Innolux Corp

TWSE:3481

Earnings Call Analysis

Innolux Outlines Strategies for Display, Auto, and Semicon

Innolux Group held its H1 2024 Investor Conference to present as a unified group together with InnoCare for the first time, sharing their immediate strategies and long-term vision. The near-term display market outlook appears mildly positive due to disciplined production and healthy inventory levels, supporting demand for TV and IT panels in anticipation of major sports events. Over the mid to long term, Innolux will focus on display, automotive, and semiconductors without significant capacity increases in the next two years. A focus on higher quality and integrated automotive displays align with this strategy. Innolux emphasizes its transformation with an 'More than Panel' strategy, migrating its older fabs to semiconductor packaging to capitalize on the shift towards automotive and semicon, which currently makes up about 22% of revenue. A significant accomplishment was boasting #1 spot in micro LED color uniformity in 2023 and showcasing the largest micro LED panel at Touch Taiwan.

Advancing Technology and Competitive Edge

The company has marked significant milestones, particularly in the micro LED segment, where they lead Taiwan #1 and are positioned #3 globally for related patents. This solidifies their competitive advantage in the display sector, showcasing their capability for the best resolution in automotive applications—another area where they are #1 in terms of pixels per inch (PPI). Their foray into semiconductor packaging is supported by their existing expertise in the TFT-LCD process, which shares about 60% similarity, providing them with an edge over competitors due to two decades of experience.

Diversification Beyond Displays

The company is diversifying its offerings, particularly in non-display domains such as automotive and medical applications, and not just relying on component provision but evolving as a total solution provider. The company's strategic focus is evident in the automotive segment, where the role of displays has transformed significantly—moving from entertainment-centric to integral control interfaces for vehicle operations, which is expected to be a growing trend over the coming years.

Financial Resilience Amidst Challenges

Financially, the company reported total revenues of roughly TWD 212 billion. Despite facing a deficit, the year-over-year reduction in the cost of goods sold (COGS) by 9.5% enhanced gross margins by 4.6%. This improvement is attributed to effective cost management and operational efficiencies. The last two quarters showed positive EBITDA and gross margins, with expectations for continued quarter-on-quarter improvements into 2024. The balance sheet remains strong, with the company operating at a net cash position and a debt-to-equity ratio of approximately 17%, boasting a current ratio of 153%, amongst the top global panel players.

Earnings Call Transcript 2023-Q4

[Operator]

Good afternoon, everyone. Welcome to Innolux Group First Half 2024 Investor Conference. Today's event is being webcast live at Innolux and InnoCare company website. The same page where you can download the conference materials. Please take a moment to read the disclaimer notice slide. Today's meeting, we will have 3 speakers to provide the company's key messages. The first one is Mr. Jin Hung, Innolux's Chairman and CEO; Second is Mr. James Yang, President of Innolux Corporation and Chairman of InnoCare and also Mr. Eric Lee, President of InnoCare. After presentation, we will conduct a question-and-answer session.

Now I will hand it over to Jin.

[Jin-Yang Hung, executive]

Thanks, [indiscernible]. Good afternoon, ladies and gentlemen. Thanks for joining us this afternoon. I'm pretty excited about today's meeting fiscal conference and be able to see everyone face-to-face. Actually, today's event is pretty special, not because we speak in English, because it's the first time that Innolux worked as a group to have the analyst conference. So today, we are presenting is not just Innolux itself, but also InnoCare, our X-ray detector solution provider. So we want to do today's meeting to be able to provide you not just the company individually, but also join the whole group strategy and also about the near term and the long-term vision of the company. So without wasting time, I will just hand over to James with the market update, and I will take over on the company strategy and overall.

[Chu-Hsiang Yang, executive]

Thank you, Jin. Good afternoon, everyone. It's James and I will walk through all the market outlook in short term, midterm and long term. Please see that on the page. So conclusion comes first. We expect the display market will enjoy mildly improved in short term with the support of supply and demand. First is the production discipline and it's [indiscernible] the panel industry is adapting the made to order discipline to avoid the oversupply. In addition, both the panel and finished good pipelines, the inventory level has been very healthy to low since last year. The very important factors to encourage our customers to kick off their restacking of TV panels and IT panels especially for the larger-sized TV panel for upcoming 3 big sports events. And then we also expect the IT product could be encouraged a bit later with the replacement of Window OS and also the AI notebook from this year.

