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

Hi, everyone. I'm Scott Callon. Thank you so much for joining, working off of the FY '25, the March 2025 fiscal year first quarter corporate presentation that's right in front of us and also available on our website. Let me start before going into today's discussion by expressing our sympathies to all those affected by the earthquake yesterday in Kyushu. It was quite a shake. So 7.1 magnitude, very disruptive. I do think we should probably also point out, this is an example of how Japan is just extraordinarily capable of dealing with these kinds of natural disaster, a quake of that size. No deaths, only 16 injuries. It's just, again, remarkable how strong Japan is in this area, but it was disruptive and we extend our heartfelt thoughts for everybody in terms of the recovery process. I'm going to turn to the Q1 overview. We did a lot this quarter. Rapid progress in our game changing EV technology. As you know, we've invented a more advanced form of OLED. I'll talk a little bit more about that. later in the presentation today. We're on track for mass production in December this year. We had a robust OLED and automotive demand, driving our sales growth, particularly OLED, which is very important to us. The world is switching over to OLED, had 41% year-on-year growth. We have the losses on our core sales growth, improved product mix, fixed cost reduction inside our inventory management. So literally, improvements in EBITDA, 51% LP, 49% OP, operating profit, of course, net income of 53%. Normally, Sharp announces their earnings the day before we do. So everybody has a chance to see those. They announced at the same time as us. So just as you know, we've got sales up 6% year-on-year and having our operating losses. Sharp in its display business had sales down 26%, 27% and no improvement on the operating side. So it does describe a quarter where we did relatively well relative to 1 of our key peers. And the operating environment continues to be challenging. We've got a lot of work to do, and we'll continue to do it. We are going to drive and are driving a radical transformation and profitability. Look, we have their operating losses year-on-year. That's super important for us to get to where we need to be. We expect to be EBITDA positive in the second half of this year. It's huge demand for eLEAP. We're working with the Wuhu government on launching a large-scale eLEAP Fab and that's just going fine. Turning to the next page. One of the key deliverables we have is to deliver global #1 tech, meaning technology that no one else has. And if that sounds hard, I have to tell you it is hard and -- but there's a lot easier path to profitability than having technology where 3 or 4 or 5 very strong Asian competitors have equivalent capabilities. This is absolutely fundamental to delivering huge value for not only our customers, for our shareholders. And like eLEAP, which is a JDI technology, which we invented and is going -- it's the first in the world and an extraordinary improvement over current OLED technology, we are delivering over and over and over out of our labs and not just labs, but bringing into mass production on new technologies. So we announced last week, the first automotive grade dual touch 2 vision display. You literally take 2 displays -- 1 display and you make it into 2 displays. It's a really interesting tech. I'll talk about that. We have the world's highest resolution, ultra-high-resolution VR running on glass, which is a low cost. You can deliver normally what used to take super expensive silicon to deliver the kind of performance we can deliver on glass. We are -- we believe -- well, I mean, it is a case, we're way ahead of everybody on being able to do high resolution on glass. We have telecom technology that we're rolling out. I mean, JDI really wants to go beyond displays. Display is a tough market. I mean the great thing about displays is they're fundamental and foundational for modern life, and there's also a bunch of companies out there. So going outside of the displays into new areas is important to us. So we've got some technology that we put relevant in communications. We developed ZINNSIA, a brand-new sense of -- a set of sensor technologies that was really interesting. I'll touch on this later in the presentation. And finally, something that's important that's happening is there is a reconfiguration of supply chains that's going on. It means Japan has become far more important as a strategic manufacturing base and JDI is also. So we've got a surge French [ warring ]. In other words, moving kind of your supply chains to allies that's going on that is being driven by JD customers. So really 4 messages here. One, eLEAP is on track and we'll be -- absolutely transformational, not only for the industry and our customers for JDI. Two, we're hitting the numbers we need to a huge improvement year-on-year on the operating side, putting us on track to get to EBITDA profitable in the second half of the year. Three, we're delivering on brand-new technologies that no one else can do that will create powerful value for our customers and also for our shareholders. And four, there is something very big going on in geopolitically and restructuring the supply chains, and we're a big beneficiary of that. I will now turn it over to Hiko before I come back for some more details.

