索尼 (SONY) 2014 Q4 法說會逐字稿

Welcome to the Sony Corporation Conference Call for overseas investors for the fiscal year ended March 31, 2015. My name is John, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded. Now, I will turn the call over to Casey Kuester.

Thank you very much for that introduction, John. And thank you all for joining us today, April 30, 2015, for a discussion of Sony's result for the fiscal year ended March 31, 2015. We hope you have all enjoyed Cassandra Wilson's Going Forth By Day while you were on hold.

I am Casey Kuester in the Investor Relations department here in Tokyo. And with me on the conference call tonight is Kenichiro Yoshida, Executive Deputy President and CFO of Sony Corporation; Kazuhiko Takeda, Vice President and Senior General Manager of Sony's Corporate Control Department; (inaudible) Vice President and Senior General Manager of Sony's Finance Department and Steven Kober, Executive Vice President and Chief Financial Officer, Sony Corporation of America.

Thank you all very much for joining us. In just a few moments, we will 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 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.

Before turning to Yoshida san for some remarks, please allow me to briefly give an overview of our results for the full year and forecast for the upcoming fiscal year.

In fiscal year 2014, consolidated sales increased 5.8% year-on-year to JPY8,215.9 billion, primarily due to the impact of the depreciation of the yen. Consolidated operating income was JPY68.5 billion, roughly two and a half times higher than that of the previous fiscal year. Net loss attributable to Sony Corporation's stockholders was JPY126 billion, essentially flat year-on-year. For fiscal year 2015, we expect consolidated sales to decrease by 3.8% year-on-year to JPY7,900 billion, consolidated operating income to grow to JPY320 billion and net income attributable to Sony Corporation stockholders to be JPY140 billion. Also, we plan to issue an interim dividend of JPY10 per share this fiscal year.

For this fiscal year, in order to better reflect the current business landscape, we have revised the sensitivity of our combined electronics business to JPY7 billion negative impact per yen depreciation against the US dollar and JPY5.5 billion positive impact per yen depreciation against the euro. The change in the impact from the US dollar, in particular, has had a large impact on our forecasts. There are two major reasons for revising our sensitivity to the dollar. First, when calculating our sensitivity, we exclude the impact of emerging market currencies which we had previously included in our US dollar sensitivity calculations, as they were thought to be linked to the dollar. Second, Sony's proportion of dollar-based cost has increased in recent years. Using this updated sensitivity to calculate the impact of currency on a year-to-year basis, we calculated on approximate JPY85 billion impact due to the change in rates from fiscal year 2014 to those used to formulate our business plan for this fiscal year. This impact has been included in each of our segments forecast for the fiscal year.

Since creating our business plan, however, foreign currency rates have continued to fluctuate and we are now forecasting an additional JPY65 billion negative impact on a consolidated basis due to the change in rates. All of Sony's segments are currently evaluating various measures to mitigate the negative effect of foreign currency fluctuation, including changing our prices. The majority of this additional JPY65 billion impact that I previously mentioned, has been incorporated into a JPY70 billion allocation for risk for this fiscal year that we have incorporated into our corporate line. I will now explain the forecast for each segment.

In Mobile Communications, we are planning on focusing on high value-added models in order to emphasize profitability and as a result, we expect Smartphone unit sales to decrease from [39.1 million to [30 million] in fiscal year 2015. We expect to record an operating loss of JPY39 billion, primarily due to the recording of restructuring charges and the impact of the appreciation of the US dollar. We view fiscal year 2015 as the year during which we will implement restructuring within the mobile segment, although it is one year behind the rest of the electronics businesses. We expect to enjoy the full benefits of this cost reduction from the beginning of fiscal year 2016.

In Game & Network Services, although the PS4 platform is expected to continue its strong performance, we are anticipating sales to be essentially flat year-on-year, primarily due to a decrease in sales of the PS3. Operating income is expected to decrease year-on-year to JPY40 billion due to the impact of the decrease in PS3 sales and exchange rate, as well as our intention to aggressively invest in this business.

In Imaging Products & Solutions, although sales of digital cameras and video cameras are expected to decrease significantly, reflecting the continued contraction of these markets, we expect to secure a similar level of profit compared with fiscal year 2014.

