索尼 (SONY) 2004 Q2 法說會逐字稿

Good morning. My name is Crystal and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Sony Corporation Second Quarter fiscal year 2004 Conference Call.

[OPERATOR INSTRUCTIONS].

Thank you, the conference will now begin.

Thank you very much for that introduction, Crystal. Thank you all for joining us today, October 28 2004 for the discussion of Sony's financial results for the second quarter ended September 30th, 2004. I am Jonathan Bates with Sony Investor relations in Tokyo.

We are joined this evening in Tokyo, by Takao Yuhara, Senior VP, Officer in Charge of Finance and Investor relations. Mr. Yuhara, would you please say a word of welcome to our guests.

Hello everyone, this is Yuhara and I am very happy to join this conference call with you today.

Thank you very much, Mr. Yuhara.

We are also joined in New York by Robert Wiesenthal, CFO of Sony Corporation of America. Mr. Wiesenthal, could you say a couple of words of greeting?

Good morning, and we look forward to this morning's call with all of you.

Thank you very much for joining us, Mr. Yuhara and Mr. Wiesenthal. In just a few moments I will invite Mr. Wiesenthal to say a few words about MGM. Before that, I'm going to give an overview of our second quarter results. Then Mr. Yuhara and Mr. Wiesenthal will be available to answer your questions. During the Q&A session, I'll be taking time out for some additional questions that we have received by email.

Please be aware that the statements made during the following remarks and the 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 in light of the information currently available to it and therefore we 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. Additional information as to risks and uncertainties, as well as other factors that could cause actual results to differ, please refer to today's press release, which can be accessed by choosing Investor Relations at the bottom of the page on www.sony.com.

With that I'm going to turn to our results. Firstly, I would like to talk about our consolidated financial results. We achieved an increase in operating income, mainly due to a significant improvement in profitability in the Pictures business.

There was also a significant increase in net income due to the contribution of equity in net income, primarily from Sony Ericsson. Sales revenue decreased 5% year on year, a 2% decrease on a local currency base. Sales to outside customers in the Electronics segment increased 1% year on year, a 4% increase on a local currency basis.

Year on year, operating income increased 31%. However, the 7% appreciation of the yen against the dollar year on year, had a 10.5 billion yen negative impact on operating income. Operating income on a local currency basis increased 62%.

Restructuring expenses for the quarter totaled 18.8 billion yen, a 9.1 billion yen increase year on year. In the Pictures segment, the strong theatrical performance of Spider-Man 2 made a strong contribution to operating income. Equity in net income of affiliated companies doubled year on year. Sony Ericsson contributed 6.0 billion to equity in net income, a 50% increase.

Equity in net income of affiliated companies for the current quarter reflects the two months of operating results for Sony BMG since its establishment. As a result of restructuring charges, an equity in net loss of 1.4 billion yen was recorded. Net income increased 62% year on year to 53.2 billion yen.

Looking forward. In anticipation of the year-end sales season, Sony is working to improve our operating results by actively introducing competitive new products such as flat panel televisions that make use of Sony's unique technology and are highly differentiated from those of our competitors within such key categories as digital AV. In addition, as you may already know, the PlayStation Portable was announced yesterday.

We are making use of alliances with other companies, such as Sony Ericsson, S-LCD, Sony BMG and MGM, where we have entered into a definitive agreement for its acquisition. Before we have a look at each business segment, please note that the Electronics and Music segments have been restated taking into account the establishment of Sony BMG.

Sales decreased 2.5% year on year, a 1% increase on a local currency basis. With respect to products within the Electronics segment, sales of Flat panel televisions, LCD Rear-projection televisions and digital still cameras increased significantly.

Operating income decreased by 83%, 59% on a local currency basis. Some of the main reasons for this change to operating income was a profit increase from sales of 11.4 billion yen, a 14.6 billion yen reduction in fixed costs resulting from restructuring activities, a 16.0 billion yen reduction in -- sorry, I made a mistake -- 16.0 billion increase in depreciation and amortization costs, a 10.4 billion yen decrease due to the appreciation of the yen, a 20.4 billion deterioration in variable costs and an increase in restructuring costs of 9.3 billion yen.

