Earnings Call
Sony Group Corp (SONY)
Earnings Call Transcript - SONY Q1 2020
Kato, Emcee
It is now time for us to start Sony Corporation's Fiscal Year 2020 First Quarter Earnings Briefing Session. I will be acting as the emcee. My name is Kato from the Corporate Communications department. This briefing is held for the media, analysts, and institutional investors who we have notified in advance. The audio and presentation materials can be viewed on our website. Today, first of all, from the Executive Deputy President and CFO, Hiroki Totoki, we will give an explanation on consolidated financial results for FY 2020 Q1 and the forecast for FY 2020 and then have a question-and-answer session. It should last approximately 70 minutes. Totoki-san, please.
Hiroki Totoki, Executive Deputy President and CFO
Today, I would like to begin by addressing the operating environment surrounding Sony. The spread of the new coronavirus disease, an increase in geopolitical risks such as the tension between the United States and China, and the frequent occurrence of natural disasters in recent years are just a few of the things that are fundamentally changing society and the economy as well as people's values and lifestyles in a variety of ways, and these changes will not be limited to the short term and they are difficult to predict. And there's a saying that it's not the strongest of the species that survives nor the most intelligent, but rather the one most adaptable to change. Sony intends to adapt flexibly to the changes in the environment and increase the focus with which we manage each of our businesses. The fiscal year ending March 31, 2021, or fiscal year '20, is an important year in which we expect to both recover from the impact of the spread of COVID-19 and formulate a strategy to address the business environment in the aftermath of the spread of the virus. We tend to improve the resilience of the Sony Group by leveraging our advantage, which is the diversity of our personnel and businesses to adapt to changes and convert the crisis into an opportunity. Now I will explain the following. Fiscal '20 first quarter consolidated sales increased 2% compared to the same quarter of the previous fiscal year to JPY 1.9689 trillion, and consolidated operating income slightly decreased to JPY 228.4 billion from the same quarter of the previous year, which is a record high. Income before income taxes increased JPY 88.9 billion to JPY 319.9 billion, partially due to an improvement in unrealized gains on securities investments in other income and expenses. Net income attributable to Sony Corporation stockholders for the first quarter increased JPY 81.1 billion to JPY 233.3 billion. Excluding extraordinary items, operating income would have increased JPY 2.2 billion from last year to JPY 225.2 billion. Now this slide shows the results by segment for the fiscal '20 for the first quarter. At the previous earnings announcement we held in May, we were unable to reasonably predict the impact of the spread of COVID-19, so our consolidated results forecast for fiscal '20 was undetermined. Today, we are disclosing the consolidated results forecast for fiscal '20. Consolidated sales are expected to be flat year-on-year at JPY 8.3 trillion, and operating income is expected to decrease JPY 225.5 billion to JPY 620 billion. Income before income taxes is expected to be JPY 685 billion, and net income attributable to Sony's stockholders is expected to be JPY 510 billion. Our forecast for operating cash flow, excluding the Financial Services segment, is JPY 550 billion. Our current forecast for 3-year cumulative operating cash flow, excluding the Financial Services, is approximately JPY 2.1 trillion. We plan to issue JPY 25 per share as an interim dividend this fiscal year compared to JPY 20 per share in the previous fiscal year. We have yet to determine how much the annual dividend amount will be this year, but our policy is to increase dividends in a steady manner over the long term. The fiscal '20 forecast for each of our segments is shown on this slide. I will explain the details when I talk about each segment after this, but I'd first like to explain the operating loss in Corporate and elimination. In the previous fiscal year, we recorded JPY 31.5 billion in extraordinary gains. Well, this year, this fiscal year, we expect to increase expenses for mid- to long-term growth initiatives and societal contributions, such as investment across the Sony Group to explore and develop new businesses, including artificial intelligence and robotics, as well as contribution to the Global Relief Fund for COVID-19. The fiscal '20 forecast includes an expectation that we will incur JPY 25 billion in restructuring costs across the Sony Group. In addition to continuing our efforts to reduce costs, we are taking action to adapt quickly to changes in the operating environment brought on by the spread of COVID-19. I will now explain the