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

Good afternoon and welcome to E Ink's Second Quarter 2023 Earnings Call. [Operator Instructions] Today's conference is being recorded. The webEx replay will be available on E Ink's website after today's conference. Joining me today are CFO Lloyd Chen and Finance Center Senior Director Patrick Chang. Now let me turn over to Lloyd.

Thank you, [ Winnie ]. Good day, everyone. Welcome to E Ink's Second Quarter Earning Conference. Before we start, you may take a quick look at those photos shown on the cover page. I think one bit is the outdoor signage that you might be unfamiliar with. The other is there's a new product being launched by international brand. It's called Kohler. They launched this smart toilet being showcased in China international kitchen and sanitary equipment exhibition. So as you can see, we are extending our application from CE, ESL outdoor signage even to the interior design. So we just try to make E Ink technology, e-paper, everywhere. We try to make both the services even smarter and greener, okay? And before we start, let's look at the safe harbor statement, first. All right, next page. All right, first thing is about the first half results. The sales revenue for first half is around TWD 14.5 billion. Y-o-Y increased [ TWD 11 billion ] with 8% growth, this performance basically marks the best result in the past 12 years. Also revenue continues to grow. Both first half operating profit, net income, EPS have reached record high in the company's history. Next page. Operating profit has shown a positive trend of growth since 2019, as you can see from the screen, with a consistent upward trajectory. Next page, the assets. Basically, by first half, the total assets was TWD 6.1 billion, (sic) [ TWD 69.1 billion ], 16% Y-o-Y growth, which was increased from operating growth and financial investments. As you can see, there's also a growing net asset value per share. Next page, for the cash. Cash was around TWD 11.1 billion by second quarter. I think I mentioned this several times in the past. We try our best to utilize cash inflow from operation and investment to further financial investments into CapEx on e-paper production line. The total financial assets plus cash was increased to around TWD 44 billion to -- by second quarter. All right, next page. All right, apart from the financial, we'd like to share the continuous recognitions externally. I mean we were being honored with the [ eighth ] national industry innovation award by the ministry of economics in Taiwan, under 4 major sectors. Well, it's under -- the award is being called on distinguished enterprise innovation. And also, for the TWSE, Taiwan corporate governance evaluation, it is the first time we are ranked as a top 5% out of Taipei exchange-listed company. Basically we used to be on the top 20% in the past 5 years. This is the first year we jumped to the top 5%. We were quite excited about this. And also we received a long-term issue credit rating twA- from Taiwan rating corp. We are the only company in Taiwan under the [ auto ] electronic display industry with a long-term issue credit rating of twA-. And also, one of the leading magazine in Taiwan is called CommonWealth Magazine. They do survey every year on Taiwan top 2,000 leading companies. And we were listed as the 141st place of the overall ranking, improved from 2,011th -- sorry, 211th place in the last -- from last year. And we were also the 14th place under another category, under the company's operating performance. Last but not least, we were also honored by TDUA, Taiwan Display Union Association, for 2 awards. 1 is from SDAA, smart display application awards, for the smart medical award with the battery-less color display device; and also the Gold Panel Awards, in technology excellence [ category ], with our latest and greatest technology, Spectra 6. All right, next page. All right, next point is about the sustainability ratings. Basically this is the third year we participated one of -- also one of the leading magazines, it's called Global Views magazine, ESG corporate sustainability award. We finally won the first price for the overall performance category in electronics and technology industry. Furthermore, we again have been listed as one of the Asia Pacific climate leaders in 2023 in a report by the Financial Times and Statista. Well, that -- the list identifies the company that achieve the greatest reduction in their scope 1 and 2 greenhouse gas emission intensity between 2016 and 2021. Then also it's the third year that we've won Asia responsible enterprise awards in the category of green leadership, with the theme of solar-powered e-paper bus stop signage enabling sustainable low-carbon and smart public transportation. And the next one is this is the first year we participated ASRA, Asia Sustainability Reporting Awards, organized by CSRWorks in Singapore. We were determined as a finalist for 9 categories out of 60 finalists from Asia. And eventually we won 3 different categories: best diversity reporting, a silver medal; best supply chain reporting, also a silver medal. And the last 1 was best environmental impact reporting, in bronze. And for FTSE Russell. We also had good progress in FTSE Russell ESG rating. Apart from 99.98% green revenue due to outstanding performance, we were the first time being listed in the FTSE4Good ESG index series. And another major ESG risk rating is called Sustainalytics. We continued to maintain low ESG risk [ towards ] Sustainalytics. Next one, more recognition in terms of the sustainability. We have won the HR Asia magazine's best company to work for in Asia, 2023, for 3 consecutive years. Furthermore, this year, we received special one, digital transformation award, due to our outstanding performance in digital transformation efforts. And this award acknowledges our dedication to providing digital platforms which transform transitional employee experiences into personalized digital processes. And also another one [ thing ] happened locally in Taiwan. The Taiwan sustainable energy research foundation has acknowledged the achievement of our sustainable projects. We have won in the TSAA, Taiwan sustainability action awards; and also APSAA, Asia Pacific sustainability action awards, under 3 different projects. The first one is achieving efficiency, reducing consumption and advancing toward net zero, which -- mapping with SDG 13, climate action goal. And it [ goes gold award ]. And the second one is e-read for future; and which was awarded SDG 4, educational quality. And that is silver medal. The last one is e-paper bus stop enabling sustainable smart public transportation, which received SDG 11, sustainable city, with bronze medal. Next one. So the next one is about the renewable energy we have been purchasing. Basically we collaborate with Chung Hwa Pulp, one of our affiliates on the [indiscernible] group, to procure the first batch of biomass renewable energy certificates. We commit to achieving by -- 100 on this goal by 2030, aiming to use 100% renewable energy. Basically our approach to sourcing renewable energy not only emphasizes the additional [ energy ] but also values diversification. Therefore, in addition to our existing renewable energy sources like solar and wind power, we first-time purchased renewable energy certificates for biomass energy from Chung Hwa Pulp. We look forward to enhancing this future collaboration with them. All right, next page. And the next one is also relevant to the RE100, so we have been making continuous efforts in the utilization of the renewable energy. And we joined RE100, initiated last year, with the goal [ in a high 100 ] by 2030. So we are very fortunate to be selected as 1 of the 3 finalists for the best newcomer category in this year, RE100 Leadership Awards. And the winner of the awards are expected to be announced during the climate week in New York in September. And out of the 3 shortlist, we are the only Taiwanese company being selected. All right, next page. So this is sort of the new ESG area we have been engaging in. We are not only committed to the energy savings and carbon reduction in our operation but also places significant emphasis on the preservation of the natural environment and conservation of the ecological diversity through the collaboration with the local Taiwan NGOs; and also participation in the international initiatives such as SBTN, Science Based Targets Network; also Business for Nature coalition; also TNFD, Taskforce on Nature-related Financial Disclosures. Through those corporate engagement program, we invest resources in biodiversity conservation where it is most needed, okay? So that is all about my sharing for second quarter. And let's move forward to the Q&A session.