Next is the Home Entertainment & Sound segment. In this segment, we are expecting sales to decrease and for operating income to decrease slightly. Last year, the television business, which is included in this segment turned to profit for the first time in 11 years. This year we expect to record a JPY5 billion profit in the television business.

In Devices, fiscal year 2015 sales and operating income are both expected to increase significantly. Orders for image sensors for mobile devices continues to be extremely high and we are operating at full capacity.

Sales and operating income in the Picture segment for fiscal year 2015 are expected to increase, primarily due to an increase in Media Networks sales. However, we expect to record a loss in the first half of the fiscal year, mainly due to the release timing of the Motion Pictures film slate.

Music segment sales are expected to remain essentially flat year-on-year. Operating income is expected to increase primarily due to the recording of (inaudible) on a recent acquisition.

For Financial Services, we expect fiscal year 2015 revenues to be essentially flat and operating income to decrease. This expected decrease in operating income is because we are not incorporating into our forecast the impact of market fluctuations on Sony Life, which increased operating performance in fiscal year 2014. Excluding this impact from prior year results, segment revenues and operating income are expected to continue to increase steadily.

Now, before we turn to Q&A, I would like to turn the mike over to our CFO, Kenichiro Yoshida.

Thank you, KC. I just wanted to say a few words about where I think Sony is in its operations and where we plan to go in the future. Last year, our CEO positioned fiscal year 2014 as a year in which we would finish restructuring. As of today, we have largely accomplished our restructuring goal with the exception of mobile. We have reduced our sales company cost by 20% and our corporate cost by 30%. And we have stopped the [breeding in Ericsson], except for mobile.

A few months ago, we announced our second mid-term plans, which takes us on a path to growth. In order to fuel this growth, we are positioning fiscal year 2015 as a year of investment. One of the largest investment we will make this year is in semiconductor. Our fiscal year 2015 focus for semiconductor CapEx is JPY290 billion. We expect to use JPY210 billion of the JPY290 billion to expand production capacity for image sensors. A large part of the remainder will be used for camera module production capacity.

We're also making investments in the Game & Network Services business. These investments include expansion of the installed base of PS4 and PS Plus subscriber. Enhancement of our service offering, including PS View (inaudible) software and original content, and development of hardware, such as Project [Mophia]. Almost all of this investment will be expensed, rather than [capitalized], but we view it as investment, just the same.

I want to make one think clear, our investments are not aimed at achieving our fiscal year 2017 target of JPY500 billion only just once. These investments are a part of our plan to transform Sony into a company that can generate high level of profits on a consistent and sustainable basis.

Thank you for your attention. Back to you Casey.

Thank you, Yoshida san. I am now going to turn things back over to John, so we can start the Q&A session. Thank you again for your attention. John, would you please queue up the questions?

(Operator Instructions) Richard Kramer, Arete Research.

I've got a couple of questions, maybe on each one in turn. First on the mobile business. If you look at other peers in the Smartphone industry who have made an effort to shrink their platforms to just high value segments, it's been very difficult to be profitable and I noticed that you don't have a long-term return on invested capital target for that business, or a sort of near-term return on invested capital target for that business. Is this a long-term commitment for Sony to stay in mobile or is this shrinking of the business, it's just a stage on a potential exit, and how should we think about that in terms of the investments you might make in the business to try to reach this sort of 8% to 15% target that you have?

Thank you for your question Richard. Just to recap, your question was concerning our mobile segment, about how other peers in the mobile business, when they tried to move to the high end, not always are successful, and what our commitment is long term regarding the mobile business?

In our mobile business, we are doing good in the high-end mobile business in Japan. We are making double-digit gross margin in Japan. So based on the foundation, we think we can maintain the current business and in relation to that as I explained -- as Casey explained, this is a year to make restructuring. We are planning to reduce the operating cost by JPY90 billion. And after that we can count on the good impact from the benefits of the cost reduction beginning from year of 2016 of this effort.

