Thank you for standing by, and welcome to the E Ink second quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. After the presentation, there will be a Q&A session. Please be advised that today's conference is being recorded. The presentation and WebEx replay will be available on E Ink's website after today's conference. Joining me today are CFO Lloyd Chen and Senior Director, Finance Center, Patrick Chang. Now, let me turn the call over to Lloyd to get started.
Thank you, Winnie. Good day, everyone. Welcome to 2022 second quarter investor conference. Before we proceed, please take a quick look at the cover page. So, that is the e-paper license plate being available in few states in the United States. Currently, this e-paper digital license plate can be purchased and even registered in few approved states in the United States. As far as we know, it is working quickly to expand this map of the states. All right, so next page. All right, before we proceed further, let's take a quick look at the safe harbor statement. All right, next page. Let me start with the PNL first.
The first half sales revenue was around TWD 13.4 billion, operating profit TWD 3.4 billion, net income TWD 3.84 billion, and EPS 3.36 NTD. For the first half operating profit was already higher than the one of the 2021 whole year. Next page. I elaborate a bit further on the operating profit. Operating profit basically continues to grow due to the strong demand from markets through eReader, eNote, retail, logistics, and signage. As you can see from the screen, in the past five years, the operating profit trend has been showing positively.
As I mentioned earlier, the first half operating profit was higher than the operating profit in 2021 whole year already. Next page. For ROE and ROA, first half ROE and ROA has been rising. I mean, as you can see from the screen, since 2017. The first half, the ROE was around 10.8%, and ROA was around 6.6% respectively, which was more than 65% of 2021 whole year ROE and ROA. It shows the growing profitability and how we efficiently and effectively utilize the shareholder equity and assets to generate the profit at E Ink. Next page.
For the assets, the total assets by second quarter they were increase TWD 9 million. Basically, it it's from the operating growth and the financial investments. Of course, due to the you know growing sales revenue and profitability, net asset value per share is also growing. Next page. For the cash flow, the net cash stayed sluggish around TWD 8.8 billion year-over-year. Basically, we utilized cash flow from operation to financial investments to the bank loans repayment and to the CapEx on E paper production line expansion to meet the strong market demand. The total financial assets plus cash was increased to around TWD 34.6 billion by second quarter this year. Next page.
All right. This page, I would like to share the second quarter accomplishments. In second quarter, we showcased the latest and greatest E Ink technology in the Touch Taiwan exhibition, including the E Ink Gallery 3, E Ink Kaleido 3, and E Ink Spectra 3100+ . We also joined SID in May in States by bringing our continuous innovation in color ePaper and next generation technology. Try our best for making smarter and more sustainable. For example, on E Ink JustTint, an innovative variable transmission light control film technology that provides variable tint and on-demand privacy solutions. Another technology we showcasing in SID, E Ink ComfortGaze, a new frontlight technology designed by E Ink in-house frontlight team.
ComfortGaze has been engineered to reduce the amount of blue light reflected off the surface of the display, providing further comfort while reading. Also, in second quarter, first edition of the ePaper Industry Blue Book was being published, collaborated with EPIA, the ePaper Alliance that we established last year and together with ePaper Insight Plus, the external consultant, CCID, China Center for Information Industry Development. This Blue Book basically is a very comprehensive market and application analysis report that covers 12 ePaper application domains, such as ePaper, eNote, smart retail, education, traffic, and others. For the awards, we also received smart display application awards for the smart retail award from TDUA, Taiwan Display Union Association.
On the E Ink Spectra 3100, basically that is the full color ePaper. Also, the Computex Best Choice Award was also received on the E Ink Drive IC with dynamic and interlaced scan by AI computing. Last but not least, this year is also E Ink first time to be ranked 427th place in the top 1,000 market cap among the companies from Taiwan, China and Hong Kong. That's for our second quarter accomplishment. Next page. Various corporate sustainability activities have been done in second quarter. We just, you know, released the corporate sustainability report for 2021, and feel free to download and review.
