Innolux Corp

TWSE:3481

Earnings Call Transcript 2017-Q4

[Operator]

Good afternoon, institution investors and media friends. Welcome to Innolux Corporation's earnings call for the fourth quarter of 2017. [Operator Instructions] The presentation deck has been made available on our website. Please feel free to download it.

Today's earnings call will be hosted by Mr. Daniel Lo, Director of the Finance and Accounting Center, and he will begin the conference call by presenting the earnings result of the fourth quarter of 2017. Let's welcome, Daniel.

[Chien-Lang Lo, executive]

Thank you. Good afternoon, ladies and gentlemen. I'm Daniel from Innolux. Thanks for joining us in this earnings call conference of the fourth quarter of 2017.

Before we begin, allow me to introduce the speakers today. The first one, our Chairman and CEO of Innolux, Mr. Wang Jyh-Chau; the second one, the President and COO, Robert Shiao; the third one is our GM of TV business unit, Jimmy Hung; the fourth one is the General Manager of AII business unit; James Yang; and the fifth one is the General Manager of our Mobile Products business unit, Yang Hung-Wen.

This earnings call will last for about 60 minutes. I will begin with the earnings result of the fourth quarter of 2017 and the overall operational result of 2017, followed by the business guidance and outlook from President Shiao. Afterwards, we will have Q&A session. All speakers will also give their thoughts on the market, technology development and the market supply-demand status. If you would like to raise any questions afterwards, we will have an online Q&A session. This will be our procedures today.

Before we proceed with our presentation, please kindly read the disclaimer on Slide #2. Please also be reminded that all the numbers in the slides are unaudit figures prepared by Innolux.

Now please move on to Slide #3, income statement. For Q4 2017, net sales was TWD 79.1 billion, which is comparable to Q3. Gross profit was TWD 11.2 billion. Gross profit margin was 14.1%, which was declined mainly due to the effect of ASP. Operating income was TWD 5.7 billion, while operating margin was 7.2%. Net income was TWD 4.3 billion, while net income margin 5.4%. Basic EPS was TWD 0.43 per share. EBITDA was TWD 14.2 billion, while EBITDA margin 18%. The CapEx was TWD 9.8 billion. As for depreciation and amortization, we've arrived at TWD 8.6 billion.

Now let's look at our operational results from the whole year of 2017. In 2017, net sales is TWD 329.2 billion, up by TWD 42.1 billion from 2016, growing rate 14.7%. Gross profit was TWD 68.7 billion. Gross profit margin 20.9%. Operating income TWD 47 billion, while operating margin 14.3%. Net income was TWD 37 billion. Basic EPS TWD 3.72 per share. EBITDA in 2017 was TWD 80.6 billion, while EBITDA margin 24.5%. As for depreciation and amortization, we've arrived at TWD 33.6 billion. The CapEx was TWD 25 billion.

And now we go to the combined balance sheet highlights. By the end of 2017, our cash was around TWD 66 billion, inventory TWD 30.3 billion, short-term and long-term debt is TWD 28.2 billion.

For financial ratios, current ratio is 120%, debt-to-equity is 11%. So net debt to equity shows we have net cash.

And Slide #6, area shipments and TFT LCD ASP trends. Area shipments in Q4 are 7.72 million square meters, up by 10.6% from Q2. The ASP is USD 341 per square meter, down by 8.6% from the previous quarter.

And small- and medium-sized shipments and sales trends. For small- and medium-sized TFT panel revenue, we've arrived at TWD 19.1 billion. The shipment quantity and area shipments are both similar to the last quarters.

As for sales breakdown by application in Q4: TV panels accounts for 45%; Desktop 11%; Mobile PC 16%; and Mobile and Cellphone 28%.

As for the sales breakdown by size for Q4: revenue generated from panels of 40 inches and above has come to 41%; 30 inches to 40 inches, 3%; 20 inches to 30 inches, 13%; 10 inches to 20 inches, 19%; 10 inches and smaller is 24%. This concludes our reports on the Q4 of 2017 and 2017's overall operation results.

And next, we are going to invite President Shiao to report on the business outlook and guidelines of 2018.

