Japan Display Inc

TSE:6740

Earnings Call Transcript 2023-Q3

[Kumi Higuchi, executive]

Hello, everyone. Thank you very much for joining the call today for Japan Display's March 2023 Third Quarter Earnings. My name is Kumi Higuchi, Head of IR from Japan Display, and I will be the moderator today.

Today, our Chairman and CEO, Scott Callon, will be explaining the Q3 results and the capital injection to strengthen our financial position and accelerate our growth strategy, METAGROWTH 2026. Today's presentation slides are available at JDI's website.

Please start the presentation, Scott-san.

[Scott Anderberg Callon, executive]

Thank you. Thank you, everybody, for joining today. We're really grateful for your time. As Higuchi-san just pointed, I'm going to be working off of 2 presentations. And actually, the more important of the 2 is the second 1 about the capital injection. So I'll go quickly through the Q3 results and then move on to the other lengthier presentation. So let's jump into it.

Next page. Look, it was a light quarter. I mean, it's actually terrible out there. If you see the results coming out of our display peers, significant losses. We're also generate losses. But the quarter was actually relatively on target. Far more fundamental than that, as we jump to the fourth bullet point, we are revising down our full year forecast. So the fourth quarter is going to be worse than the third.

And then finally, what's most important, and I'll talk about it at some length is that we've done a capital injection, which is really transformational for our ability to finance what we think is a winning strategy, and I'll go into that at some length.

But anyway, let's run forward. Next page, please. You can see, we missed the forecast which we, of course, try to avoid doing that on sales and operating earnings. Our OP was off a little bit. We actually came in above on net income because we did sign the subsidiary sale at a better level. But anyway, I don't think it's really fundamental today's discussion is what the third quarter looked like. It's kind of relatively flat against forecast.

Next page, please. On year-on-year basis, we had targeted this year to be worse, unfortunately. That was not the plan 18 months ago, but the whole things have fallen out of bed across the market. And so we're off on a year-on-year basis.

Next page, please. You can see the kind of the waterfall in terms of what's happening against the forecast relatively flat on a fee basis negative. We do benefit from having a weaker yen. You can see volume and product risk mix coming off on the right-hand side, that's almost entirely a volume hasn't been much change in terms of the product mix.

Next page, please. So unfortunately, we're looking at a downward revision based on kind of deteriorating market environment. And it means, we need to make some big changes, and I'll talk to that. So this year is going to be worse than last year. And that is, if I can put it pretty directly unacceptable. And so we're going to make some -- I'll go through kind of what the plan is to take us forward in a much better way.

Next page, please. This is -- this kind of reiterates what happens on a full year basis on an OP basis. I would point out -- I mean, like I said, it's unacceptable that the biggest move here is kind of an inventory write-down that we're putting into the forecast. It's not clearly we're actually have to do the inventory write-down, means to say, we try to manage the firm in a very conservative way. Keep our promises to all of you. So we've taken kind of a little bit of conservative position on it. But -- and in any way you think about it, this is a firm that has the ability to be robustly profitable and we're not at those levels. And so that is truly unacceptable and we're going to get there.

Next page, please. So the one thing that we had to do is we looked at ourselves turning profitable next fiscal period, which starts in April, given how negative the operating environment is, and again, I would refer to kind of every display -- leading display technology company in the world to look at their earnings to say how it's out there right now. And by the way, to give you some color on that.

We're still seeing the inability to ship full products to auto customers because of a severe analog IC shortage. So this is not kind of cutting edge process semiconductors. These are legacy process semiconductors that are still in the shortage. So we're not shipping as much as we can in the auto sector. We're #2 in the world in displays for automobiles, and we're kind of over in the kind of major markets of the U.S. and Europe. So the negative effects that are happening in terms of total auto sales deeply impact us.

Consumer is actually far worse than that. We just kind of seeing a falling out of bed with over kind of ordering and inventory on smartphones, for example, significant lightness in the VR space or we're #1 in the world. So we're thinking some impacting that.