We also donated $150,000 to UNICEF to support Ukraine relief efforts. Locally, we also joined the initiative on talent in Taiwan in terms of the talent sustainability in order to support the development of talent for the future needs by addressing diversity and inclusion, organizational communication, rewarding and motivation, physical and mental health, meaning and value, and also, of course, the talent development. We also sponsored the platform TRIPS, initiated by the Commonwealth Magazine Group. TRIPS, this platform stands for Temperature Rising Index for Pathways. Basically it collects company's ambition and pathway toward net zero in order to, you know, achieving the goal of global warming, 1.5 degrees C.
The idea behind the 1.5 degrees Celsius is the goal of Paris Agreement, which calls for countries to take concerted climate action to reduce greenhouse gas emissions in order to limit global warming. Furthermore, we have been listed as one of the Asia Pacific climate leaders in 2022 by, you know, joint report of Financial Times, Nikkei Asia and Statista. One of the lists identifies the companies that achieved the greatest reduction in their Scope one and two greenhouse gas emission intensity between the time period 2015 to 2020.
We continued to be rated as the top 20% by TWSE Corporate Governance Evaluation in the fifth consecutive year. This is our, you know, our consecutive fifth year to get this award. Next page. This page is about the green products with low carbon emissions. We are convinced that environmental sustainability and corporate profitability are equally important missions. We are committed to reduce carbon emissions from smart display through low carbon and green e-paper technology. We also lead by example by increasing the use of renewable energy in our global sites. We expect to take the lead in achieving 10% use of the renewable energy by 2022 this year.
Become the first display company to run on 100% renewable energy on 100 by 2030. Ten years after, we also aim to reach net zero carbon emission by 2040. Among those goals, we have conducted studies comparing e-paper to conventional paper and LCDs to understand the CO2 emissions from these materials. The study found that e-paper shows significant low carbon benefits. Comparing the energy usage of the e-paper retail tags versus LCD retail tags over a period of five years with four updates per day. For every kWh consumed to manufacture the e-paper material, a saving of 400 kWh is realized.
If we take eReader, for example, in the past five years, 130 million eReaders have been in use globally, replacing the purchase of paper editions of books. It is estimated that paper books would emit more than 100,000 x CO2 versus eReader with an E Ink display. Further, LCD devices would emit more than 50 x CO2 versus eReader throughout that time. All right, next page. The next one is about sustainable growth. As you can see from the screen, on the one hand, we proactively cooperate with the supply chain partners to build ePaper ecosystem, work hand-in-hand toward the net zero carbon emission target. On the other, we internally prepare future capacity expansion for the growth.
Apart from the four e-paper production line that we have been discussing previously, we will additionally expand to e-paper production line at Hsinchu. Besides, we will also build two new factories, one in Taoyuan in Taiwan and one in Yangzhou in China, which specialize in e-paper material and flexible substrate material, such as polyimide. We are prepared for the growth. Next page. Would like to share two special sustainability awards. We win three major awards at 2022 Asia Responsible Enterprise Awards. The abbreviation of it is AREA, A-R-E-A. The awards won were the Green Leadership, Social Empowerment, and Corporate Sustainability Reporting category.
Besides, we also win gold, silver, and bronze, three awards at 2022 TCSA Taiwan Sustainability Award. I would like to elaborate more on the gold award that we had which is the e-Read for the Future, the gold award at TCSA. Basically, it's an e-reader mobile library project initiated by E Ink. It has also been recognized by AREA social empowerment award. Since 2017, we have joined hands with ePaper ecosystem partners in hardware, eBook platforms, and supply chains to bring together the core products and resources from different companies. With eye-friendly ePaper devices and abundant eBooks, we help bridge.
We help bridge the learning resources gap in rural areas, which is in line with the United Nations Sustainable Development Goals, SDG, of good health and well-being, SDG 3, quality education, SDG 4, and partnerships for the goals, SDG 17. This project has also been implemented in E Ink sites in the United States, South Korea, in Yangzhou. Since its launch in 2017, it has benefited 36,000 students worldwide and contributed TWD 91.93 million in value to society. Last but not least, we'd like to share E Ink one and only the four dimension of E Ink unique PESG. As a core product of E Ink, ePaper was born for environmental sustainability.
