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

Good afternoon, and welcome to E Ink's Fourth 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, Meny. Before we start, I would like to share some information to be included in our cover page. In the past quarter, E Ink achievement and ability was recognized in its continued inclusion in DJSI, securing our position in both our DJSI World and DJSI Emerging Markets and also the S&P Global Sustainability Yearbook 2024. We've got to talk more later. In addition to those indices I just mentioned, we have taken significant steps towards environmental sustainability by joining the Taskforce of Nature-Related Financial Disclosures, TNFD. This initiative was in our early adopter. Basically, of this move highlights our commitment to contributing to the global efforts against climate change and biodiversity loss. Beyond this, we [indiscernible] involved in various initiatives and ecosystem restoration and sustainability. We definitely will also talk more later. Next page. Before we officially start, let's take a few seconds at the safe harbor statement. All right. Next page. I think right after CS exhibition, we received quite a few inquiries. They asked why there's no BMW concept cars being showcased this year. Actually, we have been working with BMW continuously. So let's take a quick look at the video clip first and then I'm going to talk more about the new project that we have been working with BMW. [Presentation]

Okay. So this is BMW i5 Flow NOSTOKANA. Basically it's all about the combination of innovation, creativity and design between E Ink and BMW. We have been working together basically to help drive rapid color changing innovation and adoption. Way back in 2022, BMW iX Flow featuring E Ink had the ability to switch from black to white at the push of a button. And then the black and white concept evolved in 2023 into the first multicolor automobile implementation of E Ink Prism 3 technology with BMW i Vision Dee with respect to the operational design, this one, the BMW i5 Flow NOSTOKANA has been outpaced with 1,349 segments that can be individually controlled, enabling even more colors and patent designs. So that's about the BMW i5 Flow NOSTOKANA art car. Next page. So talking about the financials. 2023 whole year, sales revenue was around TWD 27.1 billion. And the non-operating income was TWD 2.54 billion. Basically the Y-o-Y decline was mainly due to the color technology transitions, more investment on R&D and key talents as well as a decrease in royalty income. However, the net income for 2023 was still historically second best. So for the operating profit, relatively lower year-over-year operating profit, but still historically second best. So once again, the Y-o-Y decline was mainly due to the color technology transition, more investment in R&D and key talents. So once again, our net income still also historical second best. The total assets that was around TWD 74.0 billion versus TWD 65.1 billion in 2022 on the year-over-year increase of TWD 9.4 billion, about 13% Y-o-Y increase. Total assets increased from operating and financial investments. The continued profitability of the company basically led to an inflow of the cash from operations, resulting in increasing cash, financial investment and net asset revenue growth per share. For the cash flow, the cash position was around TWD 9.7 billion by end of last year. We basically utilized our cash inflow from operation and investment and further to the financial investments and also, of course, to the CapEx on the e-Paper production line. The total financial assets plus cash was increased to around TWD 48.9 billion by end of last year. And for the dividend payout, let me start with EPS. EPS last year was TWD 6.85. The dividend distribution going to be TWD 4.5 per share from the value perspective of sales last year, but the payout ratio is going to be increased from 50% to 66%. Once again, I think right after the earnings conference last quarter, last year, we had the third quarter conference, there's still lots of inquiries about our long-term growth. So I would like to spend a few minutes to talk about this. If we look back at our financial performance over the past 5 years, basically driven by COVID-19 economic impact in global ESG initiative. Since 2020 the demand for e-Paper has experienced rapid growth. Due to the e-Paper capacity shortage and uncertainty in the supply chain during the pandemic, our clients such as those vendors or system integrators, they proactively stocked up, leading to our sales revenue exceeding the expectation in 2022. However, 2023, the color technology transition, as I mentioned earlier, has extended the transition period causing a big slowdown in business growth. But if we look back over the past years, the sales revenue increased modestly from TWD 13.6 billion in 2019, as you can see from the trade chart. So TWD 15.5 billion. They jumped to TWD 20 billion and further exceeded our expectation, reaching TWD 30 billion and that's what the sales revenue. And for the operating profit starting at TWD 600 million in 2019 and grew to TWD 1.8 billion and then jumped to TWD 3 billion and exceeded our expectation again reaching TWD 9.2 