Sony Group Corp

Ladies and gentlemen, it is now time to start the second quarter fiscal 2020 earnings announcement of the consolidated results. And my name is Kato from Corporate Communications and I shall be serving as the MC for this session. This briefing is being held for the members of the media, analysts, and institutional investors to whom we have invited. And the session can be viewed on the internet through our investor We have with us the Executive Deputy President and CFO, Mr. Hiroki Totoki, to talk about the consolidated results of the second quarter 2020, as well as the forecast for the full year 2020. And then there will be a question and answer session. And we anticipate that this session will last for about 70 minutes. So, Mr. Totoki, first, please. Thank you. Major changes are occurring in society and the economy, as well as in people's lives, primarily due to the spread of the new coronavirus disease and an increase in geopolitical risks. At Sony, the increased export restrictions the U.S. government has imposed on a certain major Chinese customer are having a significant negative impact on our image sensor business, while stay-at-home demand resulting from COVID-19 is having a positive impact, primarily on our game business. In an operating environment such as this, where change is both rapid and broad, our diverse business portfolio augments the resilience of Sony and provides us an opportunity to expand new businesses. Now, I'd like to explain the following topics, as you see here. Fiscal 20 second quarter consolidated sales decreased slightly compared to the same quarter of the previous fiscal year. to 2 trillion 113.5 billion yen, but consolidated operating income increased 38.8 billion yen year-on-year to 317.8 billion yen, which was a record high for the second quarter. Income before income taxes increased 37.5 billion yen year-on-year to 299.6 billion yen. net income attributable to Sony Corporation stockholders for the quarter increased 271.7 billion yen year-on-year to 459.6 billion yen. This significant increase in net income was primarily due to the improvement in operating income I mentioned and a 214.9 billion yen reversal of a portion of the valuation allowances recorded against deferred tax assets in the consolidated tax filing group in Japan. For details of adjusted profit excluding extraordinary items recorded in second quarter, please refer to pages four through seven of the presentation materials. This slide shows the results by segment for fiscal 20, quarter two. Next, I'll show the consolidated results forecast for fiscal 2020. Consolidated sales are expected to increase 200 billion yen compared with the previous forecast to 8,500,000,000 yen. And operating income is expected to increase 80 billion yen to 700 billion yen. We have also upwardly revised the forecast for income before income taxes to 765 billion yen and the net income attributable to Sony's corporation's shareholders to 800 billion yen. Our forecast for the consolidated operating cash flow excluding the financial services segment is 630 billion yen, an increase of 80 billion yen compared to our previous forecast. Our assumed foreign currency exchange rate for the second half of the year is 105 yen to the U.S. dollar and 123 yen to the euro. Now, this slide shows our forecast by segment. I will now explain the situation in each of our business segments. First, GNNS. First, in the GNNS segment, software and network services performed well in second quarter, primarily due to our first-party software title Ghost of Tsushima becoming a big hit, and PlayStation Plus subscribers increasing as a result of stay-at-home demand. Sales increased 11% year-on-year to 506.6 billion yen, with all categories increasing except for hardware, which is anticipating a launch of the PlayStation 5. Operating income significantly increased 39.9 billion yen to 104.9 billion yen, primarily due to an increase in software revenue. The fiscal 2020 sales forecast has been revised upward 100 billion yen compared to the previous forecast to 2 trillion 600 billion yen, and the operating income forecast has been revised upward 60 billion yen to 300 billion yen. Although it has leveled off compared with its peak in April, stay-at-home demand, which drove sales and profit in this segment in the first half of the fiscal year, continued to have a positive impact, with total PlayStation user gameplay time in September up approximately 30 percent compared to the same month of the previous year. We expect this level of stay-at-home demand to continue in the second half. Last month, we announced the price, release date, and the software title lineup of the PS5. The price we announced is the same one we incorporated into the fiscal forecast we disclosed at the last earnings announcement. So there has been no change. As for the unit sales of PS5 this fiscal year, we are aiming to exceed the 7.6 million units we sold in the fiscal year of the launch of the PlayStation 4, which achieved a substantial market share and was a major success. As for software for the PS5, we expect to have more titles than... at any launch of our history thanks to our high-quality first-party software that is exclusive to the PlayStation and to a collaboration with our publisher partners. We expect to launch the PS5 in great shape due to this appealing software lineup, the strength of the PlayStation brand, our preeminent game ecosystem, and our cohesive gamer community. Our strategy is to grow sales and profit through increased user engagement driven by great game experiences on the PS5. And we aim to accelerate the growth of recurring sales and profit by expanding the reach of our community through further strengthening of our network services going forward.

