Japan Display Inc

TSE:6740

Earnings Call Transcript 2018-Q3

[Takanobu Oshima, executive]

My name is Takanobu Oshima, Chief Financial Officer for Japan Display. I would like to present the overview of the consolidated financial results for the third quarter of fiscal year 2017. Please refer to the handout documents.

On Page 3, on top half, you will see the topics for the third quarter of fiscal year 2017. And on the bottom half, you will see the main items of the financial results, but the financial results will be explained in detail later using profit and loss statements, balance sheet and cash flow statements.

As for the topics for the third quarter, due to lower demand for smartphone panels, et cetera, the sales saw a large drop of JPY 80 billion year-on-year. Accordingly, operating income was down due to higher fixed costs for Hakusan fab operations and drop in sales.

Environment is especially difficult for the Chinese mobile market; therefore, there was a huge impact and despite the continuous cuts in operational costs, we saw a decline in operating income, although we were able to keep the loss to a minimum. And at the bottom of the page, you will see a note, but at Japan Display, we're implementing a company-wide project with cross functional team aiming to improve all operations. And with such efforts, we were able to keep the loss to a minimum.

Inventory adjustments continue based on business structural reforms and inventory reductions. I will explain this in detail later using the balance sheet. At the end of the second quarter, we did record inventory adjustments and we are able to progress with having optimal balance of inventory with improvement activities going on. And business restructure expense of JPY 14.7 billion was recorded as extraordinary loss and equity method investment loss of JPY 3.6 billion as nonoperating cost was recorded as well. Details can be found on the press release.

Business restructuring expense of JPY 14.7 billion include impairment loss of JPY 12.3 billion and early retirement package of JPY 2.4 billion. The details of the restructuring will be explained in detail later. This impairment loss of JPY 12.3 billion include impairment loss related to Mobara Plant in Japan and also facilities in China and also in Philippines. These impairment losses were recorded in the third quarter.

And production at Nomi Plant in Ishikawa Prefecture ended on December 27, 2017. As for the Nomi Plant, JOLED's possible use of this plant is under discussion.

Please turn to Page 4. Next, I would like to briefly talk about the business condition. The sales is broken down for mobile Europe, China and other regions and nonmobile. As for mobile, third quarter sales typically higher compared with the second quarter due to major customers adopting more OLED displays. And in addition, there was a slowdown in smartphone mobile shipments in China. Also, there was greater competition in display markets in China. We face competition from Japanese, Korean and Chinese companies, but pricing pressure from Chinese competitors was quite difficult. Usually, in the third quarter, we see peak of demand. However, this third quarter, unfortunately, the demand remained flat from the second quarter.

As for the nonmobile sector, the sales of some consumer product displays fell, but sales of automotive, wearable and DSC displays was strong. And to touch on next year, we are receiving strong inquiries regarding FULL ACTIVE panels from customers ahead of fiscal year 2018. Although the numbers are not reflected, in China, half of mobile sales is from FULL ACTIVE. So not only in China, but globally, we will be proactive in our sales activity related to FULL ACTIVE panels. Please turn to Page 5. I will give you details of the operating results. This statement on the left, you will see the third quarter results. In the middle is year-on-year changes from the previous year and on the right is a result for the second quarter of fiscal year 2017 and its quarterly changes. As I mentioned earlier, net sales was down significantly year-on-year. However -- the third quarter sales was very difficult. However, operation-wise, we were able to maintain the same level of sales and profit. Net sales came to JPY 191.7 billion, cost of sales JPY 189.5 billion and gross profit of JPY 2.2 billion. The gross profit came to 1.2%. This is where we are facing difficulty. I will come to the operating income figure later in detail.

But as I mentioned earlier, pricing pressure from our competitors is getting more severe. And in addition, we started operation at Hakusan Plant in December of 2016 and this is reflected fully in the third quarter results of 2017.

