Welcome to the Sony Corporation conference call for overseas investors for the first quarter ended June 30, 2015. My name is Ellen, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to your host, Casey Kuester.

Thank you very much for that introduction, Ellen. And thank you all for joining us today, July 30, 2015, for a discussion of Sony's results for the first quarter ended June 30, 2015. We hope you all have enjoyed Miguel's hit album, Wildheart, while you were on hold. I am Casey Kuester in the Investor Relations Department here in Tokyo. And with me on the conference call tonight is Kenichiro Yoshida, Executive Deputy President and CFO of Sony Corporation; Kazuhiko Takeda, Senior Vice President and Senior General Manager of Sony's Corporate Planning and Control Department; Atsuko Murakami, Vice President and Senior General Manager of Sony's Finance Department; and Steven Kober, Executive Vice President and Chief Financial Officer, Sony Corporation of America. Thank you all very much for joining us. In just a few moments, we will review today's announcement, and then we'll be available to answer your questions. Please be aware that statements made during the following remarks and Q&A session with respect to Sony's current plan, estimates, strategies, press release and other statements that are not historical facts are forward-looking statements about the future performance of Sony. These statements are based on management's assumptions in light of the information currently available to it, and therefore, you should not place undue reliance on them. Sony cautions you that a number of factors could cause actual results to differ materially from those discussed in the forward-looking statements. For additional information as to risks and uncertainties as well as other factors that could cause actual results to differ, please refer to today's press release, which can be accessed by visiting sony.net/ir. Let me remind you that a webcast replay of the investor meeting held earlier today, along with the slides presented at that meeting and our detailed earnings release, are available on…

Thank you, Casey. I just wanted to make mention a few key points before we turn to Q&A. First, although our operating income is steadily increasing compared to last year, a large portion of this increase is actually due to onetime items such as the remeasurement gain on our share of The Orchard. We're also still facing considerable uncertainty going into the rest of the fiscal year such as the movement of foreign exchange rates, which could significantly impact our results as they have in the Mobile Communications and Game segment this quarter. Due to this and other factors, we have decided to leave our full year forecast unchanged and have increased our allocation for risk included in our Corporate line. As a final point, I'd like to touch on the approximately JPY 420 billion issuance of new shares and convertible bonds that we recently made. Although Sony's stockholders' equity increased due to this fundraising, we have not changed our ROE target of 10% or more in fiscal year 2017. The purpose of this capital raise was to secure funds to invest in growth and to strengthen our financial base. Through this capital raise, we were able to secure enough capital to invest in image sensors, enhance our stockholders' equity and solidify our ability to make further investments in the future. We chose to raise capital at this time as part of our process of transitioning from a phase focused on completing restructuring to a phase where we are generating profit and investing for growth. We plan to elevate Sony to a company which generates steady high profits by making aggressive and concentrated investments in our stronger businesses and by working to increase profit. Thank you for your attention. Back to you, Casey.

Thank you, Yoshida-san. I am going to now to turn things back over to Ellen so we can start the Q&A session. Thank you again for your attention. Ellen, would you please queue up the question?

[Operator Instructions] Our first question comes from Larry Haverty from GAMCO.

I'm interested in the investment part of the equation there. The first is, do you see any -- in your investing in the game industry, do you see any breakout first-party games that are likely? Because the game business is strong, but you didn't raise your forecast. I'm wondering if there are some first-party games that, if they work, you might be raising your forecast.

Thank you for your question. Just to reiterate, your question was whether there were breakout first-party games in the first quarter or breakout first-party games that we're expecting in the rest of the year?

Expecting in the rest of the year.

Okay. So your question was whether we are expecting any breakout first-party games in the rest of...

Yes.

Well, thank you for the question. Well, we had quite breakout games. Half of them to Brasbo [ph] and first-party game of Brasbo [ph] as well as Last of Us, and we have a franchise of Uncharted as well. So those are things we are expecting. And Game is quite pace-driven, so it's very difficult to predict the breakout of the -- possibility of the breakout. Thank you.