[Chih-Hung Shiao, executive]

I'm Robert Shiao from Innolux. Good afternoon. First, best wishes to all of you before the Chinese New Year. In 2017, we have achieved a lot, and in 2018, we're still facing quite a bit of challenges. For 2018, the global economic development is forecasted better than 2017. So the market demand is there, and it will depend on how we manage at the supply side. On the supply side, we have a quite new capacity as the 8.6-Gen and 4.5-Gen, as we all know. But the first half and the second half supply demand may vary because the capacity will increase about 8% to 10% averagely as we forecast.

On the market demand front, the TV shipment will increase and the sizes would also be increased. The total effect will lead to 5% to 8% increase. Therefore, overall, the performance will be level up a bit.

On IT front, the demand for monitor and notebook will remain relatively the same as previous year. On the cell phone sector, the screen migrating to 18:9 full screen. So it is at a transition period.

To sum up, the guidance of the first quarter of 2018 is as following: the large-sized shipment is to be down at high single digit. The mixed ASP shipment is to be down at mid-single digit. And medium- and small-sized shipment is to be down in high teen. And SP -- ASP mix is to be down at low single digit.

The first quarter is usually the traditional low season. It is also the production line transfer and the overall transition period for us.

As for further details of each production line and inventory level, I'll invite head of each business unit to report to you. Let's first invite James.

[Mao-Sheng Hung, executive]

Hi, I'm James, Jimmy. 2018 will be a year with sufficient supply in terms of design capacity. As mentioned by Mr. Shiao, there will be more capacity added to this year. As explained many times, the design capacity does not equal to the actual production capacity.

Innolux holds a careful and optimistic attitude to monitor the relevant development, including size change, resolution and speed of new available capacity from other fabs and to react properly. So this year, we are very carefully optimistic.

Now we are entering to a slow season. The worldwide TV inventory tended to be a bit higher, especially in China.

So in the -- but in the emerging market, Latin America and Southeast Asia, they appear to be quite good. So that's to say, earlier we have been promoting the products for replacing CRT products, and the relevant progress has been -- is pending.

So therefore, it is better to share relevant indicators after this slow season that would be more accurate. For this New Year, Innolux will adopt a new strategy, which has been addressed many times. We are transforming from a panel maker to a software, hardware integration company, including complete sets, commercial displays and complete display systems. We will start to move shipments.

That's all from our TV Product business unit. Thank you.

[Chih-Hung Shiao, executive]

Now let's invite James.

[Chu-Hsiang Yang, executive]

Hello, everyone. I am Chu-Hsiang from Innolux. We all know that Q1 is the season to introduce new IT products. Overall, there will be no big surprise. But in micro market, we can see that Innolux has a lot of opportunities to breakthrough. For notebooks, by utilizing the automatic smart assembly line, our high-yield rate has earned great recognition from customers.

We'll use the 12 automatic production lines to produce even narrower bezel for notebooks, so we can expand to see the notebooks sector to grow.

As for the lower power consumption, our self-developed oxide technology and a-Si low-power solution have obtained Intel's recognition as the most competitive and power-saving notebook solution in CES 2018.

So this will be our new direction to expand. From cell phone to tablet to notebook and to Touch on Display, this is the development trend. We aim to offer a one-stop shopping service to our customers. This is to say that we will surpass our competitors by modifying mechanical specs and power-saving performances from a single notebook module to include touch and to apply optical bonding technology. We believe we can expand in the notebook sector.

As for gaming monitors, 3-sided or a 4-sided narrow bezel AAS panels are our focus. These products are high in value. Following up the 2017 growth, we will expand our market share of monitor in 2018.

As for automotive applications, in addition to higher resolution and bigger sizes, we provide optically-bonded 3D display panels. This will drive us away from our competitors.

As for other special applications, we keep our leading position in the medical market.

For electronic paper, we have moved from hard plastic to flexible substrate. Our products have become more valuable.

That's all from me. Thank you.

[Chih-Hung Shiao, executive]

Okay, for Mobile Products, let's ask Hung-Wen to give us some report.

