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

Good afternoon, and welcome to E Ink's Second Quarter 2024 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 Lloyd Chen, CFO and Finance Center Senior Director, Patrick Chang. Now, I would like to turn the call over to Lloyd.

Thank you, Winnie. Good day, everyone, and welcome to 2024 second quarter investor conference. Before we start, you may just take a look at our cover page for second quarter. We'd like to share something behind the cover page. We believe the digital signage is becoming a significant trend in various advertising applications. Display mainly playing a crucial role. So, what we are showing here is shot on A2 ePoster, featuring E Ink Spectra 6 being showcased in Touch Taiwan this year. So, we believe the color display, not only for outdoor signage, but also for the retail signage is going to become a trend going forward. Okay. All right. Next page. Before we start, let's just spend a few seconds on the safe harbor statement. All right. Next page. The sales revenue for first half was around TWD 13.3 billion and non-operating income was around TWD 1.7 billion. As we mentioned previously, even in the first session, I mean, Mandarin session, basically, the Y-o-Y decline was due to the first half inventory correction digestion. But since the inventory correction has been ended by second quarter, we believe, so we believe that the growing momentum is going to be backing no momentum from third quarter. All right. Operating profit, as I mentioned earlier on the year-over-year decline, mainly due to product mix, less ESL associated with inventory digestion correction and also increased operating expenses caused by R&D and key talents. All right. Next page. So the asset side, total assets was around TWD 85.6 billion versus TWD 69.1 billion second quarter last year. Year-over-year increase was around TWD 16.5 billion. Basically, total assets have doubled in 4 years. All right. Next page. For cash flow, in second quarter, both net cash and financial assets basically increased, totaling around TWD 55.7 billion. Year-over-year increased TWD 6.8 billion. Basically, we continued on CapEx preparation to support future growth. Okay. We continue basically advance our green color technology. In first half this year, we have won several awards in recognition of our continued innovative achievements in color ePaper, energy saving and power-saving technologies. Those awards include, as you can see from the screen, the most important one, Taiwan highest innovation recognition, the 6th Presidential Innovation Award for Technology Development. And also our Spectra 6 Plus color ePaper display has won of the Excellence Product Gold Panel Award. And also same thing, Spectra 6 full-color reflective display has won the Display of the Year Award at the SID Display Week. Next page. As I mentioned just now, we continue to advance our color technology. We have made significant progress in full color and large-sized ePaper technologies. Basically, we are transitioning from black and white to color and being applied to different segments such as eReader, eNote, retail, IoT and et cetera. I'm going to talk about more in next few pages. All right. Our mission and vision basically is to get, hopefully, E Ink -- ePaper everywhere. We aim to change the world through ePaper technology. Of course, we need to work closely with our ecosystem partners to create low carbon and green, smart city. As you can see from the screen, we try our best from outdoor transportation and then logistics, factory, reading, writing, education, retail, mobile and wearable, hospital, medical, architecture, environmental. Okay. So we try very hard to make services smart and green. Next page. And we are creating a small environment-friendly world, okay, because we believe the environmental sustainability and corporate profitability are equally important. So, basically, 3 major elements in our ESG actions, for example, less energy consumption, less carbon emission, less pollution through our ePaper technology as well as the ePaper products. All right. Next page. As I mentioned earlier, we are not only focused on R&D and manufacture of ePaper material, but also actively better build the paper ecosystem through the collaboration with our ecosystem partners. All right. Next page. And every quarter, we would like to share some recognitions, which received recently. The first one, we collaborate with Hsinchu City Government to engage in ecological restoration efforts at Siangshan Wetland, utilizing the low-energy consumption and low carbon emission of ePaper to contribute to the environmental protection and biodiversity conservation. And also, we participated in the 2024 21 days of green event organized by the Taiwan Environmental Information Association and Greenvines, being also one of the company that achieved the 1.5 centigrade temperature control target in Commonwealth Magazine. That's one of their very famous magazines in Taiwan, temperature rising index for pathways. That's the name of the event. And we were also awarded by also one of the famous magazine called Global Views ESG Corporate Sustainability Award for Excellence, and recognizing our remarkable accomplishment in advancing ESG sustainability. For example, we achieved 36% of renewable energy use ahead of our planned schedule and attending the net-zero carbon emissions. All right. Next page. Last but not least, we have basically consistently dedicated in ESG actions such as energy conservation, carbon reduction and environmental sustainability. And these efforts have received recognition and support. Basically, the following outlines our initiative from 3 perspectives. The first one is rating and indexes. As you can see from the screen, we are also the member of DJSI World and also the DJSI Emerging Markets. We also got quite nice scores in Standard & Poor global. Also, we are also one of the MSCI ESG Universal Indexes. Locally in Taiwan, we have been keeping on top 5% for 3 consecutive years under one of the most important Taiwan on Corporate Governance Evaluation. So that's for rating and indexes. And we also actively joined some initiative relevant to the climate change. For example, participation in the business ambition for 1.5 [ degree C ] initiative. RE100, EP 100. Basically, we want to align our internal climate structure with those external climate-related structure to improve our climate-related ESG actions. And also the last but not least awards, we have basically attended different competition awards and tried -- on the one hand, we try to know where our weakness is because through those competitions or awards, we always get the feedback. So, we know where we can improve. But by doing so, we also get more exposure of E Ink group so we can attract more talents through those awards. So, basically, once again we have constantly dedicated those ESG actions and try to improve and enhance our sustainability. But once again, sustainability and profitability basically inside include, they are equally important. We will keep it up. And basically this is my presentation for second quarter. So, we can move to the Q&A session.

