索尼 (SONY) 2002 Q2 法說會逐字稿

Good morning. My name is Lisa, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Sony Corporation's second quarter fiscal year 2002 conference call. During the opening remarks, all lines are placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you want to ask a question, please press star then number 1 on your telephone keypad. Thank you. The conference will now begin.

Thank you very much, Lisa. From Sony Investor Relations in Tokyo, this is Justin Hill. I have the pleasure of welcoming you to today's conference call to discuss our financial results for the second quarter ended September 30th, 2002. In just a moment, I will turn things over to our speaker, Teruhisa Tokunaka, our Executive Deputy President and Chief Financial Officer. Mr. Tokunaka will discuss our second quarter results announced at 3:00 p.m. today, Monday, Tokyo time. We will then have a question and answer session. In total, the call should last about an hour.

You can access the press release by choosing Sony investor relations through the corporate info menu at www.sony.com. Please be aware that statements made during the following presentation and Q and A session with respect to Sony's current plans, estimates, strategies and beliefs and other statements that are not historical facts are forward-looking statements about the future performance of Sony. These statements are based on management's assumptions and beliefs in light of the information currently available to it and, therefore, you should not place undue reliance on them. Sony cautions you that a number of important factors could cause actual results to differ materially from those discussed in the forward-looking statement. For additional information as to such risks and uncertainties, as well as factors that could cause actual results to differ, please refer to today's press release. With that, I would like to turn things over to Mr. Tokunaka.

Thank you. Hello, everyone. I'd like to begin by touching on consolidated results. Led to an increase in consolidated sales in all segments other than electronics, increase year on year of 0.5% to 1 trillion 789.7 billion, yen. This is the highest second quarter sales in our history. -Due to significant improvement in the electronics and game segment, operating income of 50.5 billion yen was recorded compared with an operating loss in the same quarter of the previous year. Compared with a net loss in the second quarter of last year, we reported a positive net income of 44.1 billion yen. Deferred tax assets that had been deemed unrecoverable at Aiwa became recoverable as a result of Sony's -decision to merge with Aiwa. The net positive impact to net income of incorporating these assets was 36.1 billion. Partially due to 5.4 billion yen loss we recorded for our interest in Sony Ericsson mobile communications, 11.3 billion yen was recorded in losses for affiliates accounted for by the equity method, a deterioration of 6.7 billion yen the compared with the same period of last year.

During the first half, in our non-financial businesses the cash growth it is the difference between the cash provided by operating activities and cash used in investing activities significantly improved compared with the same period of last year. This was due to the increase in operating income for electronics and game segments , a decrease in investments in electronics segment, and the reduction in funds necessary for operation.

I would now like to make some remarks about our electronics segment. Sales decreased in electronics 4% year on year. Sales in Japan, Europe and United States declined as a result of a difficult market condition. But sales in other areas, particularly Asian countries other than Japan, increased. On a product basis, a decrease in sales of mobile phones, CRT based, non-Sony branded computer displays, and home telephone from which we withdrew. On the other hand, digital still cameras increased significantly in all areas.

Other products that exhibited an increase in sales were VAIO desktops, PDP televisions and CLIE's, not to mention semiconductors and components Operating income in electronics increased 49.6 million yen to 26.3 billion yen. The primary reasons for the increase were, first, a two-point -- or 23.9 billion yen improvement in the cost of goods sold ratio brought on by, first, a strengthening of our profitability structure as a result of an improvement in our business portfolio due to downsizing and withdrawal from certain businesses. Second, an improvement in our product lineup, and 3rd, greater material cost reductions. Two, a 0.5 or 16 billion yen drop in the ratio of SG&A to sales due to a reduction in operating Expenses. Three, a decrease in loss on sales of fixed assets. Fourth, the possible impact of the depreciation of the yen. On a category basis, operating income increased significantly in components and semiconductors and increased in the audio and video categories. Losses in the information and communications category decreased, particularly due to the transfer to Sony Ericsson of the mobile phone business.

I now have some comments about each category within electronics. Due to the restructuring effort that led to downsizing and withdrawal from businesses, operating income in the component categories increased 37.3 billion yen. Our optical pickup, battery, and recording media businesses contributed to the profit. Information and communications saw an 18.2 billion yen improvement in profits due to the transfer to the joint venture of the mobile phone business that recorded losses in the same quart quarter of the previous year. Our consumer [AV] business which includes the audio, video and television categories had an 8.5 billion yen increase in operating income. Major contributors were audio , which benefited from restructuring initiatives, and video, which benefited from an increasing in unit sales of digital still cameras. The semiconductor category had an increase in operating performance of 5.5 billion yen. Demand for the devices used in the AV products such as CCDs used in digital cameras Increased.

