索尼 (SONY) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the consolidated financial results for fiscal year ended March 31, 2011. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I will now turn the presentation over to your host for today, to Sam Levenson, Senior Vice President of Investor Relations at Sony Corporation of America. You may proceed.

Thank you very much for that introduction, Francis, and thank you all for joining us today, May 26, 2011 for the discussion of Sony's fiscal year results. I hope that you are all enjoying Adele's latest hit while you are on hold.

I am Sam Levenson, Senior Vice President of Investor Relations at Sony Corporation of America and with me on the conference call tonight is Mark Kato, CFO of Sony Corporation; Robert Wiesenthal, Group Executive Corporate Development M&A for Sony Corporation and EVP and CFO of Sony Corporation of America. And Yoshinori Hashitani, VP and Senior General Manager Investor Relations Division of Sony. Thank you all very much for joining us.

In just a few moments, we will review today's announcements. Then we will 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.

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

With that, I am now going to turn to today's announcements. As we announced in our preliminary earnings results release on Monday, our operating profit for the fiscal year ended March 31, 2011 came in on forecast at approximately JPY200 billion or over 6 times what we recorded in the previous fiscal year.

We achieved that result despite an approximate JPY100 billion negative impact from foreign exchange combined with the initial effects of the earthquake. Excluding the impact of foreign exchange rates, operating income was 9.5 times that of the previous fiscal year. Every reportable segment recorded operating profit for the year.

In addition, the game business and Sony Ericsson each concluded the year in the black. At this time the television business is the only remaining key business unit where we still need to solve for operating losses.

As I will discuss in more detail later, the losses of the TV business were stable year-over-year despite significant price erosion and unfavorable exchange rates.

As we announced on Monday of this week, we recorded a loss for net income attributable to Sony's Corporation shareholders due to the recording of approximately JPY360 billion in valuation allowances against deferred tax assets. However, this valuation allowance is non-cash charge and has no impact on our cash flow.

Now let's review the fiscal year results on a segment by segment basis, beginning with Consumer, Professional & Devices. CPD segment sales increased 2% and sales to outside customers increased 4%. This was primarily due to higher LCD sales resulting from significantly higher unit sales and higher semiconductor sales resulting from favorable performance of small to midsized LCD panels and image sensors partially offset by lower component sales resulting from a decrease in storage media and optical disk drive sales.

Operating income in CPD of JPY2.9 billion was recorded, a significant improvement compared to a loss of JPY53.2 billion in the previous fiscal year. This improvement was driven primarily by an increase in gross profit due to higher sales, a decrease in loss on sale disposal or impairment of assets and a decrease in restructuring charges. These factors were partially offset by unfavorable foreign exchange rates and an increase in SG&A as a result of an increase in advertising and promotion expense.

Excluding these restructuring charges, product categories with an improvement in operating results included semiconductors, reflecting an increase in sales of image sensors, and professional solutions, reflecting an increase in sales of products such as digital cinema projectors.

Product categories with a deterioration in operating results included LCD televisions, reflecting a decline in the unit selling prices and unfavorable foreign exchange rates despite rising unit sales.

Television business sales increased 16% to JPY1.161 trillion due to a significant increase in LCD TV unit sales despite price declines and unfavorable foreign exchange rates. For the fiscal year, LCD TV unit sales increased 44% to 22.4 million units. This significant increase in unit sales came mostly from Japan and other areas including developing countries.

Excluding restructuring charges, JPY75 billion in operating loss was recorded, which is down slightly year-on-year. This was due to significant price declines and the significant impact of unfavorable exchange rates despite the increase in unit sales as I talked about a moment ago, along with a reduction in raw material costs and the benefits of restructuring.

Turning next to network products and services segment. NPS sales increased 0.4%. This was due primarily to an increase in PC sales as unit -- increased unit sales and market share in all regions more than offset unfavorable exchange rates.

Operating income in NPS of JPY35.6 billion was recorded, a JPY119 billion improvement when compared with the operating loss recorded in the previous fiscal year. This improvement was mainly due to a significant improvement in the cost of sales ratio coupled with an increase in gross profit resulting from higher sales, partially offset by unfavorable exchange rates.

Excluding restructuring charges, the category which favorably impacted the change in segment operating results was the game business, reflecting significant PS3 hardware cost reductions and higher unit sales of PS3 software.

Game sales decreased 5% year on year to JPY798 billion. This was primarily due to the impact of unfavorable exchange rates.

Operating income improved JPY103.5 billion year-on-year to JPY46.5 billion. This significant improvement was primarily due to PS3 hardware cost reductions, higher unit sales of PS3 software resulting from hit titles such as Gran Turismo 5, and contribution from game accessories such as PlayStation Move despite the negative impact of exchange rates.

As we go forward, we are steadily working on NGP, the next-generation portable device, which we will introduce later this year.

