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

Okay. Anthony, I think we can start.

Thank you, Jerome. Good afternoon, everyone. Thank you for joining us this afternoon for IMI's 2020 Full Year Operating and Financial Highlights. This afternoon, we have our President and CEO, Arthur Tan, who's going to discuss the operating highlights and operating environment of IMI; followed by our Chief Finance Officer, Jerome Tan, who's going to focus on the financial highlights of the company. At the end of the presentation, we're going to open the floor for your questions, and we're going to open the chat box for your question. [Operator Instructions] Thank you.

Thank you, Anthony, and welcome, everyone. I appreciate you taking time and being able to hear our analyst briefing for year 2020. And as everyone is aware, 2020 is such a special year for everybody. What we feel in IMI was that, realistically, what it was, was a real reset button on our perspective. It's a reset button because not that we know exactly how the world is going to revert or to come out of this pandemic, which we are still going through, but it was a reset button from the standpoint that it affected every market, every operation, everybody in our sphere. I don't think we -- I need to expound any more as far as the negative effects, but I think what we could say is that there are several school of thought on how the world was going to recover out of the pandemic. I think from our perspective, the major takeaway for us and how we have prepared our company was that regardless of the cycle of whether it's a B curve, a U curve or, in essence, there are going to be multiple cycles for -- depending on which country and which region, what is a given on our part is that, number one, digitization is proliferating across all markets and all segments, and that's not going to go away. The second part is that the need for technology in order to recover or even grow is even more pronounced. And under those 2 conditions, I'm happy to note that IMI, through its extensive capabilities that we've developed over the decades, at the same time, our longer-term strategy of focusing on certain technologies, manufacturing process, geographical reach has now bode well for how digitization and the technology and how each of the market is going to recover. So anchored in that, let me just go back and say -- give a preview of how we see the global economy as certain projections are provided. As you can see, a significant swing is expected on a global basis across the different major markets. And also what is telling is that there's only been a single large market, which is China, which has provided still a positive growth rate in spite of the COVID experience. So moving forward, we're bullish that we are going to be able to ride on the back of all these major economies not just because of our geographical reach in each of them but more importantly is that the megatrends that we have focused on in the last 5 to 10 years proved to be the one that is driving the next economy. Next slide, please. So one of the indicators that we use is the Global Manufacturing Purchasing Managers Index. And as you can see here, December's global manufacturing production and new order growth rates are among the highest over the past decades, which means the ability to rebound is there across all the different markets. This marks six straight months of global PMI above the neutral 50. And as you know, 50 is the indicator that if it's below 50, it's a contraction, and above 50 is an expansion. Of course, what this means is that, as always, the ability for supply and demand to match itself perfectly does not happen overnight. Mounting supply chain pressure may slow down the growth for unprepared sectors, but this does not deter the fact that the demand is there. The growth metrics forecasted still remains to be positive in the first quarter of 2021, and we're seeing some of that right now, with development still coming from multiple regions and labor markets moving closer to stability as the vaccines are rolled out, as protocols are now being identified, as the volatility of being able to manage the health crisis becomes much more manageable from each country perspective as they deploy then health care systems not only in the vaccine or the vaccination protocol but in the safeguards and being able to operate under a virus environment. Next, please. So what are the global megatrends that we continue to be focused on? Well, first and foremost, which I believe we can then see that in the background of our financial results with that, the first and largest one for us is the mobility sector. And as you can see, the forecast for light vehicle sales for -- and then a subset of that, which has one of the highest combined annual growth rate will be an electric platform. Now an electric vehicle comes in actually several flavors: there's a mild EV, electric vehicle; there's the hybrid electrical vehicle; there's a plug-in electrical vehicle; and then there's the full electric vehicle. And all those are actually dominated with different levels of power sources. Of course, the most dominant one is the battery storage-backed ones. And then on top of that, there are actually 2 predominant themes that are actually disrupting the vehicle and mobility market: of course, the platform or the powertrain side, which is the EV side; and the secondary one, which is also taking step right now, is the automated driving part, which is now where the proliferation of LiDAR has helped complement and accelerate that particular automotive segment for self-driving. How is that through the proliferation in the sensors where, when in the beginning, we were only dealing with less than 1 megapixel of CMOS sensors for our front camera system, we're now looking at 4 megapixels, and then complementing that with LiDAR and radar. And the last frontier would be the expansion and the convergence of both airspace and self-driving with an EV, which is the e-taxi drone segment that's also growing up significantly. Next, please. The next global market trend that we look at, of course, is industrial, which, over the years, in fact, in 2019, has grown faster than any segment inside the IMI portfolio. But this time, there is that convergence that's happening, and we're seeing this both on the mobility segment and on the industrial segment. And the major overlap that we see in that space is, of course, the EV charger. And that's an infrastructure play but also provides