Sony Corporation's CEO Discusses F1Q 2011 Results - Earnings Call Transcript

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 |  Includes: SNE
by: SA Transcripts

Sony Corporation (NYSE:SNE)

F1Q 2011 Earnings Conference Call

July 28, 2011 09:00 ET

Executives

Sam Levenson – Senior Vice President of Investor Relations

Mark Kato – Chief Financial Officer

Robert Wiesenthal – Group Executive, Corporate Development and M&A and Executive Vice President and Chief Financial Officer

Yoshinori Hashitani – Vice President of Senior General Manager of Investor Relations Division

Analysts

Daniel Ernst – Hudson Square Research

Andy Hargreaves – Pacific Crest Securities

Kota Ezawa – Citigroup

Louis Schreurs – LS Consultancy

Operator

Good day, ladies and gentlemen and welcome to the First Quarter Fiscal Year 2011 Sony Corporation Conference Call for Overseas Investors. My name is Jeremy and I will be your operator today. At this time, all participants are in a listen-only mode. We will later conduct a question-and-answer session. (Operator Instructions)

I would now like to turn conference over to your host for today to Sam Levenson. Sir, you may proceed.

Sam Levenson – Senior Vice President of Investor Relations

Thanks so much for that introduction Jeremy. And thank you all for joining us today July 28, 2011 for the discussion of Sony’s first quarter results. We hope you enjoy the Adele’s latest hit while you were on hold.

I am Sam Levenson, Senior Vice President of Investor Relations at Sony Corporation of America. And with me on the conference call tonight is Mark Kato, CFO of Sony Corporation; Robert Wiesenthal, Group Executive, Corporate Development and M&A for Sony Corporation, and EVP and CFO of Sony Corporation of America; and Yoshinori Hashitani VP of Senior General Manager of Investor Relations Division at Sony. Thank you all very much for joining us.

In just a few moments, we will review today’s announcement, then we’ll be available to answer your questions. Please be aware that statements made during the following remarks and Q&A session with respect to Sony’s current plans, estimates, strategies, press release and other statements that are not historical facts are forward-looking statements about the future performance of Sony.

These statements are based on management’s assumptions in light of the information currently available to it and therefore, you should not place undue reliance on them. Sony cautions you that a number of important factors could cause actual results to differ materially from those discussed in the forward-looking statements. For additional information, as to risks and uncertainties, as well as other factors that could cause actual results to differ, please refer to today’s press release, which can be accessed by visiting www.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. With that I am now going to turn to today’s announcements.

I am pleased to report that the company was successful in posting ¥27.5 billion in operating profit for the quarter despite the greatest Japan earthquake and the duration in electronics business environment. Each of the reportable segment posted results, which exceeded our main forecast. While the yen continues to strengthen and the business environment remains challenging particularly for TVs. We believe that the outperformance across most of our businesses will be sufficient to offset the pressure and as such, we are maintaining our full year outlook for operating profit to be approximately ¥200 billion. We’re also pleased to note that the recovery process from the earthquake is proceeding well ahead of our initial expectation.

Let’s discuss the first quarter results in detail. First I’ll explain the results of the consumer, product and services segment. CPS segment sales decreased 18%. This is primarily due to lower sales of LCD TVs and PCs resulting from price declines. Operating income decreased ¥26.9 billion to ¥1.7 billion. This was driven primarily by lower gross profit resulting from a decrease in sales and a deterioration in the cost of sales ratio partially offset by lower SG&A. And excluding restructuring charges, the product categories for the deterioration and operating results included LCD televisions reflecting a decline in prices and video cameras reflecting a decrease in unit sales resulting from the market trends.

In the TV business sales decreased 17% to ¥243 billion due to price declines and the impact of exchange rates. During the quarter, LCD TV unit sales decreased 4% year-on-year to 4.9 million units. Unit sales decreased because of challenging market in Europe and in North America where competition increases. On the other hand, unit sales increased significantly in Japan and other regions including developing countries. Excluding restructuring charges, an operating loss of ¥14 billion was recorded in the TV business. That’s down ¥17 billion year-over-year. This was due to pricing of declines I just cited partially offset by the impact of material cost reductions, expense improvement and the benefit of restructuring activities.

