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

Thank you for standing by, and welcome to the E Ink Second Quarter 2021 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. The webcast replay will be available after today's conference. Joining me today are Chairman, Johnson Lee; CFO, Lloyd Chen; and Finance Center Senior Director, Patrick Chang. Now let me turn the call over to Lloyd.

Good day, everyone. Before we start, let's take a look at the safe harbor statement. All right. Next page. All right. Firstly, let me talk about the profit and loss statement for second quarter and first half first. For the second quarter, sales revenue was around TWD 4 billion, for the operating profit was TWD 318 million. Net income was TWD 1.4 billion. EPS was TWD 1.23. And talking about the first half. The first half sales revenue, operating profit and even the net income was the best first half in the past 10 years. And also, it's worthwhile to mention that the upgrading income has been higher than growth income since last year. So that's for the profit and loss statement. Next page. For the operating profit, the first half operating profit was 3x growth over -- year-over-year from TWD 338 million to TWD 1.3 billion due to the strong demand from market through eReader, eNote, retail and Signage. Next page. Talking about the profitability, especially on ROE and ROA. First half ROE and ROA has been rising since 2017. First half this year, 2021 ROE was around 8% and first half ROA was 5.3%, respectively, which already more than 60% of 2020 whole year ROE and ROA. It shows the growing profitability and how we efficiently utilize shareholder equity and assets to generate the profit at E Ink. Next page. So now let's look at the asset side. Basically positive increasing trend on cash assets, total assets, even the net asset value per share, as you can see from the screen. All right. Next page. For cash flow, Cash was decreased from TWD 13 billion to TWD 9.7 billion because we converted cash to financial investments and also to CapEx on ePaper production line to meet strong market environment. The total financial assets plus cash was increased to around TWD 30.7 billion based on the second quarter of this year. And that's for the cash flow, right? Apart from those financials, I also would like to talk about some of the achievements that we had in the second quarter. I think in April, we had remarkable and successful exhibition at Touch Taiwan 2021. And it attracted a lot of attention from supplier customer and even competitor and investors during the Touch Taiwan in April. And also in April, an ePaper industry alliance was established. At the beginning, we've invited more than 60 companies to construct and refine ePaper ecosystem, to broaden ePaper application and also to explore more sites, diversify our ePaper business opportunities. And at end of this year, we are aiming to have more than 100 participants. And our goal in 2021 is to invite more than 200 members. And also, as you already know, that E Ink became the largest strategic shareholder in Nuclera, through which we have official microfluidics team from E Ink, our America subsidiaries. And apart on those accomplishments, we also got some recognition from some media. The first one is EdTech Digest. Basically, it's a digital media to offer insights, updates into the rapid evolving world of education technology. That's why they mainly sell us edtech, education technology. And their EdTech Award is a program in all of education technology, recognizing the biggest name in edtech and newer talents who are shaping the future of edtech. E Ink was named as one the '21 top 10 finalists in the emerging technology solution category. This is an award for companies and people in a brand education for outstanding contribution in transforming education. And that's for the media in the States. And we also got the recognition from 2 Taiwan local magazine. The first one is from a magazine called Business Next, basically published 2020 Taiwan high-value enterprise top 100 and E Ink was ranked as the 67th place out of 1,100 public listed companies. And we are also in the fourth place from the auto electronics industry. It not only recognize our achievement on financial performance, but also recognize our innovation, operating capability and rapid growth even in a -- under COVID pandemic. And last one is a very credible magazine locally in Taiwan. It's called CommonWealth. We also published their comprehensive annual top 2,000 survey. Basically, this survey is published every year and we were on the 206th place out of Taiwan's top manufacturing companies and also recognized as 62nd place under the category of profitability. So that's the update for our accomplishments in the second quarter. The next page. And for ESG and corporate sustainability, once again, we were rated a top 20,000 corporate governance evaluation among Taipei-Exchange-listed company for the fourth consecutive year. And apart from that, we also accomplished one achievement in second quarter. We were the first company contracted and we have accomplished 10% installed renewable energy in Taiwan. So under recent COVID-19 outbreak situation in Taiwan, we donated COVID-19 testing facilities to the local government, showing our social responsibility. And also for the ESG initiatives in Taiwan. We are selected as a top 10 constituent on 3 ESG indexes in Taiwan, including Taipei Exchange ESG IT Elite Total Return Index. And another one is on Taipei Exchange ESG Growth Total Return Index and the last one is Taipei Exchange ESG Index. Those index is recognized on our performance on both profitability and also the ESG. So that's for the ESG and sustainability. And I think recently the COVID-19 outbreak at Yangzhou under Jiangsu province. And our Yangzhou factory actually is facing complex COVID-19 containment measures activities from local governments such as movement restriction, lockdown and even temporary suspension of the production. All will impact our shipment and revenue, especially on the oldest sales revenue. We have been working very hard to mitigate those shipment and revenue impact and endeavor to accelerate the shipment in order to meet some stronger customer demand when the situation gets better. So that's a quick update about our Yangzhou factory. Next page. So I'm going to talk about our innovation for the smart lives. So our technology and product innovation basically lead to the smart lifestyle. It means a more product diversification and more on business growth along the way. And you can see from the screen quite a lot ePaper products and applications are there, better color performance, as I mentioned earlier, and larger sizes and now, safety function. We expect that we will trigger a wave of our new device and purchases of eReader and eNote. Basically, it enables not only paperless office but also digital learning. There's also a trend to integrate a larger-sized ePaper display for laptops and even a large size paper-like secondary monitors. Recently, as you can see from the screen, the Japanese company Fujitsu launched a new-generation eNote, Quaderno, with a better performance. And another Japanese company, Ricoh, has reviewed works on thinnest and lightest 42-inch portable on digital whiteboard, with applications across the medical, construction and office segments. That's about the eNote and eReader. And as for the IoT applications, our technology and product can be used from a, once again, paperless office and also factory, transportation and even to aviation. And one of our growth engines on ESL on retail, the growing momentum has been carrying forward from 2020 to 2021. And one of our system integrated partners recently announced that it would expand its ESL technology with Walmart Canada, and we're going to talk more on ESL. Next page. So in conclusion, E Ink is continuing to engage with supplier and customers, try to lead to the smart life stuff. So next page. So next page is our retail expertise. So as the leading innovator of ePaper technology, E Ink's Spectra 3100 all-in-one driver IC basically won the Computex Taipei 2021 Best Choice Award. And this is the full-color next-generation ePaper product to support ESL and signage. With this newly announced all-in-one driver IC, it enables Smart Retail 2.0, which makes new features as you can see from the screen. The first one is it makes text edge sharper, brings better power efficiency and integrates security algorithms for data security and also enable sparkling flashing mode, with more interactive images to offer more flexibility to retailers during the promotion campaign. As you can see from the screen, there's a text with the sparkling flashing action mode is the example I'm referring to. So furthermore, the key feature I just mentioned, low power consumption, it aligns with the United Nation's ESG that helps companies meet their ESG consideration for sustainable development and environmental friendliness. So that's for our retail expertise. So last but not least, we're going to talking about our continuous growth. So E Ink is aiming to replace paper. So our vision is to make services smarter. That's one of our slogan internally. We even tried to go beyond that with this longer-term vision. We endeavor the continuous growth not only focuses on business growth by engaging with more suppliers and customers and being a more robust ecosystem, but also opt for integrated supply chain to meet the stronger customer demands, along with the growth, of course, some innovation, efficiency and effectiveness are the key elements of being involved, and once again, ESG with the long-term corporate sustainability as equally important the corporate profitability. So that is my update for the second quarter. Thank you very much, and we can move to the Q&A session.