[Operator Instructions]

We noticed a few questions, online questions. The first one is from Patrick, Ashmore. The question is about the guidance on the second half outlook for ESL and eReader and also associating gross profit margin. Well, as I mentioned earlier, let me talk about the ESL first. The inventory correction has been ended by second quarter. So, we basically are expecting the growth from the ESL. So the general guidance for the sales revenue overall; the third quarter sales revenue basically will be better than second quarter. That applies the same to the fourth quarter. So, fourth quarters sales revenue will be better than third quarter. So, that's the guidance for sales revenue in general. However, if you are talking about the year-over-year, for example, ESL growth, we believe since the first half, there was some business hiccup in terms of the inventory correction for ESL. So, we don't really expect a Y-o-Y improvement for ESL. But for CE, consumer electronics, since some of our branded customers, they already launched the Kaleido devices. And the market feedback we heard were quite positive. So, we believe from CE perspective in terms of the year-over-year growth that something can be expected. In terms of the gross profit margin, the first half was below 50%. In the Mandarin session in investor conference being held 1 hour ago, one of the questions was, can we keep 50% gross profit margin for the whole year? I mean, it's hard to say at this moment since CE has been growing and ESL started growing from second half. So it's kind of hard to say, which will get a stronger growing momentum. So it's very hard for me to comment whether the whole year, the gross profit margin, can we stay around 50%? But basically, 50% in the long run, that's something can be expected. So, I just -- that's a comment for the first question. All right. Let's take the question from [ Samir ]. 1 second.

Yes. I had a couple of questions. If I can first start with ESL in the U.S., could you give us a little bit of sense on how ready are your systems integrator partners, as well as the supply chain to try and get the U.S. opportunity as a focus over the next, say, 12 months to 24 months? That's my first question, please.

Samir, good question. But normally, we don't comment too much about our SI customers, but I can give you a bit flavor. I think one of the biggest retailer in the States, they already started the business with our SI customers. So, that's basically ongoing. And for this big project, we believe it probably needs 2 years to 3 years to get everything done. So with this sort of growing momentum, we believe maybe the rest of the retailers, of course, they will wait and see at the beginning. But I believe through those successful cases that can be seen going forward, we stay very bullish about the ESL business in the American market. That's why basically...

Sorry. As you said, maybe you can't comment much on the clients, but just to give us a sense of comparison, you had decent success in the European markets. Is this customer, or the set of customers in the U.S. very different from your experience in Europe? Do you have to customize? Are your working capital requirements going to be very different? Will you require additional significant capital expenditure and resources? So, just to give a sense as to what should we expect relative to maybe the trend that you had in Europe? That will be quite helpful.

Right. Yes, once again, good question. I think that the key for those retailer is the ROI payback period. And one of the reason that for those SI, they can successfully implement ESL because the ROI and payback was relatively shorter, was around 1.5 years to 2 years. And those feedback we got from the system integrator for those American retailers, roughly slightly longer from 2 years to 2.5 years. So from the payback perspective, that's a difference we identified so far. You may ask further why there's a 6-month payback difference? Because one of the key advantage by using ESL is to save the labor cost. And we believe the labor cost in Europe is relatively higher. So, that makes the difference. And I think in Europe, some of the bigger players, they started and then some smaller players they follow. And I personally believe the similar situation can be applied to the American market since one of the biggest retailer, they already adopted ESL. I believe the rest of the players. Of course, as I mentioned earlier, they wait and see at the beginning. But for those successful cases or experience that can be seen soon, I believe, they would consider to follow.

