Thank you for standing by, and welcome to the E Ink Third Quarter 2021 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 Webex replay will be available after today's conference. Joining me today are CFO Lloyd Chen and Finance Center Senior Director Patrick Zhang. Now let me turn the call over to Lloyd.
Good day, everyone, and welcome to our third quarter investor conference. Before we start, let's take a quick look at the safe harbor statement. All right, next page. Okay, let me quickly begin with the third quarter number first, for the third quarter sales revenue was around NT 4.4 billion, operating profit was NT 527 million. As you can tell, why a year-over-year decrease was caused by Yangzhou COVID impact, also, you know, component shortage. The net income for third quarter was NT 1.2 billion. The EPS was NT 1.08 .
For the third quarter YTD, basically our first quarter to third quarter accumulated, the sales revenue and operating profit and even the net income was the best third quarter YTD in the past 10 years. It's also worthwhile to mention that the operating income has been higher than the royalty income since last year. Actually, the third quarter YTD operating profit and also the net income is pretty much equal to the last year, the whole year performance already. Okay, next page. As for the operating profit, basically, it continued to grow due to the strong demand from markets through eReader, eNotes, you know, retail ESL, logistics and the signage.
As you can tell from the screen, operating profit has been moving positively. All right, next page. All right. In terms of the ROE and ROA, basically, third quarter YTD, ROE, and ROA has been rising since 2017. Third quarter YTD this year, ROE was around 11.9% and the ROA was around 7.8% respectively, which was pretty much 100% of 2020 whole year ROE and ROA. It shows the growing profitability and how we efficiently and effectively utilize the shareholder equity on assets to generate the profit that we need. Next page, please.
For the asset side, even owner equity, positive, increasing trends on cash assets, on total assets, even the net asset value per share, as you can see from the screen. All right, next page. Talking about the cash flow. Even the cash was decreased from NT 13 billion -NT 10.2 billion because we basically converted cash to financial investments and to CapEx on the ePaper production line to meet the strong market demand. The total financial assets plus cash we have, by third quarter was increased to around NT 13.3 billion by third quarter this year. All right, next page. All right.
So, after I just explained those financials, let's take quick look at the accomplishments we made in the third quarter. Quite a few awards being received overseas. We won two awards from Asia Responsible Enterprise Awards, aka AREA. This program basically recognizes and honors deserving Asian businesses for championing sustainable and responsible business practices. As I just mentioned earlier, we won two awards. The first one is Green Leadership, which recognize the impact of running a company's business on the sustainable environment and seeks to reduce and reverse the impact. The second one we won is Investment in People.
Basically, this award, Investment in People, honoring the company that has the policy and programs in place that show respect and care for the employees. Another one we won is also relevant to HR-related. It is from HR Asia. We won Best Companies to Work For, in Asia among basically 292 contestants. Also, for the product, our Spectra 3100 All-in-One D river IC won the COMPUTEX TAIPEI 2021 Best Choice Award. Last but not least, I think months ago, one of our manufacturing sites at Yangzhou was impacted due to the COVID, and now it's fully recovered from COVID.
Basically, it's accelerating the clearance of the backup orders. That's about the accomplishments we made for third quarter. Another exciting news is about ePaper certification. We basically work with the experts at TÜV Rheinland together for more than two years to develop a metric for evaluating specific optical indicators on reading comfort for paper-like display products. We are very happy to obtain the first paper-like display certification from TÜV Rheinland. Our product have long been associated with less eye strain and low power. Those certifications are proof that ePaper is truly like conventional paper displaying images without any backlighting.
We definitely will work with our ePaper ecosystem partners to promote the paper-like display certification, and we'll continue to innovate and bring our customer the most comfort visual experience possible. It's worthwhile to mention that the new certification was awarded to our color ePaper display by using the latest Kaleido Plus technology. In addition to our true paper-like experience, our product basically, you know, help the customer reach their net zero carbon emission. Also the sustainability goes through our, you know, products. As the global sustainability trend continue to shape the economy. All right. That's about the ePaper certification we just obtained. The next page.
The next page is a quick update about the ePaper Industry Alliance, EPIA. I think in the first quarter, we launched the establishment of the ePaper Industry Alliance, and there were around only 60 companies joined by first quarter. By third quarter now, more than 90 companies already joined. We believe more than 200 companies will join next year. Once again, the purpose of the alliance is to build up a better platform for ePaper ecosystem and well-utilize the platform to extend the ePaper applications on different domains, such as smart transportation, airport, education, factory logistics, retails, and even to the smart office and hospitals.