situation in each of our business segments. First is the G&NS segment. The first quarter fiscal '20 sales increased 32% year-on-year to JPY 606.1 billion, and operating income increased JPY 15.2 billion to JPY 124 billion. Sales for the fiscal year are expected to increase 26% compared to fiscal '19 to JPY 2.5 trillion, mainly due to a significant increase in game software and hardware sales. Operating income is expected to be JPY 240 billion, flat compared with fiscal '19 because the benefit of the increase in sales and an increase in profit from PlayStation Plus are expected to be offset primarily by increasing costs related to the introduction of PlayStation 5. Hardware, software, and network services all benefited in the current quarter from the positive impact of stay-at-home demand resulting from the spread of the virus. In the software space, the first-party title, The Last of Us Part II was a huge hit and non-first-party titles, including free-to-play titles, contributed significantly. Ghost of Tsushima, which we released on July 17, sold through 2.4 million units in the first 3 days since launch, making it the fastest selling in-house first-party new game software IP for the PlayStation 4. In the Network Services area, PS Plus subscribers have reached about 45 million as of the end of June. And at a time when the communication network environment was under pressure, the PlayStation Network did not falter or experience any other issues and is continuing to deliver high-quality entertainment experiences. We aim to continue to enhance and expand user engagement as we approach the launch of PS5 in the 2020 holiday season. Next is the Music segment. Fiscal '20 quarter 1 sales decreased 12% year-on-year to JPY 177.1 billion, and operating income decreased JPY 3.4 billion to JPY 34.9 billion. For the full year, sales are expected to decrease 7% compared to fiscal '19 to JPY 790 billion, and operating income is expected to decrease JPY 12.3 billion to JPY 130 billion. In the Recorded Music space, revenue in most categories, including from packaged media and advertising-supported streaming services, is being negatively impacted by the spread of COVID-19. Overall, streaming revenue only grew 6% year-on-year on a U.S. dollar basis during the quarter. But audio streaming revenue, of which paid streaming accounts for a large portion, grew 17%. In the Music Publishing space, revenue from all areas, except for streaming such as music licensing from movies and television, is being significantly negatively impacted by the spread of COVID-19. And in the Visual Media platform space, revenue is being significantly impacted due to a variety of factors such as a decrease in physical media production and the postponement and cancellation of live events, primarily in Japan. On the other hand, we're beginning to have success in initiatives expected to contribute to financial performance going forward, such as the launch of Stagecrowd, a paid live video distribution service that serves as a one-stop shop for ticket sales, merchandise sales, and stage construction; and strong sales of the mobile game app, Disney Twisted-Wonderland. Next is Pictures. Fiscal '20 quarter 1 sales decreased 6% year-on-year to JPY 175.1 billion, primarily due to a decrease in box office revenue in Motion Pictures and a decrease in advertising revenue in Media Networks, but partially offset by an increase in license revenue in Television Productions. Operating income increased JPY 24.4 billion year-on-year to JPY 24.7 billion due to a significant decrease in marketing expenses in Motion Pictures. Primarily due to a decrease in theatrical releases resulting from the spread of COVID-19, we expect fiscal '20 sales to decrease 25% compared to fiscal '19 to JPY 760 billion. We expect operating income to be JPY 41 billion, a decrease of JPY 27.2 billion compared to last year, which benefited from the contribution of hit titles. Although we have resumed filming in some countries, the severe environment in Motion Pictures and Television Productions is continuing. If we can restart production, we think we can recover our position in the television production area relatively quickly because demand for content from digital distribution services is extremely high, and we think we can leverage our advantage as a major independent studio. As for theatrical, theaters are either closed or admittance is limited, and we expect the release calendar to be very crowded when they do reopen. Since Motion Pictures generate profit over multiple years, starting with theatrical releases, the impact on our financial results of not being able to release them is expected to last 2 to 3 years. On the other hand, digital sales of products we have released theatrically in the past are strong. For Sony, the importance of theatrical releases is not expected to change going forward. But in order to maximize the long-term value of our product, we will select