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Sony Corp. (NYSE:SNE)

F1Q10 (Qtr End 6/30/10) Earnings Call

July 29, 2010 09:00 am ET


Masaru Kato - EVP and CFO


Yasuo Nakane - Deutsche Securities

Kaito Arosawa - Citigroup

Yuji Fujimori - Barclays Capital

Masahiro Ono - Morgan Stanley

Kazumasa Kubota - Okasan Securities


Thank you very much for waiting. We would like to now start FY'10 First Quarter Earnings Announcement Meeting. Let me introduce the speakers to your right CFO, Corporate Executive Officer EVP, Mr. Masaru Kato, Head of IR, Gen Tsuchikawa. First Mr. Kato will give an outline. First Mr. Kato will give an outline.

Masaru Kato

Good evening ladies and gentlemen. Now on my part I would like to begin by explaining the contents of today’s announcement. The improvement in the results during the second half of the previous fiscal year continue during the first quarter with result significantly exceeding our May forecast.

The benefit of our restructuring efforts has manifested itself and we have successfully launched new competitive products causing our results to steadily improve.

Operating results for the current quarter were a profit ¥67 billion a major improvement over ¥25.7 loss of the same quarter previous year. The Consumer, Professional & Devices segment and the Network Product & Services segment contributed significantly and the TV, game and Sony Ericsson mobile phone businesses all recorded a profit for the quarter.

The quarters operating results significantly outperformed our forecast we announced in May at the fiscal year results announcement. As a result, even though we raised our euro exchange rate assumption for the remainder of the fiscal year from ¥155 million to significantly higher ¥110 level, we have revised, our forecast for the full year consolidated operating income ¥25.10 billion in net income attributable to Sony shareholders was recorded in the first quarter at positive turnaround from the loss of the same quarter previous year. Next let me talk about P&L, consolidated sales for the quarter increased by 4%.

The negative impact of exchange rate was about ¥73 billion and on a local currency basis sales increased by 8%. Consolidated operating income of ¥67 billion was recorded with a positive strength, from the loss of the same quarter previous year due great performance of the consumer professional and devices segment and the network products and services segment.

The non operating income improved by ¥19.1 billion due to the recording of the net performing exchange Yen compared to a net foreign exchange loss of the same quarter previous year. As a result ¥78.9 billion in income before income tax estimates recorded compared to ¥32.9 billion loss in the same quarter previous year.

The effective tax rate during the quarter was ¥55 the reason, this rate exceeded Japanese Statutory Tax rate was mainly because we revised our estimates on the final outcome of bilateral APA on transfer pricing based on the most recent government to government negotiation and thus recorded additional tax expenses.

Net income attributable to Sony shareholders was ¥25.7 billion compared to a net loss of ¥27.1 billion in the same quarter previous year. Now we will explain segment results. First I would like to briefly explain a change in our segment reporting to reflect the change in our organizational structure as of the April 1.

We have repositioned the operation of the B2B and disc manufacturing segment. B2B operations have been incorporated into the consumer products and devices segment which was renamed the Consumer, Professional & Devices segment. Disc manufacturing operation is now included in all other.

On this slide you can see the change in each segment sales and operating results for this quarter. Sales in the consumer professional devices segment increased 7% primarily due to an increase in the early sales of LCD TVs. Operating income ¥50.1 billion was recorded a significant improvement over the loss recorded in the same quarter previous year. This was mainly due to an improvement in the cost of sales ratio higher gross profit from the increased sales and they grow our restructuring charges.

Despite the increase in SG&A and negative FOREX impact the primary factors causing the change in the results included as you see on the slide was a positive factor and the negative factors excluding the impact of restructuring changes product categories would improve results, includes sale contracts which benefited from the higher sales of (inaudible) and the television with higher sales. TV business sales increased 23% to ¥292 billion due to a 60% increase in LCD TV unit sales to 5.1 million units excluding restructuring charges ¥3 billion in the operating income was recorded and improvement of ¥11 billion compared with the ¥8 billion loss this was due to the increase in unit sales reductions in materials under cost and benefit of restructuring although prices declined.

