索尼 (SONY) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Sony Corporation Fiscal Year 2009 Second Quarter Earnings Announcement.

My name is Lacey and I'll be your coordinator for today.

At this time, all participants are in a listen-only mode.

We will be facilitating a question-and-answer session towards the end of this conference.

(Operator Instructions).

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr.

Sam Levenson, Senior Vice President of Investor Relations at Sony Corporation of America.

Please proceed.

Thank you very much for that introduction, Lacey.

Thank you all for joining us today, October 30, 2009 for the discussion of Sony's Second Quarter Results.

I'm Sam Levenson, Senior Vice President of Investor Relations at Sony Corporation of America.

And with me here on the conference call tonight is Nobuyuki Oneda, Executive Deputy President and CFO Sony Corporation; Robert Wiesenthal, Group Executive Corporate Development and M&A for Sony and EVP and CFO of Sony Corporation of America; and Gen Tsuchikawa, Senior General Manager of the Investor Relations division.

Thank you all very much for joining us.

In just a few moments, we'll review today's announcement.

Then we'll be available to answer your questions.

Please be aware that statements made during the following remarks and Q&A session with respect to Sony's current plans, estimates, strategies, press release 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 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 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 visiting www.sony.net/ir.

With that, I'm going to turn to today's announcements.

I'll begin by briefly summarizing the financial results and other key developments during the past quarter.

We will also touch upon the key questions raised earlier today when we hosted our regular earnings press conference and investor meeting here in Tokyo.

Let me remind you that a webcast replay of the investor meeting, along with the slides presented at that meeting, as well as our detailed earnings release, are available on our website for your access.

During the second quarter ended September 30, we achieved a number of successes, despite the ongoing challenges presented by a difficult economic environment and the appreciation of the yen.

Excluding restructuring charges and equity in affiliates, our operating profit for the quarter JPY 12.5 billion, as compared with JPY 10.8 billion in the second quarter last year; this was achieved despite the fact that the appreciation of the yen had a JPY 77 billion on our operating results in the current-year period.

Due to the better-than-forecasted results and after review of our outlook for the balance of the fiscal year, we have upwardly revised our full-year outlook for operating loss from JPY 110 billion to JPY 60 billion.

This JPY 50 billion improvement is comprised of JPY 30 billion in the Consumer Products and Devices segment, net of a JPY 10 billion increase in restructuring charges; JPY 15 billion in the Financial Services segment; JPY 15 billion from other factors, including a revision of R&D, improved efficiencies and headquarters and other expense reductions; and a JPY 10 billion increase in our estimates for losses from equity affiliates, including Sony Ericsson.

During the quarter, we also made significant progress in substantially reducing inventories in CPD, NPS, and in B2B & Disc Manufacturing to 60 days on hand from 78 days on hand just six months ago, as well as tightly managing receivables and payables.

As a result, our cash flow substantially improved.

While the forecast still anticipates negative cash flow for the year, we continue to strive to bring it to breakeven.

The structural transformation process that we initiated earlier this year is progressing in line with our expectations.

We now have targeted JPY 330 billion in annual cost savings from the structural transformation, reduced advertising and promotional expenses, and the reduction in general expenses.

Thus far, we have achieved approximately 80% of the targeted JPY 330 billion in savings.

Among other activities, we continued to consolidate manufacturing facilities and expect to end the fiscal year with 48 facilities as compared with 57 as of the end of last February.

In May 2010, we'll close another facility, bringing the number of locations down to 47.

On the procurement side, we continued to target a 50% reduction in the number of suppliers.

We were also targeting 20% reduction in procurement costs and at this point in time, we're on track to achieve approximately 90% of the procurement cost reduction.

So to put it simply, we are radically transforming the processes, the structure, the cash flow and the earnings of the Company.

Before we turn to your questions, let me briefly discuss a few key developments in each of our businesses.

In the Consumer Products and Devices segment, our results for the quarter were significantly impacted by lower sales, appreciation of the yen, and in some cases lower selling prices.

However, due to aggressive cost reduction, operating income excluding restructuring charges and the impact of exchange rates increased year over year.

In Compact Digital Cameras, operating profit increased year on year and we achieved an operating profit margin and exceeding that of the same quarter of the previous year.