[Operator Instructions] The first question comes from [ Harvey So ].

Can you hear me?

Yes, we hear you, [ Harvey ].

I just have some quick one. In your opening remarks, you mentioned that the overall impact from the COVID-19 in Yangzhou . So I'm just wondering, could you please give us some like quantitative impact on your maybe August revenue? And I also see that in your July sales, the overall momentum actually seemed quite fine and grew like 20% month-to-month. And I note that in the third quarter, it's normally the model exceeded for your -- earlier you said you didn't know. I'm just wondering, if we see a much softer top line momentum focus, can we still expect the maybe third quarter to see some growth on the top line level? And how can we imagine the overall outlook for your top line into second half for your base business?

Okay. Thank you, [ Harvey ]. So I think the question is about the Yangzhou situation, of the impact of the COVID. At this moment, the Yangzhou City is still at lockdown. It was -- it started, I think, in early August, and it's been almost 3 weeks now. So it does impact our revenue in August because of the shutdown. And mostly, we've made all our module in Yangzhou. And E Ink business, a big portion of our revenue comes from the module -- the ePaper module. So it does get affected. But since it's been 3 weeks now, roughly 3 weeks or so, so we believe the situation should improve because they took drastic measure in locking down the city. It's going to -- it's really going to impact our August revenue. But it doesn't mean that the orders are canceled. It just means that it's going to be delayed in terms of shipment. If everything goes back to normal, hopefully soon, and we believe it should be because yesterday, there was, I think, 6 people that was infected and the day before was 3. And the day before that is also 6. So it's already in the single-digit in terms of people affected with COVID in Yangzhou. So we believe that it should be back in production, hopefully, by September. And if that is possible, then we believe that we need to catch up in September and maybe all the way through December to catch up the loss of shipment during that period of August right now. So overall, in terms of revenue, I do believe that it -- in August, it's going to be impact, but for the whole year, there might be impact. It really depends on when the shutdown is over or when the shutdown of the city is over. But overall, second half is always better than the first half in general for E Ink, and we believe that this year, this should continue on as well.

