Japan Display Inc

TSE:6740

Earnings Call Transcript 2019-Q2

[Takanobu Oshima, executive]

My name is Oshima, Chief Financial Officer of Japan Display Inc. I'd like to take you through the consolidated financial results for Q2 of fiscal year 2018.

Please take a look at Page 3 of the presentation material. The slide shows key topics for Q2 FY 2018. Sales were JPY 111 billion, up 8% quarter-on-quarter. Initially, our guidance was an increase of 40% to 50% quarter-on-quarter. Due to the late supply of some components, shipment to customers has been postponed until October onwards. That's the factor behind the Q2 sales limited only to JPY 111 billion.

Looking at operating income, however, despite the large gap in net sales compared to the guidance, thanks to the ongoing structure reform undertaken since last year and the progress on cost reduction, both on the fixed cost and variable cost front, operating loss came to JPY 4.7 billion, reduced by half compared with the Q1. As for the monthly results for September, in line with the guidance of a single-month positive profit, we were able to post a positive operating income for the first time in 18 months. Net income also came to a positive territory.

Next slide shows trends in sales by region and application for last 6 quarters from Q1 2017. Starting in Q1 of fiscal year 2018, we have been showing results for non-mobile broken down into 2 parts, one is automotive and other is nonautomotive. As you can see from the top, we have U.S. and Europe, China, other mobile, other non-mobile and automotive. In total, we have 5 categories. As for the mobile business in the U.S. and Europe, as mentioned earlier, due to the postponement of shipment until October onwards, the Q2 sales were slower than expected.

The mobile business for China and other areas was also sluggish due to the continuously tough OLED penetration and overall market conditions. As for the non-mobile businesses, such as wearable, DSC and VR, we had strong performance with new products, resulting in a positive growth both quarter-to-quarter and year-on-year. This point will be covered more in detail by Mr. Tsukizaki later.

Please turn to Page 5. This shows the quarterly results of our P&L statement. On the left, we have Q2 of FY 2018; in the middle, we have Q2 of FY 2017; and on the right, we have Q1 of FY 2018. Net sales for the Q2 were JPY 111 billion. Gross profit, however, was strong, with gross profit margin of 6.6%, which is not as high as it can be. Nevertheless, it represents a major improvement both quarter-to-quarter and year-to-year compared with just around 1% gross margin previously.

Selling, general and administrative expenses, or SG&A, improved by JPY 2.4 billion year-on-year. Although it is up by about JPY 1 billion from Q1 of FY 2018, we believe that the overall trend has been improving.

Nonoperating loss was dramatically reduced to JPY 1.6 billion, partly helped by foreign exchange rates. Ordinary income was negative JPY 6.3 billion. Net income attributable to owners of the parent, including corporate income tax, was negative JPY 7.8 billion, which represents a major improvement year-on-year. The average exchange rate was around JPY 110 to the dollar, mostly unchanged from JPY 109 to the dollar last quarter.

Please turn to Page 6. This is a comparison between the first half of fiscal year 2018 and the first half of fiscal year 2017. Net sales for the first half 2018 were JPY 214.3 billion, down about JPY 160 billion year-on-year. On the other hand, COGS and gross profit margin improved year-on-year. Operating income was negative JPY 14.5 billion. The amount of operating loss was reduced by half compared with the same period of last year. Net nonoperating expenses were also reduced to 1/3 of what it used to be in the previous year.

Net loss attributable to owners of the parent was reduced to JPY 9.5 billion due to the extraordinary gain of JPY 11.9 billion booked for Q1 of this year, when our stake in JOLED was increased as well as the extraordinary loss of JPY 30 billion booked for Q2 of last year to accelerate recognition of structure reform cost. So the difference is about JPY 30 billion. Those are the factors behind net loss attributable to owners of the parent of JPY 9.5 billion or slightly below JPY 10 billion for the first half of this year.

Please turn to next page. Page 7 shows a comparison of our operating income for Q2 of this year vis-à-vis previous year and previous quarter. The chart on the left shows a comparison with the previous year and the chart on the right shows a comparison with the previous quarter. The year-on-year comparison shows a significant drop in sales by about JPY 70 billion while operating loss was reduced to 1/3 what -- of what it was a year ago.

Factors behind the major change included the negative effect of sales mix being nearly JPY 1.7 billion associated with the significant drop in sales. On the other hand, there was a major improvement in manufacturing fixed costs in addition to SG&A expenses resulting from the structure reform and the sale of the Nomi Plant. On top of the improvement in fixed costs, there was a positive inventory impact as well. For the first half of fiscal year 2017, to generate JPY 186.8 billion in sales, the inventory level was increased during Q1 and decreased later during Q2. So if you compare Q2 of this year with Q2 of last year, the inventory level was higher this year, partly due to the postponement of shipment until October onwards. That's my explanation of the positive contribution from inventory.

There was a positive contribution from inventory on the quarter-to-quarter comparison as well. All in all, the inventory impact made a significant contribution of JPY 12.9 billion on a year-on-year basis. The chart on the right shows a quarter-to-quarter comparison. The shipment volume added nearly JPY 3 billion to operating income. This is in line with the sales growth of JPY 7 billion quarter-on-quarter. The improvement in manufacturing fixed cost was JPY 1.2 billion, reflecting further productivity improvement. The inventory impact was -- as I explained earlier, there was a positive impact quarter-on-quarter as well.

Please turn to Page 8. This is the balance sheet comparison of the past 4 quarters. Let me comment on changes from the end of June this year. First, on assets. Inventories increased from JPY 69.2 billion to JPY 78.1 billion quarter-on-quarter. This represents an increase of JPY 9 billion for JDI. As mentioned earlier, our inventory level has been going up, but this is caused by our current operation model, where we supply panels and components to our EMS vendors, buy back the assembled products and sell them to our customers. That's the operation model we have. As a result, we saw an increase in our accounts receivable and accounts payable from -- as of the September -- as of the end of September compared with the end of June. This means that our supply of component to EMS vendors increased. With the commencement of shipment in October, however, we will recover them.