Next is the music segment. Fiscal year 2020 Q2 sales increased 5% year-on-year to 230.9 billion yen, primarily due to an increase in streaming revenue and a hit album released by Kenshi Yonezu in Japan. Operating income increased 15.4 billion yen to 52.9 billion yen due to the impact of the increase in sales and a one-time gain resulting from the transfer of a business. In the recorded music space, advertising-supported streaming, which was negatively impacted by COVID-19, is recovering, and streaming revenue during the quarter continued to grow at the high rate of 18% year-on-year. primarily because streaming revenue in recorded music is exceeding our expectations. Fiscal year 20 sales are expected to increase 60 billion yen compared to our previous forecast to 850 billion yen, and operating income is expected to increase 22 billion yen to 152 billion yen. Demon Slayer, Kimetsu no Yaiba, the movie, Mugen Train, which Aniplex, a consolidated subsidiary of Sony, co-produced and co-distributed, opened on October 16, 2020, and became the first film ever released in Japan to exceed 10 billion yen in box office revenue in the 10 days after opening. The TV series is being distributed outside of Japan via channels such as Sonimation, which is also a Sony Group company, and it is extremely popular. We expect this IP to contribute even further to the enhancement of synergy across our entertainment businesses, not just the animation business we are focusing on. Next is the picture segment. Fiscal year 2022 sales significantly decreased 26% year-on-year to 192.3 billion yen, primarily due to a significant decrease in theatrical releases resulting from the impact of COVID-19 compared to the same quarter of the previous fiscal year in which the major hit Spider-Man Far From Home was released, as well as a decrease in advertising revenue in media networks. Operating income decreased 7.6 billion yen year-on-year to 31.8 billion yen as the impact of the decrease in sales was partially offset by a decrease in marketing expenses, emotion pictures, and other factors. Our forecast for fiscal year 20 sales has not changed, but the forecast for operating income has increased 7 billion yen to 48 billion yen to reflect the results of the first half. While taking steps to prevent the spread of COVID-19, we have restarted motion picture and TV show production in stages since July. Box office revenue has begun to recover, but the closure of theaters in major cities in the U.S. continues and the major studios are postponing the release of large films. Once theaters reopen, there is a possibility that increased competition from a crowded motion picture release schedule will cause the recovery of our sales and profit to be delayed. The motion picture business model is one where sales and profit are generated over multiple years, starting with theatrical release where hits are made and progressing to successive windows such as home entertainment and TV and video on-demand licensing. As a result, the negative impact on our financial results of not being able to release films into theaters will continue for several years going forward. On the other hand, advertising revenue in the media networks business, which was significantly negatively impacted by COVID-19, is recovering. Next is the EPNS segment. The second quarter sales increased 2% year-on-year to 504.7 billion yen, primarily due to an increase in unit sales of TVs. Operating income increased 12.6 billion yen year-on-year to 54 billion yen, primarily due to a reduction in operating costs and an improvement in the product mix and an increase in the unit sales of TVs. No change has been made to the forecast for fiscal year 20 sales, but primarily due to the favorable impact of foreign currency exchange rates, we increased the FY20 operating income forecast by 7 billion yen compared to the previous forecast to 67 billion yen. Although this segment was significantly negatively impacted by COVID-19 early from February of this year, It regained its stability in Q2 thanks to a stabilization of the supply chain, stay-at-home demand for home audio and video products, and a recovery of demand for digital cameras and other products. Nevertheless, we are operating the business with extreme caution as recent signs of a resurgence of COVID-19 have proven that the unpredictable situation is continuing. We are working to build a business that can generate a profit under even more severe circumstances by further accelerating management of the segment as one unity, improving the efficiency of our operations, and optimizing our scale. Moreover, in order to bring reality, real-time, and remote value to our customers using Sony's technology, we will work diligently to sow the seeds of future growth.