And on the -- I was a little surprised in the guidance for the Game & Network Services business, given that you're entering a very large cycle and obviously seeing growth in both Software and the Network Services business that the overall guidance for sales is roughly flat, as is the operating income guidance. Shouldn't the Game business, as Network Services and Software grows, shouldn't that be becoming a much more profitable business? And equally, when we look at the PS3 shipments or non-PS4 shipments for the last few quarters, they seem already to be down to a very low level. So maybe you could explain why you don't have much higher aspirations in the near term for profitability from the Game business.

Thank you for your question. Once again, just to recap, your question is regarding our Game & Network Services segment. Perhaps, your concern was that the guidance that we have recently given is potentially conservative and we have mentioned in the past that we are going to be growing the PS4 platform and Network Services. And you just wanted to ask about the targets and how we've set them.

The focus of this business is to give them entertainment in network platforms, which is variable to our customers, and to grow our presence. And it's kind of a long-term business plan. And as for this fiscal year, also the network business is rapidly growing, but we have a couple of reasons. As we mentioned earlier, foreign exchange, decrease in sales of the PS3 platform and investment in customer acquisition, customer content and such offerings, and also hardware development. As for the PS3, PS3 is -- last year was still quite a sizable amount and the decline in the PS3 is quite significant, because in case of PS3, we cannot reduce the price of PS3 hardware to the same level as prior generation as being the main reason. And again, as for as the investments, that includes R&D in Game. As we disclosed in handout, the R&D expenditure for the Games last year was JPY89 billion. And we are currently thinking, say, double-digit expansion of R&D in both software and hardware development.

And my last question is just on pictures, since that's the area where growth stands out the most. And I'm just wondering, with the 16% growth you have forecast, how much of that is down to FX and why wouldn't we see a much larger impact on the bottom line, if that business is, is both in sales and in operating income, largely US dollar based?

Once again, just to recap, your question was about our guidance for the Pictures forecast; how much of the growth that we've for forecast next year is due to foreign exchange and your question is just again about the guidance, the bottom line for that segment.

For the coming year, the forecast shows a growth in sales, as you pointed out. A portion of that comes from foreign currency rate. However, the biggest piece comes from our media networks business which continues to grow. However, that's a business that we are growing, investing in and the returns aren't coming through as fast as we can. So the margins are still on the lower end. We're working to improve the margins. So that's why you don't see as big an increase as we would like in the short term, but in a few years, we expect to see much better returns, as we've shown in the targets that we've set for FY17 and FY18.

Atul Goyal, Jefferies.

I've got two questions. Firstly, Yoshida san, last time in the previous quarter you had mentioned that there are certain number of downward revisions that Sony had to do, maybe you said 10 quarters or 15 quarters in sequence, this is before you took over. And that was one of the reasons you are very concerned or careful about the guidance. So that's one. And second follow-up question is on mobile. But if you could just take the first one and remind us what was a concern that you expressed the last time around, which makes you extremely careful when providing guidance?

So just to recap, your question was about Yoshida san thinking about how he decides to create the forecast when calculating the business plan each year.

And also, specifically he mentioned there were certain number of times that certain numbers or certain occasions back to back that he had -- that Sony had to revise down. And this is something that he does not want to do in future. That's why.

Yes, as you mentioned, well, I think we are still regaining the thrust of the capital market, because as you mentioned, we have repeatedly downwards revised our earnings forecast in the past. One point. And, as Casey mentioned, this fiscal year 2015 forecast, we put about [JPY70 billion] of risk upfront. And that's the second point. But having said that, as a whole, this forecast is our best estimate at this point in time.

The second question is related to mobile and there was an earlier question, something similar. Want to follow up on that one that we understand your Japan business is very profitable, probably the most profitable of all the regions. And since Totoki san has taken over, my concerns have subsided. The belief is that he's probably one of the best people to run the business. But that being said, if you don't have a forecast of profits even this year, and assuming that in contingency, at what point in time would you actually consider an exit strategy, because we've been waiting for profits in mobile for a very long time. And I understand that this is your last year of restructuring. You already completed restructuring in other businesses and for mobile this is -- as you are saying, this is the last one. But what is the contingency plan and why would you not consider an exit strategy when even this year -- last year when we started, we were expecting mobile to be profitable, which was not the case as a whole. If this year is also a very large loss, what would be the exit strategy going forward, if at all, or should we not expect an expression of exit strategy, because obviously that hurts the prospects of exit strategically? So you should not -- that you don't want to talk about it for obvious reasons, given that it will hurt the possibility of that partnership, if it all, there is one?