Next page, please. So here, from the midterm market, we compare the capacity and the demand trend for more hints. So that means the black color is demand, red color is supply. From the capacity side, we don't see any new fab of capacity increase in 2 years. [Automotive segment] is very difficult to predict, but the need to replace is always be [layer] less our opportunity. As the average TV size grows larger and larger, you will pay the foundation to consume the ordinary capacity in a faster pace. The tight, supply and demand, this trend will lay the foundation for the competition of new technology and also spec up. The industry's approach has been changed a lot few years ago.

In the past, it's always about the size, the quantity and the capacity. From now on, it's very clear the panel industry become more focused on quality and performance. Consumers need a larger size TV with better resolution, higher mobility and so on. So it takes more effort to build a good panels more than to build a bit of new fabs.

Next page, please. And then in our long-term strategies, that means that we focus on display, automotive and then semiconductors. We expect the display business still the main core business of Innolux and that will be growing based on the size migration and also the diversification of application. Surely, the display technology will be more diverse to the things Innolux working on and more information will be shared to you later by our CEO, Jin. And then automotive is very important, a better feel now everyone focused. The Major differences of automotive display is that the longer order visibility and then more on the quality and the integration-oriented efforts. I believe most of us, you have your TV, monitor, notebook, tablet at homes. But now you don't have a larger screen, larger sized integrated display, automotive display, less is our opportunity. So uncover the size, the capability of system integration with the software firmware that is also the barrier of our industries. And then Innolux [indiscernible] We earlier cut in and then the role of a Tier 1 supplier.

Automotive will be the driven force of the display and also of Innolux. And then last but not the least, is semiconductor above the transformation. However raining day sunny day whatever the profit and the loss, transformation is needed for every day and every corporate. In order to [indiscernible] after the automotive business and then now we extend our innovation onto the semiconductors that means Fan Out PLP, advanced package. Our peer may be transfer layer fabs for the different applications. Innolux finds our way to deploy the old regional fab to utilize our talent engineers to semiconductor business. That's our long-term capacity plan and also our factory reorientation plan.

I will stop here and hand it over to Jin. Thank you.

[Jin-Yang Hung, executive]

Thanks, James. I think as James mentioned, I think on the screen, you can see that more than panel slogan. And I'm sure that you are being heard that hundreds or thousands of times in the last couple of years. So I was speaking back to 2019 or 2020 when we first raised this slogan. It's just a direction. We want to do or we want to be viewed than just the panel -- pure panel players. But at that time, it's more like a rough idea. But after this 5 years' work, I think the new place of Innolux led by this more than panel strategy is quite clear. I think displays our foundation while auto and semiconductor business are the shines to make us a star.

I think display domain will continue to be our major revenue stream in the next couple of years other than just a pure component suppliers. We are also stretched the breach to the system integration to be able to provide our customers with higher value. Also, I think quite a few of you know that we have raised the Indian projects last year. And that is an innovative idea that we want to turn our know-how into income without the pressure from CapEx.

On the non-display side, what we can say is very clear that rather than just a direction, we know exactly the place, we want to move on, which like James mentioned, is to automotive and semicon. I think this is our key transformation approach although the revenue share currently is around about 22% plus/minus. But I think we are expecting that to continue to grow and ultimately it will contribute to a much more significant share for the companies on the revenue and our bottom line.

I think a lot of the our panel peers are also talking about the automotive or even medical what makes Innolux special is that we leverage our oldest fab into the packaging, IC packaging business by leveraging our talent pool and also our hardware. So we believe that by doing so, we are -- be able to leverage our value into the next level. I believe that most of us would agree that Taiwan is leading stage in the technology industry and the semiconductor is particularly the most competitive or the focus among all this. And we have not only the complete value chain from the [mask] from all the different ingredients on the semicon related.

Also, we have a very competitive regulation environment, have a very competitive financing or the banking environment, even to an extent the score or the academic resources on the semicon related very abundant. And that also major advantage, we believe that we had to help us to move into the Fan-out PLP. So I think also, if you look at on the market side, the slowing demand on the high-end IC, which are the EV or the AI computing related that further fertilize the opportunity for us. So we are working our best to grab the chance to create the best value for our investors.

Next page, please. So coming back to what we say on the -- our strategy overall for both the display and the non-display. Like I said earlier, that display will remain as our key focus in terms of the revenue contribution in the next few years. But I'm sure that all of you understand that Innolux's advantage on the vertical integration, amorphous TFT, so on and so forth. So I think I will use this page to further elaborate our technology road map, particularly on the micro LED. I think that is still one of the major focus.