In Video Cameras, we achieved the same operating profit margin as last year because of aggressive expense reduction, despite lower sales and profits.

In the TV business, our operating profit excluding restructuring charges declined by JPY 3 billion to JPY 11 billion.

In the Networked Product and Services segment, we also recorded lower sales year over year, primarily due to the game and VAIO businesses.

Exchange rates, as well as lower PS2 sales, impacted the game business.

VAIO sales were impacted by a decline in average sales price due to the shift in mix to lower-priced models, by decreased unit sales, and by exchange rates.

In the game business, PS3 hardware unit sales increased significantly, exceeding 3.2 million units in the quarter.

We also achieved double-digit percentage increases in PS3 software sales, year over year.

PSP unit sale for the quarter were approximately 3 million units and 1.9 million units of PS2 were sold.

In the Pictures segment, our results were in line with our forecast for the quarter and we remain on track to achieve our forecast for the year.

The second quarter had difficult year-over-year comparisons in the prior year we benefited from the blockbuster title Hancock and we did not have a comparable release in the second quarter of the current year.

In addition, the results for the current year period also reflect significantly higher marketing costs for upcoming films, as well as fewer home video releases.

As is normal course in this business, the timing of theatrical and home video releases impact the quarterly results and for the full year we remain confident that we will achieve our forecasts for higher operating profit.

Turning to the Music segment; we now consolidate Sony Music Entertainment, whereas in the previous year it was an equity affiliate.

On a pro forma and constant-unit dollar basis, the music business enjoyed a 6% increase in sales year over year.

Strong sales of Michael Jackson catalog product have helped to partially offset the continued pressure from lower physical sales.

In addition, continued expense reduction contributed to a JPY 12 billion improvement in operating profits year over year on a pro forma basis, yielding a profit of JPY 8.6 billion as compared with a loss of JPY 3.5 billion.

As I mentioned earlier, the results of the Financial Services segment were quite strong.

Revenue increased 101% year over year, due to an increase in Sony Life.

Operating income of JPY 32.8 billion was recorded, as compared with an operating loss of JPY 25.3 billion in the same quarter of the previous fiscal year.

In the current year quarter, the Japanese Stock Market rose 2%, whereas in the comparable quarter last year it fell 16%.

This had a positive effect on our results as we mark-to-market certain securities in the portfolio at Sony Life.

In summary, the most significant upside to our previous forecast comes from Consumer Products and Devices and Financial Services.

We continue to aggressively transform the Company and continue work toward improved profitability and cash flow.

With that, we'd be happy to take your questions.

(Operator Instructions).

And our first question will come from the line of Kota Ezawa with Citigroup.

Please proceed.

Hi.

It's Kota Ezawa of Citigroup.

Thanks for taking my question.

I have one question for you-- you mentioned total restructuring benefit will be JPY 330 billion in a former conference call in Tokyo.

Could you break down this into detailed parts like your labor costs, SG&A or some other elements, please?

Well, this is Nobuyuki Oneda.

Out of JPY 330 billion savings, roughly speaking JPY 200 billion of those savings is coming from the labor-related expenses and one third is the other expenses like advertisements, promotions and some of the amortization and the unutilized equipment.

This is a very rough break down of the JPY 330 billion restructuring cost savings.

Okay.

I have one more follow-up question.

Is this JPY 330 billion a part of item for today's upward revision?

If so, could you explain what sort of benefit comes from the restructuring program and what is the rest of this portion in the whole picked up JPY 50 billion in operating profit this time?

Well, about JPY 330 billion-- the savings-- partly is coming from the last year's investment which is about JPY 75 billion which we made in fiscal year '08; and that would probably be reflected into this fiscal year a little over JPY 100 billion.

And at this time, we're going to invest about JPY 130 billion.

And then next year, we'll probably save about JPY 86 billion.

That is kind of the investment amount and also the saving amount for the following year.

And this year, so far after the second quarter, we could already enjoy the almost 80% of the JPY 330 billion savings.

Is that clear to you?

Yes.

Actually my question was-- today's upward revision is about JPY 50 billion I think; can we understand that the part of this upward revision is based on your restructuring program benefit?

