Innolux Corp

TWSE:3481

Earnings Call Analysis

Innolux Showcases Growth and Restructuring

Innolux reported a positive outlook in its recent earnings call, focusing on sustainable demand, a restructuring into display and non-display domains, and financial gains. The company has reorganized its business to target higher-margin areas such as avionics and industrial uses, while growth in non-display revenue from 10% to 22% is driven by automotive products. Financially, Q2 saw improvements with a 20.8% quarter-on-quarter revenue increase to TWD 55 billion, and marked enhancements in gross and operating margins by 7.6% and 9.2% respectively. Innolux is committed to ESG with initiatives aligned with the Science-Based Targets initiative (SBTi).

Strategic Business Restructuring and Financial Results

This earnings call covers some crucial areas. A major highlight is the restructuring of the company's business unit, leading to a division between display and non-display domains. This strategic move aims to enhance business resiliency against cyclical trends and secure a healthy balance between display and non-display operations. Financially, the company experienced a remarkable quarter with substantial top-line growth in its TV and notebook segments by 27% and 24% quarter-on-quarter, respectively. This performance is reflected in improved gross and EBITDA margins, up 7.6% and 9.2% respectively in the second quarter, coupled with a significant reduction in total inventory.

Commitment to Sustainability and Long-Term Growth

The company casts its eyes to the future with its approved science-based targets contributing to limiting global warming. By fortifying the non-display domain, it seeks to tap into niche technologies across new business areas such as X-ray and automotive solutions, aiming for not only improved gross margins but also robust long-term growth. The financial undertakings regarding these initiatives are treated as capital investments with the goal of deriving sustainable returns.

Market Dynamics and Future Demand Outlook

Looking ahead, the company identifies a healthy supply-demand scenario for larger-sized panels, driven partly by the anticipated demand spike from major upcoming sports events. The average TV size continues to grow, currently at an increase of 1.4 inches, favoring utilization rates. Additionally, the company perceives a post-pandemic market ripe for new applications such as XR and AI, which will likely bolster demand for high-performance notebooks and monitors.

Earnings Recovery and Utilization Targets

Despite a current downward trend in bottom-line profitability, there's an expectation to return to positive net earnings by the second half of 2023 or into 2024. While specific guidance on the timing remains elusive due to market volatility, the company's executives underscore a confidence based on demand and supply recovery signs and controlled loading since the previous year. Furthermore, Q3's utilization rate remained steady at around 80%, and the company remains flexible, ready to dynamically adjust utilization and product mix in response to market requirements for better profitability and sustainability.

Earnings Call Transcript 2023-Q2

[Operator]

[Operator Instructions] You may download the Chinese and English conference materials at Investor website. Please take a moment to read the disclaimer notice slide.

Today's meeting, we will have Mr. Jin Hung, Innolux Chairman and CEO; and Mr. James Yang, our President, to provide us information on market overview, corporate strategies, financial results and ESG update. After that, we will conduct a question-and-answer session.

Now I will hand it over to Jin.

[Jin-Yang Hung, executive]

Good afternoon, friends. In today's meeting, we have a few key points we'd like to share with you but how sustainable the demand will be not long ago, we announced the restructuring of our business unit and display domain. So we will elaborate a bit more with that perspective. And thirdly, on the financial results we just announced in the second quarter, we have been seeing the quarter-on-quarter improvement. So we will also discuss a bit more on that. And lastly, the ESG advancement, we will share with you. So we'll stop here and hand over to James.

[Chu-Hsiang Yang, executive]

It's James. I'm going to go over the market share and first to report you a good news. And now we just entered the third quarter, we performed the second quarter. The previous first quarter, the higher inventory -- and then from now on, is due to the capacity actually is well controlled by self constraint to control the recovery.

And then also through the pickups. So that means the TV, the readouts, the larger size TV growth is [ 1.z ] and brand industries to pay the foundation for next year and to enjoy normal lighter gamer as a player enjoy the wire the GPU, CPU to enjoy the entertainment application. That is 1 driver.

