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

All right. Good afternoon, everyone. Thanks for taking the time to join us today for our 2023 full year analyst briefing. Joining us today is our CEO, Arthur Tan; our President, Jerome Tan; and our CFO, Laurice Dela Cruz. Jerome will start off going through a few market slides, just an update on the global economy and the factors affecting IMI and this segment in per se performance as well before moving on to some of the more detailed financials, which Lau will cover. And then we'll have Art to join us during the Q&A. Yes, I think we can get started. Jerome, do you want to take it away?

Yes. Good afternoon, everyone. So I'll kick off with the global economic outlook and some of the segment outlooks. So if you look at the global economic growth forecast, the global economy is proving to be resilient, showing positive GDP growth in major economies in 2023 and also going into 2024, despite the high inflation, high interest rate environment as well as the geopolitical issues with the continuing war in Russia and the more recent Middle East conflict. Global growth remained positive in 2023 and at similar levels for 2024, at least that's the forecast from IMF. IMI growth was estimated to have been stronger than expected in the second half of 2023, particularly in the U.S. In several cases, government and private spending contributed to upswing with real disposable income gains supporting consumption amid the still tight labor market like in the U.S. and the household drawing on the accumulated on pre-pandemic savings. So this is actually supporting the inflation or countering the inflation and the slowdown in the overall economy. The U.S. is projected to fall from 2.5% in 2023, down to 2.1% though, in 2024 and further soften in 2025. I think a lot of this is as a result of the fiscal spending that they've done and the expected tightening of the monetary policy, which will lead to slower growth in the next few years. But we will see with the election coming up, that picture may change as well. The rising momentum was not felt everywhere. However, most notably in Europe, where we are seeing weaker consumer sentiment and lingering effects of the high energy prices and weakness in the interest rate sensitive manufacturing and business environment. Growth in the Euro area is projected to recover from its low rate of 0.5% in 2023, which reflected a high -- relatively high exposure to the war in Ukraine, 2.9% in 2024 and then stronger in 2025 at 1.7%. The growth in China is projected at 4.6% in 2024, a slight pick up -- sorry, a drop in 2020 versus 2023, and then continued softening. So, there is, however, some upward revision from the prior forecast in 2024, reflecting the stronger-than-expected growth that's coming in. If you look at, I think, the recent announcement with the PMI becoming more than 50%, which reflects the growth and also government spending, particularly on infrastructure to support the economy. So we think that might continue to support China even though they're undergoing challenges, as you know, in the property sector. Inflation, however, is falling faster than expected from its 2022 peak. So that's a positive sign. And it's also a smaller-than-expected toll on employment, particularly in the U.S., as the labor continues to be -- or labor employment continues to be quite resilient. So we have -- seems like we have averted this global recession that was initially feared. It's just that the uncertainty -- it's just that going forward this year and into '25, a bit more uncertainty, at least at this point in time. So that's also holding back. If you look at our new projects, it's also affecting our new project wins as well. Moving on to the next page. In terms of the global automotive sector, which accounts for the largest share of the IMI Group revenue is now up about almost 60% of our revenues is from this segment. It is expected to be weighed by the slowdown in the consumer spending and the high interest rate environment, and also a slowdown in the transition in EV, at least in the near term, as we are probably -- as you probably have been reading, some countries have pulled back on subsidies on EV and the challenge of continued buildup of the charging infrastructure is impacting the growth expected from the EV segment. Although in -- for EV for 2024, the growth expectation is still a 21% growth, although it slowed down coming from 2023 with a growth of about 31%, and we're seeing this as well in our businesses. China will continue to account for more than half of the global EV sales in a similar share of exports. But the Chinese government support for the sector will prompt more trade tensions. For instance, in the U.S., the U.S. credits given to EVs would be excluded if the EVs have a lot of the battery components, like refined materials and certain inputs to the EV coming from foreign entities of concern, including China. And also similar requirements in the U.K. So with this -- this would then really impact some of the trade tensions that would arise because of this. Such policies combined with funding regulations, such as the U.S. Inflation Reduction Act and EU green policies will then attract more local production of the EV and battery production in the U.S. or in Europe as opposed to all coming from China. So I think this would also support the regionalized manufacturer locations where IMI, we believe IMI would benefit from this trend. On the Industrial segment, this is the other segment, which accounts a significant portion of IMI's Group, right, it's about 30% of our revenues. The global industrial markets are expected to continue its growth trajectory in the medium term. Although in the near term, we have seen significant slowdown in this segment. For instance, in the global intelligent lighting