Sony Corp. F4Q07 (Qtr. End 03/31/08) Earnings Call Transcript

May.14.08 | About: Sony Corporation (SNE)

Sony Corporation (NYSE:SNE)

Q4 FY08 Earnings Call

May 14, 2008, 09:30 AM ET

Executives

Sam Levenson - Sr. VP, IR

Nobuyuki Oneda - EVP and CFO

Robert Wiesenthal - Robert Wiesenthal, EVP and CFO, Sony Corporation of America

Analysts

Evan Wilson - Pacific Crest

Colin Sebastian - Lazard

Michael Kopelman - Merrill Lynch

Daniel Ernst - Hudson Square Research

Ben Williams - GAM

Benjamin Lu - Seligman

Operator

Good day, ladies and gentlemen, and welcome to Sony Corporation Consolidated Financial Results for the year ended March 31st, 2008. My name is Lauren, and I will be your operator for today. At this time all participants are in listen-only mode. We will conduct the question-and-answer session towards the end of this conference. [Operator Instructions] As a reminder this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr. Sam Levenson, Senior Vice President of Investor Relations at Sony Corporation of America.

Sam Levenson - Senior Vice President, Investor Relations

Thank you very much for that introduction, Lauren. And thank you all for joining us today, May 14, 2008, for the discussion of Sony's results for the year-ended March 31st, 2008. I'm Sam Levenson, Senior Vice President of Investor Relations of Sony Corporation of America. I'm joined this evening in Tokyo by Nobuyuki Oneda, Corporate Executive Officer, EVP and CFO of Sony Corporation; and by Robert Wiesenthal, Group Executive, Corporate Development and M&A for Sony Corporation, and EVP and CFO of Sony Corporation of America.

Thank you both very much for joining us. In just a few minutes, I'm going to give a brief summary of today's announcement. Then Mr. Oneda and Mr. Wiesenthal will be available to answer your questions.

Please be aware that statements made during the following remarks and Q&A session with respect to Sony's current plans, estimates, strategies, 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.

With that, I'm now going to turn to today's announcement.

I'll begin with a discussion of our consolidated results and segment results for the fiscal year-ended March 31st, and then review our forecast for the year-ended March 31st, 2009. During the fiscal year ended March 31st, 2008, we set new sales records, new records for consolidated sales, income before income taxes, equity and net income of affiliated companies and net income. Consolidated operating income was 5.2 times that of the previous fiscal year reaching at second highest level in Sony's history.

Income before income taxes was 4.6 times and net income was 2.9 times that of the previous year, both significant increases. More specifically consolidated sales increased by 7% year-on-year to ¥8.8714 trillion, consolidated operating income was ¥374.5 billion, 5.2 times that of last year. Other income improved ¥61.5 billion yen year-on-year to ¥91.8 billion. This significant improvement was primarily due for the recording of the gain of ¥81 billion from the global IPO of Sony Financial Holdings.

Equity and net income of affiliated companies increased by 28% year-on-year to ¥100.8 billion. The contributions of the major affiliates were ¥79.5 billion from Sony Ericsson, ¥10 billion from Sony BMG, and ¥7.4 billion from S-LCD. As a result of these factors ¥369.4 billion in net income was recorded, an amount 2.9 times that of the previous fiscal year and a new record after ten years.

Next, I would like to report the results of our three-year restructuring plan. As we already announced, during the year ended March 2007 we've had achieved our 20% model count reduction, our 10,000 person headcount reduction, and the ¥120 billion asset sale goals. The ¥200 billion cost reduction goal was achieved by the third quarter of last year. With regards to our goal of consolidating or closing 11 manufacturing facilities, 9 locations were previously announced, and we are now adding the Elsa's [ph] plant in France and the second factory at Sony Electronics, Korea to complete that initiative.

As for the 15 product categories earmarked for elimination, 14 have been previously announced and we are now adding Aiwa branded products to complete that initiative. Although, external factors such as valuation losses brought on by the decline in Japanese stock market, did prevent us from achieving our 5% consolidated operating income margin target for the year just ended. On an operational basis we have created a structure, whereby 5% margin can be achieved.

In addition, in the electronic segment the operating income margin was 5.4%, much higher than the 4% we had targeted for the year just ended. As we disclosed earlier today, we plan to hold a corporate strategy meeting in June where we will discuss our forward strategy for the mid-term timeframe.