And then from our company perspective in terms of product specifications, do you need to change or modify or customize anything? Or given your experience in doing what you have done with European customers, it's almost a similar product and therefore, no incremental resources required from our side?

That varies from SI to SI. But basically, what I can tell you is with our latest generation of ESL, latest generation of the ePaper for ESL, it can be for both, American customers and -- American retailers and also European retailers. From the technology perspective, it doesn't make a big difference. And of course, from the system integrator perspective, they use different communication system. They use different software and all that. But from ePaper perspective, that's pretty much the same. Yes.

And with the U.S. China relationships always a question mark, do you anticipate us having to do anything different in terms of manufacturing capabilities? So, do you need to start manufacturing outside of China to satisfy? Maybe if the large customers goes big scale, will we be able to accommodate the requirements given the issues that we face?

Right. Yes. Good question. Geographical risk is always a concern, I mean, for us and also from system integrators' perspective. So for -- of course, we manufacture module for our customers, but on top of that, we still have another 8 module partners, external ones. So, of course, they have a very good manufacturing capability in China, but they also already built quite a few manufacturing capacity outside China. So, they try to mitigate the geographical risks as you just mentioned. And same thing for the EMS partner that those SIs using at this moment. They try and build EMS capability and capacity outside China. So that could be a concern, but that shouldn't be an issue because our partners, even include ourselves is aware of the potential risk in terms of the geographical risks.

Right. Maybe just moving a little bit to the different product. You've been quite positive and optimistic about the media sector over a long term as your technology for color paper really gets better and the size increases. Could you just give us a sense as to how you see that development of the sector? Are you selecting one customer to start off? Are you going with the geography? Are you looking at, say, transport or medical? Or how would you define your strategy and what are the milestones that we should expect over the next, say, 12 months, 18 months, 24 months in a market that holds a lot of potential?

Right. So basically, from the -- I think that -- let me just try to answer your question from a different perspective. For example, for CE business, we work with the branders. And for ESL we work with the system integrators. But for the signage, we try to work with our end customers and also the system integrators and even our module partners. So through different partners, we try to open up more market for signage because I think your question is highly relevant to the potential signage business. So through different partners, we believe we increase more chances to broaden the signage market. So that's the first thing. And second one is geographically, of course, Europe, even the North America could be one of the biggest market. Why? Because same thing for the outdoor signage. The reason they want to switch from the conventional static, bigger size conventional signage or LCD, LED, that sort of signage using a digital solution. The reason why they want to switch from that to our solution, one of the key reasons is try to save the labor cost. And of course, one of our key features is basically we create no light pollution. But from a labor cost perspective in Europe, in North America, their labor cost is relatively more expensive. So from that perspective, of course, we will focus on those potential markets in those 2 regions. However, that's from the outdoor perspective. But indoor perspective, we also work with some branders. For example, at the beginning of our -- my presentation, we work with Sharp and also we work with Philips. And for those branders, they have their own in-house hardware and software team. So it can help us very easily to widen the market. However, we are pretty much at the early stage of the signage business. We still have so much to learn. And then from the capacity perspective because we do see the potential. So going forward -- I mean, we have been expanding our capacity. So, we built already 4 additional lines in the past 2 years. But for another 2 lines, we are working on and we are about to do. Basically, we are using the large size of the equipment. So that on the one hand, that create a more cost competitiveness for our ePaper product. And on the other, since we can make a bigger size of the ePaper, so that basically meet the requirement of the large sized signage products. So basically, that's what we are thinking at this moment. I hope I answer your questions. Yes.

Yes. Yes, you did. One follow-up on that. My knowledge on this is quite poor, but you might have mentioned about yields in your manufacturing as you get larger size. Where are you? Do you think you are stabilized? And are you now looking to optimize in terms of yield management?

Samir, come again? Sorry, your voice is breaking up. Yes.

So my question was, as we are going from smaller size to larger and bigger sizes and also in color, given that there is a technological upgrade in your manufacturing, are you able to generate yields of production that are say 80, 90-plus percent? Or will it take time for us to achieve good yields that reduce our costs over a period of time?