Next is the INSS segment. Fiscal year 2020, second quarter sales decreased slightly year-on-year to 307.1 billion yen, and operating income significantly decreased 26.5 billion yen to 49.8 billion yen. Sales for FY20 are expected to decrease ¥40 billion to ¥960 billion, and operating income is expected to significantly decrease ¥49 billion to ¥81 billion. Even accounting for the decrease in operating income in FY2020, we expect the difference between the total of operating cash flow and investing cash flow for the segment over the three fiscal years that began in April 2018. to be positive pursuant to export restrictions announced by the us government on august 17 2020 we terminated product shipments to a certain major chinese customer as of september 15th the forecast This clause today for the second half of this fiscal year does not include any shipments to that customer. In addition, the operating income for the quarter includes an approximately ¥70.5 billion write-down of finished goods and work-in-process inventory for that customer recorded at the end of September. Based on this situation, we are further revising the business strategy I explained at the previous earnings announcement from the perspective of capital expenditures, research and development, and customer base. We are further postponing the timing of capital expenditures, with cumulative capital expenditures for the three fiscal years that began April 2018 expected to be reduced 40 billion yen from approximately 650 billion yen I explained last time. We do not think it is prudent to prematurely reduce research and development spending because we want to meet the needs of a wide range of smartphone customers as well as maintain and increase our future technological competitive advantage. We have had some success expanding and diversifying our customer base for fiscal year 21. The financial impact on our business in fiscal year 2020 is limited, but we do think it is possible to recapture in fiscal year 2021 a large portion of the market share on a unit basis. We lost this fiscal year. However, we expect that it will take a long time for other customers to follow the trend to higher functionality and larger die-sized smartphone cameras that the Chinese customer was needing. Thus, we expect... the substantial recovery of profitability driven by those high value-added products to take place in the fiscal year ending March 31, 2023. By recapturing market share in fiscal year 2020 through an increase in sales of commodity sensors and by recouping business profitability in fiscal year 2022 through more high value-added products, we aim to return the mobile image sensor business to growth. In addition, there is no change to our mid- to long-term strategy of growing our business through expansion of applications that use edge AI and 3D sensing capabilities, as well as through starting up automotive sensors in earnest. Last is the financial services segment. Fiscal year 2020's second quarter of financial services revenue was essentially flat at 373.9 billion yen. Operating income increased 4.9 billion yen to 43.7 billion yen, primarily due to an improvement in valuation gains and losses on securities held at Sony Bank and a decline in the loss ratio for automobile insurance at Sony Assurance. We expect fiscal year 2020 financial services revenue to increase 60 billion yen compared to our previous forecast to 1 trillion 460 billion yen, primarily due to an increase in net gains on investment in the separate account related to variable insurance products at Sony Life. We expect operating income to increase 13 billion yen to 155 billion yen primarily due to the decline in the loss ratio for automotive insurance at Sony Assurance. Sony Financial Holdings became wholly-owned subsidiary of Sony Corporation on September 2, 2020. Going forward, we will disclose the information shown here pertaining to the financial services segment on a quarterly basis in a supplemental information. Lastly, I would like to discuss the outlook of our businesses into next fiscal year. The slide shows our current view as to the momentum for each business from today through the next fiscal year and beyond. As I have explained today, we are incorporating a negative impact on the financial results of the INSS segment relating to a certain major Chinese customer. But there is no change to the mid- to long-term growth momentum of our business overall. And we are gaining confidence that it is possible to strengthen and grow our business despite the COVID-19 pandemic. We aim to grow even more in the future by returning to the past profit growth from the next fiscal year, which is when we start the next medium range plan. Thank you very much.

