索尼 (SONY) 2013 Q4 法說會逐字稿

Good morning, and welcome to the Sony Corporation conference call for overseas investors, for the fiscal year ended March 31, 2014. My name is John, and I will be your operator for today's call.

(Operator Instructions). Please note that this conference is being recorded.

I will now turn the call over to your host, Casey Keister. You may begin, Casey.

Thank you very much for that introduction, John. And thank you all for joining us today, May 14, 2014, for a discussion of Sony's results for the fiscal year ended March 31, 2014. We hope you all enjoyed Pharrell Williams' new hit album, GIRL, while you were on hold.

I'm Casey Keister in the investor relations department here in Tokyo. And with me on the conference call tonight is Kenichiro Yoshida, CFO of Sony Corporation; [Ichiro Takagi], Senior Vice President; Kazuhiko Takeda, Vice President, and Senior General Manager of Sony's corporate control department; and Steven Kober, Executive Vice President, and Chief Financial Officer of Sony Corporation of America. Thank you all very much for joining us.

In just a few moments, we will review today's announcements, and then 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 assumptions, in light of the information currently available to us. 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 statement.

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 reply 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 the mic over to our CFO, Kenichiro Yoshida, to further explain the announcement made earlier today.

Thank you, Casey. And thank, all of you, for taking time to listen to today, and for showing an interest in Sony. I know many of you have supported Sony for a long time, whether shareholders or not. And I humbly appreciate your ownership and your concern for our future.

Some of you may know that I spent close to nine years as President of So-net Corporation, an Internet service provider in Japan, which was majority owned by Sony. In December of last year, I came back to Sony Corporation, where I started my career, to become Chief Strategy Officer and, as of April of this year, I assumed the role of CFO.

I look forward to speaking with you on these calls every quarter, and in other meetings, going forward.

As I mentioned today at our earnings announcement in Tokyo, I deeply regret to have to report that we recorded a net loss of approximately JPY130 billion in fiscal year 2013; and that we expect to record a net loss of JPY50 billion in fiscal year 2014.

This means that we would not achieve the financial targets for fiscal year 2014 that we announced at our last corporate strategy meeting.

I want to emphasize, however, that both the loss in fiscal year 2013, and the loss we project for fiscal year 2014 are due to our aggressive efforts to restructure Sony, and to position us for future bottom-line growth.

The total amount of cost we will incur over fiscal year 2013 and fiscal year 2014, to exit the PC business, and implement other strategic management initiatives, is approximately [JPY300 billion].

Our decision to exit the PC business was not an easy one. It was also a costly one. We recorded almost JPY92 billion in total losses associated with the business in fiscal year 2013.

In fiscal year 2014, we expect losses from this business to be approximately JPY80 billion. But we feel that withdrawal from the PC business is an essential step in the transformation of Sony.

Fundamentally, altering the cost structure of our sales companies and headquarters is another important staff in our transformation; the data is clear.

The sales of our legacy electronics businesses have come down by almost half from their peak in fiscal year 2007. The majority of our headquarters and sales companies' costs are related to these legacy businesses. And we must alter our cost structure to adapt to this new operating environment.

We are targeting a 20% reduction in fixed costs at our sales companies by fiscal year 2015 from the approximately JPY290 billion in fiscal year 2013. And we are targeting a 30% reduction of fixed costs at headquarters by fiscal year 2015 from the approximately JPY145 billion in fiscal year 2013.

One of the reasons why we recorded a net loss in fiscal year 2013 was because we recorded impairments of assets in businesses, such as batteries and disc manufacturing. We undertook these impairments not only because we want to ensure that our balance sheet properly reflects the value of our assets, but also because we want to increase flexibility regarding these businesses, going forward.

You have probably noticed that we have increased our disclosure from this fiscal yearend, providing a forecast for each of our business segments and outlining our long-lived assets and goodwill by segment. By doing so, we hope to increase transparency, enhance accountability and augment our credibility with investors.

We believe in the simple principle that as these metrics improve, our Company's performance will also improve.

