Japan Display Inc

TSE:6740

Earnings Call Analysis

Earnings Call Transcript 2024-Q1

[Haruhiko Sakaguchi, executive]

Hello, everyone. This is Hiko Sakaguchi, CFO of Japan Display. Thank you very much for joining us on this web call. I appreciate your time. I'm going to speak to the quarterly earnings. And then following me, our Chairman, Scott Callon will be speaking to the business and the strategy update.

So with that, I'm going to dive right into the presentation. We're looking now at Slide 4, which shows an overview of our first quarter earnings. As you see, sales came in at JPY 53 billion. Operating profit was 13.9 billion operating loss and net income was $12.2 billion net loss as well. So numbers are still very difficult still deeply in the red. But what I would like to highlight is that versus our internal plan, all lines have actually outperformed.

So you can see that versus plan, sales came up above plan operating profit exceeded planned by JPY 2.8 billion. And likewise, net income exceeded our plan by JPY 5.6 billion. So versus plan, we're actually outperforming.

The next slide on -- Slide 5 shows a breakdown of our top line sales. What I would like to highlight here is that our core businesses, which we define as Automotive and Non-Mobile which are our strategic growth areas are actually doing quite well. So as you see Automotive is up 8% and Non-Mobile up 9% for the reasons you see on the screen. And conversely, our noncore business, which is our Mobile, this is our conventional LCD smartphone business, which we've been talking about shrinking and ultimately exiting is down quite hard. So overall sales down, but it's really down mostly because of the shrinkage of our noncore business, which is strategic. And I'd just like to highlight that our core businesses are actually growing right now. On Slide 6, we're looking at the breakdown of operating profit from the previous first quarter to this first quarter. The biggest contributing factor there, as you see on the screen is the accounting effect on inventory. When you actually take that out, we're kind of on par with last year, which really means the sort of the important changes worth highlighting are the fact that the operating environment continues to be very difficult. We still see material costs, energy costs remaining at very high levels, thus impacting profitability. But we're trying to counteract that through ongoing cost reductions, we've taken out some costs as we've ended production at the Higashiura fab, as we have announced. And also alongside the shrinkage of our smartphone LCD business, we've actually been taking out capacity at Mobara, which have also been sort of additive to our cost-cutting efforts. The next slide, on Slide 7, shows the quarter-on-quarter change in operating profit. I think the important point here is that it's on an upward trend. Things are starting to look better. The key highlight there is the mix item you see in the middle, you see a JPY 5.1 billion gain. That's mostly on sort of business mix improvements. It's really largely a result of the shrinkage of our smartphone LCD business and also the efforts we've been making in our Automotive business in terms of trying to either shrink or end specific unprofitable lines. So just to note here that this is on an upward trend. With that, I'm going to shift over to the current year forecast. This slide is actually no different from the slide that we presented in our May earnings results meeting. So we have kept our forecast the same. The key highlight here, as I explained this past May, is that revenue is looking to shrink again this year, but it's strategic. Most of that reduction, as you see on the screen, is coming from our Mobile businesses. I've said several times that this is being strategically taken down. So this is progressing as planned. All the profit lines still look difficult this year. We're forecasting some pretty deep losses this year, a little bit better than last year, but nonetheless, this year is going to be looking quite difficult as you see on the screen. And the last slide for me, again, this is the same slide reusing this slide from our May presentation. The key highlight here is that this is showing the improvement in operating profit in the second half of the current year. And as we explained this past May, the key here is that it's strongly on an upward trend. We're expecting the second half to show stronger recovery of profitability. A large part of that is just to repeat myself, the fact that we are strategically transforming our business portfolio out of less profitable businesses and product lines into more profitable business lines. And so a big part of this improvement is there in addition to contributions from some of our new technologies.

So the key highlight here again is that we're expecting things to start improving on an accelerated basis from the second half of this year and onwards into the future.

And so with that, that's sort of all I have in terms of the earnings, I want to hand the Board over to Scott Callon for a business and strategy update. Thank you very much for your time.