Days in inventory shown at the bottom is 68 days. Since the increase in sales was only JPY 7 billion quarter-on-quarter and increase of COGS was also limited, days in inventory, is calculated by dividing JPY 78.1 billion by the COGS amount, it has increased from 61 days to 68 days. However, since inventories will be reduced from Q3 onwards, we should be able to keep inventories under control towards March next year.

Please move on to Page 9. This shows consolidated cash flow. Previously, we showed 2 types of cash flow statements. The one on the left is JGAAP-based cash flow statement, where advances received are included in cash flow from operating activities; whereas on the right-hand side, advances received are recognized as long term liabilities and included in cash flow from financing activities. However, this time around, in both cases, free cash flow remained almost unchanged from the first quarter to the second quarter. Nevertheless, if we look at the break down, there are some differences between the first quarter and the second quarter.

First, on cash flow from operating activities. It improved quarter-to-quarter by about JPY 20 billion on the left-hand side and JPY 18 billion on the right-hand side. This was due to a major improvement in the other item from Q1 to Q2. The improvement in the other item was driven by 2 factors. They are -- as shown on the lower left of Page 9, there are 2 factors.

First, we have posted a provision to absorb all of the structure reform cost at once at the end of March 2017. We did have some provision in Q2 in the same year, but recovered the rest in Q4 of 2017. That was the accounting treatment on fiscal year 2017 P&L. On the other hand, in terms of cash flow, cash outflow, some of the reform costs were recorded later in fiscal year 2018, as we explained in the previous earnings results meeting. Specifically, about JPY 5.2 billion, it was booked for Q1 fiscal year 2018 as structure reform cost.

Due to the absence of such measure cash flow -- or outflow for Q2, we have the difference between Q1 and Q2 as shown here. The other item has a larger impact due to the acquisition of a higher stake in JOLED, we booked JPY 11.9 billion in extraordinary gain for Q1 this year. This is included in net profit attributable to the owners of the parent. This is merely an accounting process without an accompanied cash flow.

Since operating cash flow is calculated from net profit attributable to the owners of the parent, this was taken off once, so we subtracted this for Q1. For Q2, however, we did not have any extraordinary gains or losses. We have same numbers here. Consequently, cash flow from operating activities improved by JPY 8 billion to JPY 10 billion. As for cash flow from investing activities, there was a major gain in Q1 because, as shown in the lower left, at the end of June, we have sold the Nomi Plant to JOLED. The proceeds from the sale was about JPY 18.8 billion. This factor was absent for Q2. We have an item called acquisitions of P&E, which is our regularly incurred investment. That was 16 -- that was JPY 11.6 billion for Q1 and JPY 17.7 billion for Q2. It will be covered in detail later in the guidance discussion.

The investment amount itself has been reduced from the previous guidance level. Compared to the first quarter, however, we happened to have more payment during the second quarter, and then we booked a gain on sale of assets for Q1. Excluding the one-off gain, however, there is no major changes from Q1 to Q2. As a result, free cash flow is as shown on the slide. There is no major change from Q1 to Q2.

With this I'd like to conclude my part. Thank you.

[Yoshiyuki Tsukizaki, executive]

This is Tsukizaki, Chief Operating Officer and President. I would like to take you through Page 10 and Page 11.

First, on FULL ACTIVE. We have commenced our full-fledged shipment of FULL ACTIVE products for smartphones in October this year. As a result, total sales for the month of October exceeded the JPY 100 billion mark, and third quarter sales are expected to be significantly higher than the second quarter sales. The sales for October were even higher than those posted for the 3 months period in Q1 and Q2, respectively. As mentioned by Mr. Oshima earlier, in September, we recorded a single-month positive profit. We have posted another single-month positive profit for the month of October.

The second point I'd like to make is that we expect to see a solid growth in automotive sales for the second half this year. Other non-mobile businesses other than the automotive business are receiving a large number of new business inquiries and are looking forward to a brisk demand in the next year onwards. However, in the mobile category, JDI needs to carefully watch for and respond to any swing in demand. And as previously indicated, we are targeting a positive full year net income for fiscal year 2018. That's our current stance.

In terms of net sales, 10% to 20% growth year-on-year was our previous guidance. In view of the lack of visibility and expected volatility during Q4, however, we have revised the range to 5% to 15% and OP margin to 1% to 2%. We have kept the target of positive full year net income unchanged, and we will make efforts to achieve this goal.

Please turn to Page 11. This is about how to expand our non-mobile businesses other than the automotive business. The first area is VR-dedicated ultrahigh-resolution displays. This is receiving a large number of inquiries at the moment. Sales are expected to grow 6-fold compared to fiscal year 2017. Virtual reality requires ultrahigh-resolution displays as well as displays with high-speed response. Today, we are shipping products of 650 PPI. As announced the other day, we are developing product and getting ready for the mass production of up to 1,000 PPI.

The second area is high resolution notebook PC displays. We are working on this with LTPS. The idea is to install FULL ACTIVE like displays on PCs using the LTPS technology, which is our competitive advantage for the PC market. We have started supplying products with narrow border and low power consumption features. We are expecting 15x higher sales versus fiscal year 2017.

Furthermore, outside the display area, we are offering glass-based fingerprint sensor using the thin-film field technology. We are receiving a large number of inquiries and are planning to start mass production within this fiscal year. The many inquiries we are receiving for this product are mainly for security's application, including door locks.

That's all I have for today. Thank you very much for your kind attention.