Japan Display Inc. (6740) Earnings Call Transcript & Summary

Hello, everyone, and thank you for joining the call today for Japan Display's March 2023 Second Quarter Earnings. My name is Kumi Higuchi. I'm the Head of IR Department from Japan Display, and I will be the moderator today. Today's presentation slides are available at www.j-display.com. Scott Callon, our Chairman and CEO, will host the meeting today. Scott Callon, please go ahead and start the presentation.

Hi, everybody. Thanks so much for joining us today. We know you're busy. And it's a tough time in the world, continues to be. So we're incredibly grateful for the opportunity to spend time with you. I'll start with a presentation. We'll go through the first half numbers, and we'll go through the progress we're making on our METAGROWTH 2026 growth strategy. And then if there are any, we'll take questions or comments of any sort. Before I dive into the presentation, let me start with 2 points, if I could. The first is an apology. We announced an earnings forecast downgrade for the full year this year, and that's not at all what we intend to do and should do. So I think you all deserve an apology. We had a forecast for the full year of a little bit less than JPY 20 billion in terms of operating loss, and we pushed it up to over JPY 30 billion. So obviously, we take this very seriously. We are cautious about our numbers in order to always hit them, and that didn't happen this time. And so we're looking very hard at what we need to do on an ongoing basis to make sure this doesn't happen again. The second point is linked into the first point. So despite kind of being conservative and prudential about showing numbers in terms of our guidance, we missed them. And the backdrop to that is things are really, really tough in the world right now. It's an incredibly severe operating environment. So we recorded a loss in the second quarter of JPY 4.9 billion. So that's a little bit over USD 30 million at the current exchange rate. Just to give you some context for that, we've got some very strong competitors. Our goal is to not compete with them. And so I'll tell you about our strategy as to how we are becoming profoundly different from what used to be our peers, but -- it could give you some sense. So against our JPY 4.9 billion loss in the quarter, in the same 3 months, LG Display reported a loss of over JPY 80 billion, of it's 17x higher than us. [ Intelex ] reported loss of over JPY 70 billion. AUO reported a loss of over JPY 60 billion. Again, we're hanging out a little bit under JPY 5 billion. Sharp is closest to us in the display business. They lost over JPY 10 billion, over twice us. So I think it's worth understanding that the changes we've made and the dramatic restructuring and, frankly, cost cuts we've made to take us from a business model, which is way too heavy in CapEx towards one that's much more asset light, one that's far too commoditized with really good competitors like these other folks I've just mentioned to one that is focused on JDI proprietary technology, we're able to write something no one else has, is important, continues to be important and will be what we execute on going forward. So let me turn to the numbers. As you can see before you, key points. We came in below forecast on sales, above forecast on OP operating profit for the first half. That's a mix of factors. In the second bullet point, weak mobile demand, but strong automotive demand and the positive effect of the yen's depreciation for us in terms of driving up our yen-based sales since we sell a bunch of stuff in dollars. OP was down about JPY 5 billion year-on-year on rising material, energy and shipping costs. And as I just touched upon, we did a full year forecast downgrade, reflecting the operating environment that we're currently in. Next page, please. So there's a bunch of numbers. I'm not going to go through in too much detail. I'm happy to take questions on it. As I just described, losses ran primarily on positive FX effects. And we've just been absolutely relentless in taking out fixed and variable costs. And quite frankly, it reflects a history of structural weakness on our part and decisions that we need to go harder and make far more dramatic changes than some of our peers. And at this point, that's proven to be giving us a lot more downside protection. And we think we've preserved the upside, and we'll talk to you about that with -- we expect at METAGROWTH 2026. Next page. In the year-on-year comparison, we're off year-on-year, and this is primarily because input costs have gone through the roof. We can see kind of the waterfall on the next page, so let's go ahead and go to that. It has fewer words and more graphs. Next page, please. So on left-hand that side, you can see what's happened. Relative to the forecast, we beat the forecast. We had a drop in volume. For me, this volume drop in the negative JPY 7.9 billion, we've been relentless about taking [Audio Gap] Volume and product mix looks to be -- volume and product mix, actually, what's buried in there is a bunch of variable costs that have gone up. So input costs, as I said in the previous slide. So primarily what happened during the first half is we had surging input costs, and we were able to take out some of that with FX impact, some of that with kind of ongoing massive kind of pushdown on costs. I think in the fixed cost reduction, you should see it's negative JPY 4.2 billion, underestimates how much fixed costs and what we've done on this area. Because that is actually total fixed cost and often in part by kind of us taking down cost, but things like electricity prices and where industrial gas is. I mean the prices has gone up enormously after the invasion in Ukraine. So very, very tough operating environment, and that's where we are. Next page, please. So that takes us to a look on the full year. You should know that despite substantial progress globally in solving the semiconductor shortage, there still is an incredibly severe shortage of analog ICs, integrated circuits, going into auto production. It