Inventory at the end of the second quarter was 595.6 billion yen, a reduction of over 170 billion yen year on year. This represents a days to sales ratio of 43, which is an improvement of 15 days compared with the same level of last year. We are continuing to enhance our supply chain management through EMCS and are able to keep our inventory at a proper level.

The next segment I would like to mention is game. Sales in the game segment were 250.4 billion yen, an increase of 3% year on year. While unit sales of PS2 hardware and software in Japan decreased, unit sales of PS2 hardware and software in Europe and the United States increased significantly. Segment sales continued to increase compared with the same quarter of last year due to the increase in unit sales and despite the fact that unit price of PS2 decreased year on year as a result of a strategic reduction in the price. Sales of PS1 continue to be strong, especially in Europe and the United States. operating income increased 20.7 billion yen year on year to 24.8 billion yen. An expansion in software sales in Europe and the United States and further cost reductions in PS2 hardware contributed to the increase. Inventory in the game segment at the end of the second quarter was 167.2 billion yen. A decrease year on year of 24.5 billion yen an increase of 17.5 billion yen compared with the end of June of this year. We are increasing our inventory, especially in the United States and Europe in advance of the year-end selling season, and the level is an appropriate one. A number of attractive software titles are going on sale, and we believe that positive business cycle in the game business will continue as the number of unit sales of hardware increase.

Next, the music segment. Sales in the music segment increased 7% year on year. Sony music entertainment international, which is a U.S.-based operation, which accounts for 71% of the segment sales saw a 15% increase in sales on a U.S. dollar basis. The primary reasons for this were, first, an increase in manufacturing sales of DVD software sold to the pictures and games segment, and second, an increase in the sales dollar volume of album sales resulted in an increase in market share despite the continued contraction of global music industry which has been suffering from digital piracy and other factors. On the other hand, sales at Sony music entertainment Japan, which accounts for 29% of the segment sales decreased 5%. Album sales were down slightly, and non-music business sales fell. Operating loss for the segment went from 5.3 billion yen in the same quarter of the previous year to 5.6 billion yen. Losses at Sony music entertainment international increased primarily due to, first, increase costs incurred for ongoing restructuring activities, including the closure and consolidation of certain distribution facilities and head count reductions. And second, higher talent-related costs.

On the other hand, the operating loss of Sony music entertainment-Japan recorded last second quarter turned to operating income in this year's second quarter. Although sales decreased, profitabilty improved due to the contribution of best-selling albums by new artists and reduced operating expenses. In the pictures segment, there sales increased 27%. The strong theatrical performance of Spider-Man, Men in Black 2, Mr. Deeds, and XXX contributed to the increase in sales. As did an increase in television syndication sales, primarily from sales to cable of television programs such as "VIP" and "Seinfeld." Operating income of the pictures segment was 9.9 billion yen. A decrease of 12.2 billion yen year on year.

The primary reason for the decline in income was an increase in advertising and promotion expenses during the quarter in support of the greater number of major summer releases.

Now on the financial service segment, financial services revenue increased 18% year on year. This was primarily due to an increase in insurance revenues at Sony Life Insurance and Sony Assurance. Operating income of the segment increased significantly by 6.2 billion yen. Operating income at Sony Life increased due to the increase in insurance revenue and an improvement in the performance of assets under management. Losses at Sony Assurance decreased due to the increase in insurance revenue. Sales in the other segments were up 22%. Increased sales of our advertising agencies for Sony group companies in Japan and at Sony communications network led to the increase. Losses incurred as more investments were made in future business -- made in future businesses, primarily under the umbrella of the network application and content service sector.

Finally, let me touch on our forecast. We have changed of forecast for the fiscal year ending March 31, 2003. First, we have a changed our exchange rate assumptions from 115 yen to the dollar to around 120 yen to the dollar. We have kept our yen to euro assumption at approximately 115 yen. Consolidated sales have also been revised from 7.7 trillion yen to 7.6 trillion yen. We made this revision because although the change in assumed exchange rate is expected to have a positive effect on sales, uncertainty regarding economic recovery in the second half of the year has led us to project a decrease in sales, primarily in our electronics segment. Despite a decrease in sales, we have made no change to our July forecast for operating income or income before income taxes because we believe that material cost reductions and greater operating efficiency, along with the positive effects of the change in the exchange rate assumption will offset the downward effect of the decrease in sales.

Regarding net income, we have revised our projection upwards by 30 billion yen to 180 billion yen. This change was made primarily because of the tax benefit gained from the merger with Aiwa. There is no change in our forecast for capital expenditures for depreciation and amortization.