the optimal distribution channel for our product based on the nature, scale, and timing of the product. Next is the EP&S segment. For this quarter, sales decreased 31% year-on-year to JPY 331.8 billion, primarily due to a decrease in unit sales of digital cameras and TVs. Operating income decreased a significant JPY 34.2 billion year-on-year, and a JPY 9.1 billion operating loss was recorded due to the impact of the decrease in sales, despite a reduction in operating costs across the entire segment. For the full year, sales are expected to decrease 6% to JPY 1.870 trillion, and operating income is expected to decrease JPY 27.3 billion compared to fiscal '19 to JPY 60 billion. Mobile Communications recorded JPY 11 billion in operating income during the quarter, and we expect it to generate a profit in the full fiscal year. The EP&S segment was the segment that was impacted by the spread of COVID-19 earlier and more significantly than any other segment, but the supply chain has almost fully recovered. And although progress varies depending on the product category and region, customer demand is beginning to recover as well. We are preparing for potential second and third waves of COVID-19 by transforming the structure of our business into a more resilient one through an overhaul of our operations and further streamlining as well as enhancement of our e-commerce distribution channels. This segment, which will inherit the Sony Corporation trade name on April 1, 2021, is further accelerating its efforts to unify the management of the business under its umbrella and is promoting the evolution of the business by deploying products and services that enable reality, real-time, and remote activity through our audio, video, and communications technologies. Next is in IS&S, Image Sensing & Solutions. Fiscal '20 quarter 1 sales decreased 11% year-on-year to JPY 206.2 billion, and operating income decreased JPY 24.1 billion to JPY 25.4 billion. Fiscal '20 sales are expected to decrease 7% to JPY 1 trillion, and operating income is expected to decrease JPY 105.6 billion to JPY 130 billion. Now I will explain the state of our sensor business. Fiscal '20 sales of image sensors for mobile products are expected to decrease compared to fiscal '19, primarily due to a decrease in end-user product sales by one of our major customers, the deceleration of the smartphone market, and a shift to mid-range and moderately priced models in that market resulting from the impact of the spread of COVID-19 and significant reduction in component and finished goods inventory by Chinese customers. Profitability is expected to be impacted by a decrease in gross margins and an increase in depreciation and manufacturing-related costs associated with production equipment we purchased in the previous fiscal year when we expected growth as well as higher research and development costs. We do not expect to grow sales of mobile sensing products compared to fiscal '19 because adoption by smartphone makers has been slow and sales of flagship models, which already use our products, have decreased due to the shift in market conditions. Sales of image sensors to AV have also decreased due to the contraction of the sensor market for digital cameras resulting from the impact of the spread of COVID-19. We expect the market to contract in one year as much as we had previously expected it would contract over the next approximately three years. In order to respond quickly to the changes in the environment, especially for image sensors for mobile products, we will modify our strategy, mainly in the areas of investment, research and development, and customer base. We have already significantly reduced investment in capacity to supply the demand in the fiscal year ending March 31, 2022, because we can supply that demand by stockpiling strategic inventory through utilization of our excess production capacity this fiscal year. The forecast for cumulative capital expenditures for the three fiscal years that began April 1, 2018, which we explained in the past, has been reduced JPY 50 billion from approximately JPY 700 billion to approximately JPY 650 billion. And we are carefully reviewing the timing of planned capital expenditures in fiscal '21 and beyond. We will review the projects and priorities for research and development spending as well to ensure that they fit with the recent trends in the smartphone market and changes in our major customers' needs. However, in order to maintain and increase our future technological competitive advantage, we will not drastically reduce the number of projects or the budget. We intend to more proactively expand and diversify our customer base, which we're cautious to do previously due to production capacity constraints. Over the mid- to long term, we will work to expand the applications for image sensors and the market overall by introducing edge-sensing products that use senses equipped with AI processing