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

Welcome to E Ink Fourth Quarter 2020 Earnings Conference Call. [Operator Instructions] And today's speaker is CFO, Mr. Lloyd Chen; and Finance Director, Mr. Patrick Chang.

Okay. Good day, everyone. Welcome to E Ink 2020 quarter -- fourth quarter investor conference. Before I talk about those financials and market information, let's take a quick look at the safe harbor statement. Okay. Next page. Okay. So I'll quickly give you a flavor of what has happened in 2020 in terms of the P&L. So for the sales revenue 2020, it was around $15.3 billion, 13% Y-o-Y improvement in NT dollar, 18% Y-o-Y improvement in U.S. dollar. In terms of the operating profit, that was $1.85 billion. And in terms of the Y-o-Y improvement, that was 230%. I'm going to talk about that a bit later. And for the non-op, $2.4 billion year-over-year, that was 24% decrease due to the FX loss and decreased royalty income. And the net income for 2020 was TWD 3.6 billion, and EPS was NTD 3.18. There's one point I would like to bring up. In 2020, the operating profit was nearly equal to the 2020 royalty income. So that's about the P&L part. So, next page. For the operating profit, as I just mentioned, the Y-o-Y improvement that was around 230% improvement, basically, the reason behind was due to the strong demand from the market across all the categories, such as eReader, eNote, Signage and ESLs. Of course, last year, due to the COVID-19, we managed the costs and the expenses carefully. That's also one of the minor reasons for the operating profit improvement. All right, next page. For the return on equity, given the growing profitability, as you can see around the previous slides. The ROE has been improved from 9.2% in 2018 to 11.6% in 2020. And that's for the ROE. Next page. For the cash flow, 2020 year-end cash position remained strong, 13 -- around TWD 13 billion cash at the end of 2020 versus the cash on hand by end of 2019, that was around TWD 7 billion. And even we have a strong cash flow and position, we still utilize our external bank loan at a lower interest rate on CapEx and dividend -- cash dividend. So that's for the cash flow part. Next page. Okay. Apart from the financial I just presented, our ACeP, Advanced Color ePaper, display system, we also giving the market name, E Ink Gallery, has won the 2020 Taiwan Excellence go award. Basically ACeP adopts full color ePaper display technology. It has achieved full color gamut and video effects, like hosted printing, by controlling voltage and having our full color pigment, including yellow, cyan, magenta and white in every pixel for dynamic product mixing. Besides one of our end products of the eNote, remarkable too, has been selected the best inventions of 2020 by TIME magazine last year. And another -- our another color technology, it's called E Ink Kaleido, basically it's a printing color technology, also has been selected the 100 greatest innovation of 2020 by a magazine called Ocular Science. So that's our accomplishment in the past few months. Okay. Before I talk about the Kaleido, actually, our new generation Kaleido is called Kaleido Plus, before I talk about talk about it, but let's take a quick look at the video clip to show Kaleido Plus video capabilities, please. [Presentation]

