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Sony Corporation (NYSE:SNE)

F2Q06 Earnings Call

October 26, 2006 9:30 am ET

Executives

Jonathan Bates - Investor Relations, Tokyo

Takao Yuhara - Corporate Executive and Senior Vice President, Investor Relations

Robert Wiesenthal - Group Executive in Charge of Corporate Development and M&A, Sony Corporation, Executive Vice President and Chief Financial Officer, Sony Corporation of America

Analysts

Jason Mauricio - Arete Research

William Drewry - Credit Suisse

Daniel Ernst - Hudson Square Research

John Greenhill - Lazard

Evan Wilson - Pacific Crest Securities

Ben Atkinson - Gagnon Securities

Luc Mouzon - BNP Paribas

Colin Sebastian - Lazard

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the second quarter 2006 Sony Corporation earnings conference call. My name is Michelle and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today’s presentation.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today’s call, Mr. Jonathan Bates from Sony Investor Relations in Tokyo. Please proceed, sir.

Jonathan Bates

Thank you very much for that introduction, Michelle, and thank you all for joining us today, October 26, 2006, for the discussion of Sony’s results for the second quarter of the fiscal year ended March 31, 2007.

I am Jonathan Bates with Sony Investor Relations in Tokyo. We are joined this evening in Tokyo by Takao Yuhara, Corporate Executive and SVP, Investor Relations Sony Corporation; and by Robert Wiesenthal, Group Executive in Charge of Corporate Development and M&A, Sony Corporation; EVP and CFO, Sony Corporation of America.

Thank you very much for joining us, Mr. Yuhara and Mr. Wiesenthal.

Takao Yuhara

Thank you very much for joining us today.

Jonathan Bates

Thank you very much for joining us, Mr. Yuhara and Mr. Wiesenthal. In just a few moments, I am going to give a brief summary of today’s announcements. Then, Mr. Yuhara and Mr. Wiesenthal 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 and beliefs 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 we 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 choosing investor relations at the bottom of the page at www.sony.com.

With that, I am now going to turn to our announcement.

Consolidated sales increased 8%, enabling us to register record second quarter sales. However, our operating income decreased significantly as a result of two one-time factors. Firstly, a YEN 73.5 billion one-time gain in the prior year’s second quarter from the transfer of a portion of Sony's employee pension fund to the Japanese Government. Secondly, a YEN 51.2 billion charge recorded in the current quarter for charges relating to the recall and global replacement program for notebook computer battery packs that use lithium ion battery cells manufactured by Sony.

Excluding these two one-time factors and restructuring expenses, our consolidated operating income would have improved over the previous year.

In the electronic segment, excluding the pension benefit in the previous year, the recall and exchange expenses associated with the batteries in the current quarter and restructuring expenses, operating income improved significantly over the previous year, due to factors including an improvement in cost of sales and increased sales.

Improvements in the Bravia LCD TV and Cyber-shot digital camera businesses are especially noteworthy.

Our equity affiliate, Sony Ericsson, is performing tremendously, with sales, profit and unit shipments reaching record levels. Sony Ericsson’s income before tax margin was 15%, fueled by strong sales of mobile phones using the Cyber-shot and Walkman brand.

Moving back to our consolidated results, loss before income taxes deteriorated YEN 121.5 billion to YEN 26.1 billion, as a result of the YEN 20.8 billion operating loss, and the recording of a foreign exchange loss. In the previous year’s second quarter, there was a gain of YEN 20.7 billion from the sale of a portion of Sony's equity interest in Monex Beans.

YEN 19.7 billion in equity in net income of affiliated companies was recorded during the quarter, an improvement of YEN 22.3 billion over the previous year.

YEN 21.8 billion in profits was recorded from Sony Ericsson, and YEN 1.6 billion in profits was recorded from SLCD, while YEN 2.2 billion in losses were recorded from Sony BMG, and YEN 2.8 billion in losses were recorded from MGM. Both the amount of the losses recorded for Sony BMG and MGM improved year on year.

As a result of these factors, net income decreased YEN 26.8 billion year on year to YEN 1.7 billion.

