Japan Display Inc

TSE:6740

Earnings Call Transcript 2022-Q1

[Unknown Executive]

Good day, everyone, and thank you for joining the call today for Japan Display earnings call. Today's speakers are Scott Callon, our Chairman and CEO; and Akihito Okochi, our Chief Financial Officer.

Now Scott Callon will start the presentation with an overview of the first quarter. Please.

[Scott Anderberg Callon, executive]

Thank you, everybody. I'm Scott Callon. Appreciate your time. Thank you for joining. So I'll be going through kind of the overview of the first quarter and then Okochi-san, who is the CFO, will go into the financial details.

So let's jump ahead to Page 3. So look, the background -- so everything that we're doing is what we're all experiencing globally. We are operating on COVID, which is really, really hard. We've got global supply chain, and we're running factories, and we need to keep our people safe, and we need to deliver product to our customers. And these are challenges that are deep challenges for our supplier partners and for our customers also. And that is something that I think every business operating globally is experiencing.

The first bullet point speaks to something that is specific to most -- every global manufacturer, including ourselves. On top of COVID, we're dealing with semiconductor shortage that is absolutely devastating. It is an extraordinarily difficult operating environment because demand has surged, and there's really no ability to provide enough supply. So everyone's on allocation, and we're working with our customers and the suppliers. And we are blessed with truly world-class customers and world-class suppliers. And so it's been a very -- continues to be a very tight coordination on a daily basis.

What's available, when can we ship it and it's just really, really hard. It is extraordinarily difficult, and I would say devastating environment to be operating in. And devastating means that we can ship everything that customers are willing -- that is shippable. So the demand side is extraordinary strong. It's the supply side that can get enough parts. In our case, it's display driver ICs that are the critical item in order to deliver to our customers. Having said that, I mean, it works -- we have worked very, very hard, as I said, with our customers and our supplier partners. And they've been able to substantially reduce risk of production on our new clients. We have one case, and we're looking at several others signed long-term stable supply agreements. And so things are progressing actually very, very well, but it's very difficult.

Second bullet point speaks to what we need to continue to do, which is further cut our fixed and variable costs, which we have done. So operating loss for the quarter came in significantly below forecast, which is a good thing. We're looking at what we thought JPY 8.8 billion operating loss. We came at JPY 5.9 billion. So that's a JPY 2.9 billion improvement. I'll speak to -- on later on to the agreement that we have made to sell a Taiwanese manufacturing subsidiary to a world-class Taiwanese EMS named Wistron. The goal there is to strengthen our competitiveness to drive growth. And again, I'll give you some details on that.

Next bullet point, so I'm going through kind of some of the key things that we did during the quarter. This actually was a transaction we did last Friday. So it's after the quarter's close. So it's not showing up in the current financial statements, but we took an additional JPY 16.6 billion of capital from Ichigo. That increases our shareholder equity ratio from 14.3%, which shows up on the balance sheet that you've seen in our current Q1 financials to over 20%. Finally, we got notification from the TSE, Tokyo Stock Exchange, last month that we qualify for the Prime Market. Of course, if we qualify, we're going to go into the Prime Market. So we're in the process of progressing that.

Next page, please. I told you the operating environment is difficult, if not devastating, which is true. Nonetheless, as I also said, we've made a lot of progress. So we actually are doing an upward revision of our forecast. The 3 drivers of that are: one, again, as I said, we've made substantial progress in reducing the impact of the semiconductor shortage. So the full year forecast originally, JPY 254 billion, was conservative, but it also had a certain amount of downside risk on semiconductor parts not being available. We make a lot of parts. So we're upgrading 10.2%. The other driver of this upgrade is substantial increase in customer demand from major customer U.S. And finally, to some extent, were reflecting higher JDI product pricing. So with JPY 280 billion, we think this is not only meetable but beatable. So our goal would be to come up to this. But for the moment, we're raising our forecast by 10%.

Next page, please. Just to give you some sense of what's going on in the different product segments that we operate in. And there's a very big difference with what's happening for us in the LCD smartphone space in the U.S. and Europe and every other product category. So this is the weather forecast, which is acting as paramount in Japan, and we're a Japanese company, to describe kind of what the state of being is in industries and segments. So we're adopting that for this presentation. Hopefully, you like the pictures. So mobile, look, it's something is a long-term trend where -- because this is an LCD smartphone segment for us. We expect this to remain cloudy, and there will be a secular decline in our shipment of LCD for smartphones, which we're going to replace with OLED and automotive and nonmobile. So anyway, that stays cloudy, both current and forecast.

