Sony Group Corp

Ladies and gentlemen, it's now time to start this Sony Group Corporation's financial results briefing for the fiscal year ended March 31st, 2021. I'm Ida as the emcee for this session. Thank you very much for coming. And today, as we have announced beforehand, we have invited media members and analysts and institutional investors. And This conference will be streamed through the Internet from our site. Executive Deputy President and CFO, Mr. Totoki, will present this financial result of the fiscal year ended March 31, 2021. And later we have a Q&A session. And the total program is about 70 minutes. Thank you very much. We now like to turn to Mr. Totoki. Thank you very much. So this is the topic that I would like to cover today. The consolidated results for the fiscal year ended March 31st, 2021 and so forth. And the consolidated sales increased 9% compared to the previous fiscal year. to 8,999.4 billion yen, and consolidated corporate income increased 126.4 billion yen to 971.9 billion yen, both record highs, primarily due to the improvement of valuation gains and losses on investment securities in other income and preferences. Income before income taxes increased 392.9 billion yen year-on-year to 1,192.4 billion yen, and net income attributed to Sony Corporation stockholders increased 589.6 billion yen year-on-year to 171.8 billion yen adjusted to operating income before income taxes and net income attributable to Sonya Group Corporation stockholders which includes extraordinary items can be found on page 4 through chain of the materials. FY20 concluded operating cash flow excluding the financial services segment was 1,122.2 billion yen, approximately 2.63 yen cumulative for the last three fiscal years, a level that significantly exceeds the target we established for the third mid-range plan. The cash flow of each of our business segments in FY20 is shown on this slide. This slide shows the results by segment. Next, I will show the consolidated results forecast for FY21. Sales are expected to be 9,700 billion yen, and operating income is expected to be 930 billion yen. We have changed our accounting standards to international financial reporting standards IFRS from FY21. Therefore, the FY20 results I will explain today are based on the U.S. gap, while our FY21 forecast is based on IFRS. As a result of the adoption of IFRS, the impact of the fluctuations in the market for financial instruments is expected to result in variances with the U.S. GAP in the results of our financial services segment and in consolidated other income and expenses. However, since we do not incorporate into our forecast any impact from the fluctuations in the market conditions, we believe that the variance in our forecast resulting from the difference in accounting standards are limited. This slide shows our forecast by segment for FY21. I will now explain the situation in each of our business segments. First is the game and network services segment. Sales in FY20 increased a significant 34% year-on-year to 2,656.3 billion yen. Operating income increased a significant 103.8 billion yen year-on-year to 342.2 billion yen, a record high for the segment. The increase in operating income was primarily due to the increase in sales of same-game software network services partially offset by an increase in selling general and administrative expenses associated with the launch of the PlayStation 5. FY21 sales are expected to increase 9% year-on-year to 2,900,000,000,000 yen, and operating income is expected to decrease 17.2 billion yen to 325 billion yen. Now, I will explain in a little more detail the assumptions we made in the fiscal year forecast. As for hardware, supply has not been able to keep up with the extremely strong demand for PS5, although constraints on the supply of components Especially semiconductors are expected to continue this fiscal year. Our current target is to exceed the 14.8 million units we sold in the second year after the launch of the PlayStation 4. In order to meet a strong demand from our customers, we will continue to work to secure components and strive to do our utmost. to produce and sell more units than target. Primarily, due to improvements in the profitability of the PS5, we expect hardware and peripherals together to contribute to the same level of profit for the full year as they did in the previous fiscal year. Next, I will talk about software. Total gameplay time of PlayStation users in March 2021 continued to be quite high. at approximately 20% above March 2019, which had no impact on COVID-19. We believe that this level of strong user engagement will continue in FY21. Software sales in the first quarter ending June 30, 2021, are expected to be below the same period of the previous fiscal year when lockdowns were widespread worldwide. But we expect the same or greater revenue year-on-year from the second quarter ending September 30, 2021 onwards. Regarding network services, we do not anticipate a significant increase in subscribers, as was the case in the previous fiscal year, resulting from stay-at-home demand, but we do aim to maintain and expand the number of subscribers to PlayStation Plus. which increased throughout the previous fiscal year. In terms of cost, we plan to increase development personnel and other costs in our in-house studios by approximately 20 billion yen year-on-year as we further strengthen our in-house product-produced software. On the other hand, we plan to keep costs in all other areas at a level similar to the previous fiscal year despite the increase in sales. To enhance our software offering, we intend to continue investing in our partnering with external studios in addition to aggressively investing in our in-house studios. As I just mentioned, we aim to strengthen the PlayStation platform through actions such as the recently announced partnership with the Heaven Entertainment Studios, which was established by Jade Raymond, the creator of the famous game Assassin's Creed, and our additional investment in Epic Games. Along with the rest of the Sony group, we will also work to enhance the social and platform capabilities of games.