Just to recap, your question was about what strategic options we are looking at in mobile if the strategy doesn't pan out and what would potentially trigger a contingency plan to exit that business?

Fair enough. Yes.

Thank you very much for the question. Well, in the mobile segment, our first priority in mobile is to implement restructuring and create a structure where profits can be achieved without (inaudible). As for the contingency plan you mentioned, I believe that Totoki san, the current President, is thinking about variety of contingent plans and options. Hope this answer your question.

[John Greenhow, Bearings].

Hi, thank you very much and congratulations on a great year. I'll just ask a question, just on the line at the bottom there, the corporate elimination charge, still obviously a very big charge, I mean, you're looking for about JPY187 billion negative this year. I just wonder, is that a normalized level now or are there still some kind of one-offs going through that number and should that structurally be lower than that or do you have scope to restructure that number lower?

Just to recap, your question is regarding our corporate and eliminations line that we disclose, and whether or not the current level is the level that should be expected or whether or not there is going to be decrease going forward or what would be necessary to trigger a decrease in that number as well.

Yes, exactly.

I ask Takeda san to answer the question.

This is Kaz Takeda speaking and thank you for the question. With regards to the other segment, we have JPY187 billion in fiscal 2015 and out of that we incorporated JPY70 billion as the risk buffer from the headquarter, mainly related to the foreign exchange risks. So apart from that we have JPY120 billion or JPY130 billion in other segments. I think that is the normalized level of the expenses, which we have today. However, having said that, in that JPY120 billion or JPY130 billion, we have a slight cost related to the [bio] after-sales service cost. So, if we exclude that probably JPY110 billion could be the normalized level in the other corporate segments.

And just given that the changes we're seeing to the Japanese tax rate, I just wondered if you could guide us on your corporate-wide consolidated tax rate going forward.

Once again, just to recap, your question is about what kind of consolidated tax rate we're expecting going forward?

Well I'm going to ask Takeda san to answer that question, because basically we have a quite large portion of NOL, net operating loss tax position, I don't think our tax rate will be significantly lower, comparing with the currencies for the year. Takeda san?

I think that is true that we have a large net operating loss and also we have a valuation allowance in the Japan and US, and Europe. So, until we would generate profits consistently, our tax rate could be higher than the normal level.

(Operator Instructions) Giles Edwards, Lazard.

I just wanted to ask on the CapEx. Obviously, a huge increase in CapEx this year related to -- [specifically to] the Devices segment. How should we think about the CapEx in future years?

Thank you for your question and your question was in regards to the elevated level of our capital expenditures this year compared to previous years and what level of capital expenditures should be expected going forward.

This fiscal year is kind of an exceptional year, since we are currently rapidly expanding the capacity of (inaudible) production. And in the past, the peak level of semiconductor CapEx was around JPY150 billion and this year, as we explained, JPY290 billion. And I think this level would be reduced beginning from fiscal year 2016 and going forward. Thank you.

And then secondly, on your -- again on Devices, in your guidance, JPY121 billion. If you exclude the benefits from FX, that segment is actually very little EBIT growth, why is that please?

Just to recap, your question is regarding our Devices segment forecast and if it excludes the potential benefit of foreign exchange rates next year? It looks like it isn't increasing much and the reason for that.

I think there are three reasons. One is we are expecting a R&D expenditure increase. That was one point. And secondly, the depreciation amount is being increased, in line with the increased CapEx. And third point is, particularly in the fourth quarter of this fiscal year, we're expecting increase in stockpiling inventory. Those are the three reasons.

[Mitesh Patel, Bearings].

I have a strategic question within your Devices business and how you view CMOS sensor capacity. So you have announced a big capacity increase as part of the CapEx raise. But when you think longer term and all of the potential of possibly automotives adopting increased cameras, how do you see your need to increase capacity in-house, versus potentially continuing some outsourcing arrangements that you currently have and what kind of spend would that require over the three and five year period?