[Hung-Wen Yang, executive]

Hello. I'm Hung-Wen. In Q1, the market of cell phone is rather quiet. We have seen a decline. This is because in the transition from 16:9 to 18:9 screen, the brand companies have high retail inventory. So we haven't aggressively promoted 18:9 screen products. Therefore, our customers are trying to move out inventories instead of placing new orders. We believe that after such period, everything will go back to normal. In the past, due to short of production capacity, we were unable to offer sufficient supply. For the customers, we have been approaching in the recent years, we will be able to offer the excess production capacities to them in the future. Therefore, we expect that our 2018 shipment volume of small- and medium-sized products will not be lower than the last year's, but will go up. That's the outlook for small- and medium-sized products.

[Chien-Lang Lo, executive]

Next, we will proceed with Q&A session for our institution investors.

[Operator]

[Operator Instructions] First question comes from Citibank, Arthur Lai.

[Arthur Lai, analyst]

I have 2 major questions. First one is, could you please update us the collaboration project in LTPS fab for small- and medium-sized panels? What's the current status? When can we see the relevant revenue and profit coming in? Also in the past, we only provided for Hon Hai's production, and in the future, will there be opportunity to have deeper collaboration to develop markets? And additionally, in the planning in China by Hon Hai, what's the role of Innolux? This is my first part of questions.

[Unknown Executive]

Arthur, our Board of Directors has agreed to purchase the L6 fab from Hon Hai, LTPS fab. In the beginning, it takes time to set up, so the early business model remains unchanged. That is the fab produces the products of Hon Hai, while we offer OEM service only. Of course, we have to increase the relevant value overall, including optimizing customer and production selection. So the relevant revenues have been combined into ours, while the business model remains the same. That's what we want to report to our investors. As for Hon Hai's planning in China, in the group, there are several panel makers, each has its own advantages. If further strength can be created through collaboration, the planning in China can be more complete. So each company has its own role. Basically, the Japanese company, SDP is in charge of the investment. For Innolux, we have a great deal of experience, so we will have our own role in due time.

[Arthur Lai, analyst]

May I follow up with another question? As the relevant revenue has been combined, what's its share to our Q4 results? How about fab's gross profit? Is it higher or lower than Innolux' original gross profit?

[Unknown Executive]

For this question, would Daniel or Robert have any answers for that?

[Unknown Executive]

I think the share is not big, around 5% to 6%. For gross profit, it differs according to different products. So not able to give you an overall figure.

[Arthur Lai, analyst]

I also would like to ask Daniel or Robert, in 2018, how do we see D&A and CapEx?

[Unknown Executive]

I think that we will have a higher CapEx in 2018 in order to purchase L6 fab, which is around TWD 55 billion, including the announced TWD 30 billion CapEx for L6 fab. And for D&A, it will be a bit more than 2017's at around TWD 35 billion to TWD 36 billion.

[Operator]

Next question comes from Crédit Suisse, Jerry Su.

[Jerry Su, analyst]

I have 2 questions. On the large size front, you mentioned that the supply and demand on the first and second half will not be the same, so could Jimmy elaborate a bit more what would be the situation? Also the second question is about TV set. Last year, we have set goals. Wonder we've reached those goals this year? What about their capacity ramp-up? Is there any challenges or are you moving ahead of the schedule? This is on the large size front. As for small and medium size, you mentioned cell phone market is a bit slow. Therefore, some capacity has been moved to other production. Can you elaborate that a bit further, especially with the acquiring of L6 fab, the capacity should be ample. Wonder what's planned for the LTPS capacity?

[Mao-Sheng Hung, executive]

I'm Jimmy. Let me explain a bit more in detail. President Shiao mentioned earlier that the overall area shipment or production will have a 7% to 8% increase, but this increase will probably happen in the second half of this year. That's why we've been emphasizing that we have to research on each and every factor that would affect design and production. You know the industry well enough to understand that TV sales follows a certain time pattern. So when we make capacity arrangement, it is not always possible for us to match various demands, the high and low season. That's why we believe the seasonal changes or its demands may not be in line with the forecast. Therefore, we need more accurate data. Perhaps after Chinese New Year, when we get more actual data from the market, we can make a more accurate forecast. As for TV set shipment, no matter it's commercial display or pure TV production, we have some new development from the end of 2016, and there is already some shipment then. In 2018, the shipment will be increased in great volume. The high shipment this year, the first leg should be in March since it is the timing for China market. The second high season would be probably in June, July as that will be the timing for European and American market. The high and low season for TV is even more obvious in panels, so the capacity arrangement is the greatest challenge for us. Mr. Yang mentioned earlier that Innolux has quite a few smart manufacturing and big data-related development plan. We have confidence that we will overcome all the challenges. This is my report.

