Q&As on the Presentation of the New Medium-Term Business Plan "Yamaha Growth Plan 2010"

Q1 : The profit level from the musical instruments segment for the fiscal year ended March 31, 2007, is now expected to be ¥10 billion lower than the ¥31 billion predicted under the Company’s earlier YSD50 medium-term business plan. Can you please explain the various factors that contributed to this decline in earnings?

A1 : Under the previous YSD50 medium-term business plan, we intended to improve profits by ¥19 billion over three years. This included a ¥15 billion increase in profit arising from higher net sales. However, even including the increase in profit arising from the impact of foreign exchange, the improvement was just ¥7.7 billion, half the projected figure. On the other hand, although selling, general and administrative expenses were projected to increase ¥2.8 billion due to factors that included aggressive promotional campaigns, these costs rose just ¥400 million (reducing profit ¥400 million). We intended to cut costs ¥3.2 billion through manufacturing reforms, but because of higher materials costs and underutilization of capacity owing to production cutbacks, the actual increase in profit was just ¥400 million. Moreover, we had planned to reduce labor costs ¥3.6 billion through optimizing the personnel structure, but the actual impact was ¥2.8 billion. This is because we began hiring new college graduates earlier than planned to ensure that technology knowledge is passed on.


Q2 : Under this new medium-term business plan, you intend to increase overall piano sales ¥10.0 billion. Could you please provide a more-detailed breakdown by market and product?

A2 : We are forecasting that overall annual demand for acoustic pianos will increase from ¥165.0 billion at present to ¥169.0 billion in three years. We see demand in North America rising slightly, Europe remaining flat or declining slightly, and China growing. On the other hand, we see demand for digital pianos rising from ¥69.0 billion to ¥76.0 billion. In this operating environment, Yamaha is aiming to increase sales by ¥10 billion by expanding market share.


Q3 : Looking at Yamaha’s brand strategy, do you intend to keep developing businesses ranging from low-priced products that should sell in China all the way to concert hall instruments all under the same Yamaha brand? Please tell us about the positioning of the Yamaha brand.

A3 : As shown by our use of the “inpres” sub-brand for golf clubs, we are pursuing a brand strategy that does not use just the one Yamaha brand, but also includes the use of sub-brands. Going forward, depending on the market and the nature of the product, to increase market share and maintain and boost profits, we intend to use a variety of brands and sub-brands, which also includes the use of acquired brands.


Q4 : Could you please provide a breakdown of the ¥10.0 billion increase in piano sales under the medium-term business plan by country and market?

A4 : Looking at acoustic pianos, North American sales are projected to increase ¥2.0 billion, European market share is expected to grow from 31% to 33%, and Chinese sales are projected to grow from ¥4.5 billion to ¥7.0 billion. At the same time, although we are striving to boost market share in Japan, overall demand is expected to shrink; thus, we see sales declining from the present ¥15.0 billion to ¥13.5 billion. Turning to digital pianos, North American sales are projected to increase from ¥9.0 billion to ¥11.0 billion, and European sales are expected to grow from ¥12.0 billion to ¥14.0 billion, a ¥2 billion increase in both areas. Our sales target for China is ¥1.0 billion, and we aim to increase sales in Japan from ¥6.0 billion to ¥6.4 billion.


Q5 : You say that the Company intends to strengthen its silicon microphone business. Please tell us about the size of these sales. Also, will you need to make additional capital investments to accomplish this? Finally, it appears that they will mainly be used in mobile phones. Can you tell us how they are superior to the current condenser microphones?

A5 : We are forecasting a ¥4.0 billion increase in sales of silicon microphones, a ¥3.0 billion increase in digital amplifiers, and a ¥6.0 billion increase in LSI non-sound chips for mobile phones. Consequently, no additional capital investment will be required. The investment required for miniaturization to 0.18μm has been completed, and production has begun. In the future, along with making full use of our 0.18μm capacity, we will utilize outside foundries for advanced products. Compared to the ¥13.0 billion in total investments under YSD50, we intend to invest about ¥9.0 billion over the next three years. Silicon microphones have been well received by mobile phone manufacturers for their mountability inside mobile phones due to their small size as well as their processability.