functionality, and we will steadfastly work to grow this business. We plan to complete within approximately one year an enhancement of our business model to adapt to the recent changes in the environment, and we expect to return the business to the path of profit growth from the second half of fiscal '21. Last is the Financial Services segment. Fiscal '20 quarter 1 Financial Services revenue increased 33% year-on-year to JPY 446.8 billion, primarily due to a significant increase in net gains on variable insurance investment in the separate account at Sony Life. Operating income increased JPY 1.1 billion year-on-year to JPY 47.2 billion. Financial Services revenue in fiscal '20 is expected to increase 7% compared to fiscal '19 to JPY 1.4 trillion, and operating income is expected to increase JPY 12.4 billion to JPY 142 billion. On July 13, we completed our public tender offer for the shares of Sony Financial Holdings, SFH, not held by Sony. The shares of SFH will be delisted on August 31 and SFH will become a wholly-owned subsidiary of Sony on September 2. The Financial Services business managed by SFH has a stable high level of profit and is a core business of Sony that plays a role in our long-term growth strategy. By eliminating the listed subsidiary relationship between SFH and Sony, we intend to increase the speed of decision-making, enhance management optionality, and further improve the value of the business. In addition, by capturing the minority interest and realizing tax benefits, we expect to increase Sony's consolidated net income by approximately JPY 40 billion to JPY 50 billion per year going forward. And that is expected to contribute to increasing earnings per share, EPS, and return on equity, ROE. In order to deepen understanding of our Financial Services business, we are considering what key performance metrics to disclose. Now I will briefly discuss the minority investments we made in Bilibili and Epic Games this fiscal year. At a time when digitization of the entertainment industry is accelerating, we plan to leverage these investments to expand the customer touch points for our diverse array of content as well as create new digital content and ways of enjoying that content that go beyond our business segments in partnership with these companies. Going forward, we intend to proactively pursue strategic investment opportunities to explore future growth. Next, I will explain our enhanced segment disclosure. Historically, Sony has proactively enhanced disclosure of information about our businesses. And from this fiscal year, we have decided to disclose on a quarterly basis the information shown here in the G&NS and Music segments, which are of particular interest to the capital markets. At the same time, we have terminated disclosure of certain items in the EP&S segment. For more details, please see our supplemental information. Today, we announced the establishment of a facility to repurchase up to JPY 100 billion in shares of Sony during this fiscal year. Like in the past, we view share repurchases as a strategic investment, and we'll decide to execute them based on a comprehensive assessment of various factors, including the availability of other investment opportunities, our financial condition, and the price at which our shares are trading. We aim to maintain strict financial discipline and a healthy balance sheet going forward as we optimize our capital efficiency with a focus on EPS and ROE. We also plan to maintain sufficient liquidity at a time when the recent operating environment is uncertain, and we think it is important not to miss any growth opportunities. In conclusion, I will show our capital allocation. This concludes my remarks.
Unknown Executive, Emcee
That was Totoki, Executive Deputy President and CFO. We will now begin the Q&A session, starting with questions from the media for the first 20 minutes, followed by questions from sell-side analysts for the next 20 minutes. Those who haven't registered in advance can listen to the Q&A via webcast. Please bear with us for a moment before we continue. Thank you for your patience. We will now start the Q&A session with the media. The respondents are Executive Deputy President and CFO, Hiroki Totoki; Senior Vice President in charge of Corporate Planning and Control, Finance and IR, Naomi Matsuoka; and VP, Senior General Manager, Corporate Communications Department, Mami Imada.
Unknown Attendee, Media Attendee
My name is Inomata. Can you hear me?
Unknown Executive, Emcee
Yes, we can hear you.
Unknown Attendee, Media Attendee
Two questions. Firstly, the full year forecast that you're announcing this time, the slow recovery will start from the coronavirus situation in the second half, is that your assumption? Can you tell us more about this? And also, the second question is you're preparing for the launch of PlayStation 5, but will we be in time for a launch if you've been affected by the situation?