controls, which has reached a size of about USD 12 billion in 2023, it's expected to have a compounded annual growth rate of 14.5% until 2032. Innovations from IoT, AI and wireless communication technologies have paved for more sophisticated and user friendly lighting control system. So I think this would help drive at least medium-term growth also for IMI. On the industrial energy management system market, it's also predicted to expand with a CAGR of 8.3% from 2024 to 2034. This market size is expected to reach about $34 billion in 2024 and then $76 billion in 2034. Again, similarly, the trend is ambitions to driving the growth for this sector is the drive for more energy efficiency and regulatory compliance requirements and adoption of this new industrial energy system will also help a lot of the businesses cope with the higher energy prices and therefore, improve its long-term cost management. So I think these are the drivers of these particular segments. And then finally, with the rise in the digitization of the commercial operations due to pandemic, the need for electronic security system continued to show growth, also a CAGR of about 8% until 2028. And this is also integral to the evolution of the smart cities that a lot of governments are looking at developing. So that is also a factor that would drive the growth in this particular subsegment. Just a quick update on the supply chain. So as we've reported in past analyst briefing also, this has been quite a challenging area for the global electronics market as well as for IMI. Excess inventory grew in 2022 as aggressive stockpiling from OEMs and EMS providers sought to address the allocation of component, which resulted from disruptions of the global supply chain. So that created a lot of excess in the -- throughout the supply chain. And as consumer demand began to drop in 2022 and 2023 because of the increased inflationary environment, many players still have this overhang, and it's estimated to have an average of another 6 months before it clears, right? So over the last years, there are quite a bit of effort being done by this -- the industry to mitigate this excess stock. And we -- as I mentioned, we expect this remaining excess inventory to be depleted in the next 6 to 9 months. So hopefully, we'll see a bit more stability towards the end of 2024. This excess inventory has also impacted our IMI as well, particularly in the industrial segment, which you'll see in the later slides. Just on some of the -- we thought we had -- IMI had a lot of things going on in 2023. So we brought this page forward to give just a summary of what are the key takeaways instead of putting it at the end, right? So in 2023, it was a year where IMI looked to focus more on its wholly-owned subsidiary, its core business, basically, where we have -- and one of the things, major actions that we did this last year is the sale of STI in October, which unfortunately led to a significant onetime loss, as we've shared with you in the, I think, the press release that was announced in October or early November. At the same time, we also looked at our carrying costs of certain investments, and we've also taken an impairment loss, given some of the uncertainty in the market and also to be a bit more conservative. So overall, for 2023, we reported a significant loss of $109 million. However, on the ongoing operating performance, particularly on the wholly-owned core business, it has improved its overall performance and we've achieved a net income of $13 million, an improvement of about 14% year-on-year, mainly coming from improved material pricing as the supply chain challenges that we've seen in the last 2 years start to ease and normalize and also streamlining of a number of our overhead costs. And we will continue to look at how we improve our overhead cost structure and take out some of the excess capacities or overhead that we don't foresee that we will be able to at least utilize in the near term. Geopolitics and general slowdown in the global economy is a concern. It created a lot of uncertainty or is creating a lot of uncertainty, which could temper our business growth for this year. Although I think, as mentioned earlier, in the segment we're in, we are seeing in the medium term, there is still the continued trend of shifting more towards the electronic mega trend that's driving the growth for this segment that we -- for this business that we are in. For 2023, we saw a recovery of our European auto segment. This Europe business that we have is leading the growth in IMI. Well, the industrial, you'll see later that we're showing a significant decline because of the excess inventory of the supply chain and the weakening of the demand, particularly in certain regions like in China. This economic uncertainty is also having an impact on the new wins, as you see later on also, which is lower than our new wins from year 2022. The last item to note also is that we've recently announced our 2023 financial statements. It was released with a qualified opinion from the auditor. This is mainly due to the scope limitation at VIA optronics. As VIA has also announced last year, it has an ongoing review of compliance to certain company policies. So this has led to a more thorough audit, which is causing delay of the 2023 audit for the year. So rather than also delaying the IMI financial statement release, we opted to release the IMI Group financial statement even with the qualified financial statement. And as the conclusion of VIA audit is completed, we will disclose any amendments to the financial statement, which hopefully, we don't expect any significant amendments. We will disclose that, as I said, the financial audits are completed. Moving on to the next section in terms of our segment updates. You'll see our -- the segment leading the growth