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

Good afternoon, and welcome to the E Ink First Quarter 2023 Earnings Call. [Operator Instructions] Today's conference is being recorded. The replay will be available on E Ink's website after today's conference. Joining me today are CFO, Lloyd Chen; and the Finance Director, Patrick Chang. Now I turn to the -- I would like to turn this call over to Lloyd.

Good afternoon, and good morning, everyone. My name is Lloyd Chen. I'm the CFO of E Ink. Before we start the first quarter earning conference, let's take a quick look at the safe harbor statement. Next page. All right. Next page. Okay. I would like to briefly explain the first quarter on P&L. The sales revenue was around TWD 7.23 billion. Operating profit, TWD 1.81 billion. Net income, TWD 1.75 billion. EPS was [ TWD 1.54 ]. Basically, the sales revenue has been reached the best in the past 12 years, and operating profit, net income as well as EPS, basically were all time high. Next page. [ As you ] can see from the screen, operating profit has shown a positive trend of growth since 2019 with a consistent upward trajectory. Next page. [ For ] total assets basically increased from upgrading growth as well as on financial investments, also the growing net asset value per share. Next page. [ For ] the cash flow, cash was around $11.6 billion by first quarter. Basically, we utilized cash inflow from operation, investment to further financial investments and also to CapEx or the ePaper production lines. So the total financial assets plus cash was increased to around TWD 42.3 billion by first quarter. Okay, next page. Okay. Let's take a look at E Ink's first quarter accomplishments. We were selected for the 2023 S&P Global Sustainability Yearbook, and awarded top 10% S&P Global ESG score, also be listed as an industrial mover. We were rated as one of the top 10% enterprises in the electronic equipment, instruments and components sector. The first quarter -- sorry, I mean, last year, we were the first company in Taiwan to sign the climate declaration. Basically, we will achieve RE40 in 2025 and RE100 in 2030. It eventually hit the net 0 emission in [ 2014 ]. Also in first quarter, one of our key ecosystem partners, Philips TPV, they launched on the 25.3-inch full color ePaper signage board. They call it Philips Tableaux. They won the 2023 ISE Best Product Award. It uses our E Ink Gallery Plus technology, which has full color and no power consumption. Through the Philips Tableaux Series electronic paper [ Kanban ] enterprises can achieve sustainable goals with extremely low operating costs. Last but not the least, we have always prioritized the cultivation and the development of talent as a key objective in our business operations. We are proud to announce our participation in the talent in Taiwan. Basically, we are pledged to adhere to the alliances on 6 indicators for sustainable talent actions. There are meaning and value on diversity and inclusion, organization of communication, reward and incentive, physical and mental health and talent growth. In addition, we have also joined [ SBTi ], and -- which focuses on setting science-based targets to reduce our environmental impact without compromising the earth resources while meeting social needs. This will further facilitate healthy economic development globally. Next page. We showcased the latest and greatest on ePaper technology at Touch Taiwan. So after the exhibition, we received a lot of inquiry about our color technology. So we would like to take this opportunity to explain more on those technologies. So the first one is E Ink Prism 3. So at CES on 2023, BMW is using Prism 3 to create a multicolored scheme on their new i Vision DEE concept car, the first use of Prism 3 in automotive applications. E Ink Spectra 6, another our latest color technology, a revolutionary new color product geared for indoor advertising on indoor signage or on any paper sign replacement. E Ink Spectra 6 is a full color product, providing the level of color saturation and vividness never seen before in a reflective display. And with ability to give a visual performance similar to the most advanced paper color printers on the market today, Spectra 6 will be optimized for up to 200 PPI depending on the panel size, a typical contrast ratio of 30:1 and upgraded range of 0 to 50 degrees celsius. Another one is Gallery 3, the full color ePaper technology. Basically, it has entered our mass production. And in the past few months, we were very excited to have