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Executives

Sidney Rosenblatt – Executive Vice President and Chief Financial Officer

Analysts

Brian Lee – Goldman Sachs

Universal Display Corporation (PANL) Goldman Sachs Technology and Internet Conference Call February 13, 2013 7:00 PM ET

Brian Lee – Goldman Sachs

Hi everyone. Thanks for joining us and sticking around for the last session of the day. My name is Brian Lee, Senior Clean Energy Analyst here at Goldman Sachs. Next up we have with us Universal Display, or better known as PANL to most of you, leading IP and material supplier to the growing OLED market. With us we have CFO, Sid Rosenblatt. He has been with PANL since its beginning, and has guided it for the past 20 years. Sid, thanks for joining us.

Sidney Rosenblatt

Thank you for inviting me.

Brian Lee – Goldman Sachs

So, maybe you can just start off high-level how you are thinking about the OLED market and your prospects entering 2013, you know, if you think about 2012 it is really about Samsung, its smart phones, so maybe first on customers. Is there anyone beside Samsung that we should start to monitor and that will start to matter?

Sidney Rosenblatt

So, in mobile devices Samsung is the leader. Samsung is 95% of the market. They have done very well with their Galaxy products, the Galaxy Note. I don’t see on the handset side anyone coming in this year in significant capacity. AU Optronics has been sampling products. They have small lines for mobile devices. You have got Chimei, which is Innolux, which has in the past made small size screens, have demoed small size screens, but they really have not announced any capacity, nor do I see any capacity on their side.

So Japan Display has talked a little bit about moving into the mobile market, but they’re actually raising capital to do that. So I think on the handset sized screens, Samsung is still this year going to be the largest player in the marketplace. The other piece of it is the larger form factors, which are TVs, and so there has been a number of demos at CES, whether it is Samsung, LG, Sony and Panasonic, demonstrated larger TVs. So we see that as an area that this year will start to mature, but I don’t see a lot of high-volume in that area for 2013. I may have jumped one of your questions.

Brian Lee – Goldman Sachs

Fair enough. We will jump around. So maybe talking about some of those customers, potential customers, specifically LG, they are spending Capex, they are launching TVs even with disputes with Samsung seem to be resolved on the IP side, so what is really keeping them from doing a Samsung like long-term deal with you?

Sidney Rosenblatt

We are talking to them. We have a short-term license agreement with them, and we have continued to work with them. We start out with every customer under what we call material supply agreement, where we build a license fee into all the material that we sell them, and we report part of it as license fee and part of it as material supply.

I think as they get closer to high-volume manufacturing production, if I was them from their side, I would want to know what my cost structure is going to look like. So it seems to be as customers get closer to introducing products, the likelihood to get a deal done seems to come from their side versus ours. And we are fine with -- I tell people, we are fine with where we are, we clearly would like to get a long-term license agreement with them because we think that is good for the industry.

Brian Lee

Can you quantify what high-volume manufacturing would be, would that be the 8k pilot facility or do they really need to bring online a new 8g facility before you think they really start to moving on a long-term arrangement?

Sidney Rosenblatt

Probably some place in between to be honest. I think they are talking about -- they are selling. They are taking orders for $10,000 OLED TVs. The guys that work at Goldman Sachs are the only ones that I now that could afford that, but -- so they have sold 6 or 7. You now, I think it is -- we are going to continue to work with them to get something done.

I think realistically for the products to be a real consumer product they have to have high volume. I think the Gen 8-size facilities need to be in place before they can get any volume, any efficiencies, any yields that increase so that they can then make product and make money out of it.

Brian Lee

Sure. How about AUO, where would you rank them in terms of timing and opportunity for you in 2013, could they actually be a 10% customer at some point?

