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

Good afternoon, everyone. Welcome to the First Half and Quarter 2 Operating Performance of IMI. With us this afternoon is our President and CEO, Arthur Tan, who's going to discuss the highlights of the operations and hopefully, the outlook at least for the remainder of the year; followed by our Chief Finance Officer, Jerome Tan, who's going to provide the financial highlights of our first half. Also joining us this afternoon is our Chief Commercial Officer, Ann Natividad; and our Chief Procurement Officer, Ernest Ang, in case if you have questions for them later on. After the presentation, we're going to give you time to raise your hand and ask your question, and we're going to open the chat box for your question as an alternate communication. Thank you.

Do I start?

Yes, go ahead and start, Art.

Okay. Hello, everyone, and thank you for finding time and carving out and being in this virtual analyst briefing, which is historical on all fronts. I thought I'll change it a little bit this time. We do have both Jerome and I in the previous analyst briefings, and I took it upon to have 2 of our other executive team members, Ms. Ann Natividad, who is our Commercial Officer; as well as Mr. Ernest Ang, who is our Material Management Head globally. And so this would at least, if there were any questions or you would be given additional information regarding some of the businesses that we have and the challenges that we're actually facing right now. So the first part here is like, as always, I'll give a little bit of view on the economic outlook projections across the different markets that we serve, primarily both on the developed markets, which actually drives a portion of our business as well as the areas the developing and the rest of the world where we operate in. As expected, and as I think most of you are already aware, this current pandemic, which is already coming on, on the back of the trade issues that we had previously, has now started to really have an effect on the global basis, primarily because of several factors, one of which is that initially, people thought that these virus would just have herd immunity and be able to recover from that. We're showing that it's not, and now it's race for the vaccine. Aside from that, aside the vaccine itself, there's also the vaccination part of it that is also very challenging from a point of view of trying to have a view for when that is going to happen. Nonetheless, there are still pockets of businesses that continue to be sustainable on our part. Some of the silver linings that we see is that in spite of these challenges, the market seems to not be shying away from starting new projects as manifested by the amount of new programs, which we can then look at even more later. I think the headline here is that as we move quarter-to-quarter and as the world is trying to then address the effect of this pandemic, we will -- we see a very volatile and sometimes very, very abrupt changes in some of the markets that we're looking at. And again, an example of that already is what we see here in the Philippines. We started opening up, and now we're seeing the numbers of confirmed cases going up. And so then the idea of how we're going to be able to manage this increased confirmed cases, at the same time, continuing to open up the economy in order to drive the business is going to be a challenge both from a business perspective as well as from a government policy perspective. Next, please. So if you look at the manufacturing, our PMI output, which is one of the barometer of what we use from a global perspective, you see that it's below 50. And as long as it's below 50, then it is a contraction. And as we look at just the chart on the right, we can see that the significant amount of people are actually contracting rather than expanding. One of the countries that is of size, which is China, seems to have managed it and are slowly moving into the positive territory. Notwithstanding the fact that the latest news is that there's a second wave that is starting, and they're trying to contain that. So assuming that China will be very successful in containing that and managing their economy, so we still are seeing quite a robust view of the Chinese market. The ones that we see near hand, on our part, which continues to be a challenge will be the Philippines and Mexico. Next, please. So the other indicator that we always look at is the Global Electronics Assembly and EMS market. And as we can see, the contraction is happening right now at 1.4%. In spite of the fact that one of the brighter spots on the global economy is the technology part. We're seeing that this work-from-home scenario of being able to manage the -- to continue the work that is necessary in order to keep the world going is actually backed on a couple of things that are very technologically based: the infrastructure side, the communication side, the medical side, the industrial side. And so from those different markets, we'll see some level of positive gains. Although the drag from the other businesses, such as retail, consumer as well as automotive are hedging against that, those other markets. Nonetheless, on a global basis, it's still a significant amount that is dragging for the world because the unknown of this virus, and we're seeing that the projection is that it's still going to contract at least on the electronics side by 1.4%. Next, please. So I guess before we go into the financial side, maybe, I don't know if both Ernest and Ann can share just a brief overview because one of the things that I think our business is always involved with or looking at very extensively is how to manage then the, for example, the materials and the inventory, and then on the other side is the revenue generating. So how our customers or end customers are managing it, for example. Are we seeing a lot of cancellation? Is there a lot of push outs? Is there a change in the development projects that we were involved with? So maybe I'll start first with Ernest. Ernest, maybe you can just say a few words on our -- how we're addressing the inventory position, for example, and managing the volatility of the order book and as well as the management [indiscernible] materials. Ernest?