Next in CPS is digital imaging business. Compact digital cameras and video cameras experienced a decline in sales and operating income due to a decrease in unit sales resulting from the earthquake, unfavorable exchange rates and price declines. However, we maintained a high operating profit margin due to further cost reductions.

Turning to game business, game business sales, which include network service revenues decreased year-on-year due to the impact of PS3 hardware which did not have as much momentum from hit titles at the same quarter over the previous fiscal year Red Dead Redemption was released. And due to the PS2 business as a whole, which continues to have steady demand that is picked up in insurance. Although sales decrease and results were impacted by our efforts to deal with the unauthorized network access. Operating performance of the game business as a whole including our network business was basically unchanged year-on-year because of the reduced in the hardware cost of the PS3.

As for the Red in the fiscal year, we’re on the cost of launching multiple highly anticipated titles particularly those customized for the PS move where we announced at last month PS3 conference. And from the end of the year, we launched a next generation portable entertainment system PS Vita. PC sales decreased primarily due to the impact of price declines and a decrease in unit sales mainly in North America and Europe. Operating income increased due the decrease in material cost and strong sales of high end models like the VAIO S Series.

Now I'll turn to the Professional, Device & Solution segment. PDS sales decreased 17%. This was primarily due to a decrease in sales components. Sales of batteries, which suffered from damages in manufacturing equipment as a result of the earthquake and tsunami. And sales of storage media, which was also impacted by the earthquake and shrinkage of the market decreased. Operating income decreased ¥15.4 billion year-on-year to ¥2.3 billion. This was primarily due to a decrease in gross profit from lower sales and deterioration of the cost of sales ratio despite a decrease in SG&A expenses. Excluding restructuring charges the product categories, which had the most significant deterioration in operating results was components which had a decrease in sales primarily due to the impact of earthquake and tsunami.

Turning next to the pictures segment, sales increased 9% and operating income increased 50%. Sales increased primarily due to an increase in home entertainment revenues and advertising revenues from SPE’s network in India partially offset by a decrease in theatrical revenue as at this same quarter the previous fiscal year benefited from the strong performance of The Karate Kid. Operating income increased primarily due to higher revenues from SPE’s television network and a gain on the sale of SPE’s equity interest in a TV production company in the UK.

Sales in the music segment decrease 1%, and operating income increased 61%. Due to the appreciation of the end sales were slightly down while on a local currency basis, sales increased due to a number of key releases. Operating income increased due to the strong performance of key releases and reporting the gain from a several of the legal settlement concerning copyright infringement.

Next is the financial services segment, financial services revenue increased 19% primarily due to an increase in insurance premiums resulting from expansion of policy amounting for us and an improvement in net gains from investments at Sony Life. ¥28.7 billion of operating income is recorded for this segment in the current quarter as business expanded steadily despite a decrease in profit at Sony Bank resulting primarily from a decrease in foreign exchange net gains on foreign currency denominated consumer customer deposits.

Sales at our equity affiliate Sony Ericsson decreased 32%. This was due to a decrease in the unit shipments cost by a constraint supplied critical components as a result of the disaster in Japan. And a decline in a number of future r phones shipped as a result of a focus on smartphones. We expect there will be hardly any impact from the earthquake and tsunami on shipments of new products for the rest of the fiscal year. Loss before taxes of €43 million was reported for the quarter compared to an income before taxes of €25 million in the same quarter of the fiscal year due to the lower volumes. As a result, Sony recorded equity in net loss for Sony Ericsson of ¥3.1 billion for the quarter compared to an income of ¥0.6 billion in the same quarter of the previous fiscal year. So that ends my explanation of the second results. I’d like to turn next to our fourth half for the full fiscal year.

