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

Good afternoon. Welcome to the E Ink Fourth Quarter 2022 Earnings Call. [Operator Instructions]. Joining me today are CFO, Lloyd Chen and Financial Senior Director, Patrick Chang. Now I would like to turn the call over to Lloyd.

Thank you, Budi. Good day, everyone. Welcome to 2022 Fourth Quarter E Ink Earnings Investor Conference. Before we officially start, let's take a quick look at the safe harbor statement. Okay, on the next page. All right. So let's quickly look at the 2022 whole year P&L first. The sales revenue was around TWD 30 billion. Operating profit was TWD 9.2 billion, net income TWD 9.91 billion. EPS was TWD 8.69, basically 2022 sales revenue was 11-year best and on operating profit, net income as well as EPS is also the all-time high. Next page. For the operating profit, basically continued to grow due to the strong demand from the market with different applications. As you can see from the screen, growing operating profit since 2018. 2022 operating profit was 3x higher than 2021. Next page. For ROE and ROA, basically, the ROE was around 25%, and ROA was 16% with the Y-o-Y growth of 6%. Next page. So the total assets increased from operating growth and financial investment. So as you can see from the screen, the total assets Y-o-Y growth was around TWD 8.1 billion. Next page. For cash flow, the cash position was around TWD 8.8 billion by fourth quarter last year. We utilized on cash inflow from operation and investment to further financial investments also to dividend payment and to CapEx on ePaper production line. The total financial assets plus cash by fourth quarter was increased to around TWD 37.2 billion. Next page. So for the dividend payout, 2022 EPS was around TWD 8.69 and the dividend was TWD 4.5 and dividend was record high. And we have been switching from a value company to a growth company. So we reserve partial projects for the further growth. Next page. So I would like to share what we have done in terms of the ESG and those recognition being received externally. We continue to innovate in the development of the advanced color ePaper products for a wide variety of applications. Last year on E Ink Prism and E Ink Spectra 3100 Plus, both have won the Taiwan Excellence Award, especially Prism won the Gold Award. And also our affordable color paper technology won the 2022 SDIA, Smart Display Industrial Alliance Silver Award. At the same time, our battery-free color ePaper device also won the bronze medal of the Taiwan Innovation Technology Expo. Also E Ink Gallery 3, the full color ePaper technology won the Innovative Product Award from Hsinchu Science Park. Last but not least, the BMW iX Flow, the concept car being showcased in 2022 at CES basically collaborated between BMW and E Ink, was also being selected by Time Magazine as one of the best inventions of 2022. And on next page, I'm going to talk about their new concept car. Right, next page. All right. That's another example being used for our Prism technology. So E Ink Prism 3 is the next generation of Prism film, which bridges the gap between traditional static materials on digital technology with dynamically changing materials, fully programmable. Designers can now integrate endless materials with changeable colors and patterns. As I mentioned earlier, at CES 2023, BMW is using Prism 3 to create a multicolored scheme on their new i Vision DEE. DEE basically is the abbreviation of digital emotional experience. This concept car basically is the first one to use our Prism 3 in automotive applications. E Ink 3 creates a unique experience like never before, product developers and designers, they have the ability to integrate our technology to create dynamic services. Prism offers the ability to design in low power, sustainable display solution that is customizable and offers endless design opportunities through a combination of changing colors, patterns and user-defined programs. E Ink works to enable solutions that allow our customers to design smarter devices for a sustainable future. Next page. So I would like to talk about our latest Gallery and Kaleido color products. They also move into their production with customer launches. As you can see from the screen, the first one is in Lenovo. They announced at CES 2023 an innovative new model in the ThinkBook Plus series that reimagines the strong heritage of the twistable form factor with a dual rotating display that features an OLED panel on one side and the colorful E Ink screen on the other. It comes with the touch and pen functions, allowing the consumers to use it when you need to concentrate on reading and writing and it is equipped with E Ink Kaleido 3, the battery life of the notebook can last more than 20 hours, which will gradually reduce the energy consumption of the notebook with the positive impact on carbon emission reduction. And also, you can see Philips professional display PPDS. They also just announced a range of full sizing for color, zero power Philips Tableaux, color ePapers, signage displays. This new Tableaux display is very suitable for retail, corporate, public spaces and transportation. It is available in 25-inch and 28-inch variants at launch. This Tableaux display very much ideal for energy stated solution for business across the sectors. And last but not least, the full color ePaper technology, E Ink Gallery 3 has entered mass production. We, of course, very excited to have several major customers announce new products featuring our Gallery 3. This opens up a new chapter in digital reading, offers customers a full color, enhanced reading and shopping experience for ebooks while offering sustainable reading options. We believe customers on Black and white e-Readers will be encouraged to upgrade to the color reading experience with Gallery 3. As you can see on the screen, PocketBook Viva will be launched soon. It is equipped with our Gallery 3 technologies. Okay. One of the Green index company, FTSE Russell according to their evaluation of the green revenue model, E Ink was identified on us having 99.98% green revenue in 2021 and we contributed the positive impact on the environment. Next page. We'd also like to share our ESG efforts. We have made and recognition received in the past few months. We won 2022 TCSA, Taiwan Corporate Sustainability Award under prestigious top 100 and also Sustainability Report Platinum as well as growth through innovation. We were also included in top 25 Taiwan's global brands with the brand value of USD 78 million. And we were honored to be included in DJSI World Emerging Market Index also have exchanged the ESG Index as well as MSCI ESG index in 2022. Next page. So I think previously, I ever introduced E Ink's ESG framework on this called PESG. Basically P is our green product. So under this unique PESG framework, we are moving toward sustainability continuously. For the RE100, our original goal was to achieve RE10 by 2022. Of course, eventually, 2030 RE100, but we understand the importance of this action. So we hit RE20 ahead of our original target RE10 in 2022. And another important initiative and it's called EP100. We are the first display company joined EP100. We also received CDP rating B CDP Climate Disclosure Project. Also another rating TSA, Taiwan Sustainability Assessment rating on AA in 2022. And we endeavor moving up to the higher rating continuously. One of our important ESG actions annually on which is on the eReader for the future. We have been conducting this project since 2017. We collaborate with ePaper ecosystem partners jointly to donate eReader devices and e-books in order to build up on libraries for school. After years of solid works, we have humbly donated of nearly 3,000 e-reader devices, more than 261,000 copies of e-book to nearly 135 elementary schools, 19 libraries benefited more than 40 value students with cumulative of more than TWD 200 million value equivalent. In last year 2022, eRead for The Future ceremony was held in Penghu outside Taiwan Island. Next page. As mentioned earlier, we were not only being selected in the Sustainability Yearbook 2023 issued by S&P Global in the first time, but also rated us the top 10 companies in our category, which is electronics, equipment and components industrials. Also at the same time, we were included in the Industry Mover 2022 because of the significant improvement in reading compared with the previous year. So that is about my presentation this time. Let's move to the Q&A session. Thank you.

