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

Hello, everyone. We are going to start Japan Display's earnings briefing for March 2024. Thank you for joining us today. Today's agenda includes an overview in earnings report for March 2024, forecast for March 2025 and the launch of eLEAP, the next-generation OLED. You can find the materials we'll be using on our website. Please note that we are recording today's briefing for YouTube. Our CEO Scott Callon; and CFO, Hiko Sakaguchi, will talk today. So let's start. Scott, your turn.

Thank you, everyone, for joining. Let's jump into it. Page 4. The most important thing that we're working on is eLEAP, and I'll go into some of the detail. That's our next-generation OLED technology. We will go into mass production this year in December. It's an extraordinary game changer and an important one. Look, we understand we have been deeply unprofitable for a long time. It's structural. It's based in the lack of competitive advantage. In fact, the broader display industry where too many people are doing high capital intensity investments with low profitability. We've got to do something brand new and different. Firm has spent over 10 years developing this technology, we do think it's a winner, and it changes everything. We go from having a technology set that is not appreciably different from some very good competitors to being far advantaged, and that's what we expect to deliver for you this year. Now it is coming, and we just can't wait for it. Meaning we've got to continue to do things to transform the firm and its profitability. So the second thing that we delivered on this year was sales were down and that was deliberate. We're exiting a highly commoditized, low profitability and no expectation for it to be profitable. LCD Smartphone business, and yet we've got to drive higher profitability at the same time. So we've lowered our breakeven point by -- and then we call it relentless and I think it's what's keeping going at these folks, fixed cost reductions and higher productivity. And the environment continues to be super challenging and we have to run forward anyway. So we expect to continue to do more in terms of taking out costs and driving higher productivity in our business and will be EBITDA positive in the second half of this year. A lot of things happened this year. A lot of things driven by us and a lot of things that kind of -- well, I should say a lot of things, something very, very important to happen on New Year's Day, which was deeply unfortunately, that massive earthquake Ishikawa prefecture. We have an auto fab in Ishikawa. It's actually super important to the global auto display supply chain, given how important we are to global auto displays. I mean the good news is -- this is barely good news because it was such an extraordinary difficult and deadly event. We did respond immediately. We fixed everything we need to fix. We run forward. And so it turned out to have minimal earnings impact, but it was a very, very significant event that we had to deal with across the firm in January this year. We continue to take out fixed costs and to drive higher earnings. We are bringing to production to end at an older, less competitive G4. So fourth generation Tottori fab. This is following after shutting the Higashiura fab, which is G3.5. We're migrating more of our capability to our G6 Mobara fab and the G4.5. Ishikawa fabs, both of which use a higher-end technology called LTPS in the LCD space. And of course, Mobara is our chief, our major OLED fab. We continue to deliver on what we need in terms of technology development. As I said earlier, this is all about us creating tech that no one else has. And so I mean, there's not a problem with having capital intensity like a TSMC if you're able to do things that no one else does. And so our goal actually is to take both capital intensity out of the business and to build up a portfolio and set of capabilities that no one else is capable of matching. And so we acquired JOLED engineering talent. These are some really world-class OLED engineers. Our future is OLED. We think the world's displays features is OLED also. We continue to focus on sustainability, and we're announcing support for TCFD in [ last ] year. The OLED business is profitable .As you think of JDI as 2 technology sets. One is very, unfortunately, and this is something we have worked on. We need to continue to work on which is the exit out -- it is an exit of our LCD business, which is deeply unprofitable. The good news, however, is OLED business, which is the future, is profitable. We're running at 100% fabulization, customer demand exceeds capacity, we're going to meet that demand with eLEAP, which is our next generation OLED, which is even better than what we have today. But the business is profitable and will continue to be profitable. We are progressing discussions to increase our eLEAP capacity by a lot, by 50x in China, and we expect to report something on that this year. As I just pointed out, the LCD business, however, is unprofitable, and we need to do something about it, and we'll get it done. So there is an ongoing shift in our activity from LCD and OLED, and I'll talk about it again at some length. That's why I think that's important. It is the case, however, that our LCD product range will remain relevant, particularly in longer tail segments like autos and industrial for a while. And in that context, there was a tight supply of high-performance LTPS, which is what we excel at. I think there is an opportunity to do non-China, non-Taiwan production in this product set and to drive higher fabulization and actually drive industry consolidation. We're not alone. This is this business. We've had too many competitors with too much capacity. We are consolidating capacity. Our competitors are doing so also, finally, we appear to be at a point where there could be a structural transformation across industry. We're also moving ahead not. As you know, we're building eLEAP in Japan, and as is pointed to, we expect to do that in China. We're also having conversations -- multiple conversations about doing something in India also. Here's what happens -- has happened across the year in the various segments. We have 2 core segments, Automotive and sorry, Smartwatch and VR, the -- both with the core and we have LCD Smartphone segment, which is noncore. Automotive average is slightly down because we're exiting from unprofitable products. On the other hand, a big in Smartwatch and VR. OLED is up 74% year-on-year. For VR is also up driving greater than 20% year-on-year growth. And what's happening, obviously, the Smartphone is an exit. And so we're pushing this down hard. This allows us to focus our engineering resources on our next-gen tech, which will be JDI's. You should also know that we will reenter Smartphones with eLEAP. This is a huge market. It has demands and requirements that eLEAP will address very well, and we expect to enter there. Just what I have on the broad overview, Hiko will talk about the numbers, and we'll come back to more business activity.

