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

Thank you for standing by, and welcome to the E Ink Second Quarter 2022 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. The presentation and Webex replay will be available on E Ink's website after today's conference. Joining me today are CFO, Lloyd Chen; and Financial Senior Director, Patrick Chang. Now let me turn the call over to Lloyd to get started.

Thank you, Willie. Good day, everyone. Welcome to 2022 second quarter investor conference. Before we proceed, please take a quick look at the cover page. So that is the ePaper on license on slide, been available in a few states in the United States. Currently this ePaper digital license plate can be purchased and even registered in few approved states in the United States. As far as we know that it is working quickly to expand this method on the states. All right. So next page. All right. Before we proceed further, let's take a quick look at the safe harbor statement. All right. Next page. Let me start with the P&L first. The first half sales revenue was around TWD 13.4 billion, operating profit TWD 3.4 billion, net income TWD 3.84 billion and EPS TWD 3.36 NTD. For the first half, operating profit was already higher than the one-off 2021 year. Next page. I elaborate a bit further on the operating profit, operating profit basically continues to grow due to the strong demand markets through Retail, eNote, Retail Logistics and Signage. So as you can see from the screen, in the past 5 years, the operating profit trend and it's showing positively. And as I mentioned earlier, the first half operating profit was higher than the operating profit in 2021 early year-over-year. Next page. For ROE and ROA, on first half, ROE and ROA has been rising and as you can see from spring, since 2017. The first half, the ROE was around 10.8% and ROA was around 6.6%, respectively, which was more than 65% of 2021 whole year ROE and ROA. It shows the growing profitability and how we efficiently and effectively neutralize the shareholder equity and assets to generate on the profit [indiscernible]. Next page. For the assets. The total assets by second quarter, the Y-o-Y increased TWD 9 billion. So basically it's from the upgrading growth and the financial investments, of course, due to the growing sales revenue and profitability. So the net asset value per share is also growing. Next page. So for the cash flow, the net cash stayed flattish, around TWD 8.8 billion year-over-year. Basically we utilized cash inflow from operation to financial investments to the bank loan repayment and to the CapEx on ePaper production line expansion to meet the strong market demand. The total financial assets plus cash was increased to around TWD 34.6 billion by second quarter this year. Next page. All right. This page, I would like to share the second quarter accomplishments. In second quarter, we showcased the latest and greatest ePaper technology in the Touch Taiwan exhibition, including the gallery free, title free and spectrum to be 100 plus. We also joined SID in May in states by bringing our continuous innovation in color paper and next-generation technology trial batch for making smarter and more sustainable. For example, on JustTint and innovative variable transmission like control film technology that provides a variable tint and on-demand privacy solutions. And another technology being showcased in SID E Ink [indiscernible] a new frontline technology designed by E Ink in-house [indiscernible] has been engineered to reduce amount of blue light reflecting off the service of the display, providing further comfort while reading. And also in second quarter, first, addition of the ePaper industry Blue Book was being published, collaborated with [ FPM ], the ePaper alliance that we established on last year and together with the ePaper Insight Plus on the external consultant CCID, China Center for Information Industry Development. This Blue Book basically on this very comprehensive market and application analysis report that covers 12 ePaper application domains such as ePaper, eNote, smart retail, education, traffic and others. For the awards, we also received smart display application awards for the smart retail award from TDUA, Taiwan Display Union Association, of E Ink [indiscernible] 100, basically that is for coloring ePaper. And also the Computex Best Choice Award was also received on the E Ink Driver IC with Dynamic and Interlaced Scan by AI Computing. Last but not least, this year, it's also E Ink's first time to be ranked 427th place in the top 1,000 market cap among the companies from Taiwan, China and Hong Kong. So that's for our second quarter accomplishment. Next page. So various corporate sustainability activities has been done in the second quarter. We just released the Corporate Sustainability Report for 2021, and feel free to download the material. We also donated USD 150,000 to UNICEF to support Ukraine relief efforts. Locally we also joined the initiative Talent in Taiwan in terms of the care and sustainability in order to support the development of talent for the future needs by addressing on diversity and inclusion, organizational communication, rewarding and motivation, physical and mental health [indiscernible] and also, of course, on