Masaru Kato - Chief Financial Officer, Executive Vice President, Corporate Executive Officer, Director and Member of Compensation Committee
Takashi Watanabe - Goldman Sachs Group Inc., Research Division
Masahiro Ono - Morgan Stanley, Research Division
Yuji Fujimori - Barclays Capital, Research Division
Shiro Mikoshiba - Nomura Securities Co. Ltd., Research Division
Sony (SNE) Q2 2012 Earnings Call November 1, 2012 4:30 AM ET
[Japanese] The scheduled time has come, so we would like to start the fiscal year '12 second quarter earnings announcement meeting. Let me explain the speakers. To your right, Masaru Kato, Corporate Executive Officer, EVP and CFO. Next to him is Head of Investor Relations, Yoshinori Hashitani.
Now, Mr. Kato, please.
Thank you very much. I will begin by explaining the consolidated results for the second quarter ended September 30, 2012. The operating environment from Sony in the second quarter continue to be severe due to the slowing of the global economy. Despite this, consolidated sales for the quarter increased year-on-year due to the consolidation of Sony Mobile, and operating results increased significantly year-on-year. And we recorded greater profits than we had originally expected.
We have revised downward our August consolidation sales forecast for the current fiscal year by JPY 200 billion to JPY 6.6 trillion, but because the annual unit sales forecast for key products are expected to be below our previous forecast. Although we foresee a severe operating environment in the second half, resulting from continued uncertainty of economic trends, we have left operating income for the fiscal year unchanged. And we expect to secure the JPY 130 billion we forecasted in August.
Now, I will go through our income statement for the second quarter and the full year. Consolidated sales increased slightly. This was mainly due to consolidation of Sony Mobile and equity affiliate in the same quarter the previous year that became a wholly owned subsidiary on February 16, but it was partially offset by the decrease in unit sales of LCD TVs. On a constant currency basis, sales increased 3%.
Operating income of JPY 30.3 billion was recorded compared to an operating loss of JPY 1.6 billion. This was mainly due to an improvement in operating results of the Devices and Home Entertainment & Sound segments. The improvement in the operating results of the Devices segment was mainly due to the recording of expenses associated with the sales of the small and medium-sized display business in the second quarter of the previous year, significant increase in sales of image sensors in this quarter and recording the gain on the sale of chemical products business.
The improvement of operating results of Home Entertainment & Sound segment was mainly due to an improvement in the TV business, where we are seeing the benefit of reduced LCD panel expenses and operating expenses. Equity net loss of affiliated companies recorded within operating income was JPY 3.1 billion compared to net equity income of JPY 1.1 billion last year. The net excess of other income and expenses was a loss of JPY 10.6 billion in the current quarter compared to income of JPY 1.7 billion last year. Income before income taxes increased JPY 19.6 billion year-on-year-on-year to JPY 19.7 billion. JPY 22 billion of income tax expense was recorded. As of March 31, 2012, Sony has established a valuation allowance against the certain deferred tax assets for Sony Corporation and international filing group in Japan, the consolidated tax filing group in the U.S. and certain other subsidiaries.
During the current fiscal year, we will maintain this judgment. So Sony continued not to recognize the associated tax benefit. As a result, Sony's effective tax rate for the current quarter exceeded the Japanese statutory tax rate. Net loss attributable to Sony Corporation's stockholders decreased JPY 11.5 billion to minus JPY 15.5 billion.
Now, I will compare this quarter's operating results to our August forecast. You can see the chart in front of you. On a consolidated basis, results were JPY 20 billion higher than our August forecast. On a segment basis, the Game segment exceeded the August forecast by about JPY 5 billion due to the improvement of SG&A. The Home Entertainment & Sound segment exceeded August forecast by about JPY 10 billion due to cost improvement in the TV business that exceeded our expectation.
Although sales of image sensors were below expectations, Devices segment was JPY 10 billion higher than the August forecast due to the recording of a gain on the sale of chemicals product business and the benefit of insurance proceeds from the floods [ph]. The Pictures segment was JPY 5 billion below the August forecast due to the underperformance of certain films and the recognition earlier than expected of marketing expenses for motion pictures to be released in October.
The Financial Services segment was JPY 5 billion higher than August due to the lower insurance payment than anticipated and higher-than-expected investment performance in general accounts. Imaging Products and Solution segment and Mobile Products & Communications segment and Music segment were all to the expectation.
Now I'd like to explain our forecast for full year ending March 2013. Assuming foreign exchange rates for the second half of the fiscal year, about JPY 80 to the dollar and JPY 100 to the euro, so this represents no change from August forecast.
