Q&As on the Presentation of Financial Statements for the First Quarter of FY2007.3

Q1 : Could you please explain why operating income for the first quarter in the musical instruments, AV/IT and electronic equipment and metal products segments were above your initial plans?

A1 : In the musical instruments segment, the ¥1.5 billion improvement in profitability, over the initial plan, was due to the positive impact of ¥400 million attributable to foreign currency rate movements, ¥500 million owing to improvement in manufacturing profitability and an improvement in the gross operating margin on sales due to changes in the composition of sales, and ¥600 million coming from declines in selling, general and administrative (SG&A) expenses, including the effect of delays in usage of budgeted expenses. In the AV/IT segment, currency factors contributed ¥100 million, increases in sales and higher utilization due to accelerated production added ¥900 million, and the decline in SG&A expenses contributed ¥200 million, for a total improvement of ¥1.2 billion over our initial outlook. Also, in the electronic equipment and metal products segment, operating income was ¥900 million above initial plans owing to an improvement in the gross margin on sales and other factors.

Q2 : You have not changed your forecast for the full fiscal year, but what are views of likely performance in the second quarter? Please give us your outlook regarding your principal segments: musical instruments, AV/IT, and electronic equipment and metal products.

A2 : In the musical instruments segment, inventories in the U.S. market are increasing at the retail level, and in the first quarter, our sales were below the planned levels. However, we are making gradual progress in adjusting inventories, and we are expecting an upturn in sales in the second quarter. Profitwise, although some SG&A expenses budgeted in the first quarter will slip into the second quarter, we are looking to maintain the initially planned levels for profit in the second quarter. In the AV/IT segment, we accelerated the production of some items in the first quarter but we believe this will be leveled out in the second quarter. In the semiconductor business, we are not expecting any major changes compared with the first quarter and are looking for continued steady performance. Overall, for the first half of the FY2007.3, we are expecting profits to be above our initial forecasts. However, the initial forecasts were weighted toward improvement in the second half. Therefore we have decided not to make any revisions in the forecast for the full fiscal year, but we are thinking of reviewing the full-year forecast again at the time of the interim results.

Q3 : Work in progress and inventories of materials are increasing. Should this be a cause for concern?

A3 : This increase in work in progress and materials is related to production for the second quarter and is not a cause for particular concern.

Q4 : We understand that inventories in the musical instruments segment were at an appropriate level at the end of the first quarter; however, could you please tell us about the progress you are making toward the consolidation of warehouses in Europe and the United States and whether this will make further reductions in inventories possible?

A4 : Along with the consolidation of warehouses, we are making reforms in our systems, including those related to planning for production, sales, and inventories. However, to date there have not been any major improvements. We would like to include a medium-term target for inventories in our next medium-term management plan.

Q5 : In the AV/IT segment we understand you have accelerated the production of certain items. Could you please explain specifically which products these were and why you accelerated production?

A5 : At our plants in China and Malaysia, we stepped up production to some extent in preparation for the Christmas season in Europe and the United States, with the aim of leveling the volume of production over the course of the year.

Q6 : Please comment on conditions during second quarter in the business of LSI sound chips for mobile phones.

A6 : Unit production volume was down year on year in the first quarter, but the average unit sales price was about the same as during the same quarter of the previous year because of the shift toward up-market models. At the present time, we believe the same conditions will prevail in second quarter.

Q7 : Please explain the rate of utilization of Yamaha’s own production plant for semiconductor manufacturing.

A7 : Thus far, production at our plant and subcontracted production accounted for about 50% each, but the ratio of subcontracted production is gradually declining. At present, our plant is operating at about capacity, but, going forward, issues may arise in connection with capacity utilization. We are therefore considering the best production strategy, including what products we should be making at our plant.

Q8 : Could you please tell us about your progress in introducing and marketing devices, other than LSI sound chips for mobile phones, in the amusement and other sectors and what contribution they will make to sales going forward?

A8 : In the LSI sound chips for mobile phone business, we are moving forward with the production of not only sound source chip types with ring tone functions but also high-value-added chips that incorporate audio and a range of other functions. In the field of LSI chips for use in amusement applications, such as pachinko and pachislot machines, we are maintaining a steady share in the sound source area, but our share in the graphic content chip area is small. Going forward, we would like to emphasize the development of our position in the graphic area. In chips for other applications, we have a number of products that we are currently shipping, or are preparing to ship, samples of, but their contribution to sales is likely to be marginal during the current fiscal year. We expect to introduce those products we believe will make a contribution to sales in the years ahead in our next medium-term management plan.

Q9 : As you move forward with structural reforms in the musical instruments segment, are there some sectors that are showing improvement from an operational perspective? If so, what are these?

A9 : Since drawing up and beginning to implement our current medium-term management plan, we have proceeded with structural reforms in our musical instruments business, but, frankly speaking, we feel the sense of urgency in this area is somewhat lacking. It seems that what we intended to accomplish in three years is going to take about five years; however, we believe we are making steady progress. For this reason, we are confident that the results of our efforts will gradually emerge going forward. When the musical instrument business showed a loss for the first time five years ago, we implemented decisive reforms and this had some effect throughout the Company; the older generation is retiring and the activities of younger generations are more in evidence than before. In addition, these efforts have led to the development of new products, and, overall, we believe we are moving in the right direction.

Q10 : Could you please describe conditions in your European sales company and the new commercial audio equipment sales company in the United States?

A10 : Looking first at the commercial audio equipment company we established in the United States, the sales channels for this business are different from those for musical instruments, and we have had to begin by establishing sales routes and project planning. Therefore, we believe that it will take about five years between the time we begin negotiations with potential customers and actual results. Turning next to our European sales company, although there are differences among countries in Western Europe, we are reporting steady growth. Looking ahead, we want to increase the efficiency of these operations and increase earnings power. In addition, in Eastern Europe, thus far, we have marketed mainly through dealers, but we are working to strengthen our sales capabilities as a manufacturer by selling directly to music stores and other marketing activities. We are expecting substantial growth in Eastern Europe.