Combining product with PESG environment, social, and governance. The four dimensions of E Ink's unique PESG serve as the backbone for implementing sustainable management in E Ink. These awards and achievements shown on the screen and what I just shared basically recognize our efforts to promote PESG. We basically are convinced that environmental sustainability and corporate profitability are equally important missions. We once again are committed to reducing carbon emissions from smart displays through low carbon and green ePaper technologies. That is my update and sharing. Thank you very much, and let's move to the next Q&A session.
We are now in the Q&A session. At this time, we will open the call up for questions. Please press the raise your hand icon on the sidebar if you would like to ask a question. When we take your question, please remember to unmute yourself. The first question is from Jiong Xu. Your line is open. Please go ahead.
Hi, John.
Hi. Hello. Hey, hey. Congratulations on good numbers. Okay, the one question is, would you please give me some guidance for the second half, because I think that in previous session, Chinese session, that I think that a lot of people have these kind of questions because everybody is so worried about the consumer product demand slowing down. What's your view, I mean, on your eReader business? And the second question is about your ESL. Happy to learn that the E Ink is going to build a second new fab.
What kind of the reasons make you so confident that you guys decide to build up the second new fab in such a very short period? Thank you very much.
Right. For the second half outlook, I would like to break it down into two parts. For the CE, consumer electronics, which is relevant to the eReader and eNote, I would say due to the global inflation, CE business will go relatively weaker. I think it's still manageable. Overall, in comparison, in terms of the year-over-year growth, I think it would stay flattish or slightly lower. That's for the CE business. For the ESL, I believe the second half, even going forward, still remains very strong. You may ask why the global inflation doesn't really affect our ESL business.
Basically, the way we analyze it and the feedback we have collected from here and there from our customer is basically the ESL is kind of a tool to improve the efficiency. Because of that, even, you know, due to the global inflation, it doesn't really affect the installation of the ESL. Furthermore, one of the advantages to use ESL is to, you know, to trigger a saving on the manpower cost. Think about this. Due to the global inflation, the cost of the manpower employee cost will also go higher.
With the ESL, it definitely can, you know, save more cost from that perspective, you know. For IoT, basically relevant to the e-signage and luggage tech and all that, I think for that part, it doesn't really affect the growth of it. Even the IoT sales revenue is relatively lower in terms of our total sales revenue. For that part, it's still gradually growing. Okay? That's the second half outlook. Simply speaking, the third quarter financial performance would be better than the second quarter, and the fourth quarter would be better than the third quarter. If you want me to quantify this, that's sort of the guidance I can provide.
What makes us think the ESL business could still go strong. We believe the ESL business has been stepping into the organic growth, you know. Based on this, we believe our investment to those, you know, CapEx production line expansion should be able to justify the growth of the ESL. Okay? I hope I answered your question. Thank you, John. Yeah.
Lloyd, thank you very much. Yes, you answered my questions. My question is that going forward, I know that, I learned that from the announcement, the company announcement that you are going to build another two new production lines in your Hsinchu production sites. Then you announced that you're going to build another new production site in Guanyin. Can I assume that the Hsinchu site actually will be fully loaded or fully equipped? I will say the six line, the space for Hsinchu is a six line.
Does it imply that the sixth line will be built very fast, quickly, I mean, when the Hsinchu site is completed? Can I say that?
Yeah.
Can I conclude that?
Uh.
Thanks.
I mean, it's a bit hard to comment what will be happening in the future since that additional two lines could be possibly up and running, you know, after I mean around 2024. As I just mentioned, we believe the ESL is in the organic growth mode. Basically we are prepared for the growth. Whether it would be fully loaded or not, I can't really comment, but we believe the possibility could be high. Yeah. Once again, that's relevant to the future. You know, it's hard to comment. I think, given the ESL demands, you know, still very strong, we are optimistic.
I mean, it's hard to comment whether it's gonna be fully loaded or not yet because that will be happening in, you know.
Okay.
2024 onwards. You know? It's hard to say.
Yes, I know. Got it. Actually.
Yeah.