now the conduit for the proliferation of the electric vehicles to be used as a mainstream not just in the personal mobility space but, more importantly, in the commercial and mass market space. How is this now going to be used together with, for example, the upscale of autonomous driving? Well, that one has to be backed against a certain Internet and IoT platform, where the 5G equipment which we're very much aware of and for people that are living in Metro Manila with a properly equipped hand phone will be able to see the difference in a 5G network. So that -- those 2 are converging and overlap there, which we have to say is the mobility space as well. The other surge that has happened for us, of course, is the medical market, not just for IMI but across the world because of this pandemic. And the need, what it actually showed is, globally, we really have to start focusing back on the health status of each country, each city, down to each barangay, and our ability to manage the different issues that come out. And this virus actually made that even much more upfront and center. What it drove for us is allowed now certain facilities and subsidiaries of IMI to be put under this emergency certification criteria for producing medical devices to be used for this pandemic. We have been able to participate in that very aggressively more so in the U.K. And now we've been able to bridge the problem that we used to have in trying to penetrate the medical market was to get FDA certified as a manufacturing site for all of these types of equipment. We now have that, and we're building on that in order to drive more because we don't see this issue on managing health care and also being able to stem the pandemic to turn off like a switch. I think there will be others coming, may not be in the same scope, but there will be on a regional basis, and we have to be prepared for that. And hospitals, countries, clinics, everybody will have to take a more forward view of how to prepare for it using the best equipment and tools that are available right now in the market. Then the last one what that is driving and we still -- what we see very bullish about is the silicon carbide for power devices for EVs. Now power modules have been with us since the beginning. Every power plant that we have right now globally are actually switched on and switched off by power modules. But what is driving it is now that need for us to pay attention to climate change and how we're going to be able to efficiently manage the energy, not only the distribution, the supply and the generation, but actually the way the efficiencies of each of these major parts of the electrical supply is managed. And I'm happy to note that the technology that's driving that for smart energy is anchored upon the next-generation power modules and, in this case, silicon carbide. So that's why we see a 24% combined annual growth rate from 2020 to 2024. Next, please. And then wrapping that up, I know that there's been some headlines, and then there's been -- in fact, some of our customers have already interfaced with us regarding this component shortage. This is but an aberration that has happened because when everybody going into the COVID started shutting down their factories, of course, the supply chain is affected. And in that period, the different semiconductor suppliers have also had to survive and sustain themselves, and they had to reallocate certain parts of their capacity to those where there is still some level of demand. And when the certain parts and certain car companies have already depleted or stopped putting in forward the forecast because of the unknown, we didn't even know at the time when we were starting in the first quarter through the second quarter of 2020 whether the vaccine was realistic and when it was going to be available, therefore, it then provided that lull. What we're happy to note and we can then talk about it more in detail as we go through the presentation is that we -- this is something, number one, we anticipated. So we knew that because there was nobody who's going to order, nobody is going to turn their factory running just to produce 5 parts, that they'll have to have a minimum order. And then companies, on the other hand, didn't want to take the inventory risk of that order, nor our customers. And so everybody was aware of this dilemma as it's coming in. What we were not aware of was how fast the growth recovery will be for these segments. And that's the part that we're all now aligned, understand and trying to recover from. And that's the part that we're seeing right now because there is about a quarter more as far as our perspective is, about a quarter more for the stabilization and the rightsizing of the capacity to the demand cycle for the supply chain. So next. So in closing, I guess what we would like to say is that our first -- our 2020 definitely could have been much worse than what we expected. Just by looking 6 months prior to the end of the year, we were already looking at a very, very dire year. At that point, I think we posted that we were $22 million negative as far as our net income. And to -- and then Jerome is going to expound more on how we were able to recover. But the recovery itself, to me, where we are right now, to the positions, to the facilities that we were able to keep, the key individuals that we were able to hold and retain to be able to manufacture through the different lockdowns in different parts of the world and manage that supply chain on behalf of our customers for the most required equipment that we needed, at some point, we were building the core electronics necessary for mass production. We were building the core electronics necessary, for example, for the DNA analysis of the different virus variants so that the different medical companies would be able to fast-track the vaccine preparation. Now all of those, the background of that were pieces and supply chains that IMI was involved with. And for that, I'm very thankful for the entire management and operating team as well as our support teams for getting us back to where we are right now. I think Jerome will give you a highlight of how we finish 2020, of which I'm very pleased as -- and I'm happy that we are at that position right now to take advantage of this growth market in front of us. So what we're going to -- I'm going to go ahead and transition over to Jerome. But if you have any questions, we'll be kind enough to take those after Jerome's presentation. Thank you, everyone.