Sidney Rosenblatt

I think they could be a 10% customer at some point. I mean they have Gen 3.5 line in Taiwan, Gen 4.5 line in Singapore, which can be used for mobile devices. But they also have a TV R&D line. They haven’t made any announcements about spending Capex to build a TV Gen-8 size facility, but they do have a TV line because they actually reported that Sony TVs that were shown at CES were actually made by AUO. And AUO has a history, AUO actually in 2007 made mobile sized screens for BenQ-Siemens products, and they did that for about 8 months. So, they do have a history of making OLEDs. They were very inefficient when they did it in 2007, but they have come a long way and we obviously work closely with them.

Brian Lee – Goldman Sachs

Maybe switching to the application side, how do you think about the remaining growth in OLED smart phones, do we really need to see TVs and tablets start to pick up this year for you to resume growth, or I guess continue to see growth?

Sidney Rosenblatt

No, I think the smart phone market is one that is anticipated to grow, if you use DisplaySearch numbers, by 40% to 50%. If you listen to what Samsung has talked about, they are talking about almost doubling their number of handsets that have OLED screens. I think from our standpoint, we are looking at 2013 as a year that will be mostly dominated by smart phone sized screens and handsets. And we intend to give 2013 guidance on February 27. But we do expect the market to grow this year, and we will grow.

Brian Lee – Goldman Sachs

I think one of the things we hear a lot from investor in terms of pushback is your revenue hasn’t necessarily translated one for one with some of the unit growth numbers that you see out of -- whether it is DisplaySearch, the market, or Samsung specifically, how should we think about if there is 40% to 50% unit growth in smart phones, OLED smart phones for ’13, how does that kind of translate to your P&L?

Sidney Rosenblatt

Well, the thing that gets a little confusing with us is units shipped don’t -- for us with Samsung we get a fixed license fee, and our fixed license fee covers whether they sell one unit or 50 million units. So that license fee, which we will also disclose in our phone call is fixed for 2013, and what you have to look at for us is capacity starts, substrate starts per month, not what products are shipped because if they have increases in yields, and shipped more products one quarter versus the other, but they have started the same number of substrates, our revenues will be flat, because we coat all the glass whether it is yielded or not yielded.

In addition to that, the customer are always trying to be more efficient with their material, with their material utilization, and there are things that you can continually do to tweak your recipe so that they are always looking to save pennies. And they will tweak their recipe and use less doping concentration. So we know that there are some efficiencies there, and there are efficiencies in their equipment.

I think if you do look at the DisplaySearch numbers from ’11 to ’12, and what they actually were in ’11 to what they ended up being in 2012, our material sales weren’t significantly different than those numbers because they actually reduced, they initially talked about 2012 being 8.5 billion and now they are talking about it being 6.9 billion. So when you look at what it actually was for 2011 versus 2012, and you look at what our material sales did from ’11 to ’12, we may have been up in one to one, but we’re not that far off.

Brian Lee – Goldman Sachs

You alluded to TV there, and maybe in 2013 we will see some minimal volumes, but nothing to get super excited about, what is sort of the issue there, is it a technology issue, is it all about cost and when you talk to some of the large OEMs, specifically guys out in Korea, has there been any wavering commitment to OLED TVs, if you think about CES this year, there was a lot of buzz around ultra-HD and some other competing technologies that they are now thinking twice about?

Sidney Rosenblatt

What we hear is there is still significant efforts. I don’t see there is any less enthusiasm for OLED TVs. There is always going to be -- LCDs are always going to continue to get better. I mean LCDs are in excess of a $100 billion annual business, OLEDs are 6% or 7% of that, and they will continue to get better because they have got huge infrastructure and they are not going to just let it go away.

In terms of the commitment for OLED TVs, you are actually seeing more. I mean you are seeing Samsung, LG, it is the first time we saw Sony actually have a TV, and we believe that the benefits of OLED TVs, which are very, very thin form factor, high contrast ratio, best motion video without any technology, quarter of an inch thick, they are -- and any of you -- most of you guys probably saw them at CES. They clearly have a better picture quality to your eye than LED, back-lit LCDs. And I think that it is something that LG, it is looking to differentiate itself with.