Next, turning to our forecast for the year, please note that the numbers are unchanged from the ones announced on October 19th. Our forecasts for capital expenditures, depreciation and amortization, as well as research and development expenses, are also unchanged from our July forecast.

Now, I would like to turn to the results of our business segments, starting with electronics.

Sales in the electronics segment increased 12%. LCD TVs, Vaio PCs, and Cyber-shot digital cameras, which had strong sales in all regions, contributed to the increase in sales.

Operating income decreased 71% to YEN 8.0 billion. The reasons for the decrease in profit were the absence of YEN 64.5 billion in pension transfer gains for the segment recorded last year, and the recording of YEN 51.2 billion in expenses for the notebook lithium ion battery recall and replacement program.

The largest profits contributing products were, in order of magnitude, camcorders, digital cameras, and broadcast and professional equipment.

Next, products which had the largest improvement in profits were digital cameras, LCD TVs, and CRT TVs. Digital cameras had both an increase in sales and profit due to strong sales in all regions, especially the U.S. and Europe due to strong consumer acceptance.

LCD TVs had a large increase in sales in all regions due to the continued success of the Bravia line. Profit performance also improved significantly over the previous year due to the increased sales and cost reductions.

Profit performance of CRT TVs improved due to fixed cost reductions resulting from restructuring initiatives.

As discussed during our first quarter results announcement, we plan to continue disclosing details of our television and semiconductor businesses. Firstly, overall sales of the television category for the quarter were approximately YEN 255 billion, an increase of 46% year on year. Operating loss was approximately YEN 10 billion, an improvement of approximately YEN 24 billion year on year.

Despite the increase in competition, LCD TVs trended basically to flat, and there is no change to our forecast for the TV category to be profitable in the second-half of the fiscal year.

Secondly, overall sales of the semiconductor category for the quarter were approximately YEN 160 billion, an increase of 13% year on year. Operating loss was about YEN 7 billion, an improvement of approximately YEN 9 billion year on year.

We expect to record a slightly larger operating loss in the semiconductor category this fiscal year than last fiscal year. Last year’s loss, by the way, was YEN 34 billion, due to the decline in utilization ratio of our production facilities for PS3 semiconductors, a decline which resulted from the change in timing of the launch of PS3 in Europe.

Electronics inventory days for sales for the quarter increased to 58 days, as a result of an increase in LCD TV and PS3 semiconductor inventory.

Although at June end, LCD TV inventory was slightly above expectations due to lower World Cup sales than originally anticipated. The level came back in line during the second quarter.

The overall inventory level at September end is slightly high, but this level contains LCD TV components, including panels, for the year-end selling season, and we believe this level is necessary in order to avoid sales opportunity losses in the fast-growing LCD TV market.

Next, turning to our games segment, sales in the games segment decreased 21%. Approximately 60% of sales came from hardware and accessories, two-thirds in the previous year, and the remainder was from software. Hardware sales decreased as a result of lower PS2 and PSP unit sales compared to the same quarter of the previous year. We also engaged in a strategic price reduction for PS2 in Europe and Japan, following on the heels of the April price cut in the U.S.

Demand for PS2 continues to be strong, and it is trending slightly better than our forecast announced in July.

PSP production shipments for the first-half of the fiscal year were flat year on year. However, as announced on October 19th, we have changed our annual PSP shipment forecast from 12 million to 9 million units.

Although sales from PSP software increased, overall sales of software decreased, due to decreased sales of PS2 software.

Combined profit of the PS2 and PSP businesses was relatively unchanged year on year. However, the segments recorded an operating loss of YEN 43.5 billion, due to the recording of expenses for the launch of PS3, including approximately YEN 54.5 billion in inventory write-downs, mainly for semiconductors and continued proactive investment in research and development for the PS3 business.

Revenue in the pictures segment increased 12%, a 7% increase on a U.S. dollar basis. The sales increase was primarily due to a greater number of theatrical releases in the current year’s second quarter, combined with higher theatrical revenue per film. Major releases that contributed to revenues included Talladega Nights and Monster House.