Second driver is for the commercial notebook due to the cyber security concern, the Microsoft Windows 10 will end of surface from 2025. So from now on, we will get the opportunity to refresh after post pandemic commercial application after the global market situation getting stable and the GDPs are getting high, and then we can enjoy the commercial notebook demand.

The other is the new application. The high tech always bring the new demand for the product. For example, AR, VR, XR combined with the nowadays the hot topics AI, they need a new notebook with papers computing capability and also cybersecurity resilience. By this kind of demand, we believe, after the peak of 2021, the notebook, we're getting back the second half until the next year and to the 2025 for the notebook segment.

And now I will hand you over to Jin. Thank you.

[Jin-Yang Hung, executive]

Thanks, James. In the first half of the -- Innolux is experiencing the organizing our business into the 2 major domains as you can see on the slides is also the small size mobile phone. On this part of the business cost and our yield. This will definitely remain as our major revenue and earnings contribution. However, even within the so-called display or the component business domain, we also have the non-commodity business. We want to focus or further penetrate with higher margin and steady shares like avionics and industrial use, so on and so forth.

Other than this, the key things is that we also separate the non-display domain. That includes X-ray business and also the automotive business, which is the 2 entity we spring off in the last few years into the Innocare and also CarUX. On this part of the business, our focus is not just only on the component itself, even more important is we focus on the total solution provider. That is we want to see and further strengths were Innolux future.

I think also I strongly believe that a good balance in between the display and the non-display will be crucial for Innolux to secure the resiliency against cyclical content on the display business.

Next page. You can see that since the first quarter '22, our revenue share of the non-display has been growing steadily from 10% to 22%. This obviously is mainly driven by the automotive products growth, and we will continue to seek for the strategy partners to provide the complete solution include like cockpit entertainment and the automotive driving system also the charging fuel display to the customers.

And I think here, you also see that we believe that our strength on the inherited includes the location, includes our talents, includes our know-how. We'll review each of them and also dig out further. And hopefully, we will be able to revitalize these inherited strengths into the other right market to build the mobile and the promising new build.

Next page. On the financial side, I think as James mentioned earlier on the market update, our second quarter has seen a good improvement on the TV and notebook business both of the sectors has grown the 27% and 24% Q-on-Q respectively, on the top line. Also, our total inventory has hit a new low since the second quarter '21.

Other than that, our gross margin and EBITDA margin both are turning positive. Our gross margin and operating margin has up by 7.6% and also 9.2%, respectively, in second quarter. That thanks to the whole...

Next page. This page shows you the -- our traditional display, much of the capacity increase. However, other than this CapEx, there are also a lot of the places with the cash usage. For example, the ESG, we definitely committed ourselves to the ESG's long-term sustainability. So we are not just looking at that or treat that as expenses. We actually treat our ESG as a capital investment, and we're looking for the return. How are we going to make that into -- turning that into a business.

And other than that, the new technology rollout, like point out here, on the micro LED, we believe that there are a lot more for us to further dive into also the PLP, the panel label packaging is also where we see the future CapEx would need. Other than this, the hardware side, even on the software side, the automotive system, we would expect, like I mentioned earlier, a lot of more integration internally and also with our customers on the different kind of software skill set that will also for the future cash utilization.

Besides all of this, if there are still other cash level where we will definitely look into the other capital accommodation to seek for the best or the most optimal structure. This is the financial results we just announced on the second quarter. Our revenue has hit the TWD 55 billion, which is about 20.8% quarter-on-quarter increase, while our operating profit and our EBITDA has also turning much more positive. We see quarter-on-quarter improvement and our CapEx has maintained a stable also the last quarter's level at around TWD 5.6 billion.

