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

[Operator Instructions] For today's final featured listed company, please welcome the Integrated Microelectronics [indiscernible] [ Corp. ] team. We have welcoming on stage Jerome Tan, President of Integrated Macro Electronics; Laurice Dela Cruz, the Chief Financial Officer; as well as Brian Jalijali, group -- the Global Head of IR and Business Development. Over to you, team.

Hello. Good afternoon to everyone. Thanks for having us. I'll go through my presentation in 2 parts. The first part will be an introduction of IMI for those of you that are not familiar with us. And then the second part will share with you our Q2 results. Moving on to the presentation materials. So on the first page, you'll see for IMI -- we are actually celebrating our 43rd anniversary this year. IMI started as a semiconductor assembly and test business in 1980, and has grown from our Philippine based operations into a global operations, where we are an important part of the global supply chain in electronics manufacturing. Semiconductor assembly and test is now a small part of our business. IMI is basically an electronic manufacturing services company, and we do a full range of electronics manufacturing from the printed circuit board assembly to a full electronics box build. IMI currently ranks 22nd largest EMS in the world and also #18 automotive EMS globally. So we do have significant presence across the globe, and we serve the main regions in Europe, North America and Asia. Also something to note, it is only 25% of our revenues comes from the Philippines -- and most of the revenues coming from Philippines are exported. IMI has wholly owned legal entities, which operates in 7 countries. So these wholly owned subsidiaries are what we consider as our core operating businesses or entities, and IMI also has 2 non-wholly owned subsidiary. STI, based out of the U.K. in aerospace and defense. And VIA Optronics in Germany listed in the New York Stock Exchange. These are non-wholly owned subsidiaries. And so basically, IMI provides management oversight, but act more as a shareholder, particularly in the case of VIA Optronics. They are run by the existing management team and also the founders of these 2 companies and the management team where remains at the time of the acquisition until now. I wonder if you have recently also heard that we've announced that STI, we've recently exited. We have signed an agreement for a private equity company in the U.K. to acquire STI. And the reason for exiting or divesting STI is unfortunately, it was not able to meet its acquisition objectives and continuously suffered losses in its business, which was further impacted by the pandemic and the supply chain disruptions. So with this divestment, it allows IMI to have tighter management focus and conserve our resources on our core business, which are the wholly owned subsidiaries. It also allows -- it also has a positive impact for IMI. So if you take out the STI performance, in the last 12 months, our EBITDA has actually improved by a significant amount, from a USD 45 million, it would increase to a USD 55 million of EBITDA. IMI also focused in 2 -- right now after the exit of STI focusing on 2 core businesses, which is Automotive and Industrial. So Automotive is about 58% of our revenues and Industrial segment is about 30% of our revenues. We continue to have a strong pipeline despite the slowing global economy that we're seeing. First half of 2023, our average revenue potential, which is the average annual revenue based on lifetime of each project is $152 million. So this is, I believe, stronger than last year, and we're also on track to be able to achieve our target for this year. We believe our key differentiators are the ability to serve high-quality requirement applications like ADAS, which is advanced driver assistance system, electronic steering -- electronic manufacturing products for autonomous driving. So we do because of that high reliability requirement, we have a significant amount of advanced manufacturing and process engineers and design and development and testing system development engineers. So we have a total of 400 that are located globally. The other differentiator for us would be we are also positioned in the automotive market, quite entrenched -- and that is -- we are seeing a lot of opportunities in the future as the automotive space shifts from the traditional internal combustion engine to the growing electrification with EV vehicles. And then I think the other strong advantage that we have is our long-standing relationship with our customers, and these are blue chip customers, Tier 1 as well as OEM customers based mostly in the U.S. and Europe. Moving on to the next page, just to share with you that, as I mentioned, IMI is not just a printed circuit board assembly contract manufacturer, but is an end-to-end technology solutions provider. Our key differentiator is the ability to be able to provide customized solutions with high quality requirements. Just as an example, for the ADAS which is the front view active camera, that is really not for the passenger, but it's really for the car, right? So the quality requirements for that are in terms of defects per million, it's required at least single-digit defect per million. And compared to, I guess, an ordinary iPhone, if you look at their phone camera, the defect per million that's acceptable could be around 800 defects per million. And the difference is because automotive camera is really for safety. If it fails, it could cost lives. So that's the level of requirements that IMI is able to provide in the case of automotive. We also -- we have put in significant front end in our manufacturing value chain in design and engineering. So this enables us to provide higher value-add services to our customers and engage with them early on. That way, it remains sticky. We are able to help them codesign particularly in the areas of manufacturability and guide our customer to be able to take their designs and go into [ industrialation ] process and go into mass production. Some of the manufacturing expertise that we'd like to highlight a lot of them is being done by EMS companies, but specific capabilities, for instance, the COB or Chip-On-Board or bare die assembly is one of the, I guess, expertise of IMI. A bare die assembly is basically mounting the semiconductor die directly into the printed circuit board without the enclosure, right? So that requires very high-quality clean room. Clean room at the minimum should be 10,000 class clean room, which means 10,000 particles in 1 cubic meter of space. So that's the level of cleanliness that's required to do the bare die assembly. We're also capable to build fully automated electromechanical assembly that's required for high-precision box build. This particular application that we have is in steering application. So it controls the steering for vehicles, both the ICE and electric vehicles. The other capability that we have is we are able to design and build functional testers. So instead of the customers having somebody manufactured electronics and then have it sent somewhere else to get tested, we are able to help the customer build the functional testers in-house and to be able to do the testing along the line or at the end of the line. And of course, we have the usual fulfillment in terms of sourcing materials, logistics, delivery. But I think one that is a differentiation for us is really for automotive. Automotive, it requires full traceability down to individual component