Unknown Executive, Emcee
Thank you for the question. Firstly, concerning the full year forecast, the impact of the coronavirus assumptions, what are they, was the question. The earnings announcement we made in May, we used a general assumption for the whole company and did some simulation exercises. At this time, all the business segments have come up with their own figures and assumptions. And because businesses are all different and geographic areas are different, the nature of business is different this time, so we do not have a unified assumption for the group. And they are probably the most likely scenario that can be contemplated at this time. And your second question about PS5 preparations, is there any impact on the production. As things stand now, toward the holiday season, production is proceeding smoothly. And with regard to the development of the game software, the first-party studio as well as third-parties through their business, as again, as things stand now, there are no major issues or problems that are planned at this point in time. Thank you. I'd like to move on to the next question. From Nikkei, Shimizu-san, please?
Kosuke Shimizu, Nikkei Analyst
Yes, I am Shimizu from Nikkei newspaper. I have two questions regarding image sensors. There is trade friction between the U.S. and China, resulting in restrictions on Huawei. You mentioned that the sales forecast for the sensors is expected to decline. What is the impact of this bilateral relationship? Additionally, concerning your future policy for Huawei, I believe the risk will persist. Will you be altering your partnerships, and are there any policies regarding your supply chain partnerships?
Unknown Executive, Emcee
Thank you for your question. Regarding image sensors, there has been a decrease in sales for the full year, and the second question pertains to the supply chain. I cannot comment on specific companies, so I appreciate your understanding. The current business environment is worsening due to COVID-19, particularly in the high-end smartphone market, which is shifting toward mid- and low-end segments where volume is now concentrated. This is a significant change occurring at the moment. Additionally, the tensions between the U.S. and China are also having an impact. To mitigate risks, we need to expand and diversify our customer base, and we will continue to focus on that aspect. Now going on to the next question, please. From Toyo Keizai, Takahashi-san.
Unknown Attendee, Media Attendee
I am Takahashi from Toyo Keizai. My first question is about Game & Network Services. The profit for one quarter is JPY 124 billion, which seems quite high. What factors contributed to this? Sales were JPY 600 billion in the third quarter of 2019, and I believe some of these factors relate to the holiday season. However, compared to the third quarter, profit is significantly higher. Could this be due to advertising? I'm trying to understand what changes have occurred. That's my first question. My second question is about sensors. You mentioned that there's been a shift from high-end smartphones to low- and mid-range smartphones, which has affected profit. Given that 5G smartphones are expected to increase this year, do you think the high-end segment will weaken? Could you provide a bit more detail on what's happening? Those are my two questions.
Hiroki Totoki, Executive Deputy President and CFO
Thank you for your questions. Regarding Games in the first quarter, the high profits and the underlying factors are what you're referring to. Comparing this to the third quarter is challenging. However, when looking year-on-year, it's evident that the stay-at-home demand due to COVID played a role. In the fourth quarter, the release of new titles also had an effect. Sales from add-ons and other software contributed positively, and both first-party and third-party titles performed well. Notably, The Last of Us Part II has been a significant success. Now, concerning sensors, the market has changed considerably. Globally, there's a decline in the market, which is affecting sensor sales. Additionally, there is a shift towards more moderately priced models, leading to a decrease in sales of our high-end image sensors, which is impacting our business. That covers everything.
Unknown Executive, Emcee
Thank you. The next question. Nagumo-san from Nikkei Asian Review. Nagumo-san, please?
Jada Nagumo, Nikkei Asian Review Analyst
About image sensors. The first question is, you talked about sales decline with high-end models in the industry, image sensing industry. What do you say are the long-term changes? What are the short-term changes? Can you talk to us about the difference? And the second question also about I&SS. You'll be selective of R&D topics. Can you be more concrete and specific about that?