As you can see that most of the clients on the micro LED, what they will ask, number one, is the color uniformity. So we are very proud to say that in 2023, we have met the major milestone, the key breakthrough. We are the #1 on the color uniformity by leveraging our color conversion technology as well as our fluid mixing. So be able to provide the best color uniformity to our customers. And secondly, the ACR or the so-called Ambient Contrast ratio, is the technology allowed us to have best visual experience, no major under the direct sunlight or the DAC environment. I think Innolux is going to premier in the coming Touch Taiwan the largest micro LED panel in the Touch Taiwan. So I welcome every of you to come join us on Touch Taiwan this April to cease to believe how the micro LED display would change your whole visual experience and thirdly, I think the automotive applications, we are also the #1 on the best resolution, i.e., the best of PPI.

And lastly, I think in terms of the IP, Innolux has the Taiwan #1 and also the worldwide #3 patents on the micro LED related patents granted. So I think these are the few major milestones we have been achieved in 2023 on the micro LED, which further demonstrate our competitive advantage on the display side.

Next page. On the non-display side, I think, obviously, the automotive and medical related, those are the 2 key areas we have. And I think James already described our robust strong demand on the automotive. Later on, I think Eric will also introduce you on the medical and particularly on the X-ray detector related demand. So I will use this page to introduce you further what so-called Fan-out PLP. I think a lot of you are still wondering that how come a panel company would move into the semiconductor or the packaging business, just from the very root cause, actually, the Fan-out PLP and the TFT-LCD on the process has about 60% similarity.

So compared with the other IC packaging peers, we actually have this major advantage because we have 20 years experience in etching, developing and autogenous integration, manufacturing the fine line spacing IC, this large square panel with the controlled and the limited [indiscernible] issue. So that's the major root cause leaders or -- inspires us to move into the packaging -- advanced packaging business.

I think our goal in the industry is to act as the new, but also the experienced supplier on the Fan-out PLP. We call ourselves as a mature freshman. I think our oldest generation 3.5 fab in Tainan, happens to be the largest one in terms of the IC packaging. We can produce 700 times by 700 millimeters size the substrate, which means that we can quoting in one time seven times of the wafer. So that will make us much more cost competitive and also, we are working with the existing IC packaging peers to generate the best IC specification and the cost.

On top of the hardware, also, I think James also mentioned that our talent asset -- our experienced employees. They are also very familiar with all the processing like we mentioned earlier because the similarity of the TFT-LCD and Fan-out PLP. We think that advantage is impeccable. We think that instead of like building the whole team from scratch, this ready-to-go team will lead us that much time -- a lot of the time-sensitive testing or the experience with the clients will leave us a significant advantage.

So again, I think a lot of you are curious about that Innolux the mass production schedule. As you can see on the presentation, there are 2 types of the technology we are developing under the Fan-out PLP. Chip-First will be come out with the mass production first. We already passed the reliability assurance test with our IBM clients. So we are expecting second half of the year to have the major shipment come out with the mass production.

What follows is the RDL First, the Redistribution Layer. On that, we are also working with our existing the IC packaging peers to the new business model. I think the product future is a fine line printing on the 620 times by 750 millimeters substrate. So we will deliver to our clients with the processed glass substrate. Again, we want to emphasize that for this business, what we are -- Innolux is good at is devoting what we have on these etching or the developing process. And we want to work with the existing IC packaging companies to help to further strengthen or enhance the Taiwan's semiconductor position on the global supply chain. That's on the semiconductor side.

Next page, please. I will wrap up the Innolux part at the financial performance. I think you can see on the chart that our so-called the non-displayed revenue contribution has stabilized at around 22% to 28% last year. I think because of the commodity business still very volatile last year. Well, on the other hand, non-displayed business, both on the medical and automotive, we are seeing the robust and steady growth. Taking the automotive, for example, the absolute revenue terms has grown 46% year-on-year on the automotive side. This is also the major contribution item for our last year's non-display domain. Our key advantage on the automotive side is obviously our Tier 1 position. So instead of like other commodity business, we are keen to try to win from the client's different specification by the cost management.

Actually, on the non-display side, we are working together with clients to developing the new product launch 2 years beyond the road. So instead of just competing on the cost or the different specification, I think on the so-called non-display side, the reason we put the medical and automotive is because our position in these 2 parts of the business is rather than just a component provider. It's actually an overall total solution provider. So that's also one of the key highlights I want to share with everyone.

Also, I think on the automotive side, because the display -- the position has changed significantly from previously only as entertainment oriented. Now it's almost like vehicles steer interface. So it's like a control tower of the whole cost movement [indiscernible] on a different sensor has to through this the interface on the panel to interact with the driver or even to the autonomous driving time. So again, we are very positive on the view of automotive side of the business, i.e., the non-display side, we'll continue to grow significantly in the next couple of years, given we have a very strong backlog of our orders book.