[Operator Instructions].

Free feel to ask questions, and we are happy to answer.

The first question comes from Kenny Chen.

I have 2 questions. The first one is regarding the operating margin level. Since last quarter, you mentioned you will do some profit sharing in order to grow the ePaper industry bigger and faster. And I'm wondering how do you see the give and take. And will this help you to sustain your operating margin in 2023, at least same as 2022 or above the level of 2022 because of the growing revenue?

Right, right. Kenny, that's a good question. So I think a lot of people show the concern over the profit-sharing program we mentioned. Their concern is whether that will be greatly affecting our gross profit margin as well as our operating profit. Let me put it in this way. I think the purpose of this profit sharing program is to open up the ePaper market share. So as long as the ePaper market share can be further widen up, we believe our cost can be much more competitive. So in this regard, we are happy to contribute back those incremental additional margin that we gained associated with the wider market share back to our customers. So that is the thought behind. So coming back to your questions, since with a bigger TAM, bigger penetration and even the bigger market share, we believe our cost can be very much competitive. So basically, we just contribute back to our customer for the additional profit we may gain in the long run.

Okay. And another one is when will your new facility at Guanyin be ready for mass production, I heard that in the Chinese call that you're starting your construction entering second quarter to third quarter this year? And what products are you first focusing on?

Right, right. Yes, during our Chinese earnings conference call, our Chairman mentioned, we will kick off this project soon from the second half. I believe it at least take 1 year to go. So probably it could be really by the very end of next year or even early 2024. I mean, it's hard to say at this moment, but I think we would definitely need 1 year to go. And basically, we will get this building ready first and decide what will be -- how we set up for this Guanyin factory. But generally speaking, a very high level, definitely something associated with the ePaper production line plus some material will be used for our ePaper. Basically, the scope of the manufacturing would be something.

Next question is coming from Jerry Su.