Now, let's take few minutes to discuss the financial results on a segment by segment basis. First, electronics; sales in electronics segment increased by 9% reaching a new record, by product category LCD TVs, PCs and digital cameras reached higher unit sales in all regions contributed to the sales increase year-over-year. On the other hand LCD rear-projection televisions, which suffered from a shrinking market had a decrease in sales, as is widely known, we are planning to exit this category.

Operating income in the electronic segment reached a new record high, it was 2.2 times that of the previous fiscal year, primarily as a result of the increase in sales and the positive impact of the depreciation of the yen against the euro. The operating income margin for the segment was 5.4%, as I mentioned a moment ago.

On a product category basis PCs, digital cameras, system LSI, and video cameras achieved record operating income, contributing to the overall increase in the operating profit of the segment.

Now, looking more specifically at TV and semiconductors, first television category, overall sales of the TV category for the fiscal year increased by 11% year-on-year to ¥1.365 trillion. An operating loss of ¥73 billion was recorded for the entire category, a deterioration of ¥50.5 billion compared to the previous fiscal year. While we were able to grow our LCD TV business significantly, increasing unit sales from 6.3 million in the previous fiscal year to 10.6 million in the March 2008 fiscal year, a large operating loss was recorded due to our being forced to cut prices in the first half of the year, as a result of less than competitive product line up.

In the second half of the fiscal year, we introduced new models to the market, focusing primarily on large screen full HD products, but losses expanded due to continued intense price competition, tight supply of certain panels and our having to ship some panel via air.

Turning to semiconductors, overall sales of the semiconductor category for the fiscal year increased by 8% to ¥840 billion. Operating income improved by ¥53 billion to ¥43 billion, contributing a great deal to the improvement in consolidated operating income. Sales and operating income increased primarily due to the expansion of PS3 chip sales and the sale of equipment in Nagasaki as part of our asset life strategy.

Next, Sony Ericsson. Sony Ericsson sales increased by 7% year-on-year due to strong sales of Walkman and Cybershot mobile phones. However, due to an increase in R&D expenses as a percentage of sales which were implemented to expand the product lineup and strengthen product comparativeness, income before income taxes decreased.

The equity and net income Sony recorded from Sony Ericsson was ¥79.5 billion.

Next, the game segment. In the game segment sales increased by 26% about three-fourth of the sales came from hardware and accessories, and balance came from the software. First, looking at the hardware categories. Hardware sales increased due to the contribution of PS3 and PSP hardware sales. In its eight years since launch, PS2 has passed this peak of expansion with demand for the console continues to exceed our expectations with sales in Eastern Europe and Asia exceeding previous year levels.

Unit sales for the fiscal year vastly exceeded our original forecast and reached 13.73 million units for the year. Due to the launch of the new model and enhancement of the software lineup and add-on features such as TV viewing in Japan, the PSP gained greater acceptance from a broad user base worldwide, resulting in its recording 13.89 million units sold, a significant increase over the previous year, and also significantly higher than our original forecast for the year.

PS3 sales in the first half of the fiscal did not meet our expectations, but after the introduction of the new model and a reduction in the sales price last fall, the expansion of the platform reached the new level in Japan, the U.S. and Europe, and 9.24 million units were sold during the fiscal year.

With more than 7 million units sold in the second half, penetration in the console has gained momentum and the strength is continuing in the March 2009 fiscal year.

Overall, software sales increased due to contribution of PS3 software. Entertainment content for the PS3 was enhanced over the year with approximately 250 titles launched in Japan, the U.S., and Europe. And over 50 million game discs have been sold.

Operating loss for the game segment for the fiscal year was ¥124.5 billion, an improvement of ¥107.8 billion year-on-year. The decrease in loss, primarily resulted from a significant decrease in the operating loss of the PS3 business, due to successful hardware cost reductions and increased software sales, as well as the strong performance of the PSP business with the introduction of a new model. The PS2 business, both hardware and software, also contributed significantly to the profit of the segment.

Turning to the picture segment, sales decreased 11% year-on-year, primarily due to fewer films being released in the current fiscal year. Partially offsetting that decrease were increased home entertainment and television revenues from prior year films. Picture segment revenues also benefited from the sale of a bankruptcy claim against First Media, a formal licensee of film and television products. Major films released in the year that contributed to both theatrical and home entertainment sales included Spiderman III and Superbad.

Although sales decreased, operating income increased by 27% year-on-year to ¥54 billion. This was primarily due to the strong performance of prior year films in the home entertainment and television markets and the sale of the bankruptcy claim.

