Sony Corporation ADR (NYSE:SNE)
Q4 2005 Earnings Conference Call
April 27th, 2006
Nobuyuki Oneda, Chief Financial Officer and Executive Vice President
Takao Yuhara, Senior Vice President, Investor Relations
Credit Suisse First Boston
Deutsche Securities Limited
Nomura Asset Management
Thank you very much for waiting. Now we would like to begin the FY05 financial results presentation meeting. I would like to introduce the members on the stage. On your left, with have with us Mr. Oneda, Executive Vice President, Corporate Executive Officer and CFO. We also have the Senior Vice President and Corporate Executive in charge of Investor Relations, Mr. Yuhara.
First, I would like to ask Mr. Oneda to talk about the consolidated results and the forecast for FY06. Then Mr. Yuhara will talk about actual results by segment. First, I would like ask Mr. Oneda to make his presentation.
Nobuyuki Oneda, Chief Financial Officer and Executive Vice President
First of all, I would like to talk about our results for the March 2006 fiscal year. In July 2005, we drastically revised down our forecast for FY06. Since then, we have worked with a sense of urgency, outlining our new corporate strategy under our new management team, to revitalise our business. In particular, in the Electronics segment, we have been able to create a solid foundation for recovery within the slow-growing panel TV industry, through the introduction of the Bravia LCD TV brand. Then going beyond LCD TVs, as a results of warm acceptance from customers for our HD camcorders, digital still cameras and PS3s, just to name a few of the many products, the past year recovery for the Electronics business has become a visible reality.
This recovery in the Electronics business, along with the strong performance of our financial services segment, enabled us to raise our full year forecast in January. Because this recovery momentum accelerated further after January, our actual results for the full fiscal year were significantly higher than forecast. However, in order to achieve a genuine recovery you need earnings. We believe that there is still much more for us to do in order to achieve our targets. All of Sony is united and focused on achieving the company's goal of 4% operating profit margin in Electronics, and 5% operating profit margin consolidated in the fiscal year ending March 2008, through the continued implementation of our corporate strategy initiatives.
Now I would like to share the figures with you. Our consolidated sales 4.4% to ¥7,475.4 billion. Operating income increased 67.9% to ¥191.3 billion. Restructuring expenses were ¥438.7 billion. On a consolidated basis, we did ¥125.8 billion in Electronics. Income before income tax increased 82.1% to ¥286.3 billion. We earned ¥21.5 billion from the listing of the Sony Communication Network company and ¥26 billion from the sale of part of our stock in Monex Beans Holdings, which was the equity affiliate and ¥12 billion from the sale of part of our stock in SoNet (inaudible), a consolidated subsidiary of SCN, and ¥6.6 billion from the sale of part of our stock in DNA, an online auction company.
These gains contributed to a significant increase in our other income. The effective tax rate for corporation tax was 61.6%, which was much higher than the statutory rate, because of additional valuation allowances against deferred tax assets at Sony Corp and certain subsidiaries in Japan and overseas, due to continued losses at these entities. It was also because we recorded additional tax reserves on underestimated earnings at overseas subsidiaries.
Net income in equity affiliates decreased 54.6% to ¥13.2 billion. Sony Ericsson contributed ¥29 billion and Sony BMG contributed ¥5.8 billion. Sony incurred a loss from MGM of ¥16.9 billion and from SLCD of ¥7.2 billion. SLCD was able to turn to profit in the second half of the fiscal year, with the introduction of Bravia. Net income decreased 24.5% to ¥123.6 billion. You can see the comparison between FY04 and FY05. I would like to show you our comparison against the January forecast. Operating income improved approximately ¥90 billion from our January forecast. All settlements outperformed our January expectations expect for Game. Electronics and Financial Services exceeded expectations by ¥60 billion and ¥50 billion respectively.
The improvement in Electronics resulted from improved sales of LCD TVs and better yields, and lower research and development expenses in semiconductors. The Broadcast and Professional business was also better than expectations. Financial Services improved primarily because of the higher valuation gains and gains from the sale of stock in the general account, due to the favorable stock market conditions. On the other hand, operating income for Game (is short of our forecast?) by approximately ¥20 billion due to expenses related to the launch of PS3 being incurred at year end.