the talent development. We also sponsored the platform TRIPS initiated by the Commonwealth magazine group, TRIPS, this platform stands for Temperature Rising Index for Pathways, basically collects company's ambition and pathway toward net zero in order to achieving the goal of global warming 1.5 degree C. The idea behind the 1.5 degree C is the goal of Paris agreement, which calls for countries to take concerted climate action to reduce greenhouse gas emissions in order to limit global warming. Furthermore, we have been listed as one of the Asia Pacific climate leaders in 2022 by joint report of Financial Times, NIKKEI Asia and Statista. One of the lists identifies the companies that achieved the greatest reduction in the Scope 1 and 2 greenhouse gas emission intensity between the time period of 2015 to 2020. And we continued to be rated on the top 20% by TWSE, Taiwan Corporate Governance Evaluation, in the 5th consecutive year. This is now our consecutive 5th year to get this award. All right. Next page. This page is about the products with low carbon emissions. We are convinced of the environmental sustainability and corporate profitability are equally important missions. We are committed to reduce carbon emission from smart display through low-carbon and green ePaper technology. We also lead, by example, by increasing the use of reusable energy in our global sites. We expect to take the lead in achieving our 10% use of the renewable energy by 2022 this year and then become the first display company to run on 100% renewable energy, 100% by 2030. And 10 years after, we also aim to reach net zero carbon emission by 2040. So among those goals, we have conducted studies comparing ePaper to conventional paper and LCDs to understand the CO2 emissions from these materials. The studies found that ePaper shows significant on low carbon benefits, comparing the energy usage of the ePaper retail text versus LCD retail text over a period of 5 years with 4 updates per day for every kilowatt hour consumed to manufacture the ePaper material, a saving of 400 kilowatt hour is realized. If we take eReader for example, in the past 5 years, 130 million eReaders have been produced globally, replacing the purchase of paper editions of books. It is estimated that paper books would emit more than 100,000 times CO2 versus eReader with an E Ink display. And further, LCD devices would emit more than 50x CO2 versus eReader throughout that time. All right. Next page. So the next one is about to built for growth. As you can see from the screen, on the one hand, we proactively cooperate with the supply chain partners to build ePaper ecosystem, work hand-in-hand toward on the net zero carbon emission targets. On the other, we internally prepare future capacity expansion for the growth apart from the 4 ePaper production line that we have been discussing previously. We will additionally expand 2 ePaper production lines in Hsinchu. Besides we will also build 2 new factories, both -- one in Taiwan and Yangzhou in China, which specialize on the ePaper material and flexible substrate material such as polyimide. We are prepared for the growth. Next page. I would like to share 2 special sustainability awards. We win 3 major awards at 2022 Initial Responsible Enterprise Awards, abbreviation of it is IREA. The awards were the green leadership, social empowerment and corporate sustainability reporting category. Besides we also win gold, silver and bronze screen awards at 2022 TSAA, Taiwan Sustainability Award. I would like to elaborate more on the gold award that we have, which is the eRead for the future, that gold award at TSAA, basically it's an eReader mobile library project initiated by E Ink. It has also been recognized by area, social empowerment award. Since 2017, we have joined hands with ePaper ecosystem partners in hardware, eBook platforms and supply chains to bring together the core products and resources from different companies, which are frankly in paper devices and abundant eBooks. We helped bridge the learning resources gap in rural areas, which is in line with the United Nations Sustainable Development Goals, SDG, of good health and wellbeing, SDG 3, quality education, SDG 4, and partnerships for the goals SDG 17. This project has also been implemented, the insights in the United States, South Korea, in Yangzhou since its launch in 2017. It has benefited 36,000 students worldwide and contributed 193 million [indiscernible]. Next page. Last but not least, we'd like to share E Ink one and only, the 4 dimensions of E Ink unique PESG. As a core product of E Ink, ePaper was born for environmental sustainability. Combining product with ESG's environment, social and governance, the fourth dimension of E Ink unique, PESG, serve as the backbone for implementing sustainable management in E Ink. These awards and achievements show the strength and what I just shared, basically recognize our efforts to promote PESG. We basically are convinced that environmental sustainability and corporate profitability are equally important missions. We once again are committed to reducing carbon emission from smart display through low carbon and green ePaper technologies. So that is my update in sharing. So thank you very much, and let's move to the next Q&A session.