Q6 : You intend to increase sales in the professional audio equipment segment by ¥12.0 billion. Could you please tell us the specific markets and domains in which you hope to grow? What are your advantages over your rivals?

A6 : In professional audio equipment, we intend to increase sales of mixers from ¥13.0 billion to ¥14.0 billion, and we are aiming for an increase of ¥5.0 billion for speakers and other output devices. By taking advantage of our strength in digital mixers, we intend to tackle new areas, such as speakers and amplifiers. We believe that the key to growing this business does not lie solely in selling the strong usability, the high reliability, and system compatibility that are Yamaha’s strengths, but it also depends on providing products and offering services and other solutions that meet our customers’ needs


Q7 : From a supplier standpoint, how do you see the market for musical instruments changing in the next three to five years? Do you think that the way products are sold will change? How will you take advantage of your strong financial position?

A7 : In our opinion, the changes in the market for musical instruments will vary depending on the product and market. In Japan, the new piano market is just 1/10 the size of the market 20 years ago due to the country’s low birthrate and the growth of the second-hand piano trade. However, we believe that this decline may have finally come to an end. Japan’s musical instrument stores have been responding to market changes by offering music classes and private lessons. It also appears that people―including the younger generation―are coming back to music and musical instruments; so, the market may improve slightly in the future. After a number of buyouts, musical instrument store chains account for a large share of the U.S. market; therefore, doing business with these stores will be critical in the future. In Europe, it will be necessary to develop a market strategy that takes better advantage of the strength of the Yamaha brand to counter the musical instrument stores that are selling products under their own brands. When it comes to products, rather than looking at acoustic and digital instruments separately, we think that they should be viewed as a seamless whole. To bolster the strength of our products and to boost market share, we will establish a specific department to pursue business alliances and M&A activity.


Q8 : Why is your share of the guitar market so low? Are there issues you need to address regarding your products? What do you think that you can do to increase market share?

A8 : In addition to shoring up our factory and production framework, we will bolster artist relations, an area where we have fallen behind. By increasing the number of staff at our guitar and drum R&D facility located in North Hollywood, in the United States, we aim to reinforce manufacturing and product development for artist signature model instruments. In Japan, we are enhancing the facilities at Yamaha Music Craft Co., Ltd., a subsidiary that makes superior-quality products, and we are reinforcing our manufacturing capabilities in Indonesia and China, where we make medium to low price models. We are also considering adding one more brand in the future. The U.S. market for electric-acoustic guitars is growing, and we are strengthening our business in this area as a product strategy. We think that we will be able to demonstrate Yamaha’s technological capabilities in this area. We are strengthening our guitar business by pursuing these efforts. In any event, we hope that shoring up our fundamental strength over these three years will carry us into the following two to three years.


Q9 : You intend to boost revenue from semiconductors. Was your sales plan formulated from figures for each individual application or does it represent the overall figure you would like attain?

A9 : The plan is built on the individual figures for the applications that we have developed in the past. However, there are some areas that can only be understood in actual practice. In this respect, it would be fair to say that this plan is more like a goal for what we would like to achieve.


Q10 : Can you please tell us the foreign exchange assumptions that were used for this medium-term business plan? Also, does the plan take into account the impact associated with the change in depreciation methods?

A10 : We assumed exchange rates of ¥115 to the U.S. dollar and ¥148 to the euro. An impact of ¥2.0 billion from the change in depreciation method is included in the plan.


Q11 : You are forecasting that the operating profit from the musical instruments segment will increase ¥9.0 billion from the fiscal year ended March 31, 2007, to the fiscal year ending March 31, 2010. Could you please tell us the reasons?

