Japan Display Inc
TSE:6740
Earnings Call Analysis
Q3-2024 Analysis
Japan Display Inc
The company bounced back remarkably from the earthquake that struck Ishikawa Prefecture, with the impacted fab resuming full production within a month, thanks to the concerted efforts of a dedicated task force and suppliers. The management anticipates no significant impact on current year earnings due to this event. Further brightening the narrative is the OLED segment, which after turning profitable, is expected to grow by a hefty 76% year-on-year in sales. This optimism is fueled by high demand and the impending launch of the next-generation eLEAP line, positioning the company as a leader in the OLED industry.
In stark contrast to its rising OLED business, the company acknowledges the struggle with its unprofitable LCD business. Determined to reinvent this segment, it is embracing new opportunities like a market shift in high-performance LTPS LCD displays and geographical diversification away from China and Taiwan due to geopolitical risks. Plans center around achieving economies of scale similar to its profitable OLED segment and launching novel products, like the newly unveiled Smart Ring technology, Virgo. These initiatives are expected to amplify profitability and diversify the company's portfolio.
Over nine months, sales reached JPY 180 billion, and despite losses in EBITDA and operating profit, the company outdid its internal plans, credited to substantial cost reductions and a favorable currency environment. However, this did not improve net income levels due to a significant impairment of JPY 11 billion on LCD-related assets. For the third quarter alone, sales fell by 13% to JPY 60.5 billion but saw improvements in EBITDA and operating profit, mainly due to a strong OLED performance and strategic cost cutting. Efforts to downsize unprofitable LCD smartphone lines are starting to reflect positively in sales growth for automotive and smartwatch and VR segments. Despite various operational improvements, the full-year forecast remains unchanged from previous guidance, keeping the sales target at JPY 247 billion with an expected JPY 34 billion loss in operating profit and a JPY 44 billion net loss, as the company stays cautious due to softer VR market conditions.
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Welcome, everyone. We will now begin Japan Display Inc.'s third quarter earnings briefing for the fiscal year ending March 2024. We appreciate you taking the time to join us today. The materials will be using are available on our website. Please be aware that we are recording today's briefing, and it will be uploaded on the YouTube later.
Unfortunately, our CEO, Scott Callon, who was scheduled to speak today cannot attend. We apologize for his absence. Our CFO, Haruhiko Sakaguchi, will be presenting today. So let's get started. Haruhiko, over to you.
Hello, everyone. Thank you so much for taking the time to join our third quarter earnings presentation today. As just mentioned, Scott Callon is not with us today. So I will be speaking to both the earnings overview as well as the earnings results. But before I get started, we would like to wish our deepest condolences to the families and the friends of the many, many people who lost their lives in the Ishikawa Prefecture earthquake and also extend our heartfelt sympathies to all those people affected. And we truly hope for the swiftest possible recovery for all of those people affected.
With that, I'm going to move on to the earnings overview for our third quarter. Today, I'm going to mainly talk about 3 points. The first one, which you see on the screen right now is about the earthquake in the Ishikawa Prefecture and its impact on us. As we've announced in our press releases, our fab up in Ishikawa was impacted by the earthquake specifically, the fab suffered from pipe bursts -- bursting pipes. We had water leakages, equipment were stopped, damaged. We had misalignment to precision in equipment. And so the Ishikawa fab really did suffer from the quake. But that doesn't stop us.
The very next day on January 2, we assembled a task force of about 70 people to immediately begin our recovery efforts. And many thanks -- with many thanks to the task force and many other people within JDI. And in addition to that, with the help with a tremendous help from a lot of our suppliers and equipment makers, we were able to get the plant partially back online as of January 24. And only a week later on January 31, we were fully back into production. And so far, today is February 9, we've been running the plant without any particular problem so far.
The plant was offline for roughly a month. But with the combination of the inventory we had at hand and also with the ability now the plant is back up and running to make up for the lost production in February and March, we think we can actually make up for it. So the expectation as of now is that the -- despite the impact on the fab, we don't expect earnings for this year to be significantly impacted for this.
So we're going to continue to examine this and if things change, we'll let you know, but the expectation so far is that we don't expect for -- the fact that the fab was down to have any significant impact on our current year earnings. The second point that I would like to speak to is the fact that OLED is going great. As we've explained before, OLED has recently turned profitable for us. Our OLED business, it is a strategic part of our core business, and it is really progressing very smoothly.
As you're all aware, the display market in general, is experiencing a shift from liquid crystal displays, LCDs into OLEDs. And so OLED is a growing industry. And within that growing industry, I think JDI is very strongly establishing itself as a technology leader within the OLED space. And we're seeing that on the back of very strong customer demand for our products and also in the fact that we are very steadily growing our market share. Our fabs with respect to OLED are running at 100%. We have more customer demand than our capacity can meet. This is a great opportunity. We expect our next-generation eLEAP line to come online later this calendar year.