All the members in this alliance can explore more business opportunities. That's about the quick update on the alliance we introduced in the first quarter. I think right after the second quarter results conference we received quite a lot of inquiries about our ePaper production line expansion plans. We would like to take this opportunity to explain again. As explained in previous quarter, apart from two existing ePaper production lines we have, as you can see from the monitor, one in South Hadley, Massachusetts, in the United States, and another one in Linkou, Taiwan. We started capacity expansion for future growth. Four additional ePaper production lines.
As you can see from the screen, one will be pretty much fully ready by end of this year. Two will be ready next year. The last one will be ready sometime end of next year or early 2023. Apart from those four additional production lines, we also have the Hsinchu new building is under planning for the factory and office. Basically, those information explains the preparation for the future growth. We do feel the strong ePaper demand, which is much higher than our supply.
Therefore, how we better manage our supply chain on ePaper capacity to realize those higher demand into sales revenue will be our key focus going forward. That's about the production line expansion. Next page, please. Apart from those achievements, you know, production line expansion, I would like to share how we structure E Ink sustainability. As you can see on the screen, this architecture or you may call it E Ink sustainability framework. Basically, it starts with one big corporate sustainability goal, including both profitability and sustainability.
If it goes further down with full scope or scopes, basically a green product in nature and plus ESG. It then deploy down to five pillars as you can see on the screen. Basically, environmental sustainability. It's all about, you know, sustainable green sustainable products from the sustainable manufacturing. Social engagement, and I'm going to talk about that later in a separate page. Corporate governance concerning the governance empowerment for the corporate growth plus the information transparency. And together with the stakeholder relationship, basically by engaging more on stakeholders in terms of the ESG. If I go further down, we have basically six foundations.
That's those, basically, as you can see from the screen. It's all about the product and sustainability, green production, enterprise care, corporate governance, supply chain, and project and stakeholders. Across this six foundations, risk management is also equally important and definitely critical mechanism to secure the achievement of those actions by identifying risks, mitigating risks, and definitely will be removing risks during the execution. Last but not least, the six foundations mentioned above basically is fully tied up with the 14 SDG elements of basically sustainable development goals initiated by United Nations, which enable us to go with the global development initiatives to dedicate to be part of world citizens during the ESG execution process.
That's about our sustainability framework. The next page. Based on the sustainability framework I just explained, for the social engagement, one of the key important items we have been conducting the E-Reader for the Future project since 2017. We basically collaborate with our ecosystem partners jointly to donate eReader devices and e-books. The purpose of doing it is to build up the e-library for school.
You know, after years of solid works we have humbly donated nearly 2,000 eReader devices. More than 26,000 copies of e-books to 100 elementary school already and 20 libraries benefited more than 30,000 students with accumulated more than NT 170 million value equivalent. This project, eRead for the Future 2021, will be held tomorrow in Taoyuan in Taiwan. We also take this opportunity to share with you. At the same time, while we are having the results conference, there's the Taiwan Corporate Sustainability Award is taking place now for the consecutive fifth year joining TCSA, Taiwan Corporate Sustainability Awards.
We continue to be awarded with three awards. The first one is Sustainability Comprehensive Performance Award. The second one is Corporate Sustainability Report Award. The last one is the Growth through Innovation Leadership Award. Among those awards, we especially appreciate the last one, Growth through Innovation Leadership Award, which recognize our dedication on developing ePaper technology by utilizing this green product to then help our customer to reach the goal of net zero carbon emission. The last one I would like to share is the TCFD supporters. We signed up TCFD supporters this year. We definitely will dive in deeper to the TCFD framework through various climate related financial disclosures.
We are able to analyze, prepare, and even prevent the potential risks from the climate change. It basically enable us to echo of what the United Nations SDG 13 climate action is stating as one of the global social citizens. It's about those sustainability activities and the institution we will sign up in third quarter. The last one, by the way, thank you for participating on this results conference. I think please also follow us on Facebook. You just simply type E Ink and you can you know add it and follow us. Basically, we will provide the latest and greatest product and technology and also those sustainability activity, we are going to take or we have done. All right. So that's about the third quarter result conference that I'd like to share with you guys. Let's move to the Q&A session.
We are now in the Q&A session. At this time, we will now open 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. You can ask questions through the text in the question box on the sidebar. The first question is from J.P. Morgan, Julian. You may ask the question.
Hi, Julian.
Hello. Yes. Can you hear me all right?
Yes. Yes, we can hear you properly. Yes. Go ahead.
