ENNOSTAR Inc. (3714) Earnings Call Transcript & Summary

Welcome to ENNOSTAR Group's 2025 Second Quarter Financial Results Conference. [Operator Instructions] Now I would like to hand over to Mr. Damon Tzeng, ENNOSTAR's IR Officer. Damon, please go ahead.

Ladies and gentlemen, good afternoon. I'm Damon from the IR Department of ENNOSTAR. On behalf of the company, I would like to welcome you to participate in our second quarter financial results conference. I have 4 executives joining me here: Paul Peng, Chairman of ENNOSTAR; Terry Tang, Chairman of EPISTAR; Patrick Fan, Chairman of Lextar; and Jerry Liu, ENNOSTAR's CFO. The agenda of today is this. First, our CFO, will go over 2025 second quarter results; and our Chairman, Paul Peng, will have an opening remark. Then Patrick and Terry will each speak on the respective company's outlook. After that, we will take questions online. That concludes the agenda. I would like to first remind you that all forward-looking statements contain risks and uncertainties. Please also spend some time to read the safe harbor notice on the slide. Jerry, please.

Ladies and gentlemen, good afternoon. I'm Jerry. I would like to first go over our second quarter financial results. Due to front-loaded shipments driven by tariff constraints in Q1 and the impact of the NT dollar appreciation this quarter, ENNOSTAR's net revenue came in at TWD 5.74 billion, up by 1.9% Q-o-Q. Y-o-Y, it was down by 13.1%. Operating margin for Q2 was negative 14.5% with losses widening by 6% Q-o-Q, about 2.5% of which was attributable to NTD's appreciation. In addition, as lower loading rates and macroeconomic uncertainty led to weaker demand, our losses increased from the prior quarter with a net profit margin of negative 15.3% and EPS loss of TWD 1.19. Next slide, revenue by application. TV backlighting, automotive and sensing applications saw active front loading in Q1 amid tariff concerns. As a result, despite the second quarter being a traditional peak season, revenue growth was muted. The company continues focusing on high value-added segments. Revenue from value-added applications, including automotive sensing and professional lighting increased by 5% from Q1. Meanwhile, recent slowdown in high-end market demand and price pressure in the market have posed certain challenges and impact on our operations. Next slide, balance sheet. At the end of Q2, ENNOSTAR's cash and cash equivalent was TWD 13.4 billion. After deducting bank loans, net cash totalled TWD 12.4 billion. Inventory decreased by TWD 600 million Q-o-Q and inventory turnover shortened to 83 days. Next slide, cash flows. Despite an OP loss, we generated net cash inflows from operating activities in Q2. CapEx was TWD 123 million. Net changes in loans was TWD 509 million, and cash at the end of Q2 was TWD 13.35 billion. This concludes the presentation of our Q2 results. Next, Paul will speak on our Q2 performance and Q3 outlook.

Ladies and gentlemen, good afternoon. Welcome to our second quarter financial results conference. In Q2, our revenue rose slightly from the previous quarter to TWD 5.74 billion, driven by customers front-loading orders. Although the proportion of value-added products increased by 5% from the previous quarter, our net income dipped by TWD 880 million Q-o-Q due to the sharp appreciation of the NT dollar and intensified competition in the LED market. Meanwhile, our inventories were better controlled with inventory turnover decreasing to 83 days. The group will rigorously manage inventory, aiming to further shorten the inventory turnover. The net cash stands at TWD 12.4 billion, and the company will continue to monitor the health of our assets, including investments. As the U.S. unveiled tariffs on various countries, customers are expected to restock based on inventory absorption and demand leading into the year-end sales peak. We anticipate that shipments will continue to grow, but exchange rates will affect our revenue converted to new Taiwan dollars. We will also ramp up shipments of value-added, higher-margin products to improve profitability in the second half of this year. In addition, we will continue to increase R&D investments under the 3+1 strategy to prepare for new products next year. This concludes my sharing. Thank you.

Thank you, Paul. Next, we will go over our business outlook for the third quarter. Terry will focus on advanced display, sensing, special lighting and monitors. Patrick will speak on automotive and backlights. Now we will have Terry to speak on the outlook first. Terry, please.

