Ladies and gentlemen, we would like to start the Sony Corporation's FY 2015 Second Quarter Consolidated Financial Results Announcement. Thank you very much for coming in spite of your tight schedule today..

Executive Deputy President and CFO, Kenichiro Yoshida. SVP, Corporate Planning and Control and Accounting, Kazuhiko Takeda; VP, Senior General Manager of Finance Department, Atsuko Murakami. Today, Yoshida will discuss the results, to be followed by Q&A. We are planning to have about 45 minutes in total. Mr. Yoshida, please. .

I'm Sony's CFO, Kenichiro Yoshida. Thank you very much for joining us today. Today, I would like to explain 2 topics in the next 15 minutes..

First, in the second quarter, consolidated sales were essentially flat year-on-year at JPY 1,892.7 billion. Consolidated operating income was JPY 88 billion, an improvement of JPY 173.6 billion compared to the same quarter previous year.

This significant improvement was due to the recording of a JPY 176 billion goodwill impairment in the Mobile Communications segment in the same quarter previous year. Excluding the impairment, operating results deteriorated JPY 2.4 billion year-on-year.

The year-on-year negative impact of foreign exchange rates for the 5 electronics segments in aggregate can be estimated as approximately JPY 34 billion..

Income before income taxes was JPY 72.2 billion. Net income attributable to Sony Corporation's shareholders was JPY 33.6 billion. This chart shows the results for the first half. .

And next, this chart shows the results of each segment for the second quarter. Every segment, other than Pictures and Financial Services segment, had an improvement in the operating results..

This chart shows the results for the first half by segment. Next is the consolidated results forecast for the current fiscal year. Our consolidated sales and operating income forecast remains unchanged from the July forecast. Our foreign exchange rate assumptions are JPY 125 to the U.S. dollar and JPY 130 to the euro..

The fiscal year results forecast for each segment are shown on this slide. We changed our operating income forecast for 4 of the segments. I will now briefly explain the foreign exchange rate assumption used in the segment forecast. .

As is shown in the upper right, we used JPY 121 to U.S. dollars and JPY 132 to the euro when revising the fiscal year forecast for each of the segments. There is an approximately JPY 20 billion negative impact on operating income from our using the rates I mentioned previously for the consolidated forecast, JPY 125 to USD 1 and JPY 130 to the euro.

This impact is included in corporate and elimination..

I will now explain the current situation of each segment. First, I will talk about the Mobile Communications segment. During the quarter, operating loss was JPY 20.6 billion. Excluding the impact of the impairment, this was a JPY 26.1 billion deterioration year-on-year.

Although we essentially offset the negative impact of the decrease in unit sales by improving product mix and reducing costs, operating results deteriorated due to the significant JPY 24.4 billion negative impact of the foreign exchange rates. .

Restructuring is currently proceeding on track, and we recorded JPY 4.3 billion of restructuring charges in the quarter. Our forecast for sales and operating income remains unchanged. We will continue to manage the Mobile business by narrowing our product lineup and geographical -- geographic focus. .

Next, I will talk about the Game & Network Services segment. Sales and operating income for the quarter increased year-on-year. Operating income was JPY 23.9 billion. Network sales increased by more than 50% year-on-year.

And the strong momentum of this business continues, evidenced by the fact that in September, we recorded the highest monthly sales in the business history..

We upwardly revised our operating income forecast for the fiscal year by JPY 20 billion because of continued strong performance of the PS4 platform, including software. As previously announced, we cut the unit sales price of PS4 hardware, and we have revised upward by 1 million units our unit sales forecast. .

Next, I will explain the Imaging Products & Solutions segment. Sales and profit for the quarter increased year-on-year, and operating income was JPY 25.9 billion. In the shrinking digital camera market, I think these results were mainly due to our ability to shift to high value-added models.

In light of this situation, we upwardly revised our operating income forecast for the fiscal year by JPY 10 billion. .

