Integrated Micro-Electronics, Inc. (IMI) Earnings Call Transcript & Summary

There's no -- so good afternoon. Well, maybe we'll start with the -- Brian, let's start with the outlook operating environment. Yes. So what we'll discuss is the first portion is the outlook or what happened in the global economy and also the outlook. So if you can see in 2019, the global market actually slowed significantly. This is adversely impacted by additional trade issues, geopolitical issues, which actually impact the overall trade and manufacturing environment we're in. So if you look at the global growth rate, it dropped from 3.6% in 2018 down to 2.9% globally. In particular, the big drop is also coming from China, and we are also experiencing this -- if you look at our business in China, it's also correspondingly dropped quite significantly in 2019. Automotive industry, in particular, faced certain headwinds last year coming from adjustment to the new Euro standard emission requirements and also in China, the subsidy in EV was eliminated. So that also aggravated the situation in 2019. If we look forward to 2020, however, we were expecting some relief coming from issues that, let's say, the U.S. and China trade issue, at least for the Phase 1 of the [indiscernible] -- and also Brexit was determined, so that gave some certainty. However, the numbers here that you see in 2020 had growth over 2019, but this doesn't include the impact of what's happening in China and also that's affecting the rest of the world, which is the nCoV virus. So that might have an impact on the 2020 overall growth. Going into the next page, these are the indicators that we look at, semiconductor sales as well as the semiconductor equipment sales. So this -- if you can see, 2019 has slowed significantly and there's a deceleration in the industrial output. Negative almost all across all the metrics. But we do see in 2020 expected improvement. Again, this one doesn't incorporate the latest event that's happening in China on this virus issue. But particularly, maybe just to highlight, automotive unit sales is down 4.4% globally. And out of that, in China, the drop is around 12% to 13% decline in China. Right. So really, 2019 was a challenging year for us [indiscernible] but in 2020, we will have some improvements. If the virus issue doesn't extend beyond the first half, I think second half would [ show ] some recovery. Page 5. Just back on the novel coronavirus impact on China. So Wuhan is home to 10 car factories and accounts for about 9% of total Chinese auto production. The estimated -- initial estimated loss of unit sales would be around 350,000 units, down 7% in terms of vehicle production. I think this only assumes shutdown in February. If it extends longer, then the impact will be even higher. And impact on China GDP, there are some statistics or some estimates that it might impact 2% to the GDP of China, if this [ persists ]. Going to the following page. In terms of impact on IMI. On IMI, we have 5 manufacturing facilities in China: 2 in Shenzhen, 1 in Chengdu, 1 in Jiaxing and in 1 in Suzhou. So not within the severely affected provinces, but we do have impact in terms of the IMI facilities. So first, we have to -- before we can start production, we would need to have the government come and audit and get approval from the government. So in terms of our 5% [indiscernible], In Jiaxing, we are already at 50% production; in Pingshan and Shenzhen, we are 60% production; in Kuichong, which is also in Shenzhen, we are at 70% production; and Chengdu, we are at 90%. The one in Suzhou for VIA Optronics is still challenged in terms of the workforce. A lot of them [indiscernible] have not been [indiscernible] confirmed so that's around [ 55% ] production. So obviously, without full production, it's going to impact our revenue, at least for February. So we see estimated revenue impact could be around $8 million to $10 million, assuming this persists till the end of this month. So if it goes beyond, then there might be additional impact. But so far, we're expecting that we [indiscernible] have this backlog. This backlog will be able to then recover, assuming that this thing normalizes in March and April. The other incident this year is quite challenging for us since the beginning of this year. The other incident is the Taal incident we have in January. The good thing is it didn't proceed into a full eruption, but during that initial eruption, our sites were affected, the ones in Laguna and Cavite, but we were able to switch on our [ VCP ], so we were shut down for about -- for 2 shifts. So not a full day shutdown, it's only 2 shifts. And by the evening, we were able to start production. So no damages also in our raw materials or production, so very minimal impact on the Taal incident. And now moving on to the 3 questions so far? Or maybe I'll just continue on. And then if there's any questions, we'll take the questions. Moving on to the financial section on Page 8. In terms of revenue, our total revenue for 2019 is down 7%. Automotive is still positive growth year-on-year, up 9%. The rest of the industry, you'll see, has been down here. Our [indiscernible] segment, which is automotive, industrial and aerospace, comprise about 76% of our total revenue. So this is up from 70% in 2018, still driven by Automotive segment. If you look at Q4 versus Q3. Actually, our Q4 revenue increased. Our Q4 revenues, about $311 million versus in Q3, it's $304 million. And normally, Q4 is a lower quarter because of the year-end seasonality. But last year, Q4, in terms of revenue, we've seen some improvement or stability. And the -- a lot of the improvement in Q4 is coming from the Industrial segment. So Industrial segment is actually improved instead of down 13% year-to-date Q3. It's almost -- full year now, it's only down [ 10% ]. We also show -- see some signs of improvement in the Consumer segment, which is mainly VIA electronics. In December, is actually -- the volume has picked up, significantly up 60% versus the year-to-date November average run rate per month. So -- and I think in January, VIA is also on target but unfortunately, there is incident that we're seeing would have an impact on the February numbers. The demand is still there, but the impact is going to be whether VIA is