索尼 (SONY) 2015 Q1 法說會逐字稿

Welcome to the Sony Corporation conference call for overseas investors for the first quarter ended June 30, 2015.

My name is Ellen 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 Kuester.

Thank you very much for that introduction Ellen, and thank you all for joining us today, July 30, 2015, for a discussion of Sony's results for the first quarter ended June 30, 2015. We hope you all have enjoyed Miguel's hit album Wildheart 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, Senior Vice President and Senior General Manager of Sony's Corporate Planning & Control Department; Atsuko Murakami, 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 plan, 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 us and therefore, you should not place undue reliance on them. Sony cautions you that a number of 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 first quarter and forecasts for the fiscal year.

In the first quarter, consolidated sales were essentially flat at JPY1,808.1b. Consolidated operating income was JPY96.9b, an increase of 38.8% year on year. Income before income taxes was JPY138.7b, double that of the same quarter of the previous fiscal year. Net income attributable to Sony Corporation stockholders was JPY82.4b.

On a segment basis, the operating results of the music, devices and game and network segments improved year on year. On the other hand, the operating results of the mobile communications and picture segments deteriorated year on year.

Our forecast for sale and operating income for the full fiscal year remains unchanged from the April forecast. However, there were a few changes on a segment level that I will explain now.

In mobile communications, we have revised our forecast for sales and operating income downwards, mainly to reflect our decision to downwardly revise our fiscal year smartphone unit sales forecast, from 30m to 27m, as we implement our strategy not to chase scale in an effort to improve profitability. We have also applied to this segment approximately JPY20b risk buffer for mobile that we had incorporated in corporate and elimination in the April forecast.

In the game and network services segment, we upwardly revised our operating income forecast for the fiscal year by JPY20b due to the strong continued performance of the PS4 platform, including software. Although we are still experiencing negative effects from foreign exchange rates due to the high ratio of dollar-denominated costs in this segment.

We have upwardly revised our operating income forecast for the IP&S segment by JPY10b, primarily reflecting our decision to upwardly revise our digital camera unit sales forecast and our strong first quarter performance. Our forecast for sales and operating income for the HE&S segment remains unchanged.

In the devices segment, we have revised upward our forecast for sales of image sensors by JPY30b, partially due to the impact of foreign exchange rate. However, we expect this increase in sales to be partially offset because the sales of polymer-type batteries underperformed expectations. As a result, we have decided not to change our forecast for operating income for the segment.

We have also decided not to revise the forecast for our music and picture segment as well. The results of each business in the financial services segment continued to be strong, especially at Sony Life, and our forecast for sales and operating income for the fiscal year remain unchanged.

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

Thank you, Casey. I just wanted to mention a few key points before we turn to Q&A.

First, although our operating income is steadily increasing compared to last year, a large portion of this increase is actually due to one-time items such as the increment gain on our share of the Orchard. We're also still facing considerable uncertainty going into the rest of the fiscal year, such as the movement of foreign exchange rates which could significantly impact our results as they have in the mobile communications and game segment this quarter.

Due to this and other factors, we have decided to leave our full-year forecast unchanged and have increased our allocation for risk included in our corporate line.

As a final point, I'd like to touch on the approximately JPY420b issuance of new shares and convertible bonds that we recently made.

Although Sony's stockholders' equity increased due to this fundraising, we have not changed our ROE target of 10% or more in fiscal year 2017. The purpose of this capital raise was to secure funds to invest in growth and to strengthen our financial base. Through this capital raise, we were able to secure enough capital to invest in image sensors, enhance our stockholders' equity, and solidify our ability to make further investments in the future.

We chose to raise capital at this time as part of our process of transitioning from a phase focused on completing restructuring to a phase where we are generating profit and investing for growth. We plan to elevate Sony to a company which generates steady high profits by making aggressive and concentrated investments in our stronger businesses, and by working to increase profit.

Thank you for your attention. Back to you, Casey.

Thank you, Yoshida-san.

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

Thank you. We will now begin the question-and-answer session. (Operator Instructions).

Larry Haverty, GAMCO.