Next, looking at financial services, revenue decreased by 11% due to a decrease in revenue with Sony Life. Although, insurance premium revenue increased due to strong performance of insurance in force, revenue at Sony Life decreased by 15% to ¥464.1 billion due to a net loss from investment in the separate account and a deterioration in net valuation gains from convertible bonds and an impairment loss in equity securities and the general account. This reflects a significant decline in the Japanese stock market during the fiscal year.

Due to the decline in profit performance at Sony Life, segment operating income decreased by 73%. Although the increase in insurance premium revenue contributed positively to results, the deterioration in net valuation gains from convertible bonds and the impairment on equity securities and general account caused operating income at Sony Life to decrease by 86% to ¥11.5 billion.

All other, sales in all other increased by 8%, due primarily to the contribution of sales at U.S. publishing music company Famous Music, which was acquired by Sony's U.S. based music publishing subsidiary Sony ATV Music Publishing and consolidated in the current fiscal year. The receipt of the settlement payment related to the copyright infringement claims, an increase in sales at Sony Music entertainment Japan, and higher fee revenue from broadband connection services at So-net all contributed. An increase in trademark royalty income from Sony Ericsson also contributed to the increase in sales.

Sales at Sony Music Entertainment, Japan, increased due to an increase in music download sales. Operating income for all other increased by 74% year-on-year, this increase resulted primarily from the recording of a ¥10 billion gain from the sale of Sony Center in Berlin, the receipt of a settlement payment related to copyright infringement and the increase in trademark royalty income from Sony Ericsson.

Last, Sony BMG. Although digital product sales increased, sales at Sony BMG decreased by 4% year-on-year, primarily due to the continued decline in the physical music market worldwide. Despite the decreased sales, income before income taxes increased by 90% year-on-year. The increased profit resulted from the $67 million reduction in restructuring expenses, lower marketing costs, reductions in overhead costs, as a result of restructuring and other factors.

Artists such as Alicia Keys, Avril Lavigne, Celine Dion and Leona Lewis released the best selling albums of the year. The equity net income Sony recorded from Sony BMG was ¥10 billion.

Now turning to the forecast for the year ended March 31, 2009. First, our forecast assumes a rate of approximately ¥100 to the U.S. dollar and ¥158 to the euro. Consolidated sales are expected to increase slightly, while consolidated operating income is expected to increase significantly. Electronic segment operating income is expected to decrease due to the appreciation of the yen, but the game and financial services segments are expected to improve significantly. During the fiscal year ended March 2008, we recorded several large one-time profits such as a ¥60.7 billion gain from the sale of portion of the former headquarter site, but we don't expect to record any similar large profits in the fiscal year ended March 2009.

Due also to the absence of an ¥81 billion gain from the IPO of Sony Financial Holdings that we recorded last year, we expect income before income taxes to decrease year-on-year. Equity and net income of affiliates is also expected to decrease due to slowing market growth of mid- to high-end mobile phones and an increase in R&D expenses implemented to expand the product lineup and the strength in product competitiveness at Sony Ericsson, as well as increased restructuring charges expected at Sony BMG. The forecast for each business segment is as follows. First, electronics. Despite an increase in sales, primarily of LCD TVs, PCs and digital cameras, sales are expected to be flat compared with the previous fiscal year, mainly due to the impact of appreciation of the yen against the U.S. dollar.

Operating income is expected to decrease due to the impact of the appreciation of the yen against the U.S. dollar. However, in regards for the TV business, we expect operating performance to improve significantly year-on-year and for the TV business to record a profit for the fiscal year.

Game, although segment sales are expected to decrease due to the decrease of PS2 unit sales as the console entered its ninth year since launch, profitability of the segment is expected to improve significantly, and we expect to record a profit for the fiscal year versus ¥125 billion loss last fiscal year. The PSP strong performance in the March 2008 fiscal year is expected to continue and PS3 hardware costs are expected to be reduced, while the software lineup is expected to be enhanced.

Pictures, a decrease in sales and operating income is expected primarily because of the impact the appreciation of the yen against the U.S. dollar. However, on a local currency basis and excluding the fact of the benefits from the sale of bankruptcy claim last year, sales and operating income are expected to increase on an apple-to-apples basis.

Financial services, the effective gains and losses at Sony Life due to stock market fluctuations are not incorporated within the forecast from the March 2009 fiscal year. Therefore we anticipate a significant increase in segment revenue and operating income compared to the previous fiscal year, which was negatively impacted by the decline of the Japanese stock market.

