Q&As on the Presentation of Financial Statements for FY2008.3, Ended March 31, 2008

Q1 : Please explain specifically the factors accounting for the change in operating income in the musical instruments segment in FY2008.3 compared with the previous year. Also, please explain the specific factors behind your forecast for FY2009.3 against FY2008.3.

A1 : Operating income in the musical instruments segment rose ¥5.9 billion, from ¥22.0 billion in FY2007.3 to ¥27.9 billion in FY2008.3. The positive impact of trends in foreign currency exchange rates accounted for ¥5.0 billion of the increase, and the rise in the ratio of gross profit to net sales, due to factors other than currency rates, contributed ¥5.1 billion. The improvement in the gross profit ratio was due to higher net sales and production levels compared with the previous year as well as cost reduction. On the other hand, these positive factors were partially offset by an increase of ¥4.2 billion in selling, general and administrative (SG&A) expenses.

We are forecasting an increase of approximately ¥0.6 billion in operating income in the musical instruments segments, from ¥27.9 billion in FY2008.3 to ¥28.5 billion in FY2009.3. Specific factors accounting for this increase will be a gain in sales of ¥17.0 billion in real terms, a rise in gross profit, due to factors other than currency rates, of ¥9.8 billion, which will be partially offset by an increase in SG&A expenses of ¥4.3 billion and the negative impact of trends in foreign currency rates of ¥4.9 billion.

Q2 : Please give us your outlook for sales of the musical instruments segment in FY2009.3 by region. In particular, what factors will account for the 6% increase in real terms you are forecasting for North America.

A2 : We believe that, in the musical instruments segment as a whole, sales of professional audio equipment will increase. We are not introducing major new products in FY2009.3, but we are aiming to expand sales through appropriately replacing our sales personnel and strengthening our sales capabilities.

Also, in the digital piano field, we are aiming for growth by introducing new products in our new CLP Series on a worldwide basis.

In the acoustic piano field, we are strengthening our product lineup by introducing new products from our Indonesian plant into the European market. Also, in the North American market, besides our existing offering of upright pianos, we are introducing a line of grand pianos under the brand name “Cable--Nelson.”

In addition, we are working to expand sales of our high-value-added “MODUS” digital pianos, which feature emphasis on design.

In the North American market, we are reporting steady increases in shipments of professional audio equipment. Since our market share there is still low, we are looking for growth in this region. Conditions in the piano market are still difficult because of the weakness in the economy, but demand is relatively firm for medium-to-high quality Japanese pianos. In addition, we are introducing low-priced grand pianos made in Indonesia and are responding to the trend toward price bipolarization in the market.

Q3 : What is your appraisal of the level of inventories as of March 31 this year? Going forward, what measures will be necessary next?

A3 : We took steps to optimize inventories in the fourth quarter of FY2008.3 by reducing production and holding special sales. We believe the level of inventories was nearly optimal at the end of the fourth quarter. Therefore, at present, we are not planning to take any special inventory measures.

Q4 : Please comment on the balance between operating income in the musical instruments segments in the first half versus the second half of FY2009.3.

A4 : Sales of musical instruments have always been seasonal, with more profit in the first half of the year than in the second half. Our operating income forecast for FY2009.3 shows a slightly higher weight than previously on the second half.

Q5 : What are reasons for the slowing of growth of musical instruments sales in China for FY2009.3 compared with FY2008.3?

A5 : Our forecast for FY2009.3 is somewhat on the conservative side, but we believe that, as in previous years, the drivers of growth in China will continue to be pianos, portable keyboards, and professional audio equipment. In contrast, sales of wind instruments are relatively weak, and we are taking steps to enhance our sales network. Also, statistics show that the total demand for pianos in China is expanding from about 250,000 a year toward 280,000. We are aiming for continued annual growth of about 20%, mainly in piano sales in that market.

Q6 : Yamaha has begun the mass production and shipments of silicon microphones. What is your forecast for sales of these devices in FY2009.3?

A6 : We finally reached the mass production and shipment stage in March this year, but the volume of sales is still not large. During FY2009.3, we are going to make related capital investments and then really begin mass production and shipments in the latter half of FY2009.3

Q7 : What were the reasons why operating income in the musical instruments segment fell short of the forecast you issued in the third quarter?

A7 : Sales of musical instruments in the fourth quarter, excluding foreign currency rate factors, were only about ¥0.4 billion below our previous forecast. The reasons why operating income was short of our third quarter forecast were an increase in SG&A expenses and a decline in gross profit caused by special sales we conducted as part of our measures to optimize inventories.

Q8 : In your forecast for FY2009.3, you are predicting foreign exchange losses of ¥5.1 billion. Could you please give us a breakdown of these losses?

A8 : Accompanying the sharp appreciation of the yen, we have changed our previous views regarding the impact of foreign currency fluctuations. The breakdown of the foreign exchange losses of ¥5.1 billion is as follows: ¥1.7 billion due to the weakening of the euro, ¥0.7 billion in currency translation losses owing to the weakening of the U.S. dollar, and ¥0.8 billion due to the weakening of the Australian and Canadian dollars. On the production side, we are forecasting that the impact of the appreciation of the Chinese yuan will be about ¥1.0 billion and the effect of the appreciation of the Malaysian ringgit will be about ¥0.6 billion.

Q9 : Are you forecasting that, after excluding the effects of foreign currency fluctuations, SG&A expenses in the musical instruments segment for the two years, FY2008.3 plus FY2009.3, will rise more than ¥8.0 billion compared with FY2007.3?

A9 : SG&A expenses in FY2008.3 in the musical instruments segment, after excluding the effects of foreign currency fluctuations, rose ¥4.2 billion against FY2007.3. However, this figure included ¥0.5 billion in SG&A expenses due to the inclusion of additional subsidiaries in the consolidated accounts. Therefore, the real increase, on a like-for-like basis, was ¥3.7 billion. This included about ¥1.5 billion in one-time expenses: namely, ¥0.3 billion in M&A-related costs in the piano and professional audio equipment businesses, ¥0.3 billion in taxes paid in connection with the sale of a portion of Yamaha’s holdings of Yamaha Motor stock, ¥0.4 billion in air-transport costs for products, and ¥0.5 billion in IT system costs. The remaining increase of ¥2.2 billion was due to higher expenditures on advertising and promotion.

The increase in SG&A costs in FY2009.3, excluding the impact of exchange rates, is forecast to be ¥4.3 billion against FY2008.3, but this will actually include ¥1.3 billion in additional expenses due to the inclusion of additional subsidiaries in the consolidated accounts and ¥0.7 billion in amortization costs owing to a shortfall in retirement and severance benefits caused by the decline in the return on pension assets. After removing these two costs, the real increase will be ¥2.3 billion. This will be due primarily to higher personnel costs as well as advertising and promotion expenditures; however, this amount includes some precautionary budgetary allocations, and, depending on actual earnings performance, it may be possible to reduce these to some extent.

Q10 : Please explain the measures you are implementing to strengthen profitability in the AV/IT business segment. We are particularly interested in what you will be doing to improve profitability in the conferencing system business.

A10 : The major issue in the conferencing system business is the delay we have experienced in setting up our sales network. However, as we market these systems, what customers want has become clearer to us. We are feeding this information back to our product development team and want to make a strong comeback in this area.

In our AV business, we are working to strengthen the product development and manufacturing capabilities of our various production centers. At the same time, we are engaged in a review of our product strategies. Going forward, we want to strengthen our entry-level AV receivers and desktop audio product lineup. Although we believe growth will be difficult to achieve in FY2009.3, we want to aim for growth in this business afterwards.