Okay. Thank you. I have some follow-up questions since I didn't get my questions answered in the last Chinese session. Okay, I have follow-up questions on your new production lines.
Right.
First is that for the four lines that you have been planning, are they all dedicated to color ePaper, or some of those lines will still be black and white? Would that be a dedicated line for each type or, you know, they can all be mixed production? That's my first question.
Right. Basically, for those new production lines, it can cover all type of our ePaper products. However, how to allocate the product is pretty much up to the operational needs and also, you know, the demand from our customers.
Got it. Okay, my second question is, what's the years you use for the depreciation for the new lines?
Your question is useful year?
I mean, yeah, the years for the accounting still be used for the depreciation.
Right.
For those new lines.
I can't remember properly now, but I think you can get those information from our, you know, financial report. Yeah. I'll leave you to find out. Yeah.
Okay. You mean you'll follow the existing practice?
Yes, definitely. I think you can get the information from our financial report.
Okay. Okay.
Three to five years. Yeah. As I recall, five years or three to five years, yeah.
Okay. Could you remind me again the total CapEx you will spend for these four lines?
Right. I think that would be too specific to talk about the CapEx for those two production lines. I think in general the total CapEx for this year, that would be ranging from NT 1.5 billion-NT 2 billion and for next year ghat would ranging form NT 2 billion-NT 3 billion, yeah, the whole year throughout the years. Yeah.
That will cover all the four lines that you plan to install this and next year?
Yes or no. Because it depends on how soon we get it ready. For example, if the last one was not ready by end of next year, perhaps some of the CapEx will be carried forward to next year. But I think in general, you can stick to those numbers I just mentioned to run your total.
Okay. Got it. For the four new lines, I'm wondering, did you sign up any long-term contracts for those lines to support your such a aggressive expansion?
Well, that would be too specific. I'll hold my comment on this. Yeah, I apologize for that. Yeah.
Okay.
I think let me put it this way. We definitely have certain level of confidence, you know, for this production line expansion. Yeah.
My final question would be on the Spectra All-in-One Driver IC side. I know that you only buy Driver IC for your own module, but given that your ePaper capacity expansion is so significant, but then Driver IC current supply remains relatively tight. I wonder how your customers, you know, those system integrator or module or e-tech module assemblers, how confident are you in their capability to secure sufficient Driver IC to support the volume that you're gonna ramp up?
Right. I think that's gonna be still a potential issue going forward. However, you know, through the increasing market share of ePaper, I believe those Driver IC vendors they do see the potential of this market. I'm sure they will figure out how to allocate, you know, more for ePaper related products. To answer your question, they could be the potential issue in terms of the component shortage, but we believe the situation will gradually getting better. Yeah.
Sort of a follow-up on this question. In your sort of a discussion in your Chinese session about the volume increase by about 130%-150% next year
Right.
Would you consider Driver IC supply the key risk or key downside risk to this target?
I think it could be affecting that number, but I don't think it would be significant. Yeah.
Got it. Okay. If I may, final question on gross margin. With the increased depreciation, you know, as you ramp up the new production lines, shall we expect your gross margin to be lower than this year's average, given the higher depreciation? Or do you think that the continued economies of scale can help you continue to improve your gross margin trend? Also, the product mix can continue to help improve your gross margin trend?
I think Johnson Lee indicated in the previous results conference. I mean the Chinese one. Basically, we will moving towards the material sales gradually more and more. That definitely will be helpful for our gross profit margin. I think that's a bit I want to answer your questions.
Okay. Thank you very much. That's all my questions.
All right. Thank you.
The next question is from Fraser. Fraser, you may ask your question.
Hi, Fraser.
Hello. Hi, it's Fraser from Herald. We very much enjoyed being shareholders and are excited by the progress you're making. Could you just help me understand a little bit more about where the demand increase is mainly coming from at the moment? We looked at some of the e-shelf labeling companies, and actually we invested one in Korea called SoluM. Is a lot coming from shelf labeling, the increase in demand, or is it from other areas as well?
Right. Right. Basically, we do see the increase in demand from various applications and products. For the eReader and eNote, we do see the increase in demand. For the ESL, we see much more stronger demand. To answer your question, both applications, the demand are increasing. Yeah. Relatively, stronger from ESL.
Okay. Those comments that the other person asking the question just made was about volume increase 130%-150%. Should we expect that tie into a revenue increase of that amount as well, logically? Or is there any reason that the revenue shouldn't increase by a similar amount?