Consolidated sales for the fiscal year are expected to be JPY 200 billion below the August forecast or JPY 6.6 trillion, mainly due to the downward revisions in annual unit sales forecast of key products. There's no change to the forecast we announced on August 4. Second, for operating income, income before income taxes and income attributable to Sony per shareholders.
Now, Hashitani will explain segment results.
You can see here the quarterly sales and operating results by segment. You can see here, first, I will explain the Imaging Products & Solutions segment. IP&S segment sales decreased 17%. This was primarily due to a significant decrease in sales of compact digital camera, reflecting a contraction of the lower end of the market, resulting from the split [ph] of smartphones as well as slowing economy.
Operating income decreased JPY 13.2 billion year-on-year to JPY 2.6 billion. This was mainly due to, of what I said, decreasing the sales of compact digital cameras.
Sales and operating results of this segment are expected to be slightly lower than August forecast. This is mainly due to the lowering of annual unit sales forecast for compact digital cameras reflecting weakness of the market as a whole. Sales are, however, expected to increase and operating income as well, year-on-year, significantly. Sales of Digital Imaging Products, which is a key category of IP&S, for the first -- for the quarter, decreased significantly year-on-year, because the previous year's second quarter benefited from a rebound in sales from the earthquake that caused the reduced sales in first quarter due to the limited production.
And sales for video cameras significant -- decreased significantly, but we have maintained high market share and the level of profitability. Sale of compact digital camera decreased year-on-year due to a decrease in unit sales brought on by the penetration of smartphones and the deceleration of economy, a little bit improved profitability to enhancement of our value-added products. Sales of interchangeable single lens camera increased due to the introduction of competitive models. Going forward, we will aim to gain market share in these products and contribute to profitability through the introduction of new models.
Now going forward, we intend to enhance the productivity of the entire Digital Imaging Products category, but putting emphasis on high value added products, such as interchangeable lens cameras and high end, high magnification compact digital cameras and by differentiating our products through Sony's proprietary components, such as image processors, lens and image sensors and action cameras.
Let me move on to the results of the Game segment. Sales decreased 16% year-on-year. Overall segment sales decreased to a decrease in sales of PS3 and PSP hardware and software, partially offset by the contribution from the PlayStation Vita introduced in December last year. Operating income decreased JPY 4.7 billion year-on-year to JPY 2.3 billion due to the decrease in sales and the unfavorable impact of exchange rates.
Due to a lowering of the annual unit sales forecast for portable hardware, the forecast will gain segment sales for the fiscal year, expected to be below the August forecast. Partially due to the reduction of operating expenses, the outlook for operating results is unchanged from August. Sales expected to decrease in operating income is expected to decrease significantly year-on-year. Regarding the portable game business, we of course, enhancing the lineup of appearing software ahead of the year end holiday selling season. And we're engaging in various promotions, such as bundles of software and accessories in an effort to expand PS Vita platform.
In addition, we launched the PlayStation mobile service from October to address the rapidly growing market for games for mobile devices versus smartphones. Not only through portable game machines, but also through PS mobile, we're providing customers with the road, unique to PlayStation in the mobile space.
Next, we see mobile products and communications segment. Sales were 2.1x in second quarter of the previous fiscal year, but operating loss increased from JPY 6.1 billion to JPY 23.1 billion year-on-year, due to the lowering of the annual unit sales forecast for VAIO, reflecting difficult market conditions. Sales in the operating results for the fiscal year for this segment is expected to be lower than the August forecast. Due to the consolidation of Sony Mobile, sales are expected to increase significantly year-on-year. Operating results expected to deteriorate significantly year-on-year, primarily due to the largely mitigant [ph] gain recorded in the fiscal year for Sony Mobile.
Regarding the results of Sony Mobile Communications on a standalone and pro forma basis, had Sony Mobile been fully consolidated in the same quarter of the previous fiscal year, sales for the current quarter would have been increased approximately 16%. This was due to an increase in average selling prices due to the shift in the product mix from feature phones to smartphones and increasing the sales of smartphones due to strong sales of Xperia series. Sony Mobile became wholly owned subsidiary of Sony in February and is aiming to bring attractive products to the market more quickly, streamline supply chain management and strengthen marketing power by enhancing its operation and product development capabilities. Since October, it has been transferred in headquarter functions to Tokyo and has been implementing headcount reduction and realigning its global operations structure. Through such efforts, we aim to turn Sony Mobile to our profit on a stand-alone basis next fiscal year.