Despite this increase in revenue, an operating loss YEN 15.3 billion was recorded, an increase in loss of YEN 8.7 billion year on year. Motion picture operating income was adversely affected by higher total marketing expenses, resulting from a greater number of theatrical releases, and the theatrical underperformance of Zoom and All the King’s Men.

Television operating income declined in the current quarter, due to production and marketing expenses associated with new network and made for syndication television shows. However, for the full fiscal year, we expect to record an increased year on year profit for the pictures segment due to the home entertainment release of successful films released in theaters during the first-half of the year, such as The Da Vinci Code.

Financial services revenue decreased 4%, due to a drop in revenue at Sony Life. Revenue at Sony Life decreased because although revenue from insurance premiums increased, valuation gains in the general and separate accounts decreased.

Operating income for the segment decreased 39% to YEN 24.6 billion, primarily as a result of reduced profit at Sony Life. Operating profit at Sony Life dropped because although insurance premium revenue increased, valuation gains on convertible bonds in the general accounts decreased.

All other sales decreased 16% year on year. This decrease primarily reflects the sale of a portion of our retail businesses in the first quarter.

Operating income decreased 14%, primarily because a gain from the pension transfer was reported at Sony Music Entertainment Japan and several other businesses within all other in the previous fiscal year.

Excluding this impact, there was a significant increase in operating income within all other.

That concludes my opening remarks. With that, I would like to turn you over to our operator for the Q&A session.

Question-and-Answer Session

Operator

(Operator Instructions)

Our first question comes from the line of Jason Mauricio of Arete. Please proceed.

Jason Mauricio - Arete Research

Three quick questions. In the pictures business, can you help us understand the mix between the movie releases that you had versus DVDs, and what are the levers that might come into effect in the next couple of quarters that would get margins up there?

Second, could you help us understand the yields on blue lasers at the moment? What is Sony's current capacity, and if you can alleviate that strain by sourcing externally?

Finally, can you help us understand, in the inventory, the split between finished goods and raw materials? Maybe clarify the earlier statements from the Japanese call on what normalized inventory levels should be.

Robert Wiesenthal

Why don’t we start with the question on pictures? You asked about levers that would bring margins to where they should be for the remainder of the year. Obviously it is very difficult to take a look at the pictures business in any one given quarter. This quarter, we had a number of very large films that were out there with very high box-office numbers, such as Talladega Nights, Open Season, Monster House, and Little Man. The DVDs for those obviously are not out there, and our economics are dependent not only on theatrical release but also on DVD. Right now, you are getting the hit of those marketing costs, so in the next quarter, when we have Talladega Nights and The Da Vinci Code hitting video, you are going to get that flow back for the real thick margin cash flows that will get us to where we need to be. I would say that we are on track in terms of our own internal budgets of where we should be for profitability for pictures thus far.

Takao Yuhara

I would like to answer the question about blue laser. As you know, we have mass production of this Blu-ray diodes internally, and we have no plan to outsource because of the vast quantities. As you know, this is a most critical device for the PS3, and therefore we are watching very carefully about the daily quantities of those Blu-ray diodes.

Unfortunately, I cannot disclose the current yields on the Blu-ray diodes, but we are making every effort to meet the production shipment quantity of the PlayStation 3 at the moment.

Secondly, the inventory, as you know, taking the example of LCD TVs, because of this, we see the inventory amount as big. As you know, we have the inventory more on the raw materials, because we are meeting with the high demand in the holiday season all over the regions. We have this raw material. Inventory rebuild, we see the normalized inventory should be about eight weeks, so that is what we are considering as adequate inventory for the LCD TVs.

Jason Mauricio - Arete Research

Thank you very much.

Jonathan Bates

Thank you very much for your questions, today, Jason.

Operator

Our next question comes from the line of Bill Drewry of Credit Suisse. Please proceed.

William Drewry - Credit Suisse

Thank you. I just have two questions, please. One, I am just wondering, back on the DVDs, just wondering, we have heard from a lot of the studios that the pricing for library sales for DVD, which is obviously an important part of the business, has actually been stabilizing. There was a lot of worry in the market that it had been declining precipitously over the last 12 months or so, so I was just wondering what you are starting to see in that channel, if you are seeing library pricing start to firm up and how that business is trending for you.