Turning to mobile China/other, and that's overwhelmingly in China, over 90% China, very strong demand. And so that actually gets kind of a cloud plus sun. So it's like the cloud plus sun, the cloudy becoming sunny. The reason why it remains kind of cloudy though is surprising, as you know, on Chinese shipping smartphone displays to Chinese manufacturers. It's very, very tight. This was a business that was unprofitable, turned out to be barely profitable. So that's a very substantial, nice improvement. But this is not up in the place where we drive a lot of earnings going forward. Nonetheless, very strong demand. And because of tightness in global markets and because we can ship in quantity and at quality that's the best in the world, this is a business that we're able to do productively. So it does -- it's a business we're happy to have, but it's not going to be a bigger mix primarily.

Turning to automotive. The issue here is -- so we say this cloudy going too cloudy plus sun. It would go to sun just like nonmobile, sunny, happy times for all of us, except for the semiconductor shortage, which continues to be very, very impactful for autos. It's a very hard situation. And in that context, I mean, the good news is we continue to have overall market share on the high end. We've got a very robust new order book.

If we get through, when we get through, then we think we're going to see substantial improvements, at least in our supply chain on semiconductors by the fall. Specifically kind of we did a major transaction with our most important driver. I see supplier that will get product from their factory to us in September. So that means we're shipping the customer in October and November. So we'll see a very, very big change there. But at the moment, this continues to be -- automotive continues to be very impacted by the semiconductor shortage.

It's a way of saying right now, in both automotive and nonmobile, which are substantial growth areas for us. We are not shipping as much as we can because of the shortage of parts. And then finally turning to nonmobile, that is the most exciting, most impressive and most rapidly growing area for us. The way it goes from cloudy to pull on sun. This might even worth several suns. We're both seeing strong demand for wearables in our OLED products, which we expect to continue to grow. But the biggest driver at the moment appears to be going forward is an ultra-high-resolution LCD VR, so virtual reality.

The advantage that we have in the VR space is it's not only ultra-high-resolution, so it's a very, very high technical requirement to me. It's that you're wearing these goggles that are right in front of your face and so, I mean, literally inches from your eyes. And if there's a quality problem, it's incredibly noticeable. So you need to be able to shift to an ultra-high-resolution and ultra-high quality. And it appears to be the case that we are the only firm in the world that is able to do that at scale. Other firms are either -- it's too hard to get kind of both ultra-high-resolution and quality at the same time, so their yields are way too low or they can't even get to the ultra-high-resolution in the first place.

So we're going to see over 50% growth in this business, that would be our business this year. We expect 50% to 100% growth possibly compounded going forward, a very, very important driver for us going forward on profitability. And the reason is because -- I mean the other thing is that this is a relatively small market. And so as -- and we fully expect the market is going to continue to grow rapidly. And at the end of the day, if you produce a great product and so do all of your competitors, there's really no advantage, no ability to price for value. And because we have distinct capabilities that appear to be unmatched, this is something that we think is going to be very important to us going forward.

Next page, please. I mentioned the sale of KOE that we announced last month, on July 8. The goal of this is to take an in-house -- so this is a back-end module plant in Taiwan, and hand it over to Wistron, which is an extraordinarily capable Taiwanese EMS. We think they can drive higher competitiveness by getting better pricing for us. So we think this is kind of a win-win-win. I mean, we shed assets and convert fixed cost to variable cost. We increase our operating flexibility, our ability to respond quickly to changes in market environment, the core earnings power, capital efficiency. We get some money out of it too, which we're happy to have. But really, the driver of this is a strategic initiative for us to: one, improve the competitiveness through better pricing in auto and industrial businesses, which are core to us; and also to partner up with Wistron. We think is a partner -- has been an EMS partner for us for a year, so we think have the ability to grow -- to do some of the growth together.

Next page. I mentioned last Friday, we got additional JPY 16.6 billion from Ichigo. That takes our Tier 1 equity ratio over 20% but is an exercise amount of JPY 19 billion that we also fully expect to get. Next page. And this is what we are and what we do. It's our mission. It's something that is absolutely fundamental to what we need to do. We are a personal tech company. What we do -- and by personal, when we're shipping displays for autos, and we're shipping smartphones and we're doing wearables and we're doing VR.

I mean these are not for autos. They are for the people in the autos. So we are very involved in the daily lives of literally hundreds of millions of consumers all over the world. What we do is meaningful displays are fundamental technology for auto clients. For us to be world-class in this area is extremely important, and for us to contribute to the world and society and we're doing this well and doing it ethically is incredibly important. So everything we're doing now is creating the bases for a strong foundation. Profitability, we continue to keep our EBITDA turning positive target for the fourth quarter.

And I will now turn it over to our CFO, Okochi-san, with further details. Thank you, everybody.

[Akihito Okochi, executive]

Thank you, Scott-san. So I will explain about the Q1 financials. First, the financial overview, first quarter, sales decreased JPY 22 billion year-on-year basis. The result is JPY 66 billion. That was mainly decreased by mobile demand, as Scott said -- mentioned earlier. Semiconductor shortage increased minus JPY 8.8 billion, as you see on the below chart. Comparing to a forecast on May 14, our sales increased over JPY 2 billion. I will explain the details of the sales and operating income after next pages.

