Q&As on the Presentation of Performance Results for the Third Quarter (Ended December 31, 2010) of FY2011.3

A01: Our previous forecast for operating income was ¥2.5 billion. Factors tending to lower operating income were ¥0.1 billion due to foreign currency factors and ¥0.2 billion as a result of higher material costs. However, these negative figures were more than offset by positive factors, including ¥0.2 billion due to the actual increase in sales and production and ¥1.9 billion owing to reductions in selling, general and administrative (SG&A) expenses. Therefore, overall operating income rose ¥1.8 billion compared to the previous forecast and amounted to ¥4.3 billion.

A2 : Compared with the previous forecast, we are now predicting that operating income will be ¥0.3 billion lower because of a decline in sales and ¥0.5 billion lower because of an actual increase in SG&A expenses. As a result, we have lowered our forecast for the fourth quarter from an operating loss of ¥1.9 billion, to a loss of ¥2.7 billion. Factors accounting for the rise in SG&A expenses will be a slippage of some third-quarter costs into the fourth quarter and a necessary provision of about ¥0.6 billion for product warranties in connection with problems related to certain products.

A3 : The decline in SG&A expenses was due to the positive effects of overall cost-cutting, but the reporting and recognition of some expenses have been delayed. Overseas distribution costs were at the level we had forecast previously, and they are included in cost of sales in the consolidated statements of operations.

A4 : Trends in professional audio equipment (CA products) will be closely correlated with recovery in capital investment, mainly in the developed countries. Therefore, we are continuing our product development and marketing efforts, but difficult operating conditions are expected to continue. On the other hand, compact professional audio products that are used as peripheral equipment for musical instruments are on a recovery trend. Looking ahead, we are going to make strong promotional appeals for products that feature high performance in comparison to their cost.

A5 : Overall, we are seeing a trend toward recovery, but performance has not returned to the level prevailing before the collapse of Lehman Brothers. At the present time, we are not in a position to give a reliable prognosis for how much the market will recover or how quickly. However, our awareness is that a recovery trend is definitely ongoing.

A6 : The level of inventories held in retail stores is not high. Sales in North America in January were at double-digit levels over the same month of the previous year. Our understanding is that sales of products shipped through the end of 2010 are proceeding smoothly.

A7 : We are anticipating an overall trend toward recovery. There have been some delays in shipments, in response to customer requests, but, going forward, we are expecting an increase in sales, mainly for geomagnetic sensors, along with growth in demand for smartphones.

A8 : Factors influencing operating income year on year through the end of the third quarter (from April to December) have been as follows. Foreign currency fluctuations have had an impact of ¥3.3 billion in the musical instruments segment and ¥0.9 billion in the AV/IT segment, for a total negative impact of ¥4.2 billion. Increases in overseas distribution costs have had an impact of ¥1.0 billion in the musical instruments segment and ¥0.2 billion in the AV/IT segment for a total negative impact of ¥1.2 billion.

On the other hand, actual increases in sales and production have had a positive impact of ¥6.1 billion in the musical instruments segment, ¥2.6 billion in the AV/IT segment, ¥1.4 billion in the electronic devices segment, and ¥1.0 billion in the others businesses, for a grand total positive impact of ¥11.1 billion.

A9 : The other regions include not only emerging countries but also some mature markets.
Among these various areas, we are taking account of the outlook for a decline in sales compared with the same period of the previous year in the Taiwan market. We are also considering the outlook for inventory adjustments by our dealers in the Middle East, Africa, the CIS, and Latin America, which had reported strong sales through the third quarter.

A10 : The main reason for this is that we increased piano prices in China in April 2010, and there was a surge in demand in anticipation of this price hike in the fourth quarter of the previous fiscal year. From next year onward, we are still expecting growth of 10% or more annually in sales.

A11 : This is because, among digital musical instruments, in Europe, newly launched portable keyboards made a major contribution in the third quarter, and, in the fourth quarter, after the beginning of the new year, the outlook is for sales to decline. In addition to that, we are taking a more-conservative view.

In the wind instruments business, although there are signs of a comeback in the North American market, we are taking a more-conservative stance toward our outlook for sales in Europe and Japan.

A12 : Since we undertook a major reduction of our inventories at the end of the previous fiscal year (FY2010.3), supplies of popular products were in somewhat short supply at the beginning of this fiscal year.

This time, we reviewed our production plans to ensure an appropriate level of inventories at our sales companies and adopted a policy of holding somewhat more in stock at the end of the period.

A13 : The downward adjustment in sales of electronic devices this fiscal year was mainly due to our customers' requests In the medium term, we are expecting sales to expand, mainly for analog products, including geomagnetic sensors. Regarding profitability, we are assuming that competition will intensify, but we will continue to work to secure an appropriate level of profits. Also, at the present time, we are not scheduling any large capital investments for increasing production capacity or other purposes.

A14 : We launched some new karaoke products in October. This fiscal year we are scheduled to ship about 19,000 units. Also, we have received additional orders, and sales are continuing to hold firm. We are expecting the same level of shipments next fiscal year.

A15 : In the third quarter, operating income amounted to ¥4.3 billion, compared with ¥2.9 billion in the same quarter of the previous year. Factors tending to lower operating income during the quarter were as follows. Foreign currency fluctuations had an impact of ¥1.6 billion; higher materials costs, ¥0.3 billion; increased overseas distribution costs, ¥0.4 billion; and actual increases in SG&A expenses, ¥0.1 billion. On the other hand, factors contributing to operating income were ¥3.4 billion due to increased sales and production, ¥0.2 billion due to gains on retirement service payment obligations, and ¥0.2 billion due to the positive effects of structural reforms at the Kakegawa piano factory.
During the fourth quarter, we are estimating that the operating loss will be ¥2.7 billion, the same as in the same quarter of the previous year. Factors reducing operating income are estimated to be ¥1.0 billion due to the effects of foreign currency fluctuations; ¥0.1 billion owing to higher materials costs; ¥0.2 billion due to increased overseas distribution costs; and ¥0.4 billion owing to lower sales. On the other hand, factors contributing to operating income are estimated to be ¥1.4 billion due to lower SG&A expenses, ¥0.1 billion due to gains on retirement service payment obligations, and ¥0.2 billion due to the positive effects of structural reforms at the Kakegawa piano factory.

A16 : Sales in North America showed double-digit gains compared with the same month of the previous year, indicating that there has been no change in the underlying trend prevailing through the third quarter.

In Europe, there are differences in sales performance by product, but we are expecting increases overall compared with the same quarter of the previous year.

In Japan, sales of pianos are on a recovery trend because of the launching of upright pianos manufactured in Indonesia and other factors, but, overall, sales remain slightly below the level of the previous year.

Our view is that double-digit growth will continue in China.