Net sales of JPY 191 billion is with capacity utilization rate of 60% for the domestic front-end production. It was around 90% in the previous year excluding Hakusan Plant. Now with Hakusan Plant included, the rate stands at 60%. So fixed costs of Hakusan Plant is reflected fully, and there is pricing pressure from our competitors. And with the deterioration of the capacity utilization rate, the cost of sales is also getting more difficult. As for nonoperating loss, as was mentioned in the press release, there was JPY 3.6 billion of investment loss recorded as nonoperating expense and with very low capacity utilization rate. Some of the idle efforts of the domestic facilities are recorded, and these make up a huge part of the nonoperating expense. We didn't have these items in the previous year. So this has increased the nonoperating loss.

And as a business structure improvement expense, similar to the second quarter, JPY 14.7 billion worth of extraordinary structure reforms expense has been recorded, giving us loss before tax of JPY 33.1 billion. And the average foreign exchange rate was JPY 113. So it was JPY 3 cheaper compared to the first quarter and JPY 4 cheaper compared to last year.

Next, Page 6 shows the income statement showing operating results for the nine months ended December 31, 2017. As for net sales and gross profit, difficult conditions continue. However, net nonoperating loss is flat from the previous year. And net extraordinary loss came to JPY 32.7 billion. And if we add the extraordinary loss, it gives us loss attributable to owners of parent of JPY 100.6 billion.

Please turn to Page 7. This shows operating profit change factors. On the left is compared to the previous year and on the right is compared to the previous quarter. As mentioned earlier, the sales volume and pricing pressure and fixed costs, especially related to production, especially increasing fixed costs at Hakusan Plant, operating profit came to JPY 26 billion, SG&A was stable and with foreign exchange impact, it came to JPY 12.1 billion. Out of COGS of JPY 18 billion, fixed costs of Hakusan Plant increase came to JPY 600 million and cost profit came to JPY 6 billion. Compared to the second quarter, there is not much change. The sales did decrease; however, the current environment has not deteriorated drastically. We are pursuing improvement activities in-house and this is having a positive impact on the operations. But it is not shown in the profit and loss statement. I will explain this in detail in the balance sheet.

And this is the balance sheet I am talking about. Please turn to Page 8. I mentioned that improvement activities in-house is gradually surfacing and this is notable in the inventory numbers. From the left is the number for the end of third quarter, in the middle for the end of the first half and on the right is compared to the end of last fiscal year. Inventors at the end of first half was JPY 80.9 billion, JPY 25 billion decrease year-on-year. And days in inventory shortened from 51 days at the end of first half to 38 days.

Merchandise and finished goods and work in process has been reduced. Raw materials and supplies, basically, has been shortened to 1 week. It is very important to reduce work in process so that it will lead to reduction in the inventory of merchandise and finished goods, and the improvement measures taking place has been successful in shortening the days in inventory and is shortening the throughput time as well. We believe this is very important and results are starting to be seen.

And earlier I mentioned the profit and loss and the loss came to JPY 100 billion. And this JPY 100 billion comes from this decrease of total net assets seen here.

Please turn to Page 9. This shows the cash flow situation. On the left, you will find the financial report based on JGAAP and cash flow situation based on JGAAP is shown. And on the right is a format used for internal purposes for internal business administration. We will use these two formats to show you what has changed and what we focus on.

Using the JGAAP financial report on the left, which includes advance receipts in the operating cash flow, last fiscal year advance receipts came to JPY 52.5 billion cash inflow. This fiscal year, advance receipts came to JPY 43.4 billion cash outflow. So there is a gap of JPY 100 billion.

With JGAAP, cash flow from operating activities with such big advance receipt payments, it turns negative. Last fiscal year, the cash flow from operating activities was JPY 138 billion. And so it appears as so that cash flow from operating activities have deteriorated significantly year-on-year. Cash flow from investing activities for last fiscal year was approximately JPY 130 billion, but this fiscal year, it was reduced to 1/3. Free cash flow for the nine months ended December 31, 2017, comes to cash outflow of JPY 52.6 billion, while free cash flow for the previous year was JPY 10 billion.