Inventory was 688.5 billion yen, an 81.6 billion yen increase since June. However, there was a 10-day reduction in days supply calculated on a costs of goods basis for the following two months compared to June 30, 2004. This illustrates that the adjustment of inventory of certain products, that had increased at the end of June, is proceeding smoothly, as well as that it was decided to account for semiconductor manufacturing operations inventory, which was previously recorded in the Game segment, within the Electronics segment as of July.

We are also increasing our inventory of strategic products for the end of year sales season, and we believe that levels of inventory as of the end of September are at an appropriate level.

In the Game segment, sales decreased 26% year on year, 25% on a local currency base. Although sales of software increased, sales of hardware decreased. Unit sales of hardware declined in the US, Europe and Japan.

In preparation for the launch of the new PS2 model, a strategic curtailment of production shipments of the current PS2 model, combined with a reduction in inventory of components, caused production shipments and inventory for the PS2 to significantly decrease year on year. The Game segment experienced a very small operating loss as, despite an increase in software sales, sales of hardware decreased.

Moving now to Entertainment. In our Music segment sales declined due to the establishment of Sony BMG as of August 1st. As detailed in our press release effective August 1st, Sony began accounting for Sony BMG under the equity method. As a result, the results of the JV are not consolidated within Sony's consolidated results.

At SMEJ an increase in album and singles sales led to an 8% year on year increase in sales. Overall, an operating profit of 2.2 billion was recorded in the music segment. SMEJ's operating income increased year on year, due to the higher sales previously mentioned, reduced SGA expenses resulting from lower advertising and promotion expenses and personnel costs.

Sony BMG generated $733 million of sales in the two months since its establishment in August. As a result of restructuring charges, Sony BMG recorded a loss of $26 million.

Sales in the Pictures segment increased by 2%, 9% on a U.S. dollar basis, primarily due to higher theatrical, home entertainment and pay television revenues from motion picture products. The excellent box office performance of Spider-man 2, was a major contributor to the increase in theatrical revenues.

A 27.4 billion yen operating profit was recorded. The strong performance of Spider-Man 2, a year on year decrease in marketing costs and the recording of losses on certain films in the same quarter last year resulted in a 32.0 billion yen improvement in operating income year on year.

Revenue decreased by 18% year on year, due to a decrease in revenues at Sony Life. Sony Life's revenue was 105.9 billion yen, a 27.9 billion yen or 21% decrease year on year. This was a result of a decrease in revenue from insurance premium due to a change in revenue recognition method at Sony Life. A deterioration in valuation gains and losses from investments also contributed to the decrease in revenues.

Operating income in the Financial Services segment, increased by 32% year on year, as a result of an increase in operating income at Sony Life, and due to losses recorded in the same quarter of the previous fiscal year, by Sony Finance International in association with reorganization proceedings commenced by Crosswave Communications.

Total sales were €1,678 million, a 29% increase year on year. Overall unit sales increased 51% year on year, to 10.7 million units. New mid and high-end GSM format products, and models for the high priced Japanese market, contributed to an 8% rise in average selling price.

Income before income taxes increased to €136 million, a 97 million improvement year on year. Net income of €90 million was recorded, a €280 million improvement year on year. I will finish with our revised forecast for the fiscal year ending March 31, 2005.

The 200 billion yen downward revision of sales reflects the fact that, due to the establishment of Sony BMG, SMEI's recorded music business is no longer recorded in consolidated sales and operating revenue.

Restructuring expenses have been revised from 130 billion yen to 110 billion yen. Operating income remains unchanged, as although restructuring expenses are expected to decrease, the forecast takes into account the establishment of Sony BMG and the potentially difficult business environment for electronics in the second half of the fiscal year.

Income before income taxes has been upwardly revised by 10 billion yen. This reflects a gain from the change in equity interest from the business integration of Monex and Nikko Beans, and other gains resulting from the IPO of So-net M3, a subsidiary of So-net Communications Network. So, that concludes the review of Sony's consolidated operating results. Now I'm going to go over to Rob Wiesenthal in New York, for his comments regarding MGM.

