索尼 (SONY) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the First Quarter Fiscal Year 2011 Sony Corporation Conference Call for Overseas Investors. My name is Jeremy and I will be your Operator for today. At this time, all participants are in a listen-only mode. We will later conduct a question and answer session. (Operator Instructions) I would now like to turn the conference over to your host for today, Sir Sam Levenson. Sir, you may proceed.

Thanks so much for that introduction, Jeremy. And thank you, all, for joining us today, July 28, 2011, for the discussion of Sony's first quarter results. We hope you enjoyed Beyonce's latest album while you were on hold. I'm 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 and M&A for Sony Corporation, and the EVP and CFO of Sony Corp of America, and YoshinoriHashitani, VP and Senior General Manager, Investor Relations Division of Sony. Thank you all very much for joining us.

In just a few moments we'll review today's announcement and 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. 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'm now going to turn to today's announcement. We're pleased to report that the Company was successful in posting JPY27.5 billion in operating profit for the quarter despite the Great East Japan Earthquake and a deterioration in the electronics business environment. Each of the reportable segments posted results which exceeded our May forecast. While the yen continues to strengthen and the business environment remains challenging, particularly for TVs, we believe that the out performance across most of our businesses will be sufficient to offset the pressure and as such we are maintaining our full year outlook for operating profit to be approximately JPY200 billion. We're also pleased to note that the recovery process from the earthquake is proceeding well ahead of our initial expectations.

Let's discuss first quarter results in detail. First I'll explain the results of the consumer products and services segment. CPS segment sales decreased 18%. This is primarily due to lower sales of LCD TVs and PCs resulting from price declines. Operating income decreased JPY26.9 billion to JPY1.7 billion. This is driven primarily by lower gross profit resulting from a decrease in sales and a deterioration in the cost of sales ratio partially offset by lower SG&A. Excluding restructuring charges, the product categories with a deterioration in operating results included LCD televisions, reflecting a decline in prices, and video cameras, reflecting a decrease in unit sales resulting from the market shrinkage.

In the TV business, sales decreased 17% to JPY243 billion due to price declines and the impact of exchange rates. During the quarter, LCD TV unit sales decreased 4% year on year to 4.9 million units. Unit sales decreased because of a challenging market in Europe and in North America where competition increased. On the other hand, unit sales increased significantly in Japan and other regions, including developing countries. Excluding restructuring charges, an operating loss of JPY14 billion was recorded in the TV business. That's down JPY17 billion year over year. This is due to the pricing unit declines I just cited, partially offset by the impact of material cost reductions, expense improvement, and the benefit of restructuring activities.

Next in CPS is the digital imaging business. Compact digital cameras and video cameras experienced a decline in sales and operating income due to a decrease in unit sales resulting from the earthquake, unfavorable exchange rates, and price declines. However, we maintained the high operating profit margin due to further cost reductions.

Turning to the game business, game business sales which include network service revenues decreased year on year due to the impact of PS3 hardware which did not have as much momentum from hit titles as the same quarter the previous fiscal year when Red Dead Redemption was released and due to the PS2 business as a whole which continues to have steady demand but has peaked out and is shrinking. Although sales decreased and results were impacted by our efforts to deal with the unauthorized network access, operating performance in the game business as a while including our network business was basically unchanged year on year because we reduced the hardware cost of the PS3.

As for the rest of the fiscal year, we're on the cusp of launching multiple highly anticipated titles, particularly those customized for the PS moves that were announced at last month's E3 conference and for the end of the year when we launch the next generation portable entertainment system, PS Vita.

PC sales decreased primarily due to the impact of price declines and a decrease in unit sales mainly in North America and Europe. Operating income increased due to an increase in material cost and strong sales of high-end models like the VAIO S Series.

Now I'll turn to professional device and solution segment. PDS sales decreased 17%. This is primarily due to a decrease in sales components, Sales of batteries which suffered from damage to manufacturing equipment as a result of the earthquake and tsunami, and sales of storage media which was also impacted by the earthquake and shrinkage in the market decreased. Operating income decreased JPY15.4 billion year on year to JPY2.3 billion. This is primarily due to a decrease in gross profit from lower sales and deterioration of the cost of sales ratio, despite a decrease in SG&A expenses. Excluding restructuring charges, the product category which had the most significant deterioration in operating results was components which had a decrease in sales primarily due to the impact of the earthquake and tsunami.