That was CFO Hiroki Totoki. making the presentation. The question and answer session will be starting at 4.20, 20 minutes past four. In the first 20 minutes, we receive questions from the media. And in the next 20 minutes, we'll be receiving questions from the investors as well as analysts. So those members of the media, investors, or analysts who have previously signed up to send in questions, please call into the number that we have previously specified. And if you have not previously signed up or registered, you can continue to listen to the Q&A session over the Internet. So please wait for a while before we start our Q&A session. Ladies and gentlemen, we'll be starting the session with the members of the media. Please wait for a while. Ladies and gentlemen, thank you for waiting. We'd like to now open the questions from the media. The questions will be answered by Hiroki Totoki, the Executive Deputy President and CFO. Naomi Matsuoka, the Senior Vice President in charge of Corporate Planning and Control, Finance and IR. as well as Mami Imada, the VP and Senior General Manager in charge of Corporate Communications. So if you have any questions, please press asterisk followed by the number one. When it is your turn to ask your question, we will call your name. So please identify your name and affiliation before you pose your question. And please limit your questions to two per person. Thank you for your cooperation. And in order to prevent echoing, if you have any devices around you, please make sure that the audio for these devices are turned off. If for some reason the connections are disrupted due to time concerns, we will be moving on to the next person who will be asking the question. And if you'd like to withdraw your request for question, please press asterisk followed by number two. So I would like to now open the question and answer session. So if you have any questions, please press asterisk followed by number one. The first question. Takahashi-san from Mainichi Newspaper, please. Please wait for a while. From Financial Times, Inagaki-san, please. Financial Times, Inagaki-san, please. Please ask your question. Inagaki-san, can you hear us? Sorry for that. Due to the connections, I think we need to move on to the next person in line. From Bloomberg, Furukawa-san, please. Thank you. Furukawa from Bloomberg. I hope you can hear me. Yes, we can hear you. Regarding the semiconductor business, I have two questions. First of all, regarding the CapEx plan, the Nagasaki plan, to start operating April of 2021, is there any changes to the schedule of the operation? And also CMOS sensor production capacity by March 2021, I think 138K. I think that was the plan. So is there a modification to that? So that was on the first question. Should I ask one by one? Yes. No, please ask the second question as well. Okay. So second question. The same conductor. customer in China. Other than that, the customer for North America or other Chinese manufacturers, is there an increase in orders that you're receiving? Anything that you can share with us on that, please? Thank you for the question. I would like to respond to the first question, first of all. The Nagasaki plant has been expanded, and it's a question about the production resumption schedule. And we have always said that we will be starting our production in April 2021, and that schedule has not been changed as of now. However, after the production has been resumed, the pace at which the production increase will be taking place that may be revisited in the production plan in fiscal 2021. And as for at the end of this fiscal year, the capacity will be 138K, whether that the plan had been changed or not. On that question, yes, we will be introducing a production facility and no changes to that. But whether when or when it's going to start the production, it will depend on the demand in the fourth quarter from the customers and also the capacity factor of our production facility, and that will be used as a basis for making a decision on when the production facility will start. And also, regarding the customers other than that Chinese major customer, in general, in North America, over the previous year it has been increased year on year and also for other chinese customers there has been some additional orders and i think we are making efforts to increase orders and i think it's been effective this concludes my response

Going on to the second question. And we had heard from Mainichi Kato-san, please. Kato-san, do you hear? Yes. Kato Mainichi newspaper. Go ahead. About anime business is what I want to ask you about. In terms of segment, does it belong to music and the Demon Slayer? What is included in anime streaming or internet distribution? Is that the target? Or what about the pictures? Is it going to be included in the annual pictures sales? Thank you for the two questions. First question is about the segment. Is the anime included in the music segment? And the Demon Slayer is a big hit, and is it going to contribute to streaming of animation, or is it going to be included in the pictures side? And Matsuoka will give you the answer. Thank you for those questions. With regards to anime, the segment is music. Yes, music segment. And it is in the video image production. And as for the Demon Slayer... anime streaming revenue, as you know. There's Netflix and Amazon where they're streaming, and so there's such contributions. And as mentioned earlier, there is the contributions on the pictures side, too.

Let us take the next question. Nikkei, a newspaper, Shimizu-san will be the next. Shimizu from Nikon Keizai Shimbun. I also have two questions. The first question is about the game. Earlier, you said that PS5 in the initial year is expected to sell 7.6 million units. Given this, is it a possibility that it may exceed the 100 million yen unit that PS4 achieved? The second question is you want to diversify the customer base. You did talk about a specific major customer, but does it mean that you will place more emphasis on community products? Thank you. Let me address the two questions myself. First is about the game, PS5. Would it exceed in the long run the accumulated sales of PS4 of 100 million? Yes, it is a challenge, but we are very eager and committed to succeed. and surpass the aggregated unit cells of PS4. For a particular customer in China, we have provided the high-resolution, high-added technology. But today, we have to change that direction in the near term for 2021. we will try to capture more share using the commodity products. On the custom-made products, it enjoys high added value. Once it is on the right track, it has so much potential to grow as a big business, but since it's custom in parenthesis, you have to have a certain developmental lead time. Therefore, as I have mentioned earlier, We believe that earnings recovery in the full scale, we will have to wait until 2022. Thank you.