And then second subpart of the question, in terms of the investing with the change in the studio as we look into the next fiscal year, say, the one beginning next April 1. Is it likely that we'll see a significant increase in the production budget for Sony Pictures?

Just to reiterate your question is whether or not we are anticipating an increase in the production budget for our film business next fiscal year?

Right.

Thank you very much for the question. We are actually currently expanding our budget for the production for the film. And going through the next fiscal year, we have no plan to reduce the budget of the film investment. Thank you.

[Operator Instructions] The next question is from Richard Kramer with Arete Research.

I have several questions. Maybe I'll ask one each in turn. Specifically, on the smartphone business, there's been several quarters now of revising down the unit volume expectations or forecasts for the year. At what stage do you think that you would have to reassess whether it makes sense to stay in this business? In other words, what is the scale point that you had -- need to have as a minimum to justify the overheads? I know you're bringing them down by 30% now, but in R&D and SG&A and sourcing to make the business sensible. Maybe you could comment on sort of your breakeven point in terms of units that you think you need to have that business stay viable within Sony.

Thank you. And just once again, to reiterate, your question is about a breakeven point in the Mobile business considering our continued downward revision in unit sales and whether or not there is minimum amount of units or minimum amount of revenue that we have in order to breakeven.

Yes.

Well, thank you for the question. Well, to reduce the breakeven point, actually, we are currently doing a restructuring, and we are going to reduce operating expense by 30%, including partner costs. And so we think we can make breakeven according to the current plan, restructuring plan. And this fiscal year, we are going to reduce the operating expense by JPY 30 billion, and we are expecting that we can eliminate this fiscal year the restructuring cost of JPY 24 billion. Thank you.

Okay. My second question is on the increase that we saw in operating profit and if -- which is roughly JPY 27 billion. If you remove The Orchard gain of JPY 18 billion, the insurance gain in the Game business and some unspecified insurance gain in the Imaging Products segment and look at the difference between the real estate and other asset disposal gains that were made both this year and a year ago, it seems that about 2/3 or, if not, up to 3/4 of the improvement in operating profit was due to some sort of one-offs. Can you sort of clarify this for us as sort of what the underlying operating profit improvement was, maybe excluding all of these many swirl of one-off charges and gains.

Thank you. And once again, just to reiterate, your question is what would our operating profit look like in the first quarter had we removed what would you consider kind of onetime items or onetime gain.

Yes.

Well, thank you very much for the question. As for the operating profit date, last year first quarter, we had some -- we had actually [ph] set off. And as we mentioned, this quarter, we have an Orchard Media onetime gain as well as logistics. And sub-point is some insurance gain from our products to PSN. So if we all exclude those items, last year first quarter operating profit was actually around JPY 55 billion instead of JPY 69.8 billion. As for the -- this fiscal year first quarter, the apples-to-apples base operating profit was JPY 61.8 billion as opposed to reported JPY 96.9 billion. So apples-to-apples comparison, it's just about 12% increase.

Okay. And my final question is on the cash flow. It's obvious that there was a big outflow in the Electronics business this year in the first quarter. And do you -- can you give us a sense of what your expectation is for cash generation from the Electronics businesses for the full year and how perhaps that was connected to the recent capital increase that you did?

Just to reiterate, your question was about the rather sizable decrease in cash that we've seen in the first quarter and how this relates to our forecast for cash flow for the full year and how that in turn relates to our recent fundraising that we've completed.

Yes.

Well, thank you for the question. First of all, the purpose of the fundraising is to secure cash flow for the -- our investments of many [indiscernible]. That's the first point. And as for the cash position, I will ask Murakami-san to explain. However, let us explain in 3 points for the first quarter operating cash flow. First point is kind of seasonality. Second point is digital [ph] issues. And third point is about the timing difference of our restructuring cost. Well, timing difference means account recognition and actual cash payout. Murakami-san, would you please explain about that?

