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

Greetings, and welcome to the Japan Display's earnings video conference for the second quarter of fiscal year ending March 2024. With us are Scott Callon, Chief Executive Officer and Chairman of the Board; and Hiko Sakaguchi, Chief Financial Officer. Please note that this conference is being recorded and will be posted on JDI's YouTube channel in a few days. [Operator Instructions] Now Hiko will start the review on the Q2 earnings. Hiko-san, please go ahead.

Hello, everybody. Thank you so much for joining the call today. I'm Hiko Sakaguchi, the CFO of JDI. I'll be giving you a brief explanation about the results -- the first half results for JDI as well as giving you a bit of an explanation for the upward revision in our full year forecast. And that will be followed by our CEO, Scott Callon, speaking to an update of METAGROWTH 2026, our growth strategy. And with that, I'm going to dive right into our first half earnings. I'm looking at Page 4 right now, this is the results of our first half. What you see in front of you is sales came in at JPY 119.9 billion. Operating profit was JPY 21.4 billion operating loss. And net income was a JPY 28.7 billion net loss. So dreadfully still in the red, our heartfelt apologies for these numbers. But on the other hand, when you compare these numbers versus the plan that we shared with you in the beginning of the year, we've actually outperformed on all items. Starting with sales. Our core businesses, automotive and smartwatch and VR, are steadily up. And our noncore business, which is the LCD smartphone business, we have been strategically shrinking this moving towards an exit of this business. And if you look at our profit lines, we've outperformed on all of the lines, most -- primarily on the back of strong positive effects. We have higher yields -- higher fab productivity. We've continued with relentless cost reductions, and probably most importantly, a breakthrough to profitability on one of our key strategic businesses, core businesses, which is our OLED business. Just to make a note, we've actually changed the names of some of the sort of sales segmentation here. What we used to call mobile, we have now made that LCD smartphone. And what we used to call nonmobile, we've now made that smartwatch and VR. We feel that these names sort of better represent what exactly is going on within these sort of sales segments. We haven't changed the segmentation itself. It's really just the naming of the segmentation, but hopefully, this makes things a lot more transparent in terms of what's happening with the businesses. The next page is Slide 5. I'm going to breeze through this because most of this content is a rerun of Page 4. I think the important part here to highlight is that our core businesses are steadily growing and our noncore businesses are steadily shrinking as we intend them to be. Automotive is actually temporarily down. That's because, as we explained earlier in the year, that we are strategically shrinking nonprofitable business lines. But if you look at the longer-term trend, it's still very much steadily on a growth trajectory as is our smartwatch and VR business. So again, core business is on a growth path. Noncore businesses, LCD smartphones, in particular, are on a path towards exit. The next slide on slide -- Page 6 shows operating profit breakdown in the form of a waterfall chart. On your left-hand side, you have the year-on-year comparison. And on your right-hand side, you have the comparison versus the guidance we gave you in the beginning of the year. Starting with the left-hand side year-on-year, the number is down from previous year. You have to recognize that last year first half benefited from a rebound of the world after the lockdowns in Shanghai. So part of the reduction is a falloff of that special sort of rebound demand in the first half last year. Some of the specifics here are the volume on the left side is down primarily on the back of the shrinkage and the exit of the LCD smartphone business. Fixed costs are a positive force. A big part of that is the closure of our Higashiura fab. And then the inventory impact is really just a lot of accounting -- effectively inventory write-downs. And on the right-hand side, as explained earlier, this shows here the outperformance of our first half operating profit versus the guidance we gave you. Again, here, we have strong volume growth in our core businesses. We have continued, sort of relentless cost -- fixed cost reductions helping the case. And again, we've delivered here an outperformance versus our original plan. I'm going to switch gears now towards our full year forecast. I mentioned earlier that this is now an upward revision, I'm looking at Page 8 right now. As you will see, we have revised up all items for the full year, that's sales through all the profit lines. A large part of that is just a reflection of the strong outperformance we've had in the first half. We've taken -- we've either kept the second half forecast either flat or just ever so slightly down-ish, making for a full year forecast increase for the full year. I think one item particularly noteworthy here is that we've actually taken down the second half forecast for our smartwatch and VR line. That's a reflection of the sort of slightly cloudy outlook that we believe we're seeing in the market for VR. We're going to watch this carefully. We're going to watch and see how Christmas sales proceed in this segment. And we will revise this as necessary once we have greater clarity on this line item. The next page here on Slide 9. Before I talk about it, let me just mention that we -- there was an error on this slide in the initial posting that we made. This slide, what you see in front of you is a corrected slide. And also, we've actually reposted the correct slides on our website as well. So if you're working off of an old version, please refer to this version or the newer posted version. So what you're seeing in front of you here is effectively an operating profit breakdown going from the first half that we just completed into the second half. And I think the point here to highlight is that our operating loss nearly halves as we move into the second half. This is what we've been talking about from the beginning of the year. We've been saying that the shrinkage and the exit from our LCD smartphone business, the selective shrinkage of our unprofitable lines in our automotive business had been a lot of work done in the first half of the year, which will start to bear fruition beginning with the second half of the year and beyond. So what you're seeing really here is effectively the manifestation of those efforts in our operating losses effectively halving as we move into the second half of the year. The final page for my section here is on Page 10. This is showing the same picture, but this time from comparing the second half of last year to the second half of this year. And what you're seeing here, again, is just another representation of the fact that we are shrinking our losses by about 2/3. Again, it's a reflection of the fact that we are really working hard on, number one, driving and enhancing the core profitability of our overall portfolio by stepping out of less profitable businesses and nonprofitable businesses simultaneously working still hard at reducing fixed costs where we can. And we're expecting this to bear fruit in the form that you see in front of you. So again, we're expecting versus second half last year for things -- for operating loss to shrink by about 2/3. And so that's it for me in terms of first half earnings and the outlook for the second half. And at this moment, I'm going to hand the podium over to Scott Callon. Thank you very much.