[Scott Anderberg Callon, executive]

Thank you, everybody, for joining. There's a lot of things going on and let me go at them with you. So as Hiko pointed out, still very difficult. I mean it's -- the industry continues to hemorrhage. There was a collapse in demand. I mean rooted in the Ukraine invasion, a surge in input cost, a collapse in demand made for extraordinary [ lines ] across the entire industry. And yet we have been working towards making substantial changes in our business over a number of years, so it really doesn't affect us in terms of the long-term outlook, but it punches us in the face along with all of our competitors in the short term. So the reality is we are -- we forecast for losses this year. We're going to have losses this year and -- it's kind of -- that's the plan, and we work towards next year, which is where we expect to turn profitable. The -- having said that, we're outperforming plan in 3 key areas: it's earnings, it's our next-gen technology development, customer product road maps. I'll speak to that on succeeding slide. As you know, perhaps you didn't know. Thank you very much for joining this call. This is new information for you.

We signed a strategic alliance MOU with HKC, which is the third largest display maker in the world, working towards the final agreement in September, that was originally going to be in June. It's a pretty large agreement, it's taking some more time to get this done. So we pushed into September.

We acquired JOLED's engineering talent, became a sponsor of JOLED. I'll speak to that. It's extraordinarily important to us to have world-class engineers, and we really need them to because we've got extraordinary customer demand for eLEAP, which is our next-gen OLED technology, and we needed this talent. On the next page, we made a very hard decision among a series of hard decisions to -- in production at our Tottori fab in Southwestern Japan. It's older, it's G4 substrate, which means it's pretty small. And when you're trying to run very large glass through a line in order to reduce our cost and get economies of scale, it's really not adequate to the task. So we're shifting production towards much more competitive G6, particularly Mobara fab in Chiba near Tokyo. And this is -- it was a hard decision, but it's 1 that has to happen.

We continue to work on sustainability. We announced support for TCFD yesterday. We exist to serve customers in the world, and this is very, very important to us. And finally, Look, JDI, along with much of the industry, quite honestly, the global display industry, it's had a broken business model that combines too much capital intensity, lots of really expensive CapEx and poor profitability. And so an extraordinary dramatic business model transformation has to occur. We're taking capital out of the business, and we're going to -- and we're growing profitability by shifting towards technologies that only become great.

So the model -- in 1 sense, you can think of the TSMC model in the semiconductor space where they do things that are really, really hard and they're so good at it, and no one can compete with them, so they have the ability to generate very, very high margins. Another way to think about is similar to our model where we're building out a global ecosystem in the display space.

We expect to be licensing AutoTech and moving towards a fabless model based on the ability to generate kind of technology that no one else has, and we're going to share. We think eLEAP, for example, which again is our next-generation OLED will likely populate every display in the planet within 15 years. We do not have the capital or the production capacity to do that. So we're going to partner with companies which are really, really good, which have up to this point been our competitors, and we expect to become partnering customers. We are outperforming plan in 3 key areas. Hiko just pointed to this on the earnings side. I mean, look, that's important, that's good. Better to have higher earnings rather than worse earnings. There's nothing particularly superb about having losses, we fully expect to get the profitability. And that's ultimately about changing the product set. You should think of us as a technology company. We are -- our existing technology set is not up to task, meaning we have very, very good competitors who are able to deliver similar tech at similar pricing. None of us are profitable as a result. We're cutting over to a next-generation technology set which is unique to JDI, very powerful and will be very profitable. And yet, -- we want to have the smallest possible losses as we make this cut over, which is going to happen. It primarily starting next year. We go into mass production of both eLEAP, which is our OLED technology and also HMO, high-mobility oxide, which our backplane technology. Every display has a front plane. In this case, eLEAP is a front plane. And the backplane is a compute Matrix TFT. HMO, what's unique and powerful about is it decreases energy consumption by 40% for displays.

So anyway, earnings are outperforming. That was driven in part by a 7% outperformance relative to sales, JPY 2.8 billion improvement relative to the plan on the OP line and a JPY 5.6 billion improvement relative to net income. What's absolutely most fundamental, though, is the second area, which is our next-gen tech development.

