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FY07 1H Results and FY07 Outlook

FY07 1H Results and FY07 Outlook. 9th Nov, 2007. Forward Looking Statements.

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FY07 1H Results and FY07 Outlook

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  1. FY07 1H Results and FY07 Outlook 9th Nov, 2007

  2. Forward Looking Statements This presentation contains forward-looking statements regarding the company's future performance.  These forward-looking statements are based on management's views and assumptions, and involve risks, uncertainties and other important factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements. These include, but are not limited to, statements related to revenue and earnings growth, competition and industry conditions, targeted cost savings programs, and acquisitions of business assets.

  3. Agenda • Opening Remarks • FY07 1H Results • FY07 Outlook • Q&A

  4. D&M Strategy • Build winning brands in premium AV arena. • Create products and solutions to delight customers • Provide a world-class business platform to support brand building • Drive operational improvements • Expand in three new market areas. • Branded Automotive AV • Branded Commercial AV • Emerging Markets • Be efficient and effective at completing and integrating acquisitions in our business domain. • Attract, develop, and retain strong employees.

  5. FY07 First Half Highlights • Financial Results : • Net Sales : 50,274M JPY (6% higher than prior guidance) • Operating Profit : 906M JPY (29% higher than prior guidance) • Completed successful acquisition of Calrec on August. 20, 2007 • Accounts Receivables DSO lower by 3 days vs. September. 30, 2006. • Inventory Days Held lower by 6 days vs. September. 30, 2006. • Negotiated improved credit facility. • Dividend of 5 Yen Per Share approved and paid (as expected).

  6. FY07 1H Results

  7. FY07 1H Financial Results (JPY in millions)

  8. D&M : 1st Half Performance vs. Disclosure • Calrec acquisition completed Aug 20 • Results since closure included • Unfavorable performance in Consumer Business due to new product delays • High Definition Multi Media Interface (HDMI version 1.3a) user friendly software implementation took longer than expected • Development now complete and will not impact products shipment from now on. • Commercial Business performed ahead of plan and offset misses in Consumer. • FX was favorable overall, which was utilized to offset Consumer AV shortfall.

  9. 1st Half Performance Breakdown by Segment Sales & Operating Profit (B JPY) (B JPY) 33.5 Sales OP 16.8 1.2 Sales OP -0.3

  10. Results by segment : Consumer AV (JPY in millions) +

  11. Consumer AV Update • New complete line of upgraded AV Receivers launched in 1st half. • Development issues caused us to delay introduction. • Avoided the worst case by rigorous compatibility check. • Standard DVD sales declined with overall market. • Sales were lower than previous year by 1.7B JPY. • Impact of sales shortfall was 0.7B JPY Operating Profit. • Do not expect this issue to impact full year. － Development is now complete and full product launch is underway. • Continuing to invest in development of Advanced Media Players. • Advanced-DVD market is expanding • D&M’s 1st product will launch at the beginning of CY08 • Premium video and sound quality

  12. Results by segment : Commercial AV (JPY in millions) +

  13. Commercial AV Results Sales & Operating Profit (BJPY) Key Drivers in FY07 1H Sales : Increased from 6.5 B Yen to 16.8 B Yen +) Inclusion of PSS (in original disclosure) +) Inclusion of Calrec (not in original disclosure) OP : Improved from 681 M Yen to 1.160 Billion Yen (+ 70%) +) Inclusion of Calrec +) Inclusion of PSS -) Boston Acoustics OEM Sales to Chrysler down vs. prior year reflecting U.S. Automotive market situation -) Replay TV profit slightly below breakeven for the half 16.8 1.2 6.9% 6.5 0.7 10.4%

  14. Geographical Sales Composition FY07 1H FY06 1H

  15. Balance Sheet Highlights • Bank borrowing increased by 9.5 B JPY to fund normal seasonal working capital needs and Calrec Acquisition since March 31, 2007. • Establish a new syndicated loan of 15 B JPY in September • Revolving loan 12B JPY and term loan 3B JPY • Five years terms (from Sep. 2007 to Sep. 2012) • Obtained better terms and conditions from previous facility • AR DSO improved by 3 days vs. September 30, 2006. • Inventory Days held improved by 6 days vs. September 30, 2006.