Yoshida-san explained that this quarter, the operating cash flow and the rest of the cash was a different issue, but for this fiscal -- this quarter of this fiscal year is relatively large cash payment from the operating activities because of the increase in working capital, and as he mentioned, the increase in the film cost, partially offset by amortization. That is a big amount compared to last fiscal first quarter, and also that there is accrued expenses. For the rest of the fiscal year, we have the causes. He mentioned the huge -- the seasonality, the cash payers, so the fiscal last year's operating cash flow will be recovered the rest of the year. However, we have a relatively large capital expenditure. As we mentioned before, the seem-most [ph] capital expenditure and module -- the related capital expenditure. So for the last fiscal year, we have relatively large cash payout for the capital expenditure. So therefore, overall, we have a negative cash flow in this fiscal year.

[Operator Instructions] The next question is from Atul Goyal from Jefferies.

I've got 2 questions. One is on the adjusted profits. As underlying profits and the trends are extremely important, want to get onto that one more time. And secondly, on Mobile, just to get a bit more clarity on how does the company intend to get where it intends to get. Firstly, on underlying profits, you just clarified for last year it was JPY 55.0 billion operating profit and this year it's about JPY 61.8 billion adjusted for one-offs. There was also a very large impact of ForEx and I estimate it's about JPY 33.3 billion full year impact -- sorry, first quarter impact from ForEx. It's a negative impact. So if I have to adjust for the underlying profit trends for ForEx and one-offs, I'm actually getting a much, much stronger number to determine the underlying, as I said, JPY 55 billion versus JPY 95.2 billion. Is my estimate for ForEx around JPY 33 billion correct?

Thank you, Atul. So just to reiterate your question, from the first quarter, we have expanded our disclosure around foreign exchange, although we do not give a consolidated number. So your question is, is your estimate for the consolidated impact of foreign exchange in the first quarter of JPY 33 billion roughly correct?

Yes. And adjusted for that, what would have been the profit? If it was not for ForEx, the adjusted operating profit, what would the number be?

Well, as for the ForEx, well, our calculation is approximately JPY 33 billion negative impact year-by-year roughly for ForEx.

Okay. So that confirms just what I was getting as well. So it looks like the underlying profit adjusted for ForEx and one-off is actually going from JPY 55 billion to about JPY 95 billion, so seems pretty impressive. Your Game business and Devices business also showed very strong profit growth with and without all the adjustments. But one big scar in the entire thing seems to be Mobile. And we have had this issue with TV business for a very long time, that quarter after quarter company reported losses. Since you came last year, it's been a different thing in TV. In Mobile, I understand the company is targeting profits and ROE-based targets in this segment. It's also announced a strategy not to chase volumes, but it's not clear how it will get there. It's still -- it seems to be participating or competing in other markets. It's not clear if you have withdrawn from China, if the company is going to withdraw from U.S. or other markets. So the -- how part of the strategy is still not clear on Mobile, which is one big scar in an otherwise very good result.

Thank you for the question. Just to reiterate, your question is regarding our Mobile business and our business plan to turn this business back to profitability. And I think your question is in regards to what kind of additional plans we have beyond the restructuring that we've already announced to turn this business profitable.

Thank you, Casey.

Well, as for the Mobile, as you know, after this unique cans [ph] write-off last year, we changed management. It was November of last year. So we just changed the strategy from past expansion strategy. We had -- we have business in China. Well, we are trying to get -- provide our smartphones 3 major carriers in the United States. We changed completely the strategy to the other side. So currently, we are in the middle of the restructuring. And we think we can achieve the breakeven as a first step in next fiscal year by reducing -- or by conducting our current restructuring plan. And another point is the assets we are using in this Mobile segment is quite limited. So once we make some profit, the type of thinking is that we can get some reasonable ROIC. And the last thing I want to mention is we are making money, sizable money, in the Japanese market.

[Operator Instructions] And our next question comes from John Litschke with CREF.