billion. We already established a track record. So comparing 2023 to 2022, indeed, there were some deceleration in business growth, but we still anticipate a continuous growth, driven by our new retail solutions, color consumer products and even large-sized color sides. Every quarter, basically, we share with you some external recognition and some of the sustainable activity we have undertaken. Recently we have received multiple awards of as you can see from the screen of BTGB, Best Taiwan Global Brand. We were ranked 21st with the brand value USD 101 million. And also our e-Paper products and for multiple awards from, for example, of Taiwan Excellence and also from [ Hsinchu Science Park ] Innovative Products. And also, there's another recognition award is called Taiwan Best-In-Class 100. Basically, it's all about the foreign investors recognition. And we were being selected as the 16th among top 100 foreign institutional investor in Taiwan. Basically it is the recognition of our acknowledgment by the foreign investors. We believe on biodiversity conservation is getting more and more important. So we have actively engaged in a series of environmental protection activities. So as you can see from the screen, in 2023 last year, E Ink Group from group perspective, we achieved 36% renewable energy use globally. But for our local U.S. sites already reaching 100% of renewable energy use and also our Yangzhou factory recently obtained ISO 50001 Energy Management System certification. And also we have conducted one of the most important activities by collaborating with our ecosystem partner eReading for the Future. We also successfully conducted that project last year. Also, we worked with [ Kowchong ] [indiscernible] Hospital. This project demand us on production for flying elephants. Basically, we help the hospital to implement a paperless digital backhaul system, basically alleviating the burden of the medical care. So for those nurses, they can spend their valuable time of the most important medical parts. And also support from the Taiwan Environmental Information Association, we're also organized the first nature conservation season to promote environmental protection. Okay. And more recognition from the sustainability, basically, as you can see from the screen of the most prestigious enterprise top 10 and also the sustainability report. Under this category, we [indiscernible] and also words such as private leader, sustainable supply chain, social engagement, enterprise wellbeing and also our growth through the innovation. And last but not least, as I mentioned earlier, we were -- we are the member of Dow Jones Sustainability Indices, DJSI, under the world and emerging market. Next page. To be extended from the DJSI to S&P Global, we even secured our place among the top 5% of enterprises with the electronic equipment instruments and the components of industry ITC boasting an impressive score of 89 points. The sustainability yearbook basically evaluates over 9,400 large operations across 62-month global industry selecting only 759 leading companies based on their sustainability performance and we are one of them. Next page. Looking at the CDP results, CDP is the abbreviation of Climate Disclosure Project, we have participated -- this is the second year. Basically, our rating was improved to A- leadership grade from the previous B management grade. And we definitely believe there is room for improvement. So we definitely will work harder to get better rating. And also for another initiative, it's called water security management. This is the first year our participation. The result was a B management rate. Definitely, there is a room for improvement. So we will endeavor to improve our water security management. And from the environmental protection perspective, we definitely care for nature. So we support the environmental and promote green life in variety of ways by cooperating with internal employees and external green organizations. So as you can see from the screen, we participated several important activities. One of them, basically, there's a quite famous technological form is called Alibaba, globally in Taiwan, we basically help to restore of the habitat. And also we provide the volunteer of service with the Nature Valley Trust to remove some invasive species. Internally, we also hosting the green light family day to mitigate the plastic use and the environmental pollution. And last but not least, we have also become one of the early adopters of the Taskforce of Nature-Related Financial Disclosure, TNFD. So joining the ranks of 320 companies and organizations worldwide. Basically beyond sustainability reports that's something we've already prepared and published and we're going to integrate TCFD and TNFD framework by their framework according to the disclosure -- what I'm trying to say is the disclosure framework from TCFD and TNFD, we definitely will disclose more financial information. And through those disclosures, we definitely can enhance the transparency, helping existing investors that given the potential investors in better evaluating and understanding our sustainability performance. So that is my sharing for this quarter. We can move to the Q&A session.

