Japan Display Inc

TSE:6740

Earnings Call Transcript 2020-Q2

[Minoru Kikuoka, executive]

I would like to make a brief explanation because my colleague, Mr. Okochi, will give you the details of the business performance, followed by my presentation of financing and guidance. So briefly, I will walk you through the points of the business performance.

Compared to the first quarter, the second quarter has benefited by the strong sales of the smartphone market and -- so that we saw growth on the top line. However, the effect from the structural reform carried out in the first and second quarter, particularly the effect from the early retirement plan, are not taking roots. Therefore, we suffered a loss, although the amount of the loss declined dramatically. However, our structural reform were able to be completed, as we expected, so that the October performance -- the book was closed on November. It is on November 13 today, therefore, that October bottom line or profits on the operating and net profit level. We would like to solidify this structure so that we would like to implement some of the measures and drive the momentum forward because the shipment of the VolTE products would coming in, so we would like to fix this mechanism in place.

The financing scheme would be covered in -- when I make that guidance later on. In addition to the presentation materials, I would like to give you a detailed explanation because everybody is interested in. With that, I would like to hand over to Mr. Okochi.

[Akihito Okochi, executive]

My name is Okochi. This slide, I would like to walk you through the summary of the second quarter. The sales, I cannot disclose the names of the clients, but the sales of the new products to the major clients were very robust. As a result that -- the sales increased quarter-over-quarter and the year-on-year by 30% and 60%, respectively. Operating income, the -- thanks to the boost from the sales growth and the effect of the impairment in the Hakusan Plant and also the production of the Hakusan Plant suspended, that reduced the fixed cost, so that -- although the operating loss amount are reduced, but it still JPY 19 billion loss.

The nonoperating expenses that we recognize JPY 2.1 billion of the equity method investment loss from the JOLED affiliate company. And the Typhon #15 hit the Japan in September, and the mobile factories operation was suspended temporarily. The costs were JPY 600 million. We recognized JPY 112.1 billion for the business restructuring expenses. That major items include premium severance pay that was JPY 7.8 billion. I'm going to explain the rest later on. As a result, that JPY 12.2 billion for the recurring losses, JPY 25.4 billion for the net losses were registered.

Next slide talks about the details of the sales. The left-hand side, you find the quarterly sales trend. On the right-hand side, you find the sales by segment, and you find the major trends. Quarterly sales trends are, as I explained, the segment -- the major 3 segments enjoyed quarter-on-quarter growth. The -- so that we implemented the new products to the major clients, and that new products are the major driver -- driving engine of the sales growth. Despite the sluggish automobile sales globally, there is a major trend. But our major targets -- that the display market showed the robust growth, so that sales increased quarter-over-quarter. In the nonmobile category, the wearable and the DSC showed increase.

And next slide is about the operating results. The later slide covers the major factors to explain the change quarter-on-quarter or year-on-year. So this is a snapshot of the Q2 performance. The JPY 147.3 billion for net sales, JPY 8.1 billion for the operating loss, and the nonoperating income, the JPY 2.1 billion of equity method investment losses of the JOLED and JPY 12.1 billion from the business restructuring expenses, making that -- operating loss would be JPY 12.2 billion.

I'm going to skip the next slide.

So this slide captures the major factors with change on the operating level. First of all, the -- compared to the second quarter of FY '18, the sales increased [ 11 ] to JPY 147 billion. The major factors impact the operating profit. The structural reform was completed almost at the end of September. The JPY 9.1 billion from the reduction in the fixed cost and the JPY 2.9 billion reduction in SG&A, that is the effect of the structure reform. So these are the effects from the plan completed in September, but the effect would take root fully from this third quarter. That's why the October bottom line is in black. But I would highlight, the operating loss were reduced to JPY 8.1 billion. That is captured in the right-hand side.

The next slide is the balance sheet. Major items included JPY 56.8 billion for the cash and deposits. And I would like to stress that we secure that level. Account receivables, in keeping with the sales in -- the sales that the AR increased to the EMS, that is a subcontractor with a production that is JPY 74.9 billion. That noncurrent assets as of the March 2019 was JPY 254.5 billion, as a result of the impairment is JPY 194.5 billion. Total assets were JPY 476.6 million.

Liability side. The IBD, we executed that the JPY 20 billion short-term debt in August and September, respectively, from INCJ. As a result, the net asset level is JPY 1.6 billion of the negative net worth.

The next slide shows that the path to eliminate the negative net worth of JPY 101.6 billion. Then later on, Mr. Kikuoka would explain that -- the development in financing mechanism. If that mechanism was successful, as we disclosed, that includes the JPY 42 billion from the common stock issuance, JPY 25 billion from that payment in substitute to the JOLED and the preferred shared issuance. As a result, we are able to obtain JPY 67.1 billion to eliminate negative net worth. As for IBD that -- as of the September, it registered JPY 191.3 billion. Thanks to the 3 measures that number bringing down JPY 1.0 billion. As of the September end 2019, the shareholders' equity is created to recover to 12.8%.

The next slide is the cash flows. Please look at the advance received. The major client relaxed the terms of the advance received. So that the first half was JPY 10.3 billion. And the first quarter is JPY 8.2 billion. That improved to JPY 2.1 billion. So there's a one quarter of the first quarter that is making the positive contribution to the cash flow.