We decided to include the Medical business, which was included in All Other, in this segment from the third quarter. The forecast shown on the lower left of this slide has the forecast prior to the segment reclassification on the top and after the segment reclassification on the bottom.

We reclassified the business because we believe that it is important to draw on synergies in the imaging field to strengthen and grow the Medical business. Therefore, we assigned Mr. Ishizuka to lead the Medical business as well as the IP&S segment, which he is already managing. .

As we said in September, 4K surgical endoscope, which Sony Olympus Medical Solutions developed with Olympus Corporation, have begun to be sold..

Next is the Home Entertainment & Sound segment. For the overall segment during the quarter, sales were essentially flat, but operating income increased year-on-year to JPY 15.8 billion. The operating income of the Television business, which is included in the segment, was JPY 9.7 billion for the quarter.

We upwardly revised our operating income forecast of this segment for the fiscal year by JPY 3 billion, but we have not changed the forecast of the Television business for the full year, as we continue to have a cautious view going forward. .

Next, I will talk about the Devices segment. Sales and operating income increased year-on-year, and operating income was JPY 32.7 billion. In this quarter, there were some issues with manufacturing equipment for the image sensor. Compared to the July forecast, sales decreased due to lower output of image sensors for a certain period.

However, we have already resolved this issue with manufacturing equipment..

We started a camera module business 2 years ago. But since this is a relatively new challenge for Sony, yields did not increase as expected in the first half of this fiscal year. However, at this point in time, yields are improving. .

We have downwardly revised our forecast for annual sales from July forecast due to lower sales of polymer-type batteries and previously mentioned issues with manufacturing equipment for image sensors.

However, our forecast for operating income remains unchanged, mainly due to an improvement in productivity and yield of image sensors and cost reduction..

As to the battery business, competition with industry rivals is growing intense, and we think it is possible that the profitability of this business could continue to be negatively affected.

We're in the process of our annual review of our midrange plan, including for the battery business, and it is possible that the business environment I just mentioned could result in an impairment charge against long-lived assets in the battery business..

In addition, as was announced yesterday, we entered into an MoU with Toshiba Corporation for the transfer of certain semiconductor production facilities. At this point in time, we have not yet reached a final agreement. But if this transfer happens, we will have greater flexibility in our production strategy going forward.

We think that demand for image sensors will continue to be strong in the mid to long term, and we plan to be aggressive going forward when it comes to investing, including in the R&D area. .

Next, I will talk about the Pictures segment. The sales for the quarter were essentially flat year-on-year on a yen basis, but U.S. dollar-based sales decreased 14% from last year. A JPY 22.5 billion operating loss was recorded.

The year-on-year deterioration was due to significantly lower sales of Motion Pictures as well as an increase of marketing expenses, resulting from a larger number of major theatrical releases compared to the same quarter previous year. Also, the depreciation of the yen against the dollar had a negative impact on the operating results..

We downwardly revised our operating income forecast for the fiscal year by JPY 29 billion. And I will explain about my -- our current view of the Pictures segment. And I think there are 2 reasons for the downward revision we made of the Motions Pictures group, which represents the largest portion of the revenue for this segment.

The first reason is that profit forecasting and risk analysis for our films turned out to be a bit optimistic. The second reason is that the building up in the past of valuable assets and intellectual property rights, which would have contributed to a sustainable profit growth, was not sufficient..

Both Sony Pictures, SP, and headquarters take this situation very seriously and will work to improve the situation going forward.

And pursuant to this view of the performance of the segment, Michael Lynton, who is responsible for our Entertainment businesses, appointed a new head of the Motion Pictures group this spring, and the new management is currently working to improve profitability by balancing creativity with financial discipline.

However, I do think it will take time for the Motion Pictures business to deliver improved results because the film business cycle is relatively long. .