continues to limit the ability of automobile manufacturers to make as many cars as they want. It affects therefore total volumes. And so despite actually still relatively robust, certainly compared to other areas, robust demand in the auto space, they are experiencing kind of pretty severe impacts. Another way of thinking about it is kind of legacy processes, which are more active, some of the old technology. It's more used in the auto space. It's still deeply impacted the kind of more cutting-edge brand-new processes, or semiconductor shortages is actually very kind of robustly improved at this point. You can see, we expect to see more sales relative to the previous forecast in mobile into the U.S., but we're going to see decreased sales in China. I just talked about kind of what's going on in automotive. We've got a big drop-off in automobile, which is primarily one major [ BR ] customer dropping down their order book going forward. That's what I have on the numbers. Turning next page, please. I'm sorry, there was one more number page. Here again, a few words and more pictures. Here's what that looks like in terms of the running from negative JPY 19 billion to negative JPY 34 billion. Again, the volume and product mix is hiding up a whole bunch of input costs that are showing up. And we're doing as much as we can to offset, but there's not a full offset that can happen. So again, the operating environment, I said, is really difficult, and our peers are announcing these [Audio Gap] I know what our plan is, and I've just described it to you. We've become substantially more asset light. We will continue to do so. We put kind of premier engineering resources into high-end technology with a lot of intellectual property content and value, doing things that no one else can do. It's a worthy question as to what kind of our peers is going to do. But clearly, the industry is going to have to make some dramatic moves. The next page is actually the last page. So just to -- we're doing a lot of things across the board. So that this doesn't end up being like a 2-hour presentation, I'll just focus on the biggest new content on the page, which is we made the decision to significantly downsize our commodity LCD smartphone business. And that's kind of consistent with the fundamental strategy of the firm, is that we are kind of too asset-heavy, too CapEx-heavy with kind of inadequate returns on a commodity product, and so we've got to stop doing that. The truth of the matter is we have a fairly large LCD smartphone business. We have customers in it. They want us to come in just to ship to them. But the biggest problem we're facing right now, and I'll turn to the METAGROWTH strategy, is we're doing -- we've got 6 growth drivers. They're all proprietary. We're doing all sorts of things at once. And we've got a desperate shortage of talent. I mean there's just too many things if we're going to match production with really the first time anybody in the world has done this. No one else can do this technology. It's really, really hard. And we've got a severe shortage of talent internally. And so we need to reallocate our engineers towards more value-creating activities. We should do that anyway, but this involves some tough conversations with customers who want us to continue to ship. But we've made the decision to go ahead and take talent out of this commodity business, which we were going to exit over time anyway. To be very clear, we're exiting commodity LCD smartphones. Our new technology set, for example, eLEAP, which is next-generation OLED, the only company in the world -- I mean the first in the world ever to do it. It's maskless OLED. Anyway, I won't go into too many details. You can ask me questions about it if you want. But it's a remarkable improvement in OLED technology that clearly is applicable to the smartphone space. So what that means is we have a plant in Mobara in Chiba here near Tokyo. We're going to reduce production there by about 50%. All the employees stay. We're taking them out of that area because we need them in other parts in the growth drivers of the business. We try to do everything at JDI, with like 8 birds with a stone if we can. So the reality is -- the reason why this is a hard decision but ultimately, clearly the right decision, if you take down the capacity, you free up your talent to work on other more profitable and value-driving endeavors. It also means that we can take all the energy costs out of half the fab that we're shutting down. This is not a full fab closure. We will keep the equipment ready to push it up again. But for the moment, we're going to reduce our LCD smartphone production, take out about JPY 8.2 billion of costs in doing so, free up over 100 engineers to go work on other things. We think this is a very strong choice. Let me turn to the METAGROWTH strategy. Next page, please. So the progress update. Just to remind you, the key is -- the underlying element is underlined here. Look, it's just not -- it's not value creating to be one of kind of 6 world-class display manufacturers that all can do the same thing. So we need to be #1. And so we've taken a very hard look at our product portfolio and technology set and pushed ourselves overwhelmingly into areas where we are #1. And we can deliver something that best serve customers in the world. That's kind of -- that is absolutely fundamental to being a firm at sustainable growth. Next page. And just a reminder that META stands for comprehensive, overarching, so when we say METAGROWTH, we mean a lot of growth. The metaverse is also a JDI growth driver, but it's primarily about going after something that's really transformational. Next page, please. And again, the core strategy has 3 elements: global #1, technology leadership. The second one is about speaking directly to growth, doing something that's transformational. The third is, we have a very strong green tech focus. All of our products are -- have that element. I mentioned, for example, eLEAP, which is our next-generation OLED technology. It's maskless. What that means is you don't