But anyway, so the current operating environment is very difficult. And so we knew it look very hard. FY '23 looks like, probably do end up pushing down what we had numbers for this. At the moment, we've kind of withdrawn our numbers and said we're going to look harder. I would point out that and I'll talk about this in the next presentation.

Going forward looks better, not worse, better. We've got kind of a significant set of new technologies that we're bringing to market, they come in 2024 and 2025 in a pretty serious way. But we'll have to take a look at what the short-term looks like.

So that's what I have on this presentation. For better words, you're not done with me now. But let's move to the next one, which is about the capital injection.

So let's go to the first slide, which is a summary. So let me spend some time with you on this because this is really fundamental to JDI, who we are, who we're going to be and will we take ourselves forward. And so the first thing to point out is we have been a chronic money loser. I mean, let's not hide from it. So there is a need to rethink and rework our business model.

And frankly, it means across the entire industry. But since we kind of reached this conclusion earlier, and have made kind of some significant decisions to change who we are, I would suggest that we will advance and getting to where we need to be.

Just to give you some background, our current profitability is based on decisions about who we want to be as a firm, and specifically, which product markets we want to participate in, made kind of really 4 or 5 years ago. And so our fundamental problem. And so we have a group of products right now that -- and I'm jumping to the third point here, where despite having kind of arguably -- I think it's not even arguable at this point, we have retaken technology leadership in the global display industry. So we have this extraordinary capability in displays, which are fundamental technology for modern life.

I mean there's a lot of work going on in semiconductor and compute, and we understand that compute is fundamental to the world. We would also suggest that rich regionalization displays that everyone uses -- everyone personally in business, commercial, industrial, military is also very fundamental to the world that we live in and we are kind of the technology leader.

And despite that, we've taken our technology resources and put them into commodity display businesses. So I joined JDI 3 years ago. One of the first things I did is sat down with Nakajima-san, who's our CTO, who is here today and looked at our technology road map. And we made some decisions about where we're going to put our resources into the technologies that are not just to use a baseball analogy, singles and doubles, but home runs and grand slams. And the truth of matter is we have gotten there. We have extraordinary capabilities.

So on the fourth bullet point, we have developed proprietary global #1 technologies that are game changers. And we're going to begin shipping them in size starting the next kind of really 18 months to the world's top technology companies. And so what really has to happen for us to become kind of the robustly profitable and if not dominant technology firm in display space. And so I just say in the Japanese earnings call, I mean just you find out from that I'm an American, but through no talent, in my own I learned Japanese as a boy.

And talked about kind of how Japanese companies generally have kind of small ambitions and were Japanese company with a lot of ambition. We think that is fully supported by the set of capabilities that we have. So today's capital injection, and I'll talk about that in some detail, is all about we've got a winning strategy. It's a METAGROWTH 2026 strategy, which is we're going to focus on global #1 technologies that no one else can deliver. And we're going to push really hard and we're going to deliver on it.

And just to make one final point on why we need to be financially strong for that. The implication of that is, in a world where frequently the major tech companies and the major auto companies because, again, we're huge in that space, are looking for multiple suppliers. If they're going to buy only from JDI because we have something that no one else has, they want to make sure we're financially reliable because these are -- in certain cases, could even be bet to firm decisions in terms of their technology product set.

So getting ourselves to financially bulletproof is really important for us delivering technology to our customers and we responded to that with today's announcement on the capital injection.

So let's move forward. I think it's probably 2 pages. Next page. So 6 things we announced today. One is that we're going to end from Ichigo, JDI JPY 20 billion to repay a JPY 20 billion short-term loan from INCJ. So that's the Japanese government. That was going to be paid with proceeds from the sale of our business, the Chinese subsidiary, I mentioned in Suzhou.

Unfortunately, with the deteriorating sales environment, we built up a bunch of inventory, so we need to borrow some money from Ichigo to repay it. So one, that happens. Two, Ichigo is buying all of JDI's debt from INCJ and a result of that is that JDI no longer has any obligations to INCJ. Three, Ichigo is forgiving JPY 15 billion of that debt. That helps to finance JDI because JDI no longer has no obligation with respect to that. It also increases JDI's capital in terms of its financial position.