Yes, yes.

For example, the savings-- as I told you in the daytime, the upside revision partly comes from the Consumer Product group and about JPY 30 billion, out of which some of the amount is coming from the restructuring-related expenses for the TVs and others.

So it's part of the savings, included, yes.

Okay.

Thank you.

Thank you.

(Inaudible) this is Gen Tsuchikawa.

Let me just clarify just the numbers.

I mean as Nobuyuki explained to you about the JPY 100 billion coming from structural transformation and that he said two thirds comes from HR-related expenses.

And in addition to that, there will be JPY 50 billion coming from reduced advertisement and the rest goes to the reduction of general expenses, right?

And our next question will come from the line of Evan Wilson with Pacific Crest.

Please proceed.

Hello.

Thanks for taking the questions.

I have three questions.

I think I'll ask them one at a time.

The first is on the TV business.

You mentioned in Japan earlier today that there's the potential to bring some TV models that you had planned to launch next year into this year.

Could you discuss that strategy and what do you think the impact will be on profitability and pricing on your TV business?

Well the impact on the profitability is very difficult to tell you exactly how much we could save, but the main reason why we have to introduce the new model, which originally we anticipated to introduce in the springtime next year; was that our competitors, particularly like Samsung; their product feature is unfortunately superior than ours, particularly in the LED backlight features.

They are applying that technology, not only on the top-end model, but also the mass-production models too.

For the year, we had the LED backlight model in our product design but that was only for the top-line items.

So therefore, our lineup was not so strong enough, compared to the Samsung.

So our strategy is to introduce the new models with the spring models as soon as possible, probably sometime as in February this year.

By doing this, we have to invest some of the additional promotional expenses for the current model.

That is a negative factor.

But by introducing the new competitive model earlier than planned, that will generate some profit.

So overall, it probably will generate some profit for us in this sense.

Great.

The next question is on the PS3 also in Japan.

You had discussed some specifics about the gross margin of the PS3 hardware after the price cuts.

Could you talk about the specifics for the gross margin for PS3 as it stands now and what your outlook is for gross margins?

Well, let me put it this way.

The comparative cost versus the price; as of September, the cost is probably higher-- a little over 10% compared to the price.

But we are expecting towards the end of our fiscal year which is March next year; the cost is probably one digit higher than the price.

In other words, it's probably somewhere in the middle of the 5% or 6%.

So therefore, we are expecting that the following fiscal year, sometime in the following fiscal year, we will be breakeven or plus-- or profit for PS3 operations.

Understood.

And then the last question is on the PSP.

So far the first half of the fiscal year, shipments are tracking down about 2.6 million versus the first half of last year.

What gives you confidence that again your reiterated forecast to sell one more million PSPs this year than you did last year?

In some areas, we already introduced the PSP Go, which is the new model.

But in some areas we're going to introduce next month, right?

That will increase the hopefully overall hardware number of the PSP and also at the same time the software program will be introduced like (inaudible) during the coming holiday season.

So that hopefully will bring the numbers of the software and hardware up at the same time.

So therefore, at this moment we are behind compared to the original plan, but we are not so pessimistic to achieve the (inaudible) target.

On the PSP Go, we have also started as you know the network services, and only say Wi-Fi device so there's no physical media.

We have just started porting over many of the movies and television shows associated with that.

That takes some time to build up and as that library expands and improves I think you're going to see a very strong take-up rate for not only the device, but also the revenues associated with the service.

Lacey, next question please.

And our next question will come from the line of Daniel Ernst with Hudson Square Research.

Please proceed.

Yes, good evening and good morning.

Thanks for taking my call.

Two questions if I might; on the guidance for the full year, since your revenues are down about 6% year over year but your revenues in the first half have been down 19% year over year; so that implies some top-line growth in the second half.

And given where you've been trending and where the economy is and where the (inaudible) of the yen is sticking; what gives you confidence in getting some top-line growth to get you to that full-year revenue guidance?

And then my second question is on the excellent progress in the Consumer Products division yielding the JPY 30 billion improvement to the forecast.

Does that forecast imply or is it assumed that there is some turnaround in the profit for the Television division in the second half?

