Q&As on the Presentation of Performance Results for the Second Quarter (Ended September 30, 2013) of FY2014.3 (Held on November 1, 2013)

A1 : The beginning of the strikes occurred when the union requested the discharge of the person in charge due to an issue of alleged misarrangement during an event co-sponsored by management and the labor union in early September. The strikes ended at a later date, but a group of employees set up a picket line; therefore, people were unable to enter the factory, and production activity has been suspended.
The company has asked the police, etc. to remove the picket line, but this has not been conducted and production has been stopped for about one-and-a-half months.
A ¥1 billion loss has been estimated as a result, mainly from the factory side, as well as present opportunities lost in sales. We are forecasting a gradual recovery in production from November.

A2 : If production does not restart by the end of this fiscal year, the loss would be doubled.
Along with putting all our effort into the restart of production, we are investigating countermeasures for a production increase and expansion at a factory in China.

A3 : With regard to the decrease of actual SG&A expenses, we believed we could manage to adequately reduce it as we had variable expenses that correspond to sales. From one perspective, we are also restricting the occurrence of expenses by considering the sales situation.
Though there is partly a delay in the occurrence of expenses, we do not believe there is any aspect that will restrict investment and other positive expenses regarding the future. With regard to golf products, measures to focus on expenses when launching new products in the second half could also lead to the reduction in SG&A expenses in the first half of this fiscal year.rkets.

A4 : We believe that sales in the first half of the fiscal year fared well. We foresee adjustment due to the inventory increase at our clients’ in the second half.
As the development cost will drag on into this period and the depreciation of capital investment implemented in the previous fiscal year will also start, we are forecasting a worsening in profitability in the second half of this fiscal year.

A5 : Digital piano business has been growing for several years. One of the basic factors is there has been an improvement in product performance and, consequently, the recognition of digital pianos as substitutes for acoustic pianos has advanced. Another factor is that amid the increase in number of digital pianos in the entire market as well as the decrease in unit prices, hybrid pianos greatly expanded recently, and this trend increased unit selling prices to push up overall digital piano sales.

A6 : Severe situations continued regarding actual sales centered on the Asian region; therefore, we carefully reviewed investment for an increase in production and investment in metal molds in China and elsewhere. There are also, we believe, some issues that resulted due to delays.

A7 : This is a part of the sales structural reforms in Japan that started from the previous fiscal year. In addition to the establishment of a wholesale company this spring, we implemented the integration of sales subsidiaries aiming to further enhance their competitiveness and stabilize the management of an integrated subsidiary.

The basic idea is to reorganize our sales network bases in Japan by deeply looking into the potential of each market and plan to implement the consolidation and elimination, where necessary of bases out of our current 43 stores and 600 music school locations to realize proper replacement in three years.

As an expense for the first year, the Company recorded a special loss of ¥750 million in the performance outlook in the second half of the year, which covers the adjustment of human resources and the consolidation/elimination of facilities. We expect the positive effect in operating income of ¥640 million after three years, when each measure will have ended.

A8 : As the policies of our wholesale companies also contributed in the first half of the fiscal year, the operating ratio from the music school business has risen to around 2%, thus showing an improvement trend.

The Company plans further improvement in profitability through its current structural reforms of retail sales company.

A9 : They were not implemented directly at the instruction of management. However, we believe that, through the organizational reform implemented in August, and as a result of reorganizing development divisions under our large corporate umbrella, the synergetic effects of these realignments and the reduction of redundant units led to the overall cost reduction.

A10 : The level of ¥23 billion in total R&D expenses is not low at all, but we do not think it is too high. We see the necessity for increasing sales higher than that.

Regarding ¥10 billion in R&D expenses for audio equipment, we are in a hurry to develop such new products as digital mixers, whose competitive environment is becoming increasingly harsh. We will maintain this level for the foreseeable future and will lower it later.

A11 : Development expenses for audio equipment for the full fiscal year will be ¥10.3 billion and ¥4.9 billion for the first half of the year.

Planned expenses for the third quarter are ¥2.8 billion, and that for the fourth quarter are ¥2.7 billion. The main reason is that the second half of the year has incurred bigger development expenses.

A12 : There were large influences on inventory due to an increase/decrease in digital musical instrument production last year. As of the end of the first half of the fiscal year, the inventories of digital pianos and portable keyboards are at proper levels, and no decrease in production is forecast for the second half of the year. We believe it is under control.

A13 : Production until the end of the year has been determined already. If sales decrease, it would lead to an inventory increase. However, compared to the previous year we believe that we are not in a position where we need to be seriously concerned about inventories.