several major customers announced. There are new products featuring E Ink Gallery 3. Basically, that opens up a new chapter in digital reading, offer our customers a full color enhanced reading and shopping experience for e-books, also offering sustainable reading options. We believe on customers who own black-and-white eReaders will be encouraged to upgrade to a color reading experience with Gallery 3. The last one is Ink Kaleido 3, especially on the outdoor, basically it's based on print-color ePaper technology and utilizes an RGB color filter array on black and while electronic paper film to create a warm and colorful display offering more than 4,000 colors. E Ink Kaleido 3 Outdoor offers a vivid color image information and clear text, providing a comfortable and non-irritating color digital content experience with a visual impact close to that of color printed paper signage. The Kaleido 3 Outdoor operating temperature range is between minus 15 degree Celsius to 65 degree, which allows it to operate in extremely cold or hot areas without the need for expensive, high-energy-consuming heating or cooling devices, reducing additional power consumption. Okay. Next page. So as I just mentioned, previously, E Ink Spectra 6 featured an enhanced color spectrum and advanced color imaging algorithm to provide full color to improve marketing and advertising performance. And basically, we also won the Technology Excellence Gold Panel Award in 2023. All right. Next page. I think ePaper is a very unique technology, and we are dedicated to building and managing the ePaper ecosystem. We have established an ecosystem of partners that spans IC design, module system integration and application development. The number of members -- member companies that have joined on the ePaper Industrial Alliance that we established 2 years ago, has exceeded 150 members already. So building a complete ePaper ecosystem is one of our important business strategies for expanding our business and promoting ePaper products. So in first quarter, we have 3 new comers in our new ecosystem, 2 from IC design, as you can see from the screen, AIROHA and another one is CHIPONE, also one from the TFT Backplane, HKC, as you can see from the screen. Next page. All right. And we'd like to share a very exciting study. The study from Harvard School of Public Health comparing the adverse effects of the blue light from displays shows the benefits of E Ink's ePaper on eye health. This study -- Harvard study shows how our ePaper is up to 3x healthier for your eyes and LCD screens. So to be specifically, our device with our front light do not emit any blue light to stress retinal cells. However, if the front lights -- our unique front light congregates -- If it congregates front light being installed, even with the front light it's up to 3x less stressful for retinal cells and LCD devices, as I just mentioned earlier. [ Right ]. Next page. All right. So I think every quarter we share the achievement and accomplishment in terms of the ESG. So a few things we'd like to share. So in first quarter, one of the leading magazine in Taiwan, is called CommonWealth Magazine, they basically have the ESG corporate sustainability. So we are being honored with a comprehensive performance in the world under the category of electronics and technology sector. Additionally, we have also made [ steady ] -- in the top 5% of OTC listed company in the 11th Corporate Governance Evaluation in Taiwan, basically demonstrating our strong commitment to ESG governance and management. And also, good news about credit rating for E Ink. We see a long-term issue credit rating on twA [ minus ] from Taiwan Rating Corp. The analysts basically in their report pointed out that E Ink revenue scale has significantly increased. In other words, our expense ratio has decreased quarterly and E Ink has the leading position in the ePaper market with a steady profitability and financial capabilities. So it is expected E Ink will continue to benefit from stable market, plus its transition toward ePaper. So E Ink is the only company in Taiwan in the optoelectronic display industry with a long-term issue on credit rating of twA [ minus ]. And also, there is a very big event organized by Ministry of Economic Affairs in Taiwan. It's called National Industrial Innovation Award. So we have been honored just 2 days ago as distinguished enterprise, innovation and that was quite a big honor. So yes, that's what I would like to share for the first quarter. So we can move forward to the Q&A session.

