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Edited Transcript of 6740.T earnings conference call or presentation 9-Aug-19 8:00am GMT

Q1 2020 Japan Display Inc Earnings Presentation

Minato-ku Aug 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Japan Display Inc earnings conference call or presentation Friday, August 9, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Presentation

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Unidentified Company Representative, [1]

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Thank you very much for your attendance. I'd like to explain the consolidated financial results for the first quarter of fiscal year 2019. Please refer to the presentation material.

Please turn to Page 2, which is a summary of the financial results for the first quarter. As you can see, due to continued severe competitive environment, customer inventory adjustments and reduced demand seen as a result of U.S.-China trade tensions, first quarter sales remained at JPY 90.4 billion. Net sales were down approximately JPY 10 billion year-on-year with large increases in operating losses coming to JPY 27.5 billion. In the first quarter of fiscal year 2018, production was at near full capacity in preparation of a hike in demand expected around autumn, but this year, inventory adjustments by customers meant that our sales came from selling our stock. I would like to explain this in detail later.

As profit coming from actual production was suppressed, operating loss came to JPY 27.5 billion. As for the changes of ordinary income and net income attributable to owners of the parent, equity method investment loss of JPY 2.03 billion related to JOLED nonoperating expenses is recorded, and JPY 51.7 billion in business structural improvement expenses was also recorded. And an additional impairment loss of JPY 51.4 billion on assets related to the Hakusan plant was recorded. Due to these factors, at the end of the first quarter, liabilities exceeded assets coming to minus JPY 77.2 billion.

Page 3 shows quarterly sales. I may be redundant, but as for mobile, as I mentioned earlier, sales were down sharply quarter-on-quarter for the first quarter due to reduced demand for smartphone displays, considered to be the result of customer inventory adjustments, U.S.-China trade tensions and also seasonal impact. And as announced June 12, JDI decided to downsize the mobile business as there is no prospect of significant recovery in future demand.

And as for automotive, car sales continue to fall year-on-year in the first quarter, led by China but also in U.S. and Europe, resulting in JDI sales to also fall. The same trend is expected to continue in the second quarter, but improvement looks possible from third quarter onward with sales from new fingerprint sensors and OLED-related products expected.

Please turn to Page 4. This is the consolidated profit and loss statement. I will explain the details of this using the waterfall chart on Page 5 later, but I'd like to draw your attention to the net extraordinary loss, which came to JPY 51.7 billion, with net loss attributable to owners of the parent as shown.

Please turn to Page 5, which shows the factors contributing to the increase -- or decrease in the operating profit against our previous year on the left. Sales was JPY 103.3 billion for the first quarter of fiscal year 2018. However, as I mentioned earlier, declining inventory of JPY 16.5 billion is the biggest factor of the operating loss recorded this quarter. Sales was a result mainly of sales of inventory on hand, and we are in the midst of structural reform methods currently with effects expected to start showing in the second half of this fiscal year so we cannot deny that this quarter was quite difficult.

On the right hand of the page is a change against the previous quarter, January to March period, which cover the demand season for mobile phones with shipment volume and product mix of JPY 17.4 billion weighing heavily. Although sales were almost half of that of the previous quarter, with improvement measures taken, we were able to limit the loss at this level with accumulation of different factors.

Page 6 is the balance sheet. As I mentioned earlier, the sales were made from selling of inventories, and it went down from JPY 71.1 billion to JPY 58.8 billion quarter-on-quarter. Accounts receivable-other also declined as we use EMS. And these show how we made sales from inventory on hand with lower operating rate. And as a result, total net assets, unfortunately, came to negative JPY 77.2 billion.

We are currently making utmost efforts for our business alliance with Suwa Consortium. In addition, for your reference, we are working on long-term borrowings from INCJ. And with realization of first closing and the third CB issuance of JPY 30 billion, the measures are explained on the right-hand side. For your reference, the blue shows the equity including common stocks issuance of JPY 42 billion; preferred stocks issuance of JPY 102 billion; and payment in kind by JOLED stock, which comes to JPY 44.7 billion and extraordinary profit of approximately JPY 20 billion.

With JPY 160 billion increase in equity and when everything is realized, assuming that the above financial measures as of June end 2019 is implemented, net assets will come to JPY 87.4 billion and shareholders' equity ratio of 17.5%.

Reflecting the above net debt, JPY 164.5 billion becomes net cash of JPY 24.2 billion. With effective utilization of funds from INCJ, the existing stakeholder; and Suwa we will make efforts on business development to be freed from excessive liabilities going forward.

Please turn to Page 7. This is the last of the financial reports. The cash flows is shown. More than JPY 20 billion of operating losses are weighing heavy with income before income taxes of JPY 83.3 billion, which includes structural reform cost of JPY 51.7 billion, and operating losses and ordering losses are the big factors here. I will explain the situation and reform measures taken later. And by changing into profit from operations, we hope that we'll be able to make cash flow from operating activities and free cash flow positive going forward.