Okay. So I believe you already get a feel about how Kaleido Plus work with the video capability. So I would like to briefly explain E Ink Kaleido again, this technology. Basically, it utilizes a new printing color technology and together with our latest generation, ePaper, basically it comes faster, it becomes brighter. The new printing process alleviates the need for glass-based CFA, making the display thinner and lighter. While simultaneously having overall higher optical quality. Additionally, E Ink's faster ink in tables, quicker updates for animations and videos, as you can see from the video clip we just presented. And with this new color technology, our eNote product lines are now able to introduce writing tablet with the color highlighters, heads and markers, giving new options for education and professional devices, especially we want to -- the purpose of this technology, combining with the end device, the purpose of it is trying to replace the physical textbook to e-textbook. And as you perhaps still remember that initial Kaleido launched second quarter last year, and the market response went beyond our expectation. It went very well. However, we still took our customers' feedback from the initial launch and incorporated into this upgrade bringing a new level of color situation to our color devices. And basically, we look forward Kaleido Plus being adopted in the e-textbook market in the future, as I just explained. From the slide -- can you move to the next page? From this slide, I think you can see two new devices shown there. Basically, we are quite proud to have the support of our leading customers. On the left-hand side, basically, is one of our customer, ONYX, the product, it's called BOOX NOVA 3 Color. And on your right-hand side, 1 of our customers, Pocketbook, and the model name is InkPad Color. Basically, they already launched these two products in the market. So that's about E Ink Kaleido Plus. And given the growing momentum of ESL and eReader, eNote happened in the 2019, we believe on this growing momentum for these 2 -- well, for those 3 products can still carry forward to 2021. Basically, the advantage of the ESL is to save a lot of manpower and provide real-time dynamic pricing. Because of the lockdown on the major cities globally, we noticed that there's still a strong and growing momentum on ESL from retail, even COVID situation later on gets better, the advantage of the dynamic pricing, in other words, online/offline, the price needs to be the same, the advantage of the dynamic pricing will still be a strong ESL growth. Apart from that, in response to the anti-COVID measures, remote learning and online meeting have become a trend. So the demand of the eReader and eNote continues to grow, better Kaleido Plus, I just mentioned, the color performance, larger sizes and no taking function, we do expect that they will trigger a wave of the new device purchases, especially on the education market. Next Page. So as I mentioned, the growing momentum on those ESL, eReader and eNote, in response to the demand of the continuous growth, we endeavor to expand the capacity of the ePaper production. Apart from existing ePaper production line at Linkou, 4 additional ePaper production line will be conducted. As you can see from the presentation, line H1 and H2, basically, those investments have been approved by the E Ink Board last year already and additional 2 lines, line H3 and H4 was just approved a few days ago, basically shows our determination to grow the ePaper business. And looking forward, the future prospects of E Ink. I would like to say the profitability and sustainability are equally important. So in response to the continuous growth, we will not only focus on expanding the ePaper production capacity, as I just mentioned, but also cooperating with the module partners continuously to build up a better ecosystem. And recently, such as Yes, Y-E-S, Optoelectronics and [ Microbill Electronics ] we had closely been working with them. With those cooperations, we will provide ePaper field and related technology support to the module partners, which also increased the overall module capacity in the ePaper ecosystem. And also by leveraging their resources in the vertical market. We work with them to develop diverse ePaper products and expand customer for new business opportunities in new retail, health care, wearable logistics, even the transportation. Furthermore, we definitely understand the importance of the corporate sustainability. So we will not just only actively seeking long-term profitability of the company, but also leveraging ePaper's technology advantage, such as lower power consumption and environmental-friendly to develop more ePaper products to replace the use of the traditional print paper, so we can contribute more to a better and clean environment. In addition, we will also enhance the corporate governance, strengthen the compliance with law and regulations, improve the transparency of the information disclosure to contribute in the aspects of the ESG and environmental sustainability. So last but not least, the profitability and sustainability are equally important, once again, in E Ink's future prospects. And that's pretty much about my presentation. So let's move to the next session, Q&A session. And Patrick and I are happy to answer whatever question you're going to have. Thank you.

The first question is from Jerry Su.

Jerry, feel free to ask questions, yes?

Yes, sure. What kind of visibility do you have? And how should we think about your Q1 and also Q2's revenue and also the margin outlook?

Okay. I think that the visibility is quite clear. So in terms of the first quarter outlook, we believe, we definitely can grow. But to what extent, it all depends on how our internal ePaper capacity expansion goes. And also how much we can catch up in terms of the driver IC shortage. So the short answer for the first quarter, we definitely will grow in terms of the Y-o-Y. But to what extent, I would like to hold my comments here. And for the second quarter, same thing I would like to say. We believe we can still grow. And it may not grow us that much as the first quarter, but we definitely can grow. I think the reason remains the same. It all depends how our ePaper production expansion plan goes and how much we can catch up with the driver IC shortage. I mean overall, everything moves very positively. And we also believe the whole year 2021 can grow.