Dividends; finally I would like to review today's announcement regarding an increase in dividends. Today we announced the plan to increase our regular dividend per share by ¥15 to ¥40 per annum from ¥25 per share in the March 2008 fiscal year. Sony also plans to distribute a one-time special cash dividend of ¥10 per share. This special dividend is to reward our shareholders for the successful global IPO of Sony Financial Holdings and in appreciation of their support during the implementation of our three-year restructuring program, as well as other corporate initiatives which resulted in record consolidated net income during the fiscal year ended March 2008.

As a result, the March 2009 fiscal year dividend payout is expected to be ¥50 per share, an interim dividend of ¥30 per share and a year end distribution of ¥20 per share.

Before Mr. Oneda and Mr. Wiesenthal take your questions, I would like to conclude with a key point. We successfully achieved virtually all the restructuring initiatives outlined in 2005. While some work remains to be done, it is instructed to take a moment to look back. Over the past three years, revenue has increased 23%. This is a considerable achievement given the size of the Company. Even more important, however, is the fact, that operating profit rose over 2.5 times to level recorded three years ago.

In 2004, operating profit was less than ¥150 billion. In 2007 it approached ¥400 billion, and in 2008 we are projecting ¥450 billion. Net income also more than doubled over the course of the past three years, primarily in electronics segment, which now represents 66% of our sales, operating profit is now over 5% as compared with virtually zero three years ago.

As a result we believe that Sony is well positioned to continue its successful growth and we look forward to sharing our mid-term strategy with you in more detail in June.

With that, I'll turn the call back to Lauren to start the Q&A process.

Question And Answer

Operator

Thank you. [Operator Instructions] Your first question comes from the line of Evan Wilson with Pacific Crest.

Evan Wilson - Pacific Crest

Good morning. Thanks for taking the questions. I've got three. The first is on digital cameras, you guided up digital cameras to ¥26 million in the upcoming fiscal year from ¥23.5 million. I was wondering if you could give some more detail on the pricing changes, that assumption is based on and any other details if available for digital cameras in particular. The second is, I was hoping if you give a forecast of what you expect for Sony-branded standalone Blu-ray players in the fiscal year.

And then lastly on the PS3, given the slow unit growth you expect year-on-year, could you give us some more details on your plans for price decreases? I think it was discussed somewhat on the Japanese call earlier this morning and I could hope... I was hoping you could clarify those plans. Thanks.

Nobuyuki Oneda - Executive Vice President and Chief Financial Officer

Sorry, the mic was not on. Your first question is the digital imaging pricing and profitability. The.. one of the reasons of the price deterioration which we are expecting is that the overall the market volume will be increased and the more price competition would be expected. And probably the... more than 10% price deterioration could be expected in next year. The profitability-wise, the... our DI operation is pretty much vertically integrated and some of the key components is made in Japan site. So therefore it's pretty much unaffected by the foreign currency variations. So this is the one reason of the DI profitability.

And your second question is the BD unit forecast for the next year. Probably the next year is 7 million units global basis compared to the 2 million units this year. So this is our assumption for the coming fiscal year '08. And your third question is the PS3 quantity this year. I mean, the '07 we sold about 9.260 million units and this year we are expecting about 10 million units. So the increase is not so bigger than probably you might expected; that is the following reasons. One is the fiscal year '07; the most important thing for Sony Group is to establish the platform for PS3.

The minimum, I mean, at least over 10 million units has to be sold to create a platform. So therefore fiscal '07 even though that our cost of the hardware is much higher than the price itself, we have to sell close to the 10 million sets in fiscal year '07, but this year, our strategy is that we should focus more Internet-related service operation to increase the... to increase the internet operation, to increase the software rather than drastically increase the quantity by adjusting the prices. If you consider the long life, long lasting lifetime of the PS3, this year we don't think it is a time to aggressively sell the hardware quantity this year. That's our strategy for this fiscal year.

Evan Wilson - Pacific Crest

Thank you.

Operator

And your next question comes from the line of Colin Sebastian with Lazard.

Colin Sebastian - Lazard

Thanks for taking my question. I guess as a follow-up to Evan's third question, I was hoping you could maybe provide a little more detail on the linearity of sales of the PS3 on a quarterly basis, assuming that the production level is pretty stable at around 800,000 units a month, just looking at the implied guidance. And related to that, to achieve profitability in the game segment, is it necessary to maintain the current retail pricing?

Nobuyuki Oneda - Executive Vice President and Chief Financial Officer

Yes, we don't give the quarterly information, but I could give you some guidelines. The game business itself is pretty much the seasonally affected business. So therefore the second half of the fiscal year, we would sell more quantity than the first half. And the pricing itself, basically we don't disclose any pricing strategies for the coming year, but as I said that the... we don't aggressively adjust the price for the coming year. And to maintain the 10 million level of the quantity this year, I don't think that we really have to adjust the pricing so much.