that goes through each individual and the circuit board and ship to all the different locations of the customer. So that's the system that's required in terms of being able to have full [indiscernible]. To share some more about some of our differentiation if we go to the next page, Brian. So the first one is, as I mentioned, IMI has a proven superior technical expertise. We've focused a lot on customized solution since we are relatively small compared to a lot of the EMS that serves the consumer and computing segments. Our expertise in specialty is more on low volume, high mix, and more customized solution. We operate quite a big space in terms of clean room across all our different sites, which, as I mentioned earlier, we have from Class 10 to Class 100,000 plus, that type of clean room to be able to manufacture in different requirements. Our manufacturing expertise and experience also allow us to deliver single-digit defects per million. This is required in a lot of our production in automotive as well as industrial application, where safety and reliability is required. We also continuously look at our process to see how we can improve our quality. And one of the items that we track, our KPIs that we track is the incidence per billion. And we constantly look at ways to reduce the incidence of our quality incidents per billion of parts shipped. So to be able to maintain this high level of high standard, it's not just simple -- as simple as buying good equipment and then setting up the equipment. It also goes through a lot of accreditation. So -- most of our sites have different types of certification based on the different types of segments they serve, from the basic ISO 9001 for quality management system. Then you add on to -- if it's for automotive, you have the automotive certification. And if it's for medical, similarly, you also have a different types of certification for that. So we do -- most of our plants are certified in different aspects so that we can serve the needs of the customer. We also have extensive management experience and technical teams that have long tenure. So this allows us to be able to continue to serve our customer and have good ratings instead of customer feedback. Next page, please. The other differentiation for IMI, is IMI is strategically positioned in this mega trend that's driving the growth in the market. These trends are mainly autonomous driving and electrification for the mobility or automotive segment. And then for the industrial would be the drive for renewable energy, connectivity and access. So IMI is positioned to serve these subsegments over the years because we've been in this space for quite some time. It's only recently that the shift towards these mega trends accelerated, and we expect this to continue to grow significantly in the future as the world starts to focus in on driving more electrification and because of the climate change, more focused on renewable. Next page, please, just to share some of the data and -- our market data and automotive. So the global automotive market, if you look at the top left-hand side, it's growing at 4.4% compounded annual growth rate, not very high growth rate. However, if you look at the bottom right in the different subsegments in which IMI participate in, the growth rates are expected to grow much faster. And on the top right, you'll see the mix of the products that we serve in the automotive space. So a lot of our automotive revenue goes to the ADAS and autonomous driving, and then a portion of that goes to sensors and actuators for controls. And the more recent ones you see is a 16% now of our revenue is electric vehicle-related serving that segment. So that's the one that's driving a lot of our recent growth. As -- we think as the automotive move from the ICE to the EV there is more requirement for electronics. The moving parts, the mechanical parts, it will be reduced significantly, and so what will drive the competitive advantage of electric vehicles is really the electronics inside the car. And that's what we're seeing also from a shift in a lot of our customers, companies, especially for us, the high-growth customers are companies that used to be in the mechanical space in automotive. Because they realized the change or the shift that's happening, they are also moving more now into electronics, and we're a good partner with them. And you'll see some of the growth rates that we're showing in our particularly European region is really coming from that shift into EV. As I mentioned, most of our customers are global top Tier 1 customers. So these are companies like Bosch, Valeo, Automotive Lighting. We do have some direct OEM car manufacturers, but there are more the recent ones like the electric vehicle companies such as [indiscernible]. But a lot of our customers is still the Tier 1 automotive supplier that build systems for the car, and we are a direct vendor to these Tier 1 companies. And because of the area that we serve in automotive, which is safety and high reliability, there is also a very high barrier for entry. A lot of our competition is really our customers themselves. Because they normally decide should it be a build to print or outsource, right? So they also have their own manufacturing facility. So they tend to focus on some of the key areas they want to focus and those that are not their crown jewels in the way they would start to outsource. And we start -- we're starting to see more of the outsourcing from our Tier 1 customers into EMS companies like [indiscernible]. And because of the high reliability, it also takes a long time from the time a company wins an award to mass production. Sometimes you'll take at least 18 months to 24 months. So because of that, that's also one of the reasons why it makes it a high barrier to entry -- and most of the products that we provide to our automotive customers are single source, right? So they don't have ultimate suppliers. Because it is expensive to qualify suppliers. Going on to the next page on Industrial. The other area of focus for us is the Industrial segment. The growth rate is a bit higher than automotive at 5.4% compounded annual growth rate. But similarly, within the industrial space, there are subsegments that are growing faster. And these are the subsegments where also IMI participate in. For instance, a lot of the drivers for us are really on being able to have -- build sensors to be able to track the assets that goes across the globe and also being able to particularly have temperatures -- get the temperature data that can be tracked across the cold chain. So these type of sensors and box build that IMI produce for our customers. There's also a strong demand for power modules and power modules are basically a combination of power chips into 1 module to be able to regulate higher voltage, particularly it's needed in the renewable space for wind turbines, also for electric vehicles in the battery management requirement. And IMI is in a unique position to be able to serve this market because IMI combines our experience in being able to do semiconductor power -- power semiconductor assembly using different materials or substrate. And to manage the heat because the biggest challenge is really the heat management for a lot of these power modules and electronics. And also our experience in manufacturing electronics and managing the heat temperature of electronics and being able to design ways to dissipate the heat from the electronics. So I think this is a unique combination that we have to be able to serve this power module, which require