Now I would like to talk about the 2006 consolidated results forecast. In Electronics, we have a great recovery expected, and we also expect a profit increase in Pictures. In Game, we have to look at the loss and therefore, in overall Pictures, consolidated operating income is expected to decrease year on year. On the other hand, net income from equity affiliates should improve significantly, as Sony Ericsson, Sony BMG and SLCD should all experience an improvement in profit performance. As a result, we expect to achieve an increase in net income. Although equity affiliates sales and income before income taxes are not consolidated by Sony, it should be noted that we expect the combined figures of Sony Ericsson and Sony BMG to reach approximately ¥2 trillion in sales, and an 8% income before the income tax margin.
The forecast for each segment is as follows: in Electronics, sales should increase more than 10% due to the strengths of Bravia LCD TVs and sales of semiconductors, including those for use within the Game segment. The operating income margin pre restructuring expenses should be over 2%. As for Game during the fiscal year ending March 2007, we plan to solidify the foundation of our new game platform. So we believe that this is a year for investment. As a result, we expect to record a large loss, due to start-up costs associated with the PS3. However, after the introduction of the PS3, we will focus our efforts on expanding the platform as readily as possible. We shall also attempt to lower manufacturing costs by reducing the number of parts used in the hardware, reducing the costs of semiconductors and other key components. By doing so, we aim to bring the PS3 business to profitability at the earliest possible time, as we did for PS2.
As for Pictures, the Da Vinci Code, 007 Casino Royale and - a first for Sony Picture Entertainment - a full CG animation movie, Open Season, should all help this segment increase its sales and profit. Regarding financial services during the fiscal year ended March 2006, valuation gains on convertible bonds in the general account resulting from the rise in the stock market contributed approximately ¥85 billion to earnings. When making our forecast, however, we never assume valuation gains or losses. Since we have been conservative in our estimates of proceeds from the sales of assets, I expect sales and operating income in the segment to decline.
Next, I would like to look at the structure reform progress report. That is on track to reduced ¥38 billion in costs, an amount that is ahead of plan during the fiscal year ended March 2006. Of our target of ¥100 billion in cost savings, we expect to reduce by ¥160 billion in the fiscal year ending March 2007. As originally planned, we earned ¥78 billion from asset sales during the fiscal year ended March 2006. We expect to earn more than ¥160 billion from asset sales, more than the ¥120 billion we originally planned. Next, regarding the closure consolidation of manufacturing sides, in the area of factory consolidations, we took actions on two more facilities, adding to the seven facilities we already announced. For details, please look at our slide.
As regards the head count reduction, we exceeded our projected reduction of 4,500 people for March 2006. We reached 5,700 people. We expect to reach our target of 10,000 people by the end of March 2007, a year ahead of schedule. This is mainly due to accelerated reduction of people at Sony HQ and the overseas division. As for the 15 product categories, nine of which we have already announced, we have made decisions regarding all the rest and we will inform you as to what they are going to be and actions already determined. We will make an announcement when the time is appropriate. Now Senior Vice President Mr. Yuhara will describe the actual results by segment.
Takao Yuhara, Senior Vice President, Investor Relations
Let me start with the Electronics segment. Sales went up by 2% year on year, a decrease of 3% on a local currency basis. It came to ¥150.5 billion. For the operating income, our operating loss improved by ¥3.3 billion year on year, to ¥30.9 billion. Let me now go to Electronic sales by area. We can look at this on a pie chart. Sales to outside customers was down by 1%, and it's 5% on a local currency basis. (inaudible) ¥732.7 billion(?). If you look at the trend quarter by quarter, from Q1 to Q3 it was less than the previous year. However in Q4, this year's results were better than the previous year. LCD TV Bravia has a very productive capability and we have other products which have the capability and we would like to continue this positive trend in FY06.
Let me jump back to the Electronic section by products, with the sales and operating profit in seven categories. As usual, I would like to talk about AV and IT, and the semiconductor and components categories. For the AV and IT category, which includes audio, video, television and information communications, sales were ¥3,347.9 billion, which is down by 1%. LCD TV continued to sell very positively on a global scale, but CRT TV and Plasma TV went down in sales. TV as a whole enjoyed increased sales. Operating profit was increased over ¥25.5 billion. This is due to handycam video cameras, DVD video cameras and (digital high vision cameras?). Those are very profitable products which increased sales, contributing to the better product results.
