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

All right. I think we can go ahead and start. Thanks for everyone taking the time to join us today. Joining us from my end CFO, Lau Dela Cruz. I'll let Dela kick it of market updates. Before Lau takes us through the financial performance for the quarter.

Hello. Hi. Good afternoon, everyone. Just will give you a quick update on the market situation and then we back [Technical Difficulty]. All right. Just on the updated forecast for the global economic outlook in 2023, it remains about the same as the forecast in Q4 last year with global economy growth at 2.8%. The [Technical Difficulty] EU and the U.S. are revised slightly upwards as I think consumer spending and employment rates are holding up better than expected. So there's a slight bump up in the U.S. and Europe economies. The rising interest rate in the U.S. and in EU to fight inflation is really biding a lot of the drop in global forecast for 2023 versus '22, as you see in the chart. China, however, is expected to grow at 5.2%, much higher than 2022 [indiscernible], which is expected for growth and it's anticipated that the government would also be more positive in terms of policies that will help improve economy. So I guess all in all the macro environment level, we see the stabilization of inflation as well if you look at the U.S. numbers last night that was released, inflation was lower than expected. The global economic going to be not as bad as a lot of people are anticipating or are fearing. So which is a positive for us. At the same time, it is also an indication of the electronics PMI slightly [Technical Difficulty]. So it seems like it's -- despite the over -- I guess, supplying a lot of the inventory chain, the electronics [Technical Difficulty] is contracted in April. And it seems also like the workforce absolutely being maintained in a lot of electrical companies given the requirements to clear a lot of the backlogs. So overall, a slowdown in '23 expected but not as bad as we thought, which is good news but we -- there remains to be uncertainty. So, obviously, we will continue to watch happening in the market. Next page, please. The next couple of pages are more on chip components, this is a big topic that we have in the last couple of years. And there's also still some lingering effects in Q1 of 2023. This is a chart of the global fab equipment spending, which is a leading indicator that we track. It shows here in 2023 [Technical Difficulty] decline, which is indicating excess inventory in the semiconductor space, which I'll talk a bit later. It's not across the board. There are some pockets that are still in short span. So the [Technical Difficulty] the semiconductor space is expected in '23-'24 the market is seeing this oversupply and trying to clear inventory. However, the outdoor next year 2024, fab equipment spending recovery expected to be driven in part by the end of this semiconductor inventory correction in '23 and strengthening demand for semiconductors in the high-performance computing segment and also in the automotive segment. This quarter's semi forecast update offers our first look into 2024. Highlighted the global expansion of capacity for future semiconductor [Technical Difficulty] driven mainly by automotive and the computing segment. Next page. This is a general outlook on the global semiconductor inventory index. As you'll see [Technical Difficulty] overall market, the conductor market is entering into a major correction cycle as demand for PC, smartphones [Technical Difficulty] electronics has significantly declined. And therefore, a lot of the semiconductor and components have improved in terms of the supply. In the fourth quarter of 2022, the Gartner Index of inventory semiconductor supply tracking entered the moderate surplus zone while the overall index is no longer in the shortage zone. As I mentioned, there are still inventory imbalances, abundance of chips in -- for certain segments, but unavailability to others, particularly in automotive. So you'll see the memory chips, the memory market [Technical Difficulty] for most of 2020 due to the weak equipment demand despite the slowdown in production of the [ vendors ] as well as components, they're also headed for oversupply. And we are seeing in terms of the regular components or chipsets that we're seeing that are non-automotive grade. However, in terms of the automotive grade MCU and analogue components, there is -- we are still facing quite a shortage, which is also impacting our Q1 top line performance. But we do see this will continue to improve and should normalize towards the end of the year. Okay. Next page. I'll talk a little bit about the shift from the ICE to EV, since this shift is actually moving quite significantly in the last 2 years. And we are, as I am -- I also seeing a lot of opportunities in this space. In terms of the EV market, a total of 14% of all new cars sold were electric in 2022, up from 9% in 2021 and less than 5% in 2020. China, again, is the front runner, accounting for around 60% of the global electric car sales, more than half of the electric cars on the roads worldwide are now in China. The country has already exceeded its 2025 target for new LNG vehicle sales. In Europe, the second largest market, increased 15% overall in 2022. So meaning it's more than 1 in every 5 car