Japan Display Inc

TSE:6740

Earnings Call Transcript 2021-Q3

[Kumi Higuchi, executive]

Good day, everyone, and thank you for joining the web conference for Japan Display's March 2021 third quarter earnings. My name is Kumi Higuchi from Japan Display, I am the Head of Investor Relations and will be the moderator today.

Joining us on the conference today, we have Scott Callon, our Chairman and CEO; and Akihito Okochi, our Chief Financial Officer. Okochi will start the conference with a review of the third quarter. Callon will then follow with our strategic direction. After that, we'll take your questions.

[Operator Instructions] Also, a video of the presentation today will be available on our official YouTube channel, starting from later today or tomorrow.

Now Okochi will start the presentation.

[Akihito Okochi, executive]

Hi, my name is Akihito Okochi, CFO. Let me explain our Q3 financial results and the Q4 outlook. This is the Q3 summary. First of all, as for 9 months of fiscal year '20, sales were JPY 272.5 billion, which was an excess of JPY 2.7 billion for the sales target of JPY 269.8 billion published at the last year earnings review on November 13 last year.

Year-on-year sales decreased approximately 30%, mainly due to a sales decline to our major customer. The sales details will be explained on the next slide. As for P&L, gross P&L through the net loss were dramatically [ increased ]. Gross P&L was posted at JPY 4.9 billion. Operational loss and net loss were substantially decreased due to structural reform in 2019. And a gain on sale of Hakusan Plant in October last year, EBITDA loss was also dramatically reduced by half.

As for Q3 3 months P&L, you can take a look at on the right-hand side, same as the previous comments, sales were JPY 72.7 billion in excess of the Q3 target of JPY 70 billion as of November 13 last year. We could manage production against material procurement difficulties like semiconductor. And the operational loss was JPY 8.7 billion, which was JPY 1.3 billion better than Q3 target of 20 -- JPY 10 billion.

As publicly announced, we sold the Hakusan Plant to Sharp and to one of main customer as of October 1. And the gain on sale was JPY 18.6 billion and foreign exchange gain was JPY 5.6 billion, respectively. Net income after tax was JPY 13.4 billion.

This is the slide for sales by product category we've been using so far. As for mobile, which is mainly displays for smartphones, although sales to Chinese OEM set makers increased since our Western customer have been continuously shifted to OLED for smartphone, sales decreased approximately 70% quarter-to-quarter. As a result, mobile business share was below 50%.

As for displays for automotive on the middle side, year-on-year sales dropped 12%. However, the business has been recovered from the COVID-19 effect since the second quarter. Quarter 1 sales were [ JPY 14.8 billion ], but quarter 2 and quarter 3 sales were JPY 24 billion, respectively, which was better than our business plan which was built before COVID-19. We've been continuously and closely monitoring any potential negative impact by the recent semiconductor shortage.

Finally, nonmobile, which was our -- which are LCD for VR, digital still camera, [ notebook ] PC and OLED for smartphones, year-on-year sales increased [ mainly ] 27% due to increased orders for OLED for wearables and ultra-high resolution LCD for VR. Quarter-to-quarter sales slightly decreased to JPY 15 billion.

Next slide is P&L. I will not cover the details here because we've -- I've been -- I have already explained the details mostly. As for shipments, time frame on the right-hand hand side of the slide, sales were JPY 72.7 billion, as explained earlier. Operating loss was JPY 8.7 billion. I will explain the details on the next slide. The breakdown of nonoperating and extraordinary items are described on the bottom of the slide. Gain on sale for the Hakusan Plant as explained later.

I will skip the details for 9 months P&L here, I will explain the details of the change in operating income by next slide.

This is the waterfall chart of the operating income. The left-hand side shows the change from previous year and the right-hand side shows the change from the previous quarter. As for previous year, since the sales substantially dropped by approximately 50% to JPY 72.7 billion from the JPY 150 billion, and the product mix was important.

Operating income decreased by 15.5 -- JPY 15.8 billion. We made a continuous effort to cut the manufacturing fixed costs by JPY 3.7 billion, and operating loss result in JPY 8.7 billion.

As for previous quarter, same as for the previous year, sales dropped to JPY 72.7 billion from JPY 111.8 billion, and product mix was in. Operating income, JPY 7.2 billion decrease. And SG&A, including logistic costs, increased due to the COVID-19 impact. As a result, operating growth was JPY 8.7 billion. The section as of JPY 1.5 billion was mainly inventory difference.