In the March 2011 fiscal year we aim to turn our profit despite the price declines and the negative impact of exchange rates by reaching our goal of 25 million units through the expansion of highly appealing new models and models which meet the characteristics of each region, by continuing to reduce costs and improvement expenses.

Compact Digital Camera sales were flat year-on-year, but operating income increased slightly due to increased unit sales and improved expenses including a the reduction in materials costs and although FOREX rates and price declines had a negative impact and we increased an advertising and promotion expenses, expense sales of comparative models, video camera sales have decreased due to the negative impact of exchange rate and price declines while operating profit increased primarily due to improved expenses.

Sales in the network production sales this segment increased 32% due to increased sales in the PC and game businesses. Operating results improved significantly due to an improvement in the cost of sales ratio and an increase in gross profit from higher sales although exchange rates had a negative impact and SG&A increase reflecting the increase in sales.

Now the primary factors causing the change in this segment is here, positive factors a ¥30.7 billion improvement in the cost of sales ratio and the ¥15.6 billion, increase in gross profit from increased sales.

Game sales increased 28% year-on-year to ¥142 billion. This was primarily due to significant increase in the unit sales of PS3 hardware and software. Operating results improved ¥34.5 billion to a ¥0.5 billion profit. The significant improvement resulted from a cost reduction of PS3 hardware and an increase in the unit sales of PS3 software despite the negative impact of exchange rates.

The game business has recorded a profit for the last three quarters in a row. This fiscal year we aim to expand sales even further to turn a profit for the full year. PS3 hardware unit sales reached 2.4 million in the quarter at strong sales and birth of hit software titles expanded the penetration of the council. We’re on track to reach our target of 50 million units for the year.

PC sales increased due to a significant increase in unit sales. Operating results improved mainly due to the unit sales increase although prices declined. The total inventory in CPD and MPS segments was ¥657.1 billion a decrease of 10% year-on-year. We believe this is an appropriate level.

Pictures and music I will be quite brief you can actually look at the graphs. Picture segment decreased 22% but profit increased 68%. Sales in music segment increased 1% while profit increased 39%. Financial services revenue decreased 26% profit decreased 38%.

The decrease in revenue was primarily due to the deterioration in net gains and losses from investment at Sony Life resulting from a significant decline in the Japanese stock market. However, insurance premium revenue at Sony Life continued to increase due to an increasing in media client policy and expansion in policy enforced. The business continues to do well. For Sony Ericsson we have made our announcements already.

We are now talking about the forecast we are reversing upward our forecast for the fiscal year again this time as the trend toward improvement in performance seen since the second half of last fiscal year continues. We are not changing our assumption for the Yen to US $ exchange rate announced in May that was approximately $0.90 into $1. We are changing our Yen to the Euro exchange rate assumptions from ¥125 to ¥110.

There is no change to our forecast for consolidated sales of ¥600 billion. We have revised upward our forecast for consolidated operating income from ¥160 billion to ¥180 billion we also have revised upward our forecast for income before income taxes from ¥140 billion to ¥170 billion and for a net income attributable to Sony's shareholders from ¥50 billion to ¥60 billion. The primary reason for the upward revision in operating income forecast for the year is the significant out performance of the CPD segment compared to our main forecast.

Although operating results of the NPS segment are expected to be below that forecast, well looking at the trend from last year, looking at 2009 operating loss turned to profit because electronics business improved, but last year the financial business improved significantly throughout the year. So that was the structure, basically on the other hand we had success in the restructuring, and that is reflected in the operating results, to achieve a ¥38.9 billion but the primary driver of course is to provide product services and the relative contents for this year.