Colin Sebastian - Lazard

Okay. But it sounds like on balance you are favoring the profitability over unit sales and market share, is that a fair characterization?

Nobuyuki Oneda - Executive Vice President and Chief Financial Officer

Yes.

Colin Sebastian - Lazard

Allright, thank you.

Sam Levenson - Senior Vice President, Investor Relations

Next question?

Operator

Your next question comes from the line of Jessica Reif Cohen with Merrill Lynch.

Michael Kopelman - Merrill Lynch

Thanks. It's actually Mike Kopelman for Jessica. Three questions this morning. First of all, on your guidance for increases in revenue in OI pictures in local currency terms, I was wondering if you can talk both the underlying drivers there will be, first of all. And second of all, what you could... if you can give us a sense of how large the Kirch [ph] settlement was and... so what the impact was this year. Second of all, I was hoping we can get an update on a potential actor strike, whether you that's likely and how prepared you feel for that? And finally, I want to get a sense on home video trends, specifically what you are seeing in terms of pricing in the market on catalogs and new content, and then in terms of what you expect Blu-ray to be as a percentage of total industry sales, both in 2008-2009, a rough sense of what that might be? Thanks.

Sam Levenson - Senior Vice President, Investor Relations

That's two questions, Mike, or is that ten?

Michael Kopelman - Merrill Lynch

There might be four or five in there?

Robert Wiesenthal - Robert Wiesenthal, Executive Vice President and Chief Financial Officer, Sony Corporation of America

Hi, it's Rob,

Michael Kopelman - Merrill Lynch

Hi, Rob.

Robert Wiesenthal - Robert Wiesenthal, Executive Vice President and Chief Financial Officer, Sony Corporation of America

In terms of picture settlement, we are not disclosing that, but that was... it was something that did impact our operating income in terms of the actor's strike, everybody is working very hard to prepare for the possibility of the strike. If the strike does occur we are probably not as exposed as the domestic networks and of course any stoppage in the film category is going to not have an impact this year, but many more implications for next year. But as you can imagine there is a very, very little appetite within the entertainment industry for any kind of strike at this time. So, I think I am... we are pretty optimistic about that and, enough is enough at this point.

In terms of home video, Sony Pictures has done very well. We had about a 23% increase over the prior year in catalog which was the highest increase in the industry. Overall however, for the year the industry was slightly down. It continues to be driven by new releases and pricing on catalog is still a challenge as you can see every Sunday in your local newspaper at Best Buy and Circuit City. In terms of Blu-ray, right now it's only 2% of DVD, but on some titles it could be as high as 13% for new releases. New releases are obviously extremely important part of Blu-ray, but we are now actually starting to see classics remastered catalog that seems to be doing very well too.

And I am trying to get any of your other questions here. Overall, I think that going into next year we have some great films that are going to give us some great top-line performance in terms of James Bond in November, Zohan this June and then obviously it's hard not to be excited about having a Will Smith action picture opening July 4. So, some very, very good films coming out this year but obviously some difficult comparables with respect to earnings given the fact that we had a Spiderman 3 here and also had you know video from James Bond and video from Spiderman as well during the current year. So, overall we are very optimistic about the film business. I think we've covered each of your ten questions so, we'll go on.

Michael Kopelman - Merrill Lynch

All right, thanks Rob.

Nobuyuki Oneda - Executive Vice President and Chief Financial Officer

This is Oneda, to add Robert's comments, even though we couldn't give you the specific impact over the KirchMedia impact, if we exclude this impact and then compare the apples to apples basis, the '07 performance is... compared to the '08 to '07, dollar basis, the '08 performance is better than '07. The key reason is that, as Rob mentioned, we are expecting to be five big films which is over US$100 million domestic revenue compared to the two last year. And the five is like Zohan, James Bond, those you know things have been included. Okay.

Michael Kopelman - Merrill Lynch

Okay. Thank you very much.

Operator

And your next question comes from the line of Daniel Ernst with Hudson Square Research.

Daniel Ernst - Hudson Square Research

Hi, yes, good morning and good evening. Thanks for taking my questions and I will attempt to keep to a quick three. First on the restructuring plans for the coming fiscal year in FY08, other than AVA where is the ¥20 billion expected charges going to be coming from where is the focus of restructuring? And two, on your capital spending guidance pretty sizeable year-on-year increase, can you kind of walk me through the thinking there relative to your Asset Light strategy? And then third on your affiliates' guidance, now obviously Sony Ericsson is a big part of that. Can you talk to me over about the flexibility within that guidance, are there some levers that could happen that they could positively or negatively affect that goal? Thank you.