Looking for a moment at the whole Pictures segment. I think the business can grow over the mid-term by capitalizing on the performance of the Television Production business, which is producing hit shows like The Blacklist, the growth of the Media Networks business and the know-how that we have accumulated as one of the longtime major movie studios.

We have not changed our positioning of this business as a growth driver, even though I do think that it will take some time for the performance to improve, just as mentioned. .

Next, talking about Music segment business. Sales and operating income for the quarter increased year-on-year. The primary reason for the increase in profit was an improvement in the business mix resulting from an increase in streaming revenues.

And in the Recorded Music segment, our forecast for sales and operating income for the full year remains unchanged. .

Next, talking about Financial Services segment. For the quarter, acquisitions of new policies continued to steadily increase at Sony Life.

Compared with the same quarter of the previous year, sales and operating income decreased due to a deterioration in the investment performance of the separate account, mainly related to variable insurance, reflecting a significant decline in the Japanese stock market during the quarter.

Our forecast for the sales and the operating results for the full year remains unchanged. .

In conclusion, I will show you the screen -- this chart on the screen, which displays the forecast of each segment compared with the previous fiscal year. All 5 electronic segments are expected to have an increase in operating income compared with the previous fiscal year.

The Mobile business is expected to be loss-making, but they are working to complete their transformation or restructuring initiatives this fiscal year. And we think the Game business is at a stage where it can continue to seek scale by capitalizing on the strong momentum of PS4.

And we think that IP&S and HE&S segments are beginning to show the success of the efforts to prioritize differentiation of our scale through their focus on products that create the kind of experience that President Hirai has been talking about, and through the development of the products that capture a premium. .

In the Devices segment, even though we are paying close attention to the market environment in China, we think the demand for image sensors over the mid to long term will be strong, and we take very seriously the fact that we have made a significantly downward revision to the forecast of the Pictures segment this time.

And we are working to improve this business going forward through the implementation of various measures. .

In Music, we think that there is a possibility the market will expand. And I think that we can now continue to record consistent profits from Financial Services segment.

In Corporate and All Other, we have kept our risk buffer at around JPY 80 billion, which includes the impact of the difference in foreign exchange rates that I mentioned earlier, partially because we recorded a net loss last fiscal year, our forecast for the year continues to be conservative.

However, overall, we think the profitability of our company's businesses is improving..

And this completes my presentation. Thank you. .

Now the floor is open to entertain your questions. Those of you with questions, please wait for the microphone, and please identify yourself by stating the name and affiliation before asking the questions. When the questions are asked in English, your question will be interpreted into Japanese consecutively and answers will be given in Japanese.

And please confine your number of questions to 2 per person. .

Those of you with questions?.

Ayada of Daiwa Securities. I'd like to ask a question concerning device and game. First, in Device segment, you mentioned during the second quarter, there was a temporary decline in production of image sensors.

And what was the sizable impact of it on the second quarter sales and profit, if you can indicate numbers, please? And in this relation, about the batteries, you referred to the possibility of impairment.

What is the likely size of such impairment in terms of monetary amount? What's the image of it? And then the second question, Game & Network Services, earlier, in various areas, you've made a price adjustment, price cut.

And along with that, hardware on the balance sheet, have you conducted the review of the cost during the second quarter and if that impact is included in the results or not?.

First point concerning device, the impact of the decline in production on image sensors and also the possibility of impairment, the size and amount and also the price adjustment of PlayStation4 and if the hardware cost has been reviewed during the second quarter or not.

Concerning the first point, I'm not in a position to disclose the actual monetary amount, but this time, the downward revision of the sales of image sensors during this quarter. But basically, it really has to do with the equipment issue in Nagasaki TEC. And the downward revision of JPY 10 billion in sensor business is due to this equipment issue.

About the cost and the size of the battery impairment, the first about the battery business impairment possibility and the likely size of it, I understand. About the actual amount of the impairment, we are in the process of formulating MRP. And based on that, we will adjust the impairment.