Yes. I'm interested in the investment part of the equation there. The first is do you see any, in your investing in the game industry, do you see any breakout first-party games that are likely -- because the game business is strong but you didn't raise your forecast, and I'm wondering if there are some first-party games that, if they work, you might be raising your forecast.

Thank you for your question. Just to reiterate, your question was whether there were breakout first-party games in the first quarter or breakout first-party games that we're expecting in the rest of the year?

Expecting in the rest of the year.

Okay. So your question was whether we are expecting any breakout first-party games in the rest of --

Yes.

Thank you for the question. Well, we had breakout games, for example, Bloodborne, and first-party game Bloodborne, as well as Last of Us, and we have a franchise of Uncharted as well. So those are games we are expecting.

And you know game is quite hit-driven, so, it's very difficult to predict the breakout of the -- opportunity of the breakout. Thank you.

Second, subpart of the question, in terms of the investing, would the change in the studio, as we look into the next fiscal year, say the one beginning next April 1, is it likely that we'll see a significant increase in the production budget for Sony Pictures?

Just to reiterate, your question is whether or not we are anticipating an increase in the production budget for our film business next fiscal year?

Right.

Thank you very much for the question. Yes, actually currently expanding our budget for the production for the film. And going into the next fiscal year, we have no plan to reduce the budget of the investment. Thank you.

Thanks.

(Operator Instructions). Richard Kramer, Arete Research.

Hi. Thanks. I have several questions. I will ask one and each in turn.

Specifically on the smartphone business, there's been several quarters now of revising down the unit volume expectations or forecasts for the year. At what stage do you think that you would have to reassess whether it makes sense to stay in this business? In other words, what is the scale point that you need to have as a minimum to justify the overheads, I know you're bringing them down by 30% now, but in R&D, in SG&A and sourcing, to make the business sensible? Maybe you could comment on sort of your breakeven point in terms of units that you think you need to have that business stay viable within Sony. Thanks.

Thank you. And just once again to reiterate, your question is about a breakeven point in the mobile business considering our continued downward revision in unit sales, and whether or not there is minimum amount of units or minimum amount of revenue that we have in order to break even?

Thank you for the question. Well, to reduce the breakeven point, actually we are current doing restructuring. And we are going to reduce operating expense by 30%, including personnel costs. And so we think we can make breakeven according to the current plan, restructuring plan.

And this fiscal year we are going to reduce the operating expense by JPY30b and we are expecting that we can eliminate this fiscal year the restructuring cost of [JPY24b]. Thank you.

Okay. My second question is on the increase that we saw in operating profit, and which is roughly JPY27b. If you remove the Orchard gain of JPY18b, the insurance gain in the game business, and there are some unspecified insurance gain in the imaging products segment, and look at the difference between the real estate and other asset disposal gains that were made both this year and a year ago, it seems that about two-thirds, or if not up to three-quarters of the improvement in operating profit was due to some sort of one-offs. Can you clarify this for us and what the underlying operating profit improvement was, maybe excluding all of these many swirl of one-off charges and gains? Thank you.

Thank you. And once again, just to reiterate, your question is what would our operating profit look like in the first quarter had we removed what would be considered kind of one-time items or one-time gain?

Thank you very much for the question. As for the operating profit base, last year first quarter we had some real estate sell-off. And as we mentioned, this quarter we have a Orchard Media one-time gain as well as logistics. And third point is some insurance gain from (technical difficultly) through PSM. So if we all exclude those items, last year first quarter operating profit was actually around JPY55b instead of JPY9.8b.

As for this fiscal year first quarter, the apple-to-apple base operating profit was JPY61.8b as opposed to reported JPY96.9b. So, apple-to-apple comparison is it's just about 12% increase. Thank you.

Okay. And my final question is on the cash flow. It's obvious that there was a big outflow in the electronics business this year in the first quarter. And do you -- can you give us a sense of what your expectation is for cash generation from the electronics businesses for the full year and how perhaps that was connected to the recent capital increase that you did?

Well, just to reiterate, your question was about the rather sizable decrease in cash that we've seen in the first quarter and how that relates to our forecast for cash flow for the full year, and how that in turn relates to our recent fundraising that we completed.