Can I assume that when you guys decide to build mobeda, you decide to add the new lines in your Hsinchu site, or you decide to build another new production site in Guanyin? Before making such decisions, you talk to your customer first before you make such decision. Can I say that?
Let me put it this way. It definitely based on our internal assessment, you know, and internal analysis, and basically the assessment and analysis coming from different perspective. Of course, we talk to our customers. Of course, we use our own in-house view to analyze what will be happening in the future. Of course, from the market perspective and all that. It's analysis from different angles and perspectives. Yeah.
Okay. Thank you very much. Okay, my question is here, so I go back to the queue. Thank you very much, Lloyd.
All right. Thank you.
The next question is from Jerry Su. Your line is open. Please go ahead.
Hi, Jerry.
Yeah. Hi, Lloyd. Thanks for taking my question. I just want to ask about the, I think in your prepared presentation, you mentioned about the capacity expansion in Guanyin and also, you know, potentially in China will be.
Right.
Used partially for material such as polyimide or you know some of the adhesives. I just want to know you know are you currently sourcing those from external parties? When you in-source that or you can say as of today right? What is the you know the cost that is coming from those material that you're sourcing from external parties? How should we think about in the future you know can turn those to in-house manufacturer? How would that help your gross margin?
Right. For those upstream materials such as polyimide, currently most of it we do in-house. We sort of like do it in terms of the formulation, but we still ask the outsourcing partner to help us. Going forward, we gonna do everything in-house. That's why we need more space for that. In terms of the cost, I would say the more we do it in-house, the more cost saving we could have.
Furthermore, for this upstream ePaper materials such as polyimide, not only ePaper can use that material, and I think it can be used extensively on the TFT related products. Going forward, if everything goes very smoothly, apart from our in-house demands, we might be able to supply the polyimide to the external parties. So that's sort of like a long-term plan. First of all, we want to fulfill our in-house demand first. Try to be 100% everything in-house.
Okay. Thank you. Just one other question I want to check is that with this kind of aggressive capacity expansion, can you elaborate a little more about, well, you know, besides the ESL and also eReader or eNote that we are already, you know, driving the revenue growth in the past few years and the coming years. What else are the key end applications or markets you think that will require such a, you know, a strong capacity expansion, you know, from E Ink?
Right. Having said earlier, even the C business might get relatively weaker in second half. We strongly believe through our color technology, our C business can be triggered and grow further in the long run. I think in the past few years, most of the digital content used on the eReader and eNote are black and white. You know, they are mainly used for fiction on the eReaders. For those nonfiction portion that require color, for example, magazines and color academic books and color comic books, we believe for the nonfiction digital content through our color technology, it can be you know grown further.
That's why we need more capacity along with the growth. Further for the digital learning, currently a lot of kids are already using the Chromebook and MacBook. From our perspective, our mission and vision is not to replace those, you know, Chromebook, MacBook, those LCD devices. What we really want to, you know, replace is the conventional textbook and the conventional pen or pencil. Because think about this, when those kids, especially in the United States, even in Europe, they use the MacBook, Chromebook, but they still need the conventional textbook and pen to calculate the math question, to highlight important notes on the textbook.
If we can replace those, you know, conventional textbook and pen, our device can go very well with the LCD device, and it can become a very good digital learning package. Once it is realized, we believe we need a lot more capacity along with this growth, you know. Plus, on top of that, we believe ESL market, we know that the market penetration only 5% and double up, even triple up. We don't think it's that difficult. Based on those factors I just mentioned, it looks a bit aggressive, but in the long run, we believe that's something we definitely need for the future growth.
As our chairman, Johnson, just mentioned earlier, we are pretty much at the early stage of the growth. That's how we see those CapEx and expansion plan. Jerry, that is my answer, yeah.
Okay. Okay, thank you. I'll be back in the queue.
All right, thank you.
Next question is from Katherina Chu. Your line is open. Please go ahead.
Hi, Catherine.
Hi, Lloyd, can you hear me?
Yes, I can hear you very well.