For the balance of the year our assumptions for foreign currency exchange rates are approximately ¥80 of a dollar and approximately ¥115 for €. We have revised our sales forecast downward, and ¥7.5 trillion to ¥7.2 trillion for the fiscal year due to the faster than expected deterioration of the appliance market in the US and Europe and due to our assumed appreciation of the yen. We have made no change to our forecast for consolidated operating income. Notable changes for the fiscal year operating income forecast by segments are as follows.

Operating results for the CPS segments are expected to be significantly below on May forecast. Operating results for the first quarter exceeded expectations and businesses negatively affected by the earthquake are recovering faster than expected. However, we are viewing the CPS segment operating results more cautiously for the fiscal year compared to the main forecast primarily due to television business, in which LCD unit sales for the fiscal year are anticipated to be below previous expectations. Operating results for the PDS segments are expected to be above our May forecast. This was primarily because of faster than expected progress and reducing cost and faster than anticipated recovery in business operations that have been negatively affected by the earthquake. The fiscal year operating results were pictures, music and financial services segment are all expected to exceed our May forecast. So, it’s just a recap, the outperformance of PDS pictures, music and financial services are expected to offset the reduced outlook for the CPS segment.

Net income attributable to Sony Corporation stockholders has been revised downward primarily due to a higher than originally forecasted expected income tax rate. So, that’s the necessary view of the forecast and now we’d like to turn to your questions. Operator, please queue-up the questions.

Question-and-Answer Session

Operator

Okay. (Operator Instructions) And gentlemen, your first question comes from the line of Daniel Ernst with Hudson Square Research. You may proceed.

Daniel ErnstHudson Square Research

Hi, yes. Good evening and good morning. Thanks for taking my call. A couple questions, if I may. First, while it's somewhat of a new development, do you have any commentary on Nintendo's cutting of DS3 – 3DS price this morning relative to plans for the pricing on the PlayStation Vita? And then on the digital imaging side with camcorder sales down 29% year-over-year you said in the prepared remarks that it's overall market shrinkage. But I think that's more of an acceleration and decline than we've seen in the past. Do you have any commentary on the outlook there? Was it a product positioning issue? Was it a channel issue? Or should we expect that of actually be a trajectory for the camcorder industry going forward? And then finally on the 3D industry in general we've seen a lot of weakness in the US, the box office, you've marketed the premium, the attendance that we used to get on 3D, has that had any impact on the Sony 3D ecosystem? Thanks.

Sam Levenson

Okay, your first question about 3DS reducing prices. Well normally you don’t comment on competitors pricing decision. but if we kind of rephrase the question and say that is this a price drop in anticipation of our (VS beta) coming on in the fall, well the only comment I can make at this point is that I mean those products are positioned different. So, pricing decisions well it’s up to the consumer to decide, but I see it I mean they are completely different products, or I don’t think there is much meaning in comparing the pricing decision of different products. Your second question about camcorder, the decline in this quarter, this is I think basically due to the fact that the earthquake in the northern part of Japan affected the supply chain and we were not able to supply necessary quantity to meet demand. That would be the main reason. The third question about 3D, it is – I’ve been saying that 3D now we think it is on a very important part of our business and not just a one-time charge. If we – if the sales of the 3D product if you look at last year although they were good, but still or slightly behind our projection to be honest. The reason for that is I don’t think we have enough good 3D content at the moment, which is improving every month. So, once we have more attractive 3D software, I think our 3D business will improve.

Now, the box office I think well Rob do you have any insight on this one?

