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Executives

Steve Abramson – CEO

Universal Display Corporation (PANL) 41st Annual J.P. Morgan Global TMT Conference May 15, 2013 11:20 AM ET

Steve Abramson

Okay, so while we are waiting for the gentleman from JP Morgan to do my fireside chat, I could chat with myself without deeply boring. If everybody knows the story, I will just ask – I will just open up for some questions.

Unidentified Participant

(Question Inaudible)

Steve Abramson

So if I heard the question – we have been working with LG probably for at least (inaudible). The reason we’re working with them was – we had evaluation agreement with them, we then moved to six months commercial supply agreements. We’ve now moved to a one-year Evergreens commercial supply agreement with LG. When do those agreements – under those agreements with Evergreens they buy our phosphorus materials and what we do in those agreements is we build in the price of latency into the material supply piece. Meanwhile we are working with LG, working with them technologically and we are working with them to create a long term partnership which we can then announce. So it’s on the road that people may know we have a 7-year agreement with Samsung which involves licensing and materials supply and we expect of a similar long term relationship with LG. I just can’t predict when. Meanwhile we continue to work with them as we have for a long time.

Unidentified Participant

(Question Inaudible)

Steve Abramson

Sure, Rob, do you want me to keep on going or – okay.

Unidentified Analyst

Sorry I am late. (inaudible).

Steve Abramson

Well, that’s now, you didn’t get here to give the have whole instructions. 17-year old start-up now going to great growth company, taking the biggest market –

Unidentified Analyst

17 is not that old really when you think about it.

Steve Abramson

You know what, my oldest – my youngest kid is 1970. Question was about green and red. So this last quarter we announced that we had commercial green in the marketplace that we were selling commercial green. The numbers for the first quarter were at about $3 million of red emitters, about $3 million of green emitter and about $3 million of host ballpark. The green emitter and the host were just a part of the quarter. So we would expect the run rate for the green emitter and the host to be much larger than what you saw in the first quarter.

Now the red emitter, our revenues have come down year over year and that’s basically due to two factors. One, Samsung has made some efficiency improvements in their use of emitter materials because these emitter materials are very expensive, and second, in our long term agreement with Samsung, we have cumulative volume discounts on particular – specific molecules that they purchase. So the molecules that they have been purchasing in the Galaxy line has been the molecule they have been using since inception. And so it’s gone to some volume by variance. We expect – the question will be how long it’s going to continue, we think we are lot closer to the end than the beginning by discounts on the red.

Unidentified Analyst

Can you quantify that green emitter timing in the quarter at all or give us any idea kind of what proportion we are looking at –

Steve Abramson

That would be tough to say. We saw the purchases coming back in the latter half of the quarter. What we don’t know yet is how much they are building for just in time manufacturing, how much if any they are using for inventory. So we need a couple quarters under our belt to really get a feel for what the magnitude is. At this point we can safely assume it’s going to be larger than red.

Unidentified Analyst

I don’t know – familiar everybody is with middle market, but could you talk about other any alternative suppliers out there, I mean what’s the competitive landscape look like now, how does it develop over the next couple of years?

Steve Abramson

Good question. So there are two types of emitters, there is the – - emitter is actually what emits the light. So for those you we make some of the materials that actually emit the light in the Samsung display. So there are two types of emitters, there is a old type called florescent emitters and the new type called phosphorescent emitters. We own phosphorescent emitters. So all we have fundamental types on that as well as the patents on the materials themselves. So all of the red emitters in commercial production are owned by us. Up until recently florescent green was the green that was used in the products that’s now transitioning to phosphorescent green. And again we are the only ones that can supply in the phosphorescent emitter materials into the market. So as the trend moves towards phosphorescent emitters, it’s our entire market.

Unidentified Analyst

Is there anything – so assuming no new chemistry is found to emit light, phosphorescent light from these chemicals or compounds, you guys would have 100% of the market, is that the idea or you license the technology of someone to produce it, is that –

Steve Abramson

Well, that’s the idea although we have the fundamental patents of phosphorescent emitters through 2020. Our fundamental patents start expiring in 2017-2018 and the fundamental patents run through 2020. We don’t license those emitter patents out. We manufacture – we have the emitters manufactured by us, for us, by PPG Industries especially chemical manufacturer and glass manufacturer located in Pittsburgh, Pennsylvania. They are manufacturing our emitters at one plant Pennsylvania now. They have another plant soon to manufacture more of the materials.