Yes. Ernest, you're on the call.

Ernest, you're on mute. Go ahead.

Okay. I just unmute it. Okay. During the COVID period, we are -- basically, we are seeing a lockdown at our -- some of our supplier as well as our customers. As well, from the customer perspective, we see a lot of orders being pushed out. And at the same time, we are actually being a lot of holdback at our supplier side. And we managed to stop a lot of our inventory coming in because of a lot of our suppliers are having a lockdown as well. So in a way, the whole supply chain is kind of balanced out. In that sense, we are able to manage our inventory pretty well overall. That's all I can say. But recently, all the factory has been started their production, and the supply has been smooth since then. And occasionally, we do see some -- our customers have some last minute -- did not pick up. We started see some sudden cancellation of some orders, and we do the same to our suppliers. Okay. That's all for me.

Thank you, Ernest. Yes. No, no, that helps at least puts a frame on how we're managing the current issues on that and how we're seeing ourselves being able to at least get over that segment and still continue to be able to serve our customer needs. Ann, you want to add anything on the development side and the new order side as well as the customer ordering side?

Yes, sure. Good afternoon, everyone. Particularly on the customer side for automotive, while there is really a slowdown in the market, but anything related to technology development, like electrification or autonomous driving, the program are still on. There might be some delays in terms of the releases. But the activities, particularly in the sample build quality, on product design and process allocation continue as they see that as soon as the market resumes, these key technologies will basically drive the market. For industrial, medical, we see it more stable primarily because of the products that we're doing are related to support the current pandemic like PPEs and medical equipment. So this gives an advantage in our case because we were able to support them in terms of their pull in and expedite. So somehow, it helped a bit compensate the significant what has been the automotive revenue. That's all. Thank you.

All right. Thank you, Ann. I hope that gives everybody at least a flavor of how other businesses is managing and that how we feel that there's still quite a lot of positives that are coming down the pipeline. Although it is being deferred, I don't think that the main strategies that we were looking at in terms of mobility and the change in the mobility space in the smart energy side as well as in connectivity has faltered. So we're riding on that fact. Nonetheless, we have to deal with the current pandemic as was with everybody else in the world. And in fact, if we look at it collectively, I think we're managing it far better than most as -- by the headlines that we're seeing and the challenges that we're hearing among our peers. So with that, I'll let then Jerome go ahead and try to get down to the details on the financials.