All right, while we are waiting for Jerry's question, I noticed a few questions online. I think, Matt, I saw your question. I think your question is about 2022 outlook, are we more optimistic on demand. I think -- let me put it in this way. We also mentioned this in our Chinese earnings conference call. Basically, for the 2023 whole year, we believe the Y-o-Y still will be growing. But due to the macro uncertainty, especially that going to affect our [ MCE ] business. So we believe that the Y-o-Y growth generally as a whole will be the single-digit growth. But if it goes better, could be lower double digit. That's how we see the 2023 outlook at this moment. But whether it will turn more optimistic or pessimistic? I do not comment at this moment, but we definitely will provide an update in the next quarter conference. And you also want to have a capacity expansion update. So our first expansion for production lines basically it's all ready. It's all ready, 4 production lines ready. And as I mentioned earlier, we are constructing a new building that can fill with additional 2 production line. Let me just call it H5 and H6. So H5 basically is ongoing and probably will be ready early next year. And for the -- and basically, this one, we get approval from the Board. So it's ongoing project. And for H6, we haven't really submitted to the Board. But it's under planning. But most likely, it will be happening. It could be happening in the early 2025. So that's for the capacity expansion in terms of the ePaper production line. And as I mentioned earlier, Kenny asked about our Guanyin factory. So Guanyin factory is another production type factory that we are planning now. The new building I just mentioned basically is inside our Hsinchu campus, but we are planning to have another new factory in Guanyin outside Hsinchu, but it's not far from Hsinchu. It's in [indiscernible]. So for that building, we will get in -- we will kick it off in the second half, and we definitely did 1 year to go. So as I mentioned earlier, it could be ready very end of next year or in early 2025. So that's the capacity plan we are having now.

Next question is coming from Zhilong Yen.

I have a question about ESL. So based on your -- you mentioned earlier that ESL still the trend is growing. And I wonder, in terms of the region, well, the United -- the U.S.A. will be the major growth region? Or what other regions that you think will be our key growth region like China or East Asia?

Okay. Okay. I believe Europe is still the most mature ESL arrears and is still growing continuously. And basically, North America also has been growing and we see a big potential in the North America. So we believe the ESL opportunity in North America seems very big there. However, in Asia, we also see the growing demand in Japan and Korea and also in China. So basically, we do see the growing demand intact in the long run everywhere. But as I mentioned earlier, even Europe is one of the mature area in terms of the ESL. But we still see the growing demand there in North America as well.

Similar question is about the region. So besides ESL, there are some like signage, you mentioned earlier, there will be probably a second or another key driver for our growth. And for the signage like outdoor advertising or similar products, will that happen first in Europe as well and also how the feedback -- the key feedback from client from North America or like other Asia countries.

Yes. Our Chairman did mention the potential of the outdoor signage. Yes, we've received a lot of inquiries and we also are having an extensive on discussion with the potential customers. So we definitely believe it could be our next growth engine. But it's hard to say which area or which customer will be happening. I think we're still on need of more time on this. But definitely, as you mentioned, it could be our next growth engine. I think I would like to explain more why we see their potential. Basically, nowadays, due to the electricity associated with the Russia-Ukraine war. So a lot of outdoor signage basically the local government for the constraint over the electricity usage. So basically, a lot of outdoor signage companies, they cannot run those auto signage 24 hours. So basically, that will affect the income. That's one reason. So they definitely need a more power-efficient display for outdoor signage. So I think that's one of our advantages. And second of all, other technologies, such as LCD, OLED, they unproduced light pollution, a lot of country, the government officially be that sort of display being in-store in the busy area, because that the driver is basically very much easy to be distracted. And -- so from that regard, our technology is being certified. It doesn't produce any light pollution. So based on those reasons, as I mentioned earlier, we received a lot of inquiries. So we do see the potential of outdoor signage in our next growth engine.

So the next question is coming from [ Jennifer ].

So I have 2 questions. First of all, can you share the rough number of fourth quarter if the OpEx exclude the [indiscernible] incentive program? Is it the rate roughly the same as what we see in second, third quarter, you say 21% or so? And the second question for me is that, so the OpEx ratio -- the R&D ratio now for 2022 is around 12%, well say AUO at 5% and TSMC at 7% to 8%. So can you share your view on the long-term R&D intensity guidance, like how much would be, say, normal or reasonable to you, for the R&D as a percent of sales.

Right. Jennifer, your voice is little bit breaking up. So I think your first question is about the employee bonus, right?

Yes. For fourth quarter exclude the employee bonus and incentive program, what would the fourth quarter OpEx stay like? That's my first question.

Sorry, I can't hear you very well.

Is it clear now?