Thank you, Art. Good afternoon, everybody. We actually closed Q4 on, I think, record-high revenues. So we closed Q4 at $347 million. So if you look at the left-hand side on the table, it's up 12% compared to Q4 in 2019 and also up 11% compared to Q3 of [ 2020 ]. This is driven by sharp recovery in our auto segment, which is automotive. Automotive is up 15% versus same period last year and up 27% compared to Q3 2020. Industrial as well, up 23% versus Q4 of 2019 and 16% quarter-on-quarter growth. As well as aerospace and defense, we are starting to see some improvements in the -- particularly the defense side, where we are seeing additional business wins. So aerospace and defense up 18% versus 2019 and 40% versus Q3 of last year. And the other thing to highlight is, if you look at consumer, consumer has been relatively flat. This is mainly the laptop displays that we have at the electronics, which is not necessarily our focus segment. So we don't see a strong growth here given that the margins are relatively thin. So what's -- the good thing is in VIA, you'll see later that a lot of the transition is moving towards more automotive and industrial business, which is a higher segment. The other thing to highlight is telecommunication infrastructure, which is primarily in our China operation in Shenzhen. Actually, it's quite soft in Q4, down 61%. This is as the rollout of the 5G network in China in the Tier 1 cities have been completed, so it is now being rolled out in the second and third-tier cities, where we see not as high a volume. And also, the other thing here is the margin is continually squeezed on this particular segment. So we are not focusing a lot on the growth at this point in time given the challenges on the reduced margin for the telecom infrastructure business. Next page, please. So in terms of the financial results, you'll see on the upper left-hand side the quarter-on-quarter revenues. You see Q4, we had $347 million. With the higher revenue, we've also been able to improve our gross profit margin. It has increased in Q3, a big jump versus Q2 with the lockdown in Q2 and as we opened up in Q3. It jumped to 9.7% gross profit. And it continued to increase to 10.3% in Q4 with the improvement -- and a lot of the drivers of this improvement is really improved utilization on our fixed overhead. Our fixed overhead costs in Q4 is about 12.5% of revenues compared to 13% in Q3. In addition to that, with the revenue mix, we also are able to improve our contribution slightly. But the main benefit from that is really the improved utilization of our fixed overhead. And with that improvement in gross profit, you'll see our operating income, on the upper right-hand side, has also improved, $13.6 million as reported or 3.9%. On a non-GAAP basis, this excludes the amortization of intangibles, unrealized FX gains and other one-off items. It's actually a $15.9 million increase from $9.4 million in Q3. Similarly, in our net income, you'll see net income as reported is $8.4 million, which is 2.4%. But in here, we have a number of adjustments. So if you exclude the adjustment, our non-GAAP net income is actually $18 million in Q4. So some of the main adjustments here are related to -- if you exclude the amortization of intangibles related to the acquisition, some of the mark-to-market gain or loss related to the minority ownership in STI and VIA and some additional provisions that we've put in, such as impairment of some of our assets and some insurance provision reserve. So those are one-off items. If you exclude that, the operating [ income ] has actually improved quite significantly. Similarly, our EBITDA has also improved up to $24.5 million as reported. Non-GAAP EBITDA is $29 million. So full year EBITDA is about $59 million or about 5.2% of revenue. So just second half alone, you'll see the EBITDA margin has improved to 7.3%. Next page, please. Next page just shows the split, wholly owned subsidiaries versus non-wholly owned. So in the wholly-owned subsidiaries, which is the main IMI operating companies, you'll see a lot of the gain in Q3 and Q4 is coming from our core IMI subsidiaries, up to 4.8% net margin, which is quite a very impressive number that we've managed to achieve in Q4. On the non-wholly owned subsidiaries, there are a number of adjustments. The Q4 in particular, the big adjustments here are related to FX and mark-to-market losses related to the minority ownership, put on call options on that. So if you exclude the onetime one-off items, actually, Q4 for the non-wholly owned subsidiary has also improved. The non-GAAP net income is closer to about $1.5 million profit, which is coming off from a loss of $2 million in Q2 and a breakeven of Q3, so improving as well in the non-wholly owned subsidiaries. Moving on to the next page on by-operating-sites results. You'll also see most of the increase in -- most of the locations improved, particularly those strong in automotive business. Like for instance, Bulgaria and Serbia, in Q4, it has improved at $77.5 million revenue, up 30% versus Q3; so Czech Republic as well, up 39% versus Q3; Mexico, up 12% versus Q3; and the STI, up 16%. So it looks like even at Q4, that continues to grow. And it's a sign that we think that the market has some legs in terms of being able to continue this growth trend. But the only area that is below is the Philippines, [ 95% ] below versus Q3; and in China. Philippines is mainly because of the seasonality at year-end for December. And China is earlier-on telecom infrastructure slowdown. And I think just to highlight in VIA 2 items. VIA, we've completed also the strategic partner investment by Corning, $20 million that was placed in October. And also, they've been able to win, as I mentioned earlier, a number of automotive projects, particularly for EV related and as well as traditional automotive in the display space. And then STI also showing growth as well. In Q4, driven by a lot of this medical revenues related to the pandemic with the Penlon ventilator as well as testing -- COVID-related testing kits that they are manufacturing in Q3 and Q4, that helped them grow in the second half of this year. Going on to next page, shows our group wins. The wins also, we're seeing a pickup. So the -- even though 2020 wins, if you exclude STI for a moment, STI is tracked differently, STI tracked it on a total program life revenue. But in automotive, industrial and others, we track it on an average revenue per year. So if you just look at the auto, industrial and others, it's actually down 17% versus 2019 mainly due to the first half slow wins because of the shutdown. But in -- we do see a pickup. For instance, in Q3, our new wins was only $31 million. In Q4, that new wins have more than doubled to $83 million. STI has also slowed down a bit with 5%, but that's a good indication that the defense programs are continuing to recover. So we expect a better growth this year given that some of the notable wins, a number of the projects are in the aerospace/defense business. The other thing, I guess, to highlight is on the lower right. We also have a number of new wins related to EV, which you'll see. I think total revenue potential for these project wins in -- is about $20 million -- $20 million to $25 million of target revenues from this EV project. Okay. Next page. And I guess the other thing to highlight is we also have a number of wins in the power module. So this page can help you understand what areas or different type of applications that we use the power modules for.