Then, just on the electronics side, I just wanted to see what your current thinking was on the pricing on LCD TV if, going into the fourth quarter, the pricing trends have been in line with your expectations. Thank you.

Robert Wiesenthal

Bill, I will take the question on DVD pricing. Obviously over the past 18 months, library catalog has been challenged, but we have noticed some stabilization in the market. There has been a lot of specific promotions with retailers by all the studios that have helped library product, and I also think overall, in terms of the general DVD market, there is a lot of strong new release product coming in the fourth quarter, so people may be pleasantly surprised in terms of overall DVD sales, but we have noticed it too. Obviously, we are looking forward to the introduction of Blu-Ray to both help library product and new release product. It will give it a real shot in the arm, and obviously that has a very strong pricing element to it.

Takao Yuhara

On the LCD TV price assumptions, as you know, the price is particularly lowering in the U.S. market. As you know, competition is very, very tough in this region. We anticipate that the price will be lower around 25% to 30%, toward the holiday season, but we will say this additional price erosion has come relatively earlier than what we had expected, say maybe one month earlier than what we expected.

However, it is very important we have inventories for this holiday season. We would like to take adequate reduction for the LCD pricing, particularly the main market in the United States.

The assumption for Q4, it is maybe too early to say, but as you know, in the LCD TV business, we plan to ship 6 million for the year, which is just more than 2.1 times year on year, and then 40% of these TVs should be sold during the third quarter. Still, the fourth quarter remains at the high level of our shipping plan, but we should accomplish this, even the fourth quarter.

William Drewry - Credit Suisse

Yuhara-san, if I could just ask, do you feel in LCD TV that your pricing competitiveness is as good as any of your peers? In other words, you have not lost any price share to any competitors, have you?

Takao Yuhara

It should be all right. As you know, we have, as I said, 25% and 30% could be the current price deflation, which is within the expectations of us. Moreover, we are going to sell larger size of TVs, particularly for the third quarter, which brings the average price is flat year on year. Then, as you can see, we can have a better chance of those TVs, which have better cost structure, actually.

William Drewry - Credit Suisse

Excellent. Thank you very much.

Jonathan Bates

You are welcome. Thank you.

Operator

Our next question comes from the line of Daniel Ernst of Hudson Square Research. Please proceed.

Daniel Ernst - Hudson Square Research

Good morning, and good evening, as the case may be. Thanks for taking the call. Two questions, if I might. First, just coming back to the LCD pricing question, just to clarify. I think you said that as the shift up to larger size TV sales, you actually experience a flat basket price, or the blended price of per unit that you sell. Then, given that and given that the actual like sales for size TVs is down 25% to 30% now, what are you seeing on the production side? Are you getting a 25% to 30% reduction in the price to produce those TVs, now that you have the Gen-7 fab fully running? What does that do when you launch the Gen-8 production next year?

Second question on the PSP, given that PSP software sales were up, and that good software generally drives the hardware demand, what is behind your pull-back and assumptions for the hardware forecast for the year? Thank you.

Takao Yuhara

Daniel, first of all, regarding the LCD TV pricing, as you can see, we have developed the worldwide platform that the LCD TVs, which expected to 30% cost reduction, including the reduction of a number of components and devices, which is applied to all the LCD TVs in this year. Also, 7-G LCD production line, which gives us the large size of LCD panel with a very competitive price, competitive to current supply. Also, next year, as you know, we are going to have 8-G panel production starting in September or October in next year. This is early to say, but this is very good supply for the next holiday season, holiday season year 2007.

The more we have a large-size of LCD TVs, and then we have the better cost to the structure for these LCD TVs. That is the cost structure for this.

Jonathan Bates

Daniel, could you just recap your question about PSP?

Daniel Ernst - Hudson Square Research

Yes, on the PSP, the software sales for the PSP were actually up and, given that generally software sales or good software titles help drive hardware demand, what is behind your reduction in forecast for PSP hardware shipments?