need a fine metal mask, unlike all OLED production today. And when you don't need a fine metal mask -- and just so you know, during the production process, you use all these toxic chemicals to clean it. And so we get rid of this extraordinary environmentally dangerous. Because if you handle the chemicals right, you're having -- you can minimize your environmental impact, but we get rid of a seriously negative environmental element of the production process. It also happens to be -- and I told you we try to do like 8 birds with one stone. By getting rid of mass in your production process, it means you don't have to take your fab down. And guess what? Everyone, everyday when they're producing OLED with conventional -- OLED panels with conventional OLED technology, you have to shut production multiple times a day to change the mask, to clean the mask. It gives you much higher utilization rates. Anyway, so it's a pretty strong technology set. Next page, please. I realize in drafting this that there's a whole bunch here that I can't really speak to because this is about conversations with customers on their product set and how we fit into it and how we're going to put eLEAP into it and HMO into it, high-mobility oxide, metaverse applications. So my apologies, I can't -- I'm going to have to stay pretty high level on this page, lots of things going on. Technology development is going very well. Going so well that we -- and customer pull is so strong that getting the mass production with a number of these technologies at the same time drove our decision to -- we've got to take our engineers out of commodity smartphones and put them into this product set. A little bit easier to talk about what's happening with Rælclear, which is the only technology in the world that gives you two-way transparency in an interface. We actually call these transparent displays, and then we've been out talking to customers. And they're like, this is phenomenal, and it's bigger than just displays, these interfaces. So with customer encouragement, we've started talking about this as an interface technology. But it enables you to have visualization that -- and we're the only people in the world who can do this, that is two-way in my glass. And it's really extraordinary. So we'll see where we can take this. We're getting increasingly confident this is going to be very, very big. And then new tech products and businesses. I'm going to talk on the next pages. We have a number of rollouts for us, technologies rolled out. LumiFree, we announced last month, and the world's 3D imaging technology. I'll talk about why that's important. We actually announced just Monday this week. Next page, please. So I'll go briefly on this. But the key element of LumiFree, it's the first free-lighting technology ever developed but for LEDs. And what it means is it gives you the ability to instantaneously change direction of lighting and shape. It's really pretty remarkable, and we're using an app. And so classically, like in the room I'm in right now and in the rooms you're in, you've got fixed lighting. And it's fixed and you cannot adjust it. And so you're sitting on at the dinner table and it's one of you. And we have lights for everybody because it's kind of you can only have light for one. Instead, with LumiFree, you can literally have one person has a light and a second person shows up. You can put the light on that person also, so there's element of flexibility. I don't know if you're like me. But way back in the day, I was like, okay, we have a couch. We need to put the couch under the light. Don't need to do that anymore. It's omnidirectional. It's really, really interesting. And there's an element that is a green tech element to it also because the truth of the matter is, if you have more lighting than you need, you're using more kind of energy to produce the light. So it enables you to have very controlled lighting. Next page speaks to -- we just don't know what the market size is on this. It was clear this is going to be valuable and important. We don't know if -- when phones went from fixed to mobile, I mean kind of fixed is almost disappearing in the world, everything's gone mobile. We don't know if mobile lighting, kind of free lighting, is going to replace 1% of fixed lighting or 50% of fixed lighting. But we're pretty confident it's going to be very big. At a minimum, we see sales of JPY 10 billion or more per year a couple of years out. Next page. So the next thing that we've done that's also first ever in the world, and this is in combination with Hitachi, so this is joint development. And our contribution is the LCD technology. We've developed the first 3D imaging technology. It's supplying LCD panels. And what's powerful about that is you can actually get straight video. Like on the right-hand side of the page, you see the thing called objects. You can actually get video or camera photography of an object, but you can also do a depth map. A depth map is important for applications like, for example, it's effectively -- it's a replacement for things like LIDAR, sensor technology for automated driving. And so it's really a very broad-use technology. Next page. And you can see along the bottom, there are all these applications for it. It is a very fundamental breakthrough. And what's key about it, as you can see on the top, compared to some of the other 3D sensor technologies, so we've got our new 3D imaging technology. It competes primarily with something like a stereo camera. And in the case of a stereo camera, you've got 2 cameras, much bulkier, much more expensive, much more complex. This is super lightweight, a major intellectual breakthrough. As much as anything else, a lot of IP involved in it. So we'll see how big we can make this one. Lots of customer end games underway given the size of the market. The TAM on this, the total addressable market on this is very, very large. Next page. I talked about kind of the ongoing changes we're doing to make this a much more asset-light business, I mean, to get rid of the problem of super-high CapEx-heavy but