Robert Wiesenthal

Sure. I mean I think at the end of the day it’s about the story and if you start with quality content 3D can supercharge it. But it has to be a great story to begin with. And I think that the films that have based on great story and have a strong foundation has done well in the box office and knows that have been weak and used 3D as a novelty have done so well. We have a lot of 3D films planned over the next year and obviously the Smurfs coming out next weekend we had the Green Hornet, we have Arthur Christmas, and a bunch of other films and we’re excited about it. And I think Operson (ph) is correct. As soon as that base of strong 3D content is available for those on the TV side, I think TV will have a strong foundation as well. We’re doing large part with 3D network as a joint venture with IMAX and Discovery Channel and hopefully that serves to propound – provide a base for TV viewers. But it’s – we’re in the beginning stages of 3D, but so far so good.

Sam Levenson

You can go out and see Smurfs tonight in the States.

Daniel Ernst – Hudson Square Research

Well, I’ll take you on consideration. Thanks for the answers.

Sam Levenson

Jeremy, next question please?

Operator

And your next question at this time comes from the line of Andy Hargreaves with Pacific Crest. You may proceed.

Andy HargreavesPacific Crest Securities

Thanks. I just want to ask about TVs and specifically sales to emerging markets. Are sales to the BRIC countries that you're growing profitable at this point and the drag is purely from developed markets?

Sam Levenson

Yes, basically yes. If you look at the global markets, sales in the emerging markets including the BRIC countries, it is – for us it’s still growing and it has been and it still is a profitable business for us. And if you look at the country-by-country, there are some differences. And that as you know the China has seen a little bit of a not a decline, but a slowdown with sales positive for us. But if you go to countries like Brazil and India, they are growing at a probably good pace, which is really good for us. Yes, and the problems that we will see in the television business is more towards the mature markets, notably North America and European countries.

Andy Hargreaves – Pacific Crest Securities

And you mentioned inventory in the developed markets. Can you get a little bit more specific there? Is there a timeframe where you think that the inventory situation will be a bit more balanced?

Sam Levenson

Well, I think it’s not just for everybody in the market. And I cannot talk about our competition, but as you see there are a lot of price cutting in the market. So, eventually over time I think the inventory situation would be I’d say better. I think everybody want to be in a better position as we near the Christmas holiday season. I cannot give you a timeframe, which is two weeks or two months left. Let me not answer I guess.

Andy Hargreaves – Pacific Crest Securities

And then on Blu-ray you didn't change any of your guidance that didn't look great there. But can you comment at all about the demand and then with TV sales especially at the high-end weak and developed markets, have you seen a slowdown in Blu-ray sales in developed markets as well? If so, is that being made up for in emerging?

Sam Levenson

Blu-ray is becoming a good business a nice business for us. I think a lot to do with sales of large screen flat television as well. Because if you look at the Japanese market, as you know we had this government subsidy the eco-point system which has expired and also we have made the shift from analog to digital just this week, meaning that many people have more new television sets over past year. And when that happened people went for very well know, for the people who can occupy I mean large screen high-end television which I think grew the appetite for TV reporters especially in France. Overall (NYSE:DD) business has been growing and it is a profitable business for us again.

Andy Hargreaves – Pacific Crest Securities

Okay. Thank you.

Operator

And your next question will be from the line of Kota Ezawa from Citigroup. Go ahead.

Kota Ezawa – Citigroup

Hi. Thanks for taking my question. Just one question for you. (Kazuo) mentioned in the meeting in Tokyo about the further restructuring opportunity particularly on the headquarter on the sales company. Interestingly, but expectedly, Panasonic also mentioned additional restructuring today with even more specific timing. They said they will explain about the restructuring by the end of the next quarter results. So,, would you also give as much color on your restructuring in terms of timing or possibly depth as well? Thank you.

Sam Levenson

Okay, regarding steps, we are in – at the current stage we are in the planning process. We do have an idea where should be – we should be focusing and I did mention about those in the meeting. Previously restructuring always referred to factories, headcount within the product divisions. Not so much though in headquarters in the sales and marketing group. But this time we have a much more broader-scope. Now details further to what I have said, we need a little bit more time since we have changed the management team within Mr. Ryoji (ph) group the consumer, products and service group and announced it today. And so we have a shuffle in management the new management need a little bit more time to review the situation and as a team they’re discussing every day now on how to improve the situation. So, I cannot give you a timeframe, but it shouldn’t be so long until we are able to communicate to you what kind of programs or initiatives that we will be taking.

