Q&As on the Presentation of Yamaha Group Medium-Term Management Plan YMP2016 (April 2013 to March 2016)

A1 : Since actual results under the previous medium-term management plan diverged substantially from target in part because of assumptions regarding foreign exchange rates, we have set our assumptions at the conservative levels of US$1=¥85 and €1=¥115.

In the case of U.S. dollars, we have basically been able to make use of exchange marry positions to hedge against foreign exchange fluctuations. However, even under the new medium-term management plan, our transactions in euros basically leave us open to major foreign exchange effects. Also, the outlook is that conditions in Europe will probably continue to be unstable, and these various factors form the background for our views. Our assumptions about exchange rates for the second and third years are the same as for the first year.

Regarding trends in profitability, conditions were tough in the previous fiscal year. We are expecting increases in operating income in the first year of the new plan because of the positive effects of currency movements and structural reforms. Thereafter, we are anticipating stable expansion in income.

A2 : As a manufacturing company, we believe that we have to maintain a stable level of R&D spending. However, we are considering ways to create more-efficient development systems, including increasing the ratios of R&D functions performed at overseas locations and R&D work conducted through alliances with outside partners.

Compared with the previous medium-term management plan, we have increased our capital expenditures under the new plan by ¥10 billion. This is because we think that some of the capital expenditures that we have restrained in the past will emerge. The content of these investment outlays will be primarily investments for rationalizing production and increasing output capacity. We are not planning on building any new manufacturing facilities.

The breakdown of the ¥10 billion in new investments includes ¥6 billion in the musical instruments and audio equipment businesses as well as other investments in renovating domestic music schools and existing offices and safety maintenance investments.

A3 : We are fully aware that securing margins through proper pricing policy is a major issue. We believe this policy should be considered with reference to manufacturing costs, competitive conditions, and other factors. We are also aware that, for example, setting prices in North America, where securing margins is challenging, is an extremely important theme. We are considering the formation of a project team to deal with this theme as well as product strategy and other issues. Also, since the percentage of sales via the Internet is rising, our sales and marketing divisions are now considering the issue of global consistency of our pricing policy.

A4 : I will go through the breakdown of the ¥6.5 billion in positive effects from domestic production reforms. In the semiconductor business, we are looking for ¥3.2 billion (a ¥0.6 billion reduction in personnel costs, ¥0.5 billion due to cutbacks in the production of unprofitable products and further outsourcing, and ¥2.1 billion in the geomagnetic sensor business). In the musical instruments business, expenses will decline ¥2.0 billion in the wind instruments business because of lower costs related to factory integration, reduction of indirect expenses, and improvement in productivity. In the piano business, we are expecting a decline of ¥1.3 billion. Altogether, we are expecting positive effect to total ¥6.5 billion. Please note that the direct impact of the splitting off of production divisions into subsidiaries, scheduled for April 2014, has not been taken into account. However, please also note that we will be adopting a policy of permitting natural staff attrition without hiring replacements. The effects of this policy have been factored into the business plan budgets of each division.

A5 : The impact of foreign currency factors on operating income is estimated to be minus ¥10 billion. Basically, the factors accounting for the shortfall from income targets were currency, shortfalls from sales targets, and deterioration in manufacturing profitability due to cutbacks in production made necessary by the increase in inventories. In particular, the production cutbacks had a major adverse impact on profitability.

A6 : The factors responsible for the increase in income will be growth in sales and reductions in fixed costs due to the positive effects of business structural reforms. Our assumptions about growth in sales by market are based on what we regard to be reasonable levels (over the three years of the plan: 7% expansion in Europe, 2% growth in Japan, 10% expansion in North America, and 32% growth in China). We think we can reach our income targets.

A7 : On the sales side, we are assuming that sales of geomagnetic sensors will increase. Our plans are to expand sales of these devices to ¥7 billion in three years. We based our forecast for operating income on the positive effects expected from business structural reforms, reductions in production costs, and the development of new products with advanced functions.

A8 : I would like you to refer to the budget for the first year of the plan for the details, which we will announce on April 30, 2013. But, in general, it will not differ much from your understanding.

A9 : Thus far, responsibility for inventories has been delegated to the product divisions (development and production divisions). However, now we have shifted this responsibility to the sales and marketing divisions. These divisions communicate closely with subsidiaries in charge of sales and control inventories directly. In addition, in June we will complete and introduce a new system that links the head office with local subsidiaries. Therefore, our grasp of actual inventory levels and other sales-related matters will improve, and we will be better positioned to manage inventories. Next, we are moving ahead with the consideration of local purchasing operations based on shipments instead of production, which has been the basis so far. This will constitute yet another factor for improvement.

A10 : We do not have a specific numerical target for the percentage of overseas production, but we are moving forward with plans to shift wind and other musical instrument production overseas. Therefore, the ratio of overseas production will rise in the years ahead. Last fiscal year, the ratio of overseas production in the musical instrument business was about 52%, but we believe it will increase somewhat more.