Turning next to the pictures segment, sales increased 9% and operating income increased 50%. Sales increased primarily due to an increase in home entertainment revenues and advertising revenues from SPE's network in India, partially offset by a decrease in theatrical revenue as the same quarter in the previous fiscal year benefited from the strong performance of The Karate Kid. Operating income increased primarily due to higher revenues from SPE's television network and the gain on the sale of SPE's equity interest in a TV production company in the UK.

Sales in the music segment decreased 1% and operating income increased 61%. Due to the appreciation of the yen, sales were slightly down while on a local currency basis, sales increased due to a number of key releases. Operating income increased due to the strong performance of key releases and the recording of the gain from a favorable legal settlement concerning copyright infringement.

Next is the financial services segment. Financial services revenue increased 19% primarily due to an increase in insurance premiums resulting from the expansion of policy amounts in force and an improvement in net gains from investments at Sony Life. JPY28.7 billion of operating income was recorded for the segment in the current quarter as business expanded steadily despite a decrease in profits at Sony Bank resulting primarily from a decrease in foreign exchange net gains on foreign currency denominated customer deposits.

Sales at our equity affiliate Sony Ericsson decreased 32%. This was due to a decrease in unit shipment costs by a constrained supply of critical components as a result of the disaster in Japan and a decline in the number of future phones shipped as a result of our focus on smartphones. We expect there will be hardly any impact from the earthquake and tsunami on shipment of new products for the rest of the fiscal year.

Loss before taxes of EUR43 million was recorded for the quarter compared to an income before taxes of EUR25 million in the same quarter of the previous fiscal year due to the lower volume. As a result, Sony recorded equity net loss for Sony Ericsson of JPY3.1 billion for the quarter compared to an income of JPY0.6 billion in the same quarter of the previous fiscal year.

So, that ends my explanation of the segment results. I'd like to turn next to our forecast for the full fiscal year. For the balance of the year our assumptions for foreign currency exchange rate are approximately JPY80 to $1 and approximately JPY115 to EUR1. We have revised our sales forecast downward from JPY7.5 trillion to JPY7.2 trillion for the fiscal year due to the faster than expected deterioration of the electronics market in the US and Europe and due to our assumed appreciation of the yen. We have made no change to our forecast for consolidated operating income.

Notable changes to the fiscal year operating income forecast by segment are as follows. Operating results for the CPS segment are expected to be significantly below our May forecast. Operating results for the first quarter exceeded expectations and businesses negatively affected by the earthquake are recovering faster than expected. However, we are viewing the CPS segment operating results more cautiously for the fiscal year compared to the May forecast primarily due to the television business in which LCD unit sales for the fiscal year are anticipated to be below previous expectations.

Operating results for the PDS segment are expected to be above our May forecast. This is primarily because of faster than expected progress in reducing cost and faster than anticipated recovery in business operations that had been negatively affected by the earthquake. The fiscal year operating results for pictures, music, and financial services segments are all expected to exceed our May forecast.

So, just to recap, the out performance of PDS, pictures, music, and financial services is expected to offset the reduced outlook for the CPS segment. Net income attributable to Sony Corporation stockholders has been revised downward primarily due to a higher than originally forecasted expected income tax rate.

That finishes our review of the forecast and now we would like to turn to your questions. Operator, please queue up for questions.

(Operator Instructions) Your first question comes from the line of Daniel Ernst with Hudson Square Research. You may proceed.

Yes. Good evening and good morning. Thanks for taking my call. A couple questions, if I might. First, while it's somewhat of a new development, do you have any commentary on Nintendo's DS3 -- 3DS price this morning relative to plans for the pricing on the PlayStation Vita? And then on the digital imaging side with camcorder sales down 29% year over year, you said in the prepared remarks that it's overall market shrinkage. But I think that's more of an acceleration and decline than we've seen in the past. Do you have any commentary on the outlook there? Was that a product positioning issue? Was it a channel issue? Or should we expect that of actually be a trajectory for the camcorder industry going forward? And then finally on the 3D industry in general we've seen a lot of weakness in the US, the box office, you've marketed the premium, the attendance that we used to get on 3D, has that had any impact on the Sony 3D ecosystem? Thanks.