Next is the music segment. FY20 sales increased 11% year-on-year to 939.9 billion yen, mainly due to the growth of streaming revenue and Demon Slayer Kimetsu no Yaiba, the movie The Mugen Train, which was a blockbuster hit. Operating income increased a significant 45.7 billion yen year-on-year to 188.1 billion yen, chiefly due to the impact of the increased sales and recording of one-time gains of 11.9 billion yen from the transfer of businesses. In recorded music, streaming revenue for the fiscal year continued to grow at the high rate of approximately 22% year-on-year. The profit contribution from visual media and platform, which includes mobile game applications and anime, mainly in Japan, accounted for a little less than 30% of the operating income of the entire segment. FY21 sales are expected to increase 5% year-on-year to 990 billion yen. and operating income is expected to decrease 26.1 billion yen to 162 billion yen. The decrease in operating income is mainly due to a conservative view as to the profit contribution of mobile game applications this fiscal year, while the previous fiscal year had one-time gains and historic blockbuster hit Demon Slayer that I mentioned earlier. On the other hand, in the recorded music and music publishing businesses, We expect continued profit growth as we capitalize on the growth of streaming revenue. We are steadily improving our ability to discover and nurture artists and continuously create hits, and we aim to continue to increase our profitability going forward. Opportunities for investment in the music segment are steadily increasing, and we are aggressively pursuing them. To capture more of the growth in emerging markets, we recently announced the acquisition of Som Libre, an independent music label in Brazil. Like the acquisition of AWOL, an artist services business in the independent space that we announced in February, regular free approval is necessary, but we believe both these transactions will contribute to the further growth of the music segment. Next is the picture segment. FY20 sales decreased a significant 25% year-on-year to 758.8 billion yen, chiefly due to a significant decrease in theatrical releases and delays in TV show productions and deliveries resulting from the impact of COVID-19. Despite the impact of the lower sales, Operating income increased 12.3 billion yen year-on-year to 80.5 billion yen, mainly due to a significant decrease in marketing costs and strong home entertainment and television licensing revenues in motion pictures, as well as a decrease in portfolio review costs in media networks. FY21 sales are expected to increase a significant 50% year-on-year to 1,140,000,000 yen. This increase is mainly due to a resumption of theatrical releases in motion pictures and a recovery in TV productions and media networks. Operating income is expected to increase 2.5 billion yen year-on-year to 83 billion yen, chiefly due to the impact of the increase in sales for the entire segment, including licensed revenue for the popular U.S. TV series Seinfeld, partially offset by an increase in marketing costs associated with the reopening of theaters. In motion pictures, theaters in major U.S. cities are reopening, and from June, we plan to release into U.S. theaters sequels for hit films like Peter Rabbit and Hotel Transylvania. Theater releases remain important to Sony, but taking into account the crowded schedule of release post-theater reopening, We will be flexible when selecting the channel through which we will sell our product, depending on the content, scale, and timing of the works so as to maximize the long-term value of each work. In addition, license agreement negotiations for films and TV shows are proceeding smoothly against the backdrop of increasing demand for content. As we announced the other day, we have signed long-term license agreements on good terms with Netflix and Disney for US distribution of theatrical releases from 2022. Next is the electronics products and solutions segment. FY20 sales decreased 4% year-on-year to $1 trillion. 920.7 billion yen mainly due to a decrease in unit sales, especially of digital cameras, and the impact of foreign exchange rates. Operating income increased a significant 51.9 billion yen year-in-year to 139.2 billion yen mainly due to a reduction of operating costs, mainly in mobile communications. and an improvement in the product mix for TVs and other products, partially offset by the impact of the decrease in sales. FY21 sales are expected to be 2,260,000,000 yen, and operating income is expected to be 148,000,000,000 yen. Excluding the impact of the change in segmentation resulting from the recent organizational change, we expect that sales will increase 9% year-on-year, and operating income will increase 13.9 billion yen year-on-year. Throughout FY20, this segment was significantly impacted by intermittent disruptions in the supply chain of components caused by the various factors such as COVID-19. However, we were able to respond swiftly to these changes and secure a high level of profit. Moreover, the mobile communications industry Business, which had been an issue for us, was able to record a large profit which exceeded our initial expectations. From this April, the businesses within EPNS have been combined into the new Sony Corporation. The operating environment remains unpredictable, but the new management team, which is comprised of people who helped manage through the difficult operating environment of the previous fiscal year, are expected to continue to manage this business with a high degree of resiliency to change.