So I believe that this year's first quarter earnings announcements signals are from this perspective as well our quarterly electronic business has begun to again drive our financial improvement that continues its momentum from the previous year and it was shown in the figures. There are some individual hit products for TV we have new designed TV that is very popular for Digital Camera. In June we launched NEX compact digital camera but it also has a resolution of the compact or the digital lens camera and also the 3D products, 3D TV for example and cinema projectors are doing well.

For 3D we do have some good high expectations and we have been able to show our strength for PS3 we continued to have hardware and software that are selling well. And in the growing markets of its countries we have been successful in introducing products I have to get individual need of the countries.

One of the underpinnings of financial improvement for there are some uncertainties in the second quarter foreign exchange and so on but we do have a good products and good momentum and we want to build on this momentum with our heavy appealing products so that our second quarter results will be improving going forward after the second quarter.

This concludes my remarks.

Question-and-Answer Session


Now the floor is open to your questions. (Operator Instructions) Yasuo Nakane from Deutsche Securities.

Yasuo Nakane - Deutsche Securities

The first quarter and for the full year what's the operating income with apparent revision. What are the factors positive and negative for the revised results? And during the second half the business environment may become ever. But how would you incorporate the price factors and the regional demand situation?

Masaru Kato

If I may start and introduce some of the numbers to you, during the first quarter the margins of our improvement compared to the original forecast around ¥90 billion and the breakdown CPD about 50 billion. NPS ¥30 billion and the remainder picture and music to some extent. And out of the ¥50 billion of CPD half comes from TV improved performance. Next?

If I may give you the overall framework. For the full-year projection, CPD 40 billion, NPS minus 10 billion or the others about minus 10 billion. So if you look at these two this step chart another factor we can point to would be the products impact from the second quarter onward we estimate that to be around 80 billion and half affecting in CPD and half affecting NPS.

Therefore it is on CPD coming back to CPD results the improvement during the first quarter was ¥50 billion and subtracts negative FOREX impact of 40 billion. Therefore the simple arithmetic's would be positive the positive 10 billion, and then this difference of ¥40 billion, that mainly comes from semi-conductor business, the further improvement in semi-conductor related business from second quarter onward.

And on the NPS side, the improvement of ¥38 billion during the first quarter subtracting the FOREX impact of ¥40 billion and minus 10 billion, therefore, from second quarter onward, along the line of the original forecast. And then, the business environment during the second half price and regional demand?

I am not an economist and I am purely hesitant about talking about the macroeconomics, but all-in-all in case of advanced countries, we had a rather closer look. But the market size is very large, but in your offer for instance triggered by the financial crisis in Greece and so forth there are some uncertainties.

Therefore we will take cautious view. But immediate future we will have a very robust sales in Europe and so it's encouraging but for the future we still take cautious look. Other regions the emerging countries centering around the BRIC countries, we observe a very strong trend. Talking about the first quarter compared to the previous year, increased by about 40%.

So in period from second quarter onwards so far as emerging countries are concerned, we should able to see a very robust business and of the amount of the BRIC continues, we observed a strong growth of the middle class therefore we will work on the products and services which you are dedicated to such middle classes with reasonable prices affordable prices. Therefore we can capture that regional demand well.

About price trend a difference from 1 product category to the other so we cannot over generalize it but in terms of comparison with the first quarter during the first quarter in TV segment we, were successfully launching a very good product and we had the situation of tight supply of panel therefore in some regions we could not fully fulfill the market demand and the impact on the price was that the, price we do not have to reduce the price, because of the tight supply, compared to what we follow.

So at the beginning of the year, in addition to that the promotional expense we do not have to spend all the promotional expenses we have budgeted at the beginning of the year and that pushed up our income, along with the steady progress of cost reduction, but when it comes to price adjustment or the promotional expenses we have some positive impact on savings and then what will happen from second quarter onwards.