And I think Samsung intends to do the same thing by introducing these and doing what they did with LED back with LCDs, which is the end of a premium price to product, and have all the other OEMs trying to chase them because when you look at those OLED TVs they are pretty spectacular.

Brian Lee – Goldman Sachs

In terms of timing, I think you have said in the past 2014 is probably the year where we do start to see some real volumes on OLED TVs, is that still the view, and I guess as we look to this year, what are some of the things we should be tracking to see if that is going to be the case, or if they push it out again?

Sidney Rosenblatt

Right now each of them are building Gen 8 sized facilities. I think it is the end of this year, early next year before you see any capacity coming out of the high volume facilities. If there are glitches and things slip, it could end up slipping. I mean the issue going from a small screen to a 55-inch TV is significant.

LCDs took 15 years to go from laptops to TVs. So going just from a Gen 5.5 size piece of glass to a Gen 8 piece of glass, where you are cutting in into a 150, 5 inch screens, now you are going to take a Gen 8 and cut into 6, 55 inch TVs. If you have pixels out, you could have zero yield. So I think that they do have to work on those yields, whether you use conventional red, green and blue side by side with visible shadow masks, or whether you use the white with color filter approach, each of them have benefits and each of them have drawbacks.

Brian Lee – Goldman Sachs

Any other applications we should be monitoring I kind of have to ask, Apple did create a bit of a buzz around OLEDs to itself with the keynote presentation here at the conference, and I think in the past week or so there has been some chatter around the watch-like device that may have some OLED content in there, but any other applications beyond TVs, tablets, smart phones, we should be watching out for?

Sidney Rosenblatt

No, I do think they are flexible. Our screens on plastic are something that you will see. Samsung has dedicated a couple of lines to flexible displays. There was talk last year that they will be able to yield some -- like we have read is that they have been pushed back probably to the middle of this year. I think that is if you can make a mobile sized phone or the rumor is that the Note 3 or something will have a plastic screen. That is a game changer in terms of weight and unbreakability.

And so I think that is one area that is different that OLEDs can really do and other technologies can’t. It won’t be a truly flexible display. It will be a conformable device to get to a truly bendable, rollable display. There is a lot of other technology that has to be developed. I actually thought when you mentioned Apple, you are going to ask me about the question that I got from every single person who came into my one-on-ones today, which was Tim Cook talked about color being bad on OLEDs, and what did I think about that.

So, I’m not so sure he took a shot at Universal Display. I think it was a shot at Samsung. So I really can’t comment on that but I felt it was pretty funny. I believe it will come up in a question, or it is on your list?

Brian Lee – Goldman Sachs

Exactly. Maybe on that point, we’re going to switch gears to new materials, since that is another potential growth driver outside of just applications and new customers. There has been a lot of speculation about the green materials being featured prominently in next flagship Galaxy phones for Samsung. To the extent that you can, can you give us any kind of commentary around your visibility there?

Sidney Rosenblatt

All I really can do is quote Rob Stone from Cowen, who in his report last week talked about Galaxy 4 having [GDCs], green material in it because he said that it was stated to have at least 25% more power efficient. There is a report out that was from Duksan Hi-Metal that talked about it. It is kind of awkward to tell folks just today talking about that, we have our conference call on the 27, where we will talk about the fourth quarter and talk about 2013. So I can give you our view of what is going on at that time. But to be honest right now really I can’t say anything about it, besides what other people have said.

Brian Lee – Goldman Sachs

Sure. Fair enough. I guess on February 27 when you do provide 2013 revenue guidance, will we be able to deduce from that whether or not all this green speculation is valid or invalid, or will we still be kind of guessing?

Sidney Rosenblatt

I hope we can give as much information about that as possible. I mean it is our intent to give as clear a picture at 2013 as we have. So if we have information that we know, we will give it.