Unknown Executive, Emcee
Thank you for the questions regarding long-term and short-term changes. At this time, we don’t view current trends as indicative of a long-term decline, as we believe the effects of the coronavirus will eventually be mitigated and that the smartphone market as a whole is not experiencing a significant downturn. We think the changes we are observing are temporary. However, it is certain that this year and next year, there will be an increased demand for mid- to low-end products. Consequently, we need to focus our production on image sensors that are best suited for that market segment. This will necessitate a shift in our product mix and adjustments to our strategy and production methods. Nonetheless, we anticipate that the trend towards larger smartphones with multiple lenses will persist, and the demand for high-quality cameras in smartphones for both photo and video will continue to grow. Therefore, we are confident that demand will rebound in the future. Next question will be the last because we are running out of time. Nishida-san, a freelance journalist, please.
Nishida Munechika, Freelance Journalist
I am Nishida. I can hear you. Two questions. Regarding image sensors once again. This year or since last year, there are increasing number of lenses and that is favorable for Sony, as you have been stating. But you said that high-end models are coming down. So the trend for multiple lenses, is it slowing down temporarily? Or when you're moving towards the mid- and low-end, it's still multiple lenses? Could you talk about that? Second question, regarding EP&S business or segment. You are in the recovery phase already, as you said. But especially, which is the genre in the market and geographical area that is having difficulties? And also, which are the product areas and the geographical areas that are doing favorably?
Unknown Executive, Emcee
Thank you. In response to your first question, the trend of multiple lenses is favorable for us. In the mid- and low-end markets, there hasn't been a change in the trend towards an increased number of lenses. Additionally, multiple image sensors are still being used in mid- and low-end models, and that situation remains consistent. For the EP&S segment, there are some challenges, but I want to highlight areas where recovery is already noticeable. The U.S., Europe, and Japan are seeing positive recovery, particularly Japan, which is performing very well. In Asia and Latin America, there’s a gradual recovery occurring, although emerging markets are still facing some struggles. As for products, the demand for TVs remains strong due to the stay-at-home trend. However, the Digital Imaging sector is facing difficulties. In May, we provided a forecast, and the recovery has been quicker than expected since then, giving us optimism for the future. That’s all. Thank you. Our time has come to an end, and we will now conclude the media session. We need to change the respondents and will begin the analyst session at 4:50, so please wait a moment.
Sadahiko Hayakawa, Emcee
Thank you for your patience. We will now start the questions from the sell-side analysts. I will be acting as the emcee. I am Hayakawa, in charge of IR. The respondents are Executive Deputy President and CFO, Hiroki Totoki; Senior Vice President in charge of Corporate Planning and Control, Finance and IR, Naomi Matsuoka; Senior Vice President, Senior General Manager, Global Accounting Division, Hirotoshi Korenaga.
Unknown Executive, Emcee
Now we will begin the Q&A session. Hayada-san from JPMorgan, please.
Junya Ayada, JPMorgan Analyst
My name is Hayada from JPMorgan. I have two questions. First, regarding Games, the third-party software and microtransactions performed strongly in the first quarter. Can you explain the reasons behind this success? For example, were June PlayStation sales and Fortnite events significant contributors to the results, or did the stay-at-home impact play a major role as well? Your sales increased, but I understand it might be challenging to detail the breakdown. Do you believe that the positive results from the first quarter will carry over into the second quarter and beyond? Secondly, concerning image sensors, Mr. Totoki mentioned earlier that the goal is to return to a path of profit growth in the latter half of next year. What assumptions are necessary for achieving this? Aside from a rebound in the 5G market and high-end smartphone demand, do you think these are the required conditions for profitability in the second half of next year? Would increasing market share and reducing costs be sufficient factors for improved profitability? In essence, do you believe that operating more efficiently will lead to better profitability next year?
Unknown Executive, Emcee
Thank you for your questions. To address the first question regarding the impact on the Game business, we saw significant effects from the stay-at-home demand in the first quarter, with both first-party and third-party titles performing well. April was particularly strong for us. While activity has normalized since May, it remains high compared to last year. We were fortunate to have strong first-party titles and active third-party free-to-play games due to various events. However, it is challenging to break this down in detail. Regarding image sensors, we expect profit growth in the second half of next year. Currently, we are pursuing that goal, but there is a slowdown in high-end smartphones. Looking at the long-term, I believe this trend will continue. Additionally, many of our Chinese customers have large inventories, and inventory adjustments are affecting our results this year.