Of course we have much stronger better products this year compared to the previous year. Therefore we are very confident about the situation compared to the last year, but of course there is still competition to a lot over the optimistic in other words now maybe some price drops some extent but still. We do not simply go along with the price drop in the industry but we will combine other promotional measures and to capture the demand. Thank you. Next question please.


Kaito Arosawa from Citigroup.

Kaito Arosawa - Citigroup

NPS in the first quarter that was higher than expected and of course the future there is an impact of exchange rate but I would like you to elaborate on the performance of NPS segment current situation and future forecast. You have been talking about the network of business you have been emphasizing on network business and does is all belong to NPS. If you pick out and carve out that network business what is the current situation of network business?

Masaru Kato

NPSG, PC, VAIO and the PlayStation are major product and I would like to tough upon network products. As far as VAIO is concerned in the spring sales we launched certain products for this spring sales and they were quite attractive and there was a strong demand we could not satisfy all the demand compared to the previous year and would say there was compared to the previous year the sales increased across the 13% that is the current situation on VAIO because of that in terms of income and a loss it increased.

And there was an improvement. Now PS3 and other SCE business as we have announced in the fourth quarter the negative margin of hardware disappeared. So in the first quarter in terms of hardware as well as software PS3 contributed significantly to the profit. Now as far as PS3 is concerned the sales were lower than our expectations. The PS2 is quite dynamic and lively and the results of PS2 sales are better than we expected.

Now network business, well PS3 installed business is 52 million units. This is the number of registered users. So we could increase the numbers to this level and network related sales well the major one is actually gain but it was a bit less than ¥40 billion last year.

But this year it’s going to be double to close to 80 billion that’s what we hope and we expect. In the end of the first quarter I think we’re on track to achieve this. But contribution to profitability in that sense. Well I think this will contribute to the profitability in the next fiscal year.

Now second quarter onward VAIO and PlayStation I think we have good products and there us a PlayStation move which is with the motion controller that will be launched in autumn and there will be a software which will match this PS move.

Of course, the FOREX has a negative impact and we have to overcome this. We do not think we can have higher profits which will more than offset this negative impact of FOREX. But we think it will be about the same contribution as the negative impact of exchange rate. The ¥15 billion in the first quarter last year it was 6 billion. So it more than doubled year-over-year increase.

While we are making efforts for us to increase profitability, one is increase the installed base and another is Playstations and the TVs are connected, and other mobile equipment will be connected to network services we are trying to increase the devices which will be connected. In terms of regional strategy, we started this in America and then followed in by Europe and Japan. We would like to increase the number of countries where network service can be available.

And another is the increase of contents. Most of contents are game related content but we would like to put more content on the network. Because network is a platform, so we would have to invite as many audience and customers as, those attract more customers as possible.

Kaito Arosawa - Citigroup

This is for Mr. Kato how do you position the overall earnings of the company. Well I think your tone is quite positive and things are moving along as you planned and I think you are sending our a message that you would do a good business in terms of earnings by achieving target numbers. Or do you rather have three year plan and this year is a preparatory preparation period?

Masaru Kato

Well just intuitive answer we were making a loss in TV business and the first thing we have to do is we have to achieve turnaround in the TV business. And for this fiscal year I think we might be able to achieve that objective that's the feeling. And for PS we have achieved a profit for three fiscal years in a row three quarters in a row so the amounts might be small. And the third quarter is the busiest period because it's the sales season and we have lot of factors to increase the games profit.

So I think we have to achieve breakeven point in the game as we promised. In TV we will do our best in the first quarter of 5 million units actually we increase the units by 1.8 million units and the TV is contributing to our profits in the first quarter.

Well I receive the present posts very recently, but it's we haven’t done this for a long period of time and I am not optimistic whether this trend will continue or not, but we will keep making efforts to achieve 25 million unit sales in TV. That is the first priority and on top of that we will take various measures for growth that we have been doing it since last year and I think they will bear fruit in the future.