Hello, everyone. I'm Hiko Sakaguchi, and I'll be speaking to the earnings results for the first quarter of the fiscal year ending March 2025. And so with that, I'm going to jump to Slide 11. So for the first quarter, sales came in at JPY 55.9 billion. That's a 6% increase year-on-year versus the first quarter of last year where we reported JPY 53 billion. I'll talk a little bit more in detail about the composition of sales on the next slide. But for now, just please understand that we typically categorize our revenue into core business revenue and noncore business revenue. And as you can see, our core business revenue is strongly up 11% versus the previous quarter -- versus the quarter -- first quarter of fiscal 2023, finishing in at JPY 50 billion. And our noncore business, which is effectively our LCD smartphone business is down 27% versus the first quarter of last year only because we are strategically shrinking that business towards exiting that business. If you look at the profit lines, EBITDA came in at a JPY 6 billion loss operating profit came in at a JPY 7 billion loss. So we're still in negative territory. But as Scott mentioned earlier, we've effectively halved losses versus the first quarter of last year. In addition to the top line growth helping with that -- with the improvement in our profitability, we've also radically improved our product mix, and that's really a result of us restructuring our product portfolio out of our noncore business and into our core businesses, which, of course, enjoy higher profitability overall. We've also continued to relentlessly cut on fixed costs where we can, and we've also really been a lot tighter in terms of our inventory control. And all those together, is what has enabled us to have our losses versus the first quarter of last year. And same thing with the bottom line in addition to everything I mentioned earlier, net income came in at JPY 6.5 billion loss. In addition to all of the factors I mentioned for the operating loss line, we also reported an extraordinary gain of JPY 1.7 billion from the sale of our Higashiura -- our former Higashiura fab that we completed, the sale was completed on April 1 of this year. Now diving a little bit deeper into the breakdown of our sales. The upper half shows our core businesses in the lower half of our noncore businesses. As you see, the core business are comprised of our automotive business and the smartwatch and VR business. Automotive was up very strongly, 16% versus the previous first quarter. The -- a little bit of FX tailwind there, but more importantly, we saw very strong customer demand, including demand on some of our new products, and we were successfully able to capture that demand. So that's really what contributed to that 16% increase in automotive. Same thing with smartwatch and VR. We saw very strong demand for our OLED product lineup. VR was a little bit weak, but the strength in our OLED more than offset the weakness in our VR top line. So overall, an 11% year-on-year gain in terms of our revenue for our core businesses. And as I mentioned earlier, our noncore businesses are primarily our LCD smartphone business. We've been mentioning over the past year, 1.5 years, we are strategically shrinking this business as we transform our portfolio. So as expected, our revenues in this particular product line is down versus the first quarter of last year. This slide here shows the change in operating profit from the first quarter of last year to the first quarter of this year. As we've been mentioning several times, we've halved our operating losses from roughly JPY 14 billion to JPY 7 billion this year. A little bit of FX tailwind there as you see on the left-hand side. On the far right-hand side, you see the effect of the falloff of the inventory valuation losses that we reported first quarter of last year. But probably most importantly is that bar in the middle there, that JPY 1.8 billion gain from the mix improvements. And that's everything I mentioned earlier in terms of how we are transforming our business portfolio, our noncore businesses into more profitable core businesses and that's starting to really show effect there with that middle bar right there. This slide here shows the change in operating profit from the fourth quarter of last year into the first quarter of this year. As you see, it's slightly down. This is all seasonality. I think as you may already know, first quarter tends to be the weakest quarter of all 4 quarters for JDI. This year, no exception. So what you see here is effectively seasonality. That's it for the first quarter earnings results. I'll talk just a little bit about our guidance, our forecast for the current year that's ending March 2025. This slide is no different from the slide that we presented this past May, which is to say that our forecast remains the same. We are still looking to deliver JPY 221 billion of top line revenue, an JPY 11 billion -- roughly an JPY 11.7 billion loss at the EBITDA line and an JPY 8.2 billion loss at the operating profit line. All of this is on the back of the strategy that I've been mentioning several times, we are radically trying to improve the profitability of our business portfolio, shifting out of noncore into core businesses. And we're striving still at this point to hit EBITDA profitability in the second half of this year. So nothing has changed on this slide and as well as this slide here. So this is again -- this is a reuse of a slide from our presentation this past May. This shows the change in operating profit going from the first half of this year into the second half of the same year as well. And then as we explained in May, what we're expecting to see is an accelerated sort of improvement in our operating loss as we move into the second half of the year. It's just a manifestation as we continue to transform our business portfolio towards stronger profitability. We're also looking to monetize where we can some of the licensing from our new technology such as eLEAP and HMO. So we're all striving towards that. That's what you see in that middle box right there called mix. It's a combination of just a stronger business portfolio as well as some licensing business there. So again, no change to this slide. And with that, I want to hand it right back to Scott. Thank you.