In addition, when we look to green, we’ve had a green emitter for a while but the problem is that there wasn’t a good enough host materials. So the way the emissive system works in OLED is the dope system. So you have the emitter and you dope a small amount, relatively small amount of that into a host material and that’s how the light is emitted. So what we started doing is working on host materials as well and the host emitter system is what we are now selling. The host has two components to it, it’s a component that we make and it’s a component that our partner company of ours makes.

Unidentified Analyst

I want to talk about the market a little bit because the covering OLED market it’s been slower to develop I guess than you would have hoped than we thought. It is happening. LG has talked about 26,000 panels I think next year or maybe getting their next year in footing positively to their margins. Could you talk about what you think we are going to see this year or right now all we got there is some very expensive OLED TVs in the TV market specifically, not in handset market?

Steve Abramson

I will start off by saying the handset market is going to the big revenue growth for this year for the company. The TV market you are seeing both LG and Samsung, LG has started to sell 55-inch OLED TVs, they are not making that near them right now, maybe 50 to 100 a month, they are selling them at $10,000 to $12,000 each. This is early adopter type of stuff. These are – get them into the marketplace, the consumers look at it, get the consumer feedback. Samsung has announced they should be selling OLED TV probably in the middle of the summer. I would imagine the same types of volumes. 2014 you are going to start seeing I think the scale up, as they get the feedback and they were in the manufacturing process at better yields and that’s where LG is at by the middle of next year, they expect 26,000 sheets, that’s another glass sheets in gen-8 material which is couple meters by a couple meters. Through their fabs it’s still a small amount. By 2015 I think that’s when you start seeing some meaningful OLED TVs, displays or thoughts about, tapping about a million OLED TVs in 2015, about $1 billion – 3 million OLED TVs, about $3 billion in revenue.

Unidentified Analyst

Do you think 4K helps with them, as the two things come together and kind of help each other out or do we end up with – people are talking about 4K TVs on to be getting next year, is reasonably priced 4K TVs being next year. So do you think there is a risk that OLED 4K starts to generate some refresh in the development markets and then OLED comes behind that and doesn’t get as much as the refresh or – --

Steve Abramson

I think the one you see in OLED TV it looks much better than a 4K TV. They are both better than we have now in LED, LCDs, we are better than what we used to have. So the TV industry continues to go – I don’t think that if there’s going to be a short-term window that’s going to matter them much. I think that the OLED TV manufacturers see a lot of profit potential, the two big Korean companies look at this and they say where did you put the manufacturer of the LCDs and what happens with LCDs is the more you try to improve – the more you improve the performance of LCDs the more you increase the costs, and you’re improving the performance in order to try to get to look like an OLED. But once you get OLED yields up, and I think both of these two big Korean companies are going to be able to do that, then they are going to be able to make a lot of money on OLED TVs.

Unidentified Analyst

Can you – one thing I don’t understand about the technologies maybe a dumb question but, is OLED deposition capable right now today of shifting over into 4K resolution, is that – would that be an issue or –

Steve Abramson

It shouldn’t be an issue. There are two ways of making OLED TVs right now. LG is dong one, Samsung is doing another. LD is going what we call whiteless color filters which means they make a white OLED and they may put glycerin on top of it, they power them that, so any resolution is possible, with that resolution is not a problem at that level. Samsung is scaling up their smartphone technology using shuttlebus technology and red, green and blue side by side in order to make the TVs, the resolution in the new Galaxy has – they have announced 440 pixels per inch. So they are on the way to getting to 4K.

Unidentified Analyst

All right, so you don’t think that if there is this demand for 4K that emerges in 2014 you think the OLED industry will rotate into that relatively easily?

Steve Abramson

If they need to, you also have the issue of real of measured resolution and parent resolution. So conventional wisdom is you look at OLED TV and if the parent resolution is a lot better than the measured resolution. So the OLED TVs are traditional high def format, should look at as good not better.

Unidentified Analyst

There is definitely on the 4K side, there is talk about of – because you can’t – 4K signal is not available, you can’t get it down, the only way you are going to get it is from a local source or by converting HDs. So I guess it would be interesting to see how OLED compares to not have converted, so you want the 4K TV in the showroom?

Steve Abramson

Yes. There are lot of OLED TVs, lot of 4K TVs, conventional wisdom is OLED TVs are looking nicer. But those are the two ways that people are looking.

Unidentified Analyst

Besides LG and Samsung, is anyone out – are you aware of anybody else building OLED production capacity for larger panels?

Steve Abramson

LG and Samsung are the two big guys. What you saw at CES was Panasonic had a OLED TV, Sony had an OLED TV. UAL has demonstrated OLD TVs but the big capital bills are in Korean, LG and Samsung. AUO is going to be really seeing a smartphone soon. JDI Japan display industry is looking at OLEDs and they are probably the big mover in Japan and few years down the road you have China.