Brian Lee – Goldman Sachs

Maybe staying on that same topic, if we do think about this new potential material recipe finding its way into Samsung products, can you kind of walk us through the math maybe at a high level of a Galaxy S II or Galaxy S III phone, which I think we know has the red material, but no other material. So, you do see in a potential future phone or tablet, say like they call the Note with red, green, and the host kind of how that impacts the revenue opportunity versus what you are seeing currently?

Sidney Rosenblatt

Well, in terms of incremental revenue, when you add a color, which if you all of a sudden

went to 100% adding green, the pricing of our materials per emitters is pretty consistent, which are the same per color, and I don’t believe that even if it is adopted, or when it is adopted it will all of a sudden be in every one. It will be in new products that are designed to optimize green phosphorescent emitters, and whether that ends up being 20% or 30% or 40% of the capacity for the year, and then as other products roll out off their life cycle they add new products. It will take some time before it is 100%.

On the host side, it is a higher volume, lower ASP product and we believe that -- when our green is being used, we expect that our green host will be used at least initially, but once you get beyond that host material is a very different business than the emitter business. And the economics of it are very different, and the IP landscape is very different.

There are multiple suppliers of host materials, and the multiple suppliers of host materials

will come up and will constantly be trying to better what it is that is in the market so you can get it. We would intend to continue developing new hosts so that -- but it is a price and performance. So if a customer can get the same performance out of someone else’s host that cost pennies less, they will use it. So we intend to continue to be in that business. We actually started a relationship with Duksan Hi-Metal last year, where they actually do want to (inaudible) steps of our host materials, which in the past have been done by PPG Industries.

They actually have very good capabilities for doing that, whereas PPG’s capabilities are really much better for low volume, high purity materials, where we are going to continue to have our emitters made. So we are going to continue to develop host materials, and as part of our strategy is to develop new and better host materials so that once we do get in we want to stay in.

Brian Lee – Goldman Sachs

I guess following up on that, we have estimated in the past that you guys get maybe $0.20 of materials revenue per kind of 4, 4.5 inch display in the Galaxy phone. Assuming our number is right and pricing doesn’t really change, if you do get red, green and a green host, does that $0.20 becomes -- is it $0.60, is it $0.40, I’m just trying to get a sense of what the other factor is, the incremental revenue opportunity?

Sidney Rosenblatt

We are not saying that $0.20 is correct.

Brian Lee – Goldman Sachs

Fair enough.

Sidney Rosenblatt

Fair enough. Does it double? When you add green in those, yes. Those will then add incrementally another pretty much the same amount, yes. So, if the number is $0.20 to $0.40 to $0.60, there is probably some erosion of pricing as volumes go up, and there maybe some efficiencies that come in. But in theory that trajectory is correct.

Brian Lee – Goldman Sachs

Okay.

Sidney Rosenblatt

But, $0.20, virtually $0.10, versus $0.05, versus $0.30 I really can’t say.

Brian Lee – Goldman Sachs

Okay, and then you touched upon the economics kind of being different for host versus emitters, in the past you have talked about I think 40% to 50% gross margins on hosts, now that you are kind of maybe closer to finding hosts or supplying hosts into an actual high-volume product, is that still the same range you would expect?

Sidney Rosenblatt

We historically have had about 60% gross margin on host. And I would expect that to be in that range for the foreseeable future, whereas on our emitters it is 85% to 90%.

Brian Lee – Goldman Sachs

Okay. Maybe a little discussion around everyone’s topic, favorite topic, IP, and lawsuits…

Sidney Rosenblatt

It is not my favorite topic.

Brian Lee – Goldman Sachs

What is the status of current patent disputes and ongoing litigation? It seems like there has been some favorable developments over the past three months, but anything we should expect on the horizon over the let us say the next 6 to 12?

Sidney Rosenblatt

No, I think in our November call, we talked about in Japan that two of our patents, which had been invalidated by a lower court, which we appealed, and at that High Court level, they said that the invalidation was incorrect and were mandated back. In our K, we will update all of the patent issues, but all of the oppositions that were filed in Korea by Duk San have been dropped.