These technologies are hard. We have world-class engineers. The company brings together Sony, Toshiba, and Hitachi's display technology capabilities and yet you -- I do, as CEO personally lose sleep at night on can we get everything done because it's so hard. And the answer is yes. We are getting this done and getting things done in a far more accelerated way than we expected. And this is ultimately what's so fundamental because it serves to fulfill the third one, which is we are getting loaded into customer product road maps. There was extraordinary customer interest and progress in integrating HMO and some other secret -- and JDI and [ Acentech ], which we haven't announced yet into customer product road map. So we are talking to customers about this.

And that's one of the unfortunate challenges of running a technology company that works really, really hard to develop technology that no one else has to deliver it to customers that no one else has it. And the customers don't really want us to talk about it because they're going to use it strategically to try to win in their space. So right, you should know that the progress we're making on a tech development is going directly into customer product road maps, which speaks to how we change our earnings profile on a going forward basis. And frankly, not just change our earnings profile, how we change the world.

OLED is a spectacular display technology. It's organic. -- meaning -- and it gives you kind of a -- unlike artificial color that comes from LCDs, it gives you a purity of color that's extraordinary. It doesn't require a backlight because it's organic. That means you get -- you don't have kind of this grayness interference that occurs from the backlight, it is pure black, so you can deliver a pure black. So the contrast is enormously high. It's much faster in terms of response time than LCD. You have no backlight means lower power consumption. It means you can make the display thinner, you can make the display lighter. It's just -- it allows you to have -- you can do it on thin films.

So unlike LCD, which is, by definition, hard and rigid, you can bend and curve, and this is what allows you to have flexible and potable. It's an extraordinary technology and it has 2 major flaws. One is lifetime and the second one is cost. And eLEAP solves the both. And so we -- 50% of the smartphones in the planet right now are OLED in part, you can get away with that because the burnout that occurs with -- on the organic pixels under conventional OLED happens over a 3- or 4-year period, most people turn over to smartphones, but there's less than 1% penetration in cars -- there's a 1% penetration in TVs, the 1% penetration for OLED and IT devices like notebooks. All these have longer lifetimes. It's a safety issue in cars to have burn out, we solve for that. And so we expect to take OLED everywhere. And we think this is a multi-decade transition. CRTs lasted for decades are replaced by LCDs. For decades, we think OLED is the next step. So that's what we're all about. This is -- a lot of this information is previously disclosed. We kind of want to put it in 1 presentation. So you can -- those of us who look at as a new, you can see we're up to -- but the key is to deliver global on technology leadership, and we think we've gotten there.

The foundations to the strategy, global known technology leadership, marketing leading technology and transformational growth, we're going after very large markets displays, we think our foundational technology from [indiscernible] Society.

So the TAM is huge, and we expect to win in it, and we are fundamentally about Greentech and sustainability. The strategic initiatives have not changed. We intend to build a global display ecosystem based on the technology. We're happy to partner with people. We do not have the capability. I just told you, these are transformational technologies because of low power consumption is good for the planet. So we expect to deliver technology that protects the planet and makes the lives of people -- daily lives of people all over the world better through our technology. So having an ecosystem based on this technology, we think is very important, we're going to share. We're going to dramatically strengthen our competitiveness, whether it be a fab optimization. I just told you we've shut another fab, which is older and moving towards an asset-light strategy and also higher end fabs that we have that are depreciated and have low-cost production capability. We are continuing to develop and commercialize our technology. I showed you, that's going well above plan. So that's exciting. We do need number four, to have the financial strength in order to support the transition from our existing nonviable in terms of the ability to generate the returns that our shareholders deserve to kind of a new technology set, which has much higher returns, and we have achieved that. And finally, we expect to complete our alliance with HKC by the end of September. We have a China plus India fab strategy. To be clear, we intend to be in China very, very quickly. It's both good news and bad news. It's a little along the good news, but the reality is we have such an overwhelming demand for eLEAP. We do not have the fab capacity, we're bringing up next year in our Mobara fab in Chiba next to us here in Tokyo. There is [indiscernible] for it. We need to build much more capacity that's going to happen in China -- that has -- China has a speed, the ecosystem, the production capabilities to enable us to take eLEAP in the world at huge scale. India comes later.

