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

Thank you for standing by, and welcome to the E Ink First Quarter 2002 (sic) [ 2022 ] Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. The replay will be available on E Ink's website after today's conference. Joining me today are our CFO, Lloyd Chen. Now let me turn the call over to Lloyd to get started.

Good afternoon and good morning to all the participants. My name is Lloyd Chen. Before we start, the cover page of the presentation, basically is a photo taken from the Touch Taiwan display exhibition that we had last month. So if you were there, you know what I'm talking about. If you didn't have a chance being there, so just to give you a flavor of what our booth looked like. Next page. All right. Before we start, let's take a quick look at the safe harbor statement. All right. Next page. Okay. Firstly, I'll briefly talked about the first quarter of results. The 2022 first quarter sales revenue was around TWD 5.96 billion. The operating profit was TWD 1.43 billion, and the net income was TWD 1.46 billion. EPS was TWD 1.28. And in first quarter, sales revenue was the 11-year best, and for operating profit, net income as well as EPS is all the historical second best. One thing we'd like to bring up on first quarter, operating profit already higher than the operating profit in first half 2021. And last but not least, it's worthwhile to mention that operating profit has been higher than royalty income since 2020. Right, next page. Okay. For operating profit, the operating profit continues to grow due to the strong demand from markets through eReader, eNote, retail, logistics and signage improved operating profit since 2018. And as you can see from the screen, with 640% growth rate from in -- I mean, in 2018 to TWD 64 million deficit to TWD 1.4 billion profit in first quarter 2022. Besides, the first quarter 2022 operating profit was already higher than the operating profit in first half 2022 (sic) [ 2021 ]. Okay. All right. Talking about the ROE and ROA. These 2 indexes have been rising since 2018. The first quarter ROE was 4.5%, and it also grew positively. And the Y-o-Y ROA stayed flattish around 2.5% due to higher total assets growth. The Y-o-Y growth was around 24%. Next page. For the assets, positive increasing trend on cash assets, total assets and even net asset value per share. Higher Y-o-Y on total assets growth, TWD 12 billion, basically caused by strong company growth and financial investments. And for the cash flow, basically, was increased from TWD 8.8 billion to TWD 9.1 billion because, basically, we reduced on time deposit and increased on backlog to CapEx on ePaper production line expansion to meet strong market demand. The total financial assets plus cash increased to around TWD 38.2 billion by first quarter this year. And we definitely expect more ePaper production CapEx from second half awards. Next page. So this page, I would like to talk about the first quarter accomplishments. I mean, first of all, on the comparison with the TFT-LCD display, in general, ePaper is conceived as green products with less carbon emissions as well as less light pollution in the dark night based on the nature of the ePaper reflective technology and less light pollution basically been certified by IDA, International Dark-Sky Association. And we continue to work to make it more sustainable with low environmental impact in manufacturing and use in order to maximize the positive impact. E Ink delivers products to some of the world's most influential fronts and manufacturers that use ePaper to improve customer experience and enable energy-saving IoT applications. Also, we were rated as the top 10% by Standard & Poor Corporate Sustainability Assessment last year from the industry of electronic equipment, instruments and components within 144 companies assessed all over the world. And we also have committed to joining the RE100 initiated to hitting the goal by 2030 and The Climate Pledge co-founded by Amazon to commit to becoming net-zero carbon by 2040. And the science-based targets initiative, SBTi, and also other international environmental initiatives, including TCFD supporters and Race To Zero. In the first quarter, MSCI, a leading global index provider, added us to its global standard index. And basically, it shows the recognition of our profitability and sustainability. So that's about the first quarter accomplishment. Next one. As I mentioned earlier, after Touch Taiwan display exhibition, we still received massive, massive inquiries about our 3 color technologies. So I would like to take this opportunity to explain further. So the first one is on E Ink Gallery 3, the full-color technology. The [ MSQ ] basically is the page turn speed. For the page turn speed, the black and white page turn update time basically is the same as the past black and white ePaper. But for the color ones, the color mode is ranging from 0.5 second to 1 second based on the performance of the applications and products requested. In addition, for the resolution, basically Gallery 3 has the improved resolution of 300 PPI and versus the earlier 150 PPI. Also the operating temperature of 0 to 50 degrees Celsius, on par with the black and white eReader previously. The gallery on full-color E Ink platform series can be offered for enhanced reading and shopping experience for eBooks and for color document viewing and editing in eBooks. And the second one is E Ink Kaleido 3. Basically, it's using E Ink Print Color ePaper technology, where a color filter array is used in conjunction with our black and white ink field, creating a full-color device for a more fully realized eBook shopping and reading experience. In addition to improved color performance, Kaleido 3 uses E Ink ComfortGaze, a new front light technology designed by our in-house front light team. ComfortGaze has been engineered to reduce the amount of blue light reflected off the surface of the display, providing further comfort while reading. And last but not least, in E Ink Spectra 3100 Plus. Based on the previous E Ink Spectra 3100 full-color ePaper platform, black, white, red and yellow, E Ink Spectra 3100 Plus adopts a new way for -- to display the fifth color, orange. We added the new color orange. In addition to offering a wide range of solid and saturated colors, E Ink Spectra 3100 Plus