I think, Fraser, it all depends on how we allocate the product. Because for the module sales, especially for eReader and eNote, we supply the module, so the ASP is relatively higher. But for the material sales, we only supply the ePaper material, so the ASP is relatively lower. In general, the capacity will be increased 130%-150%. It depends on how we allocate those, you know, products. I think in general, the company is growing positively, yeah, going forward. Yeah.
You don't have specific orders in advance, I guess, or very long in advance. Like, you don't have long-term orders. You tend to would have short-term ones from your module customers, would you? But you can kind of understand a little bit about the strength of the demand they're getting. You know demand's gonna be strong and you're gonna grow, but it isn't actually necessarily contracted for a long time in advance. Is that right?
Basically, we do have good visibility for the orders, you know, from the module customer and the material customers. Whether it's contracted or not, I withhold my comments on this. It's a bit confidential to say. As I mentioned earlier, we are quite confident towards those orders. That's why we have a plan for additional four production line expansion. Plus, the new building for the factory and offices, you know, for the further capacity expansion. I mean, on top of those four additional production line.
How big is the new building? How many production lines could that take in time?
You mean for the new building?
Yeah.
Right. For the new building, basically, up to six additional production lines can be loaded. We have the potential room for six additional production lines. If later on we decide to expand further. Yeah.
How long would it take to order and receive the equipment in terms of equipment lead times to get if you wanted to put more lines in beyond the four that you've?
Right. For example, for those four additional production lines, it takes us, I think, to to three years to get everything ready, you know. For additional six lines, you know, maybe three to four years. Yeah. Approximately. Yeah.
I noticed just on your quarterly numbers that you gave, the non-operating income was up a lot as well. Could you just explain? Is there a seasonality to that?
Fraser, can you repeat this question again? Yeah.
Yes.
I apologize.
The non-operating income was up a lot as well?
Oh, right. Yeah. Non-operating income. Right.
Could you explain that, please?
Yeah, sure. Fraser, for the non-op income, basically two of the key components included there, the first one is the royalty income. We have been collecting from those, you know, TFT-LCD makers. It has been happening since 2012, I believe. The other one is basically we utilize the cash we have and then, you know, have it invested in those stable, low-risk but generating a reasonably higher yield financial products. That's the reason we have the higher non-op. For this year, in the second quarter, basically, there was a spin-out transaction which happened.
We got one-off non-op gain. That was around NT 600 million non-operating profit we booked in the second quarter. That's for the one-off transaction.
Okay. Very good. Just to summarize what you said about the demand. There's demand across the business, but you said particularly for ESL labels, I guess. Is the demand remain mainly for the black and white, or are you seeing increased demand for some of the color?
Not only from the black and white, also demand from our color products. Yeah, color products, yeah.
Do you expect the shift, the mix to shift towards more, a higher percentage of color over time?
It has the potential, but it is growing, but still relatively lower, yeah. It does, you know, have the potential, yeah, on those color products.
Okay. Great. Does demand still remain ahead of, even when you've got the additional capacity in, do you still think that there will be demand ahead of your ability to supply?
Fraser, please repeat demand. What? Sorry. Yeah.
Okay, sure. You're increasing your capacity, when these new lines come in, by 130% or 150% next year?
Right.
Will that be enough to meet the demand next year?
Oh. Oh, right. Yeah, yeah.
Will the demand still be even greater?
Yeah. No. Right. Right. I think for the next year, we believe we are pretty much okay. The year after, I think we could be struggling a little bit in terms of the you know, capacity. As I explained, we have been working very hard, you know, on those production line expansion. From now on, I think next year we seem quite okay, but the year after, we still don't know. We need a bit time to observe, but it could be, you know, it could be in short, yes. That's why I say apart from those, you know, four additional production line, we also build up a new building, you know, to for the further expansion. Yeah.
Great. I should let somebody else have a chance to ask a question. Thank you so much for answering my question.
All right. Thank you, Fraser. Thank you for your questions. Yeah.
Next question is from Sherry. You may ask your question.
Hi, Sherry.
Hello, management team. Thank you for taking my question. I want to ask, the first question is about your opinion about the Q4 margin. The second question is, how do we estimate the OPEX ratio and the tax ratio in the future? Thank you.
All right. Sherry, thank you for your question. I think we normally don't comment that much in terms of the gross profit margin. I hold my comments on that. In terms of the operating expenses and the tax rate, we invest quite a lot on the future technologies. I believe going forward our operating expenses will be increasing. However, it definitely will not increase proportionately as our sales revenue increased. From the percentage perspective, I believe the OPEX percentage will be you know getting lower and lower since our sales revenue will definitely grow.