And so we hope to make up for some of the shortage in capacity as we start to launch our eLEAP line later in the calendar year. We're forecasting that full year sales growth versus last year for our OLED business is going to be up 76% year-on-year, and we expect that growth to continue on into next year, the year ending March of 2025 and beyond. And as we explained in the November half year earnings, our OLED business has turned profitable. We've really been able to realize the economies of scale, and that's going very steady for us. But it doesn't just end there. There's a lot of excitement about our next-generation OLED technology, what we call eLEAP.
In addition to all the functional advantages that the technology offers, it also has some very unique and unmatched cost advantages. So we think between the functional and the cost advantages, this is going to be a huge ongoing driver in the future for our OLED business. And in addition to that, as you're all aware, we are currently in negotiations with the city of Wuhu in China to jointly launch a planned an eLEAP plant in China, which once it comes online, would effectively expand our eLEAP capacity by 50x. And those discussions, they're progressing very smoothly. So we're really working towards getting that eLEAP plant realized in China.
The third point, however, is despite the strength in our OLED business, our conventional LCD business does remain unprofitable. We are very keenly aware of this and are very aware that we need to make some radical transformations to change the situation. We're committed to getting this done, and we will get this done. We have an ongoing sort of look -- relentless look in terms of where we can take out costs.
In line with our METAGROWTH 2026 growth plan, we're going to explore every avenue where we can leverage our unique Global #1 technologies to create either new technologies, businesses or products to help drive improved profitability for our LCD business.
And just as we did with our OLED business, we really want to get our LCD business to a point where we can similarly realize economies of scale. We really need to load up our fabs, get our capacity utilization on our LCD fab lines higher to the point where we can start seeing some economies of scale and have those contribute towards this particular business, the LCD business turning -- improving in terms of profitability and then hopefully someday saying turning profitable as well. There are also some interesting industry sort of trends occurring now that present some opportunities for not only JDI, but the industry at large.
One of them is that there is a shortage of supply for high-performance LTPS LCD displays. And in addition to that, there is a sort of a geopolitical risk avoidance or the manufacturers are trying to move part of their production away from locations like China and Taiwan to mitigate some of the geopolitical concerns out there. And so the combination of the shortage for LTPS-based LCD panels as well as the shift away from China and Taiwan, some of that capacity shifting away from that is an opportunity for JDI to sort of capture that demand and use it to help boost the utilization of our fabs.
And also not just for JDI, but these also present very interesting opportunities for the industry at large and for example, consolidation of the industry. So we're carefully monitoring these movements and trends within the industry and making sure that we stay on top of them and we monetize where we can monetize on them. It's not just about fixing our LCD business. We're looking -- certainly, even beyond that, we're effectively trying to transform our entire business model.
So in addition to growing the already profitable OLED business, trying to fix the profitability issue of our LCD business, we're looking at new businesses, new products. And one such example of that is a brand-new product that we just announced this past Tuesday on February 6, which is a Smart Ring technology, which we call Virgo. And so this is exciting. It sort of adds to our existing line of new businesses, such as our transparent displays, our free lighting. And so we think that these new businesses as they grow, will also help to diversify our business portfolio and really strengthen the overall profitability profile of our business going forward.
So that's what I have for the overview for our third quarter earnings. I want to talk now about our results. I'm going to start with the 9-month cumulative results as of the third quarter. As you see on the screen, sales was JPY 180 billion for us. EBITDA and operating profit, both still at a loss. EBITDA was negative JPY 23 billion. Operating profit was a negative JPY 27.7 billion figure, but both of these actually outperformed versus our internal plans. And they outperformed on the back -- primarily of strong ongoing cost reductions and a little bit of a tailwind from the currency.
Unfortunately, the outperformance versus our plan at the operating profit level didn't necessarily translate down into the net income level. We were -- our net income clocked in at a JPY 38 billion loss, which is effectively in line with our plan. The reason why the outperformance from the operating profit didn't flow down is because we chose to impair some of our LCD related assets. It was a fairly large impairment of JPY 11 billion and that sort of offset the gains we had at the operating profit level, thus keeping our net income -- our net loss at the bottom line, flat versus plan.
Now we'll take a look at the 3-month stand-alone quarter for the third quarter. The picture here is that sales came in at JPY 60.5 billion. That was about a 13% fall off of last year, but both EBITDA and operating profit saw a strong year-on-year improvements versus last year. They are primarily driven by what I explained earlier in the overview, just tremendous strength in our OLED business. The fact that the OLED had a breakthrough turnaround to profitability as well as ongoing cost reductions.
But similar to what I had explained for the cumulative earnings, the improvement in the operating line did not translate down to the net income line because similarly because of the impairment that we chose to report in this quarter, but also because last year's third quarter had an extraordinary profit reported on the back of an asset sale, and that effectively fell off, dropped off of the report. So because of these 2 reasons, net income is actually down a little bit. But once again, the core performance of our business, as expressed by the operating profit line, actually saw an improvement.
And this is in line with what we had explained since the beginning of the year, we were telling you that a lot of our efforts in terms of downsizing our unprofitable LCD smartphone business, the fact that we're trying to either shrink or exit out of unprofitable lines of our auto business, all of these efforts we said would probably not bear fruit in the first half and would slowly start to manifest and enhance profitability in the second half and beyond. And hopefully, what we're seeing here in the third quarter stand-alone is the beginning signs of those efforts starting to bear fruit.