can create a partial image flashing effect. We give it a market name, E Ink Sparkle, with this special effect -- flashing effect. When E Ink Spectra 3100 Plus is equipped with the relevant all-in-one driver IC, E Ink's Sparkle can enhance the effect of advertising messages through this motion and help retailers achieve better results for their product promotions. So that's about our 3 major color technologies. And on the next page, we're going to explain how we commercialize our leading-edge technologies. We always endeavor to present the next generation of ePaper, basically satisfying the need for sustainable and diversified display in smart application. And as a leader in the ePaper display technology, we are committed to develop more low-carbon emission ePaper applications. The sustainable ePaper technology brings endless possibilities in IoT and smart world, not only on reading and writing but also expand to smart retail, smart logistics, smart transportation, smart paperless office and even to mobile and wearable. One of the good examples is our 7.8-inch E Ink Kaleido Plus that was awarded for quality mark by TÜV Rheinland in 2021 for being the most paper-like display tested to date. Next page. So this page, I'm going to talk about how we collaborate with our partners in the supply chain. So we proactively cooperate with our supply chain partners to build ePaper ecosystem. We walk hand in hand toward the net-zero carbon emission targets. Those partners are coming from upstream and downstream supply chain such as TFT panel maker, module maker, the makers from driver ICs, software, hardware and system integrators even to our end customers. Basically, we join forces with supply chain partners to promote ePaper and to reduce CO2 emission. As you can see from the screen, E Ink now goes beyond ePaper material. We're also dedicated to material film research and development, and we manufacture and provide flexible substrate material. For example, PI, polyimide, including PI varnish and PI gloss as well as some functional material films such as anti-glare film, OCA, optical clear adhesives and moisture barrier film. We do see the potential of those premium-quality material and functional films enable smooth production process of ePaper display modules and modules of other technologies. All right. Next page. So in this page, I'm going to talk about how we contribute to the environment in order to create an environment-friendly world. We -- having said that earlier, as a leader in ePaper technology, we are committed to developing more low-carbon emission ePaper applications. The sustainable ePaper technology brings endless possibility in IoT and smart world. Our products produce less CO2 than LCD devices, paper books and paper techs. Internally, we have a slogan, and we also share this slogan whenever we meet investors, analysts. Basically, we try -- we do our best efforts to make services smart and green, less energy use, less carbon emissions, less light pollution, as I mentioned earlier. And I also want to give you a couple of examples with numbers, so you can get a better flavor of how we contribute to the environment. Basically, the first example is relevant to the green retail ESL under the assumption of 5-year time period, 30 million 10-inch ESLs globally shipped. Compared with conventional paper techs, ESL produces 600,000x less on CO2 emission. And compared with TFT-LCD techs, ESL produces 12,000x less CO2 emission. And if we run another simple scenario analysis, assuming 64,000 [ blocks and stocks ] in Taiwan being used in 5 years compared with the TFT-LCD signage, basically, we produce 200,000x less CO2 emission. If I just simply convert it into the carbon credit, theoretically, the carbon credit we can get is around TWD 55 million. So once again, just want to give you a flavor with the numbers when we try our best to make services smart and green. And last part, the last page is about the corporate sustainability. Once again, we continuously, [ in general ], to contribute the corporate sustainability on PESG. Basically, we put P, product, before the ESG because we believe our green product were born to be great. So whenever we consider anything into ESG, we always consolidate our green product into consideration. So from the product perspective, even we are in a profound position, generating 99.93% green revenue evaluated by our FTSE Russell green model. We are further gradually introducing the use of renewable energy from our manufacturing and operations to reduce carbon emissions. We work continuously to improve our ePaper technology and product design with lower energy consumption and less material used, further reducing our carbon emission and electricity use for an environmental-friendly display for our customers. And for the environmental side, as the companies face the environmental impact caused by intensifying climate change, taking steps to improve our carbon footprint is the common challenge and responsibility for all human beings in the world. Once again, as a leader in the green display products, E Ink has committed to joining the RE100 initiative to hitting the goal by 2030, The Climate Pledge co-founded by Amazon to becoming net-zero carbon by 2040 and SBTi and other international initiative, including TCFD supporters and Race To Zero. I already mentioned that previously. And in terms of social care, in the first quarter, we have donated USD 150,000 to UNICEF in the project of war in Ukraine, support for children and families to support relief efforts to Ukraine. We -- apart from that, we continuously carry on the Reading for the Future global project on top of that, building a digital library for students. The club is also actively involved in the charity work. In terms of the governance and operation, we have won several awards, such as Asian corporate social responsibility award and Taiwan sustainability award. Financially, we have been included in the MSCI global standard index, and it's sustainable. And I mean other -- also other ESG-related indexes in Taiwan. Additionally, we remain on our top 20 on Taiwan corporate governance and also listed in the Standard & Poor [indiscernible] yearbook. So once again, we continuously working on the corporate sustainability. That is my update for the first quarter, and we can move forward to the Q&A session.