sold are electric in Europe. Similarly, in the U.S., EV car sales have increased 55% in 2022. So we're currently expecting a total of 14 million units of electric vehicles sales by 2023, which is forecasted to be about 35% year-on-year growth. At IMI, we are seeing this trend coming down to our -- in terms of our pipeline and our revenue growth a lot of that is driven by -- in our automotive segment, driven by the EV or a shift from the ICE to the EV cars. However, at the same time, the slowing economy and the high financing rates will also have an impact on the EV players. At the moment, there are many EV players, several hundreds of EV players globally. We expect to have some consolidation in the industry. So we continue to be focused on or more cautious on who we partner with in terms of EV projects. Going on to the financials. In terms of our total revenue by segment, overall revenue in Q1 grew by 44% year-on-year compared to Q1 2022, quite muted due to the lingering effects of the component shortages, which particularly impacted our auto segment revenues. In our auto, the growth rate is at 7%. However, approximately $20 million of these revenues are delayed, we're not able to book, mainly because of the component shortages. However, we [Technical Difficulty] as the supply challenges in the automotive segment improved, we should be able to recover these backlogs in the next 2 quarters. We are seeing, however, continued firm demand in the segment towards the future quarters, particularly in our European operations, which still shows a pretty strong order book. In the Industrial segment, we are seeing improvement in the margins as the revenue mix improves toward the higher-margin customers as we ramp up these new customers. We are also seeing increased pipeline wins, mainly also related to renewable energy management system, which you'll see some of the projects in the following pages. The Aerospace and Defense segment remains to be quite challenged as the components are quite specialized chipsets, although it has improved some, but still quite slowly in terms of normalizing. So we are seeing, however, improvements at least in our April top line in aerospace and defense segment. On the consumer space, as I mentioned earlier, there is a big slowdown compared to last year. That's why you're seeing 34% drop. This is mainly the consumer segment business of [indiscernible] subsidiary as they also work on freeing up capacity for incoming automotive and industrial business. Our telecom infrastructure business is also down. This is a less focus segment and we are looking at the decision made that we've made last year in terms of exiting some low margin customers, you're seeing that impact or effect this year which is driving the down. Next page. On a regional basis, you'll see the Philippines remain to be a strong growth coming from the industrial segment, particularly what I mentioned in the new business ramp up in the cash payment system and also in industrial lighting business. We've recently announced also a partnership with Zero, which is the EV motorcycle, which will be assembled in the Philippines. We're in the final [Technical Difficulty] production pretty soon, I think the end of June or early part of Q3 -- sorry, end of Q2 and early part of Q3. China revenue is down driven by the exit of the low-margin telco business, as well as slowdown in some of our industrial segment in the white goods area due to the downturn in the construction industry in China. The automotive segment is also muted in terms of growth, mainly because of the component shortage. However, we are able to streamline our operations in China. And so despite the lower top line growth where the margins have actually improved in China. For Bulgaria and Serbia, also showing a relatively slow growth, still impacted by the [Technical Difficulty] shortage because these 2 sites are primary automotive or primarily served automotive segment. In Czech Republic, on the other hand, because of the new business that we have started in Czech Republic, you are seeing very strong growth, and this is related to a customer that is focusing on the EV market. So that's how we do a lot of our growth in the Czech Republic, up 90% in Q1 2023. Similarly, Mexico is, again, mainly automotive, showing a healthy growth despite also component shortages in this segment. So again, we did not have that lingering component shortage in the automotive market, our growth would have been significantly higher. MVI and STI remains to be challenged here because of the consumer segment slowing down significantly. STI with the aerospace defense challenges to there. But we are seeing improvement in terms of the margin that at as a result of the slowing top line growth. Next page, our new wins. So if you look at our new wins, it's a healthy growth, both for STI as well as for IMI. Again, mainly driven by growth in the Industrial segment. We do have another major win that we have registered recently, which is not shown here. I think in April, you'll see a big jump in new ones, particularly in the automotive space. And if you can -- if you noticed also the notable wins that we have so far in 2023, a number of them are related to the electrification of the vehicle, as well as in the renewable technology. I think with that, I will turn it over to Lau to talk about the financials.