Now the next contributor is (AVIA PCs?). This was due to favorable notebook PC sales outside Japan. In addition, in Broadcast and Professional equipment, especially the ATD production equipment, went very well. Also home audio, the cost reduction benefit was enjoyed and sales were particularly favorable in Central and South America, contributing to the increased operating profit. On the other hand, there was a big negative impact from CRT TVs. Even though the sales went up, there was a unit price deduction in LCD TV which has contributed to negative earnings. Before this, LCD TV - if you look at Q3 and Q4, the situation has improved. Volume went up when the cost reduction was made, and also since the introduction of Bravia, we were able to enhance the product capability and also helped shift the customers' preference to a larger screen.
Now let me go to device and semiconductor components. The sales increased by 9%, the semiconductors for games and lithium-ion batteries for notebook PCs and memory stick sales went up. Operating loss deteriorated by ¥26.3 billion. This is due to the price decline and also image sensors, especially, suffered from price decline. Low temperature LCD panels decreased in sales. There was also a start up cost for the new manufacturing facility. Let me now talk about inventory, as of the end of March, the inventory on the semiconductors for PS3 and LCD for the spring sales season had increased inventory. Therefore, the total value went up and our days went up to 47 days. However, we believe that this inventory level is still adequate.
Let me talk about Sony Ericsson next. In sales, compared to the previous year, they went up by 23%, that was Euro 972 million. Units shipped increased 20% to 55.1 million units. Income before tax increased 29% to Euro 595 million. The notable contributors to earnings included k750 with two megapixel autofocus cameras, and also the W800i walkman phone and 3G compatible K600. Those products have contributed positively to the Sony Ericsson results. As a result, the equity and net income recorded by Sony went up by 67%, at ¥29 billion.
For the calendar year 2006, the global market for handsets to market, compared to the calendar year 2005, we expected a 10% increase. However according to the most recent figures, it has accelerated and we believe the growth will be approximately 15%, reaching 900 million units. Next is Game. For Game, the PS3 platform has been growing favorably worldwide. PS2 business also continues to perform well in sales, with a 31% increase compared to the previous year. Sales of hardware and accessories were approximately two thirds. The previous year was about 50%. On PS2 hardware in Europe and the United States, we continued to perform well. On top of that, the PS3 for all regions of Japan, the U.S. and Europe has grown favorably. It led to a significant total hardware increase. On PS2, the shipment volume was at the level of the previous year, so it exceeded a cumulative total of 100 million units for PS, with the largest home platform. PS3 at the end of March has exceeded worldwide shipments with a cumulative 17 million units. It is growing at a faster speed than other platforms.
In software, PS2 software sales have decreased, but on the other hand the software sales for PS3 contributed, so overall the sales have been relatively unchanged compared to the previous year. As for the operating income, the PSP platform globally has favorably grown, and PS2 business continued to perform well, so that the profit from the existing business surpassed the previous year, at over ¥60 billion. For year end expenses for the Game segment, mainly PS3 related expenses were recorded at over ¥50 billion. Therefore for operating income, there was an 80% decline compared to the previous year, to ¥8.7 billion.
The three main expenses are as follows: the reserve related to PS3 hardware, the second expense for PS3 business - the acceleration of investment for research and development, and thirdly for PS3, the tools for development have been updated, which is the main expense. On inventory, for all regions of Japan, U.S, and Europe, the PSP has been introduced as we said earlier, and there is a net increase in the inventory for this, the inventory was made for the campaigns for this spring. Next is the Playstation hardware production shipment volume and outlook as shown here, and also for software as indicated here, 250 million for the next period.
Next is the Pictures segment. In sales, there was approximately at 2% increase. On a U.S. dollar basis there was a 4% reduction. The U.S. dollar based reduction has to do with the films box office revenue decline and DVD (inaudible) so software sales globally have declined. On top of that, in the previous year Spiderman 2 made a big contribution. Also, for this fiscal year, there was a disappointing performance in certain films. On the other hand, for the TV product business, outside of the U.S. the international TV channels distribution was brisk. The TV library product sales have increased and also the latest agreement for Wheel of Fortune has been extended, giving an increase.