for IMI in 2023 is from the automotive segment. Full year growth is 8.5%. This is mainly coming from our China and our European sites. In our European sites in particular, this is driven by the continued ramp-up of new projects, which started in 2022. Q4, however, you'll see a flat or slightly down growth in automotive. This is also mainly -- this is mainly driven by switching of the old model in the steering application business to a new model, which is expected to start producing and ramping up, I believe, Q2 of this year. As I mentioned earlier, the Industrial segment shows a significant drop. And you'll see here, both in Q4 as well as in the full year. This is again driven by the excess inventory across the supply chain and also a slowdown in the general overall market, wherein a lot of the -- our customers' expected demand is reduced, and therefore, our revenue has also dropped. The other area here that's impacting the drop in growth is also on the EV charging space. We are seeing a lot of competition coming in, in this space, new entrants that is also affecting the ability of our customers to grow significantly. So that's also having an impact on the growth in this segment. And then the usual culprit that we have is in China also with the telco segment. Increased competition, we continue to see that. And therefore, we don't expect significant growth, in fact, declining because we opt to maintain our pricing as opposed to keep reducing our price in this telco segment. Moving on to the regional update. I think in the regional update, the 2 regions wherein we're seeing a significant slowdown is in the Philippines and China. Philippines, that's the site where we have a lot of our industrial customers. And therefore, that's being impacted in our Philippine region. We also have 5.6 million of unfavorable purchase variances that's recovered in 2023. So that's one area that we're looking at to improve the profitability of the Philippines site despite the drop in revenues. In China, the drop is mainly coming from part of the industrial business, particularly at the EV charging and also the reduction of the telco and consumer segments in China due to increased competition. The automotive business have shown growth both in 2023 in China. So that still continues to be a positive sign. And despite the drop in top line in China, the team has been able to manage its costs and streamline its operation and still able to maintain profit margin expected from China despite the lower revenues. You'll see in our Europe operation, Bulgaria, Serbia and Czech Republic is showing significant growth. In Serbia and Czech in particular, that's driven by the ramp-up of new projects that I've mentioned. In Mexico, the Mexico is relatively flat in terms of growth. Part of that is consolidation of the supply of the steering application to our China facilities in order to optimize the capacity of our China business, while Mexico is looking to gear up the new model that's going to eventually replace the old model. So that's the regional update that we have. And then moving on to the new wins. As I mentioned, 2023 new wins declined by 17% versus 2022. Again, this is driven a lot by the general uncertainty in the market, and we're also seeing increased competition, particularly also in the industrial space, wherein a lot of the customers are looking to drive higher sales by being more competitive in their pricing. We are, however, seeing increasing trends, as we mentioned also in the prior analyst brief, a lot of the new wins that we're seeing is coming from the EV or renewable space. And also one positive sign that we have is we are seeing or we are able to acquire new customers. So if you look at the notable wins that we have in 2023, 5 of the 7 notable wins are actually wins of projects coming from new customers, first-time customers for IMI. So that is a positive sign that we are also gaining some traction in order to acquire new customers. That's all from my section. I'll turn it over now to Lau for the more detailed financial performance for IMI. Thank you.

Hi. Good afternoon, everyone. So I'll be providing high level details of our 2023 full year performance and also further details on the Q4 financials. And just to note that moving forward, since we were only left with VIA optronics as our non-wholly-owned subsidiary, so we will no longer be presenting a split between the core and the non-wholly-owned. So we'll be presenting the financials, including the VIA. So as we have recently disclosed, IMI reported total group revenues of $1.3 billion for the full year of 2023. This is a 6% decrease from previous year driven by the factors attributable to the non-wholly-owned subsidiary, including the shorter fiscal year for STI. The group net loss was at $109.2 million with onetime losses of $106 million related to the loss on the sale of STI. And as mentioned by Jerome, we booked some impairment of the goodwill and certain assets given the uncertainty in the market. While the Group non-GAAP operating income, excluding one-off items, was at $12 million versus $9.3 million in 2022. So with regard to the Q4 performance of the Group, the drop in revenues from Q3 of about $48 million is mainly from the foregone revenues because of the shorter fiscal year of STI and also the shorter production days for December, but we have some sites which were able to catch up with the delivery commitments before the year-end closed. Particularly, one of our China factories was able to book a significant revenue in December and also the ramp-up of our volumes in our Serbia factory. On GP margins, you'll see that there was an improvement in the Q4 to 10.1%. And the divestment in STI actually eliminated the lower-margin businesses, therefore, improving the overall margins of the group. While on the operating -- on the