索尼 (SONY) 2003 Q1 法說會逐字稿

Good morning. My name is Matthew, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Sony Corporation First Quarter Fiscal Year 2002 Conference Call. During the opening remarks, all lines are on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer period. To queue up to ask a question, please press star, one on your telephone keypad. Thank you. The conference will now begin.

Thank you very much, Matthew. From Sony Investor Relations in Tokyo, this is Justin Hill (ph) . I have the pleasure of welcoming you to today's conference call to discuss our financial results for the first quarter ended June 30, 2003. That's fiscal year 2003.

In just a moment, I will turn things over to our speaker, Takao Yuhara. Mr. Yuhara's last name is spelled Y-u-h-a-r-a. Mr. Yuhara is a Senior Vice President and Group CFO of Sony. Mr. Yuhara will discuss our financial results, which were announced at 3:00 PM today, Thursday, Tokyo time. We will then have a question-and-answer session. In total, the call should last a little over an hour. You can access the press release by choosing Investor Relations at the bottom of the page at www.sony.com.

Please be aware that statements made during the following presentation and Q&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 statements. For additional information on risks and uncertainties, as well as factors that could cause actual results to differ, please refer to today's press release.

We have a little bit of an echo here. We'll try to fix this technical difficulty, but we'll proceed with the conference call. And with that, I'll turn things over to Mr. Yuhara. If you'd like to begin with your remarks, Mr. Yuhara?

Okay. Thank you for the introduction. I would like to begin with the overview of our consolidated results. First of all, the sales. Consolidated sales during the quarter decreased 7% year on year to 1 trillion and 603 billion yen.

Operating income decreased 68% year on year to 16.7 billion yen. And restructuring expense on a consolidated basis, including in this figure, during the first quarter, was 6.5 billion yen. Of that 6.5 billion yen, the Electronics segment recorded 4.6 billion yen, and the Music segment recorded 1.3 billion yen.

Income before income taxes decreased 69% year on year to 35.8 billion yen. In the same quarter of the previous year, a gain of 66.5 billion yen was recorded on the sale of Sony's equity in Telemundo.

The net income decreased 98% year on year to 1.1 billion yen. The primary reasons for the decline were the significant decline in income before income taxes and increased losses at Sony Ericsson due to the restructuring initiative.

The effective (ph) tax rate was as high as 71 percent due to the increase of [Inaudible] from taxes at both [Inaudible] Japanese and the U.S. entities.

Cash Flow -- from this quarter, we are disclosing, on a quarterly basis, the financial statement for both our Financial Services segment alone and for all segments other than Financial Services. Primarily due to an increase in inventory in the Electronics segment, cash flow from operating activities was negative, and free cash flow for all the segments other than the Financial Services segment was minus 194.1 billion yen.

I would now like to discuss the operating performance of our various business segments.

So Electronics is first. The sales in the Electronics segment decreased 10% year on year to 1 trillion 99 billion yen. On a geographic and local currency basis, the sales decreased in four regions. On an [Inaudible] basis, sales increased in Europe due to the positive effects of the depreciation of the yen compared with the euro. On a product basis, the sales of digital still cameras, the mobile phones, CCDs, and flat panel televisions increased, but sales of CRT televisions, VAIO and Aiwa products, and personal audio decreased. Although sales in the first quarter decreased, we began to see signs of improvement in the U.S. and Japan in June of this year. But during the month of June, Sony recovered its share of the Japanese market for camcorders and increased its shares of the Japanese flat panel television market, surpassing the 20% mark that I recognized.

Operating income in Electronics decreased 74% year on year to 12.8 billion yen. The primary reasons for the decline were: a 3-percentage-point decline year on year in the cost of sales ratio (a 27 billion yen decline); deterioration occurred primarily in the CRT televisions, digital still cameras and optical pick-ups for CD; a decrease in gross profit due to the decline in sales of 26.1 billion yen.

Now, I would like to touch on four of the categories within Electronics.

In the Video category, unit sales of camcorders and DVD players increased, but pricing pressure caused a decline in the sales of these products. The sales of the category as a whole increased, however, due to our increase in sales of digital still cameras.