Right. I'm going to talk about the earnings results for the 2023 fiscal year, which was last year, and I'm going to follow on talking about the forecast for the 2024 fiscal year, which is the current year that we're in right now. So we're looking at Page 12 right now. These are the results for the fiscal year last year, the 2023 fiscal year. As you can see, sales was down 12%. In terms of numbers, we were down about JPY 30 billion versus the previous year. However, despite the top line coming off, our profit lines, EBITDA and operating profit in particular, have shown significant improvement. This is on the back of what Scott mentioned earlier. We've really taken out a tremendous amount of fixed costs out of our system. We boosted our overall productivity, we've worked hard at lowering our breakeven point, and that's really what's allowed us to improve on our profit lines despite the decline in our top line sales. Net income is -- came in at JPY 44.3 billion loss. Sort of year-on-year comparison, that's 18-point -- that's a worsening of about JPY 18.5 billion versus the previous year. On a normalized basis, we're actually doing better. If you recall from last year, we reported two significant one-off extraordinary gains last year. One of them was a JPY 15 billion gain from the forgiveness of debt. And the other one was a JPY 13.5 billion gain from the sale of a former subsidiary. So if you actually normalize for those 2 one-off events, we're actually slightly better than we were last year. So that means all of our profit lines starting from operating profit down to net income, including EBITDA are actually better than they were last year. I'm going to be focusing mostly on full year-to-year comparisons. So this slide here in 13 actually talks about the stand-alone fourth quarter and its comparison versus to the stand-alone quarter, fourth quarter of the previous year. So maybe skipping the quarter-on-quarter slides and focusing on the year-on-year comparison slides, which takes us to Slide 14. This breaks down our top line sales into our normal categories of core businesses, which is our Automotive and Smartwatch VR as well as the noncore businesses, which is our LCD Smartphone. As Scott mentioned earlier, Smartphone -- the LCD Smartphone business is down as expected as we're working towards exiting that. And the core businesses overall are up for a strong core businesses as a whole or up 6% year-on-year, mostly driven this year by Smartwatch VR, which saw extraordinary growth, especially in OLED, as you see there, our OLED business was up 74% year-on-year. So tremendous top line growth there. And our Automotive business was down ever so slightly, pretty much on the back of us exiting specific unprofitable products and lines within our Automotive business. Again, I'm going to skip Slide 15, which is -- talks about stand-alone fourth quarter comparison versus the previous year and go to Slide 16, which now takes a deeper look at the change in operating profit from a year earlier, the 2022 fiscal year into the year that just ended the 2023 fiscal year. So as you see, we've significantly shrunk our operating loss, down from JPY 44.4 billion in fiscal '22, down to JPY 34.1 billion in fiscal '23. What you see in front of you is are the sort of the attribution of how we achieve that. The biggest sort of contributor there was, as you see fixed costs. The closure of the Higashiura fab as well as just streamlining our production at our flagship Mobara fab is really what contributed to that. You see in the mix line there, how OLED is actually starting to contribute to our overall profitability. As we take down our less profitable LCD Smartphone business. And also, as we exit some of the unprofitable Automotive lines, you're seeing a greater weighting of the more profitable OLED business coming into play. So what you see there in terms of that JPY 2.7 billion positive contribution from mix is really sort of that relative weighting of our profitable OLED business coming in there. And then finally, in the other line, that JPY 4.5 billion uplift right there is a fall off of a fairly significant inventory valuation loss that we reported in the fiscal '22 year, which fell off into the fiscal '23 year. Again, this slide here in 17 talks about the stand-alone quarter comparisons. I'm going to skip this, which takes us into the forecast now for the current year, the year that ends in March 2025, what we call the fiscal '24 year. This is -- Slide 