Sony Corporation (NYSE:SNE)
F2Q 2011 Earnings Conference Call
November 2, 2011 4:30 AM ET
Masaru Kato – VP and CFO
Kazuo Hirai – Corporate Executive Officer and Executive Deputy President
Kota Ezawa – Citigroup Global Markets
Yuji Fujimori – Barclays Capital
Yasuo Nakane – Deutsche Securities
Eiichi Katayama – Merrill Lynch
The scheduled time has come, so we would like to start Sony Corporation Fiscal ‘11 Second Quarter Earnings Announcement. Let me first introduce the speakers for today. In the middle, Representative Director, Executive Deputy President, Kazuo Hirai. To his left, the Corporate Executive Officer, CFO, EDP, Masaru Kato; and VP, Head of IR, Yoshinori Hashitani.
First, about the explanation on earnings and Mr. Hirai will talk about the consolidation of Sony Ericsson and the profitability improvement plan of TV business. Now, Mr. Kato, first.
First, I would like to summarize the consolidated results of the quarter. Sales decreased year-on-year, mainly due to the negative impact of the exchange rate and the decreasing sales of LCD TVs. Operating result deteriorated year-on-year primarily due to the decrease in sales asset impairments associated with the anticipated sale of our small- and medium-sized display business and asset impairment in the LCD TV business. However, results were better than our July forecast.
We have revised downwards the consolidated sales and operating income forecast for the fiscal year, due to a revision in our assumed foreign exchange rates to reflect the further appreciation of the yen, damage from the floods in Thailand, and lower expected sales, mainly in Europe and U.S.
Now, I would like to explain our income statement. Consolidated sales declined 9%. On a local currency basis, excluding exchange rate impact, sales decreased 4%. So, the impact of exchange rate account for over half of the decreasing sales. Consolidated operating results deteriorated ¥70.3 billion to an operating loss of ¥1.6 billion, primarily due to a decrease in gross profit from lower sales and the impact of impairment. However, results were better than July forecast.
Equity income recorded within operating income decreased ¥3.9 billion to ¥1.1 billion. The net effect of other income and expenses was income of ¥1.7 billion, compared to expense of ¥5.9 billion. The improvement was primarily due to a decrease in loss on devaluation of securities investment and an increase in net foreign exchange gains. Income before income tax decreased ¥62.6 billion to ¥0.1 billion. We recorded ¥18.4 billion of income tax expense.
During the previous fiscal year, valuation allowance was recorded in Sony and its national tax filing group in Japan against certain DTAs. Sony continued not to recognize a tax benefit associated with losses at Sony Corporation and its national tax filing group in Japan. As a result, the effective tax rate exceeded the Japanese statutory tax rate. Net loss was ¥27 billion, compared to net income of ¥31.1 billion in the same quarter of the previous year.
Now, I would like to explain our segment result. First, I will explain the result of consumer product and service segments. CPS segment sales decreased 12%. This was primarily due to LCD TV sales price declines, resulting mainly from deterioration in market conditions in the West and unfavorable foreign exchange rates, as well as lower PC sales, reflecting price competition. Operating loss was ¥34.6 billion, compared to plus ¥1.0 billion in the same quarter last year. This decrease was driven primarily by deterioration in the cost of sales ratio and decreasing gross profit resulting from the decrease in sales, offset partially by decreasing restructuring changes. You can see positive and negative factors contributing to CPS segment.
Now, sales in the TV business decreased 17% to ¥213 billion, due to the price declines resulting from the deterioration of the operating environment. During the quarter, LCD TV unit sales were basically unchanged at 5 million units, although unit sales decreased significant in Japan, and also in Europe and North America. But unit sales in developing countries increased significantly.
Excluding restructuring charges, an operating loss was ¥41 billion, a deterioration of ¥25 billion. This was due to market price declines and fixed asset impairment. The impairment was ¥8.6 billion. Without it, loss would have been approximately ¥32 billion.
Next is the Game business. Game business sales, which include network service revenues, decreased year-on-year due to the strategic price reduction of PS3 hardware undertaken in August in advance of the year-end holiday selling season, and the PS2 business as a whole, which continues to have steady demand in developing countries, but has peaked out and is shrinking. PS3 hardware unit sales were 3.7 million units, the highest ever for the seven quarters since the launch of the product in 2006.
Operating income for Game business has decreased year-on-year. Although we continue to reduce the manufacturing costs of PS3 hardware, operating income decreased due to the change in the price of PS3 hardware. Customer expectations for the PlayStation Vita, which we will launch in December are very high. Sales of the PS3 have been strong due to the benefit of the change in price and the support of strong software sales. Going forward, several hit titles are scheduled to be released. We temporarily halted the PlayStation Network due to the unauthorized access incident. But since restarting the service, customers are again utilizing the service and results are trending favorably, as customers are purchasing a great deal of content, including new popular game titles.