There was very real ongoing discussions right now with Indian partners about us going to India, but it will follow off to China. It's just going to take more time. eLEAP is, we believe, the single best and highest cost performance price for Marin's display technology in the world, sort of -- you need to walk before you run. India needs to build up a stronger ecosystem and we think India will get there, and we fully expect to be in India with our partners and building eLEAP in India over time.

As I indicated, we acquired JOLED kind of a good co, bad co. We took their talent and their IP. We really needed these world-class OLED engineers. We've got too much demand. We're going into too much product customer product road maps. This requires design and engineering resources -- so it's hugely additive to us and supportive of our METAGROWTH 2026 strategy to have these talented engineers. So that takes us forward a lot.

We have continued to optimize our fabs. In Japan is our front-end fab. So that's the super high tech element of what we do and yet some of the fabs are old and need to be scaled down. We have exited, we have sold, we have downsized. So we're getting to the right kind of line capacity in order to serve what our needs are. ELEAP requires a whole bunch of CapEx, literally billions of dollars of CapEx. We don't expect to be doing that on our own. That's why we have alliances and partners on that. We have done the CapEx in order to get up and running in Mobara fab in Chiba. We've downsized our smart phone line there.

By the way, to be clear, we've exited and we are exiting smartphones, LCD smartphones, we will reenter with eLEAP, the technology it's super powerful in the smartphone space also. And then the Global area, these are back-end fabs, they kind of more mid-tech -- and so the exits there are primarily -- we don't necessarily see ourselves advantaged in running kind of midtech, back-end fabs, switch over Taiwan fab and the China fab to EMS, we think, are very, very capable of delivering the kind of cost performance we want.

Across the board, all this meant we took out JPY 43 billion of costs that's showing up in earnings right now. It shows up in earnings in a sense that what we're still not profitable when we switch to the new product set, it's going to be create very, very powerful operating leverage for us and our shareholders. We announced yesterday support for TCFD. We continue to progress working on how we can serve the world. To be very, very clear, the central activity that we do is delivering Greentech to our customers. Again, JDI has environment positive, very particularly in the energy consumption area. We have very low power, very low energy consuming displays that's the primary way that we can help -- kind of address some of the issues of power shortages and environmental and climate change in the world. What we're doing on sustainability side is increasingly recognized broadly. FTSE us into their Japan Sector Relative Index last year, effectively kind of promoted us this year by having not only there, we're also in the FTSE Blossom Japan index, we are recognized for being best-in-class in sustainability. The final slide, it shows the path forward, these numbers look dramatically different they are. And this is what happens when you cut over from and I'm being harder on ourselves, but this is the reality we had. We have a product set which is excellent, but matches very excellent competitors in China, in Korea, in Taiwan and in Japan, we need to cut away to JDI proprietary tech that no one else has. We're doing that.

And when you do that, it changes your ability to add value to the customer. If you can -- a customer can get your technology from 5 competitors, then you're not really helping move the world forward. You're certainly not helping move that customer forward. I don't know if the analogy works for you, but Moderna, which, of course, generated COVID vaccine was dramatically a loss-making forever until they broke through with COVID -- as an effect what's happening. We're transitioning away from a nonviable product set to one that is super, super powerful. The Ford view incorporates eLEAP and our understanding of where eLEAP is and customer product road maps -- so we think this has genuine viability. And we will announce updated KPIs on this in our November earnings call, we thought we were going to do it today, but we pushed HKC out of system, so we'll do it at that point in time.

That's what have. Thank you so much, everybody. Appreciate your time. If there are any questions, we're very happy to take them.

[Operator]

[Operator Instructions] no hands are raised.

[Scott Anderberg Callon, executive]

All right. That's fine. We will bring it to a close. We have more people watching some video. So look, thank you, everybody. I really appreciate your time, especially in the summer, especially in the heat. So we were run forward. Thank you so much. I appreciate you watching what we're doing. And again, nothing shorter than full transformation of the business model and the technology set used by millions, literally billions of people across the world in this place. Thank you so much for your time. Have a good day.