19 shows our forecast for the year. We're looking -- if you look at the far right, we're forecasting top line sales of JPY 222 billion for the year. That's about a JPY 17 billion decrease versus last year. If you take a deeper look at the sort of the segment breakdown of that top line sales, you'll see that we continue to shrink our LCD Smartphone business. That's the single largest contributor of the fall in sales, and that's only to be expected as we continue to shrink and eventually exit over the medium to long term, the LCD Smartphone business. Automotive is effectively flat. We're taking care of a few remaining lines of unprofitable products and businesses. So as we shrink that, you see Automotive coming in flat. And most importantly, our core growth business, the Smartwatch and VR that continues to grow strongly following on from the strong growth that we had last year. I think importantly here is the fact that we're forecasting an JPY 11.7 billion loss for the EBITDA line for the entire year. But if you take a look at the breakdown between the first half and the second half, we're actually forecasting for EBITDA to turn positive in the second half. So that's a significant achievement that we're expecting in the second half of this year. Otherwise, we're looking at operating profit improving to JPY 18.2 billion loss and net income improving to JPY 26.6 billion loss. Once again, we're achieving these significant improvements in our profit lines despite an ongoing reduction in the top line. So what it really sort of shows that we're really making very lean our business structure. We're taking out a lot of costs. We're streamlining our operations so that we're able to deliver improvements in profitability despite declining top line sales. And as we continue to expand the business, new businesses like eLEAP come into play, and the top line turns to growth, then we're going to get significant operating leverage in our profit lines in the future. The final slide here is Slide 20. This talks to the attribution of how we're going to be improving our operating profit line from the JPY 34.1 billion loss last year to our JPY 18.2 billion forecast this year. And as you see, the single largest contribution is that mix line right there. It calls for an JPY 11.2 billion uplift. The primary drivers of that continues to be OLED. So as we take down -- as we continue to take down our LCD Smartphone weighting and a little bit of our unprofitable Automotive lines, and we continue to grow the OLED, it's just that relative weighting of the more profitable OLED business kicking in, in the mix there. The other thing you see there is as a follow-on from last year, we're expecting to deliver some licensing income from our eLEAP and HMO businesses in the second half. So that's the single largest contributor in terms of the uplift. And then also what you see on the other line is that we continue -- we will continue to see a little bit of falloff of some inventory valuation losses versus last year, but it's also going to affect much tighter inventory control and we're going to streamline our operations. That's going to be another big part of how we improve operating profit for this year. I guess, I'm sorry, this is the last slide here 21 this shows the progression of operating profit from the first half of this year into the second half of this year. So it really shows how on an accelerated path, we're going to be really strengthening our profitability in the second half of this year. And this is really what's going to be a key driver of how we get EBITDA to turn positive in the second half. As you see there, it's predominantly volume and our eLEAP and HMO licensing income. Volume, as I mentioned earlier, is going to be largely driven by -- partly from our continued growth in OLED. But also, as Scott mentioned earlier, there is a unique opportunity out there for high-performance LTS panel shipments. There is a shortage in the market, yet demand is very strong. We've got capacity. This is a great way for us to fill -- completely fill our fabs. So we're going to try to go after that business. And if we can get it, we're going to see some positive contribution in that volume column right there in addition to the licensing income that we expect from eLEAP and HMO. That's really what's going to drive that accelerated improvement in the second half and get us to EBITDA positivity in the second half. That's all I have for our earnings. Thank you very much.