A11 : We are projecting an ¥11.6 billion increase in gross operating profit thanks to higher sales, a ¥4.1 improvement in manufacturing profit, and a ¥2.8 billion foreign exchange gain. At the same time, we expect selling, general and administrative expenses to increase ¥10 billion in connection with the reinvigoration of the market. As a result, the operating profit target for the fiscal year ending March 31, 2010, is ¥30.0 billion.


Q12 : The AV/IT segment fell far short of the targets in the previous medium-term business plan. In the new medium-term business plan, you are aiming for increases in both net sales and profit, but bearing in mind the difficult market environment―such as declining prices―won’t you fail to achieve the targets of this plan as well? How is it different from the last plan?

A12 : We failed to achieve the targets of our previous medium-term business plan because home theater systems―a mainstay product line―did not grow according to our projections, because high class hi-fi equipment and online karaoke equipment suffered downturns, and because image projectors and MusicCast―new products for which we had high expectations―struggled to compete. We aim to achieve the goals established in our new medium-term business plan by reinforcing the high class hi-fi equipment business, expanding in front surround speakers for flat-panel TVs, shoring up small speakers that are used with mobile phones and PCs, and strengthening our Power Line Communications (PLC) product offering, a novel product lineup that will be a cooperative venture with a lighting manufacturer. We intend to reassess our progress in this business year and make adjustments as necessary.


Q13 : Have you actually created an organization known as “The Sound Company?" Or are you planning on creating it?

A13 : We have not created an organization with that name. Organizationally, it is broadly divided into the Musical Instruments and Software Business Group and the Sound and IT Business Group. We have also combined the sales department for the AV equipment business and the sales department for the musical instruments business.


Q14 : What do you see as the most central concept of this new medium-term business plan?

A14 : The central concept is the idea of focusing on "sound" through the domain we are calling “The Sound Company.” As of last fiscal year, we have largely dealt with the outstanding issues. Going forward, we will concentrate on “sound” and stick to one coherent path.


Q15 : With respect to your plans for increasing sales in the musical instruments segment, can you tell us about your plans for boosting sales outside of pianos and guitars? And how do you plan to proceed in the musical instruments segment in the subsequent three years?

A15 : We are aiming to increase sales by ¥38.0 billion in three years. In addition to a ¥10.0 billion increase in pianos and a ¥2.0 billion increase in guitars, we are projecting a ¥12.0 billion increase in professional audio products as well as higher sales of wind instruments and portable keyboards. During the three years of the current medium-term business plan, we will fine-tune the manufacturing framework for the musical instruments segment, and, in the following three years, we will aim for steady profit growth.


Q16 : The ¥2.0 billion increase in profit in the guitar business is just a drop in the bucket; so, it seems like a completely new and discontinuous strategy is needed. Please talk about the size of sales needed to lift Yamaha’s position in the market and increase profits, including M&A.

A16 : To be sure, going from ¥10 billion to ¥12 billion is not a big number. Afterwards, we would like to increase it by ¥10 billion. To do this, we will be building a foundation over the next three years. We will also consider acquisitions as the opportunity arises. But, in any case, we will pursue the restructuring of the guitar business with an eye toward our next steps and our vision for the future. Unless we can envision what is next, the existence of this business has no value.


Q17 : The operating profit margin for the "Diversification" business domain is lower than the operating profit margin for "The Sound Company" business domain. What sort of business evaluation standards do you have for the continued existence of the "Diversification" business domain?

A17 : If this business domain incurs losses for two consecutive years, evaluating its continued existence will be put on the table. We would not withdraw immediately, but we would discuss what should be done to lift earnings.


Q18 : What do you intend to do in the future about your equity relationship with Yamaha Motor, a company with which you share a brand name? Could you also tell us about your mutual brand strategy?

A18 : We see this as an extremely important topic, and we are continuing discussions. When something worthy of notification is decided, we will announce it immediately. Top company officials have a place to talk to ensure that the shared Yamaha brand is handled carefully by each other, so that the brand name will not be diluted.