Next is VAIO. At a time when negative growth for PCs is continuing, VAIO sales decreased significantly primarily due to difficulties in selling some models in Japan. Going forward, we will strengthen the premium segment of the PC market by offering appealing VAIO products and enhancing entertainment functionality unique to Sony. For example, we were aggressively deploying new concept models that fully utilize touch capability that sets Windows 8 apart.
Next is Home Entertainment & Sound segment. Sales decreased 25% year-on-year due to a decrease in LCD television unit sets. Operating loss decreased JPY 26 billion year-on-year to JPY 15.8 billion. This decrease was primarily due to a reduction in LCD panel-related expenses and operating expenses in line with the profitability improvement plan we announced in November last year. The forecast for the HE&S segment total sales for the fiscal year has been revised down. Operating income is unchanged from the August forecast. These forecasts indicate a significant drop in revenue year-on-year and a substantial reduction in operating loss.
Next is Television. Television sales decreased 32% year-on-year to JPY 146.7 billion, primarily because we are managing a business with an emphasis on profitability rather than the unit sales and because we're impacted by price declines. Unit sales decreased 30% year-on-year to 3.5 million units. Excluding restructuring charges, a JPY 10.2 billion operating loss was recorded, but this was JPY 30.5 billion improvement year-on-year.
Both unit sales and revenue of LCD TVs for the quarter decreased year-on-year, but operating loss increased significantly. Things are improving beyond our August expectations, and we are making steady progress towards a profitable structure. Also, the improvement in profitability is progressing beyond our expectations. We have not changed our August forecast for an operating loss of approximately JPY 80 billion for the fiscal year due to our cautiously -- of the market trends from the third quarter onward. We plan improve our profitability structure as we aim to turn to a profit in the fiscal year ending March 2014.
Next is the Devices. Sales decreased 17% year-on-year. This was primarily because sales of small and medium-size display business were included in the previous fiscal year, and sales of System LSI for the Game business decreased, partially offset by a significant increase in image sensor sales, resulting from an increase in demand.
Operating income of JPY 29.8 billion was recorded during the current quarter compared to a loss of JPY 18.4 billion in the same quarter of the previous year. This improvement is primarily due to asset impairments recorded in the same quarter of the previous fiscal year associated with the sale of small and medium-sized display business, the higher sales of image sensors during the current quarter and the gains from the sale of the chemical products-related business.
Due to -- primarily because sales of battery-related products and image sensors expected to be lower than anticipated, sales for the fiscal year is expected to be lower than the August forecast. On the other hand, operating results expected to exceed August forecast due to the gain from the sale of chemical products-related business and the benefit from insurance recoveries in the floods [ph]. Sales expected to decreasing difficulty, primarily because as I have said, sales of small and medium-sized display business are included in the previous year. Operating results are expected to improve significantly year-on-year.
I would now like to discuss the Semiconductors. Although sales of the image sensors increased because of strong demand of smartphones and other products, all the semiconductor sales decreased due to lower volume of semiconductor solely to gain business. The factors that led to the change in operating results of the 5 Electronics segment are shown here.
Total inventory for the 5 Electronics segment, as of September 30, 2012, was JPY 751.0 billion, an increase of JPY 10.2 billion year-on-year. The increase over the previous year was due to the impact of the consolidation of Sony Mobile in February this year. If it excludes that impact, the amount decreased.
Next is the Picture segment. Sales increased 4% year-on-year, and operating income decreased JPY 12.7 billion year-on-year to JPY 7.9 billion. The decrease in sales was primarily due to the sale of a participation interest in Spider-Man merchandising rights in the same quarter of the previous fiscal year. Theatrical revenues increased year-on-year due to the strong performance of The Amazing Spider-Man.
Operating income decreased due to the recording of benefit from the sale of Spider-Man merchandising rights in the same quarter of the previous year. Now primarily due to the change in the theatrical release schedule, sales for the fiscal year for the Pictures segment are expected to be lower than the August forecast. The outlook for operating results remains unchanged from the August forecast. Sales in operating income are expected to increase year-on-year.
Sales in the Music segment decreased 4%, and operating income increased to JPY 1.5 billion year-on-year to JPY 7.9 billion. The decrease in sale was primarily due to the recognition of digital license revenue in the same quarter of the previous year and the continued worldwide contraction of the physical music market.
Operating income increased primarily due to significantly lower restructuring charges, partially offset by that benefit from the recognition of digital license revenue in the same quarter of the previous year. The forecast for fiscal year sales and operating income in the Music segment is unchanged from August.