Fiscal 2014 will be yet another year of restructuring for Sony, but I believe it will be the last and that we can turn toward a bright future in fiscal year 2015.

Thank you for your kind attention. I will now pass things back to Casey.

Thank you, Yoshida-san. Before we turn to questions, I would like to briefly touch our results and forecast.

First, I would like to summarize the consolidated results for Sony in fiscal year 2013.

Consolidated sales for the year increased 14% year on year. The launch of the PS4 and higher sales of smartphones contributed to this increase, but the primary reason for this increase was the depreciation of the yen.

Operating income was JPY26.5 billion, down approximately JPY200 billion year on year.

The primary reasons for the significant decrease in operating income were the recording in the previous fiscal year of nearly JPY240 billion in asset sales and measurement gain; a JPY38.6 billion loss in fiscal year 2012 related to the PC business, including restructuring charges compared to a JPY91.7 billion loss in the same areas in fiscal year 2013; and the recording in fiscal year 2013 of JPY32.1 billion in impairment charges, related to the battery business and JPY25.6 billion related to the disc manufacturing business.

Net loss was JPY128.4 billion due to the impact of income taxes and net income attributable to non-controlling interests.

I encourage you to reference today's earnings release for a discussion of the actual results of each of our business segments.

Now, I will touch on the forecast for FY14.

We expect a slight increase in consolidated sales to JPY7.800 trillion. We also expect operating income and income before income taxes to increase to JPY140 billion and JPY130 billion respectively. However, due to the relatively low level of profitability, we expect to record a net loss of JPY50 billion, as Yoshida-san mentioned.

In keeping with our theme of enhanced transparency, from this earnings announcement we have begun to disclose the sales and operating income forecasts for each of our business segments. We have also made some slight revisions to our reported segments, which are described in the release.

In order for you to be able to compare our fiscal 2014 forecasts to our previous results, we have restated the results of fiscal 2012 and fiscal 2013 based on our new segments.

Each of our segments' forecast is based on Sony's internal budget and has been disclosed without any top-line adjustment.

Costs related to Sony's exit from the PC business and other strategic initiatives in FY2013, which Yoshida-san mentioned, amounted to JPY177.4 billion. In fiscal 2014, we expect such costs to amount to approximately JPY135 billion, and they will be primarily included in all other corporate and elimination.

In conclusion, let me touch on some key points regarding the forecasts for each of our segments.

In the mobile communication segment, which is now made up predominantly of our smartphone business, we plan on expanding our geographical and carrier footprint in fiscal 2014.

Profits are expected to grow but not significantly due to an increase in developing and marketing costs, resulting from expansion in our product portfolio. We view the smartphone business at a B2B business with the telecom carriers as our customers. Therefore, we are working hard to enhance our relationships with them.

We're also focused on managing operational risk.

In the game and network services business, the PS4 has gotten off to a strong start and we expect the loss we incurred in fiscal 2013 to change to a profit in fiscal 2014. We view one of the short term challenges of this business to be the management of the infrastructure costs of our network services system.

The imaging products and solutions segment is also projected to see an increase in profit in fiscal 2014 as we focus more on high value-added products in the face of a shrinking market.

In the home entertainment and sound segment, the profitability of the TV business is expected to improve pulling the segment from a loss in fiscal 2013 to an expected profit in fiscal 2014.

We made progress on our initiatives to reduce fixed costs in the TV business in fiscal 2013, but we did not reduce sales company costs fast enough and the economic and foreign exchange rate conditions in emerging markets hurt performance.

We will move the TV business into a new subsidiary in July, so as to optimize costs and strengthen our ability to adapt swiftly to changes in the market.

In the devices segment, we expect to generate a profit in fiscal 2014 compared to a loss in fiscal 2013. Included in the loss in the devices segment in fiscal 2013 is JPY32.1 billion in impairment charges related to the battery business. We believe that this impairment and other efforts have put us back on a path to rebuilding this business.

In the pictures segment, sales are expected to increase primarily due to increased sales in media networks. While operating income is expected to increase primarily due to a stronger motion pictures film slate and from increased media network sales.