As you can see on the right, the cash flow from operating activities comes to JPY 34.2 billion when we use the internal business administration format as JDI views advance receipts as equivalent to long-term liabilities and manages them internally by situating them in cash flow from financing activities. Therefore, cash flow for operating activities for fiscal year 2017 turns positive. However, still compared to the previous year, free cash flow is weak. This fiscal year, we have been very careful in choosing our investments. And as a result, free cash flow compared to last fiscal year has improved greatly. So Japan Display will look at cash flow situation from those perspectives and decide on what is necessary operation-wise. Please turn to Page 10. I talked about restructuring at the beginning of the presentation and this page shows a progress in restructuring. On the right, you will see the restructuring costs. We have already booked restructuring costs for the first quarter of JPY 2.7 billion, second quarter of JPY 13.8 billion and third quarter of JPY 14.7 billion, totaling JPY 31 billion.

As for the restructuring actions, we had seen partial shutdown of Japan front-end line, that is Nomi Plant production ended in December 2017 and we are discussing the use of facilities and some manufacturing equipment by JOLED. And consolidation of overseas back-end subsidiaries being planned. And we are holding constructive talks with relevant parties. Final agreement has not been reached yet, but we are aiming for final agreement at the end of March.

The negotiation is ongoing and the impairment loss from other assets for overseas facilities is being recorded in the third quarter. And write-down of business and idle assets is ongoing with assessment of impairment loss asset targets of JPY 14.9 billion write-down of some assets by the third quarter. And impairment loss makeup a big part of the JPY 170 billion now expected. And this is reflected in the 2018 business plan.

Last year, it was also announced and we did mention that impairment loss has been recorded. But recently, situation has changed. And as I mentioned earlier, we are getting very strong inquiries about FULL ACTIVE panels. Therefore, we are seeing many changes in the situations in many of the categories. Therefore, we will be reviewing the business plan for next year and also reviewing the midterm business plan. And that would change the expenses. And with the efforts in-house, we hope we will be able to reduce the restructuring costs even further. And restructuring cost will be less than JPY 170 billion as of now and we believe that revisions of a few billion yen is possible going forward.

And as for inventory assets valuation, recorded valuation losses of JPY 11.6 billion on retained inventory in second quarter has been completed. And as for personnel reductions, we gave an early retirement offer and we have accepted 290 such applicants against the original expectation of 240.

Please turn to Page 11, which is the last page of the presentation, which shows the fiscal year 2017 guidance. The net sales outlook will change from the announcement in the second quarter and the first quarter. We forecasted net sales reduction between 15% to 25% year-on-year. However, now that we are in February, we are more precise in our forecast. We believe that the sales decline will be around 20% year-on-year at JPY 710 billion. This falls between the 15% to 25% sales decline outlook that we gave earlier in August. So the outlook has not changed that much.

As for capital expenditure, it is JPY 15 billion less than previous estimate. On November 8, we reported that the outlook for CapEx for fiscal year 2017 will be JPY 65 billion. However, after review, we have reduced the CapEx figure to JPY 50 billion.

We will be making the investment if necessary. We will invest in areas where we can expect profits in the future. So investments into tools and parts will continue. And this is now taking roots in-house.

As for R&D expenses, it will come to JPY 25 billion. This will not change. For future businesses and future operations, R&D will be maintained.

As for the structural expenses, it was mentioned earlier. And building partnership with global companies. As was announced August 9, in order to improve the corporate value of Japan Display, we believe partnership with global companies is very important and necessary. But, of course, other parties will be involved in the negotiations and it is taking more time than we had expected. But in order to build partnership with global partners and to build alliances, negotiations will continue, and this direction will be maintained.

With that, I'd like to end my presentation. Thank you very much for your attention.