[Operator Instructions] The first question is from [ John Stu ].

Great conversion, good numbers. Okay. The one question is that could you please give me some -- the guidance in the second half because I think that in previous session, Chinese session that I think that a lot of people have these kinds of questions because everybody is worried about the consumer product demand slowing down. So what's your view, I mean, on your [ EPD ] bidders? And secondly, I have a second question, is about your ESL. Happy to learn that the ESL is going to build a second new fab. So what kind of the reasons you make you so confident that you decided -- you guys decided to queue up the second new fab in such -- in a very -- in such a short period?

Right. For the second half outlook, I would like to break it down into 2 parts. For the CE, Consumer Electronics, which is relevant to the eReader and eNote. I would say due to the global inflation, CE business will go relatively weaker. But I think we -- it's still manageable. So overall, in comparison -- in terms of the year-over-year growth, I think it would stay flattish or slightly lower. So that's for the CE business. But for the ESL, I believe the second half, even going forward, still remains very strong. And you may ask why the global inflation doesn't really affect our ESL business. Basically we -- the way we analyze it and the feedback we have been collecting from here and there from our customer is basically the ESL is kind of tool to improve the efficiency. So because of that, even due to the global inflation, it doesn't really affect the installation of the ESL. And furthermore, one of the advantages to use ESL is to trigger a savings on the manpower cost. So think about this, due to the global inflation, the cost of the manpower employee cost will also go higher. So with the ESL, it definitely can save more cost from that perspective. And for IoT, basically relevant to the eSignage and [indiscernible] and all that. I think for that part, the -- it doesn't really affect the growth of it. Even the IoT sales revenue is relatively lower in terms of our total sales revenue. But for that part, it's still gradually growing, okay? So that's the second half outlook. So simply speaking, the third quarter performance, financial performance would be better than the second quarter. And the fourth quarter would be better than the third quarter. If you want me to quantify this, that's sort of the guidance I can provide. And what makes us think that ESL business could still go strong. We believe the ESL business has been stepping into the organic growth. So based on this, we believe our investment should be to those CapEx production line expansion should be able to justify the growth of the ESL. Okay. I hope I answered your question.

Yes. You answered my questions. So my question set, so going forward, so I know that, I learned that from the announcement -- the company announcement that you are going to build another 2 new production lines in your Hsinchu, Hsinchu production sites. And then you announced that you're going to build another new production site in Guanyin. So can I assume that the Hsinchu site actually will be fully loaded or be fully equipped, will be fully -- I would say the sixth line, the space for Hsinchu is 6 lines. So does it imply that the 6 lines will all be built very quickly, I mean, when the Hsinchu site is completed? Can I say that? Can I conclude that?

I mean it's a bit hard to comment what will be happening in the future. It seems that additional 2 lines could be possibly up and running after -- I mean, around 2024. But as I just mentioned, we believe that ESL is in the organic growth mode. So basically we are prepared for the growth. Whether it would be fully loaded or not, I can't really comment, but we believe that possibility could be high. But once again, that's relevant to the future. It's hard to comment. But I think given the ESL demand, still very strong. We are optimistic. I think it's hard to comment whether they're going to be fully loaded or not because that will be happening in, you know, 2024 onwards, it's hard to say.

Yes, I know. Got it. So actually, can I assume that when you guys decide to build mobile, you've decided to add the new lines in Hsinchu site or you decide to build another new production site in Guanyin. So before making such decisions, you talk to your customer first before you make such decision. Can I say that?

Let me put it this way. It's definitely based on our internal assessment and internal analysis. And basically the assessment and analysis coming from different perspective. Of course, we talk to our customers. Of course, we use our own in-house view to analyze what will be happening in the future. And of course, from a market perspective and all of that. So it's an analysis from different angles and perspectives. Yes.

The next question is from Jerry Su.

I just want to ask about the -- I think in your prepared remarks you mentioned about capacity expansion in Guanyin and also potentially in China will be used -- partially used for material such as polyimide or some of the [indiscernible]. I just want to know, are you currently sourcing those from external parties? And then when you in-source that, what kind of or you can say, as of today, right, what is the cost that is coming from those materials that you're sourcing from external parties? How should we think about in the future, you can turn those to in-house manufacturer? How will that help your gross margin?

Right. So for those upstream and material such as polyimide, currently, mostly we would do it in-house. But we sort of like do it in terms of the formulation, but we still ask the outsourcing partner to help us. But going forward, we're going to do everything in-house. So that's why we need more spaces for that. In terms of the cost, I would say the more we do it in-house, the more cost saving we would have. And furthermore, for this upstream ePaper materials such as polyimide, not only the paper can use that material. And I think it can be used extensively on the TFT related products. So going forward, if everything goes very smoothly, apart from our in-house demand, we might be able to supply the polyimide to the external parties. So that's sort of like the long-term plan. That's sort of like the long-term plan. But first of all, that we wanted to fulfill our in-house demand first, trying to be 100% everything in-house.

