital Securities, could you ask your question?

My name is Pan from Macquarie Capital Securities. I would like to ask one point briefly about margins by region. I think margins in China have fallen considerably from the previous year. I believe that margins in China have accounted for about 30% of your company's margins up to now. Simply estimating from the guidance of 22%, this decrease should have had a large negative impact on operating profit of about JPY5 billion in this quarter compared to the previous year. By what did you recover this? Can you also tell us how you intend to recover this decrease in margins in China?

Thank you very much. We have received many suggestions that the overall profit margin will decrease if the percentage of China decreases, and I think that is true. China accounts for 14% to 15% of our total sales, so if it were to drop to 13%, the negative impact would certainly be large, but not so large that it would drastically change the profit margin of the entire company. In contrast, this year, there will be an increase in profit margins due to a slight improvement in the profitability of the European business, which fell sharply last year. In addition, as I mentioned at the beginning, the profit margin is rising as the results of our efforts to emphasize profitability in the domestic air conditioning business and DNA are beginning to emerge. This raises the overall level. In addition, we still generate profit margins in excess of 20% in China. In the current environment, it is really difficult to generate sales, but we are working to aggressively offer differentiated products and services against our rivals and never lower our prices. Naturally, costs will be reduced, so if we can maintain sales volume close to that of the previous year, profitability will not decline much. We believe this has allowed us to continue to maintain a high profit margin.

Thank you very much. That's all from me.

Thank you very much. This concludes the question-and-answer session. This concludes the financial results briefing. Thank you very much for your participation to the end. [END]