Nobuyuki Oneda - Executive Vice President and Chief Financial Officer

Yes, your first question is the restructuring expenses for the fiscal '08, that is relating to plants that we decided to close. One is the Argus plant in France, and the other is the Sony Ericsson Korea's [ph] one of the two plants, those are the, one of the two... two of the big restructuring related expenses. And your second question is the CapEx increases. The CapEx increases in fiscal year '08 is coming from several areas. One is the... we still continue to invest for the CMOS sensors [indiscernible] and the other is the... we also invest for the Blu-ray disc operations and we also invest for the panel related investment like films, and also we will continue to invest for the batteries. Those are the major reasons of the increase of the capital investment in the electronic areas.

Unidentified Company Representative

Other question is what?

Daniel Ernst - Hudson Square Research

Sony Ericsson?

Nobuyuki Oneda - Executive Vice President and Chief Financial Officer

The Sony Ericsson the discount opportunities, this year... we just started this calendar year past three months of this calendar year, our business in Western Europe we have been a very strong position for the mid and high end cellular telephones, that market is somewhat not expanding and also the price competition is very severe. That's one of the reasons why that the Sony Ericsson's performance is somewhat deteriorating. But, also at the same time that we are investing the relatively huge R&D expenses to expand the entry model and also their very high end models. So, therefore the risk is the Western Europe the mid to high end profitability. But also that the opportunity is that the how quick we could introduce the entry model products particularly in the developing countries.

Daniel Ernst - Hudson Square Research

Great, thank you for that.

Operator

: And your next question comes from the line of Jason Mauricio [ph] with Arete.

Unidentified Analyst

Yes, hi there. I have got three questions and a follow up from one of the previous answers. Number one is on working capital. It looked as a total, as a percent of sales, it looked quite low this fiscal year end. Just curious if that's sign of things to come, and if that's a core focus of improvement given I know inventories have been ramping quite high over the last year or so specifically to do with TVs and if that's possibly a source of improvement going forward. Second is on the TV business you are pushing units quite hard this year. If you could give us your pricing assumptions for the year and maybe if you could give us a little comfort on whether you can money on going after a low end or sort of low small screen size type products. And finally on my side, is there a change... given the dividend is there a change to your acquisition strategy? Previously you had commented on using proceeds from financial holdings to show up the game business. And if you think that now given the PS3 position, whether that's no longer a concern. And I guess finally my follow up on the camera side, I think it was a quarter ago or maybe two quarters ago you discussed trying to move production to Chinese manufacturing and if you could update us on those plans? Thanks.

Nobuyuki Oneda - Executive Vice President and Chief Financial Officer

I will answer from your fourth question. Digital camera, the production is largely speaking half of our quantity is now shifted into China that is the tremendous volume is now manufactured in China.

Unidentified Analyst

And is that the optimal ratio or could we see that grow further in China?

Nobuyuki Oneda - Executive Vice President and Chief Financial Officer

At this moment it's probably the 50% is the reasonable level I think, okay. Your third question do we really change the acquisition strategy particularly in relation to the dividend? Basically we do not change the dividend policy as of this moment. We still pay their dividend with the constant, relatively constant basis of the dividend. Because of the acquisition and the growth strategy we need the fund. So, therefore we will not... the film industry increased the dividend depending upon the cash position, depending upon the profit conditions.

Definitely we want to continue to pay the dividend as the constant basis. But, this year as we already explained the our profit level was relatively, I mean the highest in the history and also we could successfully conduct the IPO this year. So, those are the main reasons that we raised the dividend this year. And also at the same time we could maintain the profit level for next year at the same level as this year. So this is the main reason that we will not change the dividend policies. Of course at the SFH the IPO will help to invest in the game businesses and also the various Sony Ericsson areas.

Your second question is the TV, LCD televisions focus is quite high, yes, but still the even though we will sell the 70 million sets, our share is still 15%, little over 15% which is not so dedicated to be high. That seems that we did achieve that level of the market share when we are selling the silicon TV and the pricing assumption is the small size price deterioration that we are projecting about 20% year-over-year and 25% of the price deterioration for the large screen size. So average may be 21-22% price deterioration. That is the slightly lower than I mean the fiscal year '07. Your first question is the working capital against the sales is low?

Unidentified Analyst

Yes, my calculations, I had it around 13.7% and if I tracked that on a rolling basis it looked a bit higher on the... over the last say two years. So just curious if working capital was the focus and if we could see some further improvements to that going forward?