Advances received came to negative JPY 8.2 billion. Due to confidentiality clause, I cannot talk specifically about the formula used, but repayment is done in tandem with sales. And our sales in the third and fourth quarter of fiscal year 2018 being relatively high, the advances received tended to be higher this quarter. However, as mentioned before, with support from customers, we have agreed to lessen it to 1/4, reducing the burden of these advances received going forward.

Now we'd like to talk about the overview of the structural reform. Please turn to Page 8. We are looking for fixed cost reductions for fiscal year 2019 to come to JPY 50 billion, and this is expected to come from structural reform measures to be taken.

First, we will work on reducing employees and wage bills, et cetera. We will work on personnel reductions. We will ask for voluntary retirement in Japan of 1,200 people with retirement date of September 30, 2019. We will reduce overseas sales subsidiary employees by dozens, which is almost complete, and transfer employees to JOLED, mainly Nomi plant, which is an equity method affiliate; and reduce executive compensation, managerial salaries, employment bonuses, et cetera, which almost all have already been conducted. This will lead to costs and benefits of higher early retirement costs of approximately JPY 9 billion to be recorded as extraordinary loss for the second quarter of fiscal year 2019 and cost/benefit of wage costs and personnel-related costs from workforce reductions expected to be approximately JPY 9 billion in fiscal year 2019 or approximately JPY 20 billion annually.

Second, we will work on downsizing the mobile business and impairment of mobile business assets. As announced, Hakusan plant suspension from July to September 2019 and depending on future customer demand, we may restart it by the end of September. And Mobara Plant to close back-end line in September of 2019 with downsizing of the mobile business and disposal of mobile back-end manufacturing equipment will be made.

In addition to fiscal year 2018 impairment of JPY 75.2 billion, impaired assets in first quarter fiscal year 2019, such as Hakusan plant, will come to JPY 51.4 billion. Cost and benefits that will be brought by these measures is additional impairment charges and other restructuring costs recorded in first quarter of fiscal year 2019 as business restructuring costs of JPY 51.7 billion. And taken together with fiscal year 2018 impairment, depreciation in fiscal year 2019 to be reduced by approximately JPY 20 billion and approximately JPY 23 billion annually. And with the personnel reduction measures taken and other expenses considered, we believe the cost reduction will come to JPY 50 billion.

And the third measure is to convert mobile company to a subsidiary. Detach in-house mobile company and organize as a subsidiary by December 2019 and consider accepting capital participation in the subsidiary from investors. And it will bring cost and benefits as to divide our businesses with different risk profiles to ensure stability of the parent main business for mobile and nonmobile businesses and aim for further future development of OLED at subsidiaries.

Please turn to Page 9. This is fiscal year 2019 guidance. The first half fiscal year 2019 sales have upside, contrary to the May 15, 2019, forecast of a 10% year-on-year decline and are now expected to increase year-on-year. In the second half, sales are expected to grow from the first half due to the launch of new products, including OLEDs, but full year sales will likely decline year-on-year. Aim to reach profitability in the second half through the implementation of structural reforms and the effects of assets impairment is seen.

With downsizing of the mobile businesses, review of R&D costs, capital investments will be made with subsequent reductions. An Extraordinary General Meeting of Shareholders scheduled for September 27 to consider an investment from Suwa up to December 30, 2019, and refinancing from INCJ is planned. Please refer to the cost estimates at the bottom of the page for your information.

Next, I'd like to use Page 10 to talk about the capital injection from Suwa and refinancing by INCJ. 2 days ago, we made an announcement on the capital injection from Suwa. The first closing was reduced from JPY 60 billion to JPY 50 billion. And as for our second series CB, which was originally JPY 18 billion was changed to JPY 8 billion for gross proceeds. And the third series CB, the gross proceeds is raised from JPY 20 billion to JPY 30 billion.

Capital injection reduced from JPY 60 billion to JPY 50 billion may be taken negatively. But as you can see on the right, for example, we will see, in addition to convertible preferred shares of JPY 102 billion and long-term loan of JPY 50 billion already announced, we will see payments in substitutes by the transfer of JOLED stocks of JPY 44.7 billion on top and short-term loan of JPY 20 billion in place since April. And as announced 2 days ago, the short-term loan was changed to 1-year term loan. And with diverse support from our lenders, we will see that situation will stabilize.

As for the repayments to be made after the first closing, as INCJ announced August 7, with change of short-term loan, short-term stability of funds has been secured. As advances received is reduced too, this amount with financing to improve going forward, capital injection stakeholders will be received and short-term financing will improve.

For us, what is most important is management terms and to secure first closing. And third series CB is equivalent to second closing, which is a separately agreed date, but in order to have a set framework on legally permissible date, which is set for August. I will explain in detail using next page, and apologize for any misunderstanding caused with the language of the disclosing document. The payment period is from August 29, 2019 to August 28, 2020, which is legally 1 year.

Page 11 shows the schedule going forward. As explained earlier, various changes regarding refinancing and framework with Suwa have occurred, and it is a fact that it took longer than we had originally anticipated. The Extraordinary General Meeting of Shareholders will be postponed to September 27 from August 29 as announced 2 days ago.

