Sony Group Corporation (6758) Earnings Call Transcript & Summary

So thank you very much for the question. Well, because I myself. And also, I'm going to ask Kono-san. First of all, I'm going to answer and on about the past history. So I think it was around 2018 around 5 years ago, so at that time, some of the foundries capacity was not fulfilled. And around that time, we sold well because a part of the sensors will be outsourced to foundries and also the logic center -- centers will be outsourced. And therefore, we are going to make a final product, and we have given a [indiscernible] idea. However, from 2022 well because there it's a U.S.-China friction and also well because the global semiconductor shortage has happened. And therefore, from the foundries well, because so the sensors, the master process for us. And therefore, they are not able to secure the capacity for that. And therefore, the market has changed. And therefore, that had continued even now. And therefore, after that situation we felt well because outsourcing the [indiscernible] master, and we are going to have a [indiscernible] and also reduce the investment, and we have taken that direction. However, well because, we have figured to the original position. And therefore, in order to improve the ROIC, we are going to reduce the investment, and also, we are going to outsource. There is such kind of potential. However, well because in the foundry and also the capacity is not able to secure. And therefore, we need to give a good thought about that trend. So for the ROIC, Kono-san, please.

So thank you very much for the question. Well, as Shimizu had explained so well because it depends on the foundries environment. And so that's the reason we have changed our strategy, especially because they are having a huge price hike. And therefore, even if we outsource and therefore, whether we are able to provide in the reasonable price or have an internal -- have internal production, and therefore as a result, we have increased the internal production portion in our mid-range plan because we wanted to have a partial asset line and create a new business and have a ROIC of 20% by '25. However, due to the aggravation of the foundry environment, there have been changes in the profitability. And therefore, we have changed our ROIC target. However, what we give, even during the pandemic, we wanted to provide -- we were able to have a stable supply, and they have been highly evaluated well because we had internal capacity, and therefore, we would like to -- we are the sensor #1 company. And therefore, having this kind of trust for the timing, we are going to maintain the capacity that we can internally control.

Let's move on to the next question. Because of time constraints, please just ask one question per person. Next question from Nomura Securities, Okazaki-san.

Okazaki from Nomura Securities. About smartphones. AI smartphones are being launched in the market by various companies. As we have more and more AI smartphones, the sensors, sensor market might also be impacted.

Thank you very much for the question. AI smartphones will impact -- may impact our image sensors. How will it impact our image sensors? Mr. Sashida, would you like to respond to that question?

Yes. Thank you. As you said, -- since 2023, AI smartphones have increased significantly, and this trend will continue in the future. Given that backdrop, the data output from the image sensors are very high quality, and that is what is expected in AI smartphones. So we'd like to pursue that. On the other hand, by collaborating with AI the video quality, the picture quality will be upgraded, improved. So in all applications, not just in ISB, we will try to listen to the customers' demand and try to come up with the best kind of solution. In the next few years, the video will be the driving force, is that what you mean? Well, AI is going to evolve, as years go by. So our output, well, if whatever we can collaborate with AI for the output will be done, and we will be engaging in dialogue with our partners.

So we would like to invite the last question, please, from SMBC Securities, Katsura-san, please.

So this is Katsura speaking. Well, because talking about the strategy for the business portfolio on Page 7, well, because you're going to have a surplus under this mid-range plan. So however, the HAMR head laser and also the display devices, OLED and also the others, well, because they're having a business portfolio and also the business strategy and business growth. So therefore, how you're going to evolve each stage and invest? And therefore, on which timing you are going to expect revenue from those business areas, please?

Thank you very much for the question. Well, because talking about the strategic areas, laser HAMR, Micro OLED and also AITRIOS, so the recurring business for the AITRIOS. And therefore, I have outlined for the automobile industry, some, well, because the laser HAMR, well, because in the past 10 years, we have developed together with Seagate. And finally, we are able to have the mass production, and therefore, there are so energetic engineers and made a cost competitive product. So going forward, so, well, because we are going to have a generation change for the hardware by 2030. So I think we are able to generate a few tens of billions. And for the Micro OLED, well, because electro -- starting from electronic viewfinder, and recently, so VR and AR market, we have entered in that market. However, the VR/AR market is not going to drastically grow. However, with the improvement of the quality, we are able to have a very interesting market. And therefore, there is a great potential in the market. So for the AITRIOS, well, because this is a new area, so well, because having a very good hardware is a sensor and how we are going to have a value-added product. And like hammer in comparison to Micro OLED, well, because AITRIOS will take much longer time in order to generate profitability. And that's what we are thinking. That's all. Thank you.