Next is Financial Services segment. Financial Services revenue increased 26%, and operating income increased JPY 6.7 billion to JPY 31.2 billion. And it is attributed to Sony Life increasing revenue, and revenue increased because of the increased investment performance in separate accounts reflecting the fact that there was only a modest decline in the Japanese stock market during this quarter. And also now, the forecast for revenue and operating income in the Financial Services segment is unchanged from August. That is all for the explanation on the segment results.
Finally, I would like to make some supplementary comments. As was just explained, finance, music, pictures, these entertainment business throughout the year, we have been able to achieve stable business. We want to make sure we continue this trend. On the other hand, when it comes to Electronics, there are some concerns. As we conduct our business in April, we had the new management team. And we have established 3 business: Core, Digital Imaging, Game and Mobile. And also, TV profit achievement and change of portfolio of businesses and starting of new business, these were explained to you when our new management team was established in April this year.
In the second quarter, well, we have been very active in those efforts. And these are the efforts we have been making since second year of last year, where we had some termination of business of LCD. And also, this LCD and those in chemical-related business has been sold -- has been divested, so there is kind of replacement or change of the business portfolio and termination of some of these business, and also, at the same time, acquisition of other businesses like 100% subsidiary of So-net and also, Ericsson.
So the point is that our Digital Imaging for K-3D, some of our unique technology is going to be strengthened. And at the same time, in such new areas, like surgical endoscopes, we want to explore new market, so that we will be able to grow profitable business, in which we can make use of our original and unique expertise in technologies. And on the other hand, we want to make necessary investments, and cash flow is extremely important. This year's cash flow forecast is slightly positive. And through change of the portfolio, we want to make sure we balance the cash in and cash out. And at the same time, inventory management and the control of working capital is something that we will continue to make efforts as we manage the cash flow.
Next, with regard to the restructuring of the business. At the beginning of the year, 10,000 personnels -- head was to be reduced -- the headcount reduction, which was announced the beginning of the year. And in October, for domestic facilities, we have announced consolidation and closure of some of the manufacturing sites, and also some of other head -- we also announced headcount reduction at headquarters in supporting functions. And also, we announced the consolidation of offices and integration of organizations at sales companies in U.S. and Europe and also, Japan. We will continue to make these restructuring efforts, step-by-step, steadily. And as a result, JPY 30 billion -- it will contribute to JPY 30 billion profit improvement. These are some of the supplementary comments.
This year, our Electronics should be profitable. And also, also the -- our net income should be profit -- should be in the black and also positive cash flow should be achieved. Those are the 3 positives we have to achieve.
With regards to the cash flow turning positive, I think it's achievable. And also, net income can be positive. But when it comes to achieving positive operating income for 5 Electronics segment, it seems quite difficult. Of course, I want to make efforts with the year end selling season. From an objective point of view, we are in a very tough environment for making -- achieving profits for electronics area, but we want to continue to make efforts towards the year end selling season.
Thank you very much. Question-and-answer session. Please raise your hand, and for the phone, please wait for the microphone and identify yourself by name and affiliation. If you ask questions and you wish it will be translated into Japanese by interpreters, and then the answers will be given in Japanese. Because of the time constraint, please ask only 2 questions per person.
Takashi Watanabe - Goldman Sachs Group Inc., Research Division
Goldman Sachs, Watanabe. For the second half and for full year forecast, you have announced a change. But the profitability by segment, I think you announced this globally, both, but IPS -- IP&S and MP&C?
In the first half and second half, I think you expect the increased profit. But IP&S, when you say the first half and second half, usually second half profit is slower than the first half. And there is a slowdown of digital camera, compact digital camera, so you might not have higher profit in the second half. And for mobile products and communication, well, second half, unless there's an improvement of smartphones, it's going to be a difficult, I think. So whether your focus for the second half is reasonable and feasible or not, I would like to hear. The second point is inventory. On quarter-on-quarter, inventories are increasing, especially North America, and it is in sound level.
As I have explained, as far as the second quarter is concerned, the performance was better than the original forecast. But when we look the breakdown of this gain on the sale of chemical and so on. So when we look at the real business operations, in the first half, I think we did rather well, especially on ETD [ph] business. When we foresee the second half and the full year results, I think we have cautious view, because JPY 6.6 trillion of sales forecast that we forecast downward, the revision of JPY 200 billion, the breakdown of JPY 200 billion downward revision is delaying the schedule of the -- release schedule of pictures and the others in the electronics. And we have revised downward the unit sales IP&S and in MP&C and HE&S which is TV business. We have a rather cautious and stringent views.