Thanks.

To answer your first question, in our industry usually there is seasonality and the first half t is usually 40% to 45% of the annual sales will be sold and the 55% to 60% will be sold in the second half.

And in the case of the game business, probably 70% or more will be sold in the second half.

So therefore it is natural that the growth of the (inaudible).

So seasonality-wise for both (inaudible) and games are the fundamental reasons.

Just to follow up on the question; but it's understood that there's seasonality, but the growth rates I was referring to were on a year-over-year basis, so already assuming the seasonality of course in the model; but the deficit that you created in the first half-- again down almost 20% year over year; makes it hard to yield a 6% for the full year, even with seasonality.

And I'm looking at year over year; not first half versus second half.

This is Gen Tsuchikawa.

I have a quick point.

But the first half-- when you compare year on year, the first half you're comparing with the great days and the second half you're comparing with after Lehman shock; so the levels of-- the sales you're working off of are very different sales.

So when we are comparing year on year and a 20% reduction for the first half, we're comparing the great days before Lehman shock and the current economy.

In the second half, we will be comparing pretty much both world's are after Lehman.

That's why we think that we can achieve sales in the second half at relatively similar levels to what we achieved in the previous year.

Does that make sense?

Yes; got it; understood.

Okay.

And also adding the (inaudible) questions; the biggest growth compared to the first and second half is coming from the game business and the other area is the picture areas.

Also in the second half there are the big titles like 2012-- those big-- the slate will be introduced in the second half.

Understood.

Thanks for the color.

Your second question the CPD JPY 30 billion improvement; where does it come from?

This is mainly coming from the areas of like-- component areas and data (inaudible) cameras and camcorders.

TV is almost the same as we expected.

Understood.

And for the second half, do you expect to either become breakeven or create profits in TV?

TV will not be breakeven this year, unfortunately.

I mean the sales volume would be the same as the forecasted level, but profitability-wise, it's not breakeven.

Still it will be the loss situation, unfortunately.

Understood.

Thank you very much.

(Operator Instructions).

And our next question will come from line of Yuji Fujimori with Barclays Capital.

Please proceed.

Okay.

Thank you very much for taking my questions.

First of all, in terms of the TV business; it looks like first half TV losses was better than the original guidance, but second half operating losses is even worse than the budget.

And could you remind what risk you have and also can you please give us a sense of the probability that these kinds of risks will really be realized.

Okay, as you know, we are slightly behind-- I mean quantity-wise, slightly behind our original forecast in the second quarter, roughly speaking about 400,000 units.

And if we continue that situation, and also at the same time we will introduce the next spring model a couple months earlier than originally scheduled, then it could be a big mess.

So therefore, to clean up the current model, we have to spend some of the promotion expenses or these bundling items to clean up the current model as soon as possible.

That is the main reason of some deterioration of the profitability of the second half compared to the first half.

And also in the first half this year, we don't have to do so much-- the promotional activities compared to the original plan.

Okay.

However, in my loss calculations, in the first half one TV set lost around maybe $30, but in the second half you're maybe expecting more than $80 to $90 losses from one TV set.

Is that realistic or does this have some room on the upside?

Well, it really depends upon how many units would be in the market and also on [how long] before the new products will be introduced and we are considering some of the bundling programs like giving the PlayStation 3 or the Blue-ray.

So that will cost good money, so $80 million is not an unrealistic number.

Okay, thank you very much.

And the second question is in terms of working capital management which shows a very impressive result so far I think.

And first of all, could you briefly touch on the specific initiatives behind this improvement?

And secondly I'm curious how the recent decision to sell [the Tijuana] TV plants to Hon Hai will impact on the working capital in the future.

Thank you.

First of all, our improvement of the cash this time is coming from the inventory control.

We didn't develop the new supply chain-- the [higher] system yet, but by more careful-- the procurement, or the production or the distribution system; we could successfully reduce the inventory about JPR 500 billion within a one-year period.

So this is the-- not so much the sophisticated systems reason, but more careful people's handling is the main reason of the inventory.

And also some of the vendors, we successfully increased the payment terms, even though it just started, but that's another factor that we improved in our situation.