Now it's time. Then, we would like to close this session. Thank you very much for your participation. Thank you. So next session will start from 11:00. Thank you. We will start the finance segment session shortly. Please wait for a few more moments. Thank you. Thank you very much for waiting. We will now start the financial segment session. At the beginning, Mr. Hiroki Totoki, President and COO and CFO of Sony Group Corporation will take the stage to deliver a message regarding the partial spin-off. Then, Mr. Toshihide Endo, the President and CEO, Representative Director of Sony Financial Group Inc. will give a presentation regarding the mid-range plan of the financial business.

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We will now move on to the Q&A from the investors and analysts. The questions will be responded by Mr. Endo, the President and CEO, Representative Director of Sony Financial Group Inc. and Mr. Kazuhiro Yamada, the Senior Managing Executive Officer. We will now move on to the Q&A. [Operator Instructions] From Citigroup Securities, Ms. Ezawa, please?

This is Ezawa. I have 2 questions. So by deconsolidating from Sony Group, what would be the overall change? First of all, at the end, there was this collaboration with the Sony Group in one of your last slides, like the consulting system that was jointly developed, I do understand that, that was used -- that is used in Sony Life. So the system will belong to the Sony Group or Sony Financial? Are you going to pay some kind of usage fee? And regarding the Sony logo, so when it comes to this relationship, are you going to make some kind of payments for that? And if possible, can you let us know how much that may lead to? Secondly, you talked about the reform in the industry, and you also talked about being able to collect capital or funds in a unique way. So after 2030 with the industry reform in Japan in order to acquire your competitors in Japan, are you going to plan to collect funds? Is that the plan? Or are you planning to go to other countries and do M&A in other countries? Those are my 2 questions.

Thank you very much for the questions. You asked 2 questions. Number one, you talked about with -- the changes of the -- with the deconsolidation. And you also talked about the IT system and the brand and the costs related to that. The second question was about the industrial reform. And after 2030, do we have a plan to acquire competitors or are we planning to go to other markets? I would like to respond to both questions. Regarding the deconsolidation and the changes that would come along with that, like I said, the IT system and other areas, we will collaborate with SGC. The IT tools and system development has been done in the past, that has already been done. So as SFG, we will continue to use them. And regarding the brand, regarding the usage of the brand, it's true, the consolidation is going to be less than 20% now. So regarding how to use the Sony brand, we will have to conclude a contract regarding the usage of the brand with SGC. So we will be an independent company -- listed company. So we will have to think about our business operations in a independent -- from a independent -- in a independent way. And we would like to make sure that there are no hindering aspects of our business when we think about this contract with SGC. Sony Group using the Sony brand that was for the 50% subsidiaries, but we are going to be less than 20%. So -- but the brand is -- the usage of the brand has been approved. So that is because of the trusting relationship that we have between the 2 organizations. And from that perspective, we hope to put together the necessary contract. And regarding the industrial reform or transformation, as Mr. Totoki mentioned at the onset, since we are going to become a listing company, we will have to make investments for our growth and will be -- we will need to make an environment for that. In the future, we do expect a change in the industry, and we need to be prepared for that. And we'll have to see how the Japanese financial industry is going to change. Personally, for this next -- for this mid-range plan, we'll have to look at our competitors, but we are not planning to do any acquisitions or moving to other countries. We'll have to think about how we can provide stable dividends to our shareholders. And for that, we'll have to make sure that our profits can grow. And that is with our existing business. So for that, we would have to concentrate on the investments in those existing businesses. And for the next mid-range plan by 2030, we have our goals, but we have back-casted from that. So rather than our competitors, maybe in the future, we can think about going into other countries. Thank you.

Let's move on to the next question, BofA, Mr. Hirakawa, please?