Operating income of the category decreased due to pricing pressure and an increase in patent- related expenses, especially in the digital still camera and camcorder businesses.

Television -- In the Television category, LCD televisions and plasma televisions enjoyed strong sales. However, the contraction of the market for CRT televisions has caused sales and operating income of the category to decrease year on year.

Information and Communications Category -- The sales in the Information and Communications category decreased because, although more attractive VAIO products were brought to market, we trimmed our VAIO product lines to ensure profitability, causing unit sales to decrease.

Operating income in the Information and Communications categories decreased overall. While VAIO benefited from the reduction in models, unit sales of Clies decreased in the U.S. market due to pricing pressure.

The Semiconductors -- Driven primarily by the increase in demand for digital still cameras, demand for CCDs was strong and contributing to our increase in sales of the semiconductor category. However, an increase in depreciation expenses resulting from an increase in production capacity at our Kumamoto factory led to the recording of an operating loss for the category.

I would now like to say a few words about why results improved over the fourth quarter of the previous fiscal year.

Twelve (ph) point eight (12.8) billion yen of operating income was recorded in Electronics in the first quarter, as compared to an operating loss of 116 billion yen in the fourth quarter of the year. The significant improvement resulted from the absence of approximately 60 billion yen in one-time factors, an increase in sales and improvement in the cost of sales ratio amounting to approximately 50 (ph) billion yen, and a reduction in expenses amounting to approximately 20 billion yen.

Contributing to this improvement on a product basis were camcorders and digital still cameras, which enjoyed an increase in sales quarter on quarter. The personal audio and components, which benefit from improvement, operational efficiency, and VAIO, which experienced an improvement in profitability due to a trimming of its product line-up and form.

The next business segment within Sony is Game. The sales in the Game segment decreased 18% year on year to 125 billion yen. The sales of both hardware and software declined. Hardware [Inaudible] accounted for approximately 60% of sales. Our PlayStation 2 production shipment units decreased from 4.59 million units in the same quarter of the previous year to 2.65 million units in this quarter, a decline of 42% year on year. We are not concerned with this decrease because, number one, the sell-through is approximately the same this quarter as it was in the same quarter of the previous year; number two, we increased production in the same quarter of the previous year due to an increase in demand for PlayStation 2 after we reduced its selling price in the U.S. market; and, number three, we began increasing production in July for the Christmas selling season. Over the next several months, we plan to produce PS2 units on a scale of approximately three million units per month.

Operating income in the Game segment decreased 32% year on year to 1.8 billion yen. Due to hardware cost reduction and the depreciation of the yen against the euro, gross profit from both hardware and software was increased. However, operating income declined because of pro-active investment, I'd say, in research and development on semiconductors and anticipation of future businesses.

I would now like to talk about the Music segment. The sales in the Music segment decreased 9% year on year to 117.0 billion yen. Sales at Sony Music Entertainment, Inc., the U.S.-based subsidiary, which accounted for 73% of segment sales, decreased 8% on a U.S. dollar basis due to the continued industry contraction. Sales at Sony Music Entertainment Japan, the Japan-based subsidiary, which accounted for 27% of segment sales, increased 11% due to the strong sales from artists like Chemistry.

Operating loss in the Music segment was 6 billion yen, an improvement of 4 billion yen year on year. Although Sony Music Entertainment, Inc. recorded an operating loss due to the market contraction, losses decreased primarily due to the benefit of the aggressive restructuring initiative. Sony Music Entertainment in Japan, which had recorded an operating loss in the same quarter of the previous year, now recorded profit in this quarter.

The Pictures segment -- The sales in the Pictures segment decreased 13% year on year to 151 billion yen. Although Anger Management and other films contributed to the sales, the sales decreased compared with the same quarter of the previous year in which the record-breaking film The Spider-Man was released.

Operating Income -- Operating Loss, sorry. The loss was 2.4 billion yen. The Profit (ph) declined due to the decrease in sales and the increase in the advertisement expenses during this period.

The next segment is Financial Services. The Financial Service revenue increased 16% year on year to 149.6 billion yen. Revenue increased primarily due to a 16% increase in revenue at Sony Life Insurance Company.