higher voltage, higher power. And of course, the smart meter will continue to be an important part of this segment, which we are very much involved in. Customers that we have also are these -- in industrial, we have more OEM directly. One of the customers that we have a long relationship with is ASSA ABLOY. It's actually the global leader in security. You may not be familiar with the name, but they actually have a lot of the brands that you may be familiar with, for instance, HID, which is security access, the new -- normally that you have when you access your building, they also own [ Yallock ] and Dilitec, which is the hotel access cards. So again, these industrial segment depends on how complex and reliability in terms of requirement. It's either single source, but compared to automotive, they have more dual source. But the benefit of an industrial customer or industrial segment is they normally have a family of products. And they're normally lower volume, high mix. So once you're in, you're able to not only serve one family of product but also gain market share or able to enter into additional family of products within the [indiscernible]. Moving on. The other, I guess, the other highlight in terms of differentiation is IMI is deeply embedded with a lot of our top-tier customers. And you can see here some examples. Our average relationship is about 15 years and some of them are even 25 years and 20 years relationship. And the reason for that, again, is in the segment that we chose automotive, industrial, medical, these are long-cycle business. Unlike computer or computing and consumer, maybe every 18, 24 months, they would change the model and you may have a completely new supplier the -- these companies will decide to shift to. But in the case of automotive and industrial, because they're -- they're very long cycle, automotive normally about 7 years, sometimes extending to 10 years. Industrial, similar 5 to 7 years. So that also is why we focus on this segment because it also eliminates a lot of the significant disruption or volatility on our top line. So if you look at IMI in the past few years, there are dips, but it's normally not a very big dip, and we continue to, I think, over the years, most of the years, we're showing growth year-on-year. In terms of customer base, our single largest customer is about 14% of our revenue. Our top 10 customers represent about 55% of our revenue. So not very high in terms of concentration. Moving on to the next page. The other area to highlight is IMI has a very strong global footprint, which enables us to serve our global customers from different regions where they do business. We have 20 manufacturing locations that operate in 10 countries. That includes VIA and STI. So if you include -- if you exclude VIA and STI, the core IMI business are operating in 7 countries with 13 manufacturing locations. We see this as a strong competitive advantage because it allows our global customer to partner with 1 EMS that would have the same standard and process across the region that it turns. For instance, since we expanded the -- from Asia into North America and Europe about 10 years ago. We have seen our global customers increase from a handful of global customers before, which we serve from China and the Philippines. Now we have about 25 customers being served from multiple sites of IMI. And a total of 69% of our core business revenues are coming from these global customers that serve in the different regions. Especially now with the geopolitical situation going on with U.S. and China, where a lot of the supply chain now are looking at ways to decouple from China, it's becomes -- it's becoming more and more a strong competitive advantage for IMI to be able to serve our customers in different major regions. Next page. Just next page -- just shows you where we actually serve our customers or where they actually ship their products. Our customers are mostly European and North American customers. As you'll see in the pie chart, about 71% is headquartered in Europe, 14% in North America. So those are the 2 main customer base. But these are really global customer, even though they're European-based, they ship globally. And you'll see on the right-hand side, where we actually ship. So the products that we manufacture in Europe, for instance, 84% of that goes into Europe itself. And then Mexico the same thing, 89% of the Mexico production goes into Mexico or North America. And then China is most of the products that we produce actually go to China. So it's no longer China as the export base, at least for us. It's really the China for China market. Only the Philippines, where we don't really serve the Philippine market is really shipped to the different regions, Europe, the U.S. and other parts of Asia as part of the supply -- global supply chain of our customers. Next page is just to share with you that one of the things that is -- and I'm sure a lot of you have reading about this and talking about this is really ESG and sustainability commitments. This is an important part of the metric that we track now, as you probably know, Ayala has made commitments to be net zero, and along with that, all the subsidiaries have also followed suit. And at the same time, this is not just only driven by our parent company, it is also a requirement for a lot of these international customers that we serve. One of their criteria in selecting customers is how far are you in terms of your sustainability and ESG goals. So IMI supports 11 out of the 17 U.N goals for sustainability development. So here is just some data to share with you in terms of the gender equality. I think we're almost 50-50. So I think we are -- we're in a good position in terms of gender equality. And this is not just the direct labor force, but this also is evenly split almost across the different levels of the organization. On the shift towards clean energy, we've also shown quite a bit of progress in 2023, first half. 26% of our energy use comes from renewable. So we believe we're in line to be able to switch to -- or achieve our target of 100% by 2040. Similarly, on the GHG emission for Scope 1 and 2, we've achieved 15% reduction first half of this year, and we expect to be able to achieve at least 50% reduction by 2030. And then we also continue to monitor in terms of the clean sanitation or waste -- we make sure that most of our waste are either recycled or us goes into upcycling to be able to minimize those that goes into landfill. So this data is just specifically for Philippines so in the process of collecting data across our different operations. And also to note that our nonfinancial reporting for ESG is also now certified and independently assessed by third-party companies. So this is like an EY or SGV auditing your financial statement to make sure that it's accurately represented. So we also have third-party companies doing audits. I'll move on to the first half financial performance. So before I go into the details, maybe I'll just go into the -- just give a bit of background. For those that are not familiar with our industry, just to put a bit of context. So the -- sorry. The industry has gone through a major disruption in the last couple of years or 3 years that has had a significant impact of the business model. This actually started with the pandemic and then the supply chain disruption, right? The challenge for IMI has since we serve more than 50% of our revenues in the automotive industry, the automotive industry was severely affected by these external factors with the pandemic and supply