Right. Good question once again. Yields basically is always an issue for the manufacturer at the beginning stage of the new products. But I basically have a very good faith in our manufacturing team. We stay very confident about our yield. Of course, at the beginning of the ramp up or initial stage, we definitely would suffer from yield, but that is because we don't have enough volume to manufacture. Once as the volume goes up, we have more experience. Basically, I don't think yield would be an issue for us. But, of course, at the beginning stage, yield basically would be an issue, but it won't be an issue in the long run. Yes.

One final question. Do you have a guidance for 2025 capital expenditure as to how much money you might spend on new capacity or new manufacturing and logistics?

Right. Our general guidance, basically, TWD 5 billion to TWD 6 billion next year. Basically, same level. Same level for this year as well. Yes. TWD 5 billion to TWD 6 billion, yes. So, I see quite a few online questions. Yes. So, Patrick from Ashmore raised another question about, have we started to engage with large advertising company on signage products already and getting pre-orders? How big will the contribution from signage be in 2025 and 2026? So, I believe most of them, basically, still are in the sample stage and POC, proof of concept. So, we haven't really got firm orders from those advertising companies. And also, we also need bigger size equipment for the large-sized signage. So basically, the first large-sized production line should be ready in 2026 and we need some time to ramp up. So the possible contribution from signage, if you are talking about the big size, for example, bigger than 50%, I believe it won't be happening until 2026. But if it's below 50 inches, I think we already have some for bus stop and also for some indoor signage. They are gradually growing. Not the massive growth, but gradually growing. Another question. One question from [ William ], [ Overlook ]. Any guidance for D&A from 2024 to 2026? I would suggest you go back to look at our financial statement. But the useful year for the equipment, basically, we use for 5 years straight method. So, you may work it out by yourself. Yes. One question from [ Guildo Montana ]. What has driven very strong 63% growth year-over-year in CE in Q2? Is this related to customers stocking up inventory? Or does this reflect underlying demand? If so, what is driving this extremely strong demand? Yes, Guildo, I believe when we are talking about the inventory correction digestion, it's relevant to our ESL business. For the stronger CE growth, I think that should be associated with our color technology. Because what we got so far quite good market response on our CE, on color technologies. All right. So, we may answer some online questions. We can take questions now. Yes.

Let's take the question from [ Jennifer ] from JPMorgan.

Jennifer, feel free to ask questions. Jennifer, you may unmute yourself.

Can you hear me?

Yes. Very well.

I have a few questions on CE, if I may. So, our CE business has been growing over 40% first half this year. I'm just curious like how much of it is generated from the pricing, say, different from the colored and the black and white? And how much of it is from the unit-wise improvement?

Right. I don't think I can provide a percentage for -- I mean for -- I can't really break it up. But what I can comment is we do see our color technology bring a quite strong -- growing momentum to the CE growth. Yes.

Understood. I'm asking this question because I'm just curious, like, the CE quarterly revenue have grown a lot compared to the peak in the past few years. And I'm curious like how many capacity can we support the demand? And like maybe you can -- if we can share like the current utilization level and if there is still upside in terms of unit-wise demand?

Right. Yes. Jennifer, not to worry about our capacity for CE yet. We are good, yes, from the capacity perspective. And for utilization, I would say, our capacity is being healthy utilized, yes. I normally -- we don't really give the percentage, but I believe it is healthy utilized. Yes.

Understood. So maybe another question about consumer electronics. So, 2024 may be a really strong year for consumer electronics. Do we have like a rough view about how, say, 2025 will be like under this high base? Do you think there's still, say, upside or at least sustainable, if like more brands adopting the color technology? Or do you think 2024 maybe the, say, the strongest year when most clients pulling and transition from the black and white to color technology?

Right. Once again a very good question, but let me put it in this way. Allow us to have one more quarter and then we comment about the -- on '25 outlook. But what I can tell you is in terms of the CE, we stay very positive about the growth. Yes. We stay very optimistic about the growth. Yes. And for the rest of the branders and how soon or whether are they going to adopt our color technology, we don't comment, but we believe sooner or later.

That's great. And another question maybe about the signage. So, we have mentioned that the larger size might have to wait till 2026 to see some more meaningful contribution. But if I remember correctly, our H5s will be ready, say, by year-end this year or early next year. So, I'm just curious like what will be happening to H5 during 2025?

Right. So for H5, for those who -- you may not know what H5 stand for, that stands for the fifth line in our Hsinchu factory, so H5. However, that is our seventh production line globally, okay? So for H5, of course, it is designed to fit the potential big size signage business. However, it definitely can be used for ESL and CE business. And if we are using the bigger size production line, that creates a more competitive cost advantage for our ePaper mother sheet. So before it can be fully utilized for signage business, of course we can utilize that production line for other products. No problem at all. Yes.