Operating income in the Financial Services segment increased 30% year on year to 14 billion yen. The primary reason for the increase in segment operating income was a 21% increase in operating income at Sony Life. And Sony Insurance recorded the operating income for the first time on a quarterly basis.

The last segment is the Other segment. The sales in the Other segment increased 12% year on year to 75.7 billion yen. Operating income in the Other segment was 4 billion yen. This was an improvement of 10 billion yen over the 6 billion yen operating loss recorded in the same quarter of the previous year. At a NACS-related subsidiary in the U.S., a one-time gain of 7.7 billion yen was recorded due to the sale of the rights to a portion of the Sony Card portfolio.

I would now like to touch on the results of Sony Ericsson Mobile Communications. The sales at Sony Ericsson Mobile Communications increased 18% year on year to 1 billion 125 million euro. The T610, designed for the GSM market, and the SO505i, designed for NTT Docomo in the Japanese market, sold very well, contributing to an increase of 1.7 million units year on year to 6.7 million units for the quarter.

The net loss was 88 million euro, a deterioration of 5 million euro compared with the same quarter of the previous year. A restructuring charge of 58 million euro was recorded during the quarter. The equity method impact to Sony of the loss at Sony Ericsson was a negative of 5.8 billion yen to Sony Group.

Now, on to our forecast for the fiscal year ending March 31, 2004.

We are very cautious in our outlook for the second quarter and beyond, and, thus, have not changed our forecast for the fiscal year from the one we announced in April. However, we have increased our forecast for capital expenditures by 40 billion yen to 350 billion yen due to higher spending on the replacement equipment and increase in semiconductor manufacturing capacity.

Now, I would like to say a few words about our plan going forward.

In the Electronics segment, we have a strong line-up of products that we will introduce to the market, mainly from the third quarter.

We are focusing on six product areas and six products.

Number one, PDP and LCD and WEGA [Inaudible] TV. We will expand our product line-up with introduction of new models that are equipped for digital terrestrial transmission in the Japanese market.

Number two, DVD±RW Recorder & CoCoon. We will expand our line-up of these products as well, including through the introduction of models with hard disk drives, in advance of the Christmas selling season.

PSX -- We plan to introduce this product in the Japanese market within this year. This is [Inaudible] that we have announced in the last month.

Number four, VAIO. We plan to improve the profit performance of the VAIO business through the introduction of improved products and a reduction in the number of models.

Number five, the Camcorders. We plan to improve our products' competitiveness through an emphasis on high-value added models.

Number six, the digital still cameras. We plan to provide a wider range of products to meet the performance of the -- broadening the user basis in this fast-growing market. We have reviewed upward of our projected unit sales forecast from 8-million-units' level to where we announced in April, to 10 million units. This represents an almost two-times' increase over the last year.

In conclusion, I would like to say a few words about our operational management system and second phase of restructuring. As we discussed at our Corporate Strategy Meeting this May, we have set up a group control system which includes CFOs positioned at each of our network companies and a system in the Electronics segment whereby sales are reported on a daily basis and inventory is reported on a weekly basis.

Regarding the second phase of restructuring for the year 2006, we plan to record 140 billion yen in restructuring expenses during this fiscal year, 130 billion yen, of which will be in our Electronics segment. It is our intention to begin this restructuring initiative from the third quarter of this year. We will announce going forth (ph) the detail of this plan in October. So thank you very much. That is all for me.

Great. Thank you very much, Mr. Yuhara, for those remarks. I'd like to now move to Q&A. Today we have both Q&A, which is live via the telephone conference, but also we have some questions that were sent to us by email in advance. I'd like to actually try to address one of those questions now if you wouldn't mind, Mr. Yuhara. The question comes from Ruth Nash at the British Steel Pension Fund. The question is looking at the first quarter consolidated balance sheet; inventory levels are higher than they were at the end of March. Is the inventory figure in line with your expectation? Are there any areas in which inventory is particularly high at present.

Well, if you compare this inventory level, the last year, inventory levels were reduced for almost 50 billion Yen. But as you know, the almost 90 billion Yen increased compared to the end of March this year. This was due to the increase of sales volume toward the second quarter. That's the reason why I believe this inventory level is the right level.

