E Ink Holdings Inc. (8069) Earnings Call Transcript & Summary

Welcome to E Ink's Second Quarter 2020 Earnings Conference Call. Today's speaker is Chairman, Mr. Johnson Lee; CFO, Mr. Lloyd Chen; and Finance Director, Mr. Patrick Chang. [Operator Instructions] A webcast replay will be available after today's conference. Please visit tw.eink.com under the Investor Relations section. We now proceed with the conference.

Good day, everyone. Let's take a quick look at the safe harbor statement before our second quarter investor conference. Thank you. Okay. Next page. All right. So firstly, let's take a look at the first half results. There was a lot of positive momentum happened in the first half, in terms of sales revenue, gross profit, operating profit as well as the net income. For the second quarter revenue, basically the highest among the past 8 years. In terms of the operating profit and net profit, for Q2 and first half both also achieved a record high among the past 9 years. For the first half, operating profit, we already achieved around 76% what we had in 2019. So as you can see, the year-over-year improvement basically -- or positively improved. However, in terms of the non-op income was slightly decreased in first half. But by better utilizing our cash generated from operation and royalty income, we basically convert the cash to the financial investment. Some products basically are generating higher investment income in order to offset the growth income shortfall. Basically, that will be our long-term non-op income strategy. We will talk more in the third quarter investor conference. So next page. We have done a lot of efforts to improve our business and even financial performance. However, we definitely know the importance of the CSR. So E Ink's efforts on the CSR has been recognized in the second quarter. We were in the top 10 Taipei Exchange CSR index. E Ink is publicly traded in the Taipei Exchange. And we also prepared a short video clip to let you know the efforts we have done for CSR in the past few years. So Lin, please. [Presentation]

Okay. So that's on the efforts and achievement we have done for the CSR. And we apologize for the content in the video clip. It is in Chinese. The English one is under preparation. We apologize for that once again. Next page. As I explained, the second quarter operating profit and net income achieved a record high in the past 9 years. So basically, this slide show a trend chart, how it has been improved in terms of the net income and operating profit. Basically, the better profitability came from the more E Ink materials sales growth. That's why it supported a better profit. Next page. For the financial position movements, basically, it's the balance sheet items. For the cash and financial assets in the past 3 years, as you can see, our cash and financial assets position has been increased from TWD 12.4 billion to TWD 6.8 billion (sic) [ TWD 16.8 billion ]. Even the debt ratio for operation has been slightly increased from 28% in 2018 to 36% in 2020. However, the total assets had also proportionately increased by 4%, for example, from 2019 to 2020. And in the long run, basically, our strategy to utilize the cash is to basically use the cash being generated from operation and royalty income to invest. So once again, convert cash into financial assets to get higher interest investment income in order to offset royalty income shortfall. Also for the cash needed from the operation since E Ink has been growing positively, we also obtained more bank facility. So we will better utilize the bank facility and the lower interest rate to meet the operation cash needs. So that's how we are going to utilize our cash strategically in the long run. Okay. Switch. So once again, as I explained in the previous slide, our cash utilization strategy. So basically, as you can tell from this slide, from second quarter 2019 to second quarter 2020, net $1.9 billion cash being increased. Of course, it came from the operation activities positively, and we utilized the cash to reinvest to the financial products to get the higher interest and dividend income to offset the royalty income shortfall. And we utilize our bank facility and the lower interest rate to meet the requirement from the CapEx and the annual cash dividends. So once again, our financial investment for offsetting royalty income on shortfall and also continuing CapEx investment for expanding E Ink Kaleido, that's our printing color technology and also to expand material capacity. That's how we utilize the cash in the second quarter. And for the technology innovation, I think we spent a lot of efforts on capacity expansion and the strategy about how we utilize the cash. We also continue our technology innovation for business growth. For the color part, basically, we will move from the smaller size to the larger size and from the 3-color spectrum being used on the ESL, electronic shelf label, and to the multi-color Kaleido products with our printing color technologies and to -- up to the full color Gallery display and also from label, ESL, to diversify the applications. And that's for the color part. And for the black and white, basically, we have been spending a lot of efforts on the black and white. So we definitely will enhance our black and white ePaper advantages such as faster page turns and make the display thinner and make the [ font ] size bigger. And in terms of the temperature range, we will make temperature range wider to move -- even move more value function such as battery free solution and flexible, affordable technology for future business growth. And we also prepared 2 video clips to help you better understand what I just talked about. So next page. This is the foldable eBook I just talked about. Apart from a more smooth page turns, in the video clip, you can see that a front light function is added. So we prepare a video clip for you to understand better. So please. [Presentation]

So the next example we -- that I talk about -- that I will talk about, the next page, is our E Ink Gallery 4100. It's our second-generation ACeP technology. And in comparison with the first generation, as you will see from the video, it shows a flash list on page turn on black and white and a faster page turn on colors. So please. [Presentation]