Next page. Last but not least, very exciting, our science-based target as approved by the SBTi, is in line with the pathway of limiting the global warming to well the emerging focus of the -- or the concern on the bio diversifications issue into our operation by restructuring the business unit into the display and non-display domain. I think we talked about this during the earlier conference.

The non-display domain means to expand the inherent niche technology to new business like X-ray, automotive and semiconductor. This domain is differentiated by a complete solution provider rather than just the component approach. So we expect closer and steady engagement with the client customers, our clients on top of the -- just the pure gross margin. So in the near term, I can happily to say that the exact revenue or gross margin target, but we are confident to see the robust growth in the longer term.

[Li-wei Hsu, executive]

And the next question is about market outlook. How you will find the market status of Q3 in the second half year? And when will TV an IT shipment resume to pre-pandemic level. We're going to have James to answer this question.

[Chu-Hsiang Yang, executive]

Okay. I shared to all of you, larger-sized panel, the supply demand is quite healthy. The upcoming major sports event in the next year, increase the future demand for large TV. Average growth of TV size comes to 1.4-inch which favors the utilization rate. We expect this quarter is much better than Q2 and then second half year is better than first half, like the third point.

And then second, about the notebook applications. Now of course, the gaming notebook is still very welcome in the first part of the restructuring. And we expect coming the back-to-school replacement of a commercial notebook will sustain the growth. And furthermore, the AI now is a very hot topic. Microsoft or co-pilots software need a more high computing capability of hardware that will trigger another replacement of a commercial high-end notebook for the AI application.

So we think the pandemic changed the people's lifestyle and working environment. [indiscernible] is normally people use the notebook, when they go to whatever office or return to home and then with a big screen for monitor enjoy entertainment. These kind of things will enlarge the demand for commercial and also notebook and monitor applications. And then also nowadays, the new opportunity, XR, AI, we are thinking the post pandemic, the market is a new era of new applications.

[Li-wei Hsu, executive]

And the next question is about earnings. We have seen a loss trend in the bottom line into positive by Q3 or by the end of 2023, maybe we have Jin to provide information on this.

[Jin-Yang Hung, executive]

Okay. Okay, a tough one. We believe the loading control since last year, that has served as a very good base for the demand supplies recovery. As the recovery sign for the IT also appear like James has mentioned earlier, we are confident to say that beatings will get better and better in the second half of the year and also into next year 2024. .

And as you can see that our EBITDA margin -- gross margin has in Q2. Definitely, we see the next checkpoint as a single quarter's positive -- net positive. I can only see that we expect to see this the sooner the better, but I cannot provide you the exact timing for this to happen. It still depends on dynamic environment change.

[Li-wei Hsu, executive]

And the last related question is about utilization rate. What is the utilization rate of Q3? Will the future utilization rate be addressed based on market needs? We can have James on this?

[Chu-Hsiang Yang, executive]

Sure. The utilization rate of third quarter was around 80%, more or less the same with last quarter. We will continue to adjust the utilization rate dynamically and then product mix to meet the market needs and for the better profit and maintain our sustainability.

[Li-wei Hsu, executive]

Okay. Thank you. We have finished the first part of Q&A. Now we will take online questions.

[Operator]

[Foreign Language] [Operator Instructions] The first 1 to ask question is Jerry Su from Credit Suisse.

[Jerry Su, analyst]

[Foreign Language]

[Jin-Yang Hung, executive]

I will let James to answer the first and probably also the second question about the agenda.

[Chu-Hsiang Yang, executive]

Okay. So thank you, Jerry, for your question. First, we tried to first upgrade our technology of our process. For example, from TN technology to the VA and then even better to IPS. So let me -- we make some kind of concern on our capacity. But our capacity will optimize the product portfolio to enrich our value. So that is the first thing that I let you know about this quarter, the revenue and the issues.

Second thing is about Indian project. You mentioned about the Vedanta case, according to Vedanta display CEO, YJ Chen announced in the semicon India 2023, Innolux is their strategic partner to facilitate the first 50 LCD stack and LCM in India. And then these kind of things is got the blessing from the central government to the federal government, even our partners. So that's the second thing.