Four, INCJ is also making a sacrifice. They are returning all the Class A preferred to JDI. That's actually worth about JPY 20 billion, for free, and JDI is canceling those shares. Five, Ichigo and JDI are doing a debt equity swap at the closing share price of JPY 45 per share, which is yesterday. So the result of that is JDI goes debt-free. I mean it is utterly transformational in terms of our financial position. That removes issues about kind of can we get these products to customers even if they want them, and I can assure you they want them. So this is really important.

And the sixth element is, JDI was giving warrants to Ichigo, again, a JPY 45 per share. And this is a dialogue I give in the market with all of you. We think this is a winning strategy. We think we're going to deliver outstanding returns. These are struck at JPY 45. If the shares are above that level, then the money will come into JDI and we have the use of proceeds that I'll describe on the next page.

Next page, please. There are a number of things that we can do with the warrants. Most fundamental to them is driving forward hard on the METAGROWTH strategy, which, again, to repeat myself, but this is what's so important. You have to understand, I think we all understand this, in the business, or is there an investor in the business, what's gone right and what's gone wrong. What's going wrong in our case is we've taken all the assets, put them into a commodity product, which don't return. So METAGROWTH 2026 brings that to an end. We are focused overwhelmingly on JDI proprietary technologies.

And so what exists today in terms of the business model, is we have a technology set, which is also available from 5 other very good global display competitors. And so customers say, we want that technology, and then they go to, I'll say, who's going to sell to us at the lowest price. And we're changing that business model so we're not going to participate in those markets. And so these other guys can find among themselves.

And by the way, you see how kind of pro-cyclical and negative participating in those markets can be in a time like this where it's like we have products we're selling to customers and then the customer comes and says, these -- your peer, which is the second source on this, I said they're going to willing to do it for 20% lower because they want to fill the fab. What's your price? We cannot pursue in the market. It doesn't make sense, not going to do it. And so we're going to offer -- and I'll go into some detail with you today, a set of technologies that are available only from us. So we're got a whole bunch of use of proceeds that can be used should the warrants be exercised.

Let's talk about METAGROWTH. And this is not new. So I said accelerate it because we need to make a choice as to, are we doing the right things in terms of transforming our product portfolio. And again, the problem with our earnings right now is that we actually don't have our METAGROWTH propriety technologies shipping in any sort of size today. We're going to make this huge transition in the product portfolio over the -- beginning of the next 18 months and fundamentals going to happen entirely within kind of the next 36 months. And we're going to just generate a lot more value. So the focus is on global #1 technologies, taking that leadership, and we feel comfortable we've done that.

Next page. So Meta -- this is meant to be a comprehensive presentation. It's also kind of the information we provided before. So I'm going to refer to it, [indiscernible] so you don't have to listen to me forever, so it is going to run board. Let's go directly to the 6 key growth drivers that we mentioned. So can we go to the 6 drivers, please.

Okay. So one of the things that we also think is important is not only do you take technology leadership, that you think you don't make kind of outsized bets with respect to the future. Technology A is going to win. Technology C is going to win. Yes, maybe A and C win. Look, we're pretty confident that OLED, which is an extraordinary capable technology in terms of delivering high-performance thin low-energy consumption displays is a winning technology.

We can talk about kind of some of the competitors. I mean there's a certain amount of conversation going on right now. For example, about micro OLED, the super made technology is also extraordinarily expensive and hard to produce. We have a technology set there. And if the world goes on micro OLED, we expect to be a precedent there. But we think all we have is just kind of a phenomenal set of technology characteristics and price performance. It's got some problems, and I'll talk about how we solve those problems.

But anyway, so we've got a breakthrough technology in OLED called eLEAP. And we have other technologies. And so whatever going with this is kind of when you have literally 7 or 8 or 9 technologies simultaneously coming to the market to we're the best in the world, no one else can provide. You don't need all of them to win. And so that's an important part of having not just a single technology bet, but a technology portfolio rooted in our capabilities in glass semiconductors, displays or semiconductor technology business.