Thank you, Art. We'll start with the segment updates. So if you look at our first half results, the total revenue lost at $476.2 million, down 25% the first half is really highlighted by the shutdowns that we've experienced, as Art has mentioned. We have government-mandated shutdowns in the Philippines and Mexico, Philippines for -- from middle of March to end of May, and then for Mexico in April and May. Similarly, in China, we have the shutdown also in February up to -- beginning of February up to beginning of March. So that shutdown in those locations, we have estimated missed revenues because of that of approximately $58 million or close to $60 million related to that mandated shutdown. In the EU, we also experienced voluntary shutdown as the European businesses, particularly the car manufacturers, also went to a shutdown to address the pandemic. With that, we also went on voluntary shutdown in line with the OEM. So that's also an equivalent missed revenue of about $20 million. So all in all, first half, we see close to $80 million of revenue that's missed related to shutdowns. And you can see as a result of that, in terms of the industry segment, automotive and industrial, significantly down versus last -- since auto, the automotive business is primarily coming from our European Mexico and adjusting facilities. And for industrial, it's mostly coming from our Philippine, China and Mexico facilities. Aerospace and defense also has dropped versus last year. This is a result of a number of delay in the programs as the government, particularly the U.K. government, prioritized more on the pandemic response as opposed to the normal programs that they have started. However, we do see as Art has mentioned, if you look at our consumer segment, our consumer activity is up 18% first half. [Technical Difficulty] so some recovery on consumer, VIA Optronics in the consumer laptop segment and the [indiscernible] and also in our Jiaxing facility where we have white goods business increase much faster than expected. Similarly, in the telco business, we've also experienced [indiscernible] for a strong recovery as China continued to ramp up the rollout of the 5G. Compared to Q1, Q1, the telco was down 29%. So first half, it's now down 5%, so strong growth in [indiscernible]. Same goes for medical. Medical continues to grow at a similar level as Q1 as well. So if you look at our total mix, our automotive now is down to 42%, given the slow growth, but it's -- the increase in the segments are coming from industrial, consumer and medical. Going on to the following page, financial results. Because of the missed revenues in Q2 related to the shutdown, our gross profit margin has decrease 6.4% compared to Q1 was at 7.6%. And also due to the -- mainly due to the lower gross profit margin, our operating income suffered a loss of $17.3 million versus $5.2 million profit last year. We have done a number of activities to reduce our costs. Overhead costs overall, we've reduced by about $10 million or 8% lower than last year is overhead. Unfortunately, [Technical Difficulty] a much significant drop in revenues of about 25%. As we go forward, we expect to continue looking at our cost structure. We've identified a number of areas where we can improve in terms of consolidation of some of our [indiscernible] and also streamlining our operating structure. So that is, I guess, a medium-term restructuring that will happen, so the benefit coming more towards beginning of next year. We also continue to have a conservative approach on our inventory. So in Q2, we've added additional inventory provision, although these are inventory -- excess inventory that we believe we can claim back from the customer. But given current situation, we thought it might be prudent to put additional reserve as some of the customers have indicated pushback on trying to claim this additional inventory, these excess inventories. So that's about USD 3 million. So if you look at the operating income, on a non-GAAP basis, we actually dropped from $8.6 million first half of 2019, down to a loss of $13.6 million. And this $13.6 million includes the $3 million additional inventory provision. So if you exclude that onetime provision, the loss would be around the $10 million range. So I guess because of that, net income was down to a loss of $21.5 million in the first half. Non-GAAP income is $17.3 million versus last year, a profit of $3.3 million. However, as we look at the second half, we believe that the business, starting June, is starting to normalize. And we expect second half to be more of a recovery provided there is no major second wave that would cause governments to mandate shutdown. Although we believe that this -- I think a lot of the things that we hear is although there is an increased infection as the different parts of the low open up, the sense is that going into a severe lockdown may not be the priority for these governments. So -- but that remains to be a risk for us. Assuming that doesn't happen, we see, I think, a recovery in the second half, particularly in areas I mentioned earlier in consumer demand. And in fact, automotive, we've actually have a much better -- well, not much better, but a slightly better forecast than what we originally estimated in May. So at least some improvement from automotive, although it's still quite a soft business. Moving on to the next page, we just wanted to show the quarter-on-quarter split. So if you see the revenue in Q2 is significantly down versus Q1. As I mentioned, part of that is driven by the shutdown mandated by the government and some of the voluntary shutdowns that we have. Gross profit margin, and because of that miss or much lower revenue, gross profit margin is down 5%. Operating income is down from a loss of $2.6 million same period -- sorry, quarter 1 to $14.7 million. On a non-GAAP adjusted basis, the operating loss went down from $700,000 loss in Q1 to $13 million. Again, this $12.9 million loss includes the $3 million additional provision. Okay. And then next page just shows wholly-owned subs versus VIA and STI. You can see that our wholly-owned sub performed worse than VIA and STI as a lot of the shutdowns were related to operations in our wholly-owned sub. Revenue is down 28% versus first half of last year. And as a result of that, reported net loss is $20.5 million in the first half for wholly-owned sub. Within that, we've also taken an asset impairment charge of about $6 million, driven by lower volume in some of our businesses. So we continue to defer that and as -- if the business do recover, then there's still opportunity to recover those assets. But excluding that one-off charge, you'll see our non-GAAP loss in the first half for our wholly-owned sub is at $11.8 million compared to a profit of $4 million last year. For VIA and STI, the drop in revenue is not as bad as wholly-owned sub. This is driven by -- VIA actually showed a growth in Q2 [indiscernible] similarly for STI. Net loss, they also have a one-off related to mark-to-market on the minority shareholding put auction, which is about $5 million -- or $5.5 million, sorry. So if you exclude that, the non-GAAP net loss of VIA and STI is at $5.5 million compared to a loss of $1 million last year, same period last year. Moving on to the next page, just to show the quarter-on-quarter between the wholly-owned sub and VIA and STI. So as I mentioned in the wholly-owned sub, you would see continued drop in the revenue because of the part of the shutdown in Q2 in our operations in Philippines, Mexico and voluntary shutdown in Europe. So that impacted our performance in second half. Excluding the one-offs, our net loss for Q2 is at $12.7 million compared to Q1, it's about $1 million profit. For VIA and STI, we do see improvement as the -- if you see the quarter-on-quarter growth, it's up 32% coming from these results. So we're looking at, on a non-GAAP basis, the loss has reduced in Q2, down to $2 million coming from $3.5 million. Moving on to the regional updates. I guess we can see the areas that I've mentioned, the Philippines, in Europe, which is Bulgaria, Czech Republic and Mexico, those are significant drop in revenues due to the shutdowns that we experienced. So in the Philippines, about 30 -- we were operating at about 30% capacity in April and May. We are able to continue serving the essential indices. And as of June, we do see that we are now up to 80%, 85% capacity. And for the second half, we expect that to continue to normalize starting in July. In China, we've actually shown improvement. Year-on-year drop is 8% compared to our Q1. Q1, China is down 23%. So we recovered in the second half -- sorry, in the second quarter. We continue to see auto business in China weak for the second half. And the other challenge is what Art mentioned earlier is on the U.S.-China trade. So we do expect in second half, that telecom infrastructure business might decline or slowdown due to challenges in the Chinese company securing raw materials for their production. For VIA, we expect, Art mentioned a very strong Q2.