I would now like to say a few words about our forecast on the segment basis. First, regarding electronics. Because we have a very cautious view of the market due to our uncertainty concerning the direction of the economy in the second half, we have incorporated even more risk in our predictions, revising our sales figures down from the level we announced in July. We have not changed our operating income forecast announced in July. The deterioration in profit performance brought on by the decrease in sales and increased restructuring expenses will be offset by improvements in operations such as material cost reductions and the benefits of the change in foreign exchange rate assumption. In regard to the game segment, we have revised upward our production shipment forecast for the year from 20 million units to 22.5 million units for PS2 and from 3 million to 5 million units for PS1. The revision came about as a result of a strong sales of both hardware and software in Europe and the United States. Due to the revision in production shipment forecast for the year and the positive effects of the change in exchange rate, sales should change from our July projection of slight decrease to flat year on year. Operating income is also benefited from the positive factors I've just mentioned, but not enough to warrant an upward revision at this time. There is no change in our forecast for the music, Pictures, financial services, and other segments.

In closing, I'd like to say that despite the increasingly severe operating environment, we are placing greater emphasis on recovering of profitability and improving our cash flow. Thank you very much.

Great. Thank you very much, Mr. Tokunaka. Before moving on to questions and answers, I need to make one change to what was just mentioned. I think in the speech, he mentioned about Sony music entertainment international, that's actually the results of Sony music incorporated. That's my mistake in translating the speech. Sony music entertainment incorporated is the company which is in the United States and actually consolidates results our entire music business outside of Japan.

So please make that change, those of you who are experts will know that the international portion of that business is outside of the United States. Again, Sony music incorporated.

With that, I'd like to move to questions. Lisa?

At this time, I would like to remind everyone in order to ask a question, please press star, then the number 1 on your telephone keypad. We will pause for just a moment to compile the Q and A roster. Your first question comes from Jordan Wand of Maverick Capital.

Congratulations on a fantastic quarter. My question pertains to some of the profitability in game and electronics division. You've highlighted some of the reasons for the improved profitability, but can you point to what extent that profitability or any of that is related to the decision to outsource some of the manufacturing?

In the electronics business, we are trying to reduce our fixed cost and changing to the variable cost. With that, we are -sure that we can adjust for the increase or decrease in the production requirement. At of this moment, we are outsourcing about 15% our electronics production requirement to outside. We used to have about 30% outsourcing percentage, and that was reduced to the current level of 15% during the past few years. We believe that this ratio is a little bit too low, and we would certainly like to bring it back to the 30% level in the future. The flexibility in the production is very important to keep our profitability stabilized. With respect to the PlayStation 2, we are outsourcing about one-half of the requirement for the PlayStation 2 to companies within China, and with respect to PS 1, we are outsourcing -100% all of our requirements for PlayStation 1 assembling in China. They are certainly contributing to the profitability of PlayStation business.

Thank you very much, and congratulations again on the great quarter.

Thank you very much.

Your next question comes from Scott Butler from Intrepid Capital.

Hello. I was wondering if you could talk about what has changed within some of the segments of the electronics business for your full-year outlook kind of in the second half? If you can talk about what you see doing well or a little bit worse?

Yes. In the second half of our electronics business, we expect that sales will decrease by approximately 5% year on year. In terms of the category wise, we believe that the computer display, home video, audio product and camcorder will decrease. On the other hand, we are expecting that projectors and larger display and the digital camera and our CLIE business will increase. In terms of the geographic breakdown, we are forecasting that North America will be very severe, and we are estimating a 10% decline in the North America market. In Europe and Japan, we are expecting lower single-digit decrease in sales, and other areas, we are expecting an increase in sales. That is our basic forecast for the second half.

Thank you.

Your next question comes from Taizo Ishida from Wellington Management.

Hello, Mr. Tokunaka. I guess my question was also U.S. demand in second half. In view of the post strike in West Coast the last few months, and what's actually impact and this is going to be a pretty big one or maybe a small one, and then going forward, that it's sort of in line with your

expectation of the inventories going to Christmas sales or not?

Yes. We are affected by this strike. There are a lot of containers still in the U.S. coast, and we we have difficulty in delivering products from sources to the United States. And we have to expect that this kind of difficulty cannot be solved in the very near future. Accordingly, we are expecting that our sales will be affected in the United States in the third quarter, and although it's very difficult to anticipate the actual numbers, we are assuming that the few per percent of sales may be affected because of this strike. We are hoping certainly that the situation will be improving as soon as possible. But that is what we have projected into our second half forecast.

Okay. Thank you.

Thank you.

Your next question comes from Satish Betadpur of College Retirement Equity.

Good morning. Could you comment on the outlook for first party software for PS 2, and also just comment on competitive environment vis-a-vis X box?

Thank you.

Yes. Originally, Sony entertainment software rrepresented about 17 or 18%, but in the second quarter, my understanding is that that number is very close to 20%, and we are expecting that the same level of the share by software published by -SCE companies during this fiscal year will be approximately the same number. We are beginning to see the number or titles -being developed, not only in Japan but in the United States and also in Europe becoming well accepted in the market. Did I answer you?