Sales for the music segment are expected to be essentially flat year on year, and operating income is expected to slightly decrease, primarily due to an increase in restructuring charges, as well the negative impact from the contraction of the recorded music market in Japan.

In the financial services segment, financial services revenue is expected to be essentially flat and operating income is expected to decrease year on year. However, if the favorable impact of market performance on the operating results for fiscal 2013 is excluded, financial services revenue and operating income are expected to increase in fiscal 2014, due to the continued steady expansion of the financial services business.

That concludes our review. And now, we'd like to turn it over to you and answer any questions which you might have.

John, would you please queue up the questions?

(Operator Instructions). Richard Kramer, Arete Research.

I've got two related questions on mobile to start with. On the last call, Kaz Hirai said he would double down in the US and China on sales, but it doesn't seem that any US carrier has adopted the Z2.

Can you go through what drives the acceleration to higher 28% unit growth implied in your guidance?

And what does placing the mobile business in a separate subsidiary -- or splitting it out as a separate stock company, say about the goal of one Sony and integrating mobile more closely with other Sony operations?

Then I'll a next question after that. Thank you.

One moment, please.

Thank you very much for the question. As for the US, we are currently providing our mobile phones to the T-Mobile. And as you know, their activity, T-Mobile market share is small. Currently, we are talking with other telecom carriers in United States, also in China and also in Brazil. This year is a challenge year to expand our business domain.

As for the entity because the nature of the business -- of our mobile business is different from other audiovisual companies, so far we have no intention to integrate the mobile company into our Sony Corporation headquarters.

Thank you.

Okay. My next question, and maybe you'll be discussing this more next week, but if I look at your guidance as a whole for the various electronics businesses, even excluding TVs, you're still looking at -- your guidance is for roughly JPY100 billion or so of profits on about JPY4.7 billion -- JPY4.7 trillion of sales.

Should we just imagine that the 5% margin guidance for electronics is now something we should put in the past? If so, how should we think about your statement about having no further restructuring, i.e., will you take further restructuring perhaps in FY15 to reach this 5% goal, or should investors now no longer expect that the 5% margin target holds for electronics?

Thank you for the question. Yes, the 5% target for the electronics business is no longer feasible, I have to admit. In the next fiscal year, we see, of course, a much less restructuring cost will be incurred. If the market situation or business situation will change, we have to do the kind of restructuring.

But again, the 5% would be not such a big scale I expect. Thank you.

Okay. Thank you.

Daniel Ernst, Hudson Square.

I have a couple of questions on the game division and one question on the pictures division.

In game, given the success of the PS4 to date, which you've previously announced as 7 million units have sold through, it seems that your forecast for growth in the PlayStation hardware business seems a bit conservative. I wonder if you could talk about the moving parts there.

Second, on the flip side the PS Vita, while it has a niche group of fans, you're projecting JPY3.5 million sales for next fiscal year, which in the greater scheme of Sony's global scale, almost seems like it's not worth the effort. I wonder if you could comment on that.

Then last question on game; you're projecting roughly 1.6% operating profit margin for the coming fiscal year. In the past, so at the height of the PlayStation 2 cycle, you had operating margins closer to 10%.

I'm wondering, do you think that in this cycle, given how well you're doing, we can see an operating margin similar, or at least closer, to what we had in those PS2 days?

Then switching to the entertainment business, when we were in Los Angeles for the entertainment day in September, there was a lot of discussion about the cost cuts going on there.

I wonder if you could update us onto where that process stands; is it done for now or is that still ongoing? Thanks.

Thank you very much for the question. First of all, as you said, PS4 is doing very good. Actually, more than half of PS4 purchaser engaged in the PS Plus [setup] services.

As for the PS Vita, this particular platform is actually doing less than our expectation.

As for the current fiscal year's expectation for margin [smaller] than you expected is -- one reason is because of the relatively higher network cost of SMEA.