So yes, maybe I can add something here, Jerome, just to point out is because -- as everybody sees for the 2 main parts of it. One is the camera system, and everybody is thinking, "Well, how many cameras can you actually have in a vehicle for self-driving?" But what you can see here is the transition from [14] cameras to 16-plus cameras. And these are cameras not just used by the car to look outside, but more importantly, as the evolution of a self-driving car happens is these other cameras are actually used to watch inside. So these are cameras both on in-passenger cameras as well as outside cameras for the car. All of them are in order to secure the safety and security of the people and the vehicle itself. Then the other part here, which is the power module, is that there are actually several areas where the power module is going to go. On an electric vehicle, it's not just on the vehicle itself, which there are those examples for, but actually for the infrastructure as well because an EV charging station will require the same amount of complex power modules in order to manage the different types of battery, different types of power module, different types of charging system, different types of voltages that would be necessary for each of these different platforms. And then the unique part of the power module is that there are significantly a lot of customization that is necessary for each of the platform that's being developed by the car companies. I think when Audi announced publicly, for example, their new RS GT -- e-tron RS GT, that they -- not only that they announced their first performance 4-door EV vehicle, but they also announced that they have 30-plus platforms that is going to be released between now 2020, at the time, 2021, all the way to 2025. That's just Audi. And each of the car companies are actually in the same boat. So you can see now why we're very bullish about this. And every single one of these platforms and the infrastructure in order to charge them will require power modules. Now beyond that, in order to generate the electricity and the power to bring it to the power charger, to the EV chargers, then that also means that whether the generation is going to be used by gas, by coal, by thermal, by wind or by solar, and all of these will also require power modules, more specifically for solar and wind, which is the focus for renewables for everybody else. So we're very happy and we're very bullish that we're actually going to be able to touch all these different emerging markets as it becomes our standard on a global basis. And the unique part here is IMI is actually able to not only design the packages, we're able to assemble, build the customized solution for each one and test them. And then there's only a handful of companies in the world that has this vertically integrated capabilities in one place. And this is where we feel our future depends on, okay? Thanks, Jerome.