Next, from Nishi Nihon newspaper, Ishida-san, please. Please ask your question. Thank you. I hope you can hear me. Yes, we can hear you. I'd like to withdraw my question because somebody else has already asked the question that I wanted to ask. Okay, thank you. So I'd like to move on to the next question from Asahi newspaper. Suzuki-san, please. Suzuki from Asahi. I hope you can hear me. Yes. First question. Anime business. So the Demon Slayer, you were talking about the Demon Slayer. Specific numbers. What is the amount of contribution in the second quarter or so in the full year forecast? You know, what is the amount that you're expecting? And also second question. Specific Chinese customer. So you mentioned that customer. Once again, I would like to know more about the numbers, the write-down of the inventory and beyond the next fiscal year, you know, or the full year forecast for this fiscal year. You know, do you have any numbers as to how much the impact would be? Could you share that to the extent that you can, please? Thank you. The first question regarding the Demon Slayer and in terms of numbers, you know, quantitatively, what is the impact? Actually, as of now, it's been a very short time since the release. And so the full-fledged merchandising is only going to start from now. So I will refrain from talking about specific numbers as of now. And regarding the specific Chinese customer and its impact and how much impact there is. That was your second question. And once again. In the first half and the second half, there may be some reductions. And if you look at how much it has degraded, I think you can see that there has been an impact beyond the difference between the first half and the second half. And that gap, as I mentioned in my speech, have been offset by other customers' business. So we have been able to recover for that gap due to other customers' business. Thank you.

Going on to the next question. Sorry, we were disrupted earlier. Financial Times, Inagaki-san, are you with us? Sorry about the disruption earlier. Can you hear me? Yes. Yes, I am Inagaki from Financial Times, and there have been questions about the Chinese customer, and that's what I'd like to ask about. The other day, Samsung Electronics... OLED panel permission was given by the US government that is for supplying to the Chinese market. They made that clear. So the similar special transaction, maybe you will get that license. And do you expect to get the license? And in the second half, Well, you have an estimate for the second half. And for example, what about the possibility to resume the transaction? And another question, second question, that is about games in the financial statement. There is a third-party other company's software is delayed. It was mentioned. And what is the extent of the delay? And in your in-house studio, is there a similar delay that you see? And towards the launch of PS5, I think you are making preparation. And how much impact will the delay have? Thank you for those questions. About the export license, I would like to refrain from commenting. And with regards to whether the transactions can be resumed, what I can say at the present time is for this fiscal year estimate, after September 15th, the transactions have not been included. And about games, that is third-party software development is delayed somewhat, and in-house too. Is there a delay? Is there a question? And the delay in development is not just due to COVID, but, well, it happens even without COVID, and you have to recover. And in other development times, we see this happening. So our understanding is that there is no delay that will impact the PS5 launch in a big way.

Thank you. We would like to move on to the next question. Nikkei Asian Review, Nagao-san, it's your turn. Thank you. I hope I'm being heard. Yes, it's clear. For the four-year forecast, as of August, PS5 cost was... apparently going to be increased but overall the game business seems to be doing quite well with the contribution of PS5 vis-a-vis the overall performance of this category and I'm sure the increase of the business of PS4 is contributing compared to the first quarter the second quarter user approval has been declining so This is for the PS Plus. Thank you for PS5 contribution for the full year. Are you asking about the contribution of hardware sales of PS5? The President It's not the earnings contribution that we expect, but I think it will be a negative contribution for the time being. But having said that, I would like to state that penetration, the increase of PS5 in the market, would urge customers to buy the software. So overall, as a business, the PS5 ecosystem will be activated and in consequence would grow earnings. Now, MAU, how do we see the decline of MAU from the first quarter? The total number of hours being played by our customers I think it was in April when we recorded the peak. People stayed at home, but more recently compared to the previous year, I believe that it has come down to 30% increase versus the same period of last year. So that change trend has been reflected in what you have stated. But things have stabilized, so as far as the second quarter, or second half is concerned, we believe that the current level will be sustained.

Thank you. I think we are running out of time, so the next question shall be the last question. From Nikkan Kogyo Shimbun, Kunihiro-san, please. Can you hear from the newspaper? I hope you can hear me. Yes, we can hear you. Thank you. November 3rd in the U.S., there will be a presidential election in the U.S. The foreign exchange rate or an impact on your business, how do you view the impact from the presidential elections in the U.S.? Thank you. Yes, we are monitoring it very carefully, but for now, Depending on the results of the election, the full-year forecast is not to be impacted. That's our view right now. That's all. Thank you for the many questions. So it is time to close this session with the members of the media. So those analysts who will be participating In the next session, please wait until 4.46. We need to change the membership of the persons responding to questions. Starting at 4.46.