Next page is our income statement and also the balance sheet. I think in this page, I'll just quickly highlight that last year, we have total about TWD 212 billion total revenue despite still deficit year, the overall performance indicate that we are hedging upward. Our cost, COGS has down 9.5% Y-o-Y, which contributed to our gross margins improvement of 4.6%. In the last 2 quarters, we have been seeing the positive EBITDA and the gross margin, so that's actually very encouraging. And we expect a similar trend this year to have the quarter-on-quarter improvement in 2024. So the revenue side on the P&L side, I think the major improvement contribute from our effective cost management and also the cost efficiency or the operating efficiency upgrade, thanks to the whole team's efforts.

On the balance sheet side, again, I think we are running at a net cash position. So debt-to-equity has ranked about 17%. Our current ratio of 153% all are the -- among the best of the whole global panel players.

So I will stop here and hand over the next part of the presentation to Eric on the InnoCare side. Thank you.

[Chih-Sheng Lee, executive]

Good afternoon, everyone. Thank you very much for joining InnoCare's investor conference today. I'm Eric Lee, President of the InnoCare. Actually, InnoCare was found in April of 2019, and we achieved this status in March last year. So despite the global crisis COVID from 2019 to 2022, our company has been steadfast in its commitment to innovation. So today, we are very honored to have our first time Investor conference with our parent company, Innolux. So here, I would like to address the market trends, including the different application and what is the InnoCare's strength and what is our strategy approach for our customers. So this slide should present the forecast of the market size of X-ray digital detector from your data.

The primary application of X-ray detector remains in the medical field. So we can expect the CAGR to be the steady growth. However, the higher interest rate during these years have impacted the economic slowdown and the suppressed demand in the medical sector. So our major product is a TFT Photodiode sensor for X-ray inspection. So the pandemic brought, the change on X-ray inspection market. So InnoCare is also facing the challenging and opportunities during these years. So actually, there are different kinds of the technology for X-ray digital detectors, including CMOS image intensifying and the TFT which require a spec from static to dynamic. So I think TFT based detector have already established dominance in the static market. And right now, we are trying to penetrate to the dynamic market due to the IGZO technology. So we are leading the position in IGZO technology.

So many applications require a dynamic detector such as the Fluoroscope for the medical purpose [indiscernible] inspection for industrial use. So the adoption of the IGZO is driving the growth of the TFT based detector. So here, I want to have a summary for the medical market for X-ray detector in this year. So first one return to growth. So I think inflation cooled, the period of rate hike is over. So we can have an optimistic market outlook. But good news is, though, presently we engaged with a very big customer for long-term agreement for supply and shipment.

The second one, the challenge, okay? Of course, the struggle with the Chinese maker. So, the China market is still a very big market, but actually recently, there are uncertain economical factors for China market and the higher competition are [improving] this market. So we need to do some actions. First one, we want to improve our cost structure. Second one, we need to leverage our long-term relationship [ background ] brand customers like Japan or U.S. customer to provide better solutions. Third one. So where is the opportunity? First one, targeting the emerging market, I think the emerging market has the higher growth, maybe larger than 10%. So actually, so far, there are still many countries for the emerging market, they are still using the film type or CR-type detector. So that's our potential and that's our opportunity.

So for example, India is the biggest population, and their government also encouraged to enhance the ecosystem from the medical, especially after COVID. So actually, right now, we are evaluating our local-for-local spread now. Next one, how to keep our position in leading for dynamic. So more dynamic product using IGZO. So IGZO is gaining increasing visibility in dynamic market. So InnoCare is leading supplier for bringing IGZO technology to the dynamic market. So not only for medical but also for the industrial application. So we will enhance our innovation with our customers continuously.

So here is the kind of outlook for the industrial market. So the application of the X-ray inspection is expanding and the demand for in-line inspection is increasing. So I think EV car industry shifts the NDT from the laboratory level to factory inspection because the battery inspection is safety requirement. So AXI means the automotive X-ray inspection is like in-line NDT ensure the quality of the production. So AXI can cover the application from the traditional industry, but also to the semiconductor or the LED or even the car use EV car. So we expect the AXI will grow rapidly like AOI's growth history.

So the integration of AOI and AXI will elevate the industrial inspection to new heights, enhancing overall inspection [effective]. So next one, we want to address our strategy. So we want to deliver a comprehensive solution and value to X-ray inspection market. So we can provide the different business models from the device. OEM module and ODM solution based on customers' needs. First one on TFT device because IGZO has a faster frame rate [indiscernible] current. So InnoCare has worked with our customers and need the market to adopt the IGZO TFT solution to enter the dynamic since 2022. And also, we develop a higher hardness performance IGZO for AXI inspection because AXI needs a very strong dose and the continuous operation like a 24/7 operation mode. So this innovation has expanded our reach and the business from the static used to dynamic like dental, surgical, C-arm. And right now, we are actively evaluating its use in cardiovascular purpose. So with dozens of the going IGZO projects, it has significantly contributed to our increased shipments.