Thank you so much. Congratulations on the strong results. I have a follow-up questions regarding to the very impressive capacity expansion plan recently announced. My question is, if we look at the mid to as a near to midterm outlook for the ESL, we have noticed that several players in the States, and actually some of the ESL players have announced very strong result, including Pricer. That was very surprising. We wonder whether the growth is actually coming from the North American market that is actually accelerating. That was my question. I've also noticed that outside of Walmart, some of the small retailers are also embracing on the ESL. Was that because of the recent events that some of the retailers are fined by the government due to wrong price tags?
Will that accelerate the adoption of ESL, making it a must instead of just a nice-to-have?
Right. Catherine, in order to answer your question in a more accurate way, let me put it like this. We believe all the factors you just mentioned. We definitely consider them, you know, when we expand our further capacity. Whether it can be realized sooner or later is a bit hard to say, you know. It pretty much depends on how the retailers grow in the future. Think about this, if we are not prepared for the future growth, how can we quickly react if they decide to go quicker? I mean, same situation would happen again, you know.
What I'm trying to say is, we don't have enough capacity or supply to meet the demand our customers. I mean, it's a bit hard to comment how soon they will go in terms of the ESL installation. What we really know is we need to be prepared for the future growth. That's why we decide to do even it looks a bit aggressive from your perspective. Once again, as I just answered to the previously, those expansion plan, definitely. We went through a thorough, you know, a comprehensive analysis and, you know, assessment internally.
I see. Thank you very much. I don't have any other questions from my end. Thank you, Lloyd.
All right. Thank you. Thank you, Catherine. Yes.
Next question is from Maximilian. Your line is open.
Hi, Max.
Hey, Lloyd. Thank you very much for taking my question, and congrats to your recent results.
Thank you.
Just wondering if you could shed a bit more light on the license plate you showed at the very beginning. Is it something you want to actively collaborate, maybe work like some automotive companies? You showed like a Tesla on that picture. Is that something which will be coming, so will we see contracts there? Maybe also on the capacity expansion, are you maybe able to provide maybe a bit more like numbers on that? Is there any way we can have like kind of sheets or something? How much capacity expansion can we expect on a rough percentage, ballpark figure, maybe?
Right. For that car license plate, as I just mentioned earlier, basically, that's the application we are aiming for. I think it's still at the early stage. How soon the volume will go significantly, it's hard to say, but we definitely see the potential of it. Just like other IoT projects, such as e-signage being used in the public place or logistics tags or even luggage tags. We do see the potential, but how soon the volume will go significantly, it's hard to say. That's exactly the reason why we need to get ourselves ready for the future growth.
For the expansion plan for new factory in Guanyin or new factory in China, we still need a bit more time to figure out the layout and all that, you know. We haven't go into the detail for that. It's a bit hard to say how much additional capacity we could have at our new factory or in our China factory. I hold my comment for that. We definitely would share further possibly in the next quarter earnings conference.
For the two additional production line I just mentioned, I would say from capacity perspective, that additional two production line can be equivalent to three production line that we had this year. Maximilian, I don't know if you get my point.
Yeah.
I think previously, we are having a plan. We have four production lines, right? Three of the production lines out of four, the capacity will be equivalent to the two additional production lines that we're gonna have. Those two additional production lines won't be ready till 2024, you know. We basically just get approval from the board since it's relatively longer lead time for the e-paper production line. Normally, it needs a year. We just want to get approval blessing from the board first and then try to place a PO to get things going.
Okay, great. Great. That's already super helpful.
Yeah. I think it won't be happening till 2024. Yeah.
Got that. Maybe just a quick follow-up, as you're mentioning 2024. As time changes sometimes, et cetera, how quickly can you guys switch maybe back from like ESL allocation maybe back to a consumer allocation, like within the production lines? Like, how much would that cost like,
Oh, that.
How much would that affect you guys?
Basically, for those four production line, we are preparing for additional two, I just mentioned. Basically, they can manufacture both ESL and CE product. They are switchable. No problem at all here.
Okay, perfect. Thank you very much for taking my question.
All right. No problem. Thank you, Max.
Next question is from Ajay Sharma. Your line is open.
Hi, AJ. I hope I pronounced your name correctly. Hi, AJ.