I was just wondering, with the Pictures division, it looked like the profits were down about JPY 20 billion year-on-year. Q1 probably faced a tough comp. But could you talk a bit about what happened in the Q1, the comp from last year as well as the updated outlook for the different subsegments: Network, TV and Film? And if you could comment a bit about your expected economics on SPECTRE as well, that would be helpful.

Thank you very much. So just to reiterate, your question was regarding our Pictures division and in regards to the results of the first quarter and how that compares to the same period of the previous fiscal year. Another question you had was whether or not we had any kind of updated economics forecast for each of our 3 categories within the segment as well as what kind of economics we're expecting from our upcoming film in the third quarter, SPECTRE.

Yes.

Thank you very much for the question. Well, basically, first of all, I have to remind you that first quarter is not a seasonally good quarter. If you take a look at the past 10 years, we made operating loss 3 times. So there's seasonality issues. As for the other question, I will ask Steve Kober to answer your question.

Thank you, Yoshida-san. The Film business is a cyclical business. It depends a lot on the release schedule of our film. So last year, we had 2 very large films released during the first quarter. The Amazing Spider-Man 2 took in over $700 million of box office and 22 Jump Street took in approximately $200 million. This year, we had a much smaller release schedule with no big-budget films. So that accounts for the large year-on-year decrease in revenues and profits because The Spider-Man contributes profits in the quarter it's released. So that's the biggest reason. For this coming year, we have a lot more releases still to come later in the year. We have in the September -- end of the September, we have Hotel Transylvania 2, a sequel to our successful first Transylvania film. It's an animated film. We also have in October, Goosebumps, which is based upon a children's book. Then, as you mentioned, in November, we have the next James Bond film, SPECTRE. And later in the year, we have Concussion with Will Smith. So we still have a very big release schedule to come. As far as the performance for this quarter, so I mentioned Motion Pictures was down significantly. Television Productions and Media Networks were up. Our business is doing very well in the Television and Network business. The Film business, as you know, is cyclical, and last year, we had a very strong year. This year, it comes later in the year, and we're still very hopeful and we've kept our full year forecast. As far as the economics of the next Bond film, I can't get into too much detail other than we are only 1 of 3 partners that share in that film. We work with MGM and others on that film, and we're looking forward to it. We've had a lot of success with it, and we're expecting good results when it comes out in November.

And as a follow-up, could you comment on the updated outlook for CMOS? There's been a bit of concern in the market with the smartphone market demand going forward, but if you could talk about your CMOS business.

So thank you. And just once again, to reiterate, your question is regarding our full year outlook for our CMOS business regarding some potential rumors in the market about softness in the demand for smartphones.

Right.

Well, thank you very much for the question. The results of the total market of smartphone is really slow, particularly in China. However, demand for our CMOS sensor has been -- continued to be strong since more and more smartphones are digital camera-oriented products. So even middle-range smartphone products, there's a demand for high-end CMOS sensor. So again, our demand for CMOS sensor has been -- continues to be strong. Thank you.

And just my last question. It sounds like you've reallocated JPY 20 billion out of the elimination line into Mobile Comm, if I heard that correctly, to increase your risk buffer or whatever you want to call it, in the Mobile Comm division. But then, at the same time, it looks like the elimination line or the total other corporate costs, including eliminations, was actually raised by another JPY 9 billion. Could you explain that? So you probably just added further risk buffers or you took FX into consideration? Or what exactly is the cause for that?

Thank you. Once again, just to reiterate, your question is regarding our allocation for risk that we have included in our corporate elimination line and how that relates to our decision to move JPY 20 billion of that allocation for risk and distribute that into the Mobile forecast for this year.

But at the same point in time, you took that risk buffer and increased it even though you took JPY 20 billion out into Mobile Comm. So it looks like a total risk -- does that make sense?

You're right. We actually added additional risk buffer to other. Takeda-san will elaborate further that point.

