Innolux Corporation (3481) Earnings Call Transcript & Summary

[Interpreted] Good afternoon, everyone. Welcome to Innolux's Second Half Investor Conference. [Operator Instructions] You may download the Chinese and English conference materials at Inno's website. Please be reminded the presentation includes forward-looking information based on our current expectations. Actual results may differ materially due to relevant market factors. To understand these risks, please take a moment to read the disclaimer on this line. Today's meeting, we will have Mr. Jin Hung, Innolux's Chairman and CEO, to provide us information on market overview, corporate strategies and financial results. After that, we will conduct a question-and-answer session. Now I will hand over to over to Jin.

Okay. Thanks, Phoebe. Again, thank you for joining us today on Innolux's second half Investor Conference. I will start today's presentation with a quick summary. Of course, we divide the company's overall business into 2 major domains on the display and the nondisplay. On the display side, our core business continue to be impacted by the consumer sentiment and also the component price hike. I think everyone knows that the memory price has been skyrocketed. So that also impact into the overall buying behavior that we will explain later on how that impacts our results. And on the nondisplay side, which is much more steady, we have continued to see improvement on our shipment and also overall earnings performance on the non-display side. Also, we have seen a positive momentum on the market consensus. We have seen some of the upward revision on the company's forward-looking earnings estimate. Our EPS from '26 to 2028 has been seeing the greater improvement. We thank you for the investors' confidence on us. And so far, this is aligned with our continued transformation strategy, we try to lower our cyclicality on the earnings while improve continually our overall performance. Later on, we will expand more into the details. On the panels core business, I divided by the products. On the TV side, the overall market shipment was expected to be down about 3% year-on-year, while the area or the size are probably down slightly 1%. This is mainly due to a lot of the Chinese manufacturers using the high generation G10 or 10.5 line for the large-sized TV. Innolux differentiate ourselves on focusing at the 50-inch or below market segmentation, which we believe we have a much stronger cost advantage and also a much better customer engagement. So overall, our shipment on the TV, we believe will be flat or even slightly growth year-on-year. On the monitor side, the market overall still focus on the high-end gaming and also the OLED model. And so far, I think our high-end monitor has already account more than 50% of the overall monitor shipment. So this is also a positive feedback from both of the TV and the monitor products. On the notebook side, which is impacted significantly by the market momentum, I think the major impact from the high memory price has been triggered the customer to have a defensive inventory. They pull in a lot of the demand from second half to first half. That's also why first half, we have seen the more positive buying behavior than expected. While in return, I think the second half, probably even to the early next year, we expect to see some slowing down of this notebook demand. And this is for the customer to try to avoid the cost rising and also the extended lead time. So the momentum on the notebook side in the next probably 6 to 9 months we expect to be slowing down. However, in the longer term, we do believe that AI PC wave will continue to trigger the new refresh cycle in the longer term. So that is a long-term positive. On the other hand, on the non-commodity, i.e., the industrial demand, which continue to see a very steady growth, thanks to the booming of the edge AI and also our own ecosystem like InnoGallery has seen the positive feedback from the customers. So the industrial demand, we continue to invest and continue to see the great improvement by more orders. Okay. Next page is on the company's strategy. I'm sure that people who have been following us are very familiar with this page. These 4 major pillars are the ones we use to identify our own transformation strategy. We review ourselves all the assets from facility to capacity and also eventually want to yield a better profitability and the return. Our overall transformation strategy remains unchanged at the light assets and also maximize our investors' return. So in 2026, we have announced to dispose 3 plants include both Fab 2 and Fab 5. Also, we have a smaller plant, a module plant also announced earlier to dispose. So far, I just want to emphasize again that we are not disposed this plant for a onetime gain. More important, by unload these assets, we believe this will help to ease our long-term maintenance expense or cost. So this actually help us to improve on our margin side, and we have been seeing the positive feedback on this from the both the clients and the internal feedback. We believe that this positive momentum should continue to go on. This will definitely help with our shareholders' return. To further elaborate more, in order to maximize our ROE on one hand, we see like a relatively short to midterm, our focus is to improve our overall revenue and earnings breakdown by focusing more into the high-margin business and that is on the both non-commodity and non-panel side, while our bigger contribution now has continued to help to support and improve our business. And also earlier, we mentioned about the scale of our idle plant has also reduced our maintenance cost and CapEx. So this for the short-term improvement. While in the long term, we are still definitely focusing on the next major earnings growth driver. And as many