So we've got eLEAP. We've got HMO, I'll talk about this high mobility oxide, which is also revolutionary. We have the both, we're the only people in the world there, a company in the world producing those. Metaverse ultra-high resolution, we're #1 in the world.

Next page, please. AutoTech head-up display, we're going to be able to use some of our other technologies and always including eLEAP and HMO. We're also #1 in the world in head-up displays. Rælclear, we're #1 in the world in this. In fact, we're the only company capable of shipping a 2-way transparent interface. We also have new tech products and businesses that are coming.

I'll go into some specific details to give you some granularity on this because, look, these technologies and the value delivered to customers and how we deliver value is critically important to deliver robustness as both technologies and as a source of earnings for the firm, but I'm not going to go through every single detail on the presentation for the benefit of all of you, meaning I'm going to -- you're not going to have to stick with me for another 20 basis. So let's run forward.

eLEAP stands for environment positive, Lithography with maskless deposition, Extreme long life, low power, and high luminance and Any shape Patterning. Patterning, in the next page. What's critically important about this technology, and it is revolutionary. And it's kind of head breakingly revolutionary.

It's maskless. All OLED displays in the world are currently made with so-called fine metal mask, FMMs. And you can see kind of got these on the screen, the screens are in front of me. You've got this conventional OLED you've got all this black space. You only have 20% visibility from that -- I mean, kind of generation of life from the pixels, we doubled that and leave it to 60%. That's really all about -- this is actually a molecular deposition, but when you use a metal mask, it's cloogy and it gets in the way and you can't be as precise.

And so -- with our eLEAP technology, you get to tens brightness of OLED, you get 3x lifetime. As you can see the problem with conventional OLED is part of the reason why it's suffered in trying to enter the auto market, which needs durability is that it burns itself out over time. eLEAP has got 3x the lifetime. That's in part because you -- if you have a higher degree of kind of aperture ratio is called higher pixels on per density in the substrate, it means you can run less voltage to it, and so it enables to have a longer life.

So anyway, it's not only higher performance, where I'm going with this is because you don't use mask, you don't have to take down your factory constantly. Remove the mask and clean the mask, and has environmental benefits, but it also means your factory utilization -- capacity utilization goes up with eLEAP, probably 20% to 30%. Where I'm going is better performance, lower cost. That is what JDI is looking into the world.

Next page, please. We'll go into the ecological elements of it. But just guys we don't have mask, we're also not using toxic chemicals to clean up the mask. We don't have environmental pollution to water, decrease of CO2 emissions. It's a really very powerful ecological technology.

Next page, please. Again, first in the world. We're the only people delivering this. And here, the outperformance comes from a simultaneous combination again of outstanding performance and lower cost. So oxide is a mature backplane technology, back planes are what you use to drive signals to the front plane, which will be things like OLED and LCDs. Every display has a backplane. Common backplane technologies, things like oxide, LTBS, LTBL, mophie silicon. So oxide is great in a sense that it's mature and it's cheap to manufacture, and it's low energy consuming. Unfortunately, it's incredibly slow and gives you really poor performance. And so we have solved that with kind of this head breaking, similar to mask list deposition in eLEAP, high mobility oxide, which has never existed before. And what you get with that is you get the single best performance and lowest power consumption literally taking display power for exemption down by 40%. So it is enormously powerful breakthrough technology. We begin shipping eLEAP. Next year, HMO, we began shipping also.

Next page, please. Next page. Let me talk a little bit about the Metaverse. We'll all find out together how huge is going to be. We are #1 in the world in the technology and our market share. And to go again to why we exist to deliver -- if you want to deliver better values to consumers, it needs to be at a good price. And so what I've shown on the page here is we are the only company in the world shipping 1,200 ppi or higher displays. They're being used in VR applications.

If you actually put displays in silicon, it's pretty straightforward to go up to like 2,000 ppi. It just is. And so when you say, 1,200 ppi, how interesting it's that? I mean, actually, it's super, super important for VA applications because you're using these lenses. They generally 10x lenses, actually the experience you get as a user to use a 10x lenses on 1,200 ppi is only 120 and they give you some sense of this, your smartphone high end is going to be 400 to 500 ppi.