Two other sections in the presentation. The business in the METAGROWTH 2026 update in the eLEAP launch. I'm actually going to jump through this one. Look, this is a lot of material here. We could skip some slides also. We do believe we should provide more information around less. We have it -- it's our job not only to deliver results, but be transparent about how we're thinking about where those results are coming from, how we're thinking about the firm and the upside and the opportunity and technology. And so we try to give you more information around less, but at the same thing, we don't -- we're not intending to make this a 3-hour presentation. So there is information deeply relevant to the firm. We spent a lot of time creating it. We would be delighted if you would read it, but I'm going to jump to and make a decision to what is most fundamentally important to discuss with [ vitae ] and that's eLEAP. It is truly transformational for the firm, and we think transformational for the global display industry, which means for billions of consumers. So let me go slide by slide here because this is so critical. So as whether eLEAP stands for environment positive, lithography with maskless deposition, extreme long life, low power, high luminance and any shape patterning. So that's what eLEAP is and here is kind of a key tenet of how we're running the firm. We do think OLED is the winning display technology. And so we'll talk about that why it's better. It's the best tech out there. It's got the best price performance we believe it's going to be become the overwhelming display market leader, and we think within OLED, eLEAP is the one and only technology. So let's start to that. And look, this is not just us. I mean we don't believe in we serve customers in the world. We don't believe in taking a view and pledging forward on it. This is, of course, deeply linked into the performance characteristics of the technology and its ability to respond to customers' needs. And so the fine fact of the matter is that OLED is better than LCDs. It is -- the biggest difference is that LCDs require backlighting. And so with OLED, it's organic, literally, it is organic. They have self-illuminate pixels. It means you have, you can make your OLED displays, ultra-thin, lightweight, low power, you have perfect blacks, no graying for the black light. you have beautiful colors. They're natural and organic. It turns out actually LCD [ covers ] or not. Ultra-wide viewing angles, superb video performance, OLED is much faster than LCD. LCD is by definition, rigid. It cannot be bent and I mean you can do a little bit of curvature, it's not flexible and customizable. So OLED is fantastic. It truly is. And that's why the world is cutting over to it. We put 3 customer segments on the page, all of them big Smartphones, Automotive, notebook PCs is not only in segments the shift is happening from LCD to OLED. I told you we're going to -- I'm going to talk on every page, but I'm not going to make this a 3-hour presentation, so we'll move forward. But OLED is winning. It's worth raising the question if it's winning now against LCD whether or not there are other competitive alternative technologies, and we believe actually that OLED will dominate these also. So micro LED, micro OLED. Micro OLED sometimes is called OLEDoS, OLED on silicon, so the difference is between OLED, which is done on glass substrates and micro OLED is on silicon. Silicon is small and very expensive. But the key difference is what's substrate are using and OLED is on glass, as I said, and micro OLED is on silicon. We think OLED dominates both these decks. There are just too many unresolved technical issues, production yield challenges and on high cost. Major reports of a major cancellation in the micro OLED space in the last couple of months as customers begin to understand that the future is in fact OLED. In a good way, OLED is a mature tech meaning. It's got a super robust ecosystem, it is an economies of scale, very sophisticated set of capabilities in it. It's the winning tech. And has -- and so the challenge is with micro LED and micro OLED are specifically to both technologies. But what we were saying here is that we are seeing in our customer product road maps also that OLED is going to win. And so you need to have a play in OLED in order to serve the world. I think we get the impression that people think OLED is really kind of out there. And it is because half of Smartphones are using OLED and all the tie-in Smartphones are and there's been -- and by the way, penetration in the Smartphone market is growing year after year, but one should not be misled by half, 50% market share in Smartphones, OLED is almost nowhere right now in autos and notebook PCs and it's getting specked in. So there's a massive growth upside in this market as OLED takes over. And that's why eLEAP's important. It's important to us and it's important in the world. It is the case that OLED does have some inherent issues. One of them is short lifetime and the other ones high production costs. And eLEAP allows you to solve for both and so it's a deeply advantaged form of OLED. It's an evolved form of OLED, if you want to put it that way, at powerfully move, we'll look forward. I would want to spend a lot of time on this slide, but I guess I won't. The thing you should know is that what is the synergy about eLEAP from a production perspective is that we don't use so-called fine metal masks. We don't use masks and the result of that is you have these huge masks in conventional OLED with very poor precision. And so you have to have. You can't really move the masks around that well. And so you have to have big kind of -- if you look at the page, you see all this black space in conventional OLED because you can't put the pixels together because there's not enough precision in moving around these big metal masks. And so in order to avoid R&D and being on top of each other, you have to space out the pixels. What that means is you get much less brightness area. By the way, we don't talk about it as much, but it also means that you can pack not only more brightness