We are now in the Q&A session and open for questions. [Operator Instructions] The first question is from [ Jasper ].

Can you hear me okay?

Yes, I can hear you.

Okay, great. I was wondering. In relation to 2024, can you say anything? Can you give any early indications of what your expectations are for 2024 in terms of, first, ESL? And secondly, in consumer electronics, do you expect the weakness there to continue into 2024? Or is that more of a '23 story? That's my first question.

Right. [ Jasper ], before answering your question, I think it will be effective to talk about the second half this year because we just finished the earning conference in Mandarin an hour ago. We talked about what will be happening in the second [ quarter ]. So basically we are transitioning -- yes, [ Jasper ], if you don't mind, can you put on mute to avoid the echoes? Yes, yes. Thank you, yes. So basically we are transitioning our color technology in CE and ESL, which would impact our performance. So what we are expecting in second half, there -- I mean basically, for the whole year 2023, we believe the sales revenue would stay flattish. And even a single-digit drop could be possible because the guidance we had from last earning conference was we were expecting a single-digit growth for 2023, so given the statement I just mentioned -- so coming back to your question, 2024, we believe we need a bit time to get over transition. And we are pretty sure 2024 will -- still better than 2023, but to what extent it will grow, we still need a bit time to observe. But simply speaking, I'm sure the color technology would -- still better in 2023. So that might possibly trigger the growth from our CE business and even from our ESL business. So I'll just pause right here to see if you have further questions.

Yes. Maybe you can talk more about what is really driving this lower guidance in -- for 2023. Is it mainly ESL, or is it mainly consumer electronics? Is it inventory digestion? Or what exactly is driving that?

Right, right. I think, for consumer electronics, given the macro uncertainty, we already mentioned the whole year will have been relatively weaker. So that still continues. And for ESL, we are transitioning from 3-color technology to 4-color technology. So that would affect our sales performance because for the 4-color ESL technology we provide with a very competitive price. So from the system integrator's perspective, they would go for the latest technology which is 4 color now quicker and sooner. In that case, they -- of course, we are happy to provide. However, they need the new TFT. And they also need a new driver IC, so that would affect the growth of our sales revenue a bit. So that's a reason behind for this unfavorable impact.

And does that apply to both ESL and consumer electronics equally, or is it more consumer electronics?

Come again. Your question is...

You said this transition to 4 colors is putting downward pressure on your revenue, but is that in both segments? Is that both for ESL and for consumer electronics?

Yes, yes, both segments, yes.

Okay. And just...

But I -- yes, but I would say for CE, consumer electronics, due to the macro uncertainty, that part is under expectation. But for ESL, from last quarter, we thought that whole year would have grown single digit, but after we observed what have been happening, we believe the 2024 sales revenue would stay flattish, yes, more but a bit down, yes.

And do you expect any FX impact on the top line and on the margin?

I think -- you mean the gross profit or gross profit margin...

If you look at the growth on the top line. Is there any impact from FX changes?

FX. You mean...

Yes, yes. I'm wondering if your revenues are lower because of unfavorable currency exchanges in 2023.

All right, [ you have ] another question, right...

No, same. If -- I wonder if your top line growth is slower in the second half of 2023 because of unfavorable FX or currency. So...

No, no. It has nothing to do with FX, [ yes ].

Next question is from [ Alan Zhang ].

I was wondering if you could address the level of inventory right now in your system integrators and your downstream customers, particularly in China.

Okay. I think on our inventory level, from E Ink's perspective, are regarded as a healthy situation since, as you can see from our financials, our inventory has been decreasing, so -- but if you want me to comment our customers' -- especially downward stream, their inventory level, I think it's hard for me to comment, but I would say, during the technology transition, I would say, it possibly affect their inventory digestion a bit, yes. But I believe that would be the -- that's a transition that we have to get through, yes.

Okay. That's very clear. Could you -- for my second question, could you mention what order trends have been like inside China and in your other geographies?

I'm sorry, [ Alan ]. Can you please come again? What order -- yes.

Yes, how your orders; your sales trends have been for ESL within China and, say, for your European customer or your Korean customers; how that sell-in has been going.

All right, [ Alan ], let me put it this way. We don't -- there are few types of business models. For ESL, because we are supplying e-paper material, of course -- eventually goes to the system integrators, but we don't take orders directly from them, even they are our European end customers and Korean end customers. So we normally take the order from their module samplers. So the majority is still in China. So their orders, we believe, is reasonably okay, but I think, as I mentioned earlier, we are transitioning our color technology in ESL. So moving from 3 color to 4 color. So they would rather go straight to 4 color directly. However, in order to make it work, they need the support from the TFT LCD maker with the new products and also new IC drivers, so that would affect their order [ base ]. So that's why we -- at the beginning of the call, I mentioned our guidance, where we changed. For the 2023, the whole year, sales revenue will be changed from single-digit growth to flattish or even in a single-digit drop.