Okay. And then how should we think about the margin? Because gross margin in Q4 is down sequentially, how should we think about the margin in the first half of this year? And perhaps maybe some comments about the product mix in Q4 and also in the first half?

Right. So in terms of the gross profit margin -- actually, we received a lot of inquiries here. And we basically -- we work quite hard to improve the gross profit margin constantly. However, with the product mix change, sometimes it is hard to comment how the gross profit margin would go. But in general, I'm sure it's moving positively. It's moving positively. And I'm sure the asset value of the gross profit margin can also grow, as I just mentioned, the first quarter, the second quarter, even the first half, our overall performance will get better in terms of Y-o-Y.

Okay. Maybe last question, and then I'll go back in the queue is that, how should we think about ESL demand this year? I think in previous result or analyst meetings, Johnson has mentioned that he is targeting for 20%, 30% growth year-over-year and could accelerate to 30% to 40%. So how should we think about that for 2021?

I think the growing momentum, as you mentioned, it is still there, definitely, still there. And our situation is not -- we don't really worry about the demand of the ESL. What we are worrying about and what we are really working hard is how can we execute the ePaper production expansion efficiently, in order to catch up those growing demand. So the growing momentum is still there. And what we really need to work on is to work harder to execute the ePaper production expansion more efficiently. So that's for the ESL. And apart from the ESL, we believe the growing momentum on the eReader, eNotes, is also there. Seems with the contribution of the Kaleido technology, we believe the opportunity for the education market definitely will be there. So not from the ES -- not only from the ESL market, we believe our eReader and eNote market will also grow.

The next question is from [ Juno Lee ].

I would like to ask, can you elaborate how big is the market size? And what's your market share? And who is your major competitors? And who is your top 3 clients?

[ Juno ], yes, thank you for your questions. So let me answer your question like this. From ESL perspective, our market penetration is pretty much only 5%. So as you can imagine, how much is room for us to grow in terms of the ESL market. So that's for the ESL market. And we also believe the eReader market and the eNote market can further grow, associated with our new Kaleido Plus technologies. And in terms of the customers, I'm afraid that we will not disclose from the call here because we don't directly comment to our customers. And I think one of your question is our competitors. Basically, our ePaper technology is really in a dominant position in the world. So I hate to say we don't have any competitors, but we are really in a dominant position in this field. So -- however, as I just mentioned earlier, with the strong demand from ESL and even from the eNote and eReaders, what we are really working on is how to execute our ePaper production expansion more efficiently. So I would like to say maybe the biggest competitor is ourselves. If we can't get those expansion plan efficiently, we cannot move forward to the next level. So currently, how we can execute those expansion plan efficiently, is the first priority.

Can you let us know what's your utilization ratio at the moment?

I think our -- currently, our ePaper utilization is very, very tight. That's why we need to expand our ePaper production line. And also, for your information, on even our ePaper technology is can be break down into 2 sub technology. One is microcapsule, one is Microcup. However, all the additional production line we are working on, those 2 technology are switchable. So in the long run, depends on the market requirement, market demand. These 2 technology can be switchable for -- from our 4 additional line that we are working on now. So our capacity is pretty much booked out by our customers so far. That's why we need to work harder on the production line expansion.

So for your production line expansion, are you planning any capital raising?

We do need the money. However, as you can see from our cash flow performance last year, our cash position and cash flow remained very strong. So basically, we can utilize our internal fund for the additional CapEx. However, as I just mentioned, we still utilize our partial bank facility at the lower interest rate for the additional CapEx. Basically, it's all about how we utilize our money efficiently and effectively.

The next question is [ Jane Andrew ].

I've just got a couple of questions. The new capacity, when are you -- what's the timing of this coming on, please? And is any of this for new customers? And then my second question is about the component shortage, if you can give any more details of -- on this, please?

[ Jane ], I think, first question, I can hear you very well, it's about the new capacity. But second question, what is that? Can you repeat? Hello?

Hello. Sorry, the organizer muted me again. The second question is about component shortages. And I think you mentioned driver IC shortage and how long it can further impact Q4? And is there anything you can do about that, please?