Yes, thank you for asking that question. Actually, we booked the JPY 70 billion of risk in other segment at the time of the annual release in April. Then now, we have shifted to -- JPY 20 billion to mobile phone. That is correct. Then in July, at this time, we booked the additional JPY 100 -- 10 billion of the risk buffer into the other segments. So total, we have JPY 80 billion. Of JPY 80 billion, JPY 30 billion is for the foreign exchange risk and the other JPY 50 billion is for the other risk for uncertain economic situation or future foreign exchange situation. Thank you very much.

[Operator Instructions] And our next question is from Atul Goyal with Jefferies.

Yoshida-san, this is again about the Mobile business. Since you've come, whether it was Mobile or other businesses, it seems like there are stringent accountability standards in the company. There's a requirement to deliver. There's a requirement for targets to be met. But at the same time, you're saying that next year, after the restructuring, and of course, Totoki-san has started just recently, but you're saying by next year, you expect breakeven or some profits in this business. My question is this, that planning contingency, if it doesn't happen, how would you look at this business? In past, you have mentioned that you would -- you are -- you're okay or you are looking for strategic partnership in this business. Of late, Totoki-san has mentioned there's no plan to exit. Now these 2 things are obviously different. Strategic partnership is different from a complete exit. But how do we reconcile the contingency plan in this business?

So thank you for your question. Just to reiterate, your question is about our Mobile business and our current attempted turning this business into breakeven next year. And if we are unable to achieve this plan, what kind of contingency we have in place for such a scenario, whether that includes exiting a business or partnerships.

Thank you for the question. As we are always considering possibility of alliances and not just my Corporate side, but also Totoki-san's side is considering every possible deal or tactic. And that -- the purpose of that kind of alternative measurement is to reduce the risk of Mobile business. However, at this moment, there's nothing to be decided.

And the next question is from John Litschke with CREF.

Just a follow-up on the Mobile business. You mentioned that Japan, you're delivering strong profits. Do you think that's a sustainable situation? And when we think of the first quarter, could you comment a bit, it looks like you had about JPY 9 billion in restructuring charges. I assume it was booked to the OP line. And additionally, if you could talk about the FX impact on the Mobile Comm business in the first quarter. And so what is the underlying like sort of profit loss trend in Mobile Comm, absent FX? And given the FX exposure, I'm assuming a lot of that comes from Europe. And in your review of where you want to focus geographically, would it make sense to pull back or even out of select markets where perhaps you're not seeing a positive situation?

So just to reiterate, I believe your question had 3 points. The first is about the sustainability of our profitability in Japan. The second was about our first quarter results. If we took out the restructuring charges and the impact of foreign exchange, how would the results look year-on-year in the first quarter? And the last was the impact of foreign exchange results in general in the Mobile segment, specifically with our sensitivity to the European market.

Yes. And given that it probably has some negative impacts to euro in some geographies, you're probably not very well positioned to losing money. You could selectively contract or reduce exposures there to have a relatively meaningful impact?

Oh, okay. As for the question one and three, I will answer the question. And as for second question, I will ask Takeda-san to answer. Well, as for sustainability, Japanese market profitability, since we have a quite good relationship with 3 telecom carriers, Docomo, au and SoftBank, I think it's fair to say for -- well, at least for coming couple of years, to keep -- maintain the current good relationships with those 3 major telecom carriers. This is the possibility of sustainability very high, okay? Third point, again, Totoki-san is always considering some options to reduce the exposure in some not profitable area or even exit the markets which are not profitable. But at this moment, we haven't decided yet. As for the second question, Takeda-san will answer.

Yes, thank you for asking. First, restructuring cost for the first quarter this year was JPY 8 billion, and foreign exchange negative impact was JPY 25 billion.

So absent the FX and restructuring would actually deliver profit, is that right?

Yes.

As we are running out of time, I would like to hand the call back over to Casey Kuester for closing remarks.

Thank you very much, Ellen. And with that, we would like to end tonight's conference call. Thank you very much for calling in again, and thank you very much, and we will say good night from Tokyo.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.