Okay. Great. So I come back to you said that in maybe, as you mentioned, maybe you catch up the production and that be then pushed out into the September month and also you mentioned that second half is normally better than the first half. So can I assume that if we do catch up in the production into the September month, our third quarter sales could come in the quarter, even with the impact in the August month because of the COVID-19 restructure?

Right. So the plan is once the shutdown is over, we're going to start shipping the modules. That was -- some of them were actually prebuilt in the early days of August. So I don't think -- we don't believe that we can catch everything up in September to cover the August time frame. But it may take until October or even go all the way down to December, depending on how quickly this pandemic is over in Yangzhou. But at this moment, we will believe that it's going to take us roughly 3 -- at least 3 months to catch up the loss of shipment in August.

Next question comes from [ John Xu ].

Can you hear me?

Yes, John.

One question because I just -- I also attended Chinese version an hour ago. And you mentioned that the capacity actually will be -- will still be pretty tight in next year, I mean, particularly in your material business. So can I assume that the next year, the material business will outgrow the module business and therefore, actually, your gross margin fluctuation, while being stabilized or we will see that -- that we won't see the pretty big significant margin fluctuation in next year? That's my question.

John, thank you. Thank you for this question. So in a general sense, yes. As we sell more E Ink materials, hopefully, there's going to be less fluctuation in terms of margin. But I think this year is actually a very special year. Everything was in shortage, ICs and TFTs, But as we live us today and looking forward, we believe the situation will not be over, but it will be better than the first half of this year. So looking forward, as we expand our FPL, that's what we call it internally, FPL, our E Ink materials, we're expanding that capacity as it gets ramped up. Yes, we should be selling more E Ink materials down the road. I think the key question -- I think the key -- what we mostly concerned about is how quickly we can ramp up our new facility up and running because at this moment, when we're looking at the demand side, the demand is quite strong. And it needs us to ramp up our facility a lot quicker than we expected to. So yes, that's a bit of pressure on the team. But all those E Ink materials are made into module by E Ink, it needs to be determined because we're still in that phase of negotiation with our customer for next year. So yes, that's the situation. And on the earlier call, it was actually a question about our expansion of the new facility in Hsinchu factory or our Hsinchu office. We're building a new building in Hsinchu that can -- we can put in more production equipment into it, but it will take until 2023 before the facility is ready. So we have next year to-- we still need to get over with.

Okay. I see. So I mean regarding your module business. So actually, in the next year, the module assembly business is still in China. So maybe next year, you still cannot diversify your production base. I mean your margin base.

Yes. So I mean in terms of the module side, we're also seeing strong demand on that side as well. So yes, we really have to see how that's going to affect our revenue down the road. If we continue to sell more modules, of course, our revenue will be a lot higher than selling just E Ink materials. So because there's also a transition that's happening at E Ink, where it's moving from black and white to color. So we're still wait-and-see in that sense how that will pick up in terms of volume for next year.

Okay. So the one more question is that, can you remind me that in terms of the gross margin, the mature business is better than the module business?

That's actually quite a tough question. So we really don't comment too much about the margins. But you can obviously tell from Q2 this year that there's an increase in price from TFTs, an increase of price from ICs, which our supplier are doing super well. I mean I look at their financial report from [ CitiPower to Oxfordshire ] to Himax to [ Heatwell ] and the like. Yes, they're all doing really well, and I'm happy for them. But we didn't really transfer that increase of cost to our customers. And we kind of just absorb those costs. But down the road, if potentially this doesn't really improve, then it's really going to hurt our bottom line big time, then we will consider raising our prices. But at this moment, we think it's still okay. Whether older products will have better margins, it's really hard to say because when we do our pricing strategy, there's a lot of things involved. It's not just how much money we can make out of each module, but it's really about applications, about when we think about that application, whether it's a higher volume, which usually goes with the lower margin or is it small volume but -- a smaller volume but then it will have a -- reflect with a higher gross margin. So it really depends on the application.

We noticed a question online. It's about the reason of lower gross profit margin in the second quarter. I think Johnson already answered that question.

Okay. We don't have any questions online now. So thank you for joining us today. Good day, and goodbye.

Thank you. Have a good weekend.

Thank you. Bye-bye.