not enough returns. There was a Chinese subsidiary sale that we announced recently as part of that Suzhou JDI Electronics. We're selling to DSBJ, a very good Chinese LCD module manufacturer. The goal is to -- for us to become more asset-light, lower our fixed cost, increase our competitiveness and profitability. And on the right-hand side, you can see this is a third in a number of factory actions we've taken. We sold KOE to Wistron, a very strong Taiwanese EMS, last year. We have a fab in Higashiura, which is a front-end fab. So that's an IC prefecture in Japan. [ T3.5 ], so poor competitiveness. And so that's -- we made a decision to close that. The combination of those 3 takes our fixed cost down by JPY 25 billion a year. I mentioned that we're going to take cost out of Mobara by doing a utilization reduction beginning from next April. That's going to take another JPY 8 billion in year-over-year cost, so JPY 33 billion in terms of taking down fixed cost and increasing our operating leverage. Next page, please. So we downgraded this year's forecast. And so it's a super good question as to what happens going forward. We left FY '24 and '25 and '26 unchanged. Actually, given the current exchange rate and given the fact that we're an exporter, those numbers will go up by quite a bit. But we have revised FY '23 numbers for next year, and they look strong. And the next page will give you the details on that. Next page, please. So first to start, kind of if we're forecasting losing about JPY 35 billion this year, on what basis do we think we're going to make JPY 5 billion next year? And the answer is on the page. We've taken a very hard look at this. But the FX impact is very small. The average -- our weighted average FX rate for this year, we expect to be JPY 139. We're doing this guidance for next year at JPY 140, so it's only plus JPY 0.8 billion. The 2 big drivers are volume and product mix. We expect to see significant growth in our VR, OLED and auto businesses next year. The profitability -- we're taking in product -- in terms of product mix, we're taking out LCD smartphones that I spoke to. VR, OLED and auto are going up. Those are far more profitable than the commodity business, LCD smartphone business. We've got fixed cost reductions that are continuing. I already touched on Higashiura. You can see it says a JPY 5 billion improvement. That's JPY 9 billion improvement coming from Higashiura fab production and JPY 8.2 billion coming from Mobara fab cost reduction, and that's offset by JPY 12 billion of input cost increase. So just so you know, we've got plus JPY 17.2 billion minus JPY 12 billion of negative impact on input costs, and that still gets us to plus JPY 5.2 billion. And that's how we go from last year's -- from this current year number to next year's numbers. You can see on the bottom, we've also got changes relative to what we announced on May 13 of this year when we announced the METAGROWTH strategy. And there, the big moves are FX and volume. Volume down, a big negative drag. And I said to you before, this is a really hard operating environment, and we can expect it to continue. And certainly, we should plan and operate as if it were to continue into next year. We can ramp up production if we need to. But for the moment, we're assuming a significant decrease in volume relative to what we thought was going to happen in May. And then that's offset in part by an FX impact, which we don't control. So we know that this is not a hard work. This is the end, for some reason, has [ plunged ]. I guess we don't need that conversation. I hope you come to Japan. It's an extraordinary lovely country. Working very, very well and with the yen at near JPY 150, it's really cheap. As an exporter, this move is very meaningful for us still. We are robustly competitive at nearly JPY 150 to the dollar, and we're going to take advantage of that. So that's the fixed cost reductions. As you can see, the new one is Mobara fab cost reduction of JPY 8.2 billion. There's another JPY 0.8 billion that we've worked out we can get out in terms of fixed costs. And so it turns out that we were looking at it in a very different operating environment and a very different kind of forward scenario. We thought next year, we would get to profitability of around JPY 4 billion of OP. Having rerun all the numbers again, we expect to get to JPY 5 billion. And a lot of things have kind of moved around in between, but those are real numbers. And we fully expect to get there. Next page, please. This gives you some sense of how we've reworked our product portfolio to take ourselves out of commodity product into much higher-value product. We haven't revised FY '24, '25, '26 numbers for smartphones, so this probably go away. You can see the gray is the smartphone area, and this is -- we've just done a huge pushdown of that to push ourselves into far better products in terms of the value that we create for customers and, therefore, the margin that we deserve to get. Next page. This is the last page. I've talked a lot, and I thank you for your patience listening. It kind of -- it's just numerous, the growth drivers that we're working on are on the bottom of the page. It talks what we're doing in terms of our cost reduction, becoming asset-light and giving ourselves kind of strength in down cycles, again, to reiterate the point. This incredibly tough operating environment doesn't change what we were going to do. It just kind of reinforces why it's so important. And we fully expect to get to profitability next year on that basis of executing against the plan. Thank you so much. Really grateful for your time. Happy to take any questions or comments, if there are any.

[Operator Instructions] If there are no questions, this concludes today's meeting. Again, I would like to thank you all for taking time out of your busy schedule to join us today. Any comments?

Comments? No, let's -- thank you, everybody. Let's run forward. Really appreciate your time. Thanks so much.

If anything comes up, please feel free to contact us. Thank you very much. Have a nice day.