And your second question is for cash-wise selling the Baja California plant will generate the cash to us, but operation-wise for the past couple of years there is not so much big impact towards our bottom line, because they will succeed our employees-- they will actually employ our existing employees without any payroll cut, and also still their model is-- they're going to use our specified parts like panels.

Still they have to use the Samsungs or the Sharps or whatever which we're going to decide.

So for the past couple of years I don't think there is a big improvement of the cost.

But of course there is some because after they will introduce another company's product; that will reduce their overall overhead expenses.

And also some small parts they procure by themselves, they will enjoy volume discount benefit.

So some reductions of the costs, but I don't see any big reductions for the first couple of years.

Great; thank you.

And our next question will come from the line of Mark Harding with Maxim Group.

Please proceed.

Thank you for taking my call.

A couple of quick questions; firstly around the TV side.

First if you could perhaps share your thoughts of some targets on outsource manufacturing.

And then secondly there was a comment during your earlier call regarding sort of moving towards profitability on the television side requiring you to look beyond the hardware; if you could just provide a little bit more color around that as well, that would be great.

Yes, currently as you know, under the (inaudible) era, little gradually difficult to make a differentiation for the television businesses.

So therefore and also the assembly areas-- the final assembly areas; there is less profit is expected in this area.

So therefore, we will do still the engineering or the design side.

But the final assembly areas we would try to increase the percentage of the assembly to the outside EMS operations.

On the second question; it's Rob Wiesenthal speaking.

Nick mentioned in our meeting today about beyond hardware and what he was referring to was about the use of digital services on our television sets.

Right now, as you know, we have the PlayStation Network on the PS3 and on PSP Go that is migrating to the television, the BRAVIA over time.

Right now there already is a service in place called the Bravi internet link that allows people to watch television and content from various networks.

Last year we were the first company ever to show a film directly to television owners outside cable and satellite and we have more planned in the future.

So that's really what it refers to is that service stream which will generate revenues beyond the threshold of the retail store.

And that is something that is just beginning with IP TV and I think you'll see a lot more to come in the coming months.

Great.

And then if I could just touch on the timing of the remaining restructuring charges; or I guess that's another way to think about it is in terms of profit margins for the remaining two quarters of the year.

Can you give us any color around that?

The timing of the remaining restructuring charges; restructuring charges will probably continue not only this year, but also next year too.

But major restructuring is probably done within this fiscal year and OP margin for Q3 and Q4 is not disclosed yet, but it will not be so much affected because of the restructuring expenses reasons.

Okay.

Thank you.

And our next question will come from the line of Jed Latkin with ING.

Please proceed.

I actually have a few questions.

On the-- since we have the launch of the PSP Go in October, have you guys factored in-- what sort of split have you factored in between the 3000 and the PSP Go; and given the significantly higher ASP and underlying margin, how is that going to affect the margins in the games business and is that higher ASP offset enough to mitigate the losses on the lower-priced PS3?

This is (inaudible) speaking.

On the PSP Go we have only launched in major countries in Europe in the U.S.

so far and some countries in Asia.

The Japanese launch will begin next week.

So we don't have a full grasp of how this product will evolve but roughly speaking for the fiscal year, we aim to do north of 2 million units.

So that are the kinds of numbers we're looking for PSP Go.

Now as we have a higher ASP compared to the 3000 that will result in a higher margin for us.

But I don't think it's appropriate to kind of compare the margins on the PSP Go with the loss on the PS3.

I think you're not comparing apples to apples.

Money is money; but I don't think it's appropriate to answer your question in this way.

But it's more the margins for the entire division as a whole; as you change to a more download-based system that should increase the margins of the business.

And what is the assumption for the change of the margins, i.e.

also the breakdown for software sales.

Like what percent are you assuming is going to be download versus physical distribution?

This depends on what kind of tie ratio-- attach ratio happens for the PSP Go.

As you know, the PSP Go is only downloads.

There is no package needed as you can pay on the PSP Go.

So the margin structure on the PSP Go depends on attach ratio as well as the breakdown between the first party and third party content.

Obviously the first party content, you have a higher margin.

We cannot disclose in detail how these margin structures are at the moment, but in the end the more we have a business shift towards the download side of the business, our margin will improve.