Nobuyuki Oneda - Executive Vice President and Chief Financial Officer

I think that we could try to reduce the inventory level of this fiscal year and it is still somewhat higher than we expected because we had to purchase the panel because of the strategic reasons. Because of that we are expecting the high volume for the fiscal year '08, we decided to buy the panel a little bit earlier than the usual. And also we also have to buy some the memory ICs because of the price strategy and also the volume of the buy quantity. The efforts of the... there might be some possibility that the working capital percentage against sales has to be improved.

Unidentified Analyst

Okay, and finally, on my second question on TVs again, just curious as you move and push harder at the smaller screen size whether you can discuss how you plan to make money in such a competitive market?

Nobuyuki Oneda - Executive Vice President and Chief Financial Officer

Yes, of course, we also still continue to sell the largest screen size, but we are of course at the same time that we will sell the entry model products. To sell the entry model we have to be very competitive in the cost structure. The main cost reduction for this coming year is to introduce the standard panel, standard chassis.Those are the two main reasons that we could drastically reduce the price and the cost of the relatively small size of the LCD television.

Robert Wiesenthal - Robert Wiesenthal, Executive Vice President and Chief Financial Officer, Sony Corporation of America

We've seen a lot in the press that's come over to us in Tokyo about the push on the low cost television side, I think it's important to point out there is a very big difference between the high-end 1080p sets and the low-end kind of Vizio and Chinese manufacturer semi non-HD sets. So, when we talk about these lower cost versions there is a big bandwidth in the middle that we think we still can make money on that where there is a market hole that retail tells us that there is a demand for Sony products.

Unidentified Analyst

Great

Sam Levenson - Senior Vice President, Investor Relations

Thank you Jason. We'll go to the next question please.

Operator

: Your next question comes from the line of Ben Williams with GAM.

Ben Williams - GAM

: My question really is just a follow up on the television business, because that seems to be the key driver of maintaining profitability in the electronics division. I understand the comments that people make, that you made earlier to the previous question. I am kind of guessing the dramatic improvement in profitability suggests that the actual infrastructure for this 17 million unit sales is actually already in place and therefore the marginal operating profit is going to be quite high. Can you confirm that the actual infrastructure is already in place? Because I think in previous years what we have had is obviously comments that you have been building assembly plants in, I think in Mexico and Eastern Europe and there has been delays and what have you, which has sort of kept down profitability. Can you... are you feeling convinced that the actual infrastructure is there to allow profitability to come through?

Robert Wiesenthal - Robert Wiesenthal, Executive Vice President and Chief Financial Officer, Sony Corporation of America

I think that your point is right, that most of the infrastructure is already in place as you know as Nick Oneda has pointed out, we have been working on common chassis to get the costs down and there have also been significant management changes on the television group. So we are pushing hard to try to get to the point that we have enhanced profitability. There were certain delays in certain planned construction but I think that is largely behind us at this point.

Nobuyuki Oneda - Executive Vice President and Chief Financial Officer

And also the other, the areas that we are expecting improvement is supply chain. So, currently that many panels is coming from Korea and then we store in bulk in Korea and then ship to the manufacturing plant in the overseas. But we are trying to ship directly from the plant rather than going through the warehouse in Korea, and also that in the future that we will make the module of the panel close to the assembly plant. By doing those the supply chain management, we could also change the infrastructure for 17 million units.

Sam Levenson - Senior Vice President, Investor Relations

Well let'stake two more questions and we are going to have to end.

Operator

Your next question comes from the line of Ben Lu with Seligman.

Benjamin Lu - Seligman

Great thanks and congratulation on executing well in this challenging environment. Two questions one in the gaming, one on the TV side. On the gaming, obviously you guys are looking for a big year-over-year improvement in operating profits from a loss of about 125 billion to profits I'm presuming in the low single digit billions. Of that let's call 130 billion or so year-over-year improvement in operating profits can you actually break down how you arrive at that swing on a year-over-year basis in terms of whether it's hardware cost down, higher volume, any inventory reversal charges you plan to take or software and if you can't quantify maybe if you can rank it. And then I have a question on the TV side.

Nobuyuki Oneda - Executive Vice President and Chief Financial Officer

The game side, one would be the cost to down reason is the, we will use the 65 nano chip for the RSX ICs which was not, actually available in fiscal '07. That will help to reduce our manufacturing costs. But these are... one of the reasons of the cost reduction for the hardware side and also we're expanding the titles of the software that will also generate the profit for this PS3 platform. So, therefore to summarize the reasons of the improvement is one side is the IC cost deduction and the other is the software titles and also the quantity increases.