Not really. Please come again. Yes. Come again, yes.

Sorry. So I mean as I exclude the employee bonus in the fourth quarter, what would be OpEx be like in fourth quarter?

Okay. Your question is, if I take out those bonus, how much the OpEx percentage would look like, right?

Yes, yes, exactly.

I apologize. I think I can't really answer your question. But I think let me put it in this way. Let me put it in this way. Employee basically is a valuable asset of the company. So without their contribution, we can't really achieve that sort of performance in 2022. So this sort of OpEx level would be similar going forward. So if you want to build up your model, I think you can simply just use the historical -- the OpEx percentage over the sales revenue, try to use that percentage to build up your model. And basically, it would be similar, it would be similar because once we decide to have this policy, I believe we will be consistent. And your second question, I think it's also relevant to the R&D expenses under OpEx, right? So once again, my answer would be similar, the ratio or the percentage will be similar. So I suggest you can take the percent -- historical percentage to build your model.

You mean for 2023 or say going forward?

I mean, going forward, I think you can use the 2022 and even 2021 as a reference yes, to build your model. Yes. But by the way, let me put it in this way. Our R&D spending, 50% is relevant to our existing technology products and 50% basically is for our future technology and products. So that's kind of the investment for our future technology. I think that's very important. However, with this investment, if we can open up our sales revenue further, I think down the road, the bottom line is the total OpEx against our total sales revenue. I think that percentage will become relatively low. Jerry, I saw your question online. I think your question is about the completion of the Guanyin factory, the time line. It's hard to say at this moment. It's really depends on how we start in second half. We could start like late second quarter or we may start from third quarter this year. So it's hard to say, but we definitely need 1 year to go. So that's my answer to your question. And for the CapEx, I think our general guidance still TWD 5 billion to TWD 6 billion per year. And I think you mentioned something about the North American rate and is it associated with our further capacity expansion. Let me put it in this way. I think second expansion for H5 and H6, basically, that's a preparation for the potential business and the Guanyin factory, also the same thing. You also mentioned about the gross margin 50% plus/minus it's a healthier level when the gross margin would go back to 50%. I think it all depends on the product mix. But I think third quarter last year, fourth quarter last year, so don't take them as a normal level of the gross profit margin in like third quarter, there was a one-off inventory provision involved in fourth quarter, as Johnson mentioned earlier, there was due to the component shortage our [ ZIC ] and LCD cost was relatively more expensive. But those price for those components was more relax now. So that's being reflected in the fourth quarter gross profit margin. So -- and on top of that, we would implement the profit-sharing program. So I won't say it will be happening like overnight, even next month. I think it takes a while. But I think 2 months may be needed. But once again, I suggest you guys don't take too much attention on our gross profit margin. I think -- we are looking after the gross profit, absolute value in the long run. We are not really care too much about the gross profit margin in the short run because we really want to open up the market share for ePaper. Okay. There is a question about from [ Dominik Salasky ]. He want us to repeat the 2023 guidance full year, again. Yes, we are happy to. Basically, we believe 2023, the year-over-year growth for the time being, we believe from that would be more likely single-digit growth, but it could be a lower double digit. That's how we look at it at this moment. But we have the quarterly conference call. If there's a change or we definitely will provide update in the next quarter conference.

Next question is from Derrick Yang.

One small question on the OpEx side. You mentioned that we use for 2023, you mentioned that we can yield the OpEx ratio in 2022 and 2021 for our estimate. But actually, it was quite a big difference between these 2. Because if you look at 2022, it's about 23% of the revenue. But if you look at 2021, it's 28%. So if you could give us a bit more color regarding this about the OpEx rate, for the OpEx as a percentage of total revenue for 2023 more guidance?

So, Derek, I think my answer still be the same. So if you feel less comfortable to add 2021 into your analysis or how you built the model, maybe just use the 2022 historical year for your reference. And if I simply break out, the OpEx, I would say for the potential increase only on employee cost plus the R&D spending. Basically, we believe they are very important items for E Ink because without good people, we can't really grow. We can't really keep the target. So we need to take good care of our employees. And without the proper R&D spending, we can't really have a good future technology. So but we will also carefully control the level of expenses. So once again, take the 2022 historical OpEx for your reference. I think that should be reasonable for you to build your model. And on top of that, depreciation is something you should consider. But that mainly affect the cost under the cost of goods sold, OpEx is less being affected by the depreciation. All right. We believe we answered all the questions. And thank you very much for your participation. Looking forward to discuss with you guys next time. Thank you. Bye-bye.