[Operator Instructions] Our first question is coming from [ John Tsu ].

Can you hear me?

Yes, [ John ].

Yes. Great. In the previous session, you mentioned that the fourth line will be -- probably will be delayed to the second quarter next year due to the very long lead time of equipment. So my question is that -- so if the demand actually is better than expected and your 4 lines cannot fulfill your customer demand, so you probably will add another or maybe another 1 or 2 new lines in your Hsinchu buildings. So well, what do you -- are you prepared for that scenario, which means that you already pay some deposit to your equipment maker just in case that if you really -- if you guys want to -- like to expand the additional new lines in your Hsinchu buildings?

So [ John ], let me confirm your question again. So you are asking the assurance over those production line we are building at this moment, right? Is that your question? Basically...

Yes, yes, yes. My question is actually if the next year, I mean, the demand actually is much better than the company expected and the 4 new lines cannot fulfill the customer demands and you guys definitely have to build out the 1 or 2 lines in your Hsinchu buildings. So once that scenario happens, so do you take any step -- can you make sure that you can get your equipment on time? Or maybe you have to wait for another year, I mean, to add your new lines in your Hsinchu building, if that scenario -- if such scenario happens?

Right. Okay. All right. So first of all, thank you for your question, [ John ]. So basically, we are expecting more and more in demand going forward. But the first priority we will work on is try to finish the 4 production line first and then try to fill the growing demand from the customer this year. And then we will observe how we're going to add additional production lines from the new building we are working on at this moment. Okay.

Okay. Okay. The other question is that you mentioned that your color for ePapers and when the -- when eReaders or eNotes, I mean, start to adopt the color for ePapers, just as you say, you mentioned in previous sessions, it means that the size, I mean, in terms of the eReaders or eNotes, is going to be getting larger and larger. So I mean, in the company's strategies, so if that happens, I mean, it means that your customers start to adopt the color for eReaders or we'll see that penetration rate is going to be a [ fair ] rate. So well, too, I mean, so in the colorful eReader, eNote, so how you still, I mean, continue -- I mean, are you still insist your strategies that you outsource your modules, I mean, to your partners rather than, I mean, keep your modules assembled in-house? That's my question.