And we are trying to become a leaner mean by transformation and we will continue to do so, but in terms of growth we have to deliver a growth to be a well received by the banker. So in that sense maybe we might not be achievable to goals before the end of this fiscal year, there are so much more that we have to do.

But in terms of the profit structure or in terms of the balance sheet, compared to the difficult times of the past I think we have achieved improvement so we are almost ready to be offensive in terms of cash and in terms of the a good balance sheet. So how much money we’ll invest in what sort of segments? I think we have to wait until autumn where we will explain corporate strategy. So I hope you will wait until that time. Is this an intuitive answer?

Kaito Arosawa - Citigroup



Yuji Fujimori from Barclays Capital.

Yuji Fujimori - Barclays Capital

By geographical region, can you break it down, please you have the sales data that you have disclosed but in this for example, China or BRIC countries. If you break it down by geographical regions how much would it be in US it’s the sales have declined but making profit in US is exactly what Sony has been doing in the past, so if you don’t lose in US then you can continue to make profit in BRIC countries, so given the competitive situation, can you break it down by geographical regions, please?

Masaru Kato

Yes by region, if we look back at the first quarter for example, on the year-on-year basis for all regions we were outperforming the previous year for electronics compared to the previous year increased by 16% in electronics. Now if you break it down by the region as you mentioned, its primary in the emerging markets including the BRICs. That’s about the 40% of the overall growth. So they are the driving force. In the industrialized countries on the other hand the growth rate is less.

As of April, we had projections as of early April and the situation has changed slightly. In Japan, it was better than we have anticipated in the America's it was slightly less. That was because of the tight supply of TV so there was some particular reasons so it was below the original projection for other regions it was almost as expected in Europe and emerging countries we were not too far from the original projections at the beginning of the period in terms of sales.

For profitability depends on the products category but for example for TVs American market is a large market but the competition is very severe there so for profitability structure lines. The BRICs countries emerging markets or other regions the profitability in these regions are higher.

So these markets on the other hand are growing and we are able to catch up to that growth of these markets which is a very favorable situation for us. For other products and we cannot disclose for all of the products for most of the products the trend is similar. Just add so for the full year projection for CPD you said semiconductors is going to go to the positive so DI for the first quarter there has been a growth but you don’t anticipate any additional increase.

Yuji Fujimori - Barclays Capital

But I think there are some more opportunities?

Masaru Kato

Well there are pros and cons within Sony as well. But the figures the projection that we have disclosed to you for DI for example we don’t factor in the projection that they will grow dramatically but for DI in general on a quantity basis there is going to be continued growth but on the monitory basis, there is not going to be a major growth in some markets there are some contraptions.

So the competition is very severe in this market. However, NEX the new camera with a new concept, we will be launching these new products. So high-end models and some products for catering the needs of the users of the BRICs countries, we do have different products in the line-up, and so we want to report to you in three months time or six months time, we did better than we had anticipated. But, as for our plan, we are rather conservative and we are not anticipating a major dramatic increase by these kind of figures that we presenting to you today.

But of course, we are very eager to expand the market for NEX new camera. I think for the first time in a long time indeed, the market demand, you know, we are meeting the needs of the market.

So that is the reaction that we have. So we want to increase the production and so the business group is very eager to increase production. Just to add, compared to the first quarter projections and comparing with the results, there are no categories which did less than the projections. So generally speaking, we were able to outperform the projections, in terms of our profitability, yes.

And in terms of price, we were able to hold onto the price level that we had anticipated and also, compared to the previous year, other regions, we were able to grow. VAIO and LCD TVs were the driving factors, VAIO in general the spring and summer models switch over was very smooth that was the primary reason. Thank you very much.


And the third person Ono from Morgan Stanley.

Masahiro Ono - Morgan Stanley

Thank you for this opportunity. Concerning the first quarter, TV and PC value and digital camera and camcorder situation, on this four product categories all-in-all other profits registered the increase was it because of volume or the price or the combination I would like to have your comment. And if possible if same price came down can you give us some guidance about the price situations.