[Operator Instructions] The first question from Max [indiscernible].

Congratulations on this great results. I just quickly want to ask you if you could share more details on the progress of the capacity expansion? And also, maybe what the demand looks like from customers, especially for the consumer segment in Q2 right now?

So Max, the -- for the capacity expansion -- I think you are quite familiar with our expansion. So we did the expansion last year. So 4 production line were involved. So the very last one, the fourth one, basically was completed in the first quarter this year. So everything is going well. We -- that production line is ramping up. So we believe in the third quarter we can start the contribution. So apart from those 4 production line in our first expansion, we are planning for the second expansion. So another production line is in process. So we placed the PO and basically, it should be ready next year. So that's basically what is all about for the production line. And for the outlook for the second quarter in terms of the sales revenue, I think the second quarter sales revenue should be slightly better than the first quarter. And we believe third quarter will also be better than the second quarter, but just slightly increased. And we just had the first quarter earnings conference in Mandarin 1 hour ago and the guidance we just gave for 2023, basically on the year-over-year growth still remain the same lower single-digit in terms of the Y-o-Y growth.

Maybe just then a quick follow-up question on this. If you're saying you remain in your guidance with low single-digit year-over-year growth, which is great, can you maybe also share last -- in the last earnings call for full year 2022 we were talking a lot about the gross margin, that you are considering lowering ASP to penetrate the market more quickly. Can you maybe share an update on that?

Sure. Yes. Max, I think I can add more color on that -- the Y-o-Y growth at the low single-digit. I think the CE basically this year, the whole year still remain relatively weaker. So we are still expecting ESL will be growing. But net-net -- so it turned out to be a single-digit year-over-year growth. So that's the first thing I would like to add. And the profit-sharing scheme you are referring to, I think the purpose of doing it is basically just try to open up the ePaper market share. So with the scale up, basically, we can save in terms of the operational efficiency or those component savings. So we would like to contribute those savings back to our partners in our ecosystem. So that's what is all of that. I think it's going well. And the -- with this scheme we want to implement basically [ we'll ] be on specifically on our new technology or new products. So it will be gradually implemented. So it hasn't really affected our gross profit margin overall. If your question is relevant to the lower gross profit margin in the first quarter, I think I can take this opportunity to answer this question. Basically, lower gross profit margin of 48 point-something percent, that was mainly caused by -- for IoT sectors, we also shipped the ESL module for our customers. So that portion in the first quarter was relatively higher. So simply speaking, we ship more module than material. So that's the main reason for the lower gross profit margin in the first quarter. It has just a little bit to do with that profit sharing scheme. But I think in last session, Mandarin session, someone also asked the gross profit margin in second quarter. I think the product mix in the second quarter, I think we should be shipping more material in second quarter. So that gross profit margin would be improved a bit if you compare it with the first quarter.

So overall, we can say that the profit sharing scheme does not materially impact the gross profit margin?

We don't think in that way. I think product mix would affect the gross profit margin. However, even it does under the condition of opening up the ePaper market share. So overall, the gross profit will still be increased even with the lower gross profit margin. I think you get my point, right.

Next question from [indiscernible]

One is just about the gross margin point that we just talked on. You said that an important part is the mix between modules and materials. How should this trend over the long-term? Should we expect significantly more material or will the mix stay basically the same or will there be more modules?

So how about let -- I mean, let me answer your first question first. Okay? Is that okay? Let me answer your first question first, okay? All right. Right. I think in the long run, E Ink trying to be a material company. So we never meant to increase the additional module capacity. So that's why we would try to invite a lot of module maker joining out into our ecosystem because we believe ePaper market share will be massively increased. So as [ slow ] as our new customer system integrator, they need a new module capacity, those partners, they can provide. So coming back to your questions, in the long run, since we are aiming to be a material company, so more and more ePaper material sales will -- would be expected. However, during the transition, our new customers always want us to help them to do the module for the new product first. Whenever it gets matured, we hand it over to the module maker. So some parts -- for example, first quarter, more module we manufactured. So that led to the relatively lower gross profit margin. I think it will still be happening now and then. But I think in the long run, we are aiming to be a material company.

May I just ask one more question, please, which is that, another company in this sort of ecosystem is the French-listed company, SES-imagotag and they recently announced that Walmart will be rolling out the ESL shelf labels across, I think it was 500 stores in the U.S. So 2 questions -- or a few questions. Firstly, a user exclusive supplier to that in terms of the ePaper? Secondly, was that already baked into your expectations? And thirdly, to what extent do you think that, that Walmart deal will now trigger other Tier 1 supermarkets and retail players to sort of accelerate their ESL strategies?