Regarding the P&L, cost reduction -- please go back to the original page. Yes. Thank you. Regarding P&L, cost reduction made gross profit JPY 1.4 billion, which is JPY 0.4 billion increase and operating loss is JPY 5.9 billion, which JPY 1.1 billion increased year-on-year basis, even though sales decreased a lot. Except for negative effect by semiconductor shortage, we could have expected JPY 4.2 billion operating income improvement. Comparing to our forecast on May 14, operating income improved JPY 2.9 billion.

Ordinary loss JPY, 2.4 billion, improved, and net loss, JPY 9.3 billion, improved. There are no loss for Hakusan Plant asset preservation costs, and this is a improvement in cost, respectively, last year. EBITDA became minus JPY 0.5 billion as depreciation costs. Except for negative affect by semiconductor shortage, we have expected JPY 2.6 billion EBITDA improvements.

Next slide, please. Sales by product, firstly mobile business. As we had explained, mobile sales has been decreasing since the main customer shifted from LCD to OLED for their smartphone display. Comparing to last fiscal year, sales from the main customer became half, JPY 55.4 billion, to JPY 21.4 billion. That's exciting quarter-on-quarter basis though. China mobile business has been good and increased JPY 8.7 billion, which was JPY 3.3 billion increase comparing to our forecast on May 14.

Next, auto business. As we see, this is damaged by semiconductor shortage, also JPY 2.5 billion shortage from our forecast on May 14. The result became a large increase year-on-year basis. Lastly, nonmobile business. Wearable OLED displays to our main customer and ultra-high-resolution LCD for VR are in good, and those sales increase was year-on-year and quarter-on-quarter basis. Especially VR has been good and increased JPY 2.5 billion comparing to our forecast on May 14. These factors make the mobile business ratio 46 point -- 46%. As for productivity, it's very high, but ratio is going to be smaller going forward. On the other hand, automotive and nonmobile, which productivity are low, the ratio is getting bigger, and we would divest our business portfolio.

Next slide, please. This is the operating income changing factors from last year to this quarter. 2020 first quarter sales was JPY 88 billion and operating loss was JPY 7 billion. And this quarter sales was JPY 66 billion and operating loss is JPY 5.9 billion. These are 4 -- there are 4 factors for this result. First, sales decrease and change of product mix caused JPY 3.3 billion worse. However, we implemented manufacturing cost, fixed cost, JPY 1.7 billion cost reduction and SG&A, JPY 0.8 billion reduction, totaling JPY 2.5 billion reduction. The factors are decreased -- depreciation decreased by impairment, improvement and any other cost reductions. These made total JPY 1.3 billion cost reduction. As a result, sales of associates decreased but operating loss improved JPY 1.1 billion.

Next slide, please. This is the revised fiscal year sales forecast, as Scott explained earlier. We revised '21 sales as JPY 280 billion, which is 10.2% increase compared to our forecast on May 14. The main factor is this mobile smartphone LCD for Europe and U.S. customer and smartphone LCD for Chinese customer and automotive are also increasing. The chart here always compares with the 2020 actions. As we have already -- as we had explained, the pace probably is in details.

Next slide, please. This is the last slide, the -- next slide, please. Thank you. Second quarter forecast. The above charts is the one which is the total of first quarter action and second quarter forecast and the below chart is the one which shows only second quarter forecast. As for first half, the sales will be JPY 134 billion, and that is 33% year-on-year basis. The main factor is the sales of the -- our main customers, which we have seen, which has been continuing last year. However, all other products categories, such as the mobile Chinese 22% plus, automotive 18% plus, nonmobile like wearable OLED and ultra-high-resolution, VR, 11% plus.

We expect strong demand. Yes. Except for the damage of the second -- by the semiconductor shortage, the forecast will be JPY 150 billion, decreasing 25% year-on-year basis. The P&L operating loss will increase to JPY 13.9 billion, mainly due to the sales drop. Except for the damage led by semiconductor shortage, the amount will be JPY 7.9 billion. That means JPY 2 billion operating loss improvement. As for quarter 2, details are mentioned on the charts on the right-hand side. The trend is the same as first half, as I explained earlier. Operating loss will increase to JPY 8 billion due to the sales decrease. However, semiconductors price increase will be passed to the sales price from quarter 3 and onward. And our fourth quarter goal is EBITDA -- positive EBITDA remains unchanged.

This is the end of our presentation. Thank you for listening.

[Unknown Executive]

And we will close the conference now. Please feel free to contact Japan Display Investor Relations if you come up with any questions later. Thank you very much for joining the call today. Thank you.

[Scott Anderberg Callon, executive]

Everybody, thank you very much.

[Akihito Okochi, executive]

Thank you very much.