We will start the Q&A for investors and analysts soon, so kindly wait a little while longer. Thank you for your patience. We would now like to take the questions from our investors and analysts. I am acting as the MC, and I am Hayako in charge of finance and IR. To answer your questions, we have Hiroki Totoki, CFO, Executive Deputy President. We have Senior VP from Corporate Planning and Control, Finance and IR, Naomi Matsuoka. And Hirotoshi Korenaga, Senior General Manager, Global Accounting Division and Senior Vice President. If you have a question, please press asterisk the number one. We will call out your name, so when your name is called, please ask your question. Kindly limit your questions to two per person. And to prevent audio feedback, please turn the surrounding devices off or turn down the volume. If because of the transmission, there's a disruption in the sound, our time is limited, so we may have to go on to the next question. And if you wish to cancel your request to ask a question, please press the number two after asterisk. So let us now start. So if you have a question, please press asterisk one. JP Morgan, Ayada-san. Thank you. This is Ayada of JP Morgan. I and SS and games. Two questions, please. First question, the image sensors. Totoki-san gave an explanation earlier toward next year that you could recover shares on a volume basis. And can you give the reason? In other words, the market doesn't have supply capacity, so customers have to come to you, or maybe you will work hard to regain shares with pricing. So can you talk about this process? And after that, probably... It's going to link to the custom product market share increase. So compared to your competitors, the catalog specification, high resolution, higher definition, maybe it's a different customer and you seem to be a bit behind. So is it a level that can be adjusted? It's not a fundamental problem. I'd like to confirm that. And then the second question, if I may go on, is about games. The slide you showed at the end, next year, it seems that games is sunny, and so the background of this. Next year, stay-at-home demand will decelerate, and there will be the improvement of the cycle of the new PS5. Is that going to be the absorbing factor? And in connection with that, add-ons... and software sales, network. Next year, it will be maintained at a high level. It will not go down. Is that the right understanding? That's all. Thank you. Thank you for those questions. First of all, INSS question towards next year to regain share. And next year, as you say, probably 0.7 micron, this fine scale will be the main battlefield. fine pixel, and we have to catch up. And if it's a commodity, so for price, we will have to make efforts. And so more than high resolution, the margin will fall. However, To an extent, we will permit that to get share and we will expand our customer base. And having done that, higher quality, higher resolution will be pursued and There are customer needs in that direction, so it will be supported. And on both fronts, towards 2022, our business foundation will be upgraded. And the second question about games. So that there's no misunderstanding, I'd like to say up front, For the next year almost, in terms of business momentum, we showed the picture, and it's not the results forecast. So please look at this from that perspective. The reason why it's sunny, well, we have very strong PS5 customer demand and reputation, and the line-up, The software strength is there. So next year, the customer base, we believe, can be expanded even more. There is that expectation. So mid to long term, the service will be reinforced and recurring revenue will be increased. So it's not so much the single year. But rather, over the mid to long term, what kind of expansion can be realized? That's where we see the essence of competition.