And then now in the final stage of central government, that means Honorable Prime Minister Modi's approval, and then we can keep on. We hope it will happen soon.

[Jin-Yang Hung, executive]

Okay. And I will answer the last part of Jerry's question. On the so-called the non-display side, as you can see on our presentation slides that is being over 20% of the total revenue breakdown, includes the X-ray detectors and automotive. And also you mentioned the POP project. Obviously, we expect this percentage to continue to grow going forward, will be mainly driven by the automotive since we have quite some projects in the pipeline that we are confident to see.

On the other hand, you also mentioned that whether we are likely to use the M&A to achieve the next stage for next milestone. Our answer is we do -- we are for, we are pretty open. We do not exclude any possibility to further enhance this part of the business. However, we will not do the M&A for the -- only the revenue in large purpose. We're definitely looking for better synergies to enhance this part of business. As we said earlier, it's not just component itself, it's more important is that we are very committed to develop our overall solution providers role. So any further company's opportunities can help us pretty open.

[Operator]

[Foreign Language] [Operator Instructions] Next 1 to ask questions, Derrick Yang from Morgan Stanley.

[Hong Ji Yang, analyst]

[Foreign Language]

[Jin-Yang Hung, executive]

Okay. Let me try to take that question first. You know that the automotive business is definitely for the longer term. Usually, we get the case for about 5 to 7 years life time for 1 single order from different branded customers. So that means that even at the very beginning, a couple of years ago, when we start to penetrate or further strengthen our automotive business, that business was enough for us to support the next couple of years backlog.

So from that perspective, I think earlier, I remember probably last analyst meeting, we also highlight that our automotive business were likely to see the double-digit growth. So that one, we are confident to say. However, in terms of the total revenue or earnings percentage started a little bit more dynamic because that also depends on other parts of the business like TV now is recovering, IT is recovering.

So it depends on the other part of our business, how fast they grow. But overall speaking, if you have 1 leg, which is growing like double digit and the other part is probably slightly recovery or a more robust recovery, I would expect to see the percentage will still grow. Ultimately, we will see that probably an optimal stage that this part of business so-called the non-display at least 1/3 of the company and may be likely to reach half of the company's total revenue breakdown in the longer term, okay?

So that is what we think will build the company as more resilient in terms of the revenue or earnings exposure to not only just the consumer, consumer electronics, but also industrial, but also new business opportunities so on and so forth. So that is the company's longer-term view. I don't know whether that answers your question, [ Kennen ].

[Hong Ji Yang, analyst]

Very clear.

[Chu-Hsiang Yang, executive]

Yes. One thing I tried to share with you about the trend of user experiences, like our focus on CarUX, that means we not only focus on the driver of co-drivers. We offer the simulator and the dashboard, integrated with the central controlled 2-in-1 display with some kind of supporting the smartphone software and even further up this AI personal assistant or the driver monitor system to maintain, improve the safety of the drivers.

Second thing is we also cut in the passengers and real estate. We launched the largest 31.3-inch open transmitter about the user experience on the cinema display. We can compatible for the 16 x 9, 21 x 9, even 32 x 9 contents for entertainment. But nowadays, since executive are quite busy, we can split this into the 3 screens for video conference. So this kind of thing is wonderful Tier 1 positions we are leading the application in this.

[Operator]

[Foreign Language] Gilbert Lu from [indiscernible] Securities.

[Unknown Analyst]

[Foreign Language]

[Jin-Yang Hung, executive]

[Foreign Language]

[Operator]

[Operator Instructions] Right now, we have Lisa Chen from Yuanta.

[Meifen Chen, analyst]

[Foreign Language]

[Jin-Yang Hung, executive]

[Foreign Language]

[Operator]

There seems to be no further questions. Thank you for your participation. We will conclude.