All right. I'm going to go through the Business & Metagrowth 2026 update. This is 30-plus slides. I don't intend to go through every single 1. And yet, it feels like we should kind of remind you of what we're up to, why we're doing what we're doing with the kind of core business strategy is. So please allow me to address that for all of you. I mean I think the core of our growth rate, which we announced 2 years ago is, look, this is a radical transformation of JDI. We expect of ourselves and our customers tell us that we're capable of this and so that we need to deliver as a global #1 technology leadership. So that's what we're doing. We use the word meta to describe big in size. We could have called it mega. We could have called it giga. But the goal is not to do something small, to do something very, very big on scale that is meaningful. And that reflects the fact that displays are foundational technology for modern society. I mean, they're everywhere. I mean, the AI revolution is real, and it uses compute in a very powerful way and guess what the compute shows up in our lives via displays. And displays continue to be not only ubiquitous and growing, we're in a technology area that's deeply important for customer and social value, and we can improve people's lives and we're going to. Three key pillars of the strategy: 1 global #1 technology leadership I touched on this a little bit earlier. It's hard to be #1, but it's even harder to deliver profitability on -- by being #2, #3 or being tied for kind of with 3 other firms. So it is fundamental to us that we deliver a technology that no 1 else is capable of and we are doing that. Two, I mean, the market-leading tech part reflects the global number one. we need the growth to be transformational. It is not interesting for us to do something small. The good news is that we can do something very, very large at scale with technology that people don't have and deliver significant value for not only our customers and our shareholders. Three, climate change is real environmental damage that is occurring across the globe is real. We need to be green. We need to be sustainable. We are committed to being so. I touched on this a little bit earlier, Global noon technology. It's certainly something we're doing with eLEAP, with a transformational next-generation OLED, but it's across the board. So as examples, we have -- this technology is fantastic. I hope you join me in absolutely loving tech and its ability to move the world forward and it's magical. So we've developed a very high precision sensor interface, which were called -- rebranding as ZINNSIA, that goes through all sorts of materials, so you can just turn anything into a sensor and the touch controls. So we're coming to market with this every customer we've shown it to you. And if you -- if there's a customer on the call, we welcome inbound from you because we'll show you all the different demos we have for it. This is a really interesting technology. It is powerful. It's coming to market very soon. We have -- as another example. We are the world's best at ultra-high resolution VR. I mentioned this earlier. And you probably know this, but the issue with VR is you're using -- the displays are very close to your eyes. You're using kind of lenses in order to kind of magnify them to get the full immersion effect. Typically, it's a 7x lens or a 10x lens, which means that if it's 10x lens, it means you're cutting the actual PPI, the resolution experienced by the user by 10x. So it doesn't feel like it's 120,000, 200 PPI, it feels like 120. So it's [indiscernible] demand for high PPI for high resolution and it needs to be cost effective. And the problem with silicon is it's very, very expensive. So JDI is pioneering the ability, and it is truly unmatched to deliver super high-end resolution and a very low-cost glass substrate, again, coming to you soon. We have -- this is also like magic. It's really fantastic. We have developed very high-performance what we call 2VD, 2 vision display, you take a single monitor and you run totally different content on it. So for example, this is an example of an auto case. The driver is looking at whatever the driver is looking at GPS, road information the passenger is watching a movie or watching the Olympics. This is not only for autos, it's for -- it actually has dual touch use, so you can both be on touching the screen at the same time, 2 different people, the driver in the passenger in this case, the touch does not interfere with each other. It is literally taking a single display and making it into 2 displays. It is not only for auto applications. You can do it vertically, you can do it horizontally, you can have 2 people sharing the same laptop or tablet kind of having completely different functionality, real time, you can switch to, let's share it together. It's enormously powerful tech. It's a way of taking -- the reason why it's very powerful for autos is because as displays proliferate in autos, for example, passenger displays. They want to give the passenger display. The problem is if passengers want to have a big display and it interferes with the airbag. And so you've got very constrained space, this is a technology that we had kind of 10 years ago, and we had a competitor that was also involved in it. The technology was to use a technical word, crap, the visual experience, the image quality was terrible. There was no dual touch, we've solved for both of those problems in the world's first firm doing that. This again, this technology come to you very soon. It's coming to you on autos and it comes to you across a range of applications that we think will be very powerful. We have deployed our world-class expertise in liquid crystals to generate advanced telecommunication commitment, excuse me. I'm notionally a native speaker in English. So hopefully, I can get through this call. This is web presentation. And so there's things we're working on with big telecom operators allowed them to do more in 5G, which have some challenges in creating the transmission and communication coverage that users need. So that would be 4 examples of things that we're doing in terms of a world-class technology. Again, we are continuing to take out costs and to take out assets. The problem with the display business historically has been it combines asset heaviness with low profitability that does work. So we're taking out both assets and increasing our profitability. Let me touch a little bit what's going on geopolitically. And I think probably the next slide is really the important one. And I touched upon this