Okay. Your first question about 3DS reducing prices -- well, normally we don't comment on competitors' pricing decisions. But if we kind of rephrase the question and say that is this price drop in anticipation of [ESP] they're coming out in the fall. The only comment I can make at this point is that both products I think are positioned differently. So, pricing decisions? It's up to the consumer to decide. I see it. They are completely different products. I don't think there's much meaning to compare pricing of these products.

Your second question about camcorders, the decline in first quarter -- this is I think basically due to the fact that the earthquake in the Northern part of Japan affected the supply chain and we were not able to supply necessary quantities to meet demand. That would be the main reason.

Your third question about 3D, I've been saying that 3D, we think this is a very important part of our business and not just a onetime fad. I think the sales of the 3D product, if we look at last year, although they were good, were still slightly behind our projections. I think the reason for that is I don't think we have enough good 3D content at the moment which is improving every month. Once we have more attractive 3D software, I think our 3D business will improve.

Now, the box office -- I think -- Rob? Do you have any insight on this one?

Sure. I think at the end of the day it's about the story and if you start with quality content, 3D can supercharge it but it has to be a great story to begin with and I think the films that have been based on great story and have a strong foundation, have done well in the box office and those that have been weak and used 3D as a novelty have not fared so well. We have a lot of 3D films planned over the next year and obviously some coming out next weekend. We had the Green Hornet, we have Arthur Christmas, and a bunch of other films and we're excited about it and I think [Hatsan] is correct. As soon as that base of strong 3D content is available for those on the TV side, I think TV will have a strong foundation as well. We're doing our part with 3DNet which is a joint venture with IMAX and Discovery Channel and hopefully that serves to provide a base for TV viewers. But we're in the beginning stages of 3D but so far, so good.

You can go out and see Smurfs tonight in the States.

I'll take it under consideration. Thanks for the answers.

Jeremy? Next question, please?

Your next question at this time comes from the line of Andy Hargreaves with Pacific Crest. You may proceed.

Thanks. I just want to ask about TVs and specifically sales to emerging markets. Are sales to BRIC countries that you're growing profitable at this point and the drag is purely from developed markets?

Yes. Basically, yes. When you look at the global markets, sales in the emerging markets including the BRIC countries, for us it is still growing and it has been and still is a profitable business for us. If you look at it country by country, there are some difference. As you know, China has seen a little bit of a -- not a decline, but a slowdown. But it's still positive for us. But if you go to countries like Brazil and India, they are growing at an accelerate pace which is very good for us. Yes. And the problems we foresee in the television business, it's more towards the richer markets, North America and European countries.

You mentioned inventory in the developed markets. Can you get a little bit more specific there? Is there a timeframe where you think the inventory situation will be a bit more balanced?

I think it's not just us but for everybody in the market and I cannot talk about our competition but as you see there are a lot of price cutting in the markets. Eventually, over time, I think the inventory situation will be I would say better. I think everybody wants to be in a better position near the Christmas holiday season. I cannot give you a timeframe. Is it two weeks or two months? I'm not going to answer, I guess.

Then on Blu-ray you didn't change of your guidance it didn't look like there. But can you comment at all about the demand? With TV sales especially at the high end weak in developed markets, have you see a slowdown in Blu-ray sales in developed markets as well? If so, is that being made up for in emerging markets?

Blu-ray is becoming a good business, a nice business for us. I think a lot to do with sales of large screen flat television as well. Because if you look at the Japanese market, as you know we have this government subsidy, the eco-point system which has expired and also we have made the shift from analog to digital just this week, meaning that many people had to buy new television sets over the past year. And when that happens, people went for very -- for the people who can afford to buy large screen high-end television which I think grew the appetite for BD [recorders], especially in Japan. Overall BD business is growing. It is a profitable business for us. Yes.

Thank you.

Your next question will be from the line of Kota Ezawa from Citigroup. Go ahead.