Unidentified Analyst

Can you update us on the barrier technologies, you said a little bit about progress in the earnings call just maybe recap that and let us where we are with barrier technologies.

Steve Abramson

Flexible, I will go into a little bit of flexible displays there. Flexible displays are a potential game changer for OLEDs and the display market. Not because you can roll display up which ultimately we would like to do but because the plastic display will be unbreakable. And that will be really good, drop it, sit on it and breaks screen number one reason why people return their phones. In order to have a plastic display, plastic is – OLED is permutable to oxygen and moisture. So you need to have a barrier on the plastic and then you need to be able to encapsulate the display.

We’ve been in the technology which is a single layer thin-film technology which should be less expensive to manufacture and higher performance than the current process, which is a bulky multi-layer technology, the current process is basically you put organic, inorganic layers and you build up six or seven on them. And the oxygen which are torturous paths to get through. So we are funding this low cost similar technology more than half a dozen years ago at one of the universities we brought in-house now. We’re looking at – we have been able to scale it up in house and we are now looking at various commercialization opportunities.

Unidentified Analyst

Maybe walk us through kind of where we are with this all flexible display production, so we keep hearing that deposition on plastic is difficult, with high temperature deposition. And Corin (ph) for instance talks a lot about their willow glass, flexible glass, that could be used, how do you see it out playing out – do you think that the plastic flexible displays really are going to emerge as the predominant flexible medium or do you think that there is going to be other things in the market?

Steve Abramson

I think flexible displays have their place in the market. I think Corning’s will address, glass is great. It breaks. I think the unbreakability of plastic displays are really good when you marry that to an OLED, and so it will be lighter weight, that's really compelling value proposition. I think both Samsung and LG have announced this year that they're coming out with flexible.

Unidentified Analyst

They announced last year.

Steve Abramson

Which they announced last year. One of the issues in the OLED industry is there is announcements in reality. So you will hear me be a little hesitant as they announced that. I believe flexible OLED displays will be the market, whether it's going to this year or next year I am not going to tell you. Because it’s still manufacturing issues. The reason why we work on a long-term encapsulation technology because it's going to dovetail into the manufacturing technology. Just can’t tell you exactly why.

Unidentified Analyst

Do you think – - what do you think – - what you’re calling this level that we will actually see devices from let’s say Samsung who seems to be the furthest ahead on flexible displays this year and do you think – - would you say you’re 80% confident we will see somebody shipping this year or you just don't know?

Steve Abramson

I am very confident that we are going to see flexible displays in the near term, whether it's this year or next year, I can't predict when Samsun or LG is going to feel comfortable enough to release a product but why and what their windows are. I can just see it from a technology standpoint, what I am seeing from them how the issues are scaling up and the importance of it, then I think it’s in near-term introduction.

Unidentified Analyst

Do you think that – do we see OLED kind of bifurcating down to technology paths that we have, the flexible displays which go to the portable devices that need the durability and then we end up with a more of a glass based display to TV or do you think the TVs will go to flexible pretty quick as well or how does – --

Steve Abramson

I think we have to see how it plays out. Right now what we have is the core OLED business which is smartphones on glass, and then when you do a circle around that you see – if you are looking to smartphones on plastic, and we are going to do TVs on glass and I think what we have to do is simply see what's going to happen to smartphones on plastic which will happen in TVs on glass, ultimately it’s about cost of performance, right. So if you can get lower-cost and higher performance with the flexible then they have certain advantageous, you’re hanging TV on the wall. If it’s now hanging TV on the wall, do you really need to have a plastic TV to hang on the wall.

Whereas these glass TVs is good enough I think we will have to find out, or people are going to want to roll TV up and hang in each room. The long-term science guys, science fiction guys have been talking about that for a while but people don’t need that very well.

Unidentified Analyst

Let’s go back to kind of business, the barrier technology, do you think that when these flexible displays ship, they will actually ship – is your barrier technology the only option that’s viable from S production or other options out there that people can – I thought that seven layer technology we’re talking about, super expensive.

Steve Abramson

Well it is but it's not – well your first product out there is going to be what you got. So Samsung is going out there with a barrier technology. LG is going to go out with a different technology. But they are both looking for a next generation encapsulation technologies. And we have a really good one.

Unidentified Analyst

And does anybody else have a good one, do you think?