That's our basic assumption.

The network model should be efficient compared to the package model because there is no physical disc to be manufactured, no inventories to be carried, etc.

etc.

And we don't have to worry about shelf space at the retail store.

So I'm talking in very general terms.

But as we progress, we hope to increase the part of the download business as much as we can.

But this transition will take time I guess, because not all consumers have the connectivity to utilize the full features of the PSP Go.

And one final question on the music business; given the launch of the Michael Jackson movie, how much-- what are you budgeting in for the continued Michael Jackson effect for the remainder of the year.

We are not disclosing the numbers, but let me put it this way.

So far the Michael Jackson CD business in the United States is about 5 million units and on a global basis it's about 15 million-- 5 million units in the U.S., 15 million globally.

Okay.

Thank you.

(Operator Instructions).

Our next question will come from the line of David Liebowitz with Horizon Asset Management.

Please proceed.

Good morning.

A few questions; one, in terms of the PlayStation; how many years do we have to wait do you believe before we'll have a next generation of architecture either from yourself or your two major competitors?

We are not disclosing those kinds of questions.

I'm sorry.

I can't answer that.

Needless to say, the whole premise of the PlayStation 3 with this network connectivity and the cell processor is that it is something that is actually better today than it was when it first came out and it continues to grow with more and more digital services.

This platform has lots of life, so that's something that we're really not spending a lot of time talking about at this point.

Right now, we're just continuing building this platform.

Okay.

Second question; could you go over for calendar year 2010 your major theatrical releases and your major music releases that you have on schedule right now?

Sure.

On the music side right now it's actually-- we have a terrific lineup with albums from John Mayer, Leona Lewis, Alicia Keyes, Britney Spears and then Susan Boyle from X factor and then Adam Lambert from American Idol.

And then respect to films; we're very excited about 2012 which is tracking incredibly strong.

That comes out on November 13th which it's an incredible science fiction film with John Cusak and Amanda Peet.

And then during Christmas, we have a romantic comedy called "Did You Hear about the Morgans?" with Hugh Grant and Sara Jessica Parker.

So that's what we're kind of looking forward to right now.

And then obviously- "This Is It" opened up on Wednesday in 99 countries and did $20 million which is actually a record for a Wednesday and we're very excited about the start of that film and we'll see how this weekend goes and the cinema scores for that film were an A across the board at all ages, so it's been a great week for the picture company.

And just two more questions if I may; the first one- right now, how much money do you leave on the table because of piracy either in recorded music or in film distribution?

Needless to say, piracy continues to be a problem both physically and digitally; but actually trying to quantify this is very, very difficult.

But we're taking a lot of measures, including for example even this Michael Jackson film that opens simultaneously across the world at the same time because of issues of camcorder piracy and piracy at film-processing labs.

Day-in-day releases are actually doing a lot to curb piracy-- getting the films out there, but also giving legal alternatives to consumers both on the music side and on the film side; is really how we do our best to try and curb it.

But there is really no stopping it altogether.

And last question, turning to consumer photography; are you gaining or losing share at the mid and high end to some of your arch rivals such as Cannon and Nikon as well as all the others who are in the field right now?

I think if you are talking about the Cannon or the Conika type-- the--what's called the single-- we are not losing market share.

We are the late comers and our target was 10% last year but now that our share is above double-digit percent so we are not losing share.

And what share of market do you think you need to continue moving forward in this process or is there a chance if you can't get beyond your current market share that you would fold and move onto other products that offer more promise?

We don't know how fast and how big these categories will be expanded, but at this moment at least more than10% market share with reasonable profit is our immediate target.

Just to clarify, the share he's talking about is for the DSLR market, not the compact digital market.

Understood.

And I say thank you very much.

I'll open it for other questions.

This concludes the question-and-answer portion of today's call.

I would now like to turn the call back over to Mr.

Sam Levenson for any closing remarks.

I just want to thank everybody for joining us and remind you that our IR teams in Tokyo, London and New York stand ready to answer your questions and we look forward to speaking with you in the future.

Thanks so much.

Thank you for your participation in today's conference.

This concludes your presentation.

You may now disconnect.

Good day and good evening, everyone.