into eLEAP because we substitute for masks photolithography. So we're using the semiconductor process, so we can pack the pixels together without worrying about them being on top of each other. It also means you can get much higher resolution out of eLEAP. And so there is obviously a broad customer set. I mean, customers like high resolution and beauty and also particularly in the VR space, we use these big lenses in order to kind of make a very small screen seem big. They cut the users understood or experienced resolution by a lot. So high resolution is something very, very important. And we think eLEAP is able to deliver super high resolution VR over time that will be important. Anyway, so you get super high brightness, you get long lifetime because the problem with conventional OLED is you have all this black space and you're pushing a ton of current through kind of a primarily black display and it burns up the pixels. And so by going to eLEAP, you don't have the pixel burn out so you get a lifetime, and it's nonlinear, you get actually 3x the lifetime. You get lower cost [ eLEAP ] -- we think roughly 30% lower cost. It's primarily -- it's linked to not having fine metal masks and all their costs. It's not -- you don't have fine metal masks related to production downtime as you're replacing and cleaning and maintaining the fine metal masks, you get higher fabulization. So it is -- the good news is and this is why the technology is going to win. It's not only better, it's less expensive. It also because you're not moving these massive metal masks around a much less energy consumptive. So in other words, a much more energy-efficient production process. That means you actually have 50% less CO2 emissions during your production process for a 14-inch notebook. The amount of CO2 emissions goes down to something on the order of 14 kilograms, 30-plus pounds per notebook. So this is nontrivial. If you want to create a world and look, we take the view where we hope you join us as the climate change is real and that we should do something about that, that eLEAP is a powerfully green tech that can help solve a major planetary problem. The development is going very fast. We started 1.4-inch first customer samples in Sept of 2022. We increased the display by 58x by mid last year. We're now driving kind of into higher -- much higher sample sizes, and we'll talk -- we'll have some announcement about that this year. We're also driving much higher functionality out of it. We're now, for example, doing 1,600 nits to eLEAP with a single stack, meaning there's a way to try to get higher brightness by doubling up your OLED with so-called tandem structure. It makes both the product, the manufacturing process is more complex and makes them more expensive. So you want to have a fantastically extraordinary performance display at a price point that is truly mass and affordable, eLEAP is the solution. And so this is the year of eLEAP. I mean it's been a long time coming. We have worked on this technology for over 10 years. It's accelerated over the last couple of years. Our current production yield is over 60%. That is actually very good. We're not -- there are companies out there that are shipping conventional OLED with all the kind of yields in 20% to 30% by the way, they're profoundly loss creating. We do, but we are already at 60%. We're going to go to production launch in December this year. We actually -- and our goal is again above 90% yield by that time. We think it's very viable. But this is a technology that we're driving forward very, very fast on, and we think is truly a game changer for the global display industry. I wish it to say our senses here have been to display revolutions. One was kind of the cathode-ray tube, which was fantastic, right? I mean you could actually have moving pictures in your home but if you are over my age, you can remember kind of like having a house party and having kind of like 5 of your neighbors over to move your 120-pound or 200-pound TV. So the second revolution was LCDs which took you to compact, energy-efficient, high-resolution screens you can move around without having 5 people help you do it. OLED is dramatically progresses display technology, but we don't think it's complete. You need kind of lower cost and longer lifetimes and OLED is -- eLEAP is going to achieve that. So our strategic direction is we have taken -- it's operating hypothesis of the firm that OLED is going to win, and you need to win in OLED. And so that is a key element of any investment you make with JDI as to your view on what you think the future is OLED and the TAM is for OLED and the TAM is for eLEAP within OLED. But we think OLED's winner. We think eLEAP's a winner and there's an opportunity to deliver extraordinary customer value that we have not delivered because we didn't have this technology. So this is going to be 0-1. We turn on the switch. We began shipping eLEAP and we're going to do it hopefully in size. In that sense, in the work we're continuing to do in China in cooperation with government in Wuhu to reach an agreement is super important. The announcement, it would increase our production. If we get this done, both capacity will be 50x. This technology is very relevant. It has a massive TAM. We need more of it rather than less of it. So this is a very important element of extending a JDI and eLEAP's reach to kind of the world. Not only China. We also have our own discussions in India. We think that these are both deeply relevant, massive and growing markets for our [ staff ] presence and they will be immediately present. So that is today's -- complete today's presentation, skipped over a fair amount. Happy to take any questions. But again, something very, very important is coming out to you this year and we look forward to delivering the goods for you. Happy to take any questions or comments.

[Operator Instructions] It looks like there are no questions, so we will end today's briefing. I would like to express our sincere appreciation for your participation. Thank you very much for joining us today.

Thank you, everyone. We went forward. Take care.