Takao Yuhara

You are right. The PSP software was increased compared to last year. However, the PSP hardware and software is lower than what we have expected. In other words, it is lower in every quarter, so therefore, in order to meet the dwindling demand expectation for the year, we did revise the total production quantity from 12 million to 9 million, and we are going to adjust the inventory by taking [inaudible].

Daniel Ernst - Hudson Square Research

I understood, but just to clarify, what do you think is behind that reduced demand for the PSP? Is the product just in decline? Is there something that can be done to revise sales, or is it just a matter of working down the inventory and making lower assumptions for the product overall?

Takao Yuhara

We have started production, the programming based on the 12 million, but honestly, at the moment, the PSP inventories are slightly higher than our expectations, and therefore, we are just going to adjust this. Obviously, we are preparing the wiser use of the PSP for the future and also the releasing of a number of software. We are always looking at the PSP business expansion.

Robert Wiesenthal

Just two things to add to that on PSP. Clearly on the software side, any real killer title will galvanize the sales. There have been a number of titles that have been terrific, but not the one title that defines the product. Additionally, as you probably know, there are a lot of features such as wireless and network capability that are just starting to be tapped right now. As those features start to be utilized in terms of services that we are working on, there will be a lot more usability of the device in taking a lot more advantage of the functionality. We think that will help sales, and that is just going to take time.

Daniel Ernst - Hudson Square Research

Understood. Thank you.

Operator

Our next question comes from the line of John Greenhill of Lazard. Please proceed.

John Greenhill - Lazard

Thank you. I just wonder if you could clarify on the electronic inventory again please, for me. You mentioned a portion of the build-up was due to PlayStation 3 semiconductor. I wonder if you could just quantify that, say how much of the inventory is in that semiconductor, the PlayStation 3 semiconductor and how much of that was up year on year?

Jonathan Bates

Just to clarify, John, your question is about the proportion of inventory made from semiconductor inventory within our electronics division?

John Greenhill - Lazard

Yes.

Takao Yuhara

In this electronics inventory, as you mentioned, there was the semiconductor for PS3 in this electronics segment. If we take the semiconductor out, the days supply will be from 68 days, which is in this chart, to 50 days. So that is what we are looking at.

John Greenhill - Lazard

What would it have been in Q2 last year, had you taken out semiconductor inventory?

Takao Yuhara

Q2 last year? This was not in last year, because this inventory is just for the PS3.

[Multiple Speakers]

Takao Yuhara

Last year, no. We had not started yet for this semiconductor products for the PS3.

John Greenhill - Lazard

Okay.

Jonathan Bates

Thank you very much.

Operator

Our next question comes from the line of Evan Wilson of Pacific Crest. Please proceed.

Evan Wilson - Pacific Crest Securities

Thanks for taking the questions. I have three. First, relative to the equity affiliates, trends are clearly very strong at Sony Ericsson. I also think that the releases that came out of September for Sony BMG were well-received. What is going on with the no increase in terms of the equity affiliate guidance? Is there something on the profitability on those two units or in the other pieces of the equity affiliates that has changed in the last quarter or so? On BMG, Rob, overall, could you comment on what you think the total music market will grow this year and next?

Second question, just simply on the PS3. There have been some comments in the media recently from the Sony Computer and Entertainment Group kind of wavering on confidence around your PS3 target of 6 million units for fiscal year. I hope you could touch briefly on that.

Then third, on the LCD TVs, we have talked a lot about pricing. Could you also give your assumptions for market share this holiday season, relative to last year? Thank you.

Takao Yuhara

Maybe I can answer your first question about the equity affiliates issue. Yes, Sony Ericsson Mobile, this operation is doing very well. We expect that this momentum will continue, so therefore you could expect much more profit from this company. However, those increases will be offset from Sony BMG, largely by Sony BMG, which is lower than what we have made in forecast in [inaudible] time. Also, some of the affiliate companies are showing lower performance forecasts than previously forecast. Therefore, taking the performance forecast, and we just remain at the same amounts of profit from equity affiliates, as it was forecasted.