Steve Abramson

There are other competitions, what we’re seeing right now we think our technology is probably the best, it’s however not – LG has its technology they are going to be using. Samsung has a technology that they are going to be using. So ours would be next generation not only what phosphorescent did to florescent, that would be the next-generation technology coming to be able to improve the performance.

Unidentified Analyst

Is that – so think about – we should be thinking about that more like a 2014 revenue opportunity for you guys or do you think –

Steve Abramson

That one we think of it as a 2013 revenue. More than 20.

Unidentified Analyst

At margins on that would they be comparable to the –

Steve Abramson

Encapsulation, so it depends on how we do it. Because there is a process license increase and there is an equipment case. So the question is exactly how we are going to big money in that business, one of the things as we develop the technology we’re talking to a number of people to figure out what's the best way to make money off of the business.

Unidentified Analyst

What are you leaning toward now, do you think it’s licensing?

Steve Abramson

We can do a combination, that’s always good. If you can manufacture if you can license a manufacture the equipment piece and license the OEMs to the users, the process license piece, and since we have an existing licensing business won’t be that difficult to add into that.

Unidentified Analyst

You said in the earnings release a stabilized a blue molecule – somebody did, yeah. Update us on the –

Steve Abramson

What we have done is we have made progress on light length. And we have continued to make progress on light bulb. So 40 years if we are having this conversation, the question will be are you ever going to have blue and I would say well, we are working on it. Since that time we’ve been able to develop light bulk, our light blue materials we are selling now into the lighting industry as full phosphorescent system. So we have good efficiency and good lifetime. Our deep blue, we have not yet gotten, made progress but we have not yet gotten to a stable molecule where we could actually see somewhat be commercially viable.

Unidentified Analyst

The last time I talked to you guys, about blue, you were kind of waiting for an innovation dropouts out of sky, you didn’t have any idea how – you guys had an idea about how things might come about but they didn't – the breakthrough hadn’t occurred yet. It sounded to me – many on this room have read your transcript but it sounds like at least there's been some progress on the blue or you found the molecule that emits those frequencies or is it not correct?

Steve Abramson

What we have done is we have molecules that emit at the right frequencies. We have molecules to last long time but at different frequencies. We have molecules that have high efficiencies. So we have all three pieces.

Unidentified Analyst

All in deep blue?

Steve Abramson

Blue, putting them altogether into one piece. Our blue team is working two ways, once is incremental approach, approaching from the light blue standpoint, incrementally can we make the wavelength shorter and move with that light and the others are more fundamental basis starting from deep blue color, how do we improve the efficiency and the lifetime. So we’re making good progress on both sides from its basic scientific level of understanding of how to take the deep blue color and make it last longer and more efficient and how to make the efficient longer lived light bulbs are deeper color. But we’re not there yet.

Unidentified Analyst

How important is blue really, we talked about it a lot but how important is it to the industry, does it – is it mainly a power efficiency issue for the mobile devices that we need to solve –

Steve Abramson

Well, it’s going to be power efficiency issue and ultimately a lifetime issue. So right now using a phosphorescent red lifetimes are in hundreds of thousands of hours. Phosphorescent green or florescent green lifetimes are in thousands of hours and florescent blue lifetime was 20,000 to 50,000 hours. It's not that efficient. So ultimately you are going to want to increase the lifetime of the blue and increase efficiency of the blue and that's what we are working on. Now from our business standpoint so from the near-term revenues, near term revenue are in red, green, host, that’s what you are seeing. Long-term building of our business the invention of blue is going to be huge because it was going to us another 20 year lock on the patents we discovered it. There’s going to be this whole new business opportunity to go into blue emitters and whatever other materials that we use when we invent that technology.

Question-and-Answer Session

Unidentified Analyst

We got a question in the audience here.

Unidentified Participant

What is used today as a substitute for –

Steve Abramson

It’s florescent blue. It's a florescent molecule.

Unidentified Analyst

You may want to describe how it’s used to the affected more area for the blue than the others and that’s why the –

Steve Abramson

So florescent blue is inherently less efficient, use 25% of the energy in the molecules as opposed to 100% and also because of the efficiencies of our red and green they are able to use more pixel area – more sub-pixel area in a pixel. So the blue area that it takes up in the pixel is a lot better than the red and the green. So they are able to get the lifetime on a switch. Correspondingly we sell less material.