As you know, currently, more and more proportion of the content delivery through network is getting large. And in case of SMEA, our perimeter entertainment cost increases are resulting from the increasing numbers of sessions and traffic are exceeding our expectations, especially data center and backbone and CDM and content, [where the] network (inaudible).

So that is the basic reason of the lower margin. But we expect, network service's eventual margin will exceed the threshold. So I personally think PS4 has good potential to achieve the level of profit which PS2 achieved in the past.

And as for the second question, Steve, could you?

Sure, let me respond to the entertainment question. In November, we announced the multi-year program that would take through March of 2016 to implement.

So far, we're right on target. Of the $300 million in targeted annual savings at Sony pictures, approximately $130 million was realized that in the year ending March 31, 2014.

For fiscal 2014, which has just started, all of our entertainment units' budgets are consistent with the program that was implemented and announced last November during the entertainment investor meetings. So everything is on target as of right now and we're very optimistic that we will meet the targets we promised.

Thanks.

Thank you.

Kota Ezawa, Citigroup.

I have two questions. The market has already started to be worried about the new guidance, on TV 60 million units and mobile handsets 50 million units and a favorable weaker yen assumption on the US dollar and the euro.

I'd like to know what's Yoshida-san's contingency plan, if those numbers should fall against your guidance. For example, TV, if it is almost flattish from the first year, you will lose JPY110 billion of revenue. Mobile handsets could be the same; and the currency also you could lose a couple of billion yen.

So how you can cover these potential losses in the sales if it happens, if it's a worse case; cutting the further fixed costs; by adding more restructuring; or you could say some other procedure that you can take on varying costs or margin or profit ratio side? This is question number one.

The number two is about R&D cost. You said that the further R&D cost increase in this fiscal year, which actually has surprised the market again.

I'm just curious why the R&D cost is increasing after you disposed the PC business. And it's almost reaching 8.5%, although you mentioned JPY5.4 trillion electronics business overall sales. This is probably -- this is very high ratio over the sales. So I'd also like to know: what's the long-term Sony's electronics' business R&D costs spending level? Thank you.

As for the first question about television, it is true, we are expecting a growth. But, at the same time, we already fixed the fixed cost of the business side, whereas fixed costs of the sales company that helps with our (inaudible).

As for the upside risk or downside risk of the top line, we are currently carefully monitoring and actually, we set a monthly operation meeting, including myself as well as top management of TV and (inaudible), as well.

So I think the current television management team is capable to effectively respond to the change in the marketplace. So I, myself, am less concerned that -- than the mobile business.

In the case of the mobile business, as we said that we are expanding the total [variance], and countries and also telecom carriers. So as for the mobile, we have to even closely look at the day-to-day operations, particularly the delivery of the product is key to watch. That's my answer.

And as for the R&D, why it is going up, there are two reasons. One is the going up in mobile business, based on the increase of the [variance]. And secondly, the increase in the device business mainly for semiconductors CMOS image sensors.

Thank you.

(Operator Instructions). Samuel Lau, [Micro Research].

If I may, can I ask following up on your answer on the television business, you mentioned that your fixed costs is pretty much fixed now.

In that case, I wonder whether that 16 million units target that you set, whether it was actually simply set, because that equals to your break-even point.

And how do you plan to achieve that figure? Is that -- basically, are you counting on market share gain? That's my first question. I've got a second question.

One moment please.

Well, as you may know, the 4K market, where we have a strength, is now expanding and we are actually doing good, particularly in Japan. We started a 4K business in China as well. So we are expanding.

The decline in average price in 4K, but still 4K is much higher in price. So that is one of the reasons why we are expecting a sales volume growth. We are currently doing very good in emerging countries, particularly in India as well; that is another issue. Thank you.

Okay. Sorry, just a follow-up one on that. What proportion of the market at the moment is 4K? And roughly for your Company as well; do you have a rough figure? As a proportion of your sales, what proportion is 4K please?

Yes. As for the unit base, it's approximately 5%, but [by the] base it's much, much higher than that. Thank you.

Is that both for your Company as well as for the market?

That's Sony.