As for the operating income, a reduction of 57%, the operating income being ¥27.4 billion for the reasons that I have mentioned in the sales discussion. Next is our financial services business. For financial services business revenue, this was mainly from an increase of sales at Sony Life, with a 33% increase for the segment. Sony Life's revenue increased 36% to ¥645 billion. This was mainly due to the favorable stock market with the improvement in investment performance and also due to the increase in insurance in force, bringing the increase in insurance premium. As for the operating income, again for Sony Life, for their investment, the convertible bond stock conversion rates valuation gains have improved greatly, and as a result general accounts investment performance had greatly improved. For the financial services segment overall, for operating income: 3.4 times the previous year at ¥188.3 billion. Sony Assurance and Sony Bank business performed well.
As for everything else, sales decreased 11%. For the previous fiscal year sales, there was a full month of sales recorded for the SMEI recorded music business, which was integrated into the Sony (EB MGD?) record affiliate, otherwise it would be a small volume increase. SMEJ sales compared to the previous fiscal year was relatively unchanged at 37% overall. Operating income increased ¥12 billion, to give ¥16.2 billion of operating income, mainly in the Music business, SMEI recorded music business in the previous fiscal year had a recorded loss and also SMEJ's strong operating performance had contributed.
Now for Sony BMG, the account team here has been matched to Sony's. Sony BMG sales was $4.283 billion and income before income taxes was $150 million, including the structural reform charge of $186 million included for the income before income taxes. This benefited from the reduction of restructuring charges and the realization of cost reduction. The net income was $95 million and equity in net income of ¥5.8 billion was recorded by Sony. That was the performance by segment.
Thank you very much, now we would like to take questions from the floor. The microphone will be brought to you, so please give your name and your affiliation. Then ask questions. The questions are confined to two questions per person, so follow this discipline please. Any questions?
Questions and Answers
Question - Credit Suisse First Boston
I have two questions. As for Q4, the actual results, they seem better than your original expectation by segment. What were the actual results, compared to expectations? Were they better or worse than expectations by segment? As for the details about each segment, in Electronics and Semiconductor, the loss compared to the Q3 - was that by 20 billion? Image sensors, LCD TV etc. were explained, but where are the sales of SIL(?) during Q4? You became profitable during the quarter, I would like to know that about SIL(?).
As for Q4, compared to our expectations, which sector was better? One sector that was better was Electronics. Another was the Financial Service sector. As for Financial Service, as I explained before, since January the stock market has been in very good condition, particularly the convertible bond valuation gain. That has been much larger in realized than we originally expected. In Electronics, LCD TV sales were very favorable, and that is a very big factor that contributes to the better results. On top of that, the additional still camera and the PV has been very good. SIL profit during Q4, whether that was recorded during Q4, within the Electronics sector the SIL sales were not recorded. What we did for SIL(?) this time was within the Game sector, we talked about the expense recorded at the end of the year. For the future, the price and cost relations must be carefully studied. For the semiconductor, we carried out a write-down partly, but the sales etc. were not recorded during Q4. Compared to Q3, the semiconductor business has been deteriorating. Was that your question? As for this, for LCD and image sensors, compared to our expectation they had dropped more.
Question - Daiwa Securities
I have two questions. The first question is regarding Electronics. You have a plan for the recovery of Electronics during fiscal year. What are the factors contributing to the recovery of Electronics, and particularly for semiconductors? How do you view the semiconductor business during this fiscal year? The second question: is Game going to incur a major loss, the PS3 price has not been announced yet, so under the circumstances, when you look at all the factors related to Game, how should we interpret the business prospects for Game? That's my second question.
On Electronics recovery, I should say there were two major factors. In the first factor, Bravia has had good sales, in both sales and cost, and I think there is a very favorable picture on Bravia. The second thing on the Electronics segment, the semiconductor sector increased in sales vis a vis the Game sector and will expand. That is another reason the sales will increase in the Electronics category. In addition to them, in all categories across the board, we expect that there will be an increase versus the previous fiscal year, particularly for the semiconductor segment. Their sales will gain, and the volume increase in sales to the Game sector seems to be the major contributing factor. Regarding the major loss within Game, as for the platform, we don't make any disclosures by platform, but of course we do have a budget. At this moment, there is a competition issue if we disclose a price. Therefore we are not able to announce any price at this moment. At the appropriate time, the SCE(?) will make an announcement about the price for PS3. The next question please?