Yes. Hello. Hello. I wanna check, in the first half, if I look at the consumer electronics revenues are actually up about high single digits or so. I just wanted to confirm, basically you are now guiding to flat to down. Is it for the full year, or is it only for the second half?
I'm talking about the whole year.
Okay.
year-over-year growth, 2022 versus 2021. For the CE business, I would say it could be staying flattish or slightly lower. Slightly lower. Yeah.
Okay. Can you talk about the ramp-up of the line, two, three and four, basically?
All right. Yeah. Out of four production lines, the second one and third one was ready by first half, end of first half. They are ramping up now, so I mean, it should be 100% ready from fourth quarter. The very last one, the fourth one, it should be ready by early next year. For the four lines, they can be 100% contributed from second quarter next year.
Okay. If I look at your gross margin, despite a slightly higher than expected mix for consumer electronics, your gross margins have still done quite well actually, if I look at second quarter specifically, because second quarter there was a big jump in consumer electronic revenues as well. I'm just wondering, so have you seen the gross margin improve for the ESL side?
Right. I mean, the reason for the higher gross profit margin in second quarter, yeah, due to the product mix are more ESL product shipments. Yeah, basically.
Yeah. Other than the product mix, even the ESL margins are improving, compared to last year, right? Basically, that's why.
Yes. Overall speaking, yes. There's improvement, yeah, involved. Yeah. I would say, yeah.
Okay. Just the last question.
I think a lot.
So-
Yeah, go ahead. Yeah, go ahead, AJ. Yeah.
Just on the color side, basically. How does the production process, how is it different for color versus black and white? In terms of the ASP or the margin and the percentage of color, do you expect going forward, how is that going to evolve, basically?
Right. Basically, they are very much similar, but you know, from the bill of material, the color technology use four pigments. The black and white only use two pigments. So from that perspective, a little bit more pigments being used, but that's pretty much peanuts, you know. So in terms of the bill of material, that's minor and the manufacturing process is similar. I think your question would be, since it's color, we are in a better position to ask more premium. Once again, we would ask for the reasonable margin, slightly higher reasonable margin, but what we really want to do is to open up the e-paper market share, you know.
We are not really aiming for the short-term gross profit margin increase. We would rather, you know, go with, you know, higher or more e-paper market share.
Sure. Makes sense. Thank you so much.
All right. Thank you. Thank you, AJ.
Now we will take last question from Alan Wang. Your line is open.
Hi, Alan.
Hi, Johnson and Lloyd. Can you hear me?
Yes, I can hear you. Yeah.
Okay, good. Thank you. I have two questions.
Sure.
First question is, we see there are many more unmanned stores all over the world now. How do you see this trend? Would most of all of the unmanned stores use ESL? This is first question. Yeah. Thank you.
Right. As I just mentioned earlier, we do see the ESL business has stepping into organic growth mode. We do see the potential of it, you know. How soon or how quick the retailer would decide to install, it's a bit hard to comment. We do see the trend, just a matter of time. That's why we try our best to prepare for the future growth. We believe it wouldn't take too long for the big guys, even the smaller guys, to install the ESL.
Okay. Even in Asia, right?
Yes, we believe so. Yeah. In Korea, in Japan, and even in China, yeah, there's a decent amount of the ESL installation already. Yeah. We also see the potential in India. Yeah.
Okay. Thank you. Another question is about, of course, margin, which you just mentioned about the product mix, right? That affects-
Right.
gross margin. Recently then we know the components, right? Such as from a supplier, the cost down, such as driver IC. How do you
Right.
See this situation going forward, and how it's gonna affect E Ink? Thank you.
I think last year, due to the global component shortage, we suffered the higher cost on the TFT panel plus the driver IC. The situation turned better and I'm sure you guys know the price of the panel and even the driver IC has been, you know, more favorable to us. We take it very positively. Yeah. In terms of our cost. Yeah.
Okay, no problem. Thank you so much. Thank you for the great session. Thank you.
All right. Thank you very much. I think it's about time, 5:00 P.M. Thank you for you guys' participation, and let's talk soon next quarter. Thank you. Bye-bye.