All right. I think for the module assembly activity for our eReader and eNote, of course, we will try to fill in our internal in-house module capacity first. And however, with the growing demand if we don't have enough capacity, we have the 10 module partners in our ecosystem. So our customers can definitely utilize their module capacity for further manufacturing activities. So not to really worry about the module capacity for ePaper because apart from our in-house module capacity, we still have the 10 module partners in our ecosystem. And with the growing demand over the ePaper-related products, that's one of the reasons we try to invite more and more module partners into our ecosystem.

Okay. So in terms of the -- your -- the color for eReaders or eNotes in your design pipeline, so when can you -- would you please share about -- share your idea or some colors about the penetration in next year or maybe in the year 2024? Can we see that the penetration rates going to be a [ fair ] rate next year or maybe in 2024?

It's hard to say about the rate of the penetration, but we do believe the potential of the growing eReader and eNote market because with our new color technologies, I think, in the past, from a digital reading perspective, we only cover the fiction digital content. For the nonfiction digital content, such as the magazine required color, the textbook required color, and basically it's not covered. So with our color technology, we believe the nonfiction market can be further expanded. So that will be the additional contribution to the reader and note business. And apart from that, from the education perspective on digital learning as we repeated in the past, basically, we just want to replace the paper, not really want to replace the TFT-LCD or that sort of devices. So what we want to really replace basically is the conventional textbook. So with our devices, we believe it goes very well with the LCD devices, such as Chromebook, MacBook. So our stuff, together with LCD, can be a very good digital learning package. So from those perspective, we believe the potential of the eReader and eNote growth with our new color technologies. However, how much penetration rate it would grow? It's hard to say at this moment. But as I mentioned earlier, we are running out of capacity. I think that the first priority is let us just focus on the completion of this 4 production lines first. And then we figure out how to allocate that.

Our next question is coming from [ Maximilian ].

Congrats. Great results. So I would just be interested due to the delay in the fourth production plant, how will you -- do you have like any focus on your capacity allocation, especially between ESL and consumer? And in the ESL segment, especially between color and black and white ESLs, so will we see like a higher allocation to, for example, color ESL displays? And will that have an impact on your overall margin?

[ Max ], first, some noises from your background. So let me just try to answer your question. I think that the very first question is relevant to the delay of our fourth production line, right?

Exactly. Sorry, I may say it again because it was a bit noisy in our office. Sorry, probably again. No, I was just asking if you -- how capacity allocation will look like due to the delayed fourth production plant between ESL, consumer and also within maybe ESL, if there will be a focus on color [indiscernible].

Right, right, right. Okay. All right. So I think according to the demand from the different customers, we do see a stronger growing demand from ESL. So even there is a possible delay for our fourth production line, but we still try to allocate the more ESL products. However, we do see the potential of our eReader and eNote products. So it's a bit hard to say how much exactly we're going to allocate the ESL and eReader. But we have a good plan that they should figure out how to allocate that. But [ Max ], once again, I know where the question is coming from. So whether we allocate more to the ESL or less to the eReader, but what we want to achieve is try to increase the market share of the ePaper-related products. So whatever allocation we're going to make, basically, we try to check up the sales revenue in order to have more gross profit margin in terms of the dollar value. So that's how I would like to answer your question. [ Max ], are you still there?

Now I should be back. Yes, that's quite clear. Second question I would have would be regarding the general like capacity utilization. So are you able to increase the capacity utilization of your current production lines? And how much room do you've got potentially left to serve the demand of your customers?

Right, right, right. So I think we have the Mandarin session, earning conference just 1 hour ago, similar question being asked. So I take the one we just finished -- that the production line, we just finished by end of last year. I think we -- the utilization rate hasn't been fully in the first quarter, and it has been ramping up from the second quarter. So it is quite normal to spend 1 quarter or 2 in order to get the new production line fully ramped up. So the second and third production line would be ready by first half of this year. So once again, we may also need 1 quarter or 2 to get it fully ramped up. So similar time frame would be needed for a new production line in there.

Next question is from Jerry Su.