And so including timing, we are not in a position to talk about it nor the size of it. But about the likely size if it, the amount of fixed assets for Device segment as a whole is disclosed at the end of September. And if you turn to Page 16, that is JPY 412.8 billion for Device segment as a whole.

And out of that, the fixed-asset amount of energy is about 10% of the total device fixed asset. And concerning the game, what about the cost recalculation based on the price adjustment of the hardware if we have conducted that or not.

Rather than revisiting the cost, what we conducted was the measures or provisions we take in the way of inventory compensation if the need occurs on the part of dealers or customers. Next question. .

The person sitting next to the person. .

My name is Okazaki from Nomura Securities. My first question, B2C products, TV, smartphone, digital camera. My question concerns that the global recession -- concern from the recession, under that situation, towards the second half, was there any that you sensed the changes coming? The second about Pictures.

There is a large downward revision this time around. The largest film is going to be released in the third quarter for this fiscal year.

Before the release, you downwardly revised the Motion Pictures, and why is it? And other than that, Motion Pictures, TV Productions and Media Networks, what would be your plan?.

Thank you for your questions. About your first question, Takeda will answer. And the second one I will take myself, and then supplemented by, if necessary, Mr. Takeda. .

About your first question, B2C products. There's this concern about the global recession and what would be the impact that we are feeling. Especially in the emerging markets, China, India, Russia, Brazil, Latin American countries, it's a highly volatile markets in our review.

For each, the market is important to us at Sony, especially among them, China. There's a slowdown of China and we recognize China slowdown. But on a consolidated basis, what would be the impact on Sony's consolidated results among all the total sales. China accounts for less than 10%, so it's not a big impact from China in our view.

China, for us, is a market, and also we have production facilities there in China. Our important customers have the production facilities in China and the supply base. So at this moment, we don't recognize a large impact concerning China. But we continue to be quite cautious by watching the movement.

About the Pictures, there's this downward revision, those already released have not performed according to our expectations. And Media Networks, because of the currency situation, it has not grown to our expectation. Those are the factors. For the TV Productions, it's on track. Basically, it's on track, the right track.

Any supplementary comment?.

Now before the release, why do we downwardly revise the forecast? For us, the Picture business, as has been explained in the previous presentation meeting, there's this production process. And before the release, a huge marketing cost is incurred. And then at the release, the payback period will continue for several years after the release.

And this year, in the first half, we released some films, but they didn't become big hits. In the second half, we expected to have the revenue. The Motion Pictures, software and TV licensed products, we cannot expect much revenue from these. That's why we had this downward revision this time. Thank you. .

I'd like to invite another question. Raise your hand. In the first row or the farthest block from myself. .

Ezawa of Citigroup securities. Two points, please. The full year, your plans by segment, if I look at the numbers, the elimination into corporate, the buffer is at JPY 80 billion. Can you explain about this? Firstly, first half is over now and still, you have this huge amount of buffer prepared.

Why is that? The reasons why you are keeping this amount of buffer, do you have clear prospects of using this? And what's your view -- what's your take on the realizability or actual use of these prospects or the actual use of these buffers? Another question concerning entertainment and movies. The performance is declining.

And you say that Pictures is a long-cycle business, and the management has not done an adequate job in the past. But to deal with the situation, I'm sure you're contemplating taking some actions. And you said that Michael Lynton has appointed a Head of the Motion Pictures segment now, but Michael Lynton himself is at the very top of this business.

Why are you saying that he is not responsible for the poor performance that has been caused by the management inadequacy of the past?.

Your first question was why are we keeping this amount of buffer and also you asked for some breakdown. And also, your second question concerns the management's responsibility for the performance of the Pictures segment. On your first point, I will say a word, and then I'll invite Mr. Takeda to make some additional comments.

So we are keeping this buffer. The reason is that our business is diversified. And also, as you may know, we've had a repeated process of downward revisions in our performance announcements in the past, and the result of which was that we might have lost your confidence that you placed on us.