Next is the imaging and sensing solution segment. Fiscal year 20 sales decreased 5% year-on-year to 1 trillion, 12.5 billion yen, primarily due to lower sales of image sensors for mobile. Operating income decreased a significant 89.7 billion yen year-on-year to 145.9 billion yen, primarily due to an increase in research and development expenses and depreciation as well as the impact of the decrease in sales. Fiscal year 21 sales are expected to increase 12% year-on-year to 1 trillion 133 billion yen and operating income is expected to decrease 5.9 billion yen to 140 billion yen. In fiscal year 21, we expect that our market share on a volume basis will return to a similar level as it was in the fiscal year ended March 31, 2020 Thanks to our efforts to expand our customer base in the mobile sensor business, we will manage the business in a more proactive manner while keeping an eye on risk. We plan to increase research expenses in fiscal year 2021 by approximately 15% or 25 billion yen year-on-year to expand the type of products we sell and to shift to higher value-added models from the fiscal year ending March 31, 2023. We expect image sensor capture expenditures to be 285 billion yen, part of which was postponed from the previous fiscal year. We plan to shift to higher value-added products that leverage Sony's stack technology in preparation for an improvement in the product mix from fiscal year 2022 and will concentrate our investment on production capacity necessary to produce them. The other day, we held a completion ceremony for our new Fab 5 building at our Nagasaki factory. Expansion of production capacity is progressing according to plan, and we'll build, expand, and equip facilities in line with the pace of expansion of our business going forward. Shortages of semiconductors have become an issue recently, but with the cooperation of our partners, we have already secured enough supply of logic semiconductors used in our image sensors to cover our production plan for this fiscal year. However, there is a possibility that the semiconductor shortage will be prolonged, so we are accelerating the shift to higher value-added products that we have been advancing here before. We are also continuing to proactively pursue mid- to long-term initiatives in the automotive and 3D sensing areas, and will explain more details at the IR day scheduled for next month. Last is the financial services segment. This year, 20 financial services revenue increased a significant 28% year-on-year to 1,668.9 billion yen, primarily due to an increase in net gains on investments, in the separate accounts at Sony Life Insurance, partially offset by a decrease in single premium insurance. Operating income increased significant 35 billion yen year-on-year to 164.6 billion yen primarily due to an improvement in valuation gains and losses on securities at Sony Bank and a decline in the loss ratio for automobile insurance at Sony Assurance, partially offset by an impairment charged against long-lived assets in the nursing care business. New policy amount in force at Sony Life in fiscal 2020 was below that of the previous fiscal year due to the impact of COVID-19, but it has trended higher year-on-year from the second quarter ended March to September 30, 2020. Fiscal 2021 financial services revenue is expected to decrease 16% to 1 trillion 400 billion yen primarily because we do not incorporate into our forecast an increase in net gains and investments in the separate accounts at Sony Life resulting from strong market conditions as was the case in the previous fiscal year. Over-earning income is expected to increase 5.4 billion yen to 170 billion yen primarily due to an increase in policy amounting force at Sony Life. Now I would like to discuss the financial directions of fourth mid-range plan which starts this fiscal year. In previous mid-range plans, we have prioritized improvement and enhancement of the profitability of each business But in the fourth mid-range plan, we aim to grow both sales and profit. We will adopt adjusted EBITDA as the group key performance indicator for the fourth mid-range plan. EBITDA is a metric that enables us to confirm that all of the businesses in the Sony group including financial services, which is now a wholly-owned subsidiary, are expanding over the mid- to long-term through cycles of investment and return, and it is often used to calculate corporate value. Our target for the cumulative total of the next three fiscal years is 4.3 trillion yen. For more details, including the definition of the adjusted EBITDA, please refer to page 23 of the presentation materials. Now I will update you on our capital allocation plan. During the third mid-range plan, we used the consolidated operating cash flow excluding the financial services segment and the cash we generated from asset sales to invest 1.2 trillion yen in capital expenditures, to invest 1.4 trillion yen in strategic investments including share repurchases, and issue 170 billion yen in dividends. In the new mid-range plan, we have established a capital expenditure target of 1.5 trillion yen and a strategic investment target of 2 trillion yen or more, as we aim to grow our business over the long term beyond the duration of the plan. Regarding dividends, our policy is to increase dividends in a stable manner over the long term. We expect to fund our allocation of capital through consolidated operating cash flow excluding the financial services segment, including cash left over from before. If additional funds become necessary, we might also sell assets and borrow with a strict eye on financial discipline. Operating cash flow includes dividends from the financial services business, and we expect that the financial services business will contribute to the growth investment capability of the Sony Group through a stable increase in its dividends as its own profit grows over the mid to long term. Lastly, I would like to touch upon share repurchases. Today, we announced the establishment of a facility to repurchase up to 200 billion yen of the shares of Sony Group Corporation over the period of one year. In the previous fiscal year, we did not avail ourselves of the share repurchase facility we had in place because of a steady increase in growth investment opportunities and the price of our shares. But we continue to view share repurchases as a part of the strategic investment and will implement them in an opportune manner. This concludes my remarks.