Next, we're going to look at sales by segment. Again, we're going to start with the 9 months cumulative performance for the third quarter. On the top of our core businesses, Automotive, Smartwatch and VR and on the bottom are noncore businesses, our LCD smartphones. The automotive business sales down a little bit. I explained, we are sort of shrinking and exiting unprofitable lines. So a little bit of that is coming in there. But smartwatch and VR up very strong, primarily on the strength of our OLED business, our smartwatch business.
And conversely, this LCD smartphone business, down significantly year-on-year, but that's only to be expected. We are strategically downsizing and eventually exiting this LCD smartphone business. So that's pretty much proceeding as planned. The next slide here is the same thing. It's the sales by segment, but for the 3 months stand-alone third quarter, what you're seeing here is that both automotive and smartwatch and VR are experiencing an increase in sales.
And again, it goes back to what I just mentioned 2 pages earlier, a lot of the efforts that we are making to strengthen our overall sort of business portfolio profitability will slowly start bearing fruit in the second half of this year and moving forward into next year. And so what we're seeing here in the stand-alone third quarter is hopefully manifestation of that trend. LCD smartphone exactly as I explained before, we're strategically downsizing and exiting this business. So only expected to see that significant drop right there.
The change in operating profit in the form of a waterfall chart. First of all, starting with the 9 months cumulative performance for Q3. We explained earlier that the operating losses expanded from the previous year's cumulative third quarter. As you see there, sales were down. So the fall in sales is really what's sort of contributing to the volume line right there. The mix is down just a little bit. What happened here is that we were expecting to make up for the lost sort of marginal profitability of our LCD smartphone business as we shrink it with the growth in our VR business.
And even though VR business is up year-on-year, it's not nearly as up as much as we had hoped for it to be. Our plans were much, much higher. And so unfortunately, we weren't able to make up for, again, the loss marginal profitability as we shrink our smartphone business, and that's what you're seeing a little bit there in the mix line right there. We were able to reduce -- further reduce fixed cost. You see that line there of an 8.8% upward contribution to operating profit change.
That comes mostly from our production and at our Higashiura Fab as well as cost reductions at our Mobara Fab, but they, unfortunately, were not enough to offset the volume and mix decline. And so again, year-on-year on a 9-month cumulative basis, we saw a little bit of an expansion in our operating loss. The picture changes as we've been seeing when we look at the stand-alone third quarter, which is the first part of our second half. Here, sales are down. And so you see the negative volume contribution.
However, mix is up here. And the primary driving forces here are, as it says on the slide, #1 is that our OLED is progressing really, really strongly. Our OLED smartwatch is experiencing and seeing very strong growth. And even though it's not on the slide there, it's actually also contributing to this mix improvement, is our automotive business. Now that we have been working to either shrink or exit some of the unprofitable lines, that's starting to sort of manifest in a mix improvement here.
And also in the third quarter, we were able to pass on a little bit of our cost increases on to customers as well. So that's also manifesting in that number you see right there. That, combined with fixed cost reductions and a little bit of reversal of some inventory revaluation effects meant that we saw a pretty significant improvement in our operating loss from stand-alone third quarter last year to stand-alone third quarter this year.
That's it for our performance, our earnings results for the third quarter of this year. Let me just finish off my explanation with an update on our forecast for the full year. I said update, but in fact, we're leaving our forecast for the full year unchanged. As I've been explaining to you thus far, our Q3 numbers were very much in line with plan. And we don't really see much change on the horizon in terms of our fourth quarter. So we feel that our full year plans are still very much achievable. So we're going to be working towards those.
The only thing probably worth mentioning is that back in November, when we had our first half earnings results, we explained to you that we had downward revised the sales outlook for our VR business. And we also said in the presentation that we wait to see how year-end sales of VR proceed. And based on how the year-end sales perceived for VR, we would, if necessary, revise our VR outlook for the year. It turns out that sort of market-wide performance -- year-end performance for VR sales were not that strong. And so we feel that the downward revision we made back in November probably still stands as of now.
So again, that's another reason why we decided to keep our full year forecast as is and unchanged. So we're still looking to achieve JPY 247 billion in sales and JPY 34 billion loss at the operating profit level and a negative JPY 44 billion loss at the net income level.
So that's all I have in terms of the earnings overview and the earnings results. And so I'm going to leave it at that. There are a few more pages at the back of the presentation, which are really just sort of they hash out a lot of the topics that I covered in the overview. So the essence of what you see in the latter pages here are effectively more details on Ishikawa earthquake, the strength of our OLED business and so forth.
So I'll leave it for you to read these pages at your leisure if you choose to do so. But for now, I'm going to end my explanation and open up the call to questions if there are any.
[Operator Instructions] Anyone has any questions. It seems there are no questions, so we'll wrap up today's briefing. Thank you very much for joining us today.
Thank you all for joining us today. Thanks so much. Bye-bye.