Thank you, Art. Move on to the next page. In terms of capital structure, despite the 2020 ending up with a loss position, the company was able to generate positive cash flow. Our cash flow from operations actually ended up with $75 million of cash, out of which we utilized about $19 million in CapEx. So net cash from operations less CapEx is about $60 million, which we have used to pay down our debt. If you look at our debt position in 2020 December, it's down to $241 million, lower by about $28 million compared to 2019. Total cash at the end is $244 million. Out of which, $99 million is from VIA related to the IPO. And then excluding VIA, it's at $146 million, which is about the same level or slightly higher compared to 2019. So with that reduction in long-term debt, we are able to reduce our debt to common equity from 0.7x ratio in 2019 to 0.47x. So that improved our debt -- our leverage, reduced our leverage and still help us to be liquid and still able to manage the growth that we've started to see in second half of 2020. Next page, please. Next page just shows the breakdown of our CapEx. Total CapEx in 2020 was much lower, 20 -- sorry, $19 million. Given that the first half, we've actually reduced -- given the reduction in revenue, reduced or -- or deferred a lot of our CapEx spending. So that's how -- that's where we ended up. And next page, just to, I guess, highlight some of the key takeaways. We did see a strong recovery, and we expect that to continue. There is some uncertainty on the semiconductor components that we actually saw in, I think, the end of Q3 last year. And we actively work with our customers to make sure they firm up their orders, so we can place allocations with the suppliers. At the same time, we also work with our customers. In this particular case, a lot of the suppliers are the second semiconductor-related component, and majority is customer nominated. So a lot of the additional costs related to that we continue to work on with the customer to pass on the costs. And our production planning is planned to capacity as opposed to the demand so that we continue to manage our inventory levels so that we don't bring in inventory while waiting for a specific component and not be able to produce finished goods. So that's what we're doing to actively manage this situation. We do expect as the suppliers of this semiconductor start to allocate capacity to the automotive segment, we see this to ease starting in second half of this year. And then the other thing is we are seeing positive, I guess, sentiment in the automotive space. A lot of push are going into the electric vehicle segment, which would be a driver of growth for the total automotive business, which is supported by a lot of the government incentives and targets of government to push for EV vehicles. And then lastly, we do see positive trends in terms of vaccines being rolled out from a majority of the IMI operating sites sponsored by the government so that at least we anticipate that this would help address the COVID situation and mitigate any other or further lockdown which we have experienced in 2020, which would have a severe impact on our business. So these are basically key takeaways from Q4 and second half of 2020. I think that's the end of the presentation, so we can open it up for Q&A.