For the tax rates, I think, as for the effective tax rate, we've been working hard for our tax planning. We believe basically it will be lower than those, you know, nominal tax rate globally because we have multiple global sites, you know. I'm just trying to figure out how I can give you guidance, but without disclosing that much numbers. I think in the past few years, our effective tax rate is lower than 20%. I believe it would be slightly higher, yeah, going forward, yeah, since we are making more money. Yeah. That's the guidance I can provide. Yeah.
Thank you. My last question is, what is the current technical limitation of Gallery? We didn't see it on mass production in EPD. Thank you.
For the Gallery, we are already in the mass production mode. What we are working on now is we already you know shipped the sample to the customer and waiting for the customer feedback. Quite a few are already in the designing stage. It's a bit hard for us to comment how you're gonna go from customers' perspective. I think everything is moving positively.
Thank you. That's my whole question.
All right. Thank you.
Thank you. Now we will take next question from Jerry Su.
Hi, Jerry.
Yes, thanks. Thanks for taking my question. I just want to follow up on the previous comment about your capacity plan, your capacity outlook for 2022 and 2023. I think you mentioned that you're pretty much okay for next year. 2023, you still have some concern. Can you just you know help us understand or clarify a little bit you know what's your concern for 2023? Is it going to be you know shortage issues or you know if any, or if there's any other things that you have seen? Thank you.
All right. I think the concern is coming from the stronger demand from the market. What I'm trying to say is even we get four additional line ready, but it's a bit hard to expect how fast or how big the ePaper market will grow. From the visibility we have so far, I think next year should be okay. A year after, even you know, in 2024, it's a bit hard to predict. We do feel the growing momentum, you know, from the ePaper related products. That's what I am referring to. Yeah.
Further, that's why I say a new building is under planning. If the situation or positive scenario goes, we can, you know, still have the room for the further expansion in that new building.
Okay. The swing factors sounds to be like from ePaper. As ESL demand seems to be, you know, quite strong, but I'm just wondering why, if that's the case next year, why you think, you know, it's pretty much okay, given the, you know, continued proliferation of the ESL globally?
Right. I think for next year, we do have quite clear visibility, you know. From those orders we received plus the production line expansion plan we have conducting. I think we are quite okay with that. Yeah.
Okay. Basically, you think next year will be more balancing after the capacity expansion, and then but 2023 could have some risk going to shortage again?
Yeah. Could be the case, but you know, everything is changing every day, you know. It seems quite okay so far, yeah.
Got it. Then maybe lastly, I'm not sure if anyone have asked about this, about FFS. How should we think about the FFS licensing income going forward?
Right. I think. Let me put it this way. I suggest we better not look at those royalty income that much because it will be decreasing, definitely. However, our operating profit is already, you know, higher than the royalty income since last year. I don't think that that would be the focus to look at it. However, if you're talking about the non-op, I think in the past few years, our non-op income has been keeping a quite good level. I think from that perspective not to worry too much about the royalty income decline. Yeah.
Okay. Got it. Thank you.
Thank you.
Now, we will take the last question from James Bai. You may ask your question.
Okay. Hello, good afternoon.
Hi, James.
Hi. Hi. Can you hear me?
Yes.
Okay. Can you give us some number about the total market value of ePaper, like in 2020 or 2021? The percentage of eReader and ESL accounts for? Maybe the each growth rate in next few years. That's my first question.
I think in terms of the market penetration, I think for the ESL, we are pretty much just, you know, 5% of the TAM. For the eReader and if you are talking about the ePaper technologies, I think we are dominant in this position. If you are talking about the handheld device, including iPad and other handheld device, I think we still have a massive room to grow. Yeah.
Okay. The second question is, can you give us the proportion of shipment area of eReader and ESL?
You mean the area consumption? The ePaper-
Oh, yes.
The area consumption?
Yes.
Right. Let me put it this way. I think the ESL on ePaper consumption I think since last year, it's pretty much equal to the eReader and ePaper consumption already. Yeah. I mean, once again, it all depends on the product mix. I think since last year both application products area consumption pretty much equal. Yeah.
Okay, thank you.
Yeah. Because it doesn't really make sense if we look at the units of the shipment because it comes with different sizes, you know. That's why I answer your question in the ePaper area consumption.
Okay. Yes. I got it.
All right.
Thank you very much.
All right. Thank you.
Thank you for your question. Now, let me turn back to Lloyd to close the meeting today.
Right. Thank you very much for joining third quarter results conference. See you soon in the next quarter. Thank you.