Japan Display Inc

TSE:6740

Earnings Call Transcript 2022-Q3

[Kumi Higuchi, executive]

Good day, everyone. Thank you for joining the call today for Japan Display's March 2022 Q3 earnings. My name is Kumi Higuchi from Japan Display's Sustainability Department. And I am a contact window for investors and analysts. Please feel free to contact me any time. Today, the speakers are Scott Callon, our Chairman and CEO; and Akihito Okochi, our Chief Financial Officer. Now Scott will start the presentation with an overview of the third quarter. Scott-san, please?

[Scott Anderberg Callon, executive]

Everybody, thank you for joining. The presentation is meant to be self-explanatory. So I will touch on what I think are current -- are the key topics, and please forgive me for jumping through areas that I think we can spend less time on. So to give a backdrop, it continues to be a very tough operating environment because of the ongoing kind of tension and tightness in the global supply chain. So our Q3 sales came in below forecast on chip shortage impacts. Nonetheless, earnings came in substantially above forecast on everything we're doing to try to get the profitability as soon as possible. So in a sense, it was a very strong quarter, particularly because of the progress we've made, which is the third bullet point on the page, which is really the most important in terms of driving our value as a company going forward as we've made huge progress on both frontplane and backplane technology. And without going into too many technical details, the frontplane is the substance the material that converts electrical signals to light. So that would be things like OLED and LCD. The backplane is the array that sends the signals to the pixels on the frontplane and so examples of technology in that space would be things like amorphous silicon, oxides, LTPS. And so they are separate. You can mix and match them. And one of the things that we think we haven't been right as a firm is we haven't pushed as hard on driving for technology development in both areas. We continue to lead the world in ultra-high-resolution LCD technology, we have a world-class and that rank -- so just the really 3 of us, Samsung, LG Display and JDI in terms of our OLED technology. But to be absolutely overwhelmingly, dominantly #1 in the world, like we are in high-end LCD is, we think, a project that's worthwhile. So to drive technology forward, so you get higher speeds, you get lower power consumption and high resolution, those are worthy projects in order to make kind of the world a better place and make people's lives better. So there will be some announcements. So coming from us. It does raise because we have had huge success, both on the frontplane and on the backplane. It does raise some issues as to how we want to handle this. The frontplane investments, particularly are going to be -- and this is to be clear, we have talked about it before, although not in detail on apologies, we're not going to do in detail today, but we have leading edge next-generation OLED technology, which either doubles brightness or have power consumption and is also extremely low cost to produce. How we exploit this technology, whether or not we should do the investments ourselves. And so with the big investment pool and the firm with really high profits going forward or whether or not we should go through a business model with more of alliances and licensing, these are very important decisions we have to make as a firm. The good news is we're in a position to be able to make them both on the frontplane and the backplane side, the technology development is also extraordinarily important, and it will be far less costly. So we're going to have to make a [indiscernible] decision in the 3 to 6 months is that we're going to roll these technologies into the world. But these technologies are coming to the world from JDI. More on the points on the page, but I think I've probably spoken as much as I should, we'll run forward. Turning to the market environment. As I said earlier, it's just really hard out there. There's -- if something goes wrong anywhere, in a very, very tight supply chain and tightly linked supply chain, it kind of re-bounced. So for example, recently, there was flooding in Malaysia that's, oh my gosh, the factory with the supply input to us has gone down. So it's been very, very difficult to work through and continues to be. I mean at this point, our primary problem in terms of -- it is primarily semiconductors and the impact on us. It is not us. It's actually our customers are our suppliers, which is to say, we have done everything we can and successfully to build substantial