Just to recap, it was regarding our Devices segment and how we view future CMOS sensor capacity. With a potential increase in demand from automotive cameras, would we need to increase our outsourcing or increase our internal spending, and if we did, what kind of level that would look like?

Majority of our CMOS sensor business is currently for mobile use, and for mobile use CMOS sensors, we are using the technology so-called [tucked] structure image sensor, so that means a sensor and logic fact and we are currently 100% outsourcing as for the logic side and as for the sensor side, say, a 10% to 15% currently we're outsourcing. So except for the sensor side, we are actually of that type of company. And as for the investments level, I'd say around JPY10 billion will be the probably normalized level of capital investment.

(Operator Instructions) Richard Kramer, Arete Research.

Just one other one on the Devices business. Can you say what percentage of the business is your largest customer representing? It seems that you're ramping quite aggressively the capacity and it would seem it's a fairly obvious large customer there. But can you say the customer concentration, since it's notable that internal sales have dropped from about 25% last year to about 21% this year? Thank you.

And once again just to recap, your question was what percentage of our sales in Devices is due to our single largest customer.

Unfortunately, we can't comment on that question.

(Operator Instructions) John Litschke, CREF.

On the [Mobile Comm], the headlines were saying that for the mid-term plan you'd actually raised the revenue target range to JPY1 trillion to JPY1.25 trillion. Want to just confirm that, what the reason would be behind that, given the declining handset sales targets, or is that mostly FX? And then regarding the restructuring, could you sort of provide a timeline as to when we might actually see further more detailed information as to what the restructuring will -- the details of the restructuring, the implementation schedule and how we will get to that JPY90 billion benefit and how much do you think you'll be able to keep at the net level, i.e. should we expect a substantial improvement from the JPY40 billion negative budget this year into next year?

Just to recap, you commented on the fact that we today also filed a new mid-term target for the mobile business and in that new target sales are up, you were wondering the reason for that. As well as, at what date will be able to give a future breakdown in more detail on our mobile restructuring plan and how much benefit we'll see from the OpEx -- operating expenses reduction in that.

Well, I think you mentioned the JPY90 billion was the target. So if that's correct, then how much should be the net benefit flowing into next year, should we see the bulk of that coming through, and is that the right number?

I think as for the last question about the JPY90 billion target we announced, I can say JPY90 billion would be the net benefit for the next fiscal year 2016. And as for the question one and two, yes, I would ask Takeda san to handle those questions.

The question one related to the sales, this is largely due to the depreciation of yen and -- I'm sorry I misunderstood the question that is there increase towards the fiscal 2017 that might be due to the segment changes. That includes the [SONET] business in [fiscal 2017].

And as far as additional details on how we get to that JPY90 billion, would that be coming up at the upcoming Analyst Day, or when might we get that further detail?

We have already announced the reduction on our headcount, approximately 2,000 employees. So half of that from our European operations, then the rest of the thing we may announce when the time comes. And also we have already announced the closure of the Chinese R&D site in fiscal 2014. So that was already included.

Giles Edwards, Lazard.

Just on the JPY110 billion cost base reduction fiscal year 2013 to fiscal year 2015, please could you give us the fiscal year 2014 number?

Your question, just to recap, was of the JPY110 billion in benefit from restructuring, comparing fiscal year 2013 to fiscal year 2015, what was the fiscal year 2014 benefit now?

That is [JPY700 million] in fiscal 2014 and [JPY400 million] in fiscal 2015.

Sorry, could you say that -- I don't understand --

Sorry, JPY70 billion in fiscal 2014 and JPY40 billion in fiscal 2015.

Next question, the R&D, JPY490 billion, is that all expensed or is any capitalized?

That is all expensed.

And the next question, excluding the semiconductor's CapEx, what should the underlying CapEx for the business be going forward?

Just to recap, your question was regarding our CapEx and if we excluded semiconductor CapEx, what is the underlying level of CapEx expected to be going forward.

It's about [JPY200 billion].

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

Thank you all once again for joining us tonight. With that we've reached the end of our Q&A session. I'd like to just say once again thank you and good night from Tokyo.

Thank you, ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.