Normally, we don't comment too much on our customers, even end customer, but we -- I can give a bit flavor of it. So for the strategic relationship between Walmart and SES, that was under our expectation. That's why we spent efforts on the capacity expansion. However, I think this good news in terms of the shipment, I don't think it will be -- affect that much this year because the total installation from that news is around TWD 60 million to TWD 80 million and it may take some time to do now. So I would say, more contribution would be happening not this year, I think for -- it should be for next year and going forward. And further, within this trigger other first-tier retailers -- to install ePaper. We believe so, but hard to comment when it will be happening. But we definitely see this positive impact along with this good news.

And just last one, were you able to comment if you're the exclusive supplier to that or can you not comment?

If you are talking about the ESL ePaper tag, this perspective, I believe we should be the only one who can supply the ePaper tag to SES-imagotag and even on the rest of the key players in this industry.

Next question from [ Tristan ].

Just 2 questions on my hand. One is -- I want to go back to the first quarter, your commentary about doing more module business for the ESL tags. I'm just a bit confused, why was there the need to do more module business for the ESL, when -- was it the decision just to backfill your module capacity or this is by requirement of customer for you to do more module even though essentially, that's something that you don't really have to do, you can just do the material if you wish? So I think just the reason behind that? And I think in terms of the -- I think, 2Q, you guided that the module part of the ESL tag will be lower. But I think moving forward, in general, what is the rule of thumb that -- for the proportion of module for the ESL tag? That's my first question. I have another one.

Yes. First, I think that's a good question. I also want to take this opportunity to explain further. [ For ] -- Let me just leave the CE business aside. For the IoT or ESL, reason we want to do the module, When -- Let me take on ESL, for example. Whenever our system integrators, they want to launch a new ESL product or new ESL technologies, they always want us to help them to work on the module manufacturing first because we know ePaper best, so we can take care of the module assembly very well. So they want us to do it when they get more matured and hand it over to their module maker. So that is the reason behind. So coming back to your question, it is not that we intentionally want to do more ESL module. Basically, that's the requirement from the customers.

Sorry, if I could just clarify, when you said new product ramp, did you mean that when customers are moving from -- for example, from 3 color to 4 color or do you mean when customers are going from no ESL to ESL adoption?

That's one of the examples. And also, retail signage is getting popular. Apart from the 1-inch, 2-inch small size, the price tag, they are planning to use, for example, 7-inch, 5-inch, 9-inch, that sort of retail signage, that sort of things.

So to follow-up on that is, if the -- whenever a customer want a total solution from you at the beginning or at least -- or when they go into mass production -- So for example, in the case of -- just, for example, like the Walmart, that kind of where there's a $60 million to $80 million shipment ramp up, does that mean that you -- at some point you are forced -- you have to be forced to expand module capacity more since you probably won't -- since you're tied up with the Walmart customer, and then you have more other customers that also want a total solution when they're ramping up as well?

Of course, we have the right to choose. We won't be really forced. So -- And I think the requirement is not directly from Walmart. It should be from -- the system integrator choice.

And then my second question is to your point on the profit sharing schemes not yet kicking in. If I could just ask if there is a -- what is the evidence or what is the turning point or what is the catalyst that makes you -- that's going to have you push out the profit sharing scheme? For example, let's say that -- is it something like -- let's say, a customer wants to migrate from 2 color to 4 color, but they want to keep the [ final ] -- the cost of the tag the same. So that's kind of the situation where you will push the price sharing scheme to customers where for 3 color or 4 color, you'll keep the -- for you the price will be the same so that you kind of give that back. Is that the -- kind of the situation where we should think about it?

Yes. For example, if the -- let me take your example. If a customer is thinking to switch from the 3 color to 4 color ESL tag, so we will consider the profit sharing scheme because as long as a more full color ESL tag will be used, which means we are in a better bargaining position in terms of the volume procurement, and the more new product we manufacture, the better operational efficiency we can achieve. So those savings and all that, we are happy to contribute back to our customers. So it would work like that. We basically will not apply the profit-sharing scheme to the old products or old technology because we try to encourage our new customers to adopt, to consider our new technology in order to grow the total market share of ESL product.