We would like to move on to the next question. Izawa-san from Citigroup Securities. Mr. Izawa-san, can you hear us? Ezawa-sama. Apparently there is a telecommunication difficulty, so let us move on to the next person. From Mizuho Securities, Nakane-san. Good evening. My name is Nakane. I have two questions. The operating income for the full year, you made a revision. the second quarter it went up some had been realized already but in the second half you do expect some upward impact can you give the details by segment that's the first question the second question you always stated and the number of input the capacity at the end of the year and the capacity and the prospects for the operation the capacity utilization and the end of the year inventory 17.5 billion of write down is it for customer products but rather a commodity product Can you sell to alternative customers if it's a commodity that you have written down? Thank you. The first question This is on a consolidated basis. I think you're referring to the question of the balance between the first and second half. The numbers, I think, are self-explanatory. The first half was a good half a period, and it looks that it will deteriorate in the second half. But most of them are temporary. short-term impact. And let me explain by each segment. First, game and network service, second half, we would incur cost to launch PS5. And stay-at-home demand, Of course, that demand was stronger in the first half, so that trend is impacting. Music. One-time impact. There has been a transfer of certain business. One-time gain was recorded in the music. Pictures. Certificate release requires marketing cost, and we anticipate that there will be increased marketing cost. There were very few, if any, during the first half, the certificate release. Therefore, the second half, there will be no merchandising almost. Therefore, the second half numbers would look poorer than the first half. EPNS, the first half, structure reform cost had increased significantly. We anticipate the increase of structural reform cost. INSS, the second half, the shipment has been terminated to a certain Chinese customer, so we are not incorporating any business to that customer during the second half. So there is an inventory adjustment that would affect the capacity utilization of our facility. I shall revisit this later. Financial services, Sony Bank. There were variation gains for the securities at the Sony Bank. Others, elimination. First, there has been an increase of new business development. But if you look at the overall picture, the business momentum, the actual strengths, I think it is fair to say that to really understand our strengths, you should look at the entire year, the full year. Now, I and SS, the wafer input and the capacity. Third quarter. Master input, the average is 30K for three months. But right now we are doing about 85%, which is 110K. During the fourth quarter, the master input it will be at the bottom range of our forecast. So we would adjust production, and it will be less than 70% of the capacity. That is our assumption as of today, but this does not reflect any possible increase of orders in the future. Should there be an increased order from our customers, the numbers would improve or would be higher. About the inventory, the fourth quarter, How much we will be receiving in terms of order? Will there be incremental demand order? And also the strength of the demand in the first part of next fiscal year. We will have to observe those and also look at the inventory level at the end of the year to determine what we will do, what should be the right inventory level. So at this point of time, it is too premature to give you any indication. But our assumption for forecast is strategic inventory. The simulation doesn't assume the strategic inventory. But of course, we would like to be flexible because demand would be a determinant. I think there will be a reasonable amount of additional order. Now, write-downs. The majority is about the sales to this specific certain customer, customs, and commodity. But it's fair to say the customs would be greater than commodity in terms of volume.

Next question. From Morgan Stanley, MUFG, Securities. Ono-san, please. Thank you, Morgan Stanley. I'm Ono. Two questions. First question, a more general question, and the other one is related to gaming strategy. So in the second quarter, in the results, I think the overall results are very strong, and I think it's very favorable. But according to you, Mr. Totoki, in the major segments, the ability to generate profits under this COVID-19 situation, and you have converted it to opportunity. And for next fiscal year, are you going to continue to change anything that you think that you can continue to make things turn more favorable throughout the next year? Please hear with us. Secondly, regarding strategy for gaming, you have invested in Epic Games last year, so you're going to have business relationship with publishers. And I think you're going to have some stake with, you know, are you going to have some kind of action with these publishers? Is it something that you're going to make it a norm? And you've been talking about the contents, the gaming contents is what you're going to be aggressively acquiring. So that position has not changed. Or are you being a little bit more aggressive than before? Can you share with us the tone with which you are addressing these partners? Thank you. So regarding the major segments, the profit generating capacity and the feel that I have on the businesses. So as I mentioned in my speech, the biggest feel that I have is that under the COVID-19 situation, People could not report to work. People had to work remotely. Even without the restrictions, it was possible that the business can be executed with a lot of effort by the people. And there's creativity included in it. But I think that is the biggest finding that I had in this COVID-19 situation. And under these circumstances, people... still have this demand for entertainment. And actually, there's an increased appetite for entertainment. And that is something that I also felt strongly about during this COVID-19 period. So if I may, for each of the segments, I do feel that there is a good feel. And for financial services, Sony Life, the life planners have been working face to face. But with the remote consulting services, we are now back. in terms of acquiring new contracts compared to the previous year. So I think with remote activities, we can still capture opportunities and grow the business. Regarding your question about the games, the relationship with the publishers, and do we have to have a stake in the publisher? No, we don't think so. If you have a lot of items for engagement or alliance, or if you have an in-depth alliance, maybe this capital relationship is probably going to be favorable as a strategy, but in any case, we want to have access to high quality contents on our platform so that we can deliver these contents to our customers and that is the goal and that it remains unchanged so we would like to have access to good contents as much as we can thank you next question is our son from citigroup