Next is the Pictures segment. Sales decreased 15% in yen and 8% on a US dollar basis. Operating income decreased 10% in yen and was almost flat year-on-year on a US dollar basis. The decrease in sales was mainly due to unfavorable exchange rates and a significant decline with international theatrical and worldwide home entertainment revenues, partially offset by an increase in television revenues. Operating income decreased primarily due to the appreciation of the yen against the dollar.

Sales in the music segment decreased 10% and operating income increased 7%. Sales decreased because of the negative impact of the appreciation of the yen against the dollar, the especially strong performance of Michael Jackson products in the previous fiscal year, and the continued contraction of the physical music market.

Despite the decrease in sales, operating income increased due to a decrease in marketing, restructuring, and overhead costs.

Next is the Financial Services segment. Although policy amount in force at Sony Life continue to grow steadily, Financial Services revenue decreased approximately 5% due to deterioration in net gains from investments at Sony life. The stable amount of operating income, JPY118.8 billion, was recorded but this was 27% lower than the previous fiscal year primarily due to lower net valuation gains from investments as the previous year benefited from the significant recovery of the Japanese stock market.

Sales at our equity affiliate, Sony Ericsson, declined 7%. This decrease was due to a decline in unit shipments as a result of a focus on high-end smartphones and a reduction in the size of the product portfolio.

Fee income before taxes of EUR133 million was recorded for the current year, a EUR787 million improvement when compared with a loss before taxes of EUR654 million in the previous year. This significant improvement was mainly due to the positive impact of a rise in the average selling price, a favorable product mix, and an improved cost structure as well as the benefit of lower restructuring charges and the reversal of warranty reserves.

As a result, Sony recorded equity and net income at Sony Ericsson of JPY4.2 billion for the current fiscal year compared to a loss of JPY34.5 billion in the previous fiscal year.

Next, I would like to briefly outline our forecast for the fiscal year ended March 2012. For the current fiscal year, our assumptions for foreign current exchange rates are approximately JPY83 to the US dollar and approximately JPY115 to the euro.

We are pleased to note that even after taking into account the impact of the earthquake, we are expecting sales to grow 4% year-on-year and operating income to be basically flat year-over-year. The forecasted earthquake impact is JPY440 billion on sales and JPY150 billion on operating income.

In addition, our forecast includes an estimated JPY14 billion of currently known costs associated with the unauthorized access of our networks. In order to reduce this impact, we are implementing various initiatives, all of which are incorporated into our operating forecast of JPY200 billion.

Almost all of the JPY150 billion impact is expected to be incurred in electronics and we expect nearly every product category to be impacted. Categories with the largest impact are TV, digital cameras, and components.

The timing of the impact on our results will depend on the product category. In the television business, the impact will be comparably small in the first quarter because we have parts and inventory, but it will be felt in the second and third quarters.

In the digital camera business, we expect a large impact in the first quarter and a mitigation of that impact in the second quarter. The impact on components will be mainly in the first half of the fiscal year but some impact will remain in the third quarter.

Overall, the impact will diminish as we go through the year with the impact being the largest in the first and second quarters and some remaining in the third quarter in categories such as TVs and components.

Restructuring charges recorded within operating expenses are expected to be JPY25 billion compared to JPY67.1 billion recorded last year.

Equity and net income of affiliated companies for the March 2012 fiscal year is expected to be approximately JPY15 billion as compared with JPY14.1 billion in the previous year. Income before income taxes is anticipated to decrease mainly due to gains on sales of investment securities and net foreign exchange gains recorded in the March 2011 year.

Net income attributable to Sony Corporation stockholders for the March 2012 fiscal year is expected to be approximately JPY80 billion compared to the loss recorded in the previous fiscal year.

For more detailed information on our forecast by business segment, please see today's earnings release.

So before we turn to questions, I would like to offer just a very brief summary. For the year just ended, operating profit increased about JPY170 billion. This despite a JPY100 billion impact from foreign exchange as well as the initial impact of the earthquake. This significant increase in earnings was driven by improvements in Network Products & Services, Consumer, Professional & Devices, and from Sony Ericsson.

If we look back over the last two fiscal years, our operating profit has improved by JPY428 billion, again despite foreign currency headwinds. For the current fiscal year ended March 2012, we believe we can effectively mitigate the enormous effect of the earthquake that is anticipated over the first three quarters and complete the year without any decrease in our operating profit.

In addition, at this time we believe that we will record a modest sales increase year-over-year, positive cash flow, and positive net income attributable to shareholders.

At this time I would like to open up the lines for questions. Operator, if you would make a poll please.

(Operator Instructions) Mark Harding, Maxim Group.

Thanks for taking my question. A couple of -- firstly looking back at 2010, could you help me understand some of the moving parts as it relates to TV pricing? Perhaps the mix of low-end versus advanced TVs and then BRIC versus developed countries?