Next slide shows the balance sheet and the cash flow summary. As for balance sheet, our balance sheet is being healthy right now. We always prioritize our cash and the cash balance was 50.4 -- JPY 54.2 billion, which is an increase of JPY 4.4 billion from September end, which is [ expected ] to more than double of the monthly sale of JPY 24 billion. Our net assets increased to JPY 37 billion, mainly due to the gain on sale of the Hakusan Plant. Shareholders equity ratio increased 8% to 14.5% on balance sheet. And as for cash flow, operating cash flow has dramatically improved from the previous year, mainly due to net income improvements. And also, the investment cash flow was reduced by cutting CapEx by half. As a result, the free cash flow deficit was only [ 1.16 ] compared to the previous year. Although actual numbers are not described in this slide, free cash flow for quarter 3, 3 months' time frame, was JPY 4.9 billion positive, same as quarter 2.

Finally, I'll explain the quarter 4 outlook here. Please take a look at the middle part on the left-hand side. Our quarter 4 sales cast is JPY 70 billion same as the quarter 3 forecast. And operating loss is expected to be JPY 11 billion. As a result, fiscal year '20 total sales are expected to be JPY 342.5 billion, and the total operating loss will be JPY 29.6 billion. We enhanced controlling our CapEx and plan to reduce it to JPY 10 billion.

Same computation will be -- and the sales computation will be the same in quarter 3. However, we assume sales will decline from quarter 3 actual for smartphones, OLED for wearables, AR and any other devices, mainly due to the impact of the global shortage of semiconductors on production at JDI and its customers.

Compared to the previous year sales stream, our major customer will drop dramatically and the operating loss will be expanded year-on-year basis because of a decline in sales, as in electricity charge at a domestic plant and the prices raise for condensers and chips by component suppliers. We have been closely monitoring the market and implementing some measures, not only quarter 4 of the current fiscal year but also in fiscal year '21.

So Scott now will explain our sales strategy. Thank you.

[Scott Anderberg Callon, executive]

Hi, everybody. I'm Scott Callon. Thanks so much for joining today. We're grateful for your time.

So I'm going to talk about going forward, the strategic direction, which we're calling game change, because it needs to be a big change. I've never seen such a combination of extraordinary technological capability and talent with kind of these sorts of losses. It's truly tragic and it's fixable, but it requires a complete rethink, reimaging, rebuilding of JDI as a personal tech company. And I'll go through the details of what I mean by personal tech.

So let me give you a sense of where we think we are right now. We do have world-class technology. We hear that from our customers, that's why they've stuck with us. We continue to be on the leading edge of a broad variety of product segments, delivering capabilities that other companies in the world cannot. We made a mistake. We bet on high-end LCD, put a whole bunch of money into it, the Hakusan Plant, which we then had to sell. And -- but we have a leading-edge OLED capability. And the reason why we're not big in OLED is because we ran out of money because we put the money into high-end LCD.

For example, in the auto display area, the major emerging technology or one of them is heads up display. We have over 70% global market share. We deliver a product that is unmatched by competitors. On the VR space, for example, we have high-end technology that, again, is unmatched. We have 73% global market share in there. So the firm does have ongoing significant technology resources.

I'll talk about -- this is the positive part of the conversation, we'll talk about things we've done wrong in more detail coming forward. But it is a great place to build a firm, which is world-class technology. And that world-class technology is developed by world-class people. I mean extraordinary level of commitment and capability in our employees, which is really important to us and to our customers.

So the result of that is we have world-class customer trust. I mean customers definitely want to continue to do business with JDI, and they're bidding on us, not just shareholders but customers are going to -- but getting profitability to levels that would make it more comfortable for us because we want to do more with them. So despite these strengths, we have been chronically unprofitable for years, and this absolutely has to be fixed. And again, it can be fixed.

So what do we need to do? The first thing is rethink, reposition and rebuild based on first principles. And by first principles, I mean let's just start from the very beginning. What are our strengths? How do we deploy them in what business product and service sectors? What's the competitive differentiation? What's the business model? What's the profitability you generate from that? And at heart, we exist to serve customers in the world. So that will drive kind of everything that -- underpins everything and the choices that we're going to make going forward.

So the second thing is we're going to go all-in on being different. People talk about wanting to become competitively differentiated from a business model perspective because it is the right way to get profitability. I think we all understand that competition inroads returns. It's also really important from a social purpose perspective. If we're the fourth company kind of delivering some product or service to customers in the world, I'm sorry, why is it that were useful and necessary?

So having something that is truly, emphatically, defiantly, radically unique is really important to deliver on profitability and our desire to serve the world. And we're going to go all-in on that.