I have 2 questions. The first question, at the moment, I think you're going to continue your current policy. The market size that you are looking at and the growth rate you're looking at, what would that be? What would that consist of? The second question has to do with investment. So investment in IT, I think you already explained that. During the next 3 years, what kind of investment are you looking at during this mid-range plan?

Thank you for the 2 questions. The first question had to do with the Sony Life market size and the growth rate. And the second question has to do with the investment aside from IT going forward. So the Sony Life's market size. Well, Sony Life isn't looking at the market size based on the product -- products. So Sony Life has different channels that it deals with the customers. And that is how we look at the market. So Sony Life's target is 8 million family customers. And how are we going to expand that? I'd like to ask Mr. Yamada, our CFO, to elaborate on that point. The second question about investment, aside from IT, at this point in time, the collaboration with the Sony Group is still based on IT. For example, the data -- sharing the data or the next development of the next-generation system, I mentioned about the data sharing. This will -- this was completed in the previous mid-range plan. And what will we do? Well, aside from the IT investment, after this mid-range plan, I would be looking at the overseas market and M&A and acquisitions outside of Japan. So we need talent to do that. So investment in talent during the next 3 years is something that we need to do. IT and system investments, well, it's still on the way. So that needs to also evolve. Regarding the first question about market size and the growth rate, Mr. Yamada will answer those questions.

In the presentation by Mr. Endo, Sony Life's market is basically targeted at the family -- the families. So the agencies and the channels are focusing on the so-called family as the main target. At the moment, the share for Sony Life is about 6% in the market. So we need to increase that market share at Sony Life. As for a new growth potential, which is the corporate customers, small- and medium-sized companies, which is about 5% at the moment. This is the target that we need to continue to approach to grow our market size. Thank you.

Let us move on to the next question from SMBC Nikko Securities, Mr. Muraki, please?

This is Muraki. I have 2 questions. For the listing, regarding the challenges that you're facing there. First of all, regarding the ESR sensitivity, how is that going to be controlled? On Page 26 with the interest rate going up, the -- if the -- it goes up 50 basis, it would go down by 23 points. For the listing and the final year of the mid-range plan, you will be using reinsurance. And how low would this percentage go to? What would be the level that it will go to? Along with that, in the past, when the interest rate went down, the capital went down. But with the interest rate has gone up now and now the capital has gone, as a holding company, what would be the governance approach that will be taken? My second question is about the improvement of profitability. On Slide 4, Sony Life profitability is about JPY 705 million. And you plan to increase that to JPY 98 billion. How is that going to be improved?

Thank you. There were 2 questions. Number one, the challenges facing the listing. And you talked about the ESR sensitivity. I said it was high. And your question was regarding -- are we going to use reinsurance? And how are we going to improve the sensitivity? And is there going to be some approaches taken by the holding company? Regarding this, I would like to talk about the overall framework. The details can be explained by Mr. Yamada. The second point was about the improvement of the profitability. How are we going to improve the profitability?

I would like to answer question #1, and then #2. Regarding question #1, on Slide 26, as you can see, the ESR sensitivity is very high. And we are recognizing this as an issue. The ESR sensitivity in order to suppress this, we can change the product mix. And also for new policies, we can use reinsurance. This has already been implemented. And for the new blocks. For the areas with high sensitivity, we have to think about the minimum protection and how we can remove that part with the reinsurance is something that we are looking into. But there is a second party involved when it comes to reinsurance, so we have to think about how much can be done by when, but it's very hard to say that. The governance in terms of the holding company, including the operations of the reinsurance approaches, we'll have to think about our sales approaches and what to do with the products and how to invest our assets. We need to make sure that we struck the right balance as a holding company and the ERM, the enterprise risk management, will have to be done appropriately. So the governance from the holding company is going to be an area of focus. So in the mid-range plan, we hope to make sure that we take the right approaches.

[ Mr. Yamada ] now can talk about the details.