[Operator Instructions] Our first question is coming from Jerry Tsai from JPMorgan.

Just a few -- a couple of questions. First of all, on the -- can you tell me for the eReader, do you expect a growth year? And if that's the case, is it mainly driven by unit or content? And then I have 2 -- couple of other questions.

Yes. Jerry, basically for the CE business, both in eReader and note, we believe we're expecting growth this year. But whether it's going to be driven by -- how do I say? I mean, to what extent it will be growing I think it's a bit hard to say because one of the driving -- drivers is going to be our current technology. So some of our vendors, they are working on their new products. So we're going to have a better picture when their product hit the market. So in principle, what I can tell is we are expecting the growth. But to what extent, we still need some time to observe. So coming back to your question in terms of the units, I think it is hard to share at this moment. Yes.

No problem. Yes. My second question is related to ESL. I think the revenue was down on a Y-o-Y basis last year. But if I look at the -- from the end market perspective, it still grew in 2023. And based on the SI's guidance, I think looking like 2024 will be another year of strong growth. In other words, in terms of end market, the 2024 should be a lot bigger versus 2022, which is a high year for you guys. Is it possible that ESL could challenge the 2022 revenue scale or even bigger for this year?

Yes. Jerry, I mean, that could be possible. But what we are working on and what we are working with our partner in our ecosystem is how to smooth out the inventory issues and we try our best work with them to resolve the issue by end of this quarter. So without the destocking issue, without the burden around the inventory, definitely we can move to the new chapter. So whether our performance is going to be over 2022 or not, it's hard to say at this moment, but once again, I think for 2024 ESL, basically, we are expecting year-over-year growth if we compare with 2023. So 2022, of course, we received the forecast. We have a good visibility, but I think it's still a bit early to comment the comparison between 2024 and 2022. So let me hold my comment at this moment. Yes.

No problem. I think maybe my last question is sort of like a follow-up to what you just mentioned. You talk about sounds like your customer may be trying to -- if I read it correctly, your customer is trying to resolve some, say, legacy product issue, i.e., the [ 3 cutter ]? And then do you see any kind of risk that you maybe had to share some of the burden financially? Or is something maybe you're helping up, but you don't really have to fork out some money to help them to do that?

No. We are not really granting the financial support to them. But what the collaboration and cooperation, I'm just referring to basically it's from a technical perspective. Yes.

Our next question is coming from Derrick Yang from Morgan Stanley.

I've got 2. So the first one is regarding your margin. Could you give us some color or guidance regarding your gross margin and operating margin outlook in 2024? Can we use 2023 as a reference plus some operating leverage? So that's my first question. The second question is that during the Mandarin call, you mentioned that your H5 production line is going to be wider on dimension versus existing H1 to 4. Could you give us some more specific number about the percentage of the -- or how much bigger or how much wider H5 is versus H4? And also how much wider is H6 versus H5? That's my 2 questions.

Right. So Derrick, first question about the gross profit margin. Historically, the gross profit margin last year that was around 53%, 54%. So one of the key components decide the level of the gross profit margin is the product mix. So it's been hard to say how the product mix going to be in 2024, because on the one hand, we are confident our cloud technology. On the other is the destocking issue will be gone by end of this quarter. And our ESL business start running again. So in this scenario, basically will be helpful to our gross profit margin. So it's hard to say what level of the gross profit margin is going to be for 2024. But I think the guidance we have given previously was, I think, 50% or slightly above to be able to maintain in 2024. But once again I still suggest you guys don't look at our gross profit margin too much. What we really want to achieve is the long-term growth. So we really want to open up the e-Paper market share. So that's why from ESL, a product ASP perspective, we want to provide more competitive price to the system integrators. And for the CD business, I think 1 hour before we just had the earning conference in Mandarin, [ Johnson ] talked about for our color CE product and the pricing also going to be very competitive. So that could affect our short-term gross profit margin a bit. But by checking up the sales revenue and our gross profit dollar automatically will also go up. So I don't know if I answered your question. What I'm trying to say is for the gross profit margin, 50%, slightly above for 2024, we should be able to maintain. But our main focus is still how to provide more competitive pricing in order to open up e-Paper market share. That's our long-term goal. Derrick, do you -- and the second question is H5, right?

Yes, H5 and [indiscernible].

Yes. So for the H5, yes, we endeavor to get it done by end of this year and hopefully, we can start the mass production first quarter next year. And the size of the equipment, indeed bigger than the production for H1 to H4. But from capacity perspective, the more we manufacture, the better yield we're going to be. So it's hard to say how much more it can be increased. But in general, I think 1.5x or even higher, depends on the yield, depends on how experienced we can be from a mass production perspective. But I think 1.5 to 2x, that's something you can consider. Yes.

That's for H5, right? How about H6? You say even bigger than H5?

That could be bigger, but let me hold my comments on the H6 because we do have a plan and we already shared the plan. We try to get that ready by end of next year. Hopefully, we can start the mass production from 2026. But everything is under preparation. So the capacity H6 would be bigger than H5, but to what extent? Let me hold my comments on that, yes, because there is still some moving parts along with that.

Sure, sure. And maybe one small follow-up question on the margin side. You say that longer term, you think 50% or above gross margin is satisfactory to E Ink. And if you look at 2023, the full year was 53.3%, would you consider that as a so-called acceptable level?

Derrick, come again. Come again, your question. You mentioned something about the gross profit margin for 2023, right?

Yes. Yes. Because you say that 50% or slightly above is a target gross margin for E Ink in the mid- to long-term. And my question is that if you look at 2023, your gross margin is 53.3%. So is that a level that fits into your criteria of acceptable level?