Robert Wiesenthal - Robert Wiesenthal, Executive Vice President and Chief Financial Officer, Sony Corporation of America

On the software side just looking at the next couple of months, you have a bunch of important titles including the Ubisoft Haze, first person shooter, we have SingStar in the PS3 for the U.S. launch which has done very well overseas, Metal Gear Solid in June, WipeOut HD and in the fall we have SOCOM Navy SEALs and then obviously you saw Grand Theft Auto where actually our weekly PS3 sales were up 50% just because of that title alone so, I think we finally have momentum on the PS3 side and then additionally the Blu-ray capability if you look at most major retailers best buy this weekend for example were shelling bundles of 50 inch Sony TVs with PlayStation 3's and your choice of five games or five Blu-ray and five Blu-ray or movies. So, I think people are understanding that this is not only game machine, but it's a network home server that can play both package good movies and games.

Benjamin Lu - Seligman

Is there any way you can quantify the roughly 125-130 billion year-over-year swing at OP should we say half of that comes from the cost down and half of that comes from expanding your software sales?

Nobuyuki Oneda - Executive Vice President and Chief Financial Officer

Well we do not disclose the breakdown of the software profitability and hardware profitability.

Robert Wiesenthal - Robert Wiesenthal, Executive Vice President and Chief Financial Officer, Sony Corporation of America

They are both important.

Benjamin Lu - Seligman

Okay and then

Unidentified Company Representative

Next question.

Benjamin Lu - Seligman

And then my follow up question on the TV side is obviously there has been a lot of press talk about $650, $699 TVs in Wal-Mart. Of the 17 million units of LCD TVs you are planning to sell this year, can you give us a split between what you'd categorize as these low end models, and also I believe you are going to be using lot of the Taiwanese ODMs to manufacture these low end TVs. What benefit does the ODM give you and how should we think about the profitability of these ODM-based TVs versus your own internally manufactured TVs that you sell at a slightly higher premium into the Best Buys and the Circuit City?

Nobuyuki Oneda - Executive Vice President and Chief Financial Officer

The low end and high end ratio is not the items that we would disclose because this is a very important product strategy so therefore I don't think that we could give you the ratio between the low-end and the high-end. But that to increase... the just to give you the some guidance is of course that to increase the volume from 10 million to 17 million we have to increase the relatively low end model, entry model. So that is the only guidance that I could give you.

Robert Wiesenthal - Robert Wiesenthal, Executive Vice President and Chief Financial Officer, Sony Corporation of America

Only I think I will add on that with respect to, we've done a lot more outsourcing at Sony in the past couple of years, and what's important to doing proper outsourcing electronics side is making sure some of your D&A is inside those products. So needless to say, even on what we will called the new market of TVs, this kind of middle end, the mass merchants are looking for, the kind of software that we need, and the kind of IP that we offer will be part of it to give... to make sure our quality is there. That's what we can offer you right now.

Benjamin Lu - Seligman

And your low-end TVs, the 699 TVs that you are pricing. Those are all going to be manufactured via ODMs, correct?

Nobuyuki Oneda - Executive Vice President and Chief Financial Officer

Well some of them would be made by the ODM, OEM makers. Of course to increase the quantity of close to 7 million units over one-year period, the capacity issue we have to consider, then we may have to use the ODM or OEM type manufacturers. So, that is basically capacity issue is the one of the TVs and why we are going to use the ODM, OEM maker. And also the ODM makers these days is the engineering wise is capable enough to produce the LCDs, that is another reason.

Benjamin Lu - Seligman

Great. And in the past, just as a quick follow-up, last question is you've talked about how your year-over-year electronic sales have been growing, I believe, I think you said in January. Now that we are in May can you give us a little flavor of how April and the first few weeks of May have been tracking for electronics on a year-over-year basis?

Nobuyuki Oneda - Executive Vice President and Chief Financial Officer

Yes, in April, our performance of the April is just we... almost same as we planned for this fiscal year '08.

Benjamin Lu - Seligman

Okay, great, thank you so much.

Sam Levenson - Senior Vice President, Investor Relations

Great. Well, at this time I'm afraid we've run out of time. I want to thank everyone for joining us today and remind you that Investor Relations team in Tokyo, London and New York are available to answer your questions. Our phone number is in the press release. It's also on the website that's sony.com and sony.net. Again thank you very much for joining us today.

Operator

And thank you for your participation in today's conference. This concludes the presentation and you may now disconnect.

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