Okay, compared to the plan that we originally had in our budget, we did experience some mix in the TV category. I will give you some examples. We expected to do about 10% of our output in 3-D TVs. This turned out to be a little bit less. The bulk of our high-end product in LED backlit TVs, this proportion was slightly lower than we had expected.

And in terms of inch size, I think the lower inch size -- around 32 inches -- a more affordable price product, a proportion of those rose a little bit compared to our original projections. Is that okay with you?

That's perfect. And then looking at the TV guidance, it looks pretty strong at 20%. I think the industry is looking for about 13% and given the headwinds at the end of the eco-points program, what gives you that level of confidence that 20% is achievable?

Various things, I guess. As you said, if you look at the Japanese domestic market, the eco-point subsidy has ended. So we are going to expect a decline in the Japanese market. When we turn to North America and European markets again here, maybe flat or even a decline in the market may be seen. But what is driving the unit numbers here is the so-called emerging markets including BRIC countries, where we are expecting a lot of growth. And we intend to follow that growth in those areas and we are investing in marketing to make sure that we do catch our fair share of the market.

Okay, fair enough. I guess just lastly, when you look at your overall revenue guidance with the backdrop of the impact of the earthquake, if you exclude out the JPY440 billion in earthquake-related hit to sales, it looks like revenue growth would be about 10%. That seems very high.

I was wondering if you could also sort of comment on what gives you that level of confidence?

Okay, I think you have the same question related to operating profit as well. We have said that the impact of the earthquake in terms of revenue is JPY440 billion and operating profit JPY150 billion. Now adding back those numbers to the fiscal 2010 projections that we have described is not the right math.

The impact of the earthquake is basically the decrease in sales caused by the earthquake, meaning that the supply chain is severely damaged and from the supply side, we will not be able to meet the initial projections that we had. This is the impact of the earthquake.

Now do we stand still there? No. We are implementing various initiatives such as if the supply is limited, we will review our pricing strategy, for example. We will review our product lineup. We will realign products so that we can build those products based on the limited key components that we have.

On top of that, we will be reviewing our marketing spend because if you don't have enough quantity to sell, nobody is going to spend that kind of marketing money we had in the budget in the first place.

So all those adjustments or initiatives are incorporated in the final operating profit or the sales numbers that we have given to you, so it's not correct to add back those numbers onto the forecast that we have given you. So in concept, the actual numbers would be slightly less if there were no earthquake at all.

Okay, okay, I appreciate that. Thank you.

Daniel Ernst, Hudson Square Research.

Yes, thanks for taking my call. Three questions, if I might. First, could you walk us through some of the mechanics in the JPY150 billion impact? Obviously a large part of that is just coming from reduced sales. But what part of that is coming from higher procurement costs if you have to go outside of your own supply -- internal supply chain for products and margin implications? If you could sort of walk us through the mechanics of and composition of that JPY150 billion?

And then looking at the forecast for the Network Product Group, which has significant reduction planned for operating income because of the reduced sales of high-margin PS2 and PSP sales, can you tell us does your forecast or can your forecast withstand a reduction in the PS3 selling price?

And then last question, excluding the impact from the earthquake, what is the outlook for the LCD business margins? Thanks.

The JPY150 billion impact of the earthquake, this is again reduction in sales due to the supply constraints, so it does not include impact of costs for example, not [at all] for us not achieving the cost down targets that we had planned. Those are a different set of numbers which are included in the JPY200 billion operating profit numbers. But I'm sorry, we do not disclose category or in detail how the improvements have been incorporated.

Talking about NPS declining operating profit projected for the coming -- for the new current fiscal year, yes, you are correct in that PS2, now in its 12th year of profit contribution, will decline, although it's a nice piece of business, yes. The same is true with our portable PSP, which we introduced in 2004. So it is in its seventh year.

Now on top of that, we have made some adjustments due to the impact of the intrusion into our network system. We have said that with -- assuming some -- I would say expenses would be incurred. Given information we have so far, we estimate that the impact will be about JPY14 billion. Now those are included in the numbers.

Now as far as PlayStation 3 is concerned, profit contribution is expected to rise because we expect more good sales on the software side. I cannot talk about pricing about PS3. I'm sorry.

And we weren't quick enough to write down your third question. What was that again?

The third question was if you were to exclude the impact from the earthquake, what was -- what is the outlook? What are the going forward trends for margins in the TV business? Operating margins?

Now, TV business, when we started planning for the new fiscal year, again we had objective target of reaching breakeven. Now as you know, we have not been profitable for the last seven years, but again, we aimed for breakeven.

But with this unfortunate happening earthquake, our target to meet that number has become very difficult. But compared to year-on-year, the losses expected would be [squeezed] for a considerable extent. I cannot give you any numbers, but the improvement in the TV business will come in the form of reduced losses, which is not an ideal situation, but we are seeing progress. We hope to see progress here.