Next question is from [ Selena Li ].

I have 2 questions. So on the consumer electronics. I mean the migration from black-and-white e-readers or e-notebooks to color. Do you think that the pause is like really a macro problem? Or is there something structural that's preventing that transition from happening? Are people not doing e-readers as much? They're reading books on their phones. I don't know, but just your views on that...

Okay, all right. So shall I answer your first question, first?

Yes, yes. Go ahead, yes, [ because it's different ], yes.

All right. So for CE, definitely macro is one of the reason for relatively weaker growth. And another reason was the one I just mentioned. We are transitioning from black and white to color. And we -- for CE, we have the -- 2 major color technology. One is called Kaleido. The other one is Gallery, and we basically offer them for our customer. It turned out to be Kaleido is much more popular at this moment. So the theory of the Kaleido technology is we still use the black-and-white e-paper, but we print the color onto it. In other words, in order to make it work, we need the new printing machine. So the Kaleido goes quite well from the customers, but it go beyond our expectation, so we need more printing machine to meet this growth. So coming back to your question, for CE, the slowdown: I think, one, it's from the macro uncertainty because it's highly relevant to the consumer electronics. The other is the limitation of our printing machine, but we are working on it. It's not so much a problem, yes.

Okay, great. And then my second question was more on like ESL. So obviously the growth over the past few years has been driven by Europe or EU. And the -- everybody is waiting for the U.S. penetration to go up. And obviously we know about the Walmart and maybe a small -- a few small grocery chains, so how do you see that progressing in the next year or so, U.S. penetration?

Right. We stay very positive about the potential growth in the North America, but it's very hard for us to comment how soon they will entirely rollout. But we believe they're growing momentum. And it's still impacting in the long run, definitely, not only in the North America. I will say even globally, yes, globally.

Next question is from Kenny Chen.

Could you hear me?

Yes.

Yes. I've got 2 questions. First one is regarding the module, ESL module, sales. I'm wondering if module, ESL module, sales in second half of this year will be higher or lower in (sic) [ than ] first half of this year. And how can we expect this trend in 2024 given your business strategy?

Okay. For the ESL module, let me put it this way. We basically get it done in our Yangzhou module factory. And we have limited capacity there, so there's no way for us to do everything, so we only help our customers on the new product or new technology being launched. So we help them at the beginning of the launch and then hand it over to their module samplers. So coming back to your question: This will not be the majority for the ESL business. Basically we just help our customers during the initial stage. So I will say, 2024, 2023, the percentage should be similar. And it's hard to say at this moment because it all depends how we best utilize our module capacity in our Yangzhou factory. For example, if CE business will be taking off better than we expect or the outdoor signage or even indoor signing goes well in 2024 -- we might figure out how to best utilize the module capacity, but for ESL the majority is still based on the material sales, not the module sales, yes. Basically for modules we just help our customers for -- to help them to get through the initial stage of the new product because no one knows the ESL module better than us. We know how to do it best, yes.

Okay, very clear. My other question is about the OpEx. I know the company is enhancing technology and capacity expansion, but I'm wondering. How can we expect the absolute numbers of OpEx in coming quarters? And for example, in first half of this year, the average is around $1.7 billion to $1.8 billion. How we -- will this change given your initial thoughts on 2024 that sales could be better than in 2023? Can we see some leverage on operating margin due to higher scale?

Right. So in general for CapEx, the annual CapEx level is around TWD 5 billion to TWD 6 billion. That guidance remains there, but we only book the fixed assets after we get everything clean. So sometimes, even we spend, but we haven't booked under fixed assets, so you haven't started the depreciation. But in general, $5 billion to $6 billion CapEx is our guidance for this year and even next year, yes.

Next question is from Jerry Tsai.