Question - Shinko Securities
I have a question on Game. At the end, you have ¥50 billion. What was your January forecast, and how did this evolve into what you did at the end of the year? What is in your forecast for this year, you have disclosed the numbers by platform and PSP is going to decline. What is the reason behind this forecast?
As for ¥50 billion at the end of the year, as Mr. Yuhara mentioned, there are three reasons. As regards to what we have done, out of ¥50 billion, ¥30 billion has already been already discounted or taken into consideration in January. It went up by approximately ¥20 billion. What was contributing to that ¥20 billion and how much? There were three factors. The first item is the PS3 reserves and allowances made. That is basically for PS3. At the initial production model on PS3, there was a cost and that cost is higher than sales price. The price cannot be disclosed, for various reasons, but we should have a write-down for the inventory that we hold. Approximately 50% of that ¥50 billion is due to that write-down evaluation of losses. Secondly, it is related to research costs, which were accelerated in the cost accumulations. As regards the research conducted internally, it is now going to be accelerated, however there are some researchers that we asked from outside to work. On the consignment research basis, the payment will be made according to the results. Once certain results are achieved, there is sometimes a one-time payment, or at (inaudible) point, and that was made before the end of the year. That is the second reason. Third is the development tool. We have to upgrade a development tool, and what we have now has to be replaced. Therefore, we had impairment accounting for those conventional tools. Out of ¥50 billion, ¥30 billion has already been taken into consideration, but there was an additional ¥20 billion to make up the ¥50 billion. As regards to your second question, we forecast by platform. 10 million units of the PS2 were forecast for FY05. A 16 million shipment was recorded, which was much more than our original plan, but it's already six years since the launch of PS2. Therefore 10 million was planned for the entire year at the beginning of the year. For the PS3, for FY03(?), we deployed (this product on loan?) for the entire area, and 70 million units in total, where in the previous year it was more than 40 million units. At the beginning of the year, for FY05, we said it would be 12 million, and the actual result has exceeded that forecast. For FY06, our original target will be set conservatively at 12 million units. For the PS2, it's 6 million in total for the full year.
Question - Deutsche Securities Limited
I have two questions. My first question is a simple confirmation. In the middle of March, the PS3 launch was made. It's almost one month. Software development tools, parts and components - are the components and preparations going to be ready?
(Is that a voice I hear?) Now that one month has passed, I think you have 6 million units forecasted. I would like to confirm that number. Do you have anything that you can disclose now? My second question is related to TV. You had a target of positive figures in the second half, and a slight loss for the full year. That has now been changed. Now on LCD TV and MD Rear Projection TV, what is the sales level going to be?
In the middle of March, the PS3 was announced and it was also announced that the launch will be November. 1 million units per month was also announced, and this has now been changed. Unless something extraordinary happens, this plan is not going to change. Now for TV, the positive profit in the second half of this year also stays. It might be accelerated further and may come forward, but at this moment we would like to achieve a positive profit in the second half of this year. Nothing has really been changed. For the LCD sales size and sales level, for 2005 it is 2.8 million units. Next year it will be 6 million units. In terms of the units, it will be approximately double, as we forecast. For the MDP - do you have a number for the MDP? It's 1.8 million? Let me confirm. In your handout material, I think it goes up by 750,000 to 1.8 million, from 1.05 million in the previous year. In both categories, the sales will go up. For the LCD, (the inventory?) will go up in ratio and that means the price per unit is going to go up, because sales will double. It may not reach quite double. In terms of inches, it will shift toward larger inches. As it goes to larger inches for the same inch size, for example like 32 inches, 20% of the price reductions will be experienced in a year or so. So relatively speaking, what is going to be the end result - probably it might have a positive impact in total. For FY05 actual, our unit price on average was almost the same as the unit price on average compared to FY04. In 2006 it will be a slight positive. On whether or not the loss for the full year has now been changed, may I repeat, you will still have a loss for the full year. Whether we are going to have loss for the full year or not, that is the question? Yes. Whether it's a loss or a positive profit, we cannot make a commitment, but as our target, we would like to achieve a positive figure for the entire year. Thank you very much. Now I would like to take the next question.