Understood, thank you.

(Operator Instructions). Yuji Fujimori, Barclays Capital.

Thank you very much for taking my question. I want to ask about the inventory situation, two things. One is it looks like the March end inventory was larger than expected mainly due to the earthquake impact. And if you can quantify the impact, could you let us know?

And secondly, if you have any outlook for the inventory situation in the end of Q1 or Q2, that would be appreciated. Also just following up a question, I could understand Kato's explanation about the operating profit impact from the earthquake, but then I couldn't fully understand the revenue impact.

So even after factoring into the earthquake impact, you are expecting 4% revenue growth this year. And due to the price competition in the TV space or very modest volume loss for business with cameras, I think 4% growth seems to be a little bit stressed. So are there any new product contributions such as tablets, [any GP] in your forecast, or the price increase impact could be much larger than I am expecting?

So could you make up the following supplementary comment on the topline growth of 4% this year?

I will try to answer your questions as much as I can. Now, on the inventory situation, I said that compared to initial expectations, level of inventory March ended slightly higher. Now this is sort of a general comment. It differs category by category. I said overall this higher-than-expected inventory is not an unmanageable situation or a negative impact to our business going forward.

But if you -- if we break down the inventory, for example, TV business inventory was a little bit high because in Japan March was the last month of the eco-points subsidy and not just us but many manufacturers expecting the last minute rush to the stores for televisions which did happen but not to the extent that we had projected. And that was the major reason for inventory buildup. This is nothing related to earthquake itself.

Now, the other side of it which is related to the earthquake is that we could not ship product to some areas. But I cannot give you category by category breakdown on inventory, and sorry.

Inventory level after end of the first quarter, second quarter, here on paper we do have projections because we have calculated impact of the earthquake, but whether those projections are correct, I think we need to see how it actually evolves. But one thing we can say or give light to the situation is that in some categories where we do foresee shortage for quite some period, we will be allocating the purchase product that we have.

So we will not be selling everything when we have a purchase order for it. Those come into play. Secondly, we are trying to get hold on the parts to build the products, but as you know, if we are missing one single part, we will not be able to assemble the final product. So that will have another impact on how well we do in securing our key devices.

Other factors, well the -- not just the direct impact of the earthquake onto parts supply, but things like power outages that are expected, they maybe not in the first quarter but in the summer season, the government has given guidelines to reduce electricity consumption by 15%. Those things come into play.

So I know I'm not answering your questions, but what I am trying to say is that all those factors would affect how our inventory will be at the end of each quarter, but I don't think it will be in a situation -- we have tons of inventory. I think we will be scrambling for more product to meet demand of our customers.

Third question, yes, the logic I explained for operating profit regarding impact of earthquake and pre-earthquake projections, I think applies to revenue as well. Now, given that we know shortages in some areas of key components, we will redesign products. We will change the lineup of products or the mix of the product. So that would ultimately determine the revenue line. And the 4% growth is a result of those planning by the different business divisions if I -- (multiple speakers)

Thank you very much for the color. The one, sorry, additional question is at the Japanese briefing meeting, Kato-san commented the panel, an LCD panel production yield program has resulted in the new product introduction in Q4. So that kind of impact was financially meaningfully big for the inventory pileup or the TV loss?

Okay, Fujimori-san, before we go to this LCD thing, let me add a little also some comments to the third question on the revenue side.

If you take product category by category and see where the growth comes from, for one thing, it's TV. As we explained, projecting higher units at 27 million. Now unit price might go down but compared to 22.4 million output for the past fiscal year, we have seen quite an increase in units. So the TV is one driver.

Second, we are aiming for higher quantities in PC. Digital cameras, especially in the single lens reflex category, and game software, those are by category explanation of the breakdown of the increase on the revenue side.

Now on LCD, I think the impact of -- on inventory of the lower-than-expected yield on LCD production, it's a mix. It works both ways because if the yield were high and if we could sell, okay, but what we did was with the uncertainty of the new panels coming in, we had to go to second sources to make sure that we could build something.

So in a sense you could say that we held inventory of parts. Not, maybe not double, but some excess inventory so that if one source did not deliver what we had accepted, we could build with other sources.

So the answer to your question is yes, but the amount of inventory involved in that category, I don't think that is a major component of the unexpected rise in the area -- (inaudible).

Francis, we have time for one more question, if you have one.

(Operator Instructions).

Having received no questions then, Francis, we're going to end the call here. Thank you all for participating and just a reminder that the contact information for the IR offices in Tokyo, London, and New York are in the press release, so please feel free to reach out to us with any other questions. Thank you so much for joining us.

Ladies and gentlemen, thank you all for your participation in today's conference call. This concludes the presentation and you may now disconnect.