All right. Sure. All right. Let me answer your first question. So for the new customers, so [ Jane ], let me briefly explain, for the ESL, basically, I believe -- we don't deal with our end customers directly. However, our system integrator has been exploring the new customers, especially from the retailer globally. We definitely can see a strong demand from this field because the advantage of the electronic shelf label, it saves a lot of manpowers. And basically, it provides a dynamic pricing. So we believe our system integrators can explore more new customers in the Europe, in the United States. However, normally, we don't disclose the potential customers' names. But as I just mentioned, I'm sure there would be some new customers happening going forward in Europe and in the United States for those branders. So that's for the ESL. And for the eReader and eNote, I think I've just briefly explained our new generation of Kaleido Plus, and we believe this will be a very, very good technology for the education field. The reason is -- I think in the past few years, digital learning has become a trend. And those kids, and even the school, try to use the Chromebook and even iPad for the digital learning. However, with those tools, that those students still need pen and pencil to incorporate it with those on Chromebooks or iPad. So with our Kaleido, our new technologies, we believe the new eReader or the new eNote because it provides the pen function and even the color function, it will be very, very helpful to replace the textbook in the long run. And besides, iPad may be -- could be a tour for the digital learning. However, it's not very good for the kids' eyes. And our eReader or eNote, basically, is very good for the kids' eyes because of our technology's advantages. So we believe with our new Kaleido technology, that will be a very good driver to replace the textbook in the long run. So we have been working very hard with those branders in this field. And we do see the potential. But so far, 2 major players, one in China and one in Europe, I think the one in China, as I just mentioned, is on it. And the other one is our Pocketbook in the Europe because they already launched the new product, so it's okay for us to mention their names. So I think that the same situation or the potential of those eReader and eNote with our Kaleido Plus technology definitely will be the driver for us to get more new customers in this field. So that's my answer to your first question. And your second question is about the components shortage. I would like to say, yes, it does -- the problem for us now because for those driver IC, it does affect our supply to the -- toward the stronger demand from our customer. However, we have been working very closely with our IC driver vendors. And it does affect our first half business a bit. However, even with this negative impact, we still believe, in terms of our Y-o-Y growth, we can still grow. Apart from the external components shortage, such as driver IC, I think, internally, as I just mentioned, we -- our ePaper supply is also very -- it is also quite tight because that's the reason why we need to spend efforts on those 4 additional pay per production expansion. So I mean, overall, it does effect our supply toward the stronger demand, but I think we are quite okay so far. And overall, we are still growing in general.

Just when will the new supply -- the new ePaper supply be coming on? When you envisage that?

The ePaper supply, basically, the supply is still ongoing. It's just our demand is higher than our supply. So that's why we need more production line to meet the growing demand. So the demand -- the supply is still ongoing. The ePaper supply is still ongoing. Basically, it is manufactured in our Taiwanese factory, which is located at Linkou, and the other is located in our Boston factory. So basically, we are still manufacturing every day. But it's just very tight. So we need to expand our production line further.

Yes. It was just when will that new capacity come on stream, maybe...

New capacity? All right. Sorry about that. Yes. So the full additional production line, basically some will be finished by end of this year, the other will be end of next year. But eventually, 2023, basically 4 production lines will be fully ready, yes.

The next question is from [ Juno Lee ].

Just wanted to clarify, you mentioned about the market size before. Is it the penetration rate? You said 5%?

Yes, the market penetration rate, it's around 5% for ESL. It's correct. So as you can imagine, we still have a massive, massive room for growth, yes.

Okay. Good. Yes. So for your new production -- production line capacity, will it mainly be located in Taiwan or elsewhere? Is you manufacturing right now mainly in Taiwan and U.S., right?

Right. Our 2 existing production line, one is in the United States, Boston mainly, and the other at Linkou. But 4 additional production will be still located in Taiwan, of course, but in Shenzhou, another region in Taiwan. However, those 4 additional production line are switchable from the Microcup and microcapsule ePaper production. So they are switchable. So you don't really need to worry about it will be restricted in particular on ePaper technology. Basically, they are switchable.