chain disruption. Their model before, if you're familiar with the automotive model is the just-in-time, right? So this allows it to be very efficient, not have a lot of inventory because they only get inventory that is going to be built and shipped out. But with what happened to the pandemic, it was really caught off guard. And given at that time in 2020 when the pandemic started, it was -- there was no certainty in terms of what the volumes of automotive would be like. So because of that, automotive industry decided to -- or did not put any orders for the components. And that order was taken over by the capacity for those semiconductor chips and so forth was taken on by computing and communication industry because if you remember, pandemic, everybody is just home, work-from-home environment so communication and computing was -- have very high demand at that point. So with that, when the pandemic started to recover, the automotive industry then -- because they didn't put in allocation for the parts, went into severe shortages, and they started in beginning of 2021, even up to 2022, even up to now, we are still seeing some of the residual effect of that. And this was also aggravated by the geopolitics in U.S. and also the prolonged lock-down in China. So that caused a lot of disruption in the supply chain, all the costs go up. And then because of that, the government had to react to tame inflation. So that's the backdrop where we were operating in the last couple of years. For 2023, we're starting to see the supply chain disruption ease. However, the challenge for us is because of the interest rate increase by the government to be able to tame inflation, that also impacted global economic growth. And therefore, we're seeing that in Q2 and probably going into the second half of this year. However, we do expect that to recover next year, especially as the shift towards the mega trend continues, that should -- as the customer clear a lot of the excess inventory in the system, that should start to turn around and show much higher growth rates towards the end of the year or next year. Going on to the next page. So you'll see in our -- in terms of our revenue, top line growth for Q2, we're down 3% overall. The segment that is still growing despite that is automotive. Automotive, we grew 15%. And despite some of the components are still short. So we're actually still have backlogs in terms of our Automotive segment. And aerospace and defense. Aerospace and defense growth is really coming from recovery of backlogs from the previous segment. And Aerospace and Defense is mainly from our STI subsidiary. The areas where we see significant drop is in the Industrial segment. A lot of that is driven by the environment in China where the commercial and residential property sector was significantly affected. And we do have part of our industrial portfolio -- our company serving this commercial and residential development in terms of quite good or building systems. The other area that has driven some of the reduction is in terms -- we do have a customer based out of China that has delayed the new model of the EV charging so that is a temporary dip in Q2. But we expect second half, they will be able to complete their upgrade in terms of models and start ramping up the production again. In the other segment, wherein we are down is our telecommunication segment. This actually is a segment wherein we're continuing to see competitive price reduction. This segment we serve out of China and most of the competition that we are seeing are local Chinese EMS providers. And with the situation happening in China, we -- we have difficulty trying to maintain a decent margin. So even as early as mid last year, we've already decided this is not an area we will focus and therefore, we've exited some of the lower-margin customers in this space. So to be able to realign our portfolio and make sure that we focus more on the higher-margin segments and subsegments. Moving on to the next page. This just shows you our project wins. So as I mentioned, even despite the global slowdown, we started to see beginning of this year. In terms of new projects, we are still seeing significant new wins, at $152 million is on the core business only, compared to $131 million of annual revenue potential in the first half of last year. And you'll see a lot of our new ones is also in the automotive space despite our efforts to try and diversify more into industrial and that relies too much on automotive because we are now [ or ] entrenched in the automotive and mobility space, we continue to see a lot of new projects. And a lot of the projects, as I mentioned, are driven by the electrification. [indiscernible] For instance, the notable wins that we have here is about energy, battery management application -- and then for ADAS, we have a new steering application system that we won recently and so forth. And then I guess the other thing to highlight is in terms of location, the Philippines is seeing much higher activity as a lot of the customers look at diversifying out of China, so Philippines does have a little bit, at least what we're seeing in our new wins. Next page, please. The next page is just to highlight one of the new wins in Q4 last year, which is a partnership in -- with Zero Motorcycle. So Zero Motorcycle is basically an EV motorcycle. We just wanted to highlight this as just to illustrate the strong shift in demand towards renewables. And in the case of IMI, it's not just a benefit of the full vehicle assembly, part of the attraction also for IMI is we would be able to serve a Zero Motorcycle for their electronics requirement. If you're not familiar with Zero, Zero is actually not a new company. It's been in existence for 15 years and sold more than 18,000 bikes. Most of them going to the U.S. and Europe. And I believe only recently with the shift towards electrification that they're seeing an acceleration of growth. And therefore, their desire to be able to partner with a company that can serve them outside of the U.S. because at the moment, most of the assembly is still in the U.S. and due to cost is very expensive for them, and they're looking to be able to scale, they were looking for a partner to be able to help them assemble outside the U.S. They did a very extensive search in selected IMI and the -- the reason why they select IMI is because of our, I guess, you can say, automotive electronics discipline, and also, we are actually now assembling bikes for KTM. So both of their requirements in a way is fulfilled with a company under one roof. So our initial project with them is to assemble their bikes. We've started production in July in this year, which also includes the battery assembly, and we expect this bike to grow mostly for exports towards Europe and mostly towards Europe. We do expect for those that are avid bikers -- we're -- or Zero is working to be able to distribute that in the Philippines by 2024. So watch out for it, if you want to get that EV bike. Zero is also looking at ambitious expansion. If you look at the pie chart on the right-hand side, that shows how big the market potentially would be in terms of 2-wheelers, $73 billion. And other Powertrain application, $29 billion. So Powertrains would be -- the Powertrain to run the vehicles like all-terrain vehicles and so forth, right? So they are looking at beyond motorcycles. And with us as a partner, we see that as a big opportunity for us to help them grow and for us to grow as well. The next few slides, I'll turn it over to Lal to share the Q2 financial results.