Unidentified Participant

(Question Inaudible)

Steve Abramson

So 3, 4 years ago that will make sense would have applied to LEDs in general lighting. This answer – apply to intergalactic LEDs. We think it’s a couple of years – few years away for general lightning, right now what we see is efficiencies are about the same. We get efficiencies about the same intergalact LEDs, depends on how you measure efficiencies. Lifetimes intergalact LEDs last forever, but always don’t last forever but from manufacturer standpoint OLED is going to be a lot cheaper. And from a performance standpoint intergalact LEDs are point sources. So they have a bright light that you actually have to put a defuse in order to be able to use that. OLEDs are our pleasing way, more accurately reflects the sun, so people are going to like that a lot better.

Unidentified Participant

(Question Inaudible)

Steve Abramson

The answer is yes, you could put in a bulb, I am not sure why you really want to. I mean a semiconductor chip is more applicable to (inaudible) which I think was a great that we did. Really impressed that they did that. This is great innovation, I love it. But what we see in the future is for example, if you look at this room the fluorescent lights we could see those being more OLED panels, so you are replacing the florescent lights with the panel but the spotlight switches are off right now but you would see the test lighting will be more like LEDs.

Unidentified Participant

(Question Inaudible)

Steve Abramson

Well, we were building up the inventory in anticipation of commercial green being used, as you have guys get out from this conversation we don’t have a great insight into exactly what our customers going to say, so we want to make sure that we have the materials available when they do. So I guess some of that inventory is used for first quarter.

Unidentified Analyst

Just to clarify would you say the S$ was the main driver or a driver amongst several?

Steve Abramson

Well the commercial shipments into the commercial product were probably the main driver.

Unidentified Participant

(Question Inaudible)

Steve Abramson

Our reds are in – that wouldn't really matter to us because same red, isn’t the S4.

Unidentified Participant

(Question Inaudible)

Steve Abramson

No, I believe.

Unidentified Analyst

Your content, your materials content in S4 is significantly better versus green –

Steve Abramson

We have to be very careful because Samsung hasn’t announced it yet. If you look at our first quarter numbers, you see the red was 3 million, green about 3 million, about 3 million green host. And the red was for the whole quarter and the green emitter and host were just part of the quarter.

Unidentified Analyst

Generally speaking I assume that in terms of amounts of materials I guess the red is being used a little more efficiently, they should be roughly equal in terms of –

Steve Abramson

Not necessarily we think that the green materials initially will be used more than red material.

Unidentified Analyst

More of it because the efficiencies is not there, and is the price of the green material similar or quite a bit higher?

Steve Abramson

They have the same pricing mechanism in the contract. So there's cumulative volume reductions for both.

Unidentified Analyst

So if you need in a panel, if you need twice the green that you need for the red, I know it’s probably right, but would you set you guys to get twice the revenue?

Steve Abramson

Yes.

Unidentified Participant

(Question Inaudible)

Steve Abramson

We feel very comfortable with the guidance and we are four months into the quarter, upside would be a quicker uptake of our green materials in the product, acceleration of TVs by LG and Samsung, flexible products get into marketplace quicker, would probably be the major upsides. Downsides would the opposite.

Unidentified Analyst

I wanted to ask you, your contents are expiring in 2020 – - a lot of these things are playing out slower I guess than we always said, lot slower than expected, by the time it literally hits mass production now you’re probably two to three years from now based on your commentary, barrier layer technology also little ways out although I guess it’s not really related to the patents, how do you see that company evolving over the next 10 years, when you think about the patent expiration and so on, how do you keep the business model working?

Steve Abramson

Well, we believe the business model generally is intellectual-property, IP licensing and tangible property. So we like to combine the two. So we have fundamental phosphorescent patents which our research partner discovered in the late 90s, that expire in 20 years. But what we've been doing since then is we have been doing a lot of research underneath that. So we have a whole slew of patents related to phosphorescent technologies, materials and devices and I believe that patent opportunity will remain strong for a long time after that because we have the largest R&D team in the world, we have been focusing on this for a long time and we know how strategic with that.

In addition we have other areas that we are looking at, such as encapsulation which we are developing IP position as well as trying to figure out what the tangible position would be. We have a manufacturing, technology, working on organic vapor gen printing which somebody challenged our patent in Korea and we just won that patent challenge. So that’s something that we are focusing on. We are focusing on for example as ways of continuing the market. So we believe our phosphorescent franchise is going to remain intact for a long, long time, we are focusing on it. We are then – we expand our business into the host, expand our business into the blue, expand into encapsulation, expand into other important areas in OLEDs because we are basically focusing on OLEDs. Lot of adjacent areas within OLEDs.

Unidentified Analyst

All right. Great, we are out of time. There is another question in the back, I will get you. Steve thanks again for coming. Appreciate it. Everybody thanks for coming.

Steve Abramson

Thank you very much.

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