First question about TV. Towards the breakeven in the next fiscal year, we have a roadmap and milestone to achieve the goal of the breakeven. And in the first half, our improvement was better than we planned. And we would like to maintain the present momentum in the second half, but the market situations in different regions are not very bright, in particular, in China. There were demonstrations in September, and there's some impact of that. We have to incorporate that impact in our forecast. So as far as TV business is concerned, we have not changed our forecast, but we cannot maintain the better performance of the first half. In the second half, it might be difficult. As far as IP&S is concerned, you're right. The profitability is quite difficult, but for instance, in Semiconductors and lenses, we have a good basic and element technology. But contrast to our camera, our market itself is contrasting, but we're shifting to higher value-added products, which is our strength to increase our profitability. We would like to do so this year and next year. On the other hand, smartphones are increasing, and so compact digital cameras will be hurt by that. But we have in a sense of business, and it's not phones and tablets that will grow, and the double lenses will be used. So I think this will be a major tailwind for our image sensor business, so that's how we look at Digital Imaging business. We have kind of profitability structure, which we can make profit from a wide range of products. IP&S in the second half, we do not have a major expectation. I think the balance between first half and second half will be about the same, especially in digital still cameras. I think the situation will be quite difficult in the second half. But for [indiscernible] series, single lens camera for the full year, I think we can expect the growth. MP&C Mobile business, I think there will be a significant improvement, but VAIO is having difficulties. That's our forecast. Smartphones, LRC, it was Ericsson, but it's now our subsidiary 100%. In this fiscal year, we have to say that we will have the red ink. But because we have 100% subsidiary, and we are taking various measures in order to achieve the turnaround in the next year, we are emphasizing development work. When there's a joint venture, we cannot disclose all the technologies we have. It was difficult in the past, but the semiconductors, image sensors, displays and batteries and all those technologies can be incorporated in new products. That's what we are doing. And globally, management and organization structure are kind of changed. Headquarters are brought to our Tokyo, Japan and the consolidation of factories, our manufacturing factories. And if there's a country where we can actually cooperate with Ericsson, we will do so.
If not, the mobile communication will do it on their own in marketing and sales. And we have also headcount reduction. Although, we cannot achieve the breaking [ph] through this fiscal year, but this is a step stone for the next fiscal year. We will make a great strides next year, so we would like have high expectations of this business next year. If there's anything good, products, which are launched have been well received by the market, highly ranked in other competitive products. So in the second half, we have expectations. That's why our unit sales, smartphones, we did not change the forecast of unit sales. But at the end of the fiscal year, we would like to say, while it was higher than we expected. But of course, I cannot foresee what's going to happen, so I think we will not change.
Takashi Watanabe - Goldman Sachs Group Inc., Research Division
How about the inventories?
As I can see, Sony Ericsson's inventory, it's consolidated, so it's included in our overall inventory level. If we discount it, subtract it, at the end of September, the level of inventory is not too high. I think it's rather well controlled. But my category, there are differences, for example, TV. Because we will not pursue our volume anymore, so we have good control over inventories as far as TV is concerned. If it will cause any concern, it is about the mobile. We actually changed the number, and it might be higher than what you might think. It's about Game. So actually, if we adjust the manufacturing, I think we can change the level of inventories, so there's no, in that sense, problem. I think the inventory level is healthy.
Please use the microphone.
The sales have decreased, and it seems that there has been increase of inventory?
Let me check. I'd like to check before this morning to -- we'd like to move onto the next question.
[Japanese] [indiscernible] of Citigroup. Point of confirmation, the first question, the insurance business. It has been an issue of recovery if you allocate it to a certain segment, or has it come under the headquarters count? And in your second half and full year plan, how do you envision the corporate tax? The bottom line has remained intact, but what is your view about the tax?
Insurance. What we point at the beginning of the year, of course, we have to go through a very complex process. We had to have evidence. There'll be opportunity loss and the Rio loss, so we have to work with the insurance company. But when we put together the business line, we were not able to ascertain what would be the proceeds or the recovery. Therefore, at the beginning of the year, it came under the Others, under the headquarter account. But as time progressed, we see more actuals, more evidences. And by that, we allocate to relevant visions of segments. Corporate tax, I think we have tried to explain to you in my presentation, to find United States in some European countries. We have had the valuation allowance for the DTA [ph]. So when there's a profit, we can enjoy a good profit. But if it's a negative, cannot do the reversal, so we cannot recover the reversal. And I think this regime or this structure will continue to be the case for some time. Going forward, the profitability will improve in Japan and United States. Of course, we have every intention to do so. For the effective tax rate towards next year would come down definitely in our view. To supplement, for the cut -- the entire year, we do have projections for throughout the year. Our corporate tax would have a tendency to go down. We would like to generate profits in many ways, so that we can enjoy the decline of the tax as we go towards the end of the year. Game inventory for the United States, the inventory of games have increased, but that's an exception.