Good morning, and thank you. We thought it would be helpful to spend a few minutes talking about the MGM transaction, as we received a lot of comments and questions regarding the transaction of the strategy and the impact on Sony Corporation.

As many of you know Sony Corporation has considered strategic opportunities with MGM in the past. Sony MGM represents one of the last great content assets with scale that was not owned by the large capitalization media companies. However, when we reviewed this opportunity in the past, typical M&A structures would have resulted in earning dilutions, significant debt consolidation, and in the case of stock for stock transaction, it would have raised a whole host of governance issues.

Last spring, we devised the structure that met many of our objectives, while minimizing many of the issues that we have with the standard M&A transaction. Some of our objectives include a low initial capital investment to Sony being required. We wanted a transaction that would have minimal dilution to Sony Corp's earnings. We desired the ability to leverage our preexisting global distribution infrastructure at Sony Pictures Entertainment.

We wanted access to some of the great franchises of MGM such as James Bond, Pink Panther, and others with the purpose of making sequels and re-makes. We wanted to preserve the opportunity to generate cash flow of an annuity type nature from distribution of those films at MGM. And additionally, we saw the ability to utilize these combined libraries across existing and emerging physical and digital platforms.

And finally, as part of any type of highly structured transaction, we wanted the opportunity to acquire MGM, if desired by Sony upon an exit of our partners, but not the obligation. We achieved many of these goals with our structure. And I think that we truly enable the financial consortium, which we were the operating partner of, to become truly strategic buyer by virtue of the value that Sony and Sony Pictures provide their partners.

This value results from a distribution and production alliance that MGM, upon closing will enter into with Sony Pictures Entertainment. This is one of the reasons why our group was competitive in the MGM process, and it is why the transaction met the investment – met the return on investment thresholds of our partners, who are among the most successful and distinguished in the private equity community.

And I would like to take the opportunity to provide you with some transaction highlights. MGM is the second largest film library in the world or, it has the second largest film library in the world. Almost 90% of those titles were created since 1949. So it's a very modern library. And about that half were created after 1976. In the library there are over 200 Academy Award winning films, including their 14 Best Picture Oscars.

Overall, the transaction is valued at approximately 4.85 billion. And we expect the transaction be funded with a 1.6 billion of equity and about 3.5 billion of bank debt. So of the total purchase price, Sony will be contributing a little bit more than 6% of the total purchase price.

We are pleased that we received commitments for 4.25 billion in bank financing, for the bank group led by JP Morgan. But we currently expect to draw down an amount, as I said, closer to 3.5 billion. The debt financing is comprised of 100% bank debt. We are pleased that we did not require a closing to access the high yield market but obviously that remains an option to MGM in the future.

Let me take a moment to point out at a few important items regarding the impact to Sony Corporation. While this transaction will contribute to Sony Pictures Entertainment operating income immediately, it will also be accretive to Sony's net income within its first full year of operations.

We are not consolidating MGM. We will be reporting our investment under the equity method of accounting. And it is important to point out that the debt on MGM's books, is completely non-recourse to Sony Corp. and its affiliates. As I mentioned before, Sony has no obligation to purchase MGM from its partners in the future. However, we do have a mechanism where we will be in a strong position to purchase the company in the future if Sony so desires.

Overall, we expect this transaction to close in the middle of calendar 2005. It is subject to MGM shareholder approval and both the U.S. and European regulatory approvals.

Thank you very much for the comments, Mr. Wiesenthal. With that I would like to hand over to Mr. Yuhara and Mr. Wiesenthal who would be happy to take any questions you may have.

And our first question comes – is a live question from Connor O'Mara from Arete . Please go ahead.

Hello, can you hear me?

Yes, we can hear you.