[Hung-Wen Yang, executive]

I am Yang Hung-Wen. I will respond to your question on L6 set. At the moment, we are still in the OEM mode on L6. Therefore, we don't necessarily have additional capacity. You also mentioned on the other application developed in the past 2 years, probably in consuming electronics and smart home appliances. So when the cell phone demand is low, we transfer the capacity to those areas. At the moment, this capacity can also be fully utilized. This is my report.

[Jerry Su, analyst]

For the TV set section, I want to verify your run rate is expected to reach 500,000 per month by the end of this year. Is that on track?

[Unknown Executive]

Yes, I believe that Jimmy just mentioned about this 500,000 numbers. I believe we can reach this goal by the end of this year. At the moment, everything goes well in terms of the development schedule with client, despite there are still some challenges on the road.

[Operator]

[Operator Instructions] Next question comes from JPMorgan, JP (sic) [ Narci ] Chang.

[Narci Chang, analyst]

I'd like to ask our first question, which is about the first quarter's guidance. I've done some comparisons with your partner factories. It seems the ASP and shipment of Innolux is relatively conservative. Wonder if the management team can give us some reasons for this? This is my first question.

[Unknown Executive]

Narci, every company has its own way to do their forecast and guidance. So we cannot and we are not in a position to comment on others. We come up with these numbers from the operation team's analysis and then report it to our investors. There's no way we can make any comparison.

[Narci Chang, analyst]

Okay. The second question is about TV inventory mentioned earlier. I'd like to have some more details. We mentioned the China market shows a higher level of inventory. Of course, it is because Chinese New Year. It seems reasonable. Or do you think it is about a little bit too much or above this new level? As for the inventory level in Europe and American market, can you also share with us the situation there?

[Mao-Sheng Hung, executive]

I'm Jimmy. Let me answer your questions. The higher inventory level in China becomes quite common in 2016 already -- 2017 already, sorry. As the market scale is slightly shrinking in China. You're right, it is the high season now. That is because it is before Chinese New Year. Everyone is getting shipment out for the holiday season. So I mentioned earlier that we need to check all the index after Chinese New Year to make sure whether it is a low season phenomena or it is a stock preparing in advance. But from all the indicators, we do have concern on China market as it was not as good as expected last year. American economy is reviving very fast as everyone is aware. Therefore, all the selling season can see high growth. At the moment, the inventory level is normal. And the Southeast Asia and emerging markets enjoys super growth, which is the focus for this year. This is the overall TV situation, which is in line with the maturing and migration of TV Product development.

[Operator]

Next question comes from Morgan Stanley, Sharon Shih.

[Sharon Shih, analyst]

I have 2 questions. The first question is about the inventory level at the end of 2017. It seems slightly higher than that of 2016. Could you please elaborate on the product mix or whether this inventory is prepared for future demand? The second question is about the new product development, which is in addition to our traditional products, of course. So what is the percentage of this non-TV, non-smartphone products in terms of revenue generating? Is there a target percentage we want to reach in 2 to 3 years in the future?

[Unknown Executive]

On the inventory front, it is indeed a bit higher than last year. The demand varies, of course, and we also have different capacity. For TV production, we have 8.6-Gen and L6 fab as mentioned earlier and also, our preparation for TV set. These are the reasons for TV inventory. For all the other products, the inventory level remains at the same as the average of last year.

[Sharon Shih, analyst]

As for L6 fab, is it because we are still playing a OEM role at the moment so the inventory is registered on our accounts?

[Unknown Executive]

For the material part, yes, we have to buy all the raw material in advance and deliver the products after manufacturing.

[Sharon Shih, analyst]

Okay.

[Unknown Executive]

Your question, is it referring to non-smartphone and TV?

[Sharon Shih, analyst]

I mean, those products in the niche market, their percentage?

[Unknown Executive]

Innolux does not categorize our products like that. In my Mobile Product business unit, non-smartphone accounts for over 50% of our production, over 50%.