And just for your reference, this video clip is from our online SID Show. Okay. Next page. So apart from the financials and the efforts on the technologies, we continuously expand our ecosystem. So E Ink, we're actively developing the ecosystem around ePaper. ePaper, of course, as a core, collaborate with upstream partners such as TFT LCD makers, IC makers and also to the downstream partners such as hardware, software suppliers, system integrators, service providers, even all the way up to the branders. We gradually build up and expand our ecosystems. In the second quarter, 3 new strategic partners joined our ecosystem. The first one is Innolux. The cooperation with Innolux basically is that E Ink supplies our Advanced Color ePaper to them. And they are, of course, the ecosystem partner for the large-sized module for our Advanced Color ePaper technologies. And now and then, E Ink will take opportunity to introduce potential customers to Innolux. So through the strong cooperation between us and Innolux, we will expand our application of color ePaper, show the excellence and the value to the ePaper and attract more market attention and adoption of our color displays. And the second strategic partner is TCL CSOT. Basically, this cooperation, CSOT will manufacture a 42-inch ePaper TFT backplane using an 8.5-generation production line. This will be the first time large-sized ePaper backplane have been manufactured in an 8.5-generation facilities. With this collaboration, it will not only help optimize our cost effectiveness of the production, but also definitely will help to increase our efficiency. And last but not least, the cooperation with Visionox, in particular, its subsidiary Yiwu Qing Yue Optoelectronics. The addition of Visionox definitely will -- to our module manufacturing partner, it will enable us to expand our presence in the ESL industry, particularly in the China market. So that's our efforts on ecosystem buildup and 3 strategic partners have joined our ecosystem in the second quarter. Next page. E Ink has been established for 30 years already. And apart from earning the profit, of course, a company needs to make the profit, we are striving to be a sustainable company for the work changing environment. We definitely need a healthy earth for us to grow sustainable. We believe we are a green company with green technology. I think as of today, we have shipped 400 million electronic shelf labels and 130 million eReader in the past 5 years. In other words, with those shipments, 20 million trees are being saved because -- with our green technology. And also, in other words, more than 5.25 billion pounds CO2 emission are being saved with our ePaper technology. And if we convert it to kilogram, that is 2.4 billion of kilograms. We definitely know the importance of our -- of the ESG, and we just want to share with you for you to understand that E Ink is a company you are evaluating for investment or you already invested. So that's our contribution in terms of the CO2 emission saving. And having said that, we move to the next page. So once again, we definitely understand the importance of the ESG. I want to emphasize again, apart from earning the profit, we definitely striving to be a sustainable company. So with the ESL, eReader on green effects, on the CO2 saving I just mentioned through our ecosystem partners' support, we believe our ePaper technology application can be further expanded to the field, for example, smart packaging, printing and even writing. So by -- I'm using a very conservative estimation, let's just assume, 2% of the paper consumption on those area I just mentioned, that would be 166 million trees can be saved per year. In other words, around 8 billion pounds CO2 can be absorbed in 1 year. Recently in Taiwan, locally, the Taiwanese government emphasized the ESG 3.0 is a big policy. We believe E Ink not just only follow, but we already moved ahead. So once again, we do understand the importance of the ESG. So last but not least, we would like to share the future of E Ink with you. Internally, we have a slogan, "We want to make all the smarts -- we want to make our surfaces smarter." So we endeavor to make all the surfaces smarter. This slide basically outlines the future of E Ink with full potential and massive business opportunities. So as you can see from the smart factory, logistics, education, medical, retail to architecture. So we really want to make all this surfaces smarter. The most important will be we continuously endeavor to the society and to the environment. So that's a key point we want to deliver in the second quarter investor conference. So we can move to the Q&A session.

[Operator Instructions]

Yes. We saw a question from Michael Li from Antipodes. I think Michael brought up a question about the outlook of July and August. I think Johnson can answer in general.

Michael, so basically, we believe that our second half will be better than the first half even though first half, we hit 9-year record high. I think we released our July sales revenue, it's either the highest or the second highest for this year. We're relatively bullish about the second half. I think it's because of COVID-19. And we were hit with the impact on the eReader side during the first half. But because, I guess, people have been staying at home for too long and the pickup of reading, which indirectly helps the sales volume for eReaders also start picking up. So we believe that the second half will be better than the first half. And ESL also has remained quite strong so far. Okay. I saw another question by [ Weather Shu ], is that [ Shu ]? Yes, [ Weather Shu ]. So in terms of royalty income, we believe that this year, we'll still continue to fall from last year. But the good thing is that we're kind of trying to offset that with our investment. So we do actually make investment in 2 categories. One is strategic investment that we think is important for us to grow either through acquisitions or purchase of IPs or purchase of teams or just purely an investment as a shareholder to bring that relationship closer. At the same time, because we have roughly $16 billion or $1.6 billion?

$16 billion.

Yes, $16 billion of cash -- TWD 16 billion cash equivalent, so we do have -- we continue to look for low-risk investment opportunities. In terms of the technology that -- so basically, LCD technology that uses -- that basically has a touch on top of it because FFS technology are the ones that if you press on it, you don't see any ripple effect. And so any LCD displays that you see comes with either capacitives or cover lens are using our technology. So -- but OLED technology, the AMOLED, they don't have to pay us royalty, but the ones that's using LCD based, a lot of marketing name is called IPS, but it's a very similar technology, but it's really about fringe-field switching, which has an ITO on the top, so which is widely used in LCD today. Okay? So either in mobile phone, tablet, car display, that needs to have an interactive touch on top of it.

Thank you for joining us today. You may now leave the conference. Good day, and goodbye.

Thank you.

Thank you.