Robert Wiesenthal

In terms of Sony BMG, obviously it has been extremely challenging on two fronts. Number one, year-to-date, just to use the U.S. market as a barometer, it has been down 15% year-to-date. In fact, you look at July, August, and September, it is even a little bit worse than that.

We also had some slippage in terms of releases that have come in a little bit late, and it is just a difficult market overall. I think that over the next year, digital sales account for about a little bit over 10% of the recorded music market. That is up significantly, so that is a fair amount of upside for us, but even when you take into account the overall global music market, decline is about 4% in the first-half of ’06, so it has been a difficult market. We expect it to continue to be difficult until the trajectory of digital really gets to a point where we have meaningful profits from it. Right now, it just does not have the scale, but it does have a lot of growth and we do have a lot of focus on it.

Takao Yuhara

The PS3 of 6 million, the shipment target, as you know, we have a certain political component and devices. However, we are making every effort to meet with this 6 million production shipment. That is what we are doing at the moment.

Also, you were talking about LCD TVs?

Evan Wilson - Pacific Crest Securities

Yes, the market share on LCD.

Takao Yuhara

The market share, which is about 15% by unit sales. That is what we are anticipating for this fiscal year. The market share in a month should be more. We are aiming for just around 20% of the worldwide market sales.

Evan Wilson - Pacific Crest Securities

Thank you very much.

Jonathan Bates

You are welcome.

Operator

Our next question comes from the line of Ben Atkinson of Gagnon Securities. Please proceed.

Ben Atkinson - Gagnon Securities

Thank you. First question is, on Sony Life, what was the growth year over year in new policies and premium revenues?

Takao Yuhara

It is about 9%. That is our expected increase of a new policy, which is about 5% or 6%, the revenue increase from insurance year on year.

Ben Atkinson - Gagnon Securities

SG&A in the quarter was up substantially year over year. Could you help us understand what are the components of that big increase, and what is kind of a normal level we should be thinking about for SG&A?

Takao Yuhara

As you know, we have made a provision or [inaudible] and those [inaudible] worldwide, the placement program.

Ben Atkinson - Gagnon Securities

Okay, so the 51 billion is in SG&A?

Takao Yuhara

YEN [51.2 billion], so that was included in SG&A, as the service expenses.

Ben Atkinson - Gagnon Securities

Okay.

Takao Yuhara

Taking this and our SG&A revenue of more or less than the same period of last year.

Ben Atkinson - Gagnon Securities

Okay, I guess I am not getting there then, because I am looking at YEN 300 billion in the second quarter of 2005.

Takao Yuhara

The other point is -- that is right. Last year -- again, this is complicated -- but we had [Daico-Hinjo] --

Ben Atkinson - Gagnon Securities

Okay, so the [Daico-Hinjo] came out of the --

Takao Yuhara

[Daico-Hinjo] is a deduction of SG&A in the last year.

Ben Atkinson - Gagnon Securities

Okay, [Daico-Hinjo] in the last year, okay. What should we think about on an operating basis then for a kind of a normal level, something around the 400 billion level for SG&A?

Takao Yuhara

It is about 20%. That is, again, of the sales. That is what we are anticipating, so therefore, at the most, YEN 400 billion, maybe YEN 370 billion to YEN 400 billion. That is what we are anticipating as an adequate level of SG&A.

Ben Atkinson - Gagnon Securities

Thank you. Now, the YEN 54 billion inventory write-down in the gaming segment, could you help us understand there? Let’s say I will use the price of 100, that the gaming division buys a semiconductor component from the electronics division and it paid 100. You are taking things that you bought from the electronics division and then writing them down within the game division? Is that what is happening here?

Takao Yuhara

That is right, yes.

Ben Atkinson - Gagnon Securities

Could you help us understand again the thought behind this, and what are the implications then for -- so that is the first question, just help us understand what the reasoning behind accounting for things this way is.