I don’t really see any other areas. In Japan, we actually acquired 600 patents from Fujifilm. I don’t think any of the issues that are going on with some of the other ones in Japan, or in Europe, where we talked -- the last we talked about was one organometallic patent was sort of a split decision, and we won it on the OLED piece, and lost it outside the OLED field.

We don’t think any of those areas are going to impact our ability or license of our technology worldwide. It is a worldwide business. We have had no disputes in the US. So a lot of these issues have gone away. So I don’t believe that the patent landscape, which I heard quite a bit about a few years ago in terms of [UDC], and how viable we are in terms of, and how strong our IP is, I think a lot of these issues over the past couple of years have taken away any of the uncertainty as to whether or not we have what we have always said that we have.

Brian Lee – Goldman Sachs

Okay. On the Fujifilm IP specifically now that you have had some time to sort through it, are there any specific areas or I guess new revenue streams that you think, or maybe you could highlight have the most potential for you?

Sidney Rosenblatt

Yes, going through it I mean there is no incremental revenue, that when we picked it up, we picked up a revenue stream. It was nothing that was in the market. There are a number of areas where we think there are opportunities for us in terms of architecture, enhancing our portfolio, being able to get maybe an incremental additional amount for our licenses, and also extending the life because most of these patents are really very young.

And there are material patents that actually for other materials that may go in the stack that we are looking at possibly going into the production of. So we always thought that there were a lot of really future potential technologies and materials in a portfolio, and we’re finding it to be true. Can I tell you today that right now where X dollars are coming from this year, I don’t know that.

Brian Lee – Goldman Sachs

In terms of timing, are we thinking it is two years out, three years out, or are there some more near-term, maybe 12 months out where you have new materials as a result of having the Fujifilm IP enhanced that you have been able to…

Sidney Rosenblatt

There is potentially near-term opportunities, but I don’t think you will see much this year.

Brian Lee – Goldman Sachs

And how do new materials typically make their way into the market, how long is the sampling period, and then ultimately getting into commercial production, how does that process play out?

Sidney Rosenblatt

For some materials it is fairly quick. For host materials and materials where you can sort of look at the properties of it and know what is does, put it in, say okay, it does X. You don’t have to worry about lifetime, and things like that. They are easier. Emitter clearly getting a list of material into devices, which really do impact the performance of the device. It is a much longer cycle. And it is a much longer cycle, one, getting out to the marketplace and sampling it, and two, scaling it up for production. So, the list of materials going from 10 grams to 100 grams to a kilogram to 5 kilogram batches takes time. There really are quite a bit of process steps. Some of the other materials don’t need to be as pure, you can scale up much quicker.

Brian Lee – Goldman Sachs

All right. So maybe outside of the [layers] that would be the more near-term?

Sidney Rosenblatt

Correct.

Brian Lee – Goldman Sachs

(inaudible)

Sidney Rosenblatt

Yes.

Brian Lee – Goldman Sachs

Okay. I think we will see if there is any questions in the audience. There is going to be a mike that is going around, so if you could just wait for that to make it to you.

Question-and-Answer Session

Unidentified Analyst

So, you talked about visibility. Historically Samsung has been really transparent with you in terms of how much of material they are using, or how they are using it, or the yield, I’m wondering how that is going to factor into the guidance you provide for us, clearly these are going to provide you with some sort of forecast, you know, looking into 2013, how do you gauge that, how do you as a person that needs to provide guidance back to us, how do you haircut that, or do you not haircut it, what is kind of your philosophy on that, knowing that it is in Samsung’s best interest have you produced as much as you possibly can?

Sidney Rosenblatt

Yes, it is difficult. When you look at it we are a technology provider to Samsung Display Corporation that they have got license to it. When you look at the other side of it, we’re literally a vendor of materials to a factory. So we deal with the purchasing agents, and we get information from them and we get estimates and forecasts. We take those forecasts, we try to figure out whether they are real or are not real. And you are correct, we also -- we always err on the cautious side because we are a sole supplier. And we never want to be in a position where we can’t deliver because if you are a sole supplier to a customer and you can’t deliver, it gives them a good reason to say, see, you should put somebody else in this business.