So I'll be presenting the second quarter financial results of IMI. And for those who have been attending the IMI's previous analyst briefings, just to highlight the change in the presentation by showing the adjusted or non-GAAP numbers in the chart to better reflect the operational performance trend of the company. Then the numbers in the boxes would indicate the reported numbers that will be published in our financial statements. However, for the 2022 numbers, we adjusted it to spread out the impact of the change in depreciation lives that's for the machinery from 10 to 10 years that we implemented in 2022. Okay, so to begin with, our revenues for the second quarter declined by $12 million or 3% versus the same period of last year. And this is mainly driven by our exit in 1 major Philippine Industrial business and also the China communication business. Also, the lower demand in the local China market as well as the declining overseas manufacturing demand going out of China. Due to the complex political and economic environment also contributes to the decline. This is partially offset by the increasing activities in our Czech Republic, Bulgaria and Mexico entities with the ramp-up and the start of production of the new EV related and industrial programs and also the general increase in demand for some of the automotive customers happened also in -- within this year. On the non-wholly owned subsidiaries, the combined revenues declined due to the increased volatility in customer demand. Particularly for VIA Optronics, the company experienced increased volatility in the customer demand in the first 6 months of 2023, as certain key customers, particularly in the automotive end market, mainly the electric vehicle market, communicated changes in the order patterns. So the current macro environment has, in some case, resulted in lower average selling prices and lower demand, which, in turn, has a negative impact on the revenue in the near term. And that's the reason why they just released a press release on the change of their guidelines. So you may just refer to the recent press release of VIA Optronics. On a quarter-on-quarter basis, the quarter 2 revenue slightly declined from the decline in demand for Philippines and VIA, but this is being offset by the growth from China, Europe and also in Mexico. So that's on the revenues of the operating income. The significant improvement from Q2 of last year is in the GP margins mainly due to the reduction of the material cost. And this is a result of the positive effect of the aligning the sales prices at the lower unfavorable purchase price variances for 2023. And also in Q2, we also realized some retrospective price adjustments for our Europe and Mexico entities that have reached over $2 million of price adjustments. However, the improvement in the material cost was slightly offset by higher labor costs, mainly from the FX impact of the strengthening of the local currencies against the U.S. dollar. So right now, the Philippine peso, the Mexican peso is strengthening against the U.S. dollars. And there are also some wage increases and some additional head count for the new programs that we recently added. All the sites, however, were able to manage the -- to reduce the operating costs through lean manufacturing and optimization of the existing resources. So on the adjusted net income, you'll see that we have been positive since Q3 of 2022, and continues to improve in 2023 despite the high interest cost. Likewise, the EBITDA have been improving for the first 2 quarters of 2023, as the component shortage situation and manufacturing efficiency improves. And we also continue to negotiate prices to recover increasing costs and some FX fluctuations. Maybe a highlight for Q2 is that we have recognized a onetime loss amounting to $84 million related to the divestment in STI -- last August 4, we released a disclosure on the sale of STI to Rcapital. And the agreement was signed, but closing will take place after the satisfaction of the condition preceded, which is mainly the approval of the government on this transaction. So based on the indicative price discussions, we performed an impairment test based on the purchase price valuation and the [indiscernible] in a onetime loss of $84 million. And this includes the impairment of goodwill of about $55 million, and the rest are allocated to the -- proportionately to certain assets. So with this onetime loss, IMI's equity will reduce by 22%, but our financial leverage ratios are still within our target range. And actually, this exit will improve our profitability by about $6 million based on last 12 months if without STI -- and to -- I think just to answer one of the questions here about when are we going to be profitable when it -- actually, if you exclude the one-off, $84 million loss. We are already at positive even if including the VIA and the STI, we are a positive $700,000 for the first half of the year. And the core business has been profitable, I think, since 2021. So there is still a challenge for the 2 nonwholly owned entities. And hopefully, the sale of STI will help improve the profitability already. Okay. Next slide, please. So I'll just make this quick. This is just a split of the wholly owned and the non wholly-owned subsidiaries. You'll see that for the core business, well, Q1 started relatively low due to the remaining component issues. The activities in Q2 started to pick up from the successful start of production of our new programs and the recovery of the backlogs in Q1. And on the bottom line, the core business has been profitable since 2021. Well, for the non-wholly owned subsidiaries, Q2 declined due to the push out of demand in the consumer and auto sector, which are the markets that VIA serves. And in response to the external and operational challenges, VIA, as mentioned earlier, in its recent press release, we affirmed its commitment to improving the performance of its business with the support of the newly appointed CEO of the company. So to this end, the company is adopting a series of initiatives, including more efficiently utilizing the existing production capacity, prioritizing the profitable organic sales growth, identifying promising opportunities to collaborate more deeply with the existing and the new customers including potential strategic market alliances and reviewing the size of its work force to ensure that staffing more closely meets the demand. So with these initiatives, you'll see that the net loss is slowly narrowing down as these entities focus on the margin improvements. So next slide, -- so this is our capital structure just to highlight the increase in bank debts, which is mainly to fund the new businesses, particularly in Czech Republic and Mexico. There was also a question about when are we going to have a positive free cash flow. Currently, our cash is -- are mostly in the inventory. And there is a decline cash balance from the slow depletion of our inventories due to the changing demand and push outs. So to resolve that, we're putting our efforts to deplete the inventory levels and to improve our inventory turnover, and that would help on the improvement of the cash position. So as mentioned earlier, the loss from the STI divestment will cause our equity to decline, but our balance sheet ratios would remain to be in its target range. And lastly from my end, on the next slide is the capital investments. So we continue to have a controlled CapEx for 2023, and we only spend on critical CapEx items, particularly related to the new programs. And you'll see that as of the first half of 2023, our capital expenditure stands at $11 million, which is almost the same level as the 2022 CapEx if you annualize it. So that's it for the financial updates. I'll turn it back to Jerome.