Hello. Good afternoon, everyone. So I'll be discussing more on the Q1 2023 financial performance. As mentioned earlier, our revenue is quite muted with growing only 4% than last year, but this is mainly driven by the strong demand in Europe and the ramp-up of the new programs, particularly in Czech Republic and Mexico related to the EV. The Philippines are also growing from the new industrial businesses that we won a year ago. There were some declines in China as a result of our exit in some of our telco businesses and the lower industrial business and also caused by push out of demand due to shortage. We are still seeing the effects or feeling the effects of shortage, but the shortage is mainly on the MCUs and automotive-grade parts and the severity depends on the ability of the customer to secure allocation. On the other hand, our non-wholly owned subsidiaries declined due to doing lower demand on the consumer segment, particularly for VIA. But they are adjusting their portfolio and is increasingly focusing on profit over revenue growth. While on the other hand, STI Defense segment is at par with last year, but they are growing their industrial segment with the new programs ramping up for 2023. Compared to the previous quarter, our revenues are down versus Q4. Since in Q4, we had some significant amounts [ UPTV ] collections and also recovery of backlogs, therefore, causes some overstock at the customer level, which is affecting Q1. Without this UPTVs and backlog recoveries in Q4, the Q1 should be almost at the same level as the previous quarter. On the margins, the increase compared to last year was mainly driven by the significantly improved margins of our non-wholly owned subsidiaries. The wholly owned, if you may recall, we have booked some accounting change on the estimated [Technical Difficulty] life of our machinery from 7 to 10 years, and that was all booked in Q4. So what we did here, assuming we spread the effect of that change in useful life from beginning of 2022, so that the chart will show the better apples to apples trend, the margin actually at par with Q1 last year and slightly improved versus the Q4. There were some increases in the direct material ratio, but this is really more on the sales mix. Those growing, especially in the automotive segment are the high [Technical Difficulty] materials products, but this was offset by better efficiency despite the impact of [Technical Difficulty] inflation, which is higher [Technical Difficulty] and the but in general, the component shortage have already improved compared to last year, especially on the freight index since the freight index is almost close to the [Technical Difficulty] levels already to 2023. So this [Technical Difficulty] that are also reflected in the operating income on the operating chart [Technical Difficulty] contributed by the increase in [Technical Difficulty]. However, if you look at the net income on the lower left, despite the improvement in the operating [Technical Difficulty], we were impacted by high interest rates in Q1 2023, which is causing the decline in net income as reported. But in 2022, just to note that we have some one of government impacts in China related to COVID and also some one of insurance. And the acquisition last year was better compared to Q1 of this year due to the euro and U.S. dollar fluctuation. So if we will exclude those one-offs, if you look at the non-GAAP, our Q1 2023 is actually better than last year and also versus previous quarter. Also just to highlight Q4, we did some impairment [Technical Difficulty], and this is because of the uncertainties [Technical Difficulty] some of our customers due to the shortage, we conservatively booked some financial provisions on the [Technical Difficulty] expected to be [Technical Difficulty] volumes are recovered. So with that EBITDA if you look at the non-GAAP EBITDA, it's still showing improvement compared to year-end also the previous quarters. Okay. Next slide, please. So this is just, again, the split of our wholly owned versus non-owned subsidiaries. So for the wholly owned, the revenue is growing 10% versus last year. Revenues is a modest growth due to the delays also in the ramp-up of [Technical Difficulty] customers and of [Technical Difficulty] shortage, which we estimate to be around 10 million. If without the shortage, it could have been higher by 10 million. But we expect still [Technical Difficulty] backlogs of the succeeding quarters. The [Technical Difficulty] income for the core business have been consistently positive without [Technical Difficulty] of the provisions and FX in Q4 in last year. The non-owned subsidiaries seems to be flattish in terms of revenue activities, but in [Technical Difficulty] the last quarter based on the non-GAAP income. So it has already reduced to [Technical Difficulty] loss compared to last 5 million to 7 million of loss per quarter. The difference in the reported and the non-GAAP [Technical Difficulty] versus the U.S. dollar. Next slide, please. This is our [Technical Difficulty] of Q1. We have some increase in bank [Technical Difficulty], and this means to support the new businesses, particularly in a Mexico and Republic. Our cash flow is also slightly higher as we have improved our working capital management to last year where we have increases in inventories. And we continue to improve our [Technical Difficulty] execution strategies as well as our to best position the business for changing market conditions. For Q1, we have [Technical Difficulty] generated positive cash flows from operations, and we hope that to further improve our working capital so that we can generate more operating cash flows in the next quarters. The current [Technical Difficulty] is slightly lower, but the debt-to-equity ratio remains the compared to December. And currently, IMI is trading at around PHP5 this morning, which is our book value per share. [Technical Difficulty] as we mentioned in the last [Technical Difficulty], we have controlled CapEx in 2022 -- 2023, we expect to be -- to have higher CapEx expenditures, and this is to support the ramping up of the new programs [Technical Difficulty]. So for the whole year, I think lending around [Technical Difficulty] for the full year compared to the 21 million of 2022. Okay. So I'll turn it back to Jerome for the Q&A.