OK. Great. This is a question for Mr. Wiesenthal. I've been reading in the specialist press, regarding MGM that part of the strategic rationale could also be considered as Sony's push into Blu-ray basically. And that combining your current library with the library for MGM would basically allow you two ensure Blu-ray as a success. And in that perspective, any kind of acquisition of MGM would actually be covered by licensing costs? So I would love to understand your perspective on that.

And also, could you help me understand what has happened to the MGM library over time, because I know part of it was stripped out of MGM, and what are the rights of the consortium to the titles that actually left the library in the past? Are they all back in there now? Thanks very much.

I think we covered a number of the strategic opportunities that we see with MGM. But I think overall it's clear that we expect these combined libraries will help accelerate the adoption of new packaged good format and digital services. And packaged good format do include high definition format developed by the industry as a whole.

With respect to MGM, the MGM management has done a terrific job creating value for its shareholders, and generating value out of its library. In the number of transactions that occurred in the past, the older portion of MGM was actually sold to Warner's. And so what you have here essentially is the U/A library and the newer part of the MGM library. So some of the older films that you may remember – some of the musicals in the 40s and such – that is owned by Warner Brothers.

Right. I am sorry. Just one last related question. Do you think electronic distribution is a threat to your DVD replication business? Or basically, was the move up into high definition negate that need, so it could create two different distribution streams? So basically, electronic distribution wouldn't be possible to create Blu-ray kind of formats.

I think that we view new types of distribution both in the packaged good format and digital to actually be additive. Every time that there has been an additional format created it has increased the value of film libraries, which is part of the rationale of this transaction. So we are actually very optimistic about the opportunities we see in new distribution both in terms of digital services and in packaged good formats for entertainment companies in general.

That's great. Thank you very much.

Thank you very much for your call. With that I would like to move over to an email question. This is an email question from Connor O'Mara from Arete. Can you give us an idea of the units you are expecting for the PSP this year in Japan, and next fiscal year globally? What tie ratio should we expect, and how many titles will be available by March?

Who are your main third party developers? Out of the total number of titles by March, what proportion will be internal versus external, and what proportion will be ported games from PS2, and what proportion new games? And this is a question for Mr. Yuhara.

OK. First the question about the expected quantities for the PSP in this year: we have scheduled production shipments of 3 million units by the end of March 2005 – this fiscal year. And in Japan, we are scheduled to ship out 500,000 units by December, and another 500,000 by the end of March. And in Europe and the United States, we also schedule production shipments of about 1 million units respectively. And for the next fiscal year we are not ready to announce the plan for that year.

The next question you asked is the tie ratio of the software for the PSP. There are currently over 100 software makers who are preparing the titles. But, for the details, could you wait for the announcement from Sony Computer Entertainment. However, in Japan, there are 21 titles scheduled to be released within December.

We cannot answer precisely about the third parties. However, of these 21 titles in December, –makers such as Electronics Arts, Capcom, Namco and Bandai are included. So the details of those titles is not specified yet. However, there are some well-known titles of the PS and the PS2 involved in this, and such franchises as Golfkid for the PlayStation. And I am also excited about in-house production for the PlayStation Portable.

Thank you very much, Mr. Yuhara. With that I would like to go over to one more email question to be answered by Rob Wiesenthal in New York. OK, the question. Can you quantify the synergies to be extracted from the Sony BMG merger, both in terms of revenue growth and cost reduction?

We expect the cost benefits resulting from this combination to be between 300 million and 360 million – cleary to exceed $300 million on an annualized basis. I want to note once again that the Sony BMG entity will be recorded under the equity method now. So, revenues and income will not be consolidated. So as you notice, as you read your earnings releases, that this drop in revenues and income in the entertainment segment on an operating basis, are resulting from this new method that we are accounting for entity.

Thank you very much. Next we would like to go over to a live question.

[OPERATOR INSTRUCTIONS].

While we take a moment to compile the Q&A roster, we will go to previously submitted email question.

The first question comes from Tom Andrews from Harris Nesbit. Mr. Andrews, please press star one on your telephone keypad. Your line is open, sir. Please proceed with your question.