Proposal for partial amendment to the articles of incorporation for the increase in the total number of authorized shares and the issuance of preferred shares and refinancing and proposal for new appointment of directors, including ones to be nominated by Suwa, will be taken up as agendas at the general meeting.

And as for the first closing, our focus is -- if you refer to Note 1 at the bottom, the first closing will be taking place on the date whichever comes later, and 3 conditions are listed after TPK is disengaged. As Suwa is not a business investor and they do not have any business investors, time will be required for review, but the assumption is for approval. So fifth business day after satisfaction or following the day on which all CBs are satisfied or have taken place on any other date as JDI and Suwa separately agreed are the conditions for the first closing. There is possibility of bringing this forward as well.

And for the first closing, new management team, including directors, are to be nominated by Suwa. And by the end of December 2019, the plan is to carve out the in-house mobile company as new subsidiary. As end of September is quite difficult to realize, we would like to make this possible by the end of December. And as for the date JDI and Suwa separately agree, the date JDI and Suwa separately agreeing means that the issuance of common stock and bonds, the stock acquisition right of JPY 30 billion is to be considered, if necessary.

Lastly, I want to talk about the future management strategy. As was announced today, this is a list of director candidates after Suwa closing, which is a third-party allotment completion. As our business alliance agreement was concluded 7th and as we go into Obon summer holidays here in Japan, through the steering committee we together set up, we will work for the next 2 weeks and decide on the candidate to be approved at the Extraordinary Shareholders Meeting September 27 so that complication notice can be discussed at the end of August.

Please turn to Page 14. The last 2 pages of the presentation material summarizes the management strategy under the new management structure. First, we cannot deny that our financial capabilities is weak at the moment, so we will work on enhancement of financial capabilities. Implementation of capital injection and INCJ refinance without fail and recovering and strengthening of relationship with suppliers and customers and eliminating concerns of the parties involved is something that we will work on.

We will carve out the mobile business, segregating business risk profile by mobile business carve-out and work on efficient allocation of limited resources and achieve growth through alliance with the important customer and strategic partners in the carved-out companies. And we will realize both final structural reform and alliance with Suwa. If this should be completed over September and October, solving problems at once, that means stable capital and cost reduction through structural reform will be made and from the second half, JPY 50 billion cost reduction impact can be expected.

We do understand that hurdles are high. Ideally, structural reform should follow capital injection, but we are working on it simultaneously so that problems can be solved. We will aim to stabilize business and realize profitable business going forward.

What is going to be a compulsory is for us to enhance the business competitiveness. We are strong in Europe, but strengthening business in China is going to be very important, and this will be done utilizing Suwa's network for auto business. We will also utilize M&A and alliance to realize smooth shift to non-mobile OLED business. With the capital injection conducted, we believe that the display business is very difficult, but shifting to non-mobile is going to be important.

And shift from LCD to OLED is going to be important for us to achieve stability. So alliance with outside partners for a good portfolio is something that we need to aim for. And we also would like to begin feasibility studies of OLED manufacturing joint venture, which I will explain in detail using the next page.

Please turn to Page 15. This is showing the current AUI, display solutions and mobile, which will go through some changes. We are thinking of forming a new JDI, and AUI and DS will fall under the new JDI, which is a new parent company, with the mobile business becoming a new company which is going to be a 100% subsidiary.

Through the new business, we'd like to establish our value chain and work on external alliances. As you can see, as shown in the middle of the page, we would like to evolve and deepen the LTPS technologies for differentiation. Suwa's injection will come into the parent company. And with the mobile business the new company to be 100% subsidiary, how to soft-land the existing LCD business to aim for and prepare for the new OLED business is going to be very important.

Suwa and/or especially Harvest support will be necessary to realize this plan. Harvest is the third fund -- third ranking fund in China, and they have a very strong basis in China. And they're a financial investor as well. So if we -- after receiving injection from Suwa, with stable financial basis, if we can strengthen the customer base for mobile and the OLED business to be gained in the second half of this year, if that can be stabilized, we believe that it will lead to a regrowth scenario.

And we may have different negotiations with different partners going forward interested in our new business. We were using our balance sheet for measures taken in the past, but reviewing what we have done, we would like to strengthen and stabilize our business so that, together with Suwa and Harvest going forward, we'll be able to have constructive negotiation with other manufacturers and develop the OLED business further without using or utilizing our balance sheet.

We believe that we'll be able to enhance the business by using our position. Enhancement of business competitiveness and OLED businesses will lead to sustainable growth. When OLED is successfully established, we believe that we can come up with a framework so that we'll be able to repay, if there's an upside, to the relevant stakeholders.

The AUI and DS business, when we compare them to other businesses, lifetime included, are quite different. So we need to make sure that our authority and delegation and rights are defined in a clear manner. Corporate structure changes will be utilized to realize a sustainable company going forward.

We were planning to have a joint press conference with Suwa. However, the relevant personnel from Suwa were not able to come to Japan. We are very sorry that we were not able to have this press conference, but Suwa regrets that they were not able to be here today. Please refer to the press release in English by Suwa explaining the situation. The Japanese translation is also provided.

That is all. Thank you very much.