I think the key takeaways would be the revenues have challenged by the lingering supply chain Q1, but we expect demand to be relatively firm. So it's not at a expected last year when we were doing our planning, particularly, this is shown in our European businesses and in the automotive segment. Margins are improving. The costs have been -- have normalized. So we expect to see improvement in logistic costs also the focus on manufacturing efficiencies also helped mitigate a lot of the increases in direct labor costs [Technical Difficulty] because of inflations and adjustment in our price has also improved or helped maintain a slightly improvement margin we continue to focus on how we can continue to pass on a number of these costs to our customers. Inflation continues to be a concern, particularly on the labor side. I think more so on the retention of employees. So that continues to be something that we will continue to watch on and see how our other opportunities or strategies as we can do to keep our [Technical Difficulty] increasing the cost or the prices or the salary [Technical Difficulty]. We are seeing a very strong pipeline. So it looks like to mention the shift towards more electrification, we are seeing a lot of activities, particularly in automotive space. And also, as mentioned, in April, we also closed 70 million of new revenue potential or new projects just to show that this activity is quite high, and we are securing businesses customers. And then as Lau mentioned, our focus is to continue to manage our cash flow, partly driving low inventory as markets to normalize, particularly in automotive segment. So with that, I will close the presentation and open it up for questions. I think [Technical Difficulty].

[Operator Instructions] The question is [Technical Difficulty]...

[Technical Difficulty] so if you look at our [Technical Difficulty] ratio or GE ratio in this [Technical Difficulty] we have a lot of [Technical Difficulty] that we've done in 2020. I think in the total savings there is out $8, if I'm not mistaken. So that helps offset a lot of the increases in the cost. So if you look at the [Technical Difficulty] costs, we maintain the direct labor as a percent of revenue despite the increased costs in a number of the areas, particularly in Europe and Mexico. And we continue to [Technical Difficulty]. And as our revenue grow, we don't expect to increase our [Technical Difficulty] so that's also shown improvement. Lau, if you anything you want to add?

Yes. We the drive is not as much people from the [Technical Difficulty]. And I think we have been improving in terms of digital revenues for OpEx and also the fixed overhead, as mentioned by Jerome.

And also [Technical Difficulty] just to add, $8 million subsidiary in the [Technical Difficulty] slowdown in the top line. They have done major restructuring. And I think it's a follow-up to the question as well. So in STI, we have done some downsizing. I think annualized savings is close to 2.5 million of downsizing exercise in the last 2 years on STI as well as the [ BI ] is also looking at focusing more on margin as opposed to just driving growth, and that also has cost improvements overall.