earlier. They raised every configuration of supply chains going on. it's happening. It's happening most prominently in the U.S. auto industry. It's expanding to European autos. It's of course, going on also in U.S. and European consumer companies, geopolitical risk arising. There is a need to figure out how to deliver customer value in a more diversified way China is a fantastic place to produce. And if only all you do is produce in China, then that can also create some risk for you as a company. So Japan is very, very good at high manufacturing, JDI is very good at high manufacturing. There has been a surge in activity. I think we probably -- we're guessing a little bit as to why this is the case that we're seeing so much more literally over the last several months. Certainly in the United States, in particular, perhaps linked to the U.S. election, where there is activity on the part of both parties to increase tariffs in a very significant way with respect to China, but this is possibly a game chamber for us, a game changer for us. It's -- this is a major shift in production activity, which we are welcome and ready for. So we'll see how far we can run forward with this. One of the ironies is that JDI has switched over to OLED, and as we should. OLED is taking over the world. But it's interesting that there is, in a way, is arguably a bigger shortage of, for example, non-China LCD capacity then there is a non-China OLED capacity. So this is directly impacting our ability to create a step change in profitability from our -- from what we thought was more of a commodity LCD business may be coming back in a big way. We'll work on eLEAP. This is -- I won't go, I think I've talked about this over and over and over. I'm hopeful that many of you are aware of what eLEAP is. It stands for environment positive, Lithography with maskless deposition, Extreme long life, low power, and high luminance, and Any shape Patterning. I mean the key is litography. We are taking what is classically been a kind of a deposition process, which uses huge fine -- we're called fine metal mask, FMM, and substituting some technology, lithography and it's very, very powerful. It is our core hypothesis that OLED is a winning display technology and eLEAP is the winning OLED technology. OLED is fantastic. I won't go in great length. I think you all know this, but it's better. It offers a series of characteristics that are super, super powerful. This is why OLED is taking share every single year. The world display technology is moving to OLED. This will be an example of it. I promise you I'm not going to talk about every slide, so I won't. We believe OLED has significant advantages over both micro LED and micro OLED, other competing technologies, and therefore, the wins. The upside opportunity in terms of what the growth market uptake looks like is very big. Smartphones have already moved over 50% OLED, we think that these other market segments also go there. So a big opportunity. And there are some challenges with OLED, specifically short lifetime and high production cost, eLEAP solves for both. Some sense of how that works is on this page. You can see on the left-hand side, we've got conventional OLED with only 20% aperture ratio, meaning kind of 72% of the space on display is actually black. That's because these huge metal mask don't have enough tolerances to place pixels next to each other because otherwise, you have red and green and blue on top of each other and you have terrible display quality. So because we switch to a semiconductor process and lithography, we don't have the metal mask limitations and we can stick pick pools really close to each other. But either delivers higher brightness or much higher pixel count. So we have the ability to break through with very high resolution OLED, for example, for the VR space in a way that is not possible conventional OLED. that also generates a long lifetime. You can see how much better our lifetime is in conventional OLED. That's directly related to the fact that we have less black space and more pixel space because the problem with running, again, on the left-hand side of the page, running conventional OLED is you have to put a ton of current through this black space in order to try to kind of create more brightness in the small brightness area, because we increase the brightness here by 2 times, you can run less current, you don't burn out your organic pixels. So that's why eLEAP has better lifetime and higher brightness. We also are cheaper to produce. So you get rid of all these costs that are related to fine metal mask, we can cut OLED production cost by 30%. This is why eLEAP is a game changer. It's better and it's cheaper at the same time. It is more environmental. You don't need all this chemicals. So it's better for water in terms of trying to wash these fine metal mask. You don't have to move around huge metal mask, that literally the amount of CO2 emission in our process is only half that of conventional. This is better technology across the board. [indiscernible] of work on it. We're improving really fast. I run forward. As you know, we announced the world's highest brightness, single-stack OLED recently, 1,600 nits on conventional relative to the conventional OLED is just typically running at 400. We won the Display Device Innovation Gold Award at DIC, the major Chinese display conference, I think it was actually -- it was 2 months ago. So this is very recently, we run forward. Three months ago, we showed our current production yield for eLEAP at 60% -- above 60%. It's now above 70%. We are on track. We're going to go into mass production in the end of December. I'm sorry, in December this year, so the end of this year. And we think we completed the third display revolution. Long time ago, cathode ray tubes were amazing. They brought moving pictures into the home. And then they were huge and bulky and massive, they're replaced by LCD. LCD has all these challenges, all this kind of replacing LCD we think we completed the revolution by bringing eLEAP to be on behalf of consumers everywhere. It's a game changer. It's a massive market. We expect to be undisputed global OLED maker. Thank you very much. Appreciate your time, and happy to take any questions or comments from anyway.

[Operator Instructions] It appears there are no questions at this time. So we'll conclude today's briefing. We sincerely appreciate your participation and want to express our heartfelt thanks. Thank you very much for joining us today.

Thank you very much, everybody. Have a great morning, afternoon, evening. We run forward. Take care.