Yes or no. Because 53% for 2023, that's based on the product mix, 50% for CE, 50% for ESL. So as I just explained, I don't know what the product mix going to be for this year and even going forward. And especially we stay very positive about the outdoor signage. So if potentially the outdoor signage or indoor signage business kick in, it has more portion in our product mix. That could decrease our gross profit margin. However, our gross profit dollar might be increased accordingly. So it's sort of about the combination of the product mix and how much value it can be increased and those benefits being generated from the operational efficiency you can read. So it's kind of hard to say. But I think if you want to build your model, I think -- just my guidance to be 50% or slightly above seem to give you margin. Yes. So that's something I can provide at this moment. Yes, I do see few questions online. Let me take a quick look. Right. There's a question about our [ One Ink ] factory construction. So for that construction project, yes, basically more likely will be started second half of this year, yes. So that's for the ongoing construction. Right. And there's a question about the anticipation, first launch of E Ink cars, I think more relevant to BMW. For that one, I think it's hard to say because they're still on the regulation issues. But for the branders, they have a lot of initiatives and creative ideas how to mitigate the impact from the regulation. So we do see the positive momentum from that perspective. But it's really hard to comment when it would be happening. But once again, what we can do so far is, for example, for the cars and even for the mobile phone cases, they will all using our Prism technologies. So what we can do is we're going to enhance our Prism technology and widely promote to more potential customers. So basically, that's going to be very helpful to our Prism business in a way. Yes, there's a question about more meetings with the investors. That one is noted, yes, definitely we're taking into consideration and try to arrange more meetings with investors and join more forums.

We see Jerry from JPMorgan have another question.

Just I think to follow the previous question on the H5. When it starts to contribute in early next year, do you expect it will be -- the main product will be for the larger size or the ESL? That's my first question. And also my second question is also regarding the larger-sized outdoor signage, which is if it's the applications used in kind of like a outdoor situation, is the E Ink technology suitable for -- given the temperature, the impact could be many different other factors that the -- based on your knowledge, is it E Ink or e-Paper technology is suitable for this kind of outdoor usage? That's my 2 questions.

Right. For your first question, how early next year is going to be for the H5 production. I think according to our plan, basically, we try to get everything ready by end of this year and start the mass production early first quarter next year. But whether we will start with the outdoor signage first or ESL, I think it's hard to say at this moment. It all depends our production plan because I'm sure our manufacturing team will break out the mass production plan for the H5, yes, at the most competitive cost. And for your second question, what was it?

Sure. My second question is that the -- how suitable it is for the -- yes, for the e-Paper technology be used in outdoor?

Right, right. We believe -- I mean, of course, that there is always the room for the improvements. But we believe we are -- it should be reasonably okay for the outdoor signage already, yes. It's all depends on the spec from the customer. But so far, there's a lot of positive discussion with our outdoor signage customers. So yes, we believe our technology is a suitable technology for outdoor signage. But it all depends on what kind of spec they are asking eventually. We are still in the process of the technical discussion with our customers. Yes, we do see 2 more online questions. First one is, what do you think the risks in 2024? And what is our comment on current inventory level at the system integrator's level? So for the risks, let me put it this way. Since we believe the destocking issue will soon be resolved by end of the first quarter. So what we are expecting now is basically growth. So for those for color products and even other color CE products, how soon we can meet our expected yield, that's going to be important. So those risks is how soon we can be there. So we have been working that and we are confident toward that. So I think in the near term, if I can be very short-sighted, I think that risks I can think of. Of course, on the macro uncertainty, I know that we have a very robust hedging policies, so FX risks, that's something we should be able to mitigate. And for the inventory level, those inventory at E Ink we believe is quite healthy, as you can see that the trend of the inventory year-over-year has been decreasing. And also the inventory level in terms of the ESL with our module assembler and even the system integrators, I believe they have been digesting quite well. Right. There's another question about the Chinese education sectors relating to our CE products. Yes, we do see a big potential for the China education market. Since our device is eye-friendly and also it is quite a learning concentration, what I'm trying to say is one of our key feature is we were not very suitable to play the video. So from that perspective, if using our devices, the learners, the students, kids can be more concentrated on learning. Yes. So we do see a very big potential on the Chinese education sectors. Let me further elaborate where is that coming from? I think for the digital learning, especially in Europe and the United States, they already use, for example, iPad, Chromebook and MacBook for the digital learning. But the students, they still need a conventional textbook and pen along with the LCD device, is why? Because they need conventional textbook to -- they also need a conventional pen to practice the math questions and also highlight the important notes on it. So what we are thinking about is we never want to replace our notes in LCD devices. What we really want to replace is a conventional textbook and those pens. So our devices can go very well with the LCD devices, plus a digital learning package. So from that perspective, are helpful for the growth of the CE market, especially in China. So no further questions coming in. So thank you very much.

So we will conclude today's conference. Thank you for your participation. See you next quarter.

See you next quarter. Thank you very much. Bye-bye.