Thank you for the question. First of all, the purpose of the fundraising is to secure cash flow for our investment of mainly image sensors. That's the first point.

And as for the cash position, I'm going to ask Murakami-san to explain. However, let us explain in three points for the past quarter operating cash flow. First one is kind of seasonality. Second point is [peak] position. And third point is about timing difference of our restructuring costs, where timing difference means account recognition and actual cash payout.

Murakami-san, could you please explain about --

He just -- Yoshida-san explained that this quarter, the operating cash flow, and the rest of the cash flow is a different issue. But for this quarter of this fiscal year, it's relatively large cash payment from the operating activities because of the increasing working capital and, as we mentioned, the increase in the film cost, partially offset by amortization. That is the comment that -- compared to last fiscal year first quarter. And also that there is accrued expenses.

For the rest of the fiscal year we have, because of -- as he mentioned, huge seasonality of cash payout, so the fiscal last year's operating cash flow will be recovered the rest of the year.

However, we have a relatively large capital expenditure. As we mentioned before, the (inaudible) of capital expenditure and more units related capital expenditure. So that for the last fiscal years we have relatively large cash payouts for the capital expenditure. So, therefore, overall we have a negative cash flow in this fiscal year.

Okay. Thank you.

(Operator Instructions). Atul Goyal, Jefferies.

Hi. Thank you very much. Thank you Yoshida-san. I've got two questions. One is on the adjusted profits. As underlying profits and the trends are extremely important, I want to get onto that one one more time. And secondly on mobile, just to get a bit more clarity on how does the Company intend to get where it intends to get?

Firstly on underlying profits, you've just clarified for last year it was JPY55.0b operating profit and this year it's about JPY61.8m adjusted for one-offs. There was also a very large impact of ForEx and I estimate it's about JPY33.3b full year impact -- oh, sorry, first quarter impact from ForEx. It's a negative impact. So if I have to adjust for the underlying profit trends for ForEx and one-offs I'm actually getting a much, much stronger number to examine the underlying. As I said, JPY55b versus JPY95.2b. Is my estimate for ForEx, around JPY33b correct?

Thank you Atul. So just to reiterate your question, from the first quarter we have expanded our disclosure around foreign exchange although we do not give a consolidated number. So your question is, is your estimate for the consolidated impact of foreign exchange in the first quarter of JPY33b roughly correct?

Yes. And adjusted for that what would have been the profit? If it was not for ForEx, the adjusted operating profit, what would the number be?

Well as for the ForEx, our calculation is approximately JPY33b negative impact year by year for ForEx.

Okay. So that confirms just what I was getting as well. So thank you very much.

So it looks like the underlying profit adjusted for ForEx and one-offs is actually going from JPY55b to about JPY95b, so it seems pretty impressive. Your game business and devices business also showed very strong profit growth with and without all the adjustments.

But one big scar in the entire thing seems to be mobile and, you know, we have had this issue with the TV business for a very long time where quarter-after-quarter the Company reported losses. Since you came last year it's been a different thing in TV.

In mobile, I understand the Company is targeting profits and ROE based targets in this segment. It's also announced a strategy not to chase volumes, but it's not clear how it will get there. It still seems to be participating or competing in the all the markets. It's not clear if you have withdrawn from China, if the company is going to withdraw from the US or other markets. So the how part of the strategy is still not clear on mobile which is the one big scar in an otherwise very good result.

Thank you for your question. Just to reiterate, your question is regarding our mobile business and our business plan to turn this business back to profitability. And I think your question is in regards to what kind of additional plans we have beyond the restructuring that we've already announced to turn this business profitable.

Thank you, Casey.

Well, as for the mobile, as you know, after the significant write-off last year we changed management. It was November of last year. So we just changed the strategy from the past expansion strategy. We had our business in China where we are trying to provide our smartphones, three major carriers in the United States. We changed completely the strategy to the other side.

So, currently, we are in the midst of the restructuring and we think we can achieve the breakeven as the first step in next fiscal year by reducing -- or by conducting our current restructuring plan.