robustness to our own supply chain, so that we're ready to ship -- and increasingly, we're running into issues where, unfortunately, other suppliers to our key customers are not ready to ship that they're experiencing supply chain issues and therefore, our customers think we can't take product from you because we can't get the parts we need from elsewhere. So it's still really, really hard out there, and it's something that we're continuing to work through as an industry. To point to the changes in terms of the market environment from the last time 3 months ago, there has been -- there's some softness that has emerged in mobile China. So shipping into our smartphone customers in China. They're having chip shortage impacts and they are also having -- they are making decisions to do some customer inventory adjustments. So that's a negative over the last 3 months. On the positive side, automotive, despite all the huge challenges, and they are -- they truly are huge. With a car, you've got thousands of parts. There's so much more complex, and so many things that can go wrong in supply chain. It is really, really hard out there for our customers and for our partners in trying to get cars built. Having said that, there still is very, very robust demand. We are taking share. We're growing volume. So this is a growth area for us. And so we've upgraded kind of our forecast, this is a little weather chart. This is a very Japanese thing to have these weather charts on the right side of the page. And I would point out that non-mobile is primarily smartwatch OLED for us and Metaverse. So VR LCD displays is very strong. We are unfortunately tip constrained, particularly in the -- in VR. And so if we could get more product, we could ship more products. So that continues to be a major focus of the firm. It's worth pointing out that we are the only company in the world capable of shipping 1,200 PPI or more. So the high-end high-resolution displays that are necessary to try to give me something of a true unified experience between the world and in the virtual world that is -- and so -- in display technology. And so it's a very important area for us, which is to say we're winning new mandates. We're #1 in the world in this technology. We're single source because no one else can build it. And so getting more parts and continue to develop our technology road map in this area is absolutely critical to the future. And we have a robust technology road map, and we're going to be -- we are going to pushing -- we see visibility with our technology up to 2,000 PPI in the next couple of years. And it's probably worth pointing out -- sorry, I'll skip some things, and I'll go into that we think it's important to share kind of the information. There is an approach to getting to the high resolution, not using glass substrates. So everything I've talked about is glass. So we're building glass and shipping 1200 PPI. We're the only company in the world capable of doing that. There is an approach to use silicon substrates. And the problem with silicon is it's incredibly expensive. I mean literally over 10x more expensive. And because you're using semiconductor equipment, the size of the displays you can build is incredibly tiny. And so the kind of a niche product, it's possible to be in demand out there. And if there is demand, we have the capability of delivering against that demand in the silicon substrate space also. But the real battle -- the real technology battle is to deliver extraordinary high resolution at extraordinarily low cost, and that requires a glass substrate. So it's a huge opportunity for the firm. It's a huge opportunity for us to serve the world. And it's a huge opportunity to participate in the metals revolution with JDI [ Insight ]. Let me turn to the next few pages. These are just meant to kind of show in a simple way, what happened during the quarter relative to our forecast and relative to last year. So we're obviously doing much, much better. Much, much better is not enough. We need to get clearly to get to profitability, and we're making huge progress in that. So this shows what's happened to EBITDA. Next page will show what's happening with OP. Can we go to the next page. And then we come to net income [indiscernible]. There was an extraordinary last year. And so net income came down and it's gone back up. Now we're at the full year forecast, again, and showing substantial strength. It's tough out there. So hopefully, I'm not complaining too much. But we are executing robustly against in a very difficult environment. Next page shows what happened on full year EBITDA forecast, which we upgraded today. Next page will show the upgrade