[Sharon Shih, analyst]

Yes. Okay. So automotive is also included in the section?

[Unknown Executive]

We have partly in AI (sic) [ AII ] business unit and partly in my Mobile business units.

[Operator]

[Operator Instructions] Next question comes from [ Fubon Life ], [indiscernible]

[Unknown Analyst]

I am [indiscernible] from [ Fubon ]. I would like to ask questions about miniLED. In CES, miniLED display for automotive were presented. What kinds of techniques were applied as these are put in other products? And my second question is, will miniLED backlight be applied to any other display products? That's my 2 questions.

[Unknown Executive]

Allow me to explain a bit here. We all know that the introduction phase in the automotive sector is longer than others. When the products shown in CES 2018, global carmakers and Tier 1 customers were fascinated. So now we entered to RFQ and hope that it will enter into mass production in the next 2 to 3 years. This is the first part. For displays, please allow us to provide further application formation in the middle of the year in our board meeting or earnings call.

[Operator]

Next question comes from HSBC, Samson Hung.

[Samson Hung, analyst]

I have 2 questions. The first question, as mentioned earlier, there are some automatic product lines news. We also see many talking about the transition. Is there any figure to explain how much cost is saved for our reference? My second question goes back to miniLED. You mentioned earlier that there would be new applications. In terms of cost saving, what's the difference between miniLED backlight and original backlight? And what kind of application has more potential? These are my 2 questions.

[Unknown Executive]

For automatic product lines, I'll give a quick answer. We started automatic production techniques because of several concerns in the past. First was from the management side. In the past, most module factories were set up in China, and due to the labors getting more conscientious about their rights and more and more young workers, the employees turnover rate is getting higher, so the initial concern was from the management side. And next, the concern has come from -- is from the quality. Manual assembly makes mistakes, while automatic production service can be more precise and offer a higher yield rate. Then, the cost concerns only comes last. That's all about the automatic production line. As for mini-LED, the performance is very good. It can generate brightness of HDR as good as OLED. It's brightness can go up to 1,000 nits or even higher. So when a vehicle entering into and coming out from a tunnel, the mini-LED can be most useful. Currently, we target at the top 5% to 10% high-end vehicle markets. Our customers can accept much higher cost than traditional backlight models as a result. Of course, after we establish an ecosystem and others, we wish to cut down cost by more than 50%.

[Operator]

[Operator Instructions] Next question comes from Citi, Arthur Lai.

[Arthur Lai, analyst]

It's me again. I have 2 questions. We have expectations towards oxide panels. Do you see any killing products in the following 1 or 2 years? That's my first question.

[Unknown Executive]

Arthur, for new technologies, there are many applications, as we mentioned. From panel itself, from HDR, high contrast and others, all are approaching to meet OLED standards. And it is also thinner. So the relevant display technology has been enhanced. Next stage, we'll be going to, what we call, QLED. So for LCD itself, it is really hard to have any big breakthrough in the future. However, when it comes to applications, the development can have great potential. In addition to TVs, IT products and cell phones, there are other great opportunities. We can develop more technology on top of that. Therefore, we mainly focus on the application.

[Arthur Lai, analyst]

Okay. Understood. Second question is about CapEx. As mentioned earlier, there will be TWD 30 billion on L6 fab. Is it made in 2017 and registered in -- recognized in 2018? Or do you mean you have to spend another or additional TWD 30 billion for L6?

[Unknown Executive]

It's actually the former. The deal was made last year, and the relevant CapEx will be recognized this year.

[Arthur Lai, analyst]

Okay. Understood. The last question is about the dividend. Any idea about the dividend payout ratio?

[Unknown Executive]

I'll answer this question. For dividends, we have to wait till the next board meeting held in April to approve the dividend before we can announce any information. Prior to the board meeting, we are unable to provide specific information.

[Operator]

[Operator Instructions] We are not getting any other questions. At this time, we are going to conclude our earnings call meetings now. So we are passing the floor to Daniel.

[Chien-Lang Lo, executive]

So we thank you for your participation.

[Operator]

We thank you again for your participation. The web recast will be available 1 hour from now at www.innolux.com.