Now, I would like to explain the Professional, Device & Solutions segment. PDS sales decreased 11%. This decrease was mainly due to the decrease in sales of the component category, where batteries and storage media sales decreased due to the impact of Great East Japan earthquake. An operating loss of ¥12.3 billion was recorded, compared with operating income of ¥22.8 billion in the same quarter of the previous fiscal year. This was primarily due to an increase in restructuring charges and unfavorable exchange rates. Excluding restructuring charges, operating income of ¥9.1 billion was recorded. The principal portion of the restructuring charges can be attributed to asset impairment associated with the anticipated sale of small- to medium-sized display business. For the detail, please look at the handout.
Imaging sensor sales in the semiconductor business increased year-on-year. We have continued to expand this business through capital expenditures from last year and the monthly production capacity of CMOS image sensors has increased from 20 million units in July to 25 million units. The total inventory of the CPS and PDS segments as of the end of September 2012, it decreased 9.3% year-on-year to ¥743.9 billion.
Next is the Pictures segment. Sales increased 17% and operating income of ¥20.6 billion was recorded compared to operating loss of ¥4.8 billion in the same quarter with the previous fiscal year. Despite adverse impact of stronger yen, sales increased primarily due to the sales of the participation interest in Spider-Man merchandising rights in the current quarter and the significant increase in television revenue. Operating results improved significantly, primarily due to the operating income generated from the sales of the merchandising rights I just mentioned.
Sales in the Music segment decreased 7% and operating income decreased 22%. Sales decreased due to the appreciation of yen and a decrease in album sales outside of the United States. Operating income decreased, due to a significant increase in restructuring charges aimed at future growth, partially offset by a benefit from the recognition of digital license revenue.
Next is Financial Services segment. Financial Services revenue decreased 17% and the operating income decreased 43%. Revenue decreased primarily due to a deterioration in investment performance at Sony Life, as the Japanese stock market declined significantly during the current quarter compared with relatively stable condition in the same quarter with the previous fiscal year. On the other hand, insurance premium revenue at Sony Life increased, reflecting a higher policy amount in force. Financial Services operating income decreased primarily due to a decline in net gains on sales of securities at Sony Life.
Sales at our equity affiliate Sony Ericsson decreased 1%. Although total unit volume declined, sales remain almost flat due to an increase in average selling price, which resulted from the higher proportion of smartphone shipment. Sony recorded equity in net growth of Sony Ericsson of ¥30 million for the quarter compared to an increase of ¥2.6 billion in the same quarter of the previous fiscal year. So, this ends my explanation of each of the segments.
Now, I would like to explain – or I would like to have Mr. Kato explain – well, I will continue, explain our forecast revision for the fiscal year. Assumed foreign currency exchange rates for the second half are approximately ¥75 to the U.S. dollar and approximately ¥105 to the euro. Consolidated sales for the fiscal year are expected to be significantly below the July forecast, primarily due to updated foreign exchange rate assumptions to account for the further appreciation of the yen, the impact of the floods in Thailand, and the impact of the lower expected sales mainly in Europe and the United States.
Consolidated operating income is expected to be significantly lower than the July forecast for the following reasons. First, the negative impact of the appreciation of the yen on the consolidated operating income is expected to be approximately ¥65 billion more than our July forecast; second, we currently estimate approximately ¥25 billion net of insurance as the impact of the consolidated operating income from the floods in Thailand in October 2011. This is a direct damage to manufacturing facilities and postponement of the certain product launches resulting from the impact of the product procurement.
Excluding the impact of the floods, we expect the operating results in the CPS segment to be approximately ¥115 billion below the July forecast, primarily due to the lower expected sales and the unfavorable impact of foreign exchange rate. Operating loss from LCD television is expected to increase significantly from the July forecast. This change is primarily due to our lower unit sales forecast, price competition, unfavorable exchange rate and impairment of fixed assets.
As industry growth slows, we are changing our business strategy away from one focused on volume growth in the midterm, and we are implementing a variety of major measures that will fit this new policy. Operating result in the PDS segment are expected to be approximately ¥25 billion below the July forecast, primarily due to the lower expected sales and unfavorable foreign exchange rates, partially offset by anticipated additional benefit of expense reduction. Including FX cost, we expect to record a gain of approximately ¥50 billion on the 50% equity stake Sony currently holds of Sony Ericsson once that entity is fully consolidated, which is expected to occur in the fourth quarter of the current fiscal year.
We will have Mr. Hirai to talk to you about the TV as well as Sony Ericsson’s acquisition, as well as various mobile policy. But before that, I would like to discuss some of the actual performance, as well as the full year results. When we announced the first quarter results, it was the first quarter when we experienced the Great Earthquake and we had better than the expected results.
And in the second quarter, too, although there was ups and downs and although we had faced red, which is of course, something that we do not welcome, but this is better than what we had anticipated in July. So, that is a result of the second quarter. There were earthquakes and floods. So, although we had experienced various matters, we did get a result that was so-and-so for the first half.
Now the question is for the second half, there are various factors, and I would like to cover various factors. I think listening to my announcement, consolidated operating income in July was ¥200 billion, but today, I talked about ¥20 billion and turning Sony Ericsson into 100% subsidiary. So, valuation gain is ¥50 billion for 50% stake in Sony Ericsson. So, ¥20 billion consolidated operating income, if we exclude the Sony Ericsson’s one.