in full year OP. The next page will show the upgrade in full year net income. And as you said, there is huge, huge changes. Turning to the strategy, and this is unchanged, but it's important to keep your word. So this is what we said we're going to do and this is what we're doing. So the KPIs on the strategic focus, which is strengthening existing businesses and build new businesses. The first KPI is to get to EBITDA positive by the fourth quarter of this year. As we can see today, we affirmed and raised our forecast for the fourth quarter, and we expect to hit this target, which is a critical target. And the second one is to build new businesses. And we've done and was to have build multiple businesses this year -- I'm sorry, last year, so this has been last year so in 2021 and we have a number of initiatives underway, one of which we made public, and I'm going to touch on that next, which is our transparent display technology. And -- but we've got a whole both of things that -- so we met our goal of getting ourselves going. In terms of the other new businesses, we expect to come to market at least one of them this year, and so we'll have disclosure about that as appropriate at that time and possibly the second one will also come this year also. Let's turn to the next page, and I'll talk a little bit about what we're doing in the transparent display space. So it's worth pointing out, one, we are clear, our transparent display technology is #1 in the world in transparency. And if you take a look at the phrase, real clear, and look at it in the middle, you can see that at the very end, it says clear. And then if you flip it from the C in the middle and read backwards, it says clear twice. And I'll explain that's actually rooted in the technology merits of the device. But we have begun -- we're going to start shipping next week with a 12-inch display. We will then begin shipping this year, 20-inch display. But what's unique about our technology is 2 things. One, it's truly transparent. And so there are folks out there who are shipping transparent displays and they are less transparent. I mean, which is to say, this is glass like transparency. And in some cases, we have competitors who look like they can ship in a real case, 60% transparency, but only in black and white, 10% transparency is full color, and this is full color at 84%. So it looks like glass. So there is a truly differentiated capability based on our material science to deliver true transparency. The second element, and this is linked into the real clear, which is clear going both directions, is the competing technologies are one-way transparency. So you look through it and it is darker than ours, but yes, it's transparent. But from the other side, since this is, for example, OLED technologies, it gets muddy and cloudy. So these are one truly kind of best thought of the competitor offerings are truly best out of this one-way transparency devices. And so this is we're delivering a brand-new technology to the world with true transparency and multi-direction transparency, it's a really interesting and exciting technology. Next page. And so we want to do something big with it. [ Some set ] on the market side, put on the bottom right side, which is our current kind of technology display as a device and what the market framing would look like for that. This is really only for a device, and we have ambitions to embed rich content on top of it. So as advice only and looking at kind of purely a transparent display segment with kind of the use cases that we, at this point, have imagined for it. We see a domestic market of about JPY 40 billion and global market JPY 600 billion, [indiscernible] will be $6 billion. And the market could be a lot of goodness, which is to say, if we think we can kick out larger nontransparent displays because these are truly displays. They are displays. They also happen to be transparent with functionality of transparency and then the market size could be literally 5x and 10x bigger. But we think it's -- it's just a really spectacular new, interesting, powerful technology. Until now, displays have been walls, not windows. And so we have truly window like display technology. And we have a video for you, which will give you some sense of it. So let's see if we can launch the video. So this is our 12-inch product, which begins shipping next week. And again, we're going to do a much larger display soon. And we have customer orders for this. So this will be beginning -- it's going to customers next week. As you can see, this is a genuine high-resolution display. This would be an example of just some Japanese graphics to put on it. [Presentation]