And another point is the assets we are using in this mobile segment is quite stinted. So once we make some profit there's a high possibility that we can get some reasonable ROIC.

And the last thing I want to mention is we are making money, sizeable money in the Japanese market. Thank you.

Thank you very much Yoshida-san. Thank you Casey.

(Operator Instructions). John Litshcke, CREF.

Yes hi. I was just wondering about the pictures division. It looked like the profits were down about JPY20b year on year. Q1 probably faced a tough comp. But could you talk a bit about what happened on the Q1, the comp from last year, as well as the updated outlook for the different sub-segments, network, TV and film? And if you could comment a bit about your expected economics on SPECTRE as well that would be helpful. Thanks.

Thank you very much. So just to reiterate, your question was regarding to our pictures division and in regards to the results of the first quarter and how that compares to the same period of the previous fiscal year. The question you had was whether or not we had any kind of updated economics forecast for each of our three categories within the segment, as well as what kind of economics we're expecting from our upcoming film in the third quarter, SPECTRE.

Yes. Thanks.

Thank you very much for the question. Well, basically, first of all, I have to remind you that first quarter is not seasonally a good quarter. If you take a look at the past 10 years, we made operating loss three times, so these are seasonality issues.

As for the other question, I will ask Steven Kober to answer your questions.

Thank you Yoshida-san. The film business is a cyclical business. It depends a lot of the release schedule of our films. So last year we had two very large films released during the first quarter. The Amazing Spider-Man 2 took in over $700m of box office and 22 Jump Street took in approximately $200m. This year we had a much smaller release schedule with no big budget films, so that accounts for the large year on year decrease in revenues and profits because Spider-Man contributes profits in the quarter it's released, so that's the biggest reason.

For this coming year we have a lot more releases still to come later in the year. We have at the end of September we have Hotel Transylvania 2, a sequel to our successful first Transylvania film. It's an animated film. We also have in October Goosebumps, which is based upon a children's book and then, as you mentioned, in November we have the next James Bond film, SPECTRE and later in the year we have Concussion with Will Smith. So we still have a very big release schedule to come.

As far as the performance for this quarter, so I mentioned motion pictures was down significantly. Television productions and media networks were up. Our business is doing very well in the television and network business. The film business, as you know, is cyclical and last year we had a very strong year. This year it comes later in the year and we're still very hopeful and we've kept our full year forecast.

As far as the economics of the next Bond film, I can't get into too much detail other than we are only one of three partners that share in that film. We work with MGM and others on that film and we're looking forward to it. We've had a lot of success with it and we're expecting good results when it comes out in November.

Thanks. And, as a follow-up, could you comment on the updated outlook for CMOS? There's been a bit of concern in the market with smartphone market demand going forward. But if you could talk about your CMOS business?

So thank you, and just once again to reiterate, your question is regarding our full year outlook for our CMOS business regarding some potential rumors in the market about softness in the demand for smartphones.

Right.

Thank you very much for the question. It's true that the total market of smartphones is a little bit slow, particularly in China. However, demand for our CMOS sensor has been -- continued to be strong since more and more smartphone is a digital camera-oriented product. So even the middle range smartphone products, there's a demand for high-end CMOS sensor. So, again, our demand for CMOS sensors has been -- continued to be strong. Thank you.

This is my last question. It sounds like you've reallocated JPY20b out of the elimination line into mobile comm, if I heard that correctly, to increase your risk buffer or whatever you want to call it in the mobile comm division. But then at the same time it looks like the elimination line, or the total other corporate costs, including eliminations, was actually raised by another JPY9b. Could you explain that? So you've probably just added further risk buffers, or you took FX into consideration, or what exactly is the cause for that?

Thank you. Once again just to reiterate, your question is regarding our allocation for risk that we have included in our corporate elimination line and how that relates to our decision to move JPY20b of that allocation for risk and distribute that into the mobile forecast for this year.

But at the same point in time you took that risk buffer and increased it, even though you took JPY20b out into mobile comm. So it looks like a total (inaudible). Does that make sense?