The recovery of insurance is JPY 13.2 billion. It goes through IP&S and Device. Is it included? Has the actual number been allocated to IP&S and Device? [indiscernible] So had it not been for this insurance recovery, what would have been the numbers for IP&S and device?
We don't disclose those numbers. But compared to our projection, what was the actual for the second quarter, of course, there is a onetime effect. And there has been some decline, excluding the onetime. But I think in real times, I think we're definitely improving.
On the tax side, the first half, the corporate tax that you're paying in the first half and the corporate tax you're paying in the second half in terms of the actual number, I think your plan calls for a reduced tax to be paid in the second half, am I right? At a first glance, I made this estimation. Am I correct?
Again, it's a very complex issue. I don't think we can give you an immediate answer. I think we shouldn't give you immediate answer. For second half, our assumption would be 40%. The effective rate will be, in terms of the effective tax rate, that will be 40%.
Masahiro Ono - Morgan Stanley, Research Division
[Japanese] Morgan Stanley, Ono. I have 2 questions. My first question is how you spend the cash? Earlier, you gave us a chart explaining it. But on the other hand, in the electronics area, churning profit is difficult. And you have China risk recent -- currently. And in terms of sales unit, it's difficult to find some products, which will increase top line increase. You said JPY 30 billion, but there is a risk that may offset that. So which means, you need to save the cash and restructuring may not be the right term, but you have to be prepared for that restructuring and save cash. So what's your idea on this? At present, except for the Financial Services, when we look at the balance sheet, you have a big debt net. So that net debt, do you have any timeframe or timeline to reduce that net debt? Now the China, to what extent do you incorporate China risk in this current projection?
Let me answer the China question first. We have adjusted, downward adjustment of JPY 200 billion for the consolidated results, and China risk is about JPY 30 billion, out of the JPY 200 billion downward adjustment. But this JPY 30 billion reduction is, of course, partly caused by the anti-Japanese demonstration. However, at the beginning of the year, the market condition and the business environment is kind of weak in China. So this JPY 30 billion downward adjustment includes all of that. China -- Chinese government is also -- GDP growth target is growing -- is getting lower. Therefore, of the JPY 200 billion downward adjustment, JPY 30 billion adjustment -- downward is for China. And when we look at the whole annual picture, well, because the business sentiment is weak now. So compared with the previous year, at the beginning of the year, of course, we assumed the market to be positive at the beginning of the year. But compared with the previous year, China-related sales may go down by as much as 10%. Well, we really hope that things will cool down in China. But as of now, I think we will have that much impact. Now the earlier question with regard to the cash, we are very -- we have a very sensitive and delicate approach, careful approach. And I showed you some chart, and we consider that into -- we take that into consideration. But that is not the -- that does not solve everything. Therefore -- well, it's true with the cash flow, but we need to support the P&L. So in the second half, we will be divesting some of -- and selling the assets. So cash flow, P&L, we want to make it healthy. At the beginning of the year, the profit of Electronics, cash flow positive and also net income positive. Those are the 3 objectives at the beginning of the year. But the first objective, profits for Electronics may be difficult. That's the bottom line in black. And also, cash flow being positive, those 2 objectives, we want to achieve by all means. Although you did not ask this question, let me go on to explain this. Sales is declining, the market sentiment is weak and the sales unit is going down. On the other hand, the bottom line remains unchanged. And how are we supporting that bottom line? Well, of course, we must make efforts in the business operation. But at the same time, we are also combining that with such measures, like selling our assets. That's our idea at present. And how do we spend the cash in a long-term basis? We need to nurture and foster core business, and we need to invest for the future. And at the same time, we need to do the cash management and make the balance sheet healthy, so we want to achieve all of them at the same time. Well, in the past few years, So-net, Olympus, we have been -- you may be thinking that we are very generous in those investment. But at the same time, we are trying to suppress working capital and controlling cash in, and also at the same time, selling some of our assets. So all in all, we are combining various measures. So we continue to invest when it's necessary, but the balance sheet loss is no longer tolerated. So we try to achieve them both.