Masaru Kato

In case of TV both volume and price situation was to our favor as I explained to you earlier, compared to the previous year the results were 5 million against the previous level 3.2 million therefore the volume increase and also on the price fund because of the good products and with some tightness in supply we did not have to reduce the price as we forecasted at the beginning and that contributed to the TV profits during the first quarter. In case of VAIO for the introduction of spring the model ran very smoothly.

Therefore the volume increased and also on the prized front not like in case of TV but depending on the model. We could achieve a higher prize than we anticipated so the volume and the price front again.

In case of DI there is rather intense price competition. Therefore we have to keep pace with the competitive situation generally. And we secure the profit in DI through cost reduction and the higher efficiency operations. Therefore generation of profits through operational improvements in the main supplementing other aspects and the camcorder in terms of the overall trend the conventional camcorder market, is on the decline by-and-by shrinking but in that we capture a solid share 40% to 50% although there is some variance from one country to the other.

But it is in that sense a stills stable source and the basis of the revenue and profit.

Masahiro Ono - Morgan Stanley

One point. In case of TV, what was the price reduction imagine you incorporated at the beginning.

Masaru Kato

Well it's different from wide screens actually they had items of inch but in overall sales we anticipated the price drop of 15% to 20% initially however the price drop did not go that far again depending on the screen size it varies but actual price achieved was higher than anticipated price level by a several percentage points. But there are special factors like 3D TV and then you might wonder what's the price difference between 3D and the conventional TV and which you asked before the launching.

But the result was that there was a shortage in terms of supply units. Therefore relatively high prices have been accepted in the market by the initial customers. So this product mix also affected the price situation.


Kubota from Okasan Securities.

Kazumasa Kubota - Okasan Securities

Volume of TV was higher than expected in the first quarter but in the first half of the first quarter there was a problem of the panel shortage and you don't have any concern about the tightness of the supply your panels? That’s my first question. And in the first half 50% of the higher results of CPD is a TV.

But what is the operating profit margin which is the breakeven point for the full year has it been revised upward as well you said 40 million units in the next fiscal year and this fiscal year is 25 million?

I think you had a very good start in the first quarter but suppose you can achieve 40 million next year but this year you were in the black ink in the first quarter. So in LED TV flat TVs do you think that you can gain you can achieve 5% profit margin because of this TV business in the next fiscal year?

About the first question maybe the way I put it was wrong so I would like to change it. I said compare it to the previous year, the TV sales were higher than the past and compared to April or May forecast, its not that the sales the sales were not higher because of the panel shortage and so on, very minor increase than the forecast. And 25 million for the full-year, whether we can achieve it or not?

Masaru Kato

Currently, throughout there was a tightness of a supply, but now that is almost soft and we diversified sources as LCD and the joint venture with SHARP in Taiwan, and we also are purchasing panels from those. So we have diversified supply sources. So I don’t think we will not achieve 25 million because of the shortage of panels. But the profit margin, 25 million can be achieved. But margin, I cannot say certain specific numbers, but at the beginning of this year. There is not much change either upward or downward from the beginning of the year, forecast at the beginning of the year.

40 million in the next fiscal year, this is our objective. We are sending out messages on target. The 20% market share is in the background, this is the way to express 20% market share in sighting that number. It also depends on the growth of the market that might fluctuate the number, if we capture 20% market share, then we have to actually 40 million this year its 25 million, next year we will have to have another step, and so, whether we can achieve the 40 million figure or not depends on how well we do this year.

In a way it hops the jump and we are now at the step period to jump next year. So if we get close to the next year, I think we can share with you more specific numbers and plans, but towards the end of the year sales period we have to do a good job. Well about the next years plan we haven’t finalized it. This was the figure of the last years MRP, 40 million in fiscal 2012, was the figure sighted in the mid ranged plan of the last year.

So we would like to close the meeting here thank you very much for attending.

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