So this is -- so these are high levels of resolution. But where I'm going with this is they're on glass. Glass is incredibly cost effective. And so yes, we could do 2,000 ppi, 3,000 ppi on silicon at 7x the cost. And companies do that. It just doesn't fit the consumer requirement for having extraordinary higher resolution at a low price.

And again, JDI is about having the maximum best cost performance. We are not about having the most expensive technology in the world that's the best, we're about having the best technology in the world at a price point that is utterly compelling for the consumer. And that is why we leave in the Metaverse space. Our capabilities on the ability to do a high resolution on glass is unmatched. No other company can do what we do.

Next page, please. I'll jump forward because there's a lot of information here. But we're really good at giving people high-quality experiences at high resolutions. Anyway, next page, please. Keep our own word, JDI inside. Next page.

So we're #1 in head-up displays also. By the way, I'm guessing not very many. I mean, I think about 10% to 15% of cars in the world are using head-up displays right now. Part of the reason why we don't have more a bigger market for this is because HUDs actually require a certain amount of space up in the dashboard and combustion engines, they're big, they're in front, they take up space. It's always been a problem to figure out whether or not you want to use that space for head-up display.

The good news is that EVs, electric vehicles do not have the same requirement. So suddenly, you have the ability to put a head-up display in EVs in a way that you didn't with combustion engines. So that is a huge driver. And again, we're #1 in the world in this technology, #1 market share, for the market growth of this.

And look, this is an incredibly important safety feature. People look down in order to see what's going on, on the dashboard instead, you can put it right in front of them on the screen, you can provide them with better information. So we're very excited about what this means for our ability to deliver this safety improvement to drivers all over the world in EVs.

Next page, please. Rælclear is the world's first fully transparent display.

Next page, please. To be clear, not only it has glass like transparency and no other company is able to produce it, this is a proprietary JDI technology. It is also multidirectional, which is to say, people had transparent displays, we're calling this transparent interface because it has increasingly broad kind of usage. But people who had these displays that kind of aren't super transparent, and they're only transparent from 1 direction. This is the only technology set in the world, which is 2-way transparent. It's glass-like and people from both sides can see through it.

Next page, please, and you can see some sense of how that works in the environment. I'll bring it to the close there. We've got a whole bunch of technologies that are coming out. We have, for example, 3 internal ventures. We've only -- that report directly to me with new technology that make really important. One of them we've already announced is in this presentation is called LumiFree, it's the first technology in the world that takes lighting and makes it flexible on free as opposed to fixed.

There are 2 others in the life sciences area that we haven't announced yet in terms of what the product is going to be. But both are very, very important to our future. I'll bring it to a close there. There's an information in the presentation. I'm grateful if you wanted to look at it, but I don't want to talk too endlessly. So just to come back where we were.

We did a major capital injection today, to put us in the place where we can deliver on these global #1 technologies, which will be transformational for our profitability and transformation for our customers. They need this from us. We have customers to give a very real example. We got our first confirmed contracted customer owner for eLEAP last week. So a bunch of conversations going on. We're going to have a lot more contracts and a lot more shipments of eLEAP going forward, but the very first one.

It is so strategic for the customer. I can't talk about what the details are. It's a non-Japanese firm, they really, really need us to be there for them. They intend to be the first in the world to deliver eLEAP technology to their customers is the way they're going to differentiate themselves. And we need to be the financial wherewithal to win -- to be around for them and deliver this kind of technology that no one else has.

So it's really very important what we announced today, and I thank you for joining today's call, and I hope you'll stay with us and watch the way we execute on this and deliver the Metaverse technology to the world.

At this point, I''m done. Happy to take anymore questions or comments. Thank you very much, everybody.

[Kumi Higuchi, executive]

[Operator Instructions] Any questions from anybody? So if you -- as there are no questions, this completes today's meeting. Again, thank you very much for joining the meeting today, and we are happy to get any questions if you come up with questions later. Thank you very much, and have a nice day.

[Scott Anderberg Callon, executive]

Thank you, everybody. Have a good day. It's a tough time in the world. Take care, be safe.