Understood. And maybe another follow-up question. Since our IoT business is still in the revamp stage of the inventory destocking or just out of the inventory digestion, I'm just curious, like, why are we still ramping up the H5, like, on schedule of our current, say, utilization for ESL isn't that high yet?

Okay. Yes. Actually, Jennifer, that's a good question. But we have a very good lesson learned 2 years ago. We just prepare. We thought enough capacity for our demand. However, due to the COVID, we sort of, like, been benefit from the COVID because that triggered the more adoption from the ESL business. So the lesson learned we got is, we didn't build the capacity more than we need. So, that was the lesson learned we got. I think we always need to prepare something in advance before what we have. So, that's what we are doing now. So, for example, H5, if -- on the one hand, if the large- sized signage business don't come that early, as we expect, we still can utilize those capacity for the CE and for ESL, especially CE business basically is growing better, I think, than you guys expected. So if we don't build enough capacity, we're going to be in trouble in terms of the capacity again. So, we don't really worry if we build more capacity than we need because we do believe the potential of the ePaper demand in the long run. And on top of that, I think E Ink Group, financially, we are in a very, very good shape. So, we should take this opportunity to build, to do a better preparation in terms of for the -- potentially in a bigger demand.

Understood. [Technical Difficulty] Now doing some, like, CE product outside the U.S. line.

Jennifer, your voice is a bit breaking up. Come again?

Sorry. Can you hear me now?

Yes, I can hear you now. Yes.

I'm sorry. So a follow-up on the capacity wise. I'm just curious, are we now doing the CE outside the U.S. line already? Or just that there is an option that CE can be provided also from our Hsinchu lines, like, the 4 lines that we have expanded in advance?

You mean the capacity for -- the capacity for CE, can we supply outside of Taiwan, right?

Capacity for, like, the IoT in Hsinchu like H1 '24 is able to also support the CE capacity. And are we now doing that already or, like, that's the upside for our CE capacity?

I would say they are -- they are pretty much switchable, but it may need a bit conversion. But for the new production line, we are doing and we are about to do, that's going to be 100% fully switchable. Yes.

Understood. The last question. Can we have some updates on the H6, like, the time line for it to come online? And how big the size will it be compared to, say, current production line or even H5?

Right. We just got Board approval on the H6. Once again, the sixth new line in Hsinchu, but they're going to be eighth globally. We got approval and we are -- it's under planning. And in terms of the capacity compared with H5, we still need to do a bit analysis, but probably will be bigger than H5. But how big going to be? I can't comment for the time being. Yes. But basically, for those new production line, we are working on, going to be bigger size production line.

Because of the time constraint, we will take the last question from Kenny from Nomura.

May I squeeze a couple of questions that I couldn't ask in Mandarin session? Yes. So, I just want to follow-up on CE. Can I confirm that in quarter 2, were you under-shipping the demand from your customers? Or you can satisfy them immediately, because if you are under-shipping, then that means more upside for your second half CE sales growth?

Yes. Kenny, this is the tricky question. I won't answer your question directly, but I can tell you that the demand is very strong there.

Okay. Yes. And yes, maybe one last question is that regarding large-sized products. So it's been 8 months this year. So, I'm wondering if customers, they are rushing to place orders to you or all of the orders or any opportunities, they are just on -- like, on track? I mean, are they eager to have their products to be commercialized faster than you expected? Yes.

You mean which business?

Signage or large-sized products?

On signage? I think it depends. Like what I mentioned earlier, we try to work with different partners for our signage business. We work with our module partner. We work with, for example, branders such as Sharp and Philips. And we also work with those OOH customers. And some of them, they have a very strong desire to speed up the commercialization of the signage product. And the other, they hesitate a bit. I think it varies from customer-to-customers. But we do see a trend that sustainability associated with low-carbon emission and also how to use the automation to improve the efficiency for the display, that definitely will be the trend. So, I think considering ePaper technology, to meet the trend, we believe that's going to be our advantage going forward. So coming back to your question, it really varies from customer-to-customer. But in terms of the trend, we believe that's favorable to us to E Ink Group from that perspective.

Thank you for your time to follow our call today, and we will see you next quarter.

Right. Due to the time constraint, we may not be able to answer all of your online questions. Feel free to send your question to us, okay? We are happy to follow-up. Thank you very much. Have a nice day.

See you. Bye-bye.

Bye-bye.