Q&As on the Presentation of Financial Statements for FY March 2006 Interim Period

Q1 : Sales in the second quarter fell short of the initial forecast by ¥4.3 billion, but inventory had increased by as much as ¥10 billion at the end of the interim period. Could you please explain this relationship?

A1 : In addition to inventory levels at the beginning of the fiscal year being higher than the initial forecast, inventory rose due to increased production following a misjudgement of sales performance. Also, due to exchange-rate fluctuation, yen translation generated a ¥3 billion increase in inventory.

Q2 : When the increase in inventory levels occurred, were any specific management instructions given? Why were you unable to manage inventory properly?

A2 : We did give instructions about inventory management, but it was bullish sales targets at overseas subsidiaries that mainly drove up inventory. In the future, we will strengthen our supply chain and inventory management, with due consideration to customers' needs. We have also launched an in-house inventory-reduction project for the whole organization. We are adjusting inventory by dividing it into fixed (old-model) and new-product inventory.

Q3 : For the second half, you have forecast a ¥6 billion operating profit year-on-year increase in the Musical Instruments business. How will you achieve this improvement?

A3 : Despite the negative impact of reduced production from inventory adjustment, we aim to grow operating profit year on year, on higher gross profit from increased revenues notably from new product launches, and on reduced SG&A expenses in administrative related departments.

Q4 : You have already passed the midway point of the medium-term business plan, but the Musical Instruments business is well short of its targets. How do you view progress just now?

A4 : Regarding the numerical targets, the obstacles are high, but we remain committed to firmly taking measures for their achievement. The medium-term business plan has three main planks: 1) maintaining a high-profit structure by strengthening the earnings potential of our musical instrument and AV/IT operations, 2) creating businesses and services that are unique to Yamaha, and 3) strengthening CSR. We believe that continuing progress in precisely these three areas will help us turn around operations. Focusing on the areas of sound and music, we expect to see good results in the hardware, software, and content spheres.

Q5 : Why have you lowered operating profit forecasts for semiconductors for the second half?

A5 : We have lowered operating profit forecasts for semiconductors for the second half because 1) it is difficult for us to reach targets for LSIs for amusement equipment such as pachinko machines, a field where we had expected to increase revenue year on year and 2) we have slightly scaled back sales targets for LSI sound chips for mobile phones due to uncertainties about prospects from January 2006. However, we see no major change from first-half performance in these LSI chips just now.

Q6 : In the previous briefing, you prioritized inventory reduction over sales expansion; is there any change on this point?

A6 : We prioritized inventory reduction in the first half, but results were ultimately disappointing. We will continue to focus on reducing inventory in the second half. Because inventor retention can result in losses from new product launch delays and inventory clearance, our aim is that inventory should always consist of new products.

Q7 : Please provide an update on progress on revamping logistics and warehousing systems in Europe.

A7 : Last year, we suffered chaos in European operations due to computer system malfunctions and operational overload; we have rescheduled the integration of warehouses, and things are gradually returning to normal. However, we expect that we will need a little more time to realize the benefits from inventory reduction and cost cutting due to warehouse integration.