So on FPD module, InnoCare is the sole global provider supporting a one-stop solution from TFT manufacturing, CSI coating and FPD assembly. So we expand our solution and the service for our customers to ensure the best quality and cause the effective supply. Additionally, emerging market has some higher growth rate, but very price sensitive. So therefore, right now we are developing our TFT device solution from generation 4 to generation 5 factory now.

So we plan to go too much production from the second half of this year. I think this approach can improve the cost structure significantly and ensure our leading position of the market share. So InnoCare remains committed delivering the cutting-edge technology and cause the competitiveness solution, ensuring our customers receiving the best-in-class offering to meet their evolving needs.

Regarding the AXI, so with cooperation with our strategic partner, we are aiming to provide a diversity solution based on the customers' need so from the key component plus the software and the system integration for the different applications. Actually, we have installed our system solution for X-ray inspection such as TV set package and the sports industry, agricultural or even the PCBA SMT for car from the 2021. So I think this installation marked the beginning of our journey to into diverse sectors, and we anticipate substantial growth in this year. So we're looking forward to the further advancement and increase the market impact in the coming years.

So the [indiscernible] than hardware, yes, that's what maybe we can think that's our more than hardware. So InnoCare is kind of basically a hardware company. So in these 3 to 4 years, we have built our different detector and system strength, including software for imaging processing and algorithm or AI. So as this slide shows, the AI for medical use to assist the diagnosis is always the important and hard topic with the cooperation with the strategic partner and great support for the medical doctor in hospital.

So we plan to apply the TFDA for our first AI for detecting hip fracture in Q3. So hip fracture is getting serious concern for aging society. So the AI model sensitivity can achieve 93% like the doctor and judging time, just need 1 second. So also, we are working with our partner to judge the osteoporosis by the same PXR image. So that means one X-ray exposure double detections. [indiscernible] economic growth raptor and X-ray inspection for [indiscernible] is quite essential tool to diagnose this. So we create and develop the Veticle as our platform and the website for [indiscernible]. Veticle is a website based and can serve [indiscernible] with the AI resource knowledge management cross domain [indiscernible] and even kind of the social interaction. So we have been working with the MPUST to establish AI models with our FPD image from 2020.

So VHS and NHA are 2 kinds of AI models. Thus for measuring the critical dimension for heart and hip for the early detection. So using this kind of AI model can reduce the workflow time from 2 minutes to 15 seconds. So that means 10x faster. So we plan to launch Veticle from Q2 this year. So we are integrating our FPD with AI for value-added solution. So anyway, this platform not only showcases our commitment to the technological innovation, but also demonstrate our dedication to meeting the specific needs and preference of any customer directly.

So here, I want to hand over to our Chairman, James Yang. So please.

[Chu-Hsiang Yang, executive]

Thanks to Eric, to explain InnoCare short-term, mid-term and long-term strategies. And then please come to the statement of our comprehensive income. First, I sincerely apologize that we missed our financial target in last year. Even we suffered a minus gap on the net sales. But the OP and net profit, actually, there is a big gap. But finally, maintained EPS TWD 3 profit. But again, after the Eric's explanation, we have a confidence level to deliver a significant growth in this year, not only revenue but also the profit.

And then next page, please, about the balance sheet. That means for the consolidated balance sheet highlights, we actually current -- our current ratio is improved from the 180% to higher figure, 218% to secure and stabilize the short-term operation in 2 years. That is our final highlights. And then above is my ramp-up of InnoCare's operations. So thank you.

[Operator]

Thank you, gentlemen, for the corporate report. Now is the Q&A session. [Operator Instructions]

The first correct question for Innolux is about corporate strategies. What will be Innolux strategy, target revenue share and gross margin for the new non-display panel -- sorry non-display domain.

[Jin-Yang Hung, executive]

I will answer for that part. I think on the Q&A, I can answer both in Mandarin and English. Since I've been saying that similar things in English, so I'll switch to Mandarian now. [Foreign Language]

Innolux will move as a new player, semiconductor on the advanced packaging. [Foreign Language] Thank you.

[Operator]

This come to the end for today. The replay of the conference will be available at Innolux and InnoCare company website within an hour. Thank you, everyone, for joining us today. Goodbye, and have a great day.