able to produce and recover the backlog. So one of the things that they're doing now is transferring production from China back to Germany. So that would help alleviate some of the production shortfall. So total automotive is now at 48% of our total revenue versus 2018 [indiscernible]. Moving on to the financial performance. As I mentioned, revenue is down 7%. But if you look at just the wholly-owned IMI subsidiary, it's down 3% versus 2018. STI and VIA combined is down 21%, so we see a significant drop in those 2 newly acquired business of IMI. In terms of gross profit margin, it's very similar to year-to-date September, wherein the margins are at 8.2% compared to last year, 10%. And as we mentioned previously also, the drivers for the drop in gross profit margin is mainly coming from lower revenue, increase in raw material costs. Since in the first half of last year, the raw material prices are still at an elevated level. And increased investment that we have on fixed overhead with the revenues not coming in as planned, so that also impacted our gross profit margin. In terms of net income are -- we are reporting a net loss of $7.8 million in Q4. Coming from year-to-date September, net income is $500,000. So the big increase in Q4 is mainly due to some provisions that we've put in. If you recall, in the last analyst briefing, we mentioned that there are some slow-moving inventories because of the drop in volumes from the customer and the forecast. So in Q4, we've taken up inventory provisioning. So we've provided around $4.5 million of additional inventory provisions. These are really still an obligation of the customer but at this point in time, the customer has actually -- or in the process of negotiating with us to see if they can reduce liabilities from their side because they are also being affected by what's happening in the market. So for -- so we're still in the process of negotiation, but we wanted to be more conservative and we've put in additional provisions in Q4. The other big item here is coming from Via Optronics. They have a deferred tax asset or you can say, a tax credit against losses in their Germany unit. And because we wanted to be a bit more conservative -- but again, we decided to put up a valuation reserve on the deferred tax asset for the tax credit. So what that means is instead of -- let's say, if you have a net loss of 10% instead of having -- sorry, if you have a pretax loss of 10%, and your tax rate is 13%, instead of having a net loss of 7 because, you can get the credit of the 3. You -- we're actually booking 100% pretax loss in the VIA German entity. So that's about $2.8 million. So if you total that, that's about $7.3 million impact to the net income, so driving the increase from $500,000 profit in year-to-date Q3 full year net loss of $7.8 million. On the non-GAAP basis, this one excludes the one-off. So this one also includes the inventory provision. We are looking at the total group at 200 net loss on a non-GAAP basis compared to $31.8 million in 2018. And because of the lower revenues, lower gross profit margins, our operating income has also been affected. On non-GAAP basis, it's still showing positive. $7 million operating income on a non-GAAP basis compared to last year, $47 million. Okay. If I take you -- I wanted to show the difference or a breakdown of our wholly-owned subsidiary versus VIA and STI. So on the left-hand side, you see our wholly-owned subsidiary. Revenue, as I mentioned, down 3%. On a non-GAAP net income basis it's still operating at a profit close to $7 million net profit compared to last year, $22.6 million. For VIA and STI, that we have a much bigger challenge in 2019. VIA and STI revenue is down 21%. And if you look at the non-GAAP net income, it's a loss of 8.8. And a reminder here, out of that 8.8, we have that tax -- DTA tax effect that I mentioned earlier, which is a $2.8 million impact. And the reason for that is VIA and STI because they are in locations that are in very low unemployment, in the U.K. as well as in Germany, a number of the highly-skilled staff that they have, we still maintain them and not try to reduce or take out the headcount. So with the lower revenues and higher fixed costs, they have a much bigger impact on the operating margins. Moving to the following page, Page 11, on the regional assets. If you look across the different locations, the growth that we have is coming from Bulgaria and Serbia combined. It's about 4%. Also in Mexico, about a 50% increase year-on-year. The rest of the sites are -- continue to be challenged. In the Philippines, Philippines is actually -- have the benefit of some of the transfer from our China operations. If you exclude the transfer from our China location, Philippines is actually down by 10%. Coming -- with the softness coming from mainly the automotive segment in the Philippines. In China, if you thought -- if you include the revenues transferred to the Philippines, actually, the China revenue drop is 14% compared to the 17% as reported. For the Philippines, however, I think for this year and going forward, the outlook is quite strong. If you look at the later page, where we show the new wins, Philippines continues to have a much bigger proportion of the new wins and a lot of that is also driven by customers, both existing and new customers looking to diversify out of China. And so Philippines is benefiting from that shift. In Serbia, we started production in -- or we started operations in September last year. And we're starting to see the ramp-up starting in November. So we have a customer that's actually started production and started high-volume ramps in Serbia. Mexico. The backlog has recovered, so we expect revenues to stabilize. In terms of operation, that's still a big challenge, so we're shifting from [indiscernible] continuing, and we're shifting to sea shipments. So that sea shipment takes another 2 to 3 months. So in the meantime, we have to continue to do the air shipments. So that's -- and also the quality inspection are required by the customer are still there. So that hasn't been taken out. We're hoping that as the operations start to stabilize in the first half of this year, we'll be able to go back to the customer and ask for some relief in terms of the full inspection requirement. And