[Scott Anderberg Callon, executive]

You can stop it here. But this is an example of one use case where we're doing real-time translation using not only the display technology, of course, but real-time transition technology. So we have a woman speaking in Chinese, being translated into English. And then the person opposite is a gentleman who is speaking English is being translated into Chinese. So that would be an example of a use case for the technology and also this is really, really interesting. So we'll see how big we can build it. We're glad and proud to bring into the world. That is what I have in terms of the overview of how the quarter has gone and what we're up to. I'll now turn to our CFO, Okochi to give you the details on the financials.

[Akihito Okochi, executive]

Thank you, Scott. [indiscernible] next slide, please. Yes. So this is the financial results summary. Please see the blue highlights in the table above that shows the actual Q3 accounting period from October to December. Right side shows the actual 9 months. The table below shows the actual numbers assuming excluding semiconductor shortage impact. Q3 finance sales is JPY 71.7 billion and year-on-year base these numbers are almost the same. And you see the EBITDA, operating profit and ordinary profit are improved significantly as Scott explained earlier. Sales for automotive, non-mobile and mobile for Chinese customers were good. And these covered the demand decrease impact of the mobile for U.S. and Europe customers. The quarter sales have been continuously declining year-on-year base for a long time, but such trends ended in Q3, and the sales will increase. The sales increase will be expected. I'll explain details about the sales by product category. As for P&L, product mix and the cost reduction and price increase significantly reduced all the EBITDA and operating profit and ordinary profit. Net income was JPY 2.4 billion positive, mainly due to the gain on sale of care restocks. Excluding semiconductor shortage, EBITDA, both for finance were positive. I will explain about the details of operating profits later on. We passed on the increased cost of the materials to stay in place. Also, we had a cost cut more than we planned. Then comparing to the outlook, which we announced on November 12 last year. EBITDA improved JPY 1.1 billion and operating profit improved JPY 10.9 billion and also net income improved JPY 8.1 billion. As we explained previously, our P&L is surely improving, and we are on the track to achieve EBITDA profitable tax. Next slide, I'll explain the [indiscernible]. I think is the same as before mobile, automotive, non-mobile, such as wearable OLED for watch and real and so on. On the left side, we show the comparison of Q3 sales with the breakout of the product categories between last year and this year. Mobile is divided into the US and China. As I explained previously, mobile for US and EURO used to be over 50%, but has decreased by 20%. The actual amount is JPY 14.2 billion in Q3. And we achieved to diversify our business portfolio. As for mobile -- I'm sorry, as for mobile year-on-year basis decreased by 23% and quarter-on-quarter decreased by 19%. So we have explained this is since our main customer has shifted to OLED. Sales to China increased mainly due to the effect of price increase while we were focused on profitability in this business. Comparing to the outlook as of November the last year, sales improved JPY 0.9 billion. Automotive sales increased by 10% due to the strong demand despite continued shortage in semiconductor and other materials in Q3. Impact of the insufficient procurement materials for customers is greater than expected. And the outlook is for November 12 was not achieved. Non mobile OLED for wearable and higher-resolution LCDs for VR were good and year-on-year improved by 29% and quarter-on-quarter improved by 21%. Comparing to the November 12 outlook, sales improved JPY 2.4 billion as we managed the material shortage. Next, I'll explain about the operating credit change. On the left-hand side, year-on-year basis and right-hand side quarter-on-quarter basis. You see the sales were almost the same, thanks for passing on the increased [indiscernible] and also weak yen, this JPY 3.7 billion increase and by reducing the costs such as manufacturing fixed cost and SG&A, operating loss significantly improved from JPY 8.7 billion to JPY 3.1 billion. Right side quarter-on-quarter, the sales were almost the same and rising the [indiscernible] increasement in the manufacturing and fixed cost and that made JPY 3.1 billion operating loss. Next please. Financial forecast. Yes. Shows financial forecast of Q4 and full year. You'll see the last focus is on the satellites on the left. Comparing to the late forecast, we revised sales $6 billion. We reflected the Q3 results and also reflected the impact of production in Q4 due to the tight global supply chain, supply-demand situation for semiconductors and also the risk of decreasing orders from customers. On the other hand, [indiscernible] improved results of Q3 and the accounting for license fees, which we announced amicable settlement with the Tianma Microelectronics dated January 21. And we also reflected to pass on the increased cost of materials to same price. And there is also price increase of some products. We changed the foreign exchange rate from JPY 112 to JPY 114 against for this financial forecast. The annual impact of the 1 year, I guess, your sales increased approximately JPY 2.2 billion for sales and JPY 1 billion for operated profit. We announced EBITDA of JPY 0.3 billion of Q4 at the last previous Atlas enhancement. We revised to JPY 1.1 billion this time, and to keep our Q4 EBITDA profitable target. While we continue to be facing environment like material shortage and rising electricity pricing and other external factors, as we've committed, we are making steady process toward a profitable recovery.

[Operator]

[Operator Instructions] Well, there seem to be no questions. So let us go over to closing comments.

[Scott Anderberg Callon, executive]

Thank you, everybody. Very grateful for your time. It's a really tough time in the world, hang in there, be safe. We are running forward. There's a lot to be done. And these are our values and kind of what we need to deliver, which is personal debt for a better world. So we look forward to speaking to you again soon. Thanks so much. Have a good day.

[Operator]

Thank you again, and have a nice day. Thank you very much.