Okay. And then just one other question I want to check is that with this kind of aggressive capacity expansion, can you elaborate a little bit more about -- besides the ESL and also eReader, what you know that we are already driving the revenue growth in the past few years and the coming years. What else are the key end applications or markets do you think that will require such a strong capacity expansion from E Ink?

Right, right. So having said earlier, even the CE business might go relatively weaker in second half. But we strongly believe, through our color technology, our CE business can be triggered and grow further in the long run. So I think in the past few years, that most of the digital content used on the eReader and e-mail are black and white. But -- and they are mainly used on the fiction for the eReaders. But for those nonfiction portion that require color, for example, magazines and color academic books and color comic books. We believe for the nonfiction digital content through our color technology. It can be grown further. So that's why we need more capacity along with the growth. And further for the digital learning, currently a lot of kids are already using the Chromebook and MacBook. From our perspective, our mission and vision is not to replace those Chromebook, MacBook, those LCD devices. What we really want to replace is the conventional textbook and the conventional pen or pencil because think about this, when those kids, especially in the United States, even in Europe, they use the MacBook, Chromebook, but they still need the conventional textbook and pen to calculate the math question, to highlight important notes on the textbook. So if we can replace those conventional textbook and pen, our device can go very well with the LCD device, and it can become a very good digital learning package. So once it is realized, we believe we need a lot more capacity along with this growth. And plus on top of that, we believe ESL market, we know that the market penetration only 5% and double up and even triple up. We don't think it is that difficult. So based on those factors I just mentioned, it looks a bit aggressive. But in the long run, we believe that's something we definitely need for the future growth. So our Chairman Johnson just mentioned earlier, we are pretty much at the early stage of the growth. So that's how we see those CapEx and expansion plan. So Jerry, that is my answer, yes.

Next question is from [ Catherine Chu ].

Congratulations on the strong results. So I have follow-up questions regarding to the very impressive capacity expansion plan recently announced. So my question is, if we look at the mid to -- near to midterm outlook for the ESL, we have noticed that there are several players in the State and actually some of the ESL players have announced very, very strong results, including price. That was very surprising. So we wonder whether the growth is actually coming from the North American market that is actually accelerating. So that was my question. And I've also noticed that outside of Walmart, some of the small retailers are also embracing on the ESL. Was that because of the recent events that some of these retailers are fined by the government due to wrong price tags? Will that accelerate the adoption of ESL, making it a must instead of just a nice to have?

Right. So Catherine, in order to answer your question in a more accurate way, let me put it like this. We believe all the factors you just mentioned, we definitely consider them when we expand our further capacity. But whether it can be realized sooner or later, it's a bit hard to say. It's pretty much depends on how the retailer go in the future. But think about this, if we are not prepared for the future growth, how can we quickly react if they decide to go quicker. I mean, same situation would happen again. What I'm trying to say is we don't have enough capacity or supply to meet the demand of our customers. I mean it's a bit hard to comment how soon they will go in terms of the ESL installation. But what we really know is we need to be prepared for the future growth. So that's why we decided to do, even it looks a bit aggressive from your perspective. But once again, as I just answered to the -- previously, those expansion plan, definitely we went through a thorough comprehensive analysis and assessment internally.

Next question is from [ Max Milan ].

Congrats on the recent results. So I was just wondering if you could shed a bit more light on the license plate you showed at the very beginning. Is it something you want to actively collaborate, maybe work like some automotive companies, you showed like a Tesla on the picture? Is that something which will be coming soon? Will we see contracts there? And maybe also on the capacity expansion, are you may be able to provide maybe a bit more like numbers on that? Is there any way we can have like kind of sheets or something? How much capacity expansion can we expect on a rough percentage ballpark figure maybe?

Right, right. For that car licensing plate, as I just mentioned earlier, basically, that's the application we are aiming for. And I think it's still at the early stage. How soon the volume will go significantly? It's hard to say, but we definitely see the potential of it. Just like other IoT projects such as eSignage being used in the public place or on logistic text or even [indiscernible] text. We do see the potential. But how soon the volume will go significantly? It's hard to say. And that's exactly the reason why we need to get ourselves ready for the future growth. And for the expansion plan, for a new factory in Guanyin or a new factory in China, we feel we need a bit more time to figure out the layout and all of that. We haven't gone into the detail for that. So it's a bit hard to say how much additional capacity we could have at Guanyin factory or in our China factory. So I hold my comment for that. We definitely would share further possibly in the next quarter earning conference. But for the 2 additional production line I just mentioned, I would say from capacity perspective, that additional 2 production line can be equivalent to 3 production lines that we had this year. Max, I don't know if you get my point. I think previously we are having a plan. We have 4 production lines, right? And 3 of the production line out of 4, the capacity will be equivalent to the 2 additional production line that we're going to have. But there's 2 additional production line, won't be ready until 2024. So we basically just get approval from the Board, seems it's relatively longer lead time for the ePaper production line. Normally it needs a year. So we just want to get approval blessing from the board first and then try to place a PO to get things going. Yes. I think it won't be happening until 2024. Yes.