Can you hear me?

Yes, yes.

Great, okay. So I think I just want to dig a little bit deeper about this technology transition, especially ESL going from 3 color to 4 color. I just wonder if this -- is this request for procuring this 4 color rather than 3 color is -- just something happened recently? Or it's something that people have been kind of -- yes. I just wondered about the timing because I think the 4 color has been out for some time, and I'm just wondering. Why are -- we just know about this now? And why are we facing -- I mean, why is the supply chain -- seems to be facing so much kind of obstacles? Yes, that's my first questions, yes.

Right. So Jerry, I think -- let me put it this way, that the 4 color technology, you guys have heard of it definitely from the Touch Taiwan, that exhibition, but by the time you heard of it, it doesn't mean that the technology was already ready. So there are some timing difference by the time you saw it in Touch Taiwan; and then we get them ready, the time when we get them ready. So there is a timing difference. That's the first thing I would like to explain. It doesn't mean it has been there for quite a long while, no. You heard it in Touch Taiwan because that's our new technology. It doesn't mean it's already ready by then. So this -- the E 4 -- E 5, basically 4-color technology, it's happening this year. So it was not ready next year, so basically it's just a new stuff. So after we offer to our customer and with -- also with very competitive price, from customers' perspective, they want -- go to the 4-color technology more. So that require the support from the TFT LCD maker and drive IC maker. So that would affect our overall sales performance this year, yes, but from a long-term perspective, we believe -- the demand still intact in the long run, yes.

Sure. Lloyd, also when you say that the -- you're pricing it competitively, it doesn't mean that you're selling 4 color at a discount to 3 color, is it?

Not really discount. Jerry, let me put it in this way. When we do the pricing, of course, we have our own mechanism, but we expect that the 4-color technology will go well. So we will consider those benefits, the -- coming from, for example, operational efficiency; and the volume discounts that we -- perhaps we can get from our vendor. We basically factor [ that go in ]. So that's where the competitive price is coming from. It doesn't mean we set a regular price and then we provide a discount to our customer. It doesn't mean like that, yes.

I see. Maybe along the same line, I'm just wondering. In such a case, should we be quite positive about the demand once this transition is over? Because if the underlying demand or adoption of ESL is still quite structured, quite intact, then this is kind of like just temporary pause. And there should be -- some kind of pent-up demand happens when the transition completes. I'm just wondering why you don't sound like you are more positive than -- and for the first one -- for first half next year or 2024...

We -- yes. We believe so. When the transition is over, definitely the growing momentum will go back up. I think, in our earning conference call last session, people -- one of the analysts asked how do we see the 2024. Basically 2024 will be better than 2023, but how much it will be better, we need some time to observe the color technology transition both in CE and ESL, yes.

Sure. Maybe just last question is kind of like a housekeeping question. Just I think you are expanding one more line in 2024 and also another one in 2025. I just want to know about you have some idea about the timing of 2024 line opening. And also, for the 2025 new line, I think it's supposed to be a larger size. Are you still -- is there any change in size that maybe it get bigger? Or it will stay the same. Just kind of wondering if -- any kind of design change for that, for the new line in 2025, yes.

For the new line in next year, we believe we can get the equipment moving in the first half. And we can start production in second half, yes. That's for the new line in 2024, but another one in 2025 -- it's hard to comment at this moment, but I will say definitely will not be the first half in 2025. I think it should be second half, yes.

Now we will take our last question from [ Jasper ].

Just a brief follow-up from my side regarding your guidance for the rest of this year. You said it could be flattish or it could be down single digits. Is that for '23 as a whole, or is it for the second half only?

2023 as a whole.

Okay, okay, so that implies that second half will be down quite dramatically given that you grew like 7%, 8% in the first half, right, yes, okay. And that -- okay. So this transition to 4 color really accelerates in the second half.

Right, right.

Thank you for your time to [ follow us ]. And see you next quarter...

All right, thank you very much. Bye-bye.