Third, we need to radically restructure. We need to cut costs. And not just in -- we have these costs and we should try to take them down 10%, 20%, 30%, it's much more 0-based than that, what we're going to be doing going forward. It's literally why do we even have this cost? Why do we have this functionality? If we don't need it, we're going to get rid of it. It is going to be a dramatically different approach to cost control.

We need to match the organization to the opportunity. This is not only across the firm but across kind of product sets. We had huge business from a major customer. That business was large, and gone away on the LCD side. So okay, how do you redeploy those resources, that talent and capability to build kind of new business streams and new profitability, that's something we're going to be very committed to.

We need to get faster. I don't think it was enough to say we needed to double our speed. I mean we just missed a lot. And it particularly shows up in getting product to market. So we have a research lab in Ebina, which is outside of Tokyo. And you go there and it's just magic. I mean there's a phenomenal set of technologies, that it's like why haven't we gone to market or what's the plan for going to market. We think we're going to do this in 2023. It's not -- no, no, no. No, that's way too far away. So getting a lot faster is something that we need to deliver and we can deliver.

We need to get our pricing and product mix right. So in many cases, we are -- because we have unique technology capabilities, we are, and particularly in autos, in many cases, a sole supplier. So we're clearly creating significant value for our customers and yet we're not making money.

And so these are hard conversations. What I'm describing, this is not easy. This is a big lift. And the change we're going to make is very big. But it does give us an opportunity to create a very different set of earnings and profitability. Meaning, if we're creating value for our customers and yet we're losing money on it, we literally are going through a process right now, product by product, customer by customer, to figure out what's profitable and what's not.

And stuff that's not profitable, it needs to either go or we need to talk with the customer, which is a difficult conversation about -- you want us to supply to you, we need to figure out how to do that in a way that is mutually profitable. On the basis of these changes, we think we get to be EBITDA positive next year in Q4. And there's a big -- there's a lot of work that has to get done to get that. But we think this is a reasonable target that we can achieve.

We're not going to just do that -- it's what I said earlier. I mean the degree -- the differentiation between -- I mean, the difference between is huge set of technology capabilities and the magic that we're creating in the labs and a lack of -- severe lack of profitability. It's just tragic, and it's fixable.

So we're going to build new businesses. We're going to deploy our deep technology strengths in radical new ways. We're going beyond displays. We're going beyond our existing business models. We're -- we care about getting it right for people, so it's going to be centered on people's needs. And that's why we call ourselves a personal tech company. I mean what we have done over time, we will continue to do.

When you think about it, a smartphone phone is something that has become integral to people's lives. Displays are a foundational technology for modern life, and we're going to go beyond displays. I mean our key other product set is in the sensor -- is the sensor area and we're going to be doing things there.

But we want to deliver kind of value for people. So it's smartphones. We're huge in autos. And there's a bunch of us kind of all banging away. We're probably still #1 in the auto sector globally. And yet we've delivered technology not for the autos, but for the drivers, for the passengers. So we will continue the wearables space. We will continue to be intimately -- building products that are intimately connected to people's lives and making them better.

Should did I go the wrong way? So it's important to think about what you can do and where you can win. And software is eating the world. We're not a software company. So what's the realistic way of getting yourself to winning that's purely not a software play. So the model for us is not going to be a Google or a Facebook, which are -- or a Salesforce, which are pure software companies.

The model for us are companies that are uniting kind of superior hardware to superior and rich kind of software and services. So it's going to be a Sony. It's going to be an Apple. And we will, this year, launch several service solution and platform businesses, leveraging our key device technologies. We will start small and we will scale quickly.

Needless to say, a lot of what we're going to do is going to generate data. And so we will give a very careful look to see how we can create value from that big data on behalf of society, customers and our shareholders.

So that's what we're going to do, personal tech for a better world. It is a dramatic shift and offers a dramatic opportunity to change who we are as a company and the profitability we generate for our shareholders.

Thank you very much. We're now happy to take any questions or input. Appreciate your time.

[Kumi Higuchi, executive]

[Operator Instructions] I see nobody raising hands at the moment. Do you have more to say?

[Scott Anderberg Callon, executive]

If there are no questions, I will say thank you again to everybody for your time. We appreciate the opportunity to talk with you. We welcome your input offline and welcome to the new JDI. We're going to be very, very different. And there's an opportunity, again, I think to deliver significant value in doing so.

So thank you, everybody. It's a very tough time in the world. Take care. Be safe.

[Kumi Higuchi, executive]

Thank you very much and have a nice day.