Thank you very much for the question. Regarding the improvement of the sensitivity and as a holding company, what would be the governance approaches? I would like to talk about the challenges and the measures that we hope to implement. As it was explained, with the decrease of the interest rate, we will have to think about how to manage that, and we need to also look into the duration gap. And we have been using super long-term bonds. We need to make sure that we adapt to the changes. The changes in the interest rate and also the cancellations coming from that. In the past, we were late and taking the action, even though the duration gap did improve in that area, we are still seeing issues. As a holding company, what the governance would be an asset and the profits and risks, we need to think about the comprehensive checks that need to be in that. And we need to also have better predictability in this area. So for the Life, Sony Life would have to look at the big picture. And as a holding company, we need to make sure that we have the right governance approaches in place. And when it comes to the sensitivity, there are major changes, we're still in a weak position. The duration gap needs to be solved, and we need to transact with the bonds, and we need to be more proactive in the hedging activities. So that's what we have been doing, but we need to diversify our hedge approaches and to make sure that we can do cash flow matching. Along with that, as you said, we can do reinsurance of the variable insurance products and also reinsurance of different blocks. That is something that we hope to look into. And at this stage, rather than sensitivity, it's the amount of risk like reducing the interest rate risks. What would be the target? We should come up with some kind of plan. But we recognize the issue. When it comes to reinsurance, we have another party to deal with. So we have to look at the big picture. And within the fiscal year, we would like to put together a policy and announce that and share that. That's all from my side. And also about recovering the profitability, the second question. So it depends on the stocks at each company or the hedge cost at Sony Life. As I indicated at the outset, during the next 3 years, it has to be over 30%. Now, the profitability, you may think that Mr. [ Muraki ], you're indicating that this is not progressing. It depends, for example, the variable annuity called [indiscernible], which is like a savings type of product. So it is a very long-term product. I think that is working, and it's being supported highly by our customers. However, our customers at the moment, they want savings more than guarantee protection. So, of course, we need to expand [indiscernible], the variable annuities. And as we increase our policies, the number of policies, well, I think it will improve our profitability in the long run. So [indiscernible] sales by the life planners, I think it's progressing very well. So being on the side of the customers, it's not just about the savings, but there is also a demand for protection and it could be a fixed term type of insurance or some kind of corporate insurance or family insurance, which is less capital-intensive products. That is what we would like to focus on in order to improve profitability.

If Mr. [indiscernible], if you would like to supplement or add?

No, I don't have anything to add.

Let us move on to the next question from JPMorgan Securities, Mr. [ Sato ], please.

This is [ Sato ] from JPMorgan. I have 2 questions. First question is about the value of new policies. On Slide 35, there was some information. In the final year, the target is about -- is basically flat from the actual performance. Qualitatively, you plan to expand this. So the target is basically flat. So what is the plus and negative side of the product mix? And what is the margin aspects or the external factors that would influence this? My second question is about, I'm not sure if this -- maybe this is too early to ask, but the shareholders of Sony Group and the potential shareholders of the future for other insurance peers -- compared to other insurance peers, what would be the appealing points? What are the superior points? When Sony Financial Holdings was listed, you talked about the sensitivity towards interest rate, and you had the high shares of Sony Group. So from a variation perspective, there was some premium. But you will be doing another listing this time from a different perspective. So what are the [ billing ] points? And how are you going to go after the premium evaluations?

There were 2 questions. Number one is about the predictions for the new policy values. As you see on 35, you see that FY '26, why is it flat? The second question is about the existing shareholders and potential shareholders of SGC compared to other insurers, what is the appealing points compared to our competitors? I would like to answer the first question. And if necessary, Mr. [ Yamada ] will also help me, and I would like to respond to the second question as well. Regarding the new policy value, if you compare '23 and '25 is around JPY 260 billion. When it comes to new value, it's already at a very high level. So maintaining this would need to require a certain level of performance. The CSM is JPY 2 trillion -- the balance is JPY 2 trillion. And as I explained, the CSM every year is about JPY 150 billion and JPY 260 billion of new policies. So with the profits, the IFRS every term, JPY 260 billion will be accumulated. So this level is not necessarily small. And for Sony Life and Sony Financial Group, this will be the expansion -- will lead to the expansion of the profit and also the stable dividend payouts.

Mr. [ Yamada ], do you have anything to add to this?