Hi. Thanks for taking my question. Just one question for you. [Kataza] mentioned in the meeting in Tokyo about the further restructuring opportunity particularly on the headquarter on the sales company. Interestingly, but expectedly, Panasonic also mentioned additional restructuring today with even more specific timing. They said they will explain about the restructuring by the end of the next quarter results. Would you also give as much color on your restructuring in terms of timing or possibly depth as well? Thank you.

Regarding steps, we are -- the current stage, we are in the planning process. We do have an idea where we should be focusing and I did mention about those during the meeting. Previously, restructuring always referred to factories, headcount within the product divisions, not so much so in headquarters and the sales and marketing groups. But this time we have a much more broader scope. Now, details, further, what I have said -- we need a little bit more time. We have changed the management team within the group, the consumer product and service group, and we announced it today. So, we have a shuffle in management. The new management needed a little bit more time to review the situation and as a team they are discussing every day now on how to improve the situation. I cannot give you a timeframe. It shouldn't be so long until we are able to communicate to you the kind of programs and initiatives we will be taking.

Thank you.

(Operator Instructions) You have a question from the line of Louis Schreurs with LS Consultancy. Go ahead.

Yes. Good morning. I've got a small question and mostly by (inaudible) to buy because of the lines may be so bad. Could you comment on the operational results (inaudible) in the first quarter? Did I understand correctly it was JPY14 billion lost? Am I wrong in assuming that?

I'm sorry. The operational results of which part of the Company?

The LCD TV.

The LCD TV? Yes. JPY14 billion operating loss for the quarter which is down, as we noted, from last year.

Okay. Thank you.

You're welcome. Can we have the next question, please?

Your next question is from the line of Sam Carlyle with Investors Asset Management.

Hi. Thank you for taking the question. My question is first of all I think you mentioned in the meeting in the afternoon that your inventory, the semiconductor is actually a bit higher than your forecast. Can you quantify that? Tell us what cost increased? And secondly, my same question would be on your television business. Are you seeing that you've already come down on your -- in terms of production, et cetera? It was your television business. And now you're no longer chasing volume growth. Realistically, how much cost would you be able to cut moving forward and what's the chance of shrinking the losses there? Thank you.

On the inventory situation related to the semiconductor business, there are two sides to it. One is -- I'll start with the slightly negative side which is we have said that the TV sales have declined or are projected to decline. So, one part of the semiconductor inventory is related to [LSIs] for TV. The bigger part which is I don't think it is a problem at the moment is that since semiconductor signals, in view of the demand that we see in the coming months, frankly speaking we cannot meet full demand on a month by month basis. So, we made plans on an annual basis to kind of even the output. What this means is that we have continued to build inventory in anticipation of demand in the future. So, this is more of the factory goal even though they are not immediately sales for the quarter. So, basically this is -- what I'm talking about is the sensors which is the very highly planned product and highly profitable as well. I don't think of that as a problem.

Okay. The loss situations are related to TV. It is quite difficult to relate directly the reduction in the volume. Quantities reducing from 27 million to 22 million. What I had said during the Tokyo meeting was that overall, although we will impact smaller quantities, try to kind of balance sales with profitability, the magnitude of the loss would be greater than what I had communicated to you during the last earnings call in May (inaudible) -- flat, could be -- the losses could be as high as last year's losses or -- if you take the most pessimistic case, maybe even larger than that.

Okay. To supplement that, the reason why we see that, while we're losing quantities, may be a better strategy to take is that in some markets we see a very tough competition in low-end products for small inch size products. Here, even though we did our best to get the costs down as much as we can, still the pricing situation today is that if we pursue quantities here when we're losing money on every unit we sell. That's where we have decided not to pursue those segments and focus on high-end products where we can get more contribution from each product and also pursue emerging markets where growth and profitability is still in balance. We are quite profitable in the emerging markets at the moment.

Terrific. Jeremy, we've got time for one more if you have one more question.

(Operator Instructions) It doesn't appear that there are further questions at this time.

Terrific. I invite everyone on the call to feel free to reach out to one of our Investor Relations offices in London, New York, or Tokyo for any follow-up questions you have and thank you, all, for joining us. Have a good night.

That does conclude our question and answer session for today, ladies and gentlemen. We thank you for joining our conference and have a wonderful day.