Ladies and gentlemen, good afternoon. I'm Terry from EPISTAR. Now I'd like to go over our outlook for sensing, special lighting and display in the third quarter. Firstly, on the sensing segment. In Q2, due to purchases of new smart wearable products by customers, we posted Q-o-Q and Y-o-Y revenue growth for the sensing business despite the unfavorable exchange rate. Looking ahead to Q3, revenue is expected to decline by a single-digit percentage both Q-o-Q and Y-o-Y due to the impact of earlier pulling in Q1. For the full year, despite uncertainties in consumer electronics demand caused by ForEx fluctuations and U.S. tariff policies, we anticipate single-digit growth in our sensing revenue compared to last year, driven by new smart wearable products. We are actively expanding sensing applications in industrial automation. In addition, new wearable applications such as biosensing technologies for monitoring glucose, hydration and body temperature are being developed, hoping to fuel the next wave of growth momentum in our sensing business. As for special lighting, on the back of stronger seasonality for horticultural lighting, Q3 revenue is expected to increase by double-digit percentage points Q-o-Q. However, given the unfavourable exchange rate and safer market competition, the revenue is expected to decline by double-digit percentage points Y-o-Y. We are, therefore, taking a more conservative view of the full year revenue of special lighting. Looking ahead, in addition to continuing to enhance the luminous efficiency of our horticultural lighting products, we are also developing new applications such as UVC and UVA light for sterilization and industrial certification process. In terms of the display business, the Q3 revenue is expected to see single-digit percentage growth compared to the previous quarter. However, due to the unfavourable exchange rate, it is expected to post single-digit percentage decline Y-o-Y. For the entire year, although demand for small pixel pitch displays remains strong, given the forest conditions, the full year revenue is anticipated to be relatively flat or down slightly compared to last year. As for advanced displays, as our micro LED products will enter the end user market starting this year with transparent display applications beginning trial volume production, they are expected to contribute to our revenue starting in 2025. Currently, we are actively submitting samples to customers in hopes of securing new projects, driving economies of scale and further reducing costs. Overall, although microLED's revenue contribution remains limited this year, it is expected that the display business will make a more significant contribution to revenue growth in the coming years. This concludes the business outlook for the third quarter of the sensing, special lighting and display businesses. Thank you.

Thank you, Terry. Now Patrick will go over automotive and backlight business outlook.

Ladies and gentlemen, good afternoon. I'm Patrick. I will speak on backlighting business first. The current macro conditions have significantly affected consumer product demand, leading to muted sales of consumer products. This impact is particularly evident in IT products with high-end IT products have been affected even more severely. Under the circumstances, we've been working very hard to maintain our market share. This, in turn, led to a dip in our revenue. While the impact was limited, it affected our gross margin, primarily due to changes in the product mix resulting in a lower margin. In Q3, notebook demand is expected to slightly increase compared to Q2, while monitor demand may soften. On the TV front, thanks to rising market share among our partner brands, the TV segment's revenue and revenue contribution are expected to edge up despite the weaker-than-anticipated market conditions. This is partly due to year-end TV promotional activities, which are being planned in Q3. Overall, aside from the tariff-induced pooling effect and some inventory buildup in the supply chain, the broader economic slowdown has impacted our backlight business. Still by maintaining our existing customer base and market share, we are working to contain the impact on the revenue even as gross margin is affected by product mix changes. Looking ahead, we will continue to monitor whether the share of LED in the high-end IT product segment will increase. This is something we are keeping a very close eye on. At the same time, the adoption of Mini LED in premium products is also rising. So we're actively working to secure more Mini LED design wins. This was about the background business. Now in the automotive segment, we are also seeing the impact of broader economic conditions as well as competition from Chinese car brands affecting international ones, causing market sentiment to be somewhat subdued. Additionally, policy uncertainty in the U.S. regarding new energy vehicles have dampened the growth momentum of EV. In product segments where ENNOSTAR enjoys high market share, such as automotive taillights, we are more exposed to the impact of the broader economic slowdown. Intensifying global competition has also put pressure on pricing in these areas. On the other hand, in segments where our market share is relatively low, such as module products, we are seeing growth, partially due to a lower base period and our active efforts to secure new design wins. Therefore, we've been making progress in Mini LED applications for automotive backlight and exterior displays and lighting. The automotive backlight segment is expected to post a noticeable revenue increase by the end of this year with even stronger growth next year. Automotive exterior displays and lighting are anticipated to begin contributing to our revenue starting in 2027, while growth in new energy vehicles has been slower than expected due to policy uncertainty in the U.S. We maintain our mid- to long-term outlook that the number of LEDs used per vehicle will increase significantly, including applications such as head-up displays on windshields and pillar-to-pillar SUDs. Mini LED backlight technology is also being adopted in a wider range of exterior displays and ambient lighting systems, both of which are experiencing substantial growth. We are actively investing in projects that will begin generating revenue in 2 years. These projects are expected to be awarded this year, laying the groundwork for meaningful contributions in the near future. Overall, while there are bumps on the road in the short term for the automotive sector, our group remains proactive in adopting emerging technologies to enhance product performance. We are applying the COB backlight technology to exterior automotive displays and have been steadily landing project wins. We are optimistic that these initiatives will generate significant revenue within the next 2 years. That concludes the update on the backlight and automotive segments. Thank you.

Now we will proceed with questions and answers. We do not have any questions online. We are handing over the call to Mr. Damon Tzeng. Damon, please go ahead.

Ladies and gentlemen, this concludes our financial results conference for this quarter. If you have any other questions, please contact us at the IR department at the ENNOSTAR Group. You may disconnect now. Thank you all for your participation.