Thank you very much for the question. JPY 260 billion is a very high level, especially in the previous mid-range going in '23 to '25, we was focusing on variable annuities. For the investment products, there were a lot of attention -- paid attention to this, and we were able to grow the policies. And in the next [ mid-range plan ], we believe that it will become a little stable, and we would like to provide protections to individuals and corporates and also asset forming products will also be used and Lifeplanner channel and the agency channel will fill in the gaps. And with that, we believe that we'll be able to maintain this level. In terms of growth potential, we believe that we still are able to look into that. And regarding the SGC existing shareholders and the potential shareholders, what kind of aspects are we going to use to appeal to them? If you look at the insurance business, the Sony Life Insurance business, we have the Lifeplanner channel and the agency channel and through them, the customer satisfaction level is #1. So with that, we've been able to perform. If you look at new policy levels compared to the other insurers, we are performing much better. For Japan, when it comes to the insurance business, we believe that we are in a very good position. And what we would like to appeal is the Sony Financial Group, obviously, the Life business is -- the Life Insurance business is significant. We have the bank and also assurance. So it's the Internet bank and also the insurance business. We also have the nursing care business. So we need to expand our customer base. Like I said, not just a family group and also the younger generation, the mass affluent and also the corporate customers. So we plan to expand our customer base. And for that, rather than just Life Insurance, we need to use the digital platform. The digital platform like the assurance in the banks, they will complement each other and collaborate and approach to our potential customers. And this is something that our competitors do not have.

From a financial perspective, do you have anything to add?

Basically, Mr. Endo explained most of the points. Life insurance products and non-life insurance products, and we have banks, the bank and also nursing care. So we are a financial group. So we need to make sure that we accumulate our efforts and improve our profits by putting in the efforts, we believe that the results will follow.

So we have very limited time. Next question will be the last question from Mizuho Securities, Sakamaki-san.

Sakamaki from Mizuho Securities. I'd like to ask 2 questions. The first question. So the partial spin-off, what kind of constraints will there be on the balance sheet? Well, I think there will not be any constraints in the balance sheet for SGC, as well as SFGI. So I want to ask you about the appetite. I think Sony Bank, the mortgage loan balance is quite high. So when you utilize balance sheet, I think you'll become freer to utilize the balance sheet in doing your business. The second point is Sony Life. So I think in the past, you were unable to utilize the life planners efficiently, but that is being turned around. So the continuity of the usage of life planners, can you please elaborate a little bit on that point?

Thank you for the 2 questions. The first question has to do with the partial spin-off. The balance sheet constraints will be removed. Risk appetite, how will that change? I think that was the gist of your question. The second question has to do with Sony Life, especially employing life planners and that difficulty in the past, but that is going very well. So the continuity of utilizing life planners, I think that was the question. Let me respond to both these questions. And if necessary, I can ask Mr. [ Yamada ] to jump in. About the partial spin-off, the balance sheet constraint, I think the expansion of the balance sheet was a characteristic that was different for the entire Sony Group, which became difficult to manage. I think that's what Mr. Totoki mentioned at the outset. Balance sheet expanding, that is, in a way, indispensable in a financial company, but I think we need to more or less manage that well. Risk appetite. Well, in terms of financial -- healthy stability of the finance, risk appetite needs to be properly managed, but it cannot completely be reduced. Now, I think there was a point about Sony Bank. Mortgage loans, compared to our competitors, we -- our presence is quite strong. But I think we're very -- we have a very good grip on the balance sheet because at the moment, we are trying to -- in 2025, we're going to disclose the next system, which is going to use a public cloud for the accounting, which is probably one of the most advanced type of system for financial institutions. So after the disclosure, we will appropriately expand the balance sheet and also increase profitability. I'm sure we will see positive changes. The life planners at the Sony Life, as I explained already, basically, they are selectively employed and they are properly educated, and they will be able to respond to the core needs of the customers. And in addition to that, Sony Life is looking at women life planners to increase employment of women life planners. This business model was introduced 40 years ago with mostly male life planners. But because of the changing times and because of the changing needs of the customers, women life planners are more in demand, and we need to provide that.

Mr. [ Yamada ], do you have anything?

No.

It's time, so we will conclude this financial services segment. Thank you very much for your participation.

This concludes the Sony Group Business Segment Meeting 2024. Once again, thank you very much for your participation and attendance. [Statements in English on this transcript were spoken by an interpreter present on the live call.]