So given that track record, we are now taking a more conservative positions. And if there are issues or challenges, we have to, of course, address those challenges or deal with those addresses solidly. That's why we are keeping this much of a buffer. Mr.

Takeda?.

Yes, the risk buffer, JPY 80 billion, how do they break down? JPY 20 billion is ForEx risk and others, JPY 60 billion of buffer is provided for now. The reason for this is that in the second half of the year, we expect that things will happen in the market or in the ForEx market, which are not visible to us currently.

That's why we're taking a conservative position, careful position. And as I said before, the impairment is a possibility that we have to make a careful analysis of in the days ahead. Because of these various potential down risks -- downside risks, we have set this amount to the buffer to be able to absorb these risks. .

The second concerning the management's responsibility. The CEO, Hirai; our CFO, myself, we are, of course, responsible for the results and the performance of the business, Michael Lynton as well. And Michael Lynton is responsible for Entertainment business in total. And what is a challenge in particular for us is the film production, Motion Pictures.

And so as Motion Pictures business is concerned, of course, the business unit responsible for picture production should be accountable.

But the headquarters in Tokyo also should share some of the responsibilities because while we are losing money with the Electronics business, we try to go after the maximization of the profitability on a single-layer basis. And therefore, for that, we sold some assets and also sold the business in terms of Media Networks businesses.

And all these have resulted in the current situation. But the current management led by Michael Lynton, they are taking improvement actions. How they are successful in preparing a success -- a recovery road map is a challenge for us, I would say. .

More -- I'd like to ask you furthermore concerning the risk of another impairment perhaps related to assets.

If this happens, what is going to happen to your guidance for the annual forecast? Your devices will not be able to absorb that, but you will be using the buffer, the risk buffers which is now recorded for the headquarters, that's why you have not changed the annual forecast for the Devices business.

Is that the correct understanding?.

Yes, your understanding is correct. .

Next question?.

Nakane, Mizuho Securities. Two questions I'd like to ask of you. First, on Mobile, did you -- the operating loss in second quarter was worse than expected because domestically, new models have been launched and we were expecting that you may become profitable.

But the JPY 20 billion and the ForEx impact may be large, but what is the progress against the plan? And domestic profit per share, is it affected by the ForEx? And what is the outlook for the second half? The current situation sounds -- appears rather tough in terms of this. And the second question has to do with the batteries.

The adjustment of sales, the smartphone brand of major manufacturers lost steam. That may be a major factor. But other than that, there is a background of the possibility of impairment.

Is it because you are not looking at the market trend differently? Or is your technology or some output or operation? What is your view about the battery business? And what was the triggering point? And what are the differences in changes?.

The first point has to do with the less-than-favorable results of the Mobile segment and what's the state of progress. And the second point has to do with the battery business. The first point I shall answer, concerning Xperia, the new model, it was put on sale in Japan starting yesterday, and very smooth order-taking record is made.

What is the biggest issue at the moment especially during the first half? That is the loss of Mobile business more or less concentrate in certain countries. Without citing the specific names of the countries, I can point to 3 countries, not 3 regions, but 3 countries incurring loss of nearly JPY 50 billion during the current period.

What we are trying to do is that of just like the good example of China. We've started restructuring earlier in China by narrowing down the sales channel, so without pursuing the scale. So for the countries with challenges, we are taking similar measures. And loss is incurred because of these measures to contract the business. That's one.

And for the second half, the -- we are incorporating the sales of Z5, and the restructuring is in progress as planned and is on track. And the second point, the battery, I'd like to ask Takeda-san to answer. .

Well, in connection with the first point, I'd like to make one point for supplementation. The operating loss during the second quarter was larger than forecasted. The ForEx impact is very large there.

And another point is that this is a business we are carrying out the strenuous restructuring efforts, and this restructuring cost is around JPY 4.3 billion. The second question concerning battery business, possibility of impairment and intense competition with competitors is one factor.