Thanks, Lau. Just -- I won't go through all of it. Basically, as you see in Q2, a lot of the efforts we focused on in the last couple of years, particularly renegotiating a lot of the increasing costs with our customers, driving productivity and efficiency in our manufacturing operations and also cost reduction on our direct material costs, of course, with the help of the slowing down of the global growth that also helped ease the supply chain issue and the component prices. So that is showing a positive effect, and we expect that to continue. The challenge would be the global economy not growing as fast as we expect but we expect that to recover as we see new projects still growing despite all the noise that you hear about the global economy slowing down. So maybe with that, we can open it up for questions. Thank you.

Thanks for that, Jerome and IMI team. So to [ clear ] it off I do have a question from the chat here. It's more on the back of the strengthening and regaining of the dollar against IMI's financial performance. Can you give your insights about that.

Okay. I can give that. So the FX fluctuations varies per site. So for example, for our entities, which are purely U.S. dollar revenues, like the Philippines and Mexico. The impact would be on the local cost like people costs, utilities. So the weakening of the U.S. dollar is actually a negative impact because it will translate to a higher U.S. dollar cost. On the other hand, for Europe, where our revenues are 100% Euro and the European entities have functional currency of euro, we do have a mismatch still on the mix of the revenue and the purchases because some of our materials are still being sourced in U.S. dollar. So 50% of the purchases are in U.S. dollars. So this is the exposure and that a strong euro would actually be a negative impact to us. Because it will translate to a higher dollar. Similar with the -- sorry, to a higher euro in the books of the European entities. This is also similar to the China. So if China RMB depreciates, the U.S. dollar payable would be higher, so this is more payables. As of the first half, the total impact to -- of this FX fluctuations is around the $791,000 for the core business, and we also have a loss for the VIA Optronics of about $1 million. And this is coming from the from the dollar assets, or a dollar cash of VIA Optronics because VIA Optronics during the IPO received proceeds in dollars, but their proportional currency is in euro. So that's the source of the ForEx fluctuations.