Operating cash flow were JPY 12.7 billion. And thanks to the borrowing from the INCJ, increasing the JPY 12 billion, so making that free cash flow negative JPY 26.2 billion.

And next, let me talk about structural reform. This may be a familiar slide to you. The annual fixed cost reduction would be JPY 50 billion.

Left-hand side, all the items were already disclosed. On the middle, the box talks about the cost. In Q1 and Q2, we recognized noncash expenses. And on the top, JPY 7.8 billion is that -- the early extra retirement payment. And the impairment is that, in addition to the first quarter's Hakusan Plant, that we recognize JPY 1.4 billion impairment in the mobile factory in the second quarter. In addition, that we will terminate the contract with EMS at the end of the March 2020, so we will recognize JPY 2 billion. And as a result of the suspension of the Hakusan factory, that we will repay the refund of the subsidies for the Ishikawa Prefecture that would be JPY 800 million. As a result, JPY 20 billion comes from cost reduction from the downsizing and the JPY 20 billion from the depreciation, and JPY 10 billion and the reduction in the fixed cost, making the total reduction of the fixed cost to be the JPY 50 billion that will be fully taking root from the third quarter.

On the bottom, you find the maximum of the JPY 12 billion. That means if we fully shut down the Hakusan factory, this is the amount that we have to prepare today, but we are exploring the wide varieties of options regarding the Hakusan factories. And we are in the process of discussing with relevant parties, and we'll promptly announce that once the discussions are closed.

Now I would talk about the outlook of the second half of FY '19 and the current -- the financing scheme. As I said at the beginning, the first month of the second half, that is October, thanks to the effect of the structural reform that we saw, that the black in operating and net profit level.

In second half of FY '19, sales are expected to increase over the first half, but the third quarter sales of that last year were JPY 251.1 billion. That is a high level, so we expect a decline for the full year compared to the last year.

On the profit side, as I said, the radical personnel reductions as a part of the restructuring and asset write-downs. And you can see in the next bullet point and that the new shipments of the new products OLED that start to -- in November and the rigorous selection of the R&D and capital investment so that we are aiming to pursue that -- the profit-making business structure from the second half. And as I introduced the -- from November, we will start shipment of first OLED display. Then the features of this product would be covered in the following slide.

The last bullet point is the items that everybody is interested in. So I'm going to give you the detailed explanation. So let's look at our financing and the cash. So this is disclosed in the October 23. The customers and suppliers shortened the payment side and the relaxation of the terms would make a positive impact, which is as much as JPY 40 billion on the cash flow. And we executed the short-term borrowings from INCJ in August and September, which amount JPY 40 billion that help improve our cash flow.

And talking about capital fund procurement that we will continue that activities, that we continue that discussion with the Harvest Tech intended investor through Suwa. And upon the request from that investment in as from the customers, that we'll continue the discussion with the financial institutions smoothly, and it was disclosed in October 23. As of today, that we'll continue the discussion with Harvest Tech, but if that Harvest Tech does not invest in us, that we will make the prompt actions collaborating with INCJ that will, in parallel, continue that intensive discussion with financial institutions, and everything progressing very smoothly. And the plan for Harvest include the raising financial assistance from the clients, the USD 100 million to USD 200 million and USD 50 billion financial assistance from the business partners and $150 million to $180 million of the financial assistance from the OSS fund. In addition, that we are discussing with financial institutions. And the new financial investors is not the Chinese investors, and it's an independent private fund. The investment horizon is long and could be lead investors. They're respecting and enhancing that current mechanism, and they're eager to engage in the hands-on management.

And the framework of the investment were decided within November. The -- if that mechanism that we submitted, the registration statements are changed, then we are required to resubmit the registration statement. Therefore, the official announcement would be postponed in December. In either way, that we would like to take the leadership and to proceed the negotiations and discussion while we respect the existing mechanism.

And talking about the demerger of the in-house mobile company, we made announcement at the results announcement in August. We are proceeding the preparations, but the financing was delayed as was scheduled. Therefore, the discussions with the relevant parties for the demerger has been suspended. Therefore, that we would like to prioritize the financing. And once that decision has been made, we would like to promptly make the announcement. And as we can see, the depreciation, R&Ds and capital investment as a result of the rigorous review that we make the downward revisions.

And the second from the last slide, so that captures that major event after the financial announcement. Please look at the slide later on. But the last items require the further explanation. The official announcement may be postponed in December. As a result, that the complication for the shareholders' meeting and other preparations should be made. Therefore, it might be difficult to hold an extraordinary general meeting of the shareholders in December. Therefore, that will bring forward to the next year. Therefore, that we make simultaneous announcement but we change the date of the exercising voting rights to the end of November. Therefore, of course, that we are eager to make the early closing as possible. But we need to resubmit the registration statement and that there is a risk that the closing would be delayed. Currently, that we borrowed that the debt from the financial institutions, thanks to the debt guarantee from the INCJ, the commitment line would be JPY 107 billion. And that closing would be postponed. There's a risk. Therefore, that we start the discussion with the stakeholders, including INCJ and the financial institutions.

The last slide describes the shipment of the new OLED. The features of the product are summarized in this slide. So please refer to this slide later on.

With that, I would like to conclude my presentation. Thank you very much.