Yes. Any comments on X box and, you know, is that competitive, competitively -- you know, I know you guys raised your estimates, but, you know, do you expect to drop prices?

Like I say, of course we are not discussing about pricing strategy for the future, but I think suffice to say that in all major markets, including United States, Japan and also in Europe, I think both PlayStation2 and PS1 has a very significant market share.

Thank you, and congratulations on a good quarter given the circumstances.

Thank you very much.

Your next question comes from Shawn Milne from Soundview Technology. Please press star then the number 1 on your telephone keypad.

Wondering if you could comment on your software expectations. I believe the forecast for units is unchanged, but you've raised your hardware expectations. Has there been a mix shift between PS2 and PS1 or has there been any geographical mix shift? Thank you.

We are not increasing our software numbers at this time, but in terms of the number of software, we are forecasting for this year, it's 10% more than the previous year, and we are expecting about 250 million units of software for this year. The one thing I should add is that although we increase the number of hardware but that number is basically the number of production level rather than the number of sales, so there is no direct relationship between the number of production of hardware and the actual sales. As I said, there will be a positive impact because of this increase, but we are expecting that there is not significantly affecting our sales for this year because we have, they have, estimated production numbers rather conservatively.

Okay. Thank you.

Thank you.

Your next question comes from Stewart Halpern of RBC Capital Market. Please press star then the number 1 on your telephone keypad. Your line is now open please proceed with your question.

Thank you. Based on the trend of sales of the PlayStation from its launch, if PlayStation2 continues to follow a similar trend, we would expect PlayStation 2 game software to be up 20% or more next year in your fiscal 04. Do you expect that PlayStation 2 should, in fact, follow this trend that was set in the first PlayStation? Thank you.

Yes. I think initially, the hardware-to-software ratio was a little bit different between the original PlayStation business and the PlayStation 2 business. But recently, those ratio are getting closer to the PlayStation 1 experience. Therefore, I certainly believe that the next year, the software for the PlayStation will increase as the hardware for the PlayStation 2 cumulative numbers will be increasing.

But we have not yet come up with our estimation for the next year's -- next fiscal year's numbers, but in terms of the general trend, I agree with you, but I'm not so sure about the specific numbers that you mentioned. The ratios are getting closer to the PlayStation 1, I think.

Okay. Thank you very much.

Thank you very much.

Your next question comes from Barbara Heap from British Airways Pension. Please press star then the number 1 on your telephone key keypad. The line is now open. Please proceed with your question.

Hello. The question is regards to the electronics division. In the first quarter, you had operating margins of approximately 4%. That declined to just over 2% in the second quarter. Can you strip out how much of that came from the strengthening of the yen versus pricing environment?

Yes. One moment, please. Yes. Thank you for waiting. Between the first quarter and second quarter, the exchange rate between U.S. dollar and yen changed. In the first quarter, the rate was 126 yen for 1 dollar. In the second quarter, it was changed to 118 yen for the dollar. That is an 8 yen upward appreciation for Japanese Yen. There is about 1.5 billion yen -- for each yen difference. Therefore, if you multiply 8 by 15, we are talking about 12 billion yen negative impact on profitability, which is approximately 1% of sales. In addition to that, we are assuming that our profitability was adversely affected by the price reduction and more difficult market conditions for the components.

Thank you.

Did I answer you?

Yes. Thank you.

Thank you.

Your next question comes from Conner O'Mara from EVT Research. Your line is now open. Please proceed with your question.

Thanks. I was wondering whether you could give us some more details on the kind of growth you're getting in your movie business, specifically on DVD, and your back catalog, and then from current releases.

One moment, please. Thank you for waiting. The number of DVD for the Sony pictures entertainment was approximately 100 million last year. That means fiscal year 2001. And this year, this fiscal, we are expecting that will become in excess of 250 million units. That is more than 2.5 times of the previous year. I'm not sure the ratio between the old catalog and new movies, but certainly we're expecting a significant DVD sales in "Spider-Man", Men in Black 2, and XXX, and those movies which are -were successful in theaters during the first half.

Right. Okay. Thanks very much.

Thank you.

Great. I think we're out of questions, and we'll thank everyone for their time this morning. I know it's an early morning for you out there. I want to thank Mr. Tokunaka for his time, and I'd like to take this opportunity to remind everyone of our investor relations contact information. In Tokyo, our -IR staff is standing by at 03-5448-2180. In New York, Yas Hasegawa , Chris Hohman and now Kumiko Koyama can be reached at (212)833-6820, and (212)833-5011. In London, Hanako Muto is available at, 442074268760, or 74268606. Again, thank you all for joining us today. This completes the call.

This concludes your conference. You may now disconnect.