Another question we have here is more on the earnings side. So in recent [ greetings ], IMI's profitability have been volatile. And that was mostly due to certain factors that the global shortage in other internal factors as well. So as the EV market gain more traction, can we expect more consistent growth moving forward?

I can take that. The volatility in the last few years is really driven by the supply chain disruption. So aside from having component shortages and also trying to be able to serve our customers and our customers' customers. A lot of times, we have to go into the open market and buy parts that are very expensive. So that decreased the direct material price significantly. At the same time, because of the unpredictability of whether you will actually get the allocation or will the supplier de-commit the allocation. It creates a lot of distortion in our ability to plan our production. So our production became very inefficient because you have staff up our labor to be able to run the production. But then you don't have the parts, then you have people just sitting around because it's a last minute decommit from the suppliers. And also the shipping delays and the very increased cost of shipping cost -- significant cost of increase. And since our -- the advantage that we have in automotive, it's a long-term contract usually, in fixed price. So it eliminates volatility on the revenue. But at the same time, in terms of passing on costs it is very controlled because there are price agreements in our contracts, right? So being able to pass on cost is a bit more difficult and also because very tight quality requirements, it's not easy to replace a part that is on [ short ] even if you have an alternative component. So a lot of these things made the last couple of years quite challenging in terms of being able to plan efficiently on production, getting the raw materials on time at the right price. And I guess going forward, I think the second part of the question is it's maybe not just the EV, but as we see the supply chain disruption ease, and we're seeing that, and I think by the second half, a lot of these shortages would have cleared, then that brings back the unpredictability of production and also since they are expecting to be excess supply in the market, that also is an opportunity for us then to go back to our supplier now to say we need to do cost down. So I think going forward, then it will be a much better predictable operating environment. The only challenge to manage is really how slow will the market slow down, right? So that's the offset slowing market, but then it gives you opportunity in terms of lower material prices and maybe lower inflation also.

So we have another question here regarding the stock price of IMI. So it's been down for about 43.5% from its 52-week high. So what do you think is the sentiment of investors or why aren't they buying into the company's [indiscernible]?

I think it's, again, partly the financial result, right? So a lot of the interest would also be driven by the bottom line, right? So unfortunately, because of the issues that we've had in the last couple of years, coupled with the 2 subsidiaries that are actually suffering in terms of profitability also at least 2022, maybe that is giving the investor pause in terms of when is the right time. The other thing I think is a lot of the investors, and this is my take, I don't know, it may not be 100% true, but a lot of the investors see IMI as being listed in the Philippines, they tend to have allocation based on companies. So that, I think, partly also affects and a lot of the focus is really the U.S. market is strong, growing. So a lot of the funds is going to the U.S. So if you look at the PSE also, it's also been not a lot of movements recently. So I think it's part of the effect as well. So -- so I think that's -- and of course, our liquidity is not as big also. So -- that's been our challenge trying to -- when we were doing a lot of roadshows before. We do have a number of companies interested, but their portfolio, minimal investment is significant, right? So that's also one of the challenges that we see. Hopefully, the things recovering, then we can start to do more market activities to get more liquidity as well.

Yes. I think that's more of the persisting challenge for listed companies in the PSE. Maybe we can take 1 or 2 more questions before I pass it on to Nisa. So in terms of the CapEx for this year, how much is it? And do you expect that to be lower towards next year?

Yes. So for the CapEx, we already spent $11 million for the first half. Initially, our target for the year should be close to $30 million. But given that we're trying to defer some of the CapEx and just focusing on the critical ones, maybe it could be a similar level to last year, which is at $22 million maybe -- average $25 million. Now for next year, most of our CapEx, especially for the new programs were already invested since mid last year up to this year. But I think there are some planned expansions, which in terms of timing, maybe I can ask Jerome to answer on the timing, but...