I want to follow up on the -- I think, previously discussed about the impact from the China lockdown. I think Johnson was saying that there will still be some impact into the second quarter. So how should we think about your second quarter revenue? I'm not very sure what he meant by impact lasting to June. Does that mean the monthly sales in the next couple of months is going to be weaker than April? Or is that the -- it will still increase, but the magnitude is not as great as you previously expected?

Jerry, your question is about the COVID impact in China. Is that your question?

Yes. How is the second quarter revenue?

Right. I think there would be an impact but, I believe, is manageable. Since last year, we already had experience for the Yangzhou city locked up. So we've already -- what kind of plan B whenever this sort of similar situation happening. So we basically reroute to different country or different city in order to deliver the goods to our customers. But with a little bit additional logistic costs, but we will still be able to deliver. But I think it would cost a little bit of timing difference in terms of the delivery, but I think it's manageable but with a little bit logistic cost.

Okay. Okay. And then second question is regarding your CapEx. I know you have mentioned that the CapEx this year could be double or more than double from last year. When I look at your balance sheet for Taiwan parent-only, although the consolidated basis, you have a pretty -- a lot of cash on hand. But I think Taiwan-only as of end of last year, I think, the cash balance, cash and cash equivalent probably adding the -- those in the financial assets, I think, probably is somewhere around TWD 7 billion to TWD 8 billion. So I'm just wondering how are you going to -- what's your plan on financing the CapEx spending, especially the order CapEx now is going to be in Taiwan? Are you going to increase your bank loans or leverages? Or do you need any further fundraising plans?

Right. So basically, in general sense, we -- I don't think we're going to have another round of big funding plan. We basically utilize the cash generating from our operation and/or utilize the existing bank facility we have on hand. Basically, even we are going to conduct more production -- ePaper production line CapEx. But I don't think it would be very much capital-intensive. So internal money, internal fund that we have and the existing bank facility should be good enough to deal with it.

Okay. And then probably lastly is on the operating expense because the revenue has been growing quite quickly. So I'm just wondering how should we think about your operating expense going forward. Should that be more a fixed amount? Or should we be looking at the amount or percentage of the revenue? Is there any guidance you can provide for us?

Right, right. One thing I can guarantee, basically, our operating expense will not go proportionately with our sales revenue growth. It does increase, especially on the R&D-related expenses. And also the employee-related expenses because we always need a new technology to bring up the new product. And also, we always need the good talent to get things going. So from the operating expense perspective, so employee costs and R&D costs will be increased accordingly. However, from dollar value perspective, it does increase, but it won't increase as much as the sales revenue grows that much. I think -- yes, so that is my answer to your questions. Yes.

Our next question is from [ Elan Wang ].

A question here is that in the IoT section, besides ESL and the signage, do you see other application that our shipment or demand from the customer is increasing looking back to Q1 or looking forward to the next few quarters?

Right. I think your question is apart from the ESL, is there any other products or application will grow significantly, right? I think that -- or what's our next growth engine? I think that's your question, right?

Yes.

Right, right. We do see the potential of the eSignage and the logistic tech. However, I believe it takes a while to grow significantly. But we do see the potential of these 2 applications.

Okay. Cool. I have another question is that you mentioned that in the new Hsinchu headquarter, there will be few production line we can build up, probably 6, right, 6. You mentioned like 6 plus. Is that we plan to do? And are we still waiting for the Board to approve and then we can release this news to everyone. Is there things going to happen?

Right, right. right. You are correct. We are constructing a new building in Hsinchu, and we've reserved the spaces for the production line, and the maximum we can have is 6 production lines. You are correct about that. So a lot of discussion going on. And -- however, for the production line expansion, we're going to be very, very careful, and we also need to discuss with the Board. So what I can tell you now is we do have a plan at this moment. But I -- we still need to further discuss with the Board. And we still need a little bit more visibility on this. So we do have a plan, and once we get everything clear, we definitely will provide an update during the result conference.

Okay. Now I would like to turn the call back to Lloyd at this time.

All right. Thank you very much for your participation. I believe I've answered pretty much all of your questions online or from the phone call. So once again, thank you for your participation and looking forward to speaking to you again in next quarter. Thank you.

Thank you much -- thank you very much for your time, and see you next quarter. Goodbye.