And the market, especially in China, the market trend is a deceleration. And another issue is technological issue when the start was not as smooth as we hoped.

Especially in terms of fixed asset, if we can recover the investment or not because of the slow start-up because of technology, if we cannot generate cash flow at the very start, the initial forecast was a little too optimistic. Next question. .

My name is Nishimura from Credit Suisse. About the device, there are 2 questions I would like to ask. One, image sensor. Quite recently, towards the second half, what would be your sentiment toward the market? At Sony, your supply and -- or how does it balance against the demand? The second question concerning battery businesses.

For -- from next fiscal year onward, what is your ideal plan for the business -- battery business? By the end of this fiscal year, are you going to have these impairment charges against the long-lived assets? Does it promote the restructuring? What is the current stance of the batteries business? How are you going to operate the battery business within the limits that you have? Please answer.

.

Thank you. First, the image sensors, great sentiment towards the market, our view on the market quite recently and the second half. And the second is the battery business. Allow me to answer these 2 questions, and then Takeda-san can supplement if necessary.

For image sensors, as is said earlier, there were some manufacturing issues in the second quarter, and it has an impact in the second half, and that has been factored in into this presentation today. Some customers didn't get what they ordered, and there's this lingering effect from that. Overall, the market of the smartphones is getting softer.

That is true, however, Sony's supply production has not been largely affected by it. But market situation is something that we must continuously monitor. For batteries, our positioning of the batteries has not changed. Among the Device segment, battery is positioned as an important element.

By the end of this fiscal year, after the impairment charges, well, the impairment charges has not been finalized yet, and it's difficult with the assumption or hypothetical discussions. But as Takeda-san said, orientation or the direction of the technology and the needs of the customers, there seems to be a gap between these 2.

We have to take that into consideration to have the design win for the next stage, and we are working very hard for that. Thank you. .

We're losing time, so I'd like to invite just 1 or 2 more questions, and raise your hand. In the second row, over here. .

Ono, Morgan Stanley. Just briefly, your -- well, actually, there are 2 points. First of all, your annual operating profit, you reviewed some of them. Is it because of the changes you expect in the second half? Or is there going to be upside? And how do you -- you were looking at first quarter upside and making upward revisions.

But this time, for Game & Network, IP&S, can you discuss the situation about changing the forecast? And about the module, camera module business, the yield was a problem. But I think you were more or less able to resolve this situation, and you're going to increase sales of camera modules.

But the users, the camera makers, they're demanding with high specifications. Given that, do we have to be concerned about it? Because seamless sensors have a high yield, 90% yield is what I see. But by internalizing production of these modules to that extent, the total yield would be lower so that the margin would also be brought down.

So would there be earnings base associated with the decline in yield as you internalize the production?.

The first point will be answered by Takeda-san, and your second point will be addressed by myself. .

So concerning your first point, annual profit, some of which were upward revision for the full year, and is it because the upside was incorporated for the second quarter in the Games business and IP&S, both of these? Not really. There are some reasons from the second factor -- second quarter.

But it's been improving profitably for full year, that's why we decided to make an upward revision for full year for these segments. .

About camera module question, there has been slight improvement in the yield. There has been a challenge for us for 2 years now. The reason why we are doing this now is that there's a future in module business. For instance, dual lenses to be used in smartphones. So there's a lot of room for innovation with the use of camera modules.

There has been some trouble with the start-up of this production. But because of that, it's true that yield was reduced, so there is an impact from that lowering of the yield. But even though that is true, yield is now improving. So in the days ahead, we'll take advantage of that improvement.

And also, we are making investments in Q2 module production to be started there. If given the high valuation of the yield, and we believe our yield is indeed high, but as far as Yamagata operation is concerned, it's still a start-up process, so there's further room for more improvement in yield from Yamagata production. Thank you. .

With this, we would like to bring this earnings announcement session to a close. Thank you very much for your participation..