Thank you, everyone, for joining. I'm going to take us through the business and the strategy update. As an overview and it goes over 4 pages, my apologies, we need to do a lot. It wouldn't fit on 1 page, it wouldn't even fit on 2 pages. Forgive me for that. Look, the very first bullet point speaks to the ambition and the need to be ambitious in what we're doing. Nothing short than a total transformation of our business model and earnings. And simultaneous to that, an extraordinary ambition to build a new global display ecosystem based on our technology set. There's something profoundly wrong with the global display industry. I mean it has the qualities of being a phenomenally big market, and we'll speak to market size later. So globally, $120 billion a year and yet kind of a bunch of competitors, including ourselves, who have thus far been kind of cookie-cutter or copycats of each other in terms of the business model, combining high capital intensity with no differentiation and low profitability as a result. This has to change in the most profound way. And we're going to change it, and we're on route to changing it and so I'll go into the details. As part of that, on the second bullet point, we've had to make some very hard decisions in terms of taking down our costs, limiting less productive fabs like our Tottori fab, which we announced on August 2 and we'll bring on production end in March 2025. We were a late entrant to OLED, and that's a problem. A little bit of an innovator's dilemma or problem because we were so strong. Remember, this is the coming together, JDI's, of Sony and Toshiba and Hitachi's display technology businesses. We were extraordinarily capable and the best in the world at LCD displays. We hung to it too long. We fell behind. OLED is fantastic, and we were late getting there. We have, as a result, figured out that we were late in taking actions and we have leveraged our capabilities to not only build competitive -- not only to get there, but overtake our peers and build a competitive advantage. Probably the most important thing I can share with you today is that the OLED business is now profitable unlike our kind of legacy LCD business. And so what JDI is doing right now is we are shrinking our legacy LCD business and pushing really hard on the OLED business. The ultimate expression of it, and I'll spend some time today, is eLEAP, our next-generation OLED. Customer demand for our OLED product is through the roof. We expect to deliver an increase in sale, 74% year-on-year in this year. The painful good news, or is it bad news, is that we actually have more demand than we have production capacity. And so we are trying to think very, very hard about how we increase the capacity. It's not nearly as simple just to say we're going to build more lines because in order to optimal -- kind of optimize the fab and run the fabs really hard and run them on a low-cost basis, what you really need to do is you need to reconfigure your fab. And so it means that we're going to build more OLED for our customers. And this is existing OLED tech where -- not eLEAP, our next generation, but we're very advantaged in existing OLED also. We have some capabilities in terms of quality and resolution and most particularly in terms of low-energy consumption in our OLED that other guys don't have. And so there's just enormous demand for it. Anyway, for us to build more, we have to take down assembly lines for a period of time. Our customers for this product is very strategic and who want us to build as much as possible as quickly as possible, it's not necessarily an easy conversation with them about how we would take our lines down for a little bit of a while because they want more product now. But we will work through this. The point is we have advanced capability in OLED. Even in existing technology space, it has brought us profitability and we expect to see significant growth going forward. I will talk about eLEAP in detail going further in the presentation. Other things going on. eLEAP is a breakthrough. It is the best OLED technology in the planet. We need size and we're going to deliver size from China. I mean China is just -- it's got the world's largest display market. It's got the world's largest and most competitive display ecosystem. If you want to deliver quality in scale to the world, you do it from China. So we have signed an MOU with our partners in Wuhu, which is both the government and industrial and strategic partners. We expect to sign a definitive agreement by the end of this year. It will increase our production capacity by over 50x. We had an alliance set of discussions with HKC, given that we decided to go directly to China and control the operation and operate in Wuhu. We switched those discussions from eLEAP to automobiles. We have ongoing discussions with them. As you know, we acquired JOLED's engineering talent in order to push forward on eLEAP. It's METAGROWTH 2026 more broadly, but they have world-class eLEAP engineers and we wanted them and we're delighted to have them join us. We've continued to work on sustainability. We announced -- newly announced support for TCFD. And although we spent quite a bit of time talking about China, specifically HKC and Wuhu, it is a case that we have ongoing discussions in India and we expect to build a local production presence not only in China, but also in India. And it will be eLEAP. A major transformation of the firm is underway. You don't really want me, I think, to talk for an hour. So this is the material we've provided before. I think it's important to have it comprehensively in one place, but I won't speak to it directly. But there is a major transformation of the firm underway. And this speaks to not only have we taken -- are we taking our production out of Tottori, but across the board we've moved our capability into our high-end facilities and made some painful decisions in terms of decreasing our footprint and giving ourselves more competitiveness. That is what eLEAP stands for: environment positive; lithography with maskless deposition; extreme long life, low power and