Question - Merrill Lynch
My first question, for this FY, did sales for external sales by region increase? What is your view? And the second question has to do with cash flow, partly. For the previous fiscal year, the (Group companies spin off you have announced?). As for the Group companies, core and non-core positioning and holding ownership percentage by selling outside - I think you expect a lot of cash there, so how are you going to address the finance? Mr. Oneda, please give us your thoughts.
First of all, regarding the free cash flow this year, it is negative ¥44 billion for this year. As for the next period, investments will rise. Overall cash flow situation, including asset sales - we will not see widening of the red. As for the cash, two months ago, earlier than expected, we issued the bond. There are six cash lines(?) for this, and based upon the cash debt we currently have, we are able to address the situation. By regions, for external sales, we said two digits sales for Electronics. Region-wise for Europe compared to the previous fiscal year, we should expect the biggest growth around 15%. That is followed by North America and other regions with growth of 10% or more. For Japan we expect less than 10% for the Consumer Electronics area. Those are the assumptions for the growth rates for our outlook that we have issued to you at this time.
Question - Goldman Sachs
My first question, earlier for the operating income, (I asked your view on the settlements Electronics?), 3% or more based upon that. There is also ¥100 billion or more of deterioration in Game. Is that the correct view, or will Game profit develop? Can you comment a bit more on that point of Game? Another point has to do with net profit regarding the equity affiliates profit changes and the view on taxes. Can you talk about that, please?
As you have mentioned, when you calculate that way, you are correct to say that there will be deterioration of over ¥100 billion. This is the period for investment and we are ready for red ink of over ¥100 billion. As for net income for all this time, and the tax rate for this fiscal year, the 41% rate is what we expect on the usual level. For FY05 we had a 61% effective tax rate, due to devaluation allowances, but for this period, I think we will have the regular level. As for the companies under the equity method, basically they are all expected to perform better, especially SLCD, with Bravia's volume up and 2H05 has shown a profit, and that profitable trend is expected to continue. Furthermore, for the mobiles for Ericsson, the market should be favorable. 900 million units are expected and volume is increasing, so we expect an increase in sales and profit. As for BMG Music, restructuring has happened quite a bit and a significant profit increase will be expected here. On (SD LCD?), with Toyota, the LCD for small mobiles, the prices are challenging and perhaps will be unchanged we think compared to the previous year. On MGM, compared to this period, we think we should see some improvement. Thank you.
Question - (Unidentified)
Can you actually give us the change in terms of the amount for the individual entities?
We are not able to disclose the actual figures, but Sony Ericsson, and as was mentioned by Mr. Oneda, on Sony Ericsson and Sony BMG the combined sales for next year will be ¥2 trillion. On the tax mentioned before, the tax is 8%. That was mentioned by Mr. Oneda. Those are two important factors, and also if you just summarize our discussion I think you could understand.
Question - (Unidentified)
The ¥100 billion in (higher on the duration of the game?) and expense was already recorded and is still ¥100 billion. We get the impression that is a great amount. What is the background against this?
Because of strategy it is very difficult to disclose everything.
Question - (Unidentified)
Do you have a rather pessimistic estimate about the price, or do you have (inaudible factors?)
On the price, we cannot tell you anything here. But as was the case with PS2, at the very beginning, the cost at the time of startup is always great. Therefore, there will be a reduction in the future for the PS3. Out of the costs used for PS3, the measured on is the (LSX sale?), in other words the semiconductor. The semiconductor which is used now is 90 nano, that will be shrunk to 65 nano, with 40-45 nano in the future. This shrinkage plan does exist, and the number of parts will also be reduced. By 2007, there will be significant growth in volume and so that is another reason for the cost reduction. But at the initial phase, we have to bear with high cost. On cost price, there is a back margin. That may occur for the first model. For that reason, during Q4 we carried out a write-down.
Question - (Unidentified)
I have another point. So on the PS3, except for the upfront investment of the PSP and PS2, how do you look at profitability for the next fiscal year?
As for PS2 and PSP, we are not able to give solid figures. We do not think that there will be major growth and we do not expect major decline either.