Maybe just a quick follow-up, as you mentioning 2024. So as like times changes, sometimes et cetera, how quickly can you guys switch maybe back from like the ESL allocation, maybe back to a consumer allocation like within the production lines? Like how much cost would that -- like how much would that affect you guys?

So basically, for those 4 production line, we are preparing for additional 2, I just mentioned. Basically they can manufacture both ESL and CE product. They are switchable, no problem at all, yes.

Next question is from [ A.J. Sharma ].

I want to check, in the first half, if I look at the consumer electronics, revenues are actually up about high single digit or so. So I just wanted to confirm, basically, you are now guiding the flat to down. Is it for the full year? Or is it only for the second half?

I'm talking about the whole year. I'm talking about year-over-year growth 2022 versus 2021. So for the CE business, I would say it could be stay flattish or slightly lower, slightly lower, yes.

And then can you talk about the ramp-up of the line 2, 3 and 4, basically?

All right. Yes. So out of 4 production line, the second one and third one was ready by first half, end of first half. And they are ramping up now. So I mean, it should be 100% ready from fourth quarter. And the very last one, the fourth one, it should be ready by early next year. So for the 4 lines, they can be 100% contributed from second quarter next year.

Okay. And then if I look at your gross margin, despite slightly higher-than-expected mix for consumer electronics. Your gross margins have done -- still done quite well, actually, if I look at second quarter specifically because second quarter, there was a big jump in consumer electronic revenues as well. So I'm just wondering, so have you seen the gross margin improve for the ESL side?

Right, right. I mean, the reason for the higher gross profit margin in second quarter, yes, due to the product mix, more ESL product shipments basically, yes.

Yes. But other than the product mix, even the ESL margins are improving compared to last year, right, basically?

Yes. Overall speaking, yes. There's improvement, yes, involved, I would say. Yes.

Just on the color side, basically, so how does the production process, how is it different for color versus black and white? And then in terms of the ASP or the margin and the percentage of color, do you expect going forward, how is that going to evolve basically?

Right. Basically they are very much similar. But from the bill of material, the color, the color technology used for pigment, the black and white only use 2 pigments. So from that perspective, a little bit more pigments being used, but that's pretty much peanuts. So in terms of the bill of material, that's minor, and the manufacturing process is similar. But I think your question would be, since it's color, we are in a better position to ask more premium. But once again, we would ask for the reasonable margin, slightly higher reasonable margin. But what we want -- what we really want to do is to open up the ePaper on market share. So we are not really aiming for the short-term gross profit margin increase. We would rather go with a higher or more ePaper market share.

Now we will take last question from [ Ellen Wang ].

I have 2 questions. First question is, we see there are many more unmanned stores all over the world now. And how do you see this trend with most of all of those unmanned stores use ESL? This is the first question, yes.

Right. As I just mentioned earlier, we do see the ESL business stepping into organic growth mode. So we do see the potential of it. But how soon or how quick the retailer would decide to install, it's a bit hard to comment. But we do see the trend, just a matter of time. That's why we try our best to prepare for the future growth. And we believe they -- it wouldn't take too long for the big guys, even the smaller guys to install the ESL.

Okay. Even in Asia, right?

Yes, we believe so, yes. In Korea, in Japan and even in China here, there's a decent amount of the ESL exploration already. And we also see the potential for India, yes.

Another question is about gross margin, which you just mentioned about the product mix, that affects gross margin. But recently, then we know the components such as supplier, the cost down, such as driver IC. How do you see this situation going forward and how it's going to affect E Ink?

I think last year, due to the global component shortage, we suffered the higher cost on the TFT panel plus the driver IC. And the situation turned better. And I'm sure you guys know the price of the panel and even the driver IC has been more favorable to us. So definitely we take it very positively, yes in terms of our cost, yes. All right. Thank you very much. And I think it's about time, 5 o'clock. And thank you for you guys participation, and let's talk soon next quarter. Thank you. Bye-bye.