high luminance; and any shape patterning. It offers unprecedented customer value, double the brightness, 3 times the lifetime. It's not on the page, we've got a fair amount of discussion about what should we reveal about cost competitiveness, but I think we need to be more transparent on this, and we'll deliver kind of more transparency going forward. We should know generally 20% to 30% lower cost in our production process really because it's an advantage and simplified production process. We get rid of these huge middle mask. We go to photolithography like in the semiconductor process. It's more efficient. It's lower cost. The other thing that's important to know is that it delivers unprecedented environmental value. Because you don't have these massive mask being pushed around in the fab, in the conventional OLED process, we cut CO2 emission by over 50%. OLED is fantastic and doesn't deliver everything we need from it. Because many of us are using phones with OLED and smartphones are expensive enough and you can go kind of -- you can have a shorter-duration display, meaning kind of OLED displays typically burn out in about 3 years. And since the smartphone cycle -- replacement cycle is short enough, consumers will accept that. It feels like there may be more OLED in the world. But in reality, OLED's market share is less than 1% for autos; less than 3% for IT, so notebooks, monitors; less than 3% for TVs. It's because it has high production cost and a short lifetime. And what is on the top of the page is just really fortunate because OLED is extraordinary. It's natural, light production, it's beautiful. You get true blacks, perfect blacks. There's a wide color gamut that is beyond what you can deliver with LCD displays. Because it is organically emissive, there's no need for a backlight. So it is thinner. It is lighter. It is low power. You have ultra-wide viewing angles because you're not trying to look at through the glass of LCD. It's extremely fast, much faster than LCD. It's a phenomenal display tech. And yet, it is way too expensive and it has poor lifetime. And eLEAP solves both of those. And so this is how we think we create a new global display standard and it's eLEAP. In order to deliver against the market opportunity, which is, we think, across every -- literally every display application, we need to get our development done and we need to get it done quickly. And so we shipped our first eLEAP prototype last year to customers, September 2022. It was 1.4 inches in size. We began shipping in July of this year a 14-inch prototype to customers. The display area is 58x. It just goes directly to the ability for us to scale this technology across a broad array of applications, and we will go to bigger sizes. We do think eLEAP completes the third display tech revolution, which is to say, I'm old enough. I remember when I was a kid, cathode-ray tubes. Watching TV on these huge things and would take, in many cases, multiple men much bigger than me because I was a child moving these things around. But it was extraordinary to have moving images in every household. I mean, CRTs were phenomenal. And then we had the second revolution, which is LCD. And it made these massive things redundant. And they were compact, energy-efficient and you can move them around. We think the third revolution should be OLED. Characteristics of it as an organic display technology. I mean, the beauty of it. I mean, the thinness of it, the lack of a backlight, the ability to be flexible. LCD can only be rigid. OLED can go into any sorts of shapes and sizes. It is beautiful. And yet, it's flawed and it's high cost and short lifetime, and we solve that for eLEAP. So we intend to complete the third display tech revolution. In short, we think eLEAP is a game changer. We're going to drive it as fast as we can and as hard as we can. It combines unmatched performance, low cost and the ability to display across scale, across all display sides and applications. You should know at this point, no one has been able to build an OLED display on anything bigger than a G6 substrate, meaning you can't get to bigger sizes with a lot of efficiency. We truly believe the total addressable market because eLEAP can go to those large sizes and also can do small size, it can do high performance, it can do high resolution, it can do low cost, the total addressable market is truly the entire global display market. And our goal is to put eLEAP when every display on the planet. It gives you an annual market size of $120 billion. We are committed to delivering unprecedented value in completing the third display revolution. But there are things that we think are relevant, I won't go through in any detail, right? And thank you for your patient listening. And let's see if they have any questions, and we would be happy to take them on. Thank you.

[Operator Instructions] Anybody have any questions?

All right. We're going to bring it to a close. I think the important message from today and the reality we've delivered is after these years of grinding away with losses in a legacy LCD display business, we've broken through the profitability in OLED. And that's just with our existing OLED technology set. eLEAP, we think, is [ all-the-way ] transformational in terms of the ability for OLED to penetrate these massive markets, autos, IT, TV, and we expect to deliver on that. The technology development is going enormously well. The capacity is going to become available to us when we complete the Wuhu deal, it's large. And look, we're talking with kind of the huge tech customers in the world. They need to be able to see from us production capacity to serve their needs because they want eLEAP. But we can't ship them 6 smartphones a year. So getting that enormous size and production capacity in an efficient way enables us to work with them to cut over their technology -- their display technology platform to eLEAP, and we think that's going to happen. So thank you, everybody. We're grateful for your time. We know you're busy. Stay tuned. JDI is working to complete the third display revolution. Have a good day.