Question - Nomura Securities
In the budget for the new fiscal year, there is a duration for the profit picture for Game. On Electronics, about ¥80-100 billion. There will be an improvement for Electronics, but you talked about improvement in semiconductors in your presentation. TV has achieved the breakeven. If that is your scenario, although there will be improvement on semiconductors, the ¥60 billion loss will be reduced to ¥10 billion. In other words, a loss still remains. Is that the right interpretation? Additionally, cost for PS3 within Game has already been recorded, but a loss of about ¥30-40 billion will remain. Is that the right understanding? Secondly, the 4% margin must be accomplished during the next fiscal year. You have only one year before you achieve the plan. On the LCD and rear projection you have a ¥300 billion increase, so I think you are able to achieve quite a good level, but on semiconductors and TV, unless you have 4%, it is very difficult for you to achieve the original target for the profit margin. Under the current TV model for this year four, are you confident about achieving the 4% margin in semiconductor PS3? If that is the PS3 during the second year, do you think you will reach the position where you can achieve the 4% margin for PS3 during the second year?
For the future, the profit and loss by categories - we are not able to disclose our forecast, but if I can share with you approximate pictures, Electronics improvement, as was already mentioned this year is breakeven, then 2% and higher. There will be an improvement by ¥100 billion and more. That interpretation and understanding is correct. As for semiconductors, there have been many difficulties in the semiconductor business in 2005. But for FY06 the volume is expected to increase. Therefore, we believe that there will be a higher profitability in this area. We expect it to be ¥100 billion and higher. The remaining loss in the semiconductor business is therefore highly unlikely for the rest of 2006.
Question - (Unidentified)
So for semiconductors in the new fiscal year, do you think FY06 is profitable?
I should say that there is no loss. I believe that there will be profit for FY06.
Question - (Unidentified)
So next year, the likelihood of accomplishing the 4% and assumptions for that for semiconductor PS3, if everything goes as planned during the second year, the 4% margin can be accomplished. Is that understanding correct? And as for TV, CRT TV used to play a major role. But course, as LCD does exist, however the vertical integration pattern has changed so under the current projection, you have a business model that achieved the 4% already. Is that business model solid?
This has something to do with the disclosure with respect to settlements, and therefore I am not able to disclose the information about this.
Question - (Unidentified)
But certainly, in order to reach the 4% margin target, how should TV perform compared to other categories, and product lines? The margin is lower for TV and (for PV and DI?), their margins are more than 10% and sometimes close to 20% profit margin. Therefore should TV be 4%, 5% or 10%?
It does not mean that unless TV achieves a higher margin we are not able to achieve the target. If the TV performs well, and other sectors perform well, I think there is a very high likelihood the 4% target can be achieved in the Electronics category. Another question was with regard to semiconductors, right? For semiconductors, as I mentioned earlier, it is deeply related to the shrinkage plan, and how far shrinkage is achieved. It is a processing industry by nature. Therefore, if the volume increases and yield increases, this automatically leads to higher profitability.
Question - Nomura Asset Management
Compared to previous years, inventory went up substantially. In FY05, was there any inventory impact, pushing the profit? If the inventory goes down in FY06, will there be a negative impact?
The reason behind this inventory increase is related to the semiconductors for Game. Basically, we said that there was a valuation loss or a write-down for the semiconductors, but the inventory is still in the Electronics segment. It is remaining as an inventory in Electronics, and therefore, even though the launch is in November, we have to accumulate the inventory to be ready for the launch, and that is why it's pushing out inventory. That is one reason. Secondly, LCD TV itself is selling in more quantities and in total, our inventory level has increased. On PSP, in Game, in spring we are going to have a major promotion and that's also helping to push up the inventory. That's on LCD, semiconductor and also for Game, the total amount of inventory is increased because of these reasons.
Question - Nomura Asset Management
What I wanted to know is whether there was any impact because of reduced fixed expenses?
I think it is related to the semiconductors. Basically, we were already down. We had evaluation losses already recorded, so if we stayed as it was, there would be reduced fixed expenses but this is already written down, so it is already offset in the consolidated results. Thank you very much.
It's time, so we would like to close the presentation. Thank you very much. Thank you very much for your participation.
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