Sadahiko Hayakawa, Emcee
I'd like to move on to the next question. Nishimura-san from Crédit Suisse, please.
Mika Nishimura, Crédit Suisse Analyst
I have a question, 2 questions regarding image sensors. For image sensor, the production capacity and the capacity factor, and also the projection for second quarter, please give them. And then for this fiscal year, the operating income was decreased. But what was the impact of the capacity factor of the production facility? Second question in Image Sensing, mobile sensing, you were not able to grow as much as you expected. So I think year-on-year, you are expecting a decrease in sales. So is it just a delay? Or is it the user's design demanding you to review or revisit your plans? Could you tell me about that?
Unknown Executive, Emcee
Firstly, regarding the image sensor, for the second quarter, the capacity at the end of the first quarter in fiscal 2020 was 133,000 units per month at the master price, and by the end of the second quarter, it is expected to be 135,000 units per month. We plan to gradually increase this capacity. In terms of wafer input, the actual figure for the first quarter averaged 126,000 for mobile and digital cameras, although some production adjustments were made. For the second quarter, the simple average for three months is projected to be 112,000 for mobile and digital cameras, indicating further production adjustments may be necessary. For the Sensing segment, we anticipate a decline in sales. Last year's actual sales were a little over JPY 230 billion, and we expect the reduction in sensors or sensing products to be about one-third of that amount. Initially, we anticipated growth, which led to capital investments and increased R&D expenditures, and that has affected our outcomes.
Sadahiko Hayakawa, Emcee
Next question from Morgan Stanley, Ono-san.
Masahiro Ono, Morgan Stanley Analyst
The first question is about Games, and the second is about Pictures. Regarding Games, specifically the PS5, I understand you might not be able to provide specifics at this time. However, in the past, you've offered guidance on the PS5 price even before it was officially announced. Considering various scenarios, the most likely one is what we should focus on. For this fiscal year, in your planning towards estimating a price range or volume quantities, what kind of range are you anticipating that you can share with us? I would appreciate any insights. Turning to Pictures, you mentioned that article releases will have impacts over the next 2 to 3 years. While these are negative factors, there could also be positives, such as an increase in digital percentage or potential growth on the TV side. What changes do you foresee in the risk/reward dynamics in terms of profitability over the next couple of years, especially with the downside risks associated with theaters? For instance, if you were to strategically boost the focus on digital, would the risk/reward upside remain relatively unchanged, or would it be affected? I would appreciate your thoughts on these matters.
Unknown Executive, Emcee
Thank you for your questions. To address your inquiry, let's start with the games segment. For this fiscal year, our key plan involves very strong results in the first quarter. However, we anticipate that demand will stabilize somewhat in the second quarter and beyond. Additionally, the introduction of the PS5 will incur certain marketing expenses, which we need to consider. While I cannot provide specific details on volumes and pricing at this moment, there are both potential upsides and risks involved. Currently, we believe we have a solid balance and have developed our plan accordingly. As for Pictures, I understand your concerns regarding the theater shutdowns and the shift toward digital distribution. There is indeed a strong demand for content from OTT platforms. While the impact of COVID-19 has affected production and release schedules in the Pictures segment, the demand for TV programs remains robust. Being an independent studio, we are strategically positioned to respond to this demand, with delays in larger movie releases allowing us to catch up via our TV productions. We will continuously assess the situation regarding the spread of COVID-19 to determine the best approach for maximizing value and profit through appropriate release strategies and sales choices. By responding strategically, we aim to mitigate risks and enhance our overall value.
Sadahiko Hayakawa, Emcee
I'd like to proceed to the next question. Nakane-san from Mizuho Securities.