Masahiro Ono - Morgan Stanley, Research Division
First, there's a seasonal effect at the end of September. For the end of the fiscal year, I think this will come down because of the seasonality issue. However, it takes time to reduce it solidly. The ratio, 50% or below 50%, is our target, but it takes time to achieve the below 50% DE ratio. It might be fiscal year '14, or by the end of fiscal year '14, we would like to achieve below 50% debt-to-equity ratio. As Mr. Hashitani said, at the end of this quarter in Electronics, we have -- we invest in new inventories because of the selling season at the end of the year. So in terms of the balance of funds, actually at the end of September is the bottom trough. And the Christmas sales will be down, and we recover our investment. And at the end of the fiscal year, we have about JPY 800 billion in debt. But towards the end of the year, this will be actually a squeeze. This will be reduced.
Yuji Fujimori - Barclays Capital, Research Division
Fujimori from Barclays. First point about Sony Mobile. If possible, we would like to know the operating results of the second quarter a bit more detailed image. And what is your view about the second half of Sony Mobile? ASP is increasing, average selling prices is increasing. But who would look at smartphones? What is the trend of ASP? Do you have to increase the selling price in the next fiscal year in order to achieve draft -- in order to achieve profitability next year, you have to increase it quite drastically, I think. But I would like to hear your view. Another question, JPY 200 billion in operating profit -- JPY 20 billion, actually. And in the first quarter, JPY 20 billion, higher than expected, so entire amount is JPY 40 billion. I think you incorporated the proceeds of the insurance from Thai floods as well as the sale of chemical business. But there's the saving of JPY 40 billion, and you will now go into the second quarter. This is your saving or deposit. Or are you incorporating the change in the environment and risks? Or it's, in reality, it's not JPY 20 billion higher than you expected?
Let me answer the second question first. So in reality, our first quarter, second quarter, our numbers were higher than our expectation. But for the full year, there's an uncertainty, and there might be kind of a bad news in the second half, especially China. So we're cautious about the second half. As far as the second quarter, which, we completed, we had good performance. And actually, our Rio operations improved and Rio numbers improved. But as you say, gross insurance proceeds -- in which quarter we can realize higher proceeds than we expected. This will be the result of negotiations with the insurance companies. So in the second quarter, the insurance proceeds we realized was higher than we expected. Mobile, I would like now to touch upon detailed figures regarding Mobile. But in this quarter, in reality, we are in line with our expectations. But there was a negative impact of exchange, so apples-to-apples comparisons from the previous year, profit has declined. But I don't think there's any problem. As far as operations is concerned, there has been an improvement, and unit sales will increase. That's our forecast. I think in the second half, there will be an improvement, but that's what we believe. And in the next fiscal -- towards the next fiscal year, I think we can achieve the turnaround. In other words, our efforts toward the turnaround the next fiscal year is going -- is moving along smoothly. First, overall sales have to increase, that's the assumption. And by increasing sales, we will make more profit. [Japanese] As far as the unit price, the unit selling price, for the same categories or same models, our prices might come down. But by increasing sales, we will improve our profitability in the next fiscal year.
Yuji Fujimori - Barclays Capital, Research Division
In the second quarter, you will have amortization of intangible assets. So in the second half, will be it be breakeven or you might achieve the bracking [ph]?
No, we are not disclosing any numbers, but I think there will be an improvement. There will be an improvement.
[Japanese] SMBC Nikko Securities. I would like to confirm one point. This is something you have said earlier. In the operating income for the second half, do you anticipate sort of onetime earnings, such as the sales of assets, which has not been incorporated in the forecast for August? And therefore, that is the reason why you maintained the forecast for the operating income.
And I'm afraid that we will not disclose the details. But I would say, yes. In Electronics and the like, we will have to supplement complement to cover the deficiency, but we will take additional actions and measures. That is now being considered. Therefore, JPY 200 billion of sales that has been the downward revision. So maybe for the operating income, JPY 50 billion to JPY 60 billion of situation is anticipated. But to cover this, you are contemplating the sales of some assets. You said -- mentioned JPY 200 billion, but if you look at the details, the looks of -- the reduction of sales did not necessarily translate into the decline of the operating income. One example is Pictures. Because the release date has been to delayed to next year, that may affect the sales of the decline. But as you will know, at the time of release, pictures industries spend a lot in promotion and advertisement. So the change of the release date will result in a change of the operating expense. So maybe, I couldn't concur with your estimate. So should I say that the gap or the difference is not as great as you might think, but I'm afraid I cannot give you the details.