All right, thank you very much. Actually, you also mentioned in the speech several questions from Ruth Nash and some other questions from Steve by email about the VAIO business. You did touch on this in your speech to a great degree, but I was wondering if you could add anything regarding the recovery of the VAIO business.

Yes, VAIO is, as you know the, now that this business is growing very big, since we started this stock at VAIO. Now the sales have almost reached $500 billion Yen for the year. However the problem is, they do not bring enough profit. That's the reason why we should concentrate to look at the profitability. That is the priority area.

I think you mentioned, to improve profitability, regarding reducing models.

Reducing models is one way to improve our profitability.

Okay, thank you very much. We'll come back to some email questions later on, but it would be great if we could take the live questions now. Matthew?

At this time I would like to remind everyone in order to ask a question, please press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. You first question is from John Patrick Mussea (ph) with Society General.

Well, I tell you, an assumption in terms of product cycle for the PS2?

Thank you for that question, Mr. Yuhara, this is the question regarding Playstation 2 and when we believe they will peak out, Playstation 2.

We believe that we have great potential in this Playstation 2. And of course there is a lot of potential on top of the Japan, US and Europe regions and we should see that other regions, there is a great potential as well. In particular this year, our plan for the shipment of the Playstation is 20 million, and this early stage, I don't think we change this 20 million forecast at this point in time.

But no change in the current year fiscal forecast between units. Do you have a follow up?

No thank you.

Okay, thank you very much, we'll go to the next question.

Your next question is from Peter Boardman with NWQ. You line is now open, please proceed with your question.

Good morning, thank you. I was wondering if you could go over your forecast for the full year by segment. It appears as though in the first quarter electronics were a lot weaker, as we had originally expected, and Playstation seems to be generally in line. But the other stuff seems to be a little better. If by segment, can you just talk about how your assumptions have changed from March to the current year. And then also, can you talk a little bit about the restructuring, I just want to understand how the restructuring charges are accounted for in the first quarter, and how you'll be accounting for it for the full year? By segment.

Before I talk about the sales and profit forecast for this year and I'd like to talk about general business environment. Two to three months before, and we thought that the US, this is our main market, and if this market is slow, it is the negative sign for the business. However, the economic index, such as consumer spending, housing stuff and DVD, the index show the positive sign compared to two, three months ago. So therefore, I think that those business environment, particularly for the Christmas season is maybe better than what we thought two to three months ago.

However, our sales and also the profits are mainly concentrated on the third quarter. At this point in time, again it is too early to change our annual sales and profit forecast at this stage. And as far as restructuring plans are concerned, and so far, we have not changed from what we have announced last time.

Mr. Vordman you had asked a question also regarding possible differences between our original assumptions but I think you mentioned that it was your impression that our performance in electronic business was below our expectations, any impression that you have Mr. Yuhara?

In this quarter, honestly speaking, the results of the first quarter were a little bit better than I have anticipated. That's fine.

Would that be in electronics?

Yeah, electronics area and game area. hill: And game area as well?

And what about full year, you're not changing by segment, any forecasts, assumptions?

I don't think that we've changed the assumption at this point in time.

Okay, and what exactly was restructuring in this quarter. What charges were made?

Well, just a moment. First quarter was 6.5 billion Yen. That was we put, actually we just spend or provided in this quarter, of which 4.6 billion Yen for electronics segment, and 1.3 billion Yen for music segment. Is that correct?

And what is this, this is like you closed a factory somewhere, or?

Well, for this electronics is mainly for severance expenses. But as you know, we have planned to close semiconductor plant in San Antonio planned in September. There are some provisions in it.

And why are you confidant that the U.S. will recover. Maybe the June number was just an abnormal

As briefly such, in June, we have the positive sign for sales. And particularly we have good sales, in U.S. market during this year. I expect that those will continue and coupled with the positive sign of economic index, as I mentioned, and our product line-up.

Okay, thank you very much.

Thank you very much, I think we'll go with another email question. There's an email question actually, maybe a difficult one to respond to, asking about restructuring charges. Why we don't take all of the restructuring charges in the first year. I believe we have forecasted 130 billion Yen over three years for restructuring.

No, for this restructuring initiative, we just plan to invest, spend 300 billion Yen.

Over three years.