And then sorry, just one minor follow-up on that. So I guess the gross margin -- long-term 50% gross margin, probably not the -- it doesn't sound like it's the best metric to measure. If I consider the mix of the existing capacity that's fully depreciated versus the new capacity that's adding in with depreciation. If I look at the business from perhaps the ROE and ROI perspective, is the consideration that even if -- even for the profit-sharing schemes, we will continue to keep -- we can keep ROI or ROE -- let's say, ROE above 25% or we are okay with saying ROE going back down from [ 2022's ] 25% or within the end to more like a 20% range? Or what is the rule of thumb on -- I guess, the rule of thumb for how aggressive you'll on the profit sharing and maybe how that reflects on our return on investment in general?

Yes. First, there are so many moving parts along with your question. So it's very hard to comment. But once again, those profit-sharing schemes, by the time we implement basically we will make the best interest of the company and the shareholders. We won't just make a decision and try to affect the best interest of the company in order to win more market share of ePaper products. So we basically will cautiously make a decision in terms of the profit sharing scheme. Yes, not to worry too much about this.

Next question from [ Saurabh ].

So just one question. When you said your GPM went down in Q1 because of modules you made for your new applications, can you give some color -- I mean to say, like as a percentage of sales, what these numbers were this year versus last year?

Come again. Your question is relevant to the gross profit margin -- relatively lower gross profit margin in first quarter?

Right.

Okay. So let me explain the business [ model ] for our 2 main business sectors. The one is called CE, consumer electronics. So basically, when I'm talking about CE, it includes eReader and eNote. So the business model is we ship the display -- ePaper display module to our customers. So we are using our ePaper and we also procure external components having assembled and it turned out to be the display module. So as you can imagine, the gross profit margin is relatively lower than the material sales, that I'm going to talk about next. So another big business sector, it’s called IoT. IoT, the majority of it basically is the ESL, electronic shelf label. So under electronic shelf label, we only supply the ePaper material to our customers. So that's pretty much everything in-house. So the gross profit margin is relatively higher. So last year, the blended gross profit margin was around o54% something because we sold more ESL. So as you can imagine, a more material -- ePaper material being sold. So the blended gross profit margin was relatively higher. And this quarter, the gross profit margin is less than 50%. Of course, we sold CE business that is relevant to module. But under ESL, as I explained earlier, whenever the customer require us to do the module for the new products or new -- by using new technology, we also do the ESL module, not very big, but it happened to be more in first quarter. So module sales -- if more module sales relatively are lower gross profit margin, so that turned out to be the gross profit margin in the first quarter was relatively low. So I hope I answered your question, yes.

Sure. But sir, just let's say, if I connect it with this, then it's all because of change in mix. That's why the margins are down. But you, at the company level, have not kind of taken a decision that we are, let's say, kind of increasing penetration, so we are reducing our prices. So that -- because in last con-call, even in this con-call, [ someone ] mentioned that -- that was the kind of strategy you were saying in your previous con-call. So is there -- so what's the strategy then? Will we be increasing penetration by reducing prices or that's not the case?

So I think that fundamentally, the strategy for E Ink is to increase the market share of the ePaper products and more applications being used. So that is a goal. So in order to achieve the goal, we need to manufacture more ePaper to achieve the goal. However, when we increase or expand our manufacturing capacity, we will focus more on the ePaper production capacity. And for the existing module capacity we have, we basically will not increase it anymore. So coming back to your questions, whenever new products, new applications going forward, we will try our best to manufacture more ePaper material. But if once our module capacity is being fully utilized, we will ask our module partner in our ecosystem to help out. So if you are talking about the product mix in the long run, I would say it should be more ePaper material being involved in whatever business sectors in the long run. I think currently, ESL, we are mainly focused on the ePaper material. But for CE, basically, we concentrate on the module sales. But in the long run, for example, for the eSignage we see the potential. I think at the beginning -- we will still help our customers to work on the module at the beginning. But in the long run, we will still focus on the ePaper material.

And let's say, when we talk about eReader, so what is your expectation about this color eReader taking off? So all your clients, they have come to you and already worked on their test case for launching color eReader or at this moment, not all of them, as you know, are ready with the product, and when do you expect them to be ready?