Yasuo Nakane, Mizuho Securities Analyst
Nakane speaking. Can you hear me?
Sadahiko Hayakawa, Emcee
Yes.
Yasuo Nakane, Mizuho Securities Analyst
I have two questions about sensors. Firstly, regarding the operations in the second half, Totoki-san mentioned that operations would be lower due to certain reasons, but are you increasing your strategic inventory? For reference, the June inventory was 2,900 strong. What was the inventory in the second quarter, and can you provide some assumptions around it? Secondly, relating to Ayada-san's earlier question, you aim to return to profitability in the second half of next year. Totoki-san noted that the slowdown in high-end models will stop, and the inventory adjustments by Chinese customers will be completed by then, suggesting brighter demand ahead. Is your assumption that capacity will remain the same or increase next year? Additionally, regarding costs, I believe they are rising to offset depreciation. What measures are in place to enhance profitability concerning costs?
Unknown Executive, Emcee
Two questions received about the sensors and second half operations, so inventory to the end of the year and operation status at the end of the year. Speaking about inventory situation, firstly, in the first quarter 2,900 strong was the level of inventory we had. But at the end of the year, I think there will be a slight increase on top of this. That's assumption. But the level of operations, a little bit less than 90% is the level of operation that we are assuming now. That's related to what I said earlier about the increase in inventory. The profitability return in the second half, what are the assumptions? Well, is the assumption to see increasing capacity? Yes, a slight increase is within assumptions. But the timing of increasing capacity, I mentioned that in our speech, but we have to observe the demand situation going forward to adjust which timing we should increase, at which timing we should operate capacity. But basically, please, I think that our capacity will increase.
Sadahiko Hayakawa, Emcee
Thank you. We have a time constraint. So the next question will be the last one. Katsura-san from SMBC Nikko Securities.
Ryosuke Katsura, SMBC Nikko Securities Analyst
I have two questions. First, regarding the EP&S segment, I know you'll provide details in the briefing, but in the presentation material, you included the unit sales volume in the forecast. It seems the impact of COVID-19 is decreasing. Looking back at the first quarter, how did the reality compare to your expectations, and what are your projections moving forward? I understand you have JPY 25 billion allocated in the budget; do you have any further comments on that? Also, on Slide 24, you provided an update on capital allocation, mentioning JPY 1 trillion or more for strategic investments. How much of that have you executed so far, and what remains? Could you share a breakdown of that strategic investment?
Unknown Executive, Emcee
Thank you for the question. Your first question in EP&S segment first quarter and I tried to summarize that quarter. Well, there was some initial simulation that we have done in May, so it's difficult to be accurate in making comparisons. But it was much less predictable in May. So based on that simulation in May, actual performance of the first quarter was much better, especially for TV, because of the demand for stay-at-home. Actually, the recovery pace was much better than we expected. So basically, the online sales were increasing. And also, once the stores were opened, the merchandise would be sold. So for the first quarter, it was actually difficult to sell. We were short of inventory. So it was actually very good. But for digital allocation, most recently, there is a good recovery. So I think if you compare to Lehman Brothers situation or compared to that time at least, the situation is very different and I think the recovery is much faster. That is my impression. However, regarding restructuring, we want to strengthen our financial status. So regardless of how we are going to prioritize ups and downs, I think we want to be resilient in what we do. And also, regarding the capital allocation that you were asking about, so more than JPY 1.4 trillion. The ones we have executed is EMI, a wholly-owned subsidiary, and also SFH becoming a wholly-owned subsidiary, that was JPY 400 billion. And then also in this interim period, we have already repurchased JPY 300 billion of our own shares, share buyback. So just generally speaking, so this year, JPY 300 billion is what we're expecting. But it depends on what opportunities we're able to capture. So we are flexible about exactly what we do. But today, we have made an announcement about this repurchase operation that will be a maximum of JPY 100 billion.
Sadahiko Hayakawa, Emcee
Thank you. It is now time to close this briefing session on earnings for the first quarter of fiscal 2020. Thank you for your participation.