So can I know that what's the ePaper production, will they use a lot of water? Because I think right now, global investor watching about the short -- water shortage in Taiwan. I'm just wondering whether this area will be impact by the water shortage in the future?

Right. We do use water. However, not that significantly. So I think it will be less concerned from our perspective. So it's in control. It's in control.

Would this industry is labor intensive? Or will you have any labor shortage issue?

[ Juno ], can you repeat? What shortage?

About the labor, labor shortage, because in Taiwan, there's a labor shortage concern.

Oh, all right, labor shortage. Sure. I think currently, our labor force in the production line is quite okay. It's quite okay, more problem at all. And I think in the past few years, we spent a lot of efforts on the automation. So that reduced the need of the labor along with the production line significantly. So the labor -- we cope with the labor issue quite okay, so far, yes.

The next question is from Jerry Su.

Okay. Just want to follow-up on the component shortage issue you have commented. So is this going to get worse? I mean, for your monthly -- for your revenue into the second quarter? Because I think that seems to be emerging from later part of last year. But it looks like your January, February revenue still -- you're still kind of pretty strong. I'm just wondering, are we going to see some decelerating in your monthly sales in the next couple of months before these things get fully resolved?

Right. Yes, good question, Jerry. I think we spent a lot of efforts on this. So I think it will get better and better. So it won't get worse. However, during the transition, as I just mentioned, the second quarter in terms of the Y-o-Y still grow. But I think because of the driver IC shortage, it would affect a little bit in terms of the shipment. But I think in the long run, it will get better, yes.

Okay. So in terms of quarter-over-quarter, then I know Q1 should be a down quarter versus Q4, and then we should be expecting Q2 to grow?

I think the first quarter and the second quarter, if you are talking about the year-over-year comparison, I think both quarters will still grow. But if you're talking about whether a second quarter will be better or worse than first quarter. It's a bit hard to say at this moment, yes.

Okay. Because I think the March, you just don't get too much revenue, even less than February, you should be able to achieve year-over-year growth. So I think year-over-year will be quite easy for you to maintain that growth. So that's why I'm asking quarter-on-quarter -- quarter-over-quarter.

Right, right. I think it's a bit hard to say at this moment, yes, but I think second quarter this year will definitely be better than second quarter last year. That's for sure, yes.

Okay. Okay. Got it. And then second question is regarding the new products. And I think you have also mentioned about the component shortage, hardware. So for this year, the topline growth, is it mostly going to be coming from unit shipment? Or we can expect some pricing adjustment? Because I think across the supply chain, a lot of companies has been adjusting the price to factor in the component shortage issue. So how should we think about that?

Right. I think the unit shipment will also grow, of course, due to the component shortage, inevitably our cost might be increased a little bit. However, with the scale -- economic scale up, we believe the operational efficiency can offset the cost pressure from those component shortage. So we are quite confident with that. And in order to grow the market, we try not to shift the cost pressure to the customer, yes. But yes, it's hard to say so far, yes, because we -- yes, everything will be changing, yes. But so far, I think everything is in control, yes, as I just mentioned.

Okay. And then, so for Kaleido Plus, should we -- is this going to be a better margin and better pricing product versus your current black and white or first generation of Kaleido?

Right. Yes. So once again, Jerry, I think that's also a very good question because a lot of people try to ask this question. And we're definitely in a good position to check up the ACeP more because of the new generation of color technology. However, what we really want to achieve is we try to grow the market. So we just try to make a reasonable margin on the new technology. So from the margin perspective, I think it would be similar or just slightly better. But the margin will not be increased significantly. What we really want is we just try to grow the market and maximize our gross profit. So for the short-term gross profit margin, it's not something we are after at this moment, yes.

Okay. So the slightly better or similar margin as compared with the current eReader product?

Not slightly better, but it won't, like you know, have a significant jump, yes.

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

Thank you very much.