That's Sony; okay, great. Thank you very much. Okay, my second question is about your forecast. You provide on page 11 of your presentation materials the segment sales and operating income split for the current year, which is very useful, so thank you very much indeed.

I just noticed that there is a rather big JPY262 billion of all other, corporate and elimination. Would you be able to perhaps give us a little bit more details in terms of the breakdown? And within that, how much of it is one-off? Do you think -- well, in next year, it would potentially return to the JPY83 billion seen in fiscal year 2012?

Thank you for the question. Mr. Takeda is going to answer the question.

Thank you for asking. So I understand that your question is that we put a large portion of the amount in the other segment and you are asking what the proportion of that.

Then, look, to answer the question, I think you should have mentioned that we will spend JPY135 billion in the -- in those total transformation costs, including reforming the -- our sales companies and also heads of function. As well as we have incorporated some risk associated the transformation activity. So that represents approximately half of that total portion.

On top of that, we put some portion of the Vaio business loss from -- previously we recorded that into our mobile communication product segment, which we reclassified into the other segment in this fiscal year. So those two big items represent, I think, a large portion of the other segment in fiscal 2014.

Does it answer your question?

Yes, I guess that JPY135 billion, I suspect you expect that to be a one-off for the current year; is that correct?

And also, the Vaio business loss, roughly how much is it? Do you expect it to be recurring; will it continue over the next few years?

No, that is one-off in fiscal year 2014 as well, because we are closing down the Vaio business in 2014. So that is going to be a one-off, I would say.

Right. And okay, so the JPY135 billion restructuring cost, that's one-off as well; is that right?

That is true.

Okay. And the Vaio, can you perhaps give us some idea? Does it -- should we expect -- because the remaining --

JPY44 billion as a loss from the PC business in fiscal 2014, on top of the JPY135 billion.

Okay, thank you. And so the remainder should be recurring, so we should perhaps expect a similar scale?

That's right. That's in the overhead expenses for the headquarters and some the common expense for the corporation.

Okay, which you are hoping to reduce anyhow over time. Okay, great. Thank you very much.

(Operator Instructions). [John Lachky, CREF].

I have a couple of questions. First of all, the JPY262 billion on the others, I'm still a little confused on the mechanics there. Could you maybe give us a better breakdown of what that JPY262 billion entails, including what the residual headquarter expense allocation is expected to be on a go-forward standardized basis?

That's the first question; I'll follow up.

Thank you for asking. However, I want to say we would not be able to give you a further breakdown of the headquarter expense, at this point of time.

Okay. And then the asset sales, it includes JPY20 billion of asset sales, so if we strip that out, the total cost would be JPY282 billion. So can you give me a better under -- of that JPY282 billion, JPY135 billion is related to restructuring? Or are there other items that are considered one-off, like the PC losses are higher than the simple JPY35 billion stated in the restructuring?

One moment, please.

So I -- is your question that how much loss associated value was incorporated in JPY282 billion?

Well yes, I guess so. I'm seeing this JPY135 billion --

Okay, okay, I'm sorry; right, right.

And it says JPY35 billion, but at the beginning of the conversation you said negative JPY80 billion, I thought was for FY14, so I'm a little confused there.

Okay. For the first question, of JPY135 billion, JPY36 billion is associated the Vaio exit cost. So if you add up the other losses from the operating from the Vaio business in fiscal 2014, you put the sum up; up to the JPY80 billion. That is associated to Vaio business.

Okay. So -- okay, got you. So in fiscal 2013 it looked like some -- a couple of charges were accelerated, I guess mostly the ODD business, which might have been on the deck for fiscal 2014 anyway. And this year in fiscal 2014 the restructuring, stripping out the PC JPY35 billion, you're at JPY100 billion. And previously you were looking at JPY70 billion.

So if we add back the supposed ODD, and then look at the increase from JPY70 billion to JPY100 billion, the plan for restructuring and impairments, you're probably looking at real number fiscal 2014 of around JPY125 billion or JPY130 billion.

That's substantially larger than previous. What incremental efforts are you doing? Should we read this as an accelerated larger restructuring effort?