also the -- the move towards the regular sea shipments would also improve the operating expenses in Mexico. In VIA and STI, I think I mentioned, again, the highly-skilled engineers we decided to keep. Because I think specifically for STI, there's still a number of projects that is in the pipeline that we would require these highly-skilled engineer. And similarly, for VIA . VIA, as I mentioned earlier, in December, we start to see a lot of pickup from new projects from the customers. So we expect VIA to recover this year. So hopefully, the impact on the virus will be short-lived and then we'll be able to recover the backlog. On the following page, Page 12, is the new wins. So our -- the -- this full year 2019, we included STI. So STI have additional 124 million of new wins, which we didn't attract in 2017 and '18. So if you exclude that, the IMI core business, new wins is around $283 million, about 10% lower than the prior year. Again, this year, we've -- because of what's happening in the market, we've been more selective in our projects. The thing to note also is the notable wins that we have in 2019, the driver monitoring camera and the bus camera as well as the aerospace sensors, those are Q4 wins. And these 3s are -- these 3 project has annual revenue potential of ranging from $20 million to $30 million. So still significant major projects that we won. The other thing to note is one of our Tier 1 customer has actually decided, as a strategy, to increase the outsourced portion of their business. So currently, they have around 2% or 3% of their total production that's outsourced and their plan is to be able to increase that to about 15% outsourced. So we're seeing that as a good opportunity for us also to participate and gain more wins to drive our growth in the future. And as I mentioned, Philippines, much higher wins in terms of the total wins of the group, 45% in 2019, an increase of -- an increase from 39% in 2018. Following page on the capital structure, maybe just to highlight, our total debt has come down from $320 million to around $270 million. We've been raising additional cash. Just so -- to make sure we have sufficient liquidity to transition during this downturn in our -- in the global economy and in our business. Bank debt-to-equity ratio is still quite healthy at 0.5. This is gross bank debt-to-equity and current ratio is at 1.5x. Then I think the last page is the CapEx page. So our CapEx in 2019 is down to $36 million. We've invested significantly from 2016 to 2018. So we're now in the process of really digesting this CapEx and try to drive additional revenue to be able to cover the additional depreciation that's coming into our P&L. And a lot of this CapEx, I think about 1/3 of that is going into the Philippines with the new power [ meter ]. I think that's the financials. That's all we have. Okay. Last page. Again, just some key considerations going forward. Again, I mentioned, on the negative side, the uncertainty around the nCoV virus, how long it's going to last. So that will have a big impact on the business, particularly for our business in China. In terms of the rest of the business, there is also an impact because a lot of the raw materials come from China, so that's going to disrupt the supply chain around -- globally, so not just China. In our locations, we have inventory that will last up until end of March. So if this continues beyond March, then that -- there will be shortages again of raw materials and that might have an impact on the raw material cost. So right now, what we're trying to do is for those that are located in China to be supplied outside of China. We are looking for alternative sources. And our customers know this, so they're quite cooperative with us in terms of being able to shift or replace certain components that source from China to a component that source outside of China, so that can be what we're doing about the supply chain challenges. But still quite uncertain at this point in time. So very -- the situation is still quite fluid. And then the other concern that we have is how strong will this recovery be or improvement be in 2020? So far, beginning of this year, it's not a good sign because of the number of issues that's happening, so that might have a spillover effect into the general economy globally so -- which might also impact our business. And again, low manufacturing utilization related to the first 2 items. And the inventory again. So we're certainly watching our inventory and making sure we don't buy excess inventory, especially now we know that in the next several months, the demand might not be very high. So we're watching and making sure we don't buy too much inventory that may led to slow-moving inventory if the forecast gets revised. On the positive side, but still remains to be seen, so at least we have some clarity on the Brexit issue. So I guess the next stage for them is now the U.K. to start negotiating with each of the EU countries in terms of the trade deal at least. But that clarity gives, I guess, a lot of our customers a bit more -- also clarity and how they plan their business and their [ programs ]. Again, as I mentioned, the wins are still there. We actually have a number of projects that we're looking at, that have received request for proposal or request for quote. And so that's still a very strong, healthy pipeline. So again, we continue to balance not being able to win a lot of projects that would require significant capital investment. So we're being -- we'll continue to be selective in projects that we enter into. And then material prices have actually start to improve. But then, as I mentioned, because of this issue that's happening now with the nCoV, that might have an impact again on the raw materials, which is unfortunate because we were seeing improvement in our raw material prices as well. And then the other thing is on the automotive side, we do see now trend towards more outsourcing, at least in one of our major customers. So that's really it -- in our presentation. So we'll open it up to questions. Art, Just to check. Are you still on the line, Art? Maybe he isn't, so...

Yes, I am. Yes, I am.

Okay. Anything you'd like to add?

No, I think [ we're settled ].

I think We can open it up for questions.

Hello?

Yes, Art?