Kota Ezawa – Citigroup

Okay, thank you.

Operator

(Operator Instructions) And you have a question from the line of Louis Schreurs with LS Consultancy. Go ahead.

Louis Schreurs – LS Consultancy

Yes, good morning. I've got a small question and mostly if I relate it (Masashi) because of the management change there. Could you comment on the operational results of beneficent in the first quarter? Did I understand correctly it was ¥14 billion loss? I might have wrongly understood that. Thank you.

Sam Levenson

I am sorry the operational results of which part of the company?

Louis Schreurs – LS Consultancy

Oh sorry, the LCD TV.

Sam Levenson

LCD TV, yes, ¥14 billion operating loss for the quarter, which is down 17 billion from last year.

Louis Schreurs – LS Consultancy

Okay, thank you.

Sam Levenson

You’re welcome. Jeremy, next question please?

Operator

And your next question is from the line of (Samuel Lover with Future Asset Management). Go ahead.

Unidentified Analyst

Well, hi, thank you for taking the question. My question is first of all I think you mentioned in the meeting in the afternoon that your inventory, the semiconductor is actually a bit higher than your forecast. Can you quantify that? Tell us what cost increased there? And secondly, my same question would be on your television business. Since you have already written down your -- in terms of volume, production, etcetera, it was your television business. And now you're no longer chasing volumes gradually. Realistically, how much cost would you be able to cut moving forward and what's the chance of shrinking the losses there? Thank you.

Robert Wiesenthal

On the inventory situation relating to semiconductor business, there are two signs to it. One, I’ll start with the slightly negative side which is we have said that the TV sales have declined – well projected to decline. So, one part of the semiconductor inventory is related to enterprise or TV. The bigger part is which is I don’t think it is a problem at the moment. It’s not the same as semiconductor business. We view the demand that we see in the coming months. Frankly speaking we cannot lead full demand on a month-by-month basis. So, we may find on an annual basis to kind of evenly output and what this means is that we have continued to build inventory in anticipation of design in the future. So, this is more of a factory load effect, even though there are not immediate sales for the program. So, basically this is – what I am talking about is the instances which is very highly demanding product and highly profitable as well. So, I don’t think that as a problem.

Okay, the last situation I relate it to TV. Now it is quite difficult to really direct the deduction in the volume, quantities reducing from 27 million to 22. What I have said during the Tokyo meeting this Friday, overall although we will aim at smaller quantities try to kind of balance ourselves with profitability, the magnitude of the loss would be greater than what I had communicated to you during the last earnings call in May. The magnitude of that had to be -- the losses could be as high as last year’s process, or well if you take the most pessimistic case, maybe even larger than that.

So, okay, to couple them back, the reason why we see that reducing quantity is maybe a better strategy to take is that in some markets we see very fast competition in low end product or small in size product. Here even though we did our best to take the cost down as much as we can still the pricing situation today is that if we pursue quantity here we’ll be losing money on every unit we sell. So, that’s where we have decided not to pursue those segments and why the focus on high end product where we can get more contribution from each product. And also pursue emerging markets where our growth and profitability can still be balanced and we are quite profitable in the emerging markets at the moment.

Sam Levenson

Terrific. Jeremy we have time for one more if you have any more question.

Operator

Okay. (Operator Instructions) Sir, it doesn’t appear there are any further questions at this time.

Sam Levenson – Senior Vice President of Investor Relations

Terrific. Well, I invite everyone on the call to feel free to reach out to one of our investor relation offices in London, New York and Tokyo for any follow-up questions you have. And thank you all for joining us. Have a good night.

Operator

That does conclude our question and answer session for today ladies and gentlemen. We thank you for joining our conference and have a wonderful day. You may now disconnect.

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