And regarding the benefit, I have not seen any detail on whether the JPY100 billion benefit to accrue from these efforts has also been likewise increased.

Do you have a rough estimate of the additional positive impact that might come from the increased restructuring?

Thank you for -- yes, I think --

Does that make sense?

In -- yes -- in -- I think you're correct that in the previous conversation that we said that the restructuring costs could be amount to the -- amounting to JPY70 billion. Then, today, we would increase that amount up to JPY80 billion. That's correct.

Then on top of that, we put some risk associated that there is transformation of our business risk into that other segment. So yes; that is all about the risk assessment what we went -- run through in headquarter.

Right. But you also took more charges last year, which probably would have been necessary to take this year.

I'm just wondering, the charges seem higher; the restructuring effort seems probably a bit larger. Will the benefit be more than the JPY100 billion that you had previously targeted?

Yes, I think the -- we would expect some more benefit than the JPY100 billion, which we announced in the previous announcement.

Okay. And as far as the new restructuring plan, are there any details on incremental efforts that you're making, that you can share? Is there a higher headcount reduction target? Or what is the incremental change from a few months ago?

One moment, please.

Yes, I think you're not incorrect that in previous announcement we have said approximately the 5,000 headcount. And of course, if you did anticipation of some researching activities for going forward to the fiscal 2014 -- from fiscal 2015. So amount of headcount could be increased.

Okay. And as far as the speed of the restructuring, and the benefits that are accruing; I can't imagine that the restructuring is static; that's going to happen on the last day of this fiscal year. And so I'm hoping to hear that the restructuring will be -- the timing -- can you give us some sort of sense as to the timing of the restructuring?

Are you looking to pull forward much of the effort, so that it's accruing more in the first half of the year? Or is it pretty steady throughout the year?

And as far as the benefits, JPY100 billion benefits; how much do you think actually accrues this year? And is that already in the budget? Or -- because if it is, then I guess that the net that would flow through next year would be much less than JPY100 billion.

So I'm just trying to understand, how much have you baked in of the benefits? Because as you're doing the restructuring, you should see some immediate impacts relatively quickly, no?

Thank you for the question. I would assume the major benefit will occur in fiscal year 2015. Some benefit may occur in the latter half of this fiscal year; but majority be the fiscal year 2015.

Can you walk through why that is?

Yes. As for the restructuring, particularly personnel issue takes some -- needs some time and some steps. So it takes some time. Thank you.

But much of it's on the sales company, which is overseas, and not Japanese, no? That doesn't sound like it takes as much time usually, overseas, to restructure.

Well, in case of US it doesn't take so much time. But in case for Europe and in Japan takes time; particularly in Japan, so labor law is quite strict. So we have to take some steps to do that. Thank you.

Okay. And when do you think the Company would be comfortable giving a longer-term view on what you think a sustainable profit level would be, post- the restructuring, as well as a sustainable tax rate over the next several years? A normalized tax rate, as well.

Well, at this time, it's a little bit early to make any forecast for the fiscal year 2015 or after.

However, what I can say is, at least we can reduce the amount of restructuring cost; and at least we can expect the diminish of the exit cost of PC. And thirdly, we can expect almost JPY100 billion benefit from the ongoing restructuring, beginning from fiscal year 2015. Thank you.

Okay.

Let me just add one comment on taxes. As you know, we have recorded large valuation reserves in prior years. Therefore, we will get the benefit of that as we start earning back money.

So it's hard to determine a run rate tax rate until we get good forecasts and we eat into our valuation allowances. Thanks.

Right. Thanks very much.

As we're running out of time, I'd like to hand the call back to Casey Keister, for closing remarks.

Thank you very much, John. We'd like to thank all of you for joining us today to discuss the announcement. Please feel free to contact our London, New York or Tokyo Investor Relations offices if you have any further questions.

Thank you all for joining us, and goodnight from Tokyo.

Thank you, ladies and gentlemen. That concludes today's call. Thank you for participating. You may now disconnect at this time.