people already mentioned, our -- one of our key focus is on advanced packaging, i.e., the FOPLP. I will use in the next few page also explain more on this earnings driver. And other than this, one of our independent company, CarUX, which focus on the panel side or the auto panel -- after last year, we announced to acquire the long-term branded company, Pioneer has been created this positive momentum for the overall smart car environment. And we believe that CarUX's combination with Pioneer to create a synergy as the Tier 1 position in the auto business will also be the major earnings driver in the longer term. On the -- again, on the semiconductor side, I think people who are familiar with the Fan-out PLP knows that Innolux has invested on all the 3 technologies from chip first to RDL and also TGV . On the chip first is already in the commercial run in the mass production. Our total shipment from very beginning on the testing to right now already more than 10x growth, and we continue to see double-digit growth this year. So this is continued business, although the technology barrier on the chip first is lower. However, it is a steady revenue driver and also help with our continued support to the RDL and TGV business. As you know that chip is only a temporary carrier. So it will unload the our carrier before the shipment. But on the other hand, RDL and the TGV, which is a much higher entry barrier, and we've been very positive to see the strategy partner to working together with us to provide this TGV and metallization. As you can see on the slides that our core of the organic substrate was being replaced from original organic to the glass substrate because we believe this provides a much better interconnect density and also much better voltage control, the heat dissipation effect. So overall, we believe that this technology can help with the overall semiconductor industry to move to the next step. And we are very honored to working closely with our partners to the global -- support to the global supply customers. Further elaborate on the RDL and comparison to the chip first. I think people are aware that RDL and TGV are both aimed for the high end because the heat and the voltage control are the key for the high-performance computing. And on the RDL, because we do the backside modification, which removed or grind away the backside. So it actually allows a much thinner IC and also help significantly with a better cooling effect. And also because RDL is a compound material, which allows for the finer line space and also because the itself glass is more rigid. So the warpage effect is also a significant improvement from original flip chip technology. So on the back of both advantage, we continue to see a strong engagement from the customer side to leverage with RDL. This page shows you that the RDL, obviously, is the type of the packaging, and we are using that into the glass substrate and as an option foundation material. So this much better CTE has able to provide a mechanical benefit and also the electrical benefit. So our ultimate goal is to help to enhance the power delivery performance on the per unit area. So this we believe is in the AI or HPC era, what all the customers are eventually looking for. So that's also why we believe the TGV technology can help GCS, the glass core substrate to fulfill what the customers needs. According to the market research, the PLP and glass substrate packaging, the market expect to have a significant growth CAGR of more than 50% over the years. And this is on the back of the AI and HPC applications. And we are seeing this and definitely witness for the market size tremendous growth. We expect as the first-mover advantage to help the company to realize a share of this part of the business. Traditional packaging, of course, have a little bit. However, we believe it's complementary to each other. So it's a feasible solution. We are very open and have a greater potential to work with all the OSAT partners. Lastly, in terms of our financial results, our revenue in the first half on the nondisplay and non-commodity has reached about 55% in the first half and both domain has like a double-digit gross margin. And this is actually what we said earlier, our transformation, the whole purpose is to minimize the cyclical impact of the commodity. So we do see this improvement or the growing percentage of the non-commodity and nondisplay have helped the company to stabilize our margins. Next page shows you our second quarter results. Our gross profit has improved from first quarter's 14.4% to 14.6% and also our operating profit also has seen the positive improvement. Of course, this is also thanks to the great team efforts on the cost control. We have been -- company has been working extremely hard on this side. So our depreciation and amortization has marked about TWD 7.5 billion and also our CapEx about TWD 2.3 billion. As you can see that in second quarter, our significant increase of the net profit after tax also due to our deferred tax assets for the last -- for our loss carryforward roughly about TWD 3 billion. So that makes to our total EPS in the first half about TWD 0.7. In terms of our balance sheet, Innolux has continued to run on the net cash base. Actually, our net debt to equity is minus 10. The company is sitting on the net cash position, and we are trying to further leverage our healthy financial situation to build into the support for our development on both PLP and the other new areas, which need investments. However, we also want to emphasize again that we are very cautious in terms of our future asset investment. We want to stay more on the asset light. Our current ratio and of course, our credit ratio are also at a very healthy stage. I think I will stop here to take any questions.

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