Sorry, I had some problems. This is Ezawa from Citigroup. I would like to ask two questions. First question, pictures business. In the second half. You have the company plan in terms of results, and I think the view is quite severe. But subcategory, motion pictures, what is the profit level and theatrical and secondaries, along with time. I think that there will be some differences. So if you could talk about the digital aspects, I'd like to hear that. And I think you said it will take a few years for recovery. So for the next year, how are you going to recover the pictures business? I would like to hear some kind of breakdown. That's the first question. Second question, capital allocation. Now, this time, operating cash flow plan has been revised upward, I think. And so this is favorable. On the other hand, capital investment, I think that's been lowered or revised downward. So free cash flow, the way you use money, the money coming out, how is it going to be allocated? Some new additional cash flow, what are you going to do with it? I'd like to hear your present thoughts. Thank you for the questions. And the first question about pictures. That is the breakdown of the segments. What's the image of the breakdown is the question. And Matsuoka? Matsuoka-san, if you could answer. Matsuoka-san, please. Yes. Matsuoka speaking. So the image of profit contribution in the future, what will happen? I would have to speak in that way. I cannot really speak quantitatively. The production of pictures this fiscal year compared to the previous year, there's almost no releases. That being the situation, you have what came out last year, and those movies can be for home entertainment or for streaming, and there could be sales there or income derived from those routes, which it's not coming out this year. On the other hand, the first half, There was no big movies coming out. But in the second half, we expect there will be some resumption. And if that's the premise, then that means in advance of that, there will be marketing costs involved. But it will be marketing and release with a delay. And we will have to recoup. And so you usually have a theatrical release, and with that performance you have home entertainment profits. And so that will be seeing a delay. Therefore, naturally, after the release, Whether the movie will be a hit, well, that will be one factor. And with COVID, what will happen to the theatrical releases, that's an uncertain factor. But that is the structure, and other segments can make up for that. is my prediction, media networks and TV programming. Now about capital allocation, let me give you the answer. So first quarter results, that is a change. If I may explain that, this time, cash flow 80 billion upward revision is seen, and CapEx is... reduction from what we showed you last time. And strategic investment, there's no change in policy. And the previous announcement, as we said, SFH, other than it being a wholly-owned subsidiary, there's about 300 billion of strategic investment. And in this 300 billion, there's also already billy-billy and ethic investment, 70. And what We have 100 billion possibility of stock repurchase. So recently, there are increase in M&A opportunities. That's my feel. And so in that sense, in various segments, there are opportunities for strategic investment. Therefore, we have to have a good analysis and conduct these strategic investments in timely manner.

I'm afraid time is running short, so we will take the last question. Thank you. INSS and ENPS would be the theme of our question. INSS, you've given some numbers during the July-September period. The master input, can you give me the number for July-September period? The write-downs, $17.5 billion, and since 15th of September, the business is nil. But in the meantime, I believe that you have obtained a license to export. And if you are allowed to export, of course, in 2016-19 period, you have had the write-down, but you are able to resume the business and you are able to reverse. revised the forecast, but the same should happen this time, should you have the licence granted. Another is EPNS. On page 19 of the slide, even if you excluded the mobile, both the top and bottom lines are increasing. TV is doing well. The digital cameras, the unit numbers are declining. But the HNS and IPNS, if you could dig deep into those areas. And also in the last slide, you talk about the momentum. APNS, there are some sun rays coming out after the cloudy weather. Is this because the COVID-19 would go away or are there any other factors that would affect this sector favorably? Thank you. I and SS, the second quarter, the actuals, what was the number of waiver? As I have stated earlier, The capacity is 130K. Any average is 110K. That's the average. For mobile communication and digital cameras, there has been some production adjustment. And there were special factors during the second quarter. There was statutory inspection in some plants. So for a short period of time, the wafer number has declined because of the inspection. APNS, second quarter, even without the mobile, the numbers have gone up, earning some profitability. The contributor is TV. TV's contribution is the largest, followed by digital camera. That's by category. the weather marks. We are looking at the momentum as of today till next year or beyond. It does not represent our forecast or performance or projection performance. Please do not be misled. But why can we improve? That is the first quarter EP&ST negative impact from the corona, COVID-19 was quite significant in terms of revenue and earnings, but this will be alleviated. The adverse impact will be alleviated. Of course, there'll be regional differences. There could be the second and third wave in certain geographical areas, but I think we know better how to adapt to such environment, we believe that we can better accommodate the new environment. So overall, there will be an improvement. Thank you. Ladies and gentlemen, the time has come to close this earnings announcement by Sony Corporation. Thank you very much for your participation.