I think yes. So one of the areas that we see as a potential area of expansion is, as you all know, the U.S. China politics. So a lot of the focus is shifting more towards how do we source outside of China. So there is strong demand in North America to onshore, in North America includes Mexico. So there are some discussions that we're having to see, that would be an opportunity for an area for us to expand. The other area is really in Europe, although we have already the new facility recently, last few years in Serbia, there are new businesses and programs in the wind that we would need to expand additional capacity as well. So I think of overall CapEx next year will be definitely higher than this year. And as things start to normalize, then we can become more aggressive in expanding our business.

Understood. So I guess we can dig on the last question. So which we'll take on the potential risk of global economic slowdown and is the company making any preventive efforts to mitigate the potential impacts of this.

I think the slowdown, if ever, at least our view is it probably will be short term, as I mentioned, as a lot of the -- our customers clear through the excess inventory in the system, that should -- once that's done, hopefully, by the end of the year. That would start to see positive signs of recovery. And I think the new programs, the good news is the new programs are still continuing. So it's not -- and also it's not a situation wherein it's very dire. Nobody wants to invest because they don't know what's going to happen. And with the U.S. economy, also it looks like it's going to be a soft landing, that also gives us a positive encouragement that it won't be a very severe slowdown, and it should turn around quickly. The things that we're doing obviously is given that it's still uncertain, we still -- despite a lot of the requirements to add people, we are deferring a lot of those, holding our head count. Only critical headcounts are being -- critical spending in terms of CapEx. As you see, we're deferring a lot just in anticipation if the slowdown is going to take longer. So those are the things that we're looking at. We're also looking at are there opportunities to consolidate some of our footprint as well. So that we can have a more efficient and increase the utilization in some of our plants.

Thanks, Jerome, and thanks, Laurice. I guess that's all the time we have left for the segment and appreciate the insights, as always. And unfortunately, we can't answer everyone or all the questions in the chat box, but hopefully, investors can reach out with the IMI Investor Day team for further questions.

Yes. My e-mail is [email protected]. Feel free to send me any questions. And I'll connect you to the people who can give you some answers and insights.

Thank you so much. So with that, Jerome, do you have any closing remarks before I hand it over to Lisa.

I think -- well, thank you very much for having -- giving us the opportunity. So hopefully, I was able to give more clarity on what IMI does. So sometimes, it's very difficult to understand exactly what IMI does in electronic [indiscernible]. Again, the environment is quite challenging, but we do see things started to normalize in the supply chain. The 2 areas is China is, as you all know, is now going through quite big challenges. So hopefully, that is -- they're able to put some stimulus to be able to get it back on track. So we'll be watching it carefully and managing our costs accordingly.

Thank you. Thank you again. So turning it over back to you, Lisa.

Thanks, Miguel. Thank you so much. IMI team, Jerome, Laurice and Brian, for sharing your insights with us today and for your very interesting presentation as well. So this concludes our day 2, in fact, the last day of the PSE's Star Investor Day brought to you by the Philippine Stock Exchange and Bloomberg. On behalf of our team, we'd like to extend our sincerest thanks to all the listed companies that joined us today, GD Capital Holdings, EastWest Banking Corp, [indiscernible], Puregold Price Club and IMI. And most importantly, thank you so much all of you for joining us for this Investors Day. We look forward to hosting you in the next PSE Star Investor Day scheduled for this November 2023. Now to officially close this week's virtual event, please welcome to the stage PSE's Chief Operating Officer, Roel A. Refran. Roel, please?

I would like to thank all the attendees for participation of PSE Star for patiently going through the past sessions. And we have seen that the attendees for this addition is a mix of first-time attendees as well as those who've actually attended our previous runs for the PSE Star. I'd like to note that company briefings while they are not required by the Securities and Exchange Commission or by the exchange, it's still best practice for publicly listed companies to conduct this company briefings. Why is this so? Because the PLCs are given an avenue to explain the context and the narrative, give context and give flavor to the financial information that's disclosed as well as really give a big picture and even go down to the nitty-gritty details about the outlook and the opportunities and the plans in general for the company. On the part of the Exchange, we run a marketplace and we know that information is very critical in the decision-making process of investors. Such being the case, we are pleased to provide an avenue that would enable investors to make better decisions and help make company briefings be more accessible to a wider audience. It is in this regard that we would like to thank our co-host Bloomberg for providing us with a platform for this event. On behalf of the exchange, I'd also like to extend our sincerest gratitude to the 10 participating PLCs and their representatives for their participation and the fund management association of the Philippines, the Trust Officers Association of the Philippines as well for their continuous support to the PSE Star by promoting the event and providing moderators for each of the company's segments. And most importantly to all of you who attended and made this event a successful one. This investor briefing has actually become a must-attend activity for investors, for analysts as well as journalists covering the PSE and the Capital Markets Week. With all the benefits, we have deemed it necessary to add a sequel to the first 2 installments of PSE Star and holds a third quarter earnings call with select public listed companies in November. We hope to see you all by then. Again, thank you very much, and we'll see you again in the next edition of the PSE Star.