From July ¥200 billion forecast, there’s a difference of ¥230 billion. And this ¥230 billion, I would like to give explanation of the breakdown. After Mr. Hirai’s presentation, I’m sure there will be questions, so I think I’d better explain it first before I receive questions.
Now, if we exclude the valuation gain of Sony Ericsson, it’s ¥230 billion difference. The breakdown: first, exchange rate factor, ¥75 against dollar, ¥105 against euro. And because of that, ¥65 billion is the exchange rate impact. Of course, the dollar and the euro cannot explain everything, because we have other currencies in BRICs or in Central and Latin America and so on. So, we have transactions in various currencies. But from August onwards, in those emerging countries, well, China is an exception, but most of emerging countries’ currencies value have deteriorated or depreciated. So, out of ¥65 billion, part of them was the impact from emerging market currencies.
As far as the dollar is concerned, we have a balanced export here, so not much changed. Now, regarding euro, we will be impacted by the depreciation of euro. And looking at the development of other currencies since August, the impact is ¥65 billion. Another is floods in Thailand. Well, things are changing and the damages are changing. So, this is forecast as of now.
We are manufacturing digital imaging-related products and back end of semiconductors with rather high profitability, and they were hurt by the floods in Thailand. And there are many component and part manufacturers there and we’re purchasing components from them. So, there’s that impact. And a lion’s share is covered by insurance, but the ¥25 billion is the difference between insurance coverage and damage.
And by segment or business by business group, TV has big number as of – from July forecast, where there’s a major change for this business group. Looking back, in July earnings release, I talked about the forecast and I said the level of loss might be about the same as that of the previous year or a bit higher than that. That’s what I said in July. But our forecast as of now is a ¥175 billion loss if we exclude exchange rate impact, which I already talked, ¥75 billion change from July forecast. This is TV business group.
Now, Sony Ericsson. I talked about the valuation gain, but as far as operations of Sony Ericsson, compared to July, competition is becoming quite intensive, so revenue was revised downward. Well, we have a lower forecast when there is some restructuring cost we might have to incur for this fiscal year. So including that, the difference is ¥30 billion.
Now, our Financial Service business. Sony Life has the biggest share in Financial Services. Actually, policies in-forces and revenue from our policies in-force are going well, but they are investing in various financial products, and we do not have very optimistic forecast about the Financial Service markets in the future. So, ¥10 billion lower than our July forecast.
Now, entertainment-related business groups, there are two, Pictures and Music. ¥5 billion lower than forecast respectively. They’re working hard to make a profit, but at the end of the first quarter in July, there was an upside from our budget. So, when we had the full-year prospect in the headquarters, high expectations were incorporated in those numbers. But we have – we will not reach those levels, though they are doing rather well. So, ¥5 billion lower than forecast respectively. So, in total, ¥215 billion and the difference between ¥230 billion is ¥15 billion. These are the actually deterioration of operating income of other business groups.
If we – electronics, excluding TV and Game, it’s ¥15 billion lower than forecast in July. There are various factors. One is the impact of the earthquake. We do have rather solid prospect, but batteries plant were hit directly, storage media as well. So, I think there’s a lingering negative impact on those two businesses. And in the West, in Europe and America, market situations are quite severe, so I wouldn’t talk about the by-segment forecast, but overall, we are cautious about the future in Europe and in the U.S.A.
Financial Services, Entertainment, TV, which needs special attention, and Sony Ericsson, if we exclude all these, there’s not much difference of the results from July forecast. So, those are the changes from our July forecast.
Now, Mr. Hirai.
Good afternoon, ladies and gentlemen. I would like to take this opportunity to be in earnings announcement, to say a few words about the plan we have already begun to implement to improve the profitability of the TV business and to touch on the consolidation of Sony Ericsson, which we announced the other day.
We believe that the TV business is essential for Sony’s future growth strategy. That’s our perception about the TV business. The entire management team has a great sense of urgency regarding the fact that the TV business has continuously recorded losses for the last seven fiscal years. I will take the lead in implementing the plan to improve the profitability of the TV business, with the aim of extricating us from this loss-making structure as soon as possible.
The entire Sony group will be involved in this profitability improvement plan, as it cannot be achieved by the TV business alone. When we announced our mid-range plan in November 2009, we outlined plans to create a structure under which we could attain a market share of 20%, 40 million units in fiscal year 2012, based on the expectation that LCD TV market would continue its high level of growth. However, industry growth has clearly slowed and developed countries are experiencing negative growth, especially in the U.S. and Europe, where economic conditions have deteriorated.
With respect to our panel procurement strategy in fiscal year 2009, we assumed that LCD panels would continue to be in short supply. But there is now a surplus of panels. And as growth has slowed, we have had to drastically change our assumption regarding 40-million-unit business. It’s obvious, but we need to design and manufacture at an appropriate cost only the volume of units that we will sell. And we need to have a level of fixed cost that is appropriate for the size of our business. And we also need to provide customers with products and services that will sell. In August, I assigned Mr. Imamura, who had been the Head of Digital Imaging Group, to head the TV business and we have made a plan to revitalize the business after changing our assumptions for market growth and adopting a new view as to the market environment.