Of which, 140 billion Yen in the first year. So about 45 percent of the total. Yeah and this is just what we've planned at this point in time. So as our initiative will be clear, month-by-month, then this figure will be changed. At this point, and I couldn't say any further more at this point.

Okay, thank you. I will go with a live question now. Sorry if I cut someone off.

Once again if you would like to ask a question, star, then the number one on your telephone keypad. And your next question is from John Taylor with Arcadia Investments Corporation. Mr. Taylor, please press star one on your telephone keypad. Mr. Taylor, please press star one on your telephone keypad now. Mr. Taylor your line is now open.

Hi, can you hear me?

Yes, we can.

Okay great, I have two questions on the games business. The first one is I think you mentioned that you would be ready, you'd have capacity to produce 3 million units of PS2 per month beginning sometime this summer. I'm wondering what the allocation of that capacity is going to be to produce the new progressive scan SKU and when you plan to start delivering that to the U.S. and Europe in particular. So a general question on that, when the shift is going to happen.

And then second is which division is going to market PSX in the Western markets. Is it Sony Computer Entertainment, or is it Consumer Electronics? Thank you.

For this [Inaudible] is concerned. And I couldn't tell you which percentage at this point in time, but we started introduce this year from Japan, and then followed by other regions such as the U.S. and Europe. Number two is, you mentioned, PSX? Well, can I be clear on this, you know the answer, that we are currently concentrating to market this product, as early as possible in this year. Therefore, I cannot say, either by SCE or electronics channels. You'll just see that.

And if I can, let me follow up on the productions and capacity allocation question. Do you anticipate, when do you expect to basically be 100%, allocated 100% of, or mostly, a huge majority of production to the H chassis as opposed to the two other SKUs.

Mr. Yuhara. Are you able to answer that now or would you like to perhaps

I would take this point and I will come up to you.

If we can answer it during the course of this call we will, if not, we'll either get back to you individually or perhaps in some other public forum.

Okay, thank you.

Okay great, we'll go with another live call.

Your next question is from Charles McKicker (ph) with Walter Scott and Partners. Mr. McKicker, please press star one on your keypad now. Mr. McKicker your line is open, please proceed with your question.

My first question is I wanted to know in a bit more detail what is going on with the television business. It looks like there's been a sharp fall in sales and you've moved into loss. What we're seeing then is extremely strong demand in flat screen TVs with LCDs and PDP TVs. Why isn't Sony participating in this very strong growth, either full out or capacitive niche it could exploit.

Second question is back in March, president Idei emphasized his willingness to gain a ten percent operating margin. I want to know if that's simply a figment of his imagination and if not what steps he's taking to regain a ten percent operating margin and could you clarify if that means exiting some businesses.

First, you're talking about the TV business means CRT TVs?

Well, the overall television business.

As you noticed, the CRT TV is replaced very quickly by the Flat Panel Display TV, particularly in Japan and followed by Europe market. Then there's, in this previous circumstances our TV business sales has reduced drastically in this first quarter. Unfortunately this trend will continue. And that we have considered, concerned very much about those profitability of this CRT business. And you know, this is matter of fact. Then, as far as flat panel display TV is concerned, and those are good signs in Japanese market. Due to that effects of the new products of LCD TV, in Japan market, now our market share has experienced 20 percent in June, this is the latest market share.

And we believe from Sony sales is, we believe that we are a strong player in this area as well. Your second question is that this operating target of ten percent is a realistic target or not. You are seeing those, profit level, and we are planning two initiatives. One is initiative of restructuring. And those very important to improve our profitability. But this is not enough. We need a more positive initiative in order to achieve this ten percent profit, that is our strong product line-up. As I mentioned the six products as of February, and we will continuously, the market, the product, to the market all over the world. That is also very important to achieve our 10% profit target.

And how do you feel about the suggestion that perhaps, you should exit some divisions? For example the music division, that's extremely difficult and plagued with piracy. And it looks like it's very hard to make money in that business.

Yes, and as you know, the profitability of music is not enough to the ten percent as you know. However, we just considering to the, try to change business models, not only the CD package sales, but also to expand our business in the music businesses itself such as artist management, or the music publishing areas; those areas in the streamlining in our operation, and that we believe we could achieve towards 10% profit target. And we know that there is a label that is making profits more than 10%.