We don’t intend to do that. So we will err on the cautious side in terms of building inventory. But we also look at all of the potential and possible sources of information. So we look at what Capex has been announced, we look at all the DisplaySearch and we look at iSuppli, we look at all the other ones, and see whether or not the estimates make sense from what it is. If we think the capacity will increase, we will use all the analyst reports, we really try to use all the information, and then we try to give when we gave guidance last year, we gave what we thought was a reasonable estimate of what would occur.

And we had some caution built in, and we missed -- I mean, it is early, and we don’t control the end product. Samson Electronics does. Are we gun-shy? For sure, from what happened last year. But we are -- we will. We do get haircuts. We do probabilities. We look at this, and when we give our estimates for the year we’re going to give the best we can. We are not trying to -- we’re trying to give as much information as we can for an emerging industry, and will we be wrong, probably.

Unidentified Analyst

I mean, you have been pretty clear that you don’t have perfect information in terms of how Samsung is going to use your materials. And I think you have been very upfront with the Street on that. Thank you. One thing I want to follow up from the last conference call on was there is a series of questions in the conference call with regards to the minimum purchase agreement on the materials. And the series of questions kind of went to is it a take or pay, is it if it isn’t taken this quarter, do they have to take it next, and it kind of sounded like they didn’t even have to take it in any given year. Can you maybe clarify what that was and explain if those minimum purchase agreements for that contract that you have with Samsung actually provide you with any visibility that you can trust going forward?

Sidney Rosenblatt

Yes. I agree when we talked about the minimum purchase commitment from Samsung that they may not be able to meet it, then they can roll it in to the next year, we should have been much more clear on what it really meant. And Samsung cannot buy phosphorescent emitters from anyone else and violate our patents. So we don’t know of any other phosphorescent emitters out there that would violate our patents.

When we put the material, minimum material purchase commitment in a contract, it was based upon what we both thought were minimal amounts that they would need. In it, it says that they can buy -- they need to buy from us everything that they use in phosphorescent emitters. If they don’t meet the minimum in that year, they then can roll into the next year.

They can’t just roll everything forever and say 2017 [is the year]. That is not what is intended, nor is it the agreement. We will say whether they met it or not on the call when we talk about it. And to be honest if -- we probably should have said if they miss, they ain’t going to miss it by much. So it isn’t like you got just $10 million or $20 million number but they bought nothing. So, you know, unfortunately and I heard this question quite a bit after the call, we should have done a better job in explaining specifically what went on with that. So it was -- we learnt.

Brian Lee – Goldman Sachs

We have time for one more question and then we will just go into the break. There were a lot meetings today.

Unidentified Analyst

Can you just talk about to the best of your knowledge right now what you heard through other industry reports about Samsung’s capacity plans?

Sidney Rosenblatt

What I heard from industry reports about their capacity plans are increase in the mobile lines, or those two flexible display lines, and I believe what I have read is there is two additional lines that should come on, each of which I think are 8000 starts per month. So that is about 32000 additional starts, and I believe that before that they were at 68000 starts. So it looks like the capacity that I have read publicly is an increase of maybe 40%, and it maybe different. I don’t know if you have heard anything different.

Brian Lee – Goldman Sachs

I think, yes, we have heard around 8 -- a couple of lines going up in kind of first half of the year and then maybe two flexibles in the back half. There maybe some capacity throughputs included in the sales. So, (inaudible), but that doesn’t necessarily get reflected in the (inaudible).

Sidney Rosenblatt

That is pretty much what we have heard.

Brian Lee – Goldman Sachs

Any other questions? Okay.

Sidney Rosenblatt

Thank you very much for your time.

Brian Lee – Goldman Sachs

Yes, thank you. We will just wrap it up there. We are going to keep to room for the breakout if there are additional questions. Thank you.

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