Hi, it is Edward Williams asking. Two questions. Could you give us an idea as to what the geographic breakdown of PlayStation 2 hardware and software shipments were for the September quarter? And in addition, could you give us an idea as to when we might hear about the European and North American launch plans for the PSPs? Specifically, when we might hear about the launch date, the quantities, the number of titles and the pricing?

OK. The production shipments for the PlayStation 2 were in total, 2 million for the second quarter. 370,000 in Japan, 700,000 units in North America and 920,000 in Europe. For the full two years, and for the PlayStation 2 they were 9 million in Japan and 30 million in North America and 17 million in Europe. So those are the quantity for both console and software. But what is your second question?

When we might hear about the timing of the PSP launch details. What the timing of the actual launch of the PSP will be in North America and in Europe as well as the quantities of launch, the price points and when we might hear more color on that.

I can confirm for you that we have announced yesterday the launch in Japan on December 12th and the price of PlayStation Portable is 19,800 yen. So that is the price. We have not announced yet the launch date for both Europe and North America, but it is certain to be released within this financial year by the end of March next year.

And, quantity wise, for the hardware is 1 million respectively, in North America and Europe. And so currently the color is black and I haven’t heard any about additional colors of the PSP at the moment. I did not hear any plan for additional colors of the PSP at the moment.

As I mentioned, there are over 100 software companies that are developing software for the PSP. These will be released in line with the hardware both in U.S. and Europe.

And one final question. Did you announce the price point for the PSP software for the Japanese market?

At current we have a confirmed price for two titles in Japan. The price point is about 4,800 yen.

OK, great. Thank you very much. Thank you very much.

Your next question from Luke Mizan (ph) from BNP Paribas. Mr. Mizan please press star one on your telephone keypad.

Can you hear me?

Yes. We can hear you.

OK. My question is just coming back to the electronic operating performance for the second quarter. And especially the explanation behind the deterioration of valuable cost. My question is the following: is that manly due to mix changes, especially on audio and television product? Or is that more likely based on the overall trading condition deteriorating in Europe and in the U.S. And would you anticipate the situation to continue over the third quarter? Or mostly the situation to reverse in terms of operating performance for the third quarter? Thank you.

Well, as far as variable cost issues, this is mainly for the product Camcorder and digital still camera and flat TV, particularly plasma TVs. And those price erosions are larger than we expected. And also those products are in a growing market. And so far we are not following our manufacturing course to comply with those price erosions.

And those situations could continue for the time being. But we have announced and released new models for the holiday season for such products. And this will gradually improve those situations.

We also made every effort to decrease the manufacturing cost. That is our most important issue so far. And we are currently working very hard on vertical integration to bring more Sony devices and components into those products. Thereby, we increase our added value. That includes LCD TVs with flat panels from our Joint Venture. And also, an increase in the usage of semiconductors and some other components.

It might be not be enough for this holiday season. But next year, you expect much better cost, manufacturing cost of the -- price.

Thank you very much.

Thank you very much. Next we would like to go over to an email question. The question is: can you update us on the timing of the PSP launch in the North American and European territories? And offer any insights on expected hardware unit shipment volume for financial year 2005?

As I mentioned, we will launch PSP by the end of March next year both in North America and Europe. And currently we expect 1 million units respectively in those regions. Of course the allocation should be flexible for those, to respond to the demand in those regions. And also the shipping schedule for fiscal year '05 is not ready to be announced yet.

Thank you very much, Mr. Yuhara. Next we would like to go over to a live question.

Your next question comes from Ms. Margaret Moore (ph) from American Century. Ms. Moore please star one on your telephone keypad. Your line is open, ma'am. Please proceed with your question.

Hi, Yuhara san. I have two questions for you? The first is the earnings season for the second quarter so far has generally been rather patchy from your competitors. Whether it be JVC, Sanyo, Pioneer as well as commentary from Canon regarding the very difficult outlook in terms of pricing and outlook for demand for the important third and fourth quarters. I was wondering if you can comment on your expectations for the Christmas season.