  16. Working Capital -3Days -6Days* *: Excludes Impact of Calrec acquisition

  17. Status of Recent Acquisitions • PSS • Offering D&M branded sound system to several automotive customers of PSS • Enhancing DHT-FS series (television sound projector) developed by PSS & Denon • Denon released FS3 (NA & EU version of FS1) in July and will release FS5 (w/o subwoofer version) soon • Transferred a D&M experienced person to PSS to develop automotive OEM business in Japan • Studying feasibility of production of PSS products in D&M China factory and overseas freight consolidation • Calrec • Pursuing sales synergies in each region • Building on Calrec relationships to expand total D&M commercial AV business in Japan • Working to provide D&M premium AV products to broadcast customers of Calrec in North America • Leveraging D&M sales force to expand Calrec’s business in continental Europe and Asia • Pursuing synergy opportunities in purchasing and development

  18. Debt / Equity Ratio

  19. Leverage Ratio (Debt / EBITDA) Note : EBITDA =Operating income + Depreciation in last 12 months : Leverage Ratio of Sep.2007 would be 2.8 if we exclude Calrec acquisition

  20. Balance Sheet : Summary

  21. 1st Quarter to 2nd Quarter Performance (M JPY) 2nd quarter operating profit 24% higher than Prior Year

  22. FY07 Outlook

  23. D&M Key Events in FY07 • PSS : Full Year Operation • PSS contributed to better performance of commercial AV sales than forecasted • Successful acquisition of Calrec, and search for additional acquisitions • Launch of D&M Advanced Media Player R&D project (500M JPY) • DENON is planning to release the first advanced DVD player models in January • Over 150 new product launches (all time high for D&M brands) • More than 100 models has already released by end of October • Increase penetration in emerging countries • Dubai office opened officially in August • Start of McIntosh Japan • McIntosh Japan started proactive promotions; ex. Mc Cafe • China & Japan Factory Renovations • Production volume of internal factories increased by more than 20% from last year

  24. FY07 Financial Outlook (JPY in millions) * *: Including 0.5B\ investment in Advanced Media Player R&D Project **: Excluding Calrec Purchase Price Allocation

  25. D&M Total : Forecast of OPImprovement vs. FY06 \2,540 \1,282 (JPY in millions) R&D Investment \500 \140 Adv. Media Investment \6,400 Stock Option Expense \5,782 Operational Improvements + Effect of PSS acquisition FY06 Actual OP FY07 Forecast OP * : Excluding Calrec for FY07 Total

  26. Impact of Calrec Not Included in FY07 Outlook • Still in the process of finalizing our acquisition accounting • Valuation of tangible and intangible assets • One time In-process R&D charge (non-cash) • Analysis will be complete by end of 3rd Quarter. • Will update our Full year guidance at that time • Contribution of Calrec to real operating income (before non-cash IP R&D charges and intangible amortization) will be positive in 2007.

  27. Advanced Media Player R&D Project • Premium Product Concept • Premium video quality for both HD and legacy formats • Premium sound quality • Multi-disc compatibility • Unique functions when combined with D&M AV receiver products • Development Approach • Centralized R&D initiative • Project management under CTO leadership • Development of Common platform available to all brands • Global collaboration and resource sharing process The first player product will be released in this fiscal year

  28. FY07 Outlook : 1H vs. Full Year U.S. Mega Retailer Start-up 20% 14% 13% * : Excluding Calrec for FY07 Total

  29. FY07 Financial Outlook : By Segment (JPY in millions) * : Excluding Calrec for FY07 Total

  30. D&M Investment Highlights • Successful acquisition of Calrec • Double-digit earnings growth projected in FY07 • Maintaining our prior guidance for the year • Expansion in three new market areas continues • Branded automotive AV • Branded commercial AV • Emerging markets • Pursuit of additional acquisitions continues

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