Can I just go back to the television question. You talk about market share, getting a 20% market share in LCD TV, from that standpoint, we're not interested in market share, we're interested in profitability. I suppose the most important thing is have you gotten the products out there in the segments that they're growing. It looks like CRT TVs is becoming very much a declining format. And the important thing is you are adapting to this transition with good products.

As you know that you there are decline in profit from the CRT TV business cannot be repressed by that flat panel display, at this point in time. However, we, as I mentioned, that toward the Christmas time of this year we are increasing line-up of LCD TV, and that expecting that more sales, and bring better profitability. So please wait and see to the third quarter this year.

Okay, thank you for your help.

Okay, thank you very much for that call, I think we'll go to an email question. Unless perhaps you'd like to respond to the question regarding the H chassis.

For this, the H chassis, and unfortunately I don't have data at this point in time, but however, the, as I mentioned that Japan first, before Christmas season, I will see that H chassis would be introduced in America and in Europe. This is the matter of timing. Is that enough for your answer?

I hope so, the question is actually off line now. But we'll go now to another email question, the one that was given to us by Matsui Williams regarding SonyLife given that - regarding the, correct, SonyLife. Given the stable performance in life insurance, it may be better to keep the business after all.

What do you think about that?

SonyLife was profitable for the first quarter. It should be good to overall consolidated profitability. I guess another way of asking the question then is why is Sony thinking about a some sort of, I believe Idei said, mentioned that equity carve out?

Yes and in May, Idei-san mentioned about possible equity carve out or IPO. But what, as you know, the, you know, those financial in the SonyLife business is sales has to grow and we are doing so. And to do this, we would like to have a possible alliance with third parties and to realize our return value, we should consider about possible IPO. We should consider this way from the Sony group total point of view.

Currently we just, you know, starting possible initiatives, and we would like to tell you about those directions before the end of this financial year.

OK. Thank you very much for that answer. I think we'll go with another e-mail question. This question is regard to the digital still camera business. The question, again, comes from Ruth Nash. The question is the earnings release refers to deteriorating profitability in digital still cameras. Have you lost any market share in this area? What kind of price decline are you expecting for the rest of the year in digital still cameras?

Yes. As you know that those in the digital camera market is expanding very rapidly. You know that compared to last year and, you know, as I mentioned that there is, no doubt, a grouping increase and also the price erosion is already incurred.

Then I assume that, you know, the price itself is 12% lower than the same period of last year. You know, the price erosion is there but it is compensated by the increase in quantity and still we could maintain a double digit profit in this product category.

OK. Thank you very much. I think we'll go with perhaps a final e-mail question. This is regarding - the question comes from Yukie Suzuki from Pictet. It's regarding our different brands here at Sony, the QUALIA, Sony, and Aiwa brands. The question is won't QUALIA, Sony, Aiwa, won't these three brands or products cause confusion to consumers.

Well, you know, the - last month and we announced in QUALIA. And you know the QUALIA is, and I believe that you say that, you saw the product yourself. And this is, you know, how can I say? We try to, you know, the satisfy that the customers, you know, the requirement through this product. And as we know that we have just announced four or five models and currently we supply you in order basis, starting the small digital still cameras and also the TV monitors. And currently so far we have, you know, order receiving.

For other products, we are starting to,you know, started, the order receiving from the owners. And this is certainly just started, and we are segmenting it very carefully, and I do not think that it causes confusion for our customers.

OK. With that I think we've come up on almost about an hour here. And I think we'll bring the conference call to an end. I want to thank all of you for participating. Thank Mr. Yuhara for his time and his remarks.

I'd also like to this opportunity to remind everyone of our investor relations contact information. In Tokyo, IR staff can be reached at 81-35448-2180. In New York, Yas Hasagawa (ph) and Koneco Koyoma (ph) can be reached at 212-833-6722, in London, Chris Hollman (ph) and Shindo Tomika (ph) are available at 44-20-7444-9713.

Again, thank you all very much for joining today that ends the conference call.

Thank you.

This concludes today's Sony Corporation conference call. Thank you for your participation, you may now disconnect.