Please come again. I don't quite get your question. I'm sorry.

Sorry. So I was saying when we look at eReader -- so you're coming up with new product, color eReader. So I was curious to know all your clients, they are ready with the color reader and they are just waiting to kind of mass produce it and launch it into the market or not all of them are ready, and if they all are not ready, when do you expect them to come to you to be ready with the new technology?

I would say some of our customers, they are ready for our color technology. So I think first quarter and even second quarter, they have the new color eReader being launched soon, but for other customers -- I think you have the customer in mind or one of our biggest ones. They are -- I wouldn't say they are not ready for our color technology. A lot of discussions [ now ]being made. So whether -- how soon or whether they will take our technology or not, it's hard to say at this moment, but a lot of discussion going on at this moment, and we stay quite positive for this. Because that's so much sensitive, yes. So that -- I only can give you this sort of color to your question.

And very lastly, like you -- just one question maybe very quickly. When you say ePaper, you want to increase ePaper market share in future. So do you have, let's say, any target in mind because new applications of ePaper are coming in? And obviously, you are engaging with new industries, new clients as well. So can you give me some color that this is what you think the markets -- and at this moment ePaper is [ this ] much market share, let's say, next 3 to 5 years is what we expect?

Sure. Let me put it this way, our new color technology, we really want to utilize it to trigger the further growth of the CE business. So let's see whether the company in your mind will be onboard or not. But like what I say, I stay positive. So let's wait and see. And for ESL, I think the strategic relationship between SES and Walmart, we believe it will trigger other big guys to consider the ESL. But how long -- I mean, how soon, when, it's hard to comment, but we do see the potential. And for the new application we basically think outdoor signage has full potential. Why? Few reasons, I think currently, the electricity issue in Europe, that really limit the outdoor signage advertisement company to run their outdoor signage business because there is not enough electricity for them to run the LCD or LED eSignage. Second of all, due to the labor shortage, even the conventional, the billboard, they don't have enough manpower to replace the advertisement. So with our technology -- basically, it's very power efficient. And on top of that, it doesn't produce light pollution. And since everything is digitized, so we believe it will be very, very good tool for the outdoor advertisement company to consider. And we do see the potential of this new application.

The last question from [ Kenny ]..

I have 2 questions. I just want to go back to the full year guidance. 2023 now is looking like low single-digit percentage growth. It seems a little bit lower than previously guided at high single-digit percent. I'm wondering, is it caused by a slightly weaker outlook for IoT or actually IoT demand is in tag, but it's more because of CE's weaker demand?

I would say the demand from ESL are still in [ tag ] in the long run. And the downside is coming more on the CE.

If I may squeeze in one more follow-up there about the signage. I assume these larger-sized products, entry barrier will be higher, but could you give us some more color whether it will be due to equipment or materials or any other technology factors? I'm wondering, if you have even a greater competitive advantage in such larger sized products compared with small size price tags?

Kenny, you are talking about entry barrier for the large-sized ePaper signage, right, not another competing technology, right?

Yes.

Okay. A few points. The first one, we need a bigger sized equipment for the outdoor signage. So that's the first thing, right? And second, not only on the ePaper equipment, also the module because the module of equipment we have on hand basically is for the smaller sizes. So we need a bigger size module machine. But basically, even we expand, it's going to be the limited expansion. So once again, for the module capacity, we definitely will rely on our module partner in our ecosystem in the long run. And third of all, one of the very likely for the outdoor signage, the technology would be Kaleido Outdoor, as I mentioned earlier in my presentation. So we definitely need a bigger printing machine. So I think that though -- I wouldn't call it obstacles. They are -- I mean, those are the demand points that we have to consider for the growth of the outdoor signage business, but we are -- I mean everything is under planning now and so far so good. We are moving positively. I think that should be the end of our conference.

Thank you. Thank you for joining us today, and you may now disconnect your lines. See you next quarter. Bye-bye.

Thank you. Thank you, everyone. See you next quarter. Bye-bye.