In the profitability improvement plan, we have developed that this time, we are determined to do everything we can do during this fiscal year, setting a goal of 20 million units for the year and implementing various measures, including impairment of machinery and equipment and disposal of unnecessary parts resulting from a reduction in number of models. The result will be a large loss for this fiscal year, but we believe these actions are necessary to turn a profit.
I would now like to explain in more concrete terms the profit structure of the TV business. TV business sales for this fiscal year are expected to be ¥875 billion and we expect to record an operating loss of ¥175 billion. In fiscal ‘12, we aim to reduce the operating loss by about half and return to profit in fiscal year ‘13, assuming no increase in sales.
Approximately ¥50 billion in additional charge are included in the cost for this fiscal year, primarily resulting from impairment of machinery and the disposal of unnecessary parts due to the reduction in number of models or done to transform operational structure in one that produces 20 million units. You might think that the primary reason for the loss in TV business is heavy fixed cost, but primarily due to the asset-light strategy we already carried out across our manufacturing facilities, certain reductions in fixed costs have been achieved.
Of course, we have to engage in further fixed cost reduction, as we change our structure from a 40-million to 20-million unit. But we believe the biggest issue at present is variable cost. If we exclude from the expected operating loss for this year ¥50 billion of additional charges associated with the transition to a 20-million-unit structure, ¥125 billion is the loss we must reduce in order to return to profitability in fiscal year ‘13.
Approximately 40% of the amount is expected to come from reduction of LCD panel costs, which are included in variable cost. The loss of approximately ¥50 billion has risen, because costs have not kept pace with the rapid decrease in market prices, causing hardware prices to no longer be competitive, and because S-LCD is not operating at full capacity this fiscal year, due to changing our 40-million unit structure. As a result, at present, Sony and Samsung are considering a variety of measures to improve competitiveness and are discussing plans that will benefit S-LCD in the future.
The most basic way to improve margin and profit is to increase the appeal of our products and reform our operations. These measures account for 30% of the amount of loss we must reduce to return to profit. On geographic basis, in developed countries, improvements in profitability will come from reducing fixed costs and improving the model mix instead of increasing volume.
In developing countries, market expansion is expected. Our brand image is strong and profitability is high. We will aim to expand at a rate faster than the market through enhancing models designed specifically for the needs of those regions, and we expect profitability to improve even further.
In the area of supply chain management, new systems have been up and running since this May, and we have reduced inventory turnover by 30 days. In fiscal year 2012, we aim to reduce turnover by a further 10 days. Regarding product differentiation, we will deploy unique technology, such as super-resolution high image quality engines that create the industry’s best picture.
There will come a time when a next generation panel will take the place of LCD panels. So, that we can lead the industry in this transition, we have accelerated the development of our next-generation TV. Due to competitive reasons, I cannot discuss today what type of technology we are focusing on.
Through implementation of our asset-light strategy in manufacturing, our use of ODMs and OEMs has increased and this has contributed to cash flow. In order to actually improve manufacturing design cost, we believe that it is essential to utilize ODMs and OEMs even more efficiently while optimizing our organization, and we will aggressively implement these measures.
As we announced yesterday, as of November 1, we changed the organization structure of the TV business unit. Up until now, the TV business was one business unit. Now, we have separated it into three fields, each with a clear mission and clear responsibilities.
First, we have put the legacy LCD TV business into a business unit that is focused on enhancing our products through internal design and manufacturing. In this unit, we will work to enhance the appeal of products, while improving product quality and ensuring greater efficiency in operations.
Next, we have put the ODM business internal, the business unit that makes products that are low cost through external design and manufacturing. By separating this unit from the unit focused on internal manufacturing, we will create an operation that is devoid of waste and is independent of the legacy framework.
Last, we have made a business unit for the group that is developing and designing the next-generation TV. Here, we will create the next generation of home entertainment that fits with the entire company’s next-generation product strategy. We have also strengthened upstream processes by consolidating the marketing and product strategy function, so that product development does not stray off-center.
Approximately 30% of the loss we must reduce is expected to come from measures such as reduction of SG&A, as sales companies in developed countries improve the efficiency of R&D through reform or design process; transfer the design process to Malaysia and locals; the reduction of indirect cost at headquarters and the business groups. This is not something that can be solved just in the TV business. This is a project for the entire company. By reducing fixed cost at sales companies, improving efficiency of R&D, and reducing indirect costs, we will implement restructuring so that the benefit can be seen in fiscal year 2013. We will undertake restructuring, with no areas kept off limits.
I will not comment on the number of people and other details here. The recovery of the TV business is the most pressing issue, not only for the Sony’s Consumer Electronics business, but also for the entire Sony Group. However, the TV business is not the only business in Sony. While improving the profitability of TV, we will steadfastly and quickly implement a growth strategy.
Since being appointed the Head of Consumer Electronics business in April, I have been saying that there are three essential priorities: one, the improvement of the profitability of the TV business; two, the expansion of the mobile business, including smartphones; and three, the proactive development of total themes such as networks services aimed at enhancing individual products and providing unified user experiences.