Thank you, Art. Thank you, Jerome. We'll open the conference for your questions. Thank you. Here's a question. Maybe Art or Jerome can take this. How much of the chip shortage would affect IMI's product fulfillment?

I think based on initial indication, we're seeing a adapt on our revenues of between 5% to 10% particularly on the automotive segment. So that would be a backlog that we think then gets pushed up into the succeeding quarters. Not a significant impact in Q4, but we are seeing -- because as the shortage becomes more prevalent, we're seeing a bigger impact in Q1. So that 5% to 10% is more of a Q1 impact, which will be pushed up to perhaps Q2, Q3 as the supply ease.

Follow-up question on that, are we going to expect an elevated level of inventory moving forward?

We're working not to have them, right? So I guess, I think our target is, as I mentioned, we don't purchase our inventory based on the demand, but we look at what is the complete set of bill of materials we need and order accordingly based on that.

Yes. Let me add a little bit to that one, that particular question. So what has always been the norm is to build inventory based on demand, meaning when the customer places an order, we take that order, we look at -- we load it up into the system, and then we then start procuring the materials for it. Because the knowledge that we have that certain types of products are -- or components may have a longer lead times than necessary, and both -- we don't want to be settled by the inventory buildup based on that, what we have taken is we've taken -- even though we've taken a little bit more work, we have switched over to what we call the inventory based on capacity, not based on demand, meaning that we will start procuring actively and developing it based on the capacity that our equipment or our manufacturing process can actually build the product. So we do -- we rescrub now the data that is necessary, and we don't start building inventory unless we know that we have the equipment, the capacity to build it at the same time that we can find all the different materials necessary to build it. So right now, we've switched over to a build -- to plan by capacity rather than a plan by demand. I hope that makes sense to everyone. Thank you.

We have a question here. Are you involved in electric vehicle battery technology?

Well, if what -- if the question pertains that are we involved in the physical battery, for example, the actual housing, the lithium part, the chemistry, the insulation that goes inside between the batteries, then the answer is no. If we're -- if the question is, are we involved in a battery management system, which includes the battery and electronics necessary for you to work in a powertrain environment, then the answer is yes.

Another one related to that, is the U.S. new position joining the Paris climate change focusing on EV and solar be felt by IMI?

I think it will be felt by everybody because then it will then open up all the necessary building blocks in order to be able to convert over and deliver all of this electrification necessary. And like I said, one of the major building blocks there will be the power module because there's no way to get around that and develop any type of renewable power source without the power module. So that, to me, is that for sure, IMI and definitely the whole market will be.

This is related to the VIA issuance. How are we going to deploy the proceeds from the VIA IPO?

I think the use of proceeds will be mainly on investing in additional facilities related to the new automotive projects that VIA has won as well as investment in research and development. I think the total investment in the new facilities in Germany plus additional investment in research and development would be closer to about EUR 15 million to EUR 20 million. So at least that's the initial investment. Then the rest will be depending on how the new projects come in, then there might be additional investment to support these new projects because, remember, automotive also may take some time, gestation period, to go from the prototyping up to mass production.

Here's another one, Art. I think this is a talk in the market right now. How are we -- do we have any partnership with Tesla?