Takao Yuhara

This accounting, the provision, if you assume that the total production costs, based on the current cost of the device and components, everything, then this is obviously higher than our expected sales price. The sales price is already set. So this [total amount] will be written down when we just took recording of inventory. That total amount is YEN 54 billion in the second quarter, as we did in the same manner in the first quarter, to YEN 16 billion in the first quarter. It is the same accounting.

Jonathan Bates

Ben, I think we are going to have to limit the questions per person.

Ben Atkinson - Gagnon Securities

That was my last one there. I wondered if you could just summarize how much of the losses on the PS3s that will be coming out this year have you already written off? How much of future losses should we expect?

Takao Yuhara

This year, as we just indicated, growth of the inventory just around the YEN 200 billion, and obviously we could have the profit from existing product, so therefore you could imagine the four months of the expected growth cut from the PS3 business for this year.

In the second year, we would expect a big swing of PS3 business from current, resonating from the -- I cannot commit today, but marginal improvement will be expected in the second year.

Operator

Our next question comes from the line of Luc Mouzon of BNP Paribas. Please proceed.

Luc Mouzon - BNP Paribas

Good afternoon. Just getting into your 4.6% EBIT margin on electronics, which would be excluding this battery recall cost. Looking into the set category, would you consider the dynamics there as especially due to TV? Is that because TV is close to break-even, or jumping back from a very negative number? Or do you have some other explanation, looking once again just at the product segment category?

Jonathan Bates

Luc, just to recap your question, I think you are asking about some of the factors driving up the EBIT margin within electronics, right?

Luc Mouzon - BNP Paribas

Yes, from the product point of view, because in your presentation on the operating income swings, in fact.

Jonathan Bates

Okay, so which product categories basically had a positive impact?

Luc Mouzon - BNP Paribas

Exactly.

Takao Yuhara

This is mainly contributed by the digital still cameras, and also the digital video cameras, personal video recording. Also, Vaio is doing pretty well and actually, the broadcast equipment, that also contributed to the positive margins.

Luc Mouzon - BNP Paribas

Just to follow-up, which means that the TV sub-segment itself is still, on an operating level, loss-making, excluding restructuring costs?

Takao Yuhara

In this forecast, unfortunately, we expected margin improvement on the TV business, but at this point in time, we would say, we would expect to break-even or a small profit from the TV business for this fiscal year. Therefore, the profit margins, as I said, mainly contributed by the products I said before.

Luc Mouzon - BNP Paribas

Briefly, on the first-half, you had a very positive foreign exchange rate impact on the set component. How do you expect that to move over the second-half? That is my last question.

Takao Yuhara

It is about YEN 30 billion for the second-half. That is what we are expecting the other sales currency, in the for-ex rate.

Luc Mouzon - BNP Paribas

Thank you.

Jonathan Bates

Thank you. We are running short of actually our allotted time today, so I would like to make the next question our final question.

Operator

Thank you, sir, and our final question comes from the line of Colin Sebastian of Lazard. Please proceed.

Colin Sebastian - Lazard

Thank you. Just a quick follow-up on the PlayStation 3. I wonder if you can comment on what the timetable is for converting the cell chip over to 65-nanometer technology, and if that is something that could create a bottleneck in the supply chain at some point? Thank you.

Takao Yuhara

Thank you, Colin. Concerning the 65-nanometer, we are going to be changing in the next Spring time, so therefore we are expected to use this 65-nanometers for next fiscal year.

Colin Sebastian - Lazard

Thank you.

Jonathan Bates

You are welcome. Thank you very much for calling, Colin, and thank you to all our callers today. With that, I would like to conclude today’s conference call and thank you again for joining us.

Also, thank you to Mr. Yuhara and Mr. Wiesenthal for joining us today.

Lastly, I would like to take this opportunity to remind everyone of our investor relations contact information. In Tokyo, investor relations can be reached at 813-5448-2180. In New York, Sam Levenson, Justin Hill, and Miki Emura, can be reached at 212-833-6722, and in London, Shinji Tomita is available at 44-207-444-9713.

Again, thank you very much for joining us today. That concludes today’s call.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference call. This does conclude your presentation, and you may now disconnect. Have a great day.

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