[Foreign Language] So regarding the…

All right. There was a question. Can we hold that until after the presentation?

[Foreign Language]

Okay. So moving on to the second page -- sorry, the next page in terms of what we talked about on the new business, new wins for the first half of 2020 is at $175 million, down 17%. A lot of the impact is coming from the automotive business. So you see our automotive actually has reduced by close to 40% in terms of new business wins. And a lot of that is related to the OEM going on shutdown, and therefore, a lot of the projects that's coming up for bidding has also been delayed due to the shutdown. The positive side, although the positive side is, if you look at the STI, has actually grown in terms of new wins from $44 million in the first half last year to $55 million in the first half of 2020. So some of the projects we highlighted below. You see automotive continue to have new projects coming in. The first one, door control unit, that has an annual revenue potential of about $15 million, and the start of production is targeted for Q4 of this year. And the second one is in the industrial business, has an annual revenue potential of about $9 million. SOP or start of production is in Q4 2020. So a number of these -- most of these new projects are either Q4 or Q1 2021. So we hope to see that at least Q -- sorry, 2021, we would start to see additional business to come in to be able to add on top of our revenue and to help improve our gross profit margin. Going on to the next page, in terms of our capital structure. I guess one thing to highlight is despite the challenges we have in the profitability in the first half, our cash has actually grown, improved cash from $153 million up to -- sorry, $166 million as of end of June. So as we continue to improve on our working capital requirements and deferral of our CapEx, we are able to continue to generate cash. This is after our reduction also of our debt, so our debt have come down from $200 million -- or close to $270 million, down to about $254 million. Debt-to-equity ratio remains healthy at 0.57 at the same level as of December 2019. And then the bank debt to common equity is that 0.73, so still pretty much around the same level as last year. So we do see in the second half, as the business start to recover and production continue to resume in locations where we have the shutdown, we expect significant improvements on the inventory turnover. That will help us generate additional cash. So we continue to watch those working capital demand or requirement to be able to continue to improve our liquidity position. On to the next page is our CapEx. There you see CapEx, as expected, has been much lower given that the weak business that we are experiencing in the first half. Total CapEx is at $9.4 million compared to about $20 million in the first half of 2019. And most of these CapEx are maintenance CapEx. We do have some that is growth-related CapEx. But the bulk of it is under maintenance CapEx. Okay. So I guess, in summary, I think the main key takeaways that we have -- second quarter was quite challenged for us due to the forced government shutdowns -- sorry, forced shutdowns in Philippines and Mexico and also shut -- voluntary shutdowns we've experienced in Europe. We do see improvement in the second half. We expect business to start to normalize, and we see that in June and also in July and expect that to continue, assuming that there's no shutdown again that's being imposed by the government. And we continue to manage our working capital to make sure that we have ample liquidity to be able to address unforeseen events that might come up. And we continue to look at our operational structure and see how we can streamline and simplify a lot of our processes and take this opportunity where the growth is slower to revisit our cost structure. And we do see that we would be able to have continued improvement in our OpEx costs in the medium term. With that, I end the presentation part, so we'll open it up to questions.

Thank you, Art. And thank you, Jerome. The conference is now open for your question or you can send it to me by the chat box. If there are no more questions, we'll end up the conference. Here, we have one. Forecast, year-end, I'm not sure if you're in liberty to say any forecast year-end.