You're right. We actually added additional risk to this buffer, to other. Takeda-san will elaborate about that point.

Yes, thank you for asking that question. Actually, we booked about JPY70b of risk in other segment at the time of the annual release in April. And now we shifted JPY20b to mobile phones. That is correct. Then in July, at this time, we have booked the additional JPY10b of this buffer into the other segment. So in total we have JPY80b.

Of the JPY80b, JPY30b is for the foreign exchange and the other JPY50b is for the other risks for uncertain economic situation or future foreign exchange situation. Thank you very much.

Great. Thank you.

(Operator Instructions). Atul Goyal, Jefferies.

Yoshida-san, this is again about the mobile business. Since you've come, whether it was mobile or other businesses, it seems like there are stringent accountability standards in the Company. There's a requirement to deliver. There's a requirement for targets to be met. But at the same time you are saying that next year after the restructuring and, of course Totoki-san has started just recently, but you're saying by next year you expect breakeven, or some profits in this business.

My question is this. That planning contingency, if it doesn't happen, how would you look at this business? In the past you have mentioned that you are okay, or you are looking for a strategic partnership in this business. Of late Totoki-san has mentioned there is no plan to exit. Now these two things are obviously different. A strategic partnership is different from a complete exit, but how do we reconcile the contingency plan in this business?

So, thank you for your question. Just to reiterate, your question is about our mobile business and our current attempt at turning this business into breakeven next year, and if we are unable to achieve this plan what kind of contingency we have in place for such a scenario, whether that includes exiting the business or partnerships.

Thank you, Casey, yes.

Thank you for the question. Yes, we are always considering the possibility of alliances and not just on the corporate side, but also production side is considering every possible deal or alternative. And that, the purpose of that kind of alternative measurement is to reduce the risk of our mobile business. However, at this moment there is nothing to be decided. Thank you.

Understood. Thank you very much.

John Litshcke, CREF.

Yes hi. Just a follow-up on the mobile business. You mentioned that Japan is delivering strong profit. Do you think that's a sustainable situation? And when we think of the first quarter, could you comment a bit, it looks like you had about JPY9b in restructuring charges. I assume it was booked to the OP line.

And, additionally, if you could talk about the FX impact on the mobile comm business in the first quarter. And so what is the underlying profit/loss trend in mobile comm absent FX? And given that FX exposure, I'm assuming a lot of that comes from Europe. And in your review of where you want to focus geographically, would it make sense to pullback or even out of select markets where perhaps you're not seeing a positive situation? Thanks.

So just to reiterate, I believe your question had three points. The first is about the sustainability of our profitability in Japan.

The second was about our first quarter results. If we took out the restructuring charges and the impact of foreign exchange, how would the results look year on year in the first quarter?

And the last was the impact of foreign exchange results in general in the mobile segment, specifically with our sensitivity to the European market.

Yes and given that it probably had some negative impacts of the euro and in some geographies you're probably not very well positioned and losing money, if you could selectively contract or reduce exposures there to have a relatively meaningful impact?

Okay. As for question one and three, I will answer the question and as for the second question, I will ask Takeda-san to answer.

So as for the sustainability of the Japanese market profitability, since we have a quite good relationship with three telecom carriers, DoCoMo, AU and Softbank, I think it's fair to say, at least for the coming couple of years, to keep maintained the current good relationship with those three major telecom carriers. It presents us the opportunity of sustainability very high, yes.

And the third point, again Totoki-san is always considering some options to reduce the exposure in some not-profitable areas, or even exit the markets which are not profitable. But at this moment we haven't decided yet.

As for the second question, Takeda-san will answer.

Yes, thank you for asking. First, restructuring costs for the first quarter this year was JPY8b and foreign exchange negative impact was JPY25b. Thank you.

So absent the FX and restructuring it would have actually delivered a profit. Is that right?

Yes.

As we are running out of time I would like to hand the call back over to Casey Kuester for closing remarks.

Thank you very much, Ellen. And with that we would like to end tonight's conference call. Thank you very much for calling in again and thank you very much and we will say goodnight from Tokyo.

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