My second question is regarding your handheld game platform. The pricing clearly was below what many had anticipated given its functionality. So I was wondering if you could talk about what unit volumes are necessary for a breakeven point and what you anticipate the key components for this product to do in terms of price deflation over time that will allow you to achieve attractive levels of profit.

OK. I will answer your first question about the price. There is very big price erosion, particularly in digital still cameras and DVD recorders, which are growing product categories. And this trend will continue for the time being, I believe. Sony has announced new models and new products for this holiday season, such as digital audiovisual product categories. We believe those products are competitive both in price and particularly their functions – their features should be attractive to the consumers.

And to your question about PlayStation portables – as you know this 19,800 yen price in Japan is a strategic price for the PlayStation portable. It will be a great platform in the portable game area. We expect that with this price we will quickly increase the quantities to form the platform. So that is very important.

And also the PlayStation portable is utilizing the Sony in-house devices such as semiconductors and batteries. And currently the in-house product ratio is 50%. This is a typical vertical integration business model. So the more we can make the PSP, the more the Sony Group will enjoy the increase of added value. So that is the important thing.

The quick increase in the quantity of the format is expected by software companies as well. So by looking out at all those aspects, we have priced the PSP at the moment.

But can you explain at current pricing levels, assuming that even your in-house production does not cross subsidize, what level of shipments do you need to break even?

Well, before I talk about the breakeven, this is a strategic price. As we did for PlayStation one and PlayStation 2, we have to wait until the quantity for the PSP reaches that level. We just have to manufacture continuously to reach reasonable quantities.

Thank you very much, Mr. Yuhara. I would like to move to another live question.

Your next question is from Stewart Halpern from RBC Capital Market. Mr. Halpern, please press star one on your telephone keypad. Your line is open. Please proceed with your question.

Thank you. Two unrelated questions, if I may. First, I noticed that you've increased your game hardware shipment estimate but kept unchanged the software shipment estimate. I am wondering if you could reconcile that for us. And then secondly, if you can give us an update on the initiatives relating to wireless entertainment. Thank you.

We just launched a new PlayStation 2. I believe that this will be well accepted in the market and by customers as well. So we increased the shipping quantities for the year.

For software, we anticipate 250,000 (NOTE: should be 250 million) units of software for the year. The big business season is coming very soon, and I would like to see the results of this holiday season's business. I believe that the software business is doing very good.

OK.

Thank you very much. And with that I would like to move over to another live question.

Your next question is from Connor O'Mara from Arete Research. Mr. O'Mara, please press star one on your telephone keypad.

Canon mentioned this morning that in the low-end of digital still camera market, it was seeing pricing a lot more severe than expected and the maturing in the market faster than expected. I'm just wondering, given you have a perspective and good insight into the mobile market as well, is this happening because people at the low end are not buying digital still cameras because of the huge penetration rate of cameras with integrated digital still cameras on them? Thank you.

As you know, Sony is the biggest supplier of CCD as a device and we have reviewed the annual sales estimation of the semiconductor – those that go to digital still cameras. The market itself is becoming unclear, particularly the low-end.

And there are the OEM manufacturers from Taiwan and China. And they just started those low-end models of digital still cameras into the U.S. and the European market. So because of such the new players in the market, and also the supply quantities increased, particularly for the last couple of months. So that's the reason why the price is also reduced, better than we expected so far.

Thank you.

Thank you very much for that question. With that I would like to conclude the conference call. Thank you very much. It has been a pleasure to take your questions today.

Thank you very much indeed, everybody.

And thank you very much, Rob, in New York too.

Thank you. And have a great day.

Thank you, Rob.

Thank you.

I would like to take this opportunity to remind everyone of our investor relations contact information. In Tokyo, investor relations can be reached at 813-544-8180. New York investor relations Takeshi Sudo, Justin Hill and Makiko Takayama can be reached at 212-813-6722. In London, Chris Hohman and Shinji Tomita are available at 44207-4449713.

I am sorry I would just like to the correct the number for Tokyo investor relations. The number is 813-544-2180. Thank you very much again for joining us today.

Thank you for participating in today's conference call. You may now disconnect.