Shiro Mikoshiba - Nomura Securities Co. Ltd., Research Division
[Japanese] Mikoshiba from Nomura Securities. One is about the TV. You reduced the forecast for the volume by 1 million. Operating loss is JPY 80 billion, as is a decline. You said that you reached the breakeven next year. For that, what's the assumption for the volume? What extent can you afford to lose the volume, and so, achieve the breakeven? Because next year, I think you will continue to see the decline of the volume.
Of course, the budget for next fiscal year has not been finalized. But let me just explain the way we look at this. This year, we focused on profitability rather than chasing the numbers. We chose not to chase after the shares or the numbers and be involved in the price competitive -- competition, so we focused on profitability to hoping that next year we will reach breakeven. And of course, we are trying to reduce the cost as we have planned to do so. Therefore, we are trying to achieve the milestone this year towards the improvement of the profitability. We will continue to seek for the reduction of the volume, which the equivalent there. Would that be an ongoing philosophy? No. Once we reduced the fixed cost, and we chase structure. So that once we have a viable earnings structure, then we hope to increase the top line as well as the bottom line, as appropriate. But we cannot do that right now. We have to work on the fabric [ph] of the business. We have to strengthen the business structure. And then once we have done so, we'll try to expand if we can do so in certain markets in the advanced station, Sony and other institutions. These institutions believe that we can expect our meaningful expansion. But in the emerging market, we can expect growth. And it is in those areas that we also hope to achieve expansion. It doesn't mean that we will forever go for JPY 50 million or seek a equilibrium at a low point. That is not an everlasting strategy. We have there for the game, portable. We revised the number downward. And in the meantime, the package software is at the same level as last year. It's the same as the first quarter. So the drop of the hardware is anticipated [indiscernible] as software. And another aspect, can we expand on this? The interesting thing is that software is based on the accumulated installed basis. So if we were to do an impact, the software is selling at a longer cycle. And also, it depends on the availability of new titles, whether they are appearing titles or not, whether it's PS3 or Vita. As times go by, the developers will be coming up with even better games. So we don't directly -- the sales of the hardware the sale of software. I'm afraid, with the time, we can only accommodate one more question. The gentleman in front?
My name is [indiscernible]. I have 2 questions. My first question -- well, I asked the question in the previous meeting, but you didn't answer it. And I know it's difficult to show us the breakdown for the mobile. 7 million sales units is the objective, but when you look at the sell-through structure, it seems very difficult. And the inventory is accumulated, it's because sell-through is weak. And how do you look -- what's the factor why the inventory is increasing towards the second half of the year. Second question, on the mid-range plan. I asked the question in the previous meeting, JPY 80 billion is the plan. But when we look at the current plan, you said you will try to secure profit by cutting down on the cost. But it's because PS3, you got marginal profit. And in R&D -- for R&D personnels, you had some restructuring. And in the midterm point of view, is it difficult to achieve the increasing sales. What does the headquarter think about this?
With regard to the mobile equipment, well, I know -- well, the software we are planning to launch towards the end of the year, we are really hopeful that it will be successful. The second question, well, I kind of missed the first part of your question. JPY 1 trillion and JPY 80 billion plan, the mid-range plan, I don't think it will add up when we look at the current situation. In order to achieve the profit, you're trying to cut down on the personnel. You can't foster your resources. Well, in a limited time, I cannot answer all your question. But when it comes to Game, from a midterm point of view, the console and the mobile equipment device, there's some tablets, mobile, tangible gains from tablets and mobile equipment, we are addressing all of them. On a midterm point of view, we are trying to make use of our strengths, but the business model is that it's true, it's kind of changing to a model where people play game through Internet. And we bought -- acquired a company called, Gaikai, a mobile game company. And so it can be used for our PS platform, which we already have, and -- or it can be expanded to other device, so the business model is changing. So as of now, in 2 years time, how much profit we can achieve. Well, it's difficult to answer that question, but for our profit structure, it's being changed. And that kind of change is seen in our industry, and there are opportunities and risks at the same time. We're not worried about the closure of the R&D facilities. Well, for R&D, I can't talk about the details. But for PS3 compared with the era of PS2 or 3, and when we look at the future, it's totally different. In the past, where we had PS2 or 3, we develop -- started the development with the chipset and then had a massive investment. So future platform is that we're using the existing chip technology. You did not -- you're not going to develop everything from the scratch on your own. So the business model is different, so just looking at the change of R&D expenditure and budget, that increase and decrease does not really mean much to our business. You can judge it from that.
It's time to close today's meeting. Thank you very much. Thank you very much for your attendance.
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