The full consolidation of Sony Ericsson, which we announced last week and the strategic acquisition of intellectual property is also one of these themes. Through this acquisition, we have added a vital element to help accelerate our four-screen strategy of smartphones, tablet, PCs and TVs. While we will work on the detailed plan towards the closing of the transaction expected in January of next year, please allow me to explain some of the key rationale for this deal and the benefits we expect from it.
The strategic importance of smartphones has increased conspicuously in the context of our network products from the perspective of consumer needs and in terms of influence on other products and services. We thought it was crucial for us to obtain complete operating control over this business, increase development in operational speed and attain the leading position in smartphones in order to grow Sony’s overall mobile business.
One of the highest priority goals for Sony Ericsson is increasing its presence in North America, which has the largest market for smartphones. It will be easier to take various actions once we make the company a 100% subsidiary of Sony. For example, Sony Ericsson’s Xperia is having great success in the Japanese market, which already has a strong relationship with Sony.
By promoting initiative such as consolidation with the Sony brand, cooperation in sales and marketing and enhanced ties between network services built around the Sony Entertainment Network and rich content, we will build a strong foundation in the North American market.
Well, of course, there are other many benefits for other Sony businesses. We will provide a unified user experience across all smartphones, tablets, Walkman and other mobile products. This can also be applied to televisions as well. Under a common service platform and user interface, we will offer consumers many unique forms of content and application across various different screen sizes and devices. This will aid in enhancing the appeal of Sony’s TVs.
Moreover, the relationship Sony Ericsson has built over the last 10 years with network operators and the expertise it has developed in the field of communication will benefit the business expansion of Sony products that have communication capabilities, including Sony Tablet, PlayStation, Vita and Reader.
The Intellectual Property Agreement we have gained this time will enable us to utilize important patents in many Sony communication devices in addition to Sony Ericsson devices. From the perspective of the product development as well, there are some significant benefits for both Sony and Sony Ericsson. Up until now, Sony Ericsson has launched products that contain technology and applications from many Sony products, such as Walkman, Cyber-shot and PlayStation.
Going forward, cooperation will be accelerated even further and we expect to plan and develop products in a much shorter time than before. Moreover, by strengthening cooperation and convergence, there are still many opportunities to raise operational speed and efficiency in areas such as product planning, development, design, sales and other business processes. And we will proactively go about doing so.
The environment surrounding the consumer electronics business is expected to continue to be severe. However, we will steadfastly implement our policy of inspiring our customers through the unification of the compelling product, content and services that Sony has. And we believe that this is the best means by which to grow and improve our profitability. This concludes my presentation. Thank you very much.
Now, question-and-answer session. Please raise your hand and identify your name and – by name and affiliation and speak into the microphone. If you ask question in English, that will be consecutively translated into Japanese by interpreters, and I would like to limit two questions per person because of the time constraint. Please raise your hand and wait for the microphone.
Kota Ezawa – Citigroup Global Markets
Citigroup Global Markets, Ezawa. I have two questions. One, centering on TV business, you have profitability improvement plan. Looking back, I would like you to reflect upon the past. Our common impression is that why the loss ballooned to this level and why didn’t you take fundamental countermeasures until this level of loss was incurred as a third-party? This is our question. In terms of governance from top management, whether top management has good control over TV business or control was not really implemented and how are you going to change this control by top management over TV business? That’s my first question.
Second question is also related to TV business. Listening to your explanation, ¥125 billion profitability improvement has to be done in two years and ¥50 billion in panel, and attractive products and efficient operation, 30%, so ¥37 billion improvement has to be made, because you said 30%. So, roughly speaking, by a marginal profitability or marginal profit rate, in two-year time, what will be the percentage of marginal profit? If you have any – some concrete numbers, we would like to know. If not, just impressions you can share with us.
First of all, regarding the first question, I would like to give an answer. Generally speaking, I think we can say that, as I mentioned in my speech, in fiscal 2009, when we analyzed the market and we analyzed what sort of policy we should take vis-à-vis TV business and we thought that the market will continue to grow. And we also thought that there will be a shortage of supply of panels. That was the basic perception. And based on that, we created a plan, and we kind of changed operations based on that assumption. But since the beginning of this year, in particular, especially in Europe, our market situation has rapidly slowed down and deteriorated.
And in April of this year, I was assigned to head Consumer Products division. And we reviewed every approach and every plan at that time, so we had thorough analysis. And the key point of our analysis is that market situation is quite severe. So, we have to have a realistic analysis. And based on realistic analysis, we have to come up with countermeasures. So, through that process and approach, we reviewed the annual number for the entire fiscal year.
So, what we reflect upon, soul-searching, I would say, the way we kind of foresaw the future of the market was a bit wrong. That’s the first point. The second point is, the sudden drop and slowdown of the market is another factor.
Let me also add, you said the situation became fundamentally bad. Yes, in the past several years, we were incurring loss. So, this is reality and I don’t make any excuses. But it doesn’t mean that the measures we took on did not bear any fruit. I would like to cite an example of other companies. For example, Panasonic, this time, has proposed a major restructuring, several hundreds of billions of yen of a structural reform budget, a very bold idea. Why didn’t we have that?
If I kind of interpret your question as that, we do not have any panel factory. We have a joint venture to manufacture panels. So, structuring – restructuring and structure reform cannot be done because we don’t own it. We had 13 assembly plants in the last several years, but that, we consolidated to four. So, we took measures to restructure this TV business. While Panasonic will dispose of several plants, we took that sort of measure in the past. So, we do not have any room for several hundred billions of yen of structural reform. We do not have that in our plan right now. Having said so, even though we took all those measures, we’re not making profit in TV business. And Hirai explained the various countermeasures to improve profitability.
And the yen’s appreciation and the continuous erosion of price, all those measures we took were offset by those two negative factors. So, the measures we took in the last several years should have contributed to the profitability by several hundreds of them. Actually, euro, ¥160, and the dollar, ¥110 several years ago, but it’s now ¥75 per $1 and ¥105 per €1. So, the exchange rate situation has changed quite drastically. I’m not trying to make excuses, but some of the competitors of Sony are actually benefiting from the weak currency of their country. So I hope you will understand that we are fighting in that sort of battlefield.
Kota Ezawa – Citigroup Global Markets
The gist of my question, or I think you have misunderstood the essence of my question. You reduced the number of locations and you are stating that there have been positive results out of such effort. The problem is notwithstanding, despite the fact that you are making such efforts, Sony, by the world comparison, is recording a big, big deficit, losses. Why is that compared to the others, Sony’s deficit seems to be significantly big?
So, rather than the change in the market, I’m implying that it has to do with the internal factors of the Sony organization, quickly stating, the governance. The top management, how, if they have ever been doing so, controlling the TV business unit? Are there any things that should be corrected or changed? Apparently, there is an inherent issue inside the organization of Sony, so I would appreciate your view on that.
Let me start in trying to respond to your questions. The TV business unit or the HE group, are they subject to any particular different governance, different from the other units or businesses or groups? Are they treated differently? No, not at all. It’s uniform governance, corporate-wide, group-wide. They put together the medium-term plan. They go through the evaluation review. And then they put together the budget, reviewed and approved. And this is exactly what the others are doing. So, there is a governance in place.
So, business unit, the TV has also come through such process. It’s not that those aggressive numbers, sort of 80 and 88 all were separated from the others. It’s a part of Sony’s plan. And we have, as a group, as a company, have concluded that it will be ¥40 million in 2009.
Now, let me add what has changed. And of course, we have made announcements, under Hirai, marketing design. They’re all assembled. They’re all placed under the responsibility of Hirai. This is not new to you. We have announced this, but this is new. This would be something different from the past.
Your second question about the marginal profit, I will not be able to disclose the percentages, but instead, let me explain how we look at the marginal profit. We are taking measures to improve the marginal profit and as has been said by Hirai, on the product side, we’re going to strengthen the products. And of course, it’s nothing new or nothing alien or strange. Geographical mix, we would review the model mix by different geographical regions. I think there’s room for improvement. We hope to be resourceful.
Well, we used to chase after the numbers. We segmented the markets and we tried to apply products per segment. So, it was the conventional marketing approach. But as a result, in certain models, the marginal profit was almost negligible and also in the price competition, we suffered. That has been the experience, we admit. So, we will depart from such an approach. And so there has been a change of our policy strategy. And in doing so, we would like to (ph) strengthen as much as possible to increase the marginal profit ratio. But I’m afraid I will not be able to disclose the ratios or percentages.
Kota Ezawa – Citigroup Global Markets
I know I’m dominating this, but you said ¥50 billion by panel and ¥30 billion by product, and even if there’s no increase of the volume. So that means that there will be a marginal profit level ratio improvement. According to my calculation, you’re talking – I think it’s about 10 points. Is that the right approach? Is this the right way to look at this? So, the earnings improvement, you’ll be able to achieve what you have said by improving the marginal profit ratio. Yes, thank you.
Yuji Fujimori – Barclays Capital
Fujimori from Barclays Capital, two questions. First, restructuring cost in the future. In this fiscal year, there might be additional restructuring cost or there might be continuous restructuring cost in the next fiscal year. That’s what I would like to know, especially overhead cost reduction. And what are you going to do with S-LCD? There might be a possibility of loss incurred? So the timing of restructuring cost and the magnitude of the restructuring cost, I would like to know.
The second question, there was the earthquake and other factors. So, we would like to know your real profitability capability. So, what is your view about the next year’s profit? I would like you to make a comment on your real capability of making profit. Or if it’s difficult, then you can explain the impact of the earthquake and the illicit access, and what sort of improvement you can expect in the next fiscal year about restructuring in TV and for the entire company?
There are two parts. For TV business, I think Hirai might add, but for the entire company, I would like to give explanation. Restructuring cost as of July was ¥25 billion. Right now, it’s ¥50 billion. So, there’s an additional ¥25 billion, and most of them is the sale of small and medium-display business and the impairment loss related to that. Now, and regarding TV, from the beginning of this fiscal year, we haven’t given any numbers, but, well, the TV business was the major part of the restructuring cost. And in the handout, it’s explained, LCD impairment and the TV and other restructuring cost are written separately. LCD, ¥13 billion for the entire fiscal year. This is related to LCD restructuring cost.
And I might be repeating myself, but is this the end of the story? I think that’s what you’re asking, whether there will be additional restructuring cost or not. There might be some. But what I would like to say is several hundreds of billions of yen, no. We do not expect that level or magnitude of that. We sold assets and we took asset-light strategy. So, we will not anticipate several hundreds of billions of yen of restructuring cost.
Now, regarding S-LCD and related cost, I would like to refrain from making comment. As Mr. Hirai said, how to improve profitability, we are having discussion with the counterparty. But whether – it’s too early for us to talk about that and the restructuring cost. So, not for this fiscal year, but for the next fiscal year, I think I’d better ask Hirai to give explanation.
So, I think there will be some restructuring cost related to TV business right now for the next fiscal year. The restructuring cost estimate, while it’s too early for us to come up with the exact number. But just a big image or impression, I would say, not several hundreds of billions, but several tens of billions of yen, I would say. I think that’s the ballpark measure.
Just 30% of ¥125 billion is overhead cost. Then you have to use twice as much cost for restructuring, usually, and allocation of this year and the next fiscal year, so this is not the end of the restructuring cost by the end of this fiscal year. As I mentioned beforehand, not only personnel cost but information system-related costs, logistics cost, service costs, naturally, and product cost and marketing development fund. All these costs are included in the number I mentioned. So, not everything is personnel cost. It’s not entirely restructuring costs. We have to improve efficiency in other aspects of operations as well. I hope you will understand that.
Yuji Fujimori – Barclays Capital
The second question, what is our true strength in generating profit?
And I think you are asking what is our outlook into the next future. It’s a very difficult, challenging question and being honest, it’s very difficult to give you the response. Flooding, earthquake, stronger yen. We could say had it not been for those, we could make whatever statement. But if you allow me, and I’m not talking about next year, but going back, the beginning of this year, before this particular business environment surfaced, the business structure hasn’t really changed, so this is if and when, so it may not be significant. But ¥300 billion to ¥400 billion of operating income was aimed for. And the company was aiming to generate ¥350 billion plus/minus of operating income.
Now, the competitive landscape has changed, so there’s no apple-to-apple comparison. But if you look at each pieces of business, and let me start with Entertainment, I think it has become a business that can enjoy steady increase of revenue with its pictures. Pictures are a hit-driven business. I accept this description. But more than that, but they have been resourceful in coming together with business model and they invest in production, invest in distribution and harvest the fruit, the benefits. And thanks to the restructuring of the Sony Pictures, there has been tremendous achievements and advancement.
The merchandising right of Spider-Man was unassumed temporary one-time-only revenue. I disagree. They invested in Spider-Man, the film. And of course, an integral part of the business model is an income from the merchandising. So, Pictures models have come off to come out with such an effective business model. Music, the market itself is shrinking, so they’re struggling. But while the packaged media sales have declined, they are trying to come up with how to – ideas to generate businesses from other resources, digitalization, diversification.
Publishing is one promising area. We have done this for some time. No matter what the medium, the Music maybe, whether it’s a packaged or digital, irrespective of the distribution, the publishing rights can be monetized. And I think it will be a source of steady income. Of course, overall Music industry is facing difficulties, but they are able to generate a reasonable income.
Financial Services. After the Lehman crisis, because of the portfolio, they had been subject to market volatility. They had been impacted by the market. But they have corrected their portfolio, and the way they invest so that they can – they will not be overly impacted by the market development. So, the policies in-force have increased and I think you can sort of depend upon the growth.
Electronics, what are we going to do? That’s the challenge for next year. We have not put together the budget for next year. It doesn’t really make much sense in talking about next year. So, whilst all the divisions are strengthening, some would be – there will be some differences. Device business is steady. And we continue to invest next year and after. We can expect a reasonable level of revenue. Digital Imaging, that has been doing. So well as the markets mature, I think the competitive conditions will become more harsh. But when it comes to product development, we have the Sony way. We have the in-house – well, there’s LSI for processing. And we have the capital manufacturing les.
So, we have those internal resources. We would like to capitalize on those internal resources. And we would like to maintain the high levels of income for Digital Imaging. I could go for a very long time, mobile, TVs. TV, of course, has been covered by Hirai. Whether it’s network or mobile, maybe, I could be supplemented by someone else.
I would like to refrain from making any – talking about any numbers on the network, just one word. Before, over the network, we were delivering different kinds of network contents to our customers, Video Unlimited. And we will have to expand the geographical coverage, the Music Unlimited. I think we are able to expand the market coverage.
And then given the current circumstances, we are changing the modality of the distribution of the contents. And I think that’s a very important first step, in my view. In addition, we have the network. And over the network, people will have to enjoy the contents. And also, they will have to enjoy being network-linked, whether it’s socially or being a part of the community, how can we be resourceful in providing that joy to our customers? And how can we associate – relate that to the contents?
That’s one task that we are undertaking. And also, PlayStation Network has started this. Rather than billing certain amount of money per one content, maybe a fixed amount of service is conceivable for PlayStation Network to allow our customers to enjoy contents. So, we’d like to challenge on the new business model, as well.
So, we would like to expand our footprint by changing the existing distribution, the modality. On the PlayStation business, at a pre-marketing level, hundreds of people have queued so that they can purchase PlayStation Vita. It will be launched on the 7 of December in Japan; and in the European and American markets, it’ll be in February.
Game industry is being challenged because of its excesses, but we have a DNA as a game company. And we have every intention to provide as much pleasure and joy to our customers. And also, at Sony Computer Entertainment, we would like to be proactive in entering into the casual entertainment space.
We only have very little time. So, can we ask to limit your question to one?
Yasuo Nakane – Deutsche Securities
Nakane of Deutsche Securities. Since you said I can only ask one question, my question directed to Hirai. How to strengthen the product appeal of TVs – the WebTV? I think you can now facilitate convergence. The Google TV. So what can be done?
And organizationally, how are you going to reorganize and make your organization more efficiently? Can we expect that there will be a reduced cost – I know my question is rather ambiguous or as Google TV, I think that not much advancement has been made on the Google TV, so time-schedule wise, when we’ll be able to see new things? And also, can we expect the increase of operation efficiency and the reduction of cost?
Actually, you implanted three questions under one big umbrella. The Google TV, you said that nothing has advanced, that, of course, the sales will be in the United States. We have updated and it can be linked to the TV Android, so I think we have enhanced the appeal of our products.
Yasuo Nakane – Deutsche Securities
At the same time, what about the volume of sales?
I think we do recognize that the situation is quite challenging. But we’d like to provide new experiences to our customers, a new experience of TV. So, it’s a product under the collaboration with Google. I think I would like to refrain from talking about future products. But together with Google, we’d like to come up with novel products and deliver that to our users.
Yasuo Nakane – Deutsche Securities
Are you talking about convergence or fusions or whatever?
I think your question is in the context of Sony Ericsson. But before responding, within the CPSG, there’s a separate entity, Sony Computer Entertainment, but they come under the one umbrella as one integral group. We are going to move from (ph) our OEM to Sony City, so they will be neighbors. So, the SCE and Sony would engage in series of collaborations. So, we made them move. And I think they are delivering good results.
So, they share the same space. They’re under the same umbrella. There are certain improvement of efficiencies, and we are seeing some tangible results. But as a company, we don’t have any intention to integrate or merge that with Sony Corporation. Sony Ericsson, they’ll be 100% subsidiary of Sony for consolidation. But system and the like, the 100% integration in the real sense in a short period of time would be quite difficult, in my view.
But having said so, as was the case for SCE and Sony, in the real operation and in the development and planning of products, I think there’s much room for collaboration. Whether it’s technically integrated or not, I think with the will of the management, these can be done with speed. And also under the four-screen strategy, I believe that products would come up. And as the management, I would like to promote such advances.
Somebody in the middle in the very front row?
Eiichi Katayama – Merrill Lynch
Katayama of Merrill Lynch. Mr. Hirai, you talked about the profit plan for TV in next year or two, there will be about ¥60 billion of loss. That will be nine consecutive years of loss. And I think that has a (ph) declaration that has made. And you are trying to get a surplus in 2013, and I can realistically understand, but you are facing the loss for such a long time. And annual surplus aim for 2013 is something that I am somewhat doubtful about. For example, in which quarter do you think you will have the prospect of the surplus or even with some changes in the environment, are you looking at some kind of a timeframe where you can realistically obtain surplus?
During the past seven years, for the six years, I believe the only person who have looked over the TV business is Mr. Howard Stringer. And for the press conference for Sony Ericsson, he was there, but he’s not here for this press conference. And I believe that this is somewhat odd. And I’m not trying to, sort of, criticize Mr. Hirai here, but was there no discussion within Sony that the Chairman should be here to take this up himself?
Well, regarding the surplus that we anticipate for fiscal year 2013, and you asked for the specific quarter where we are anticipating the shift to surplus, I will not be able to disclose it here. But including myself, as Sony’s management, this is something we need to achieve. This is a must and we will do everything we can do, and we will put the entire organization for this objective. TV business group, we’ll, of course, work on this, but this is not just for the TV business group. I think it is beyond just one business group.
And for the headquarters and for the overseas sales companies, people carried out extensive discussion. This is an all-Sony efforts, not only in Japan, but throughout the world. And we have already discussed this and this is the recognition and awareness of the management. So we, as a whole management, trying to work for this objective.
As for Sir Howard Stringer, to be honest with you, when it was the illegal access of the network and for this TV business as well, this is a business field that I am in charge of. And I personally need to explain this myself, and that is my intention. And for Sony Ericsson, this is a joint venture which continued for 10 years and we are going to acquire the equity that is held by Ericsson. This is a major project, therefore, it was appropriate for the Chairman to be there to explain about this deal.
Eiichi Katayama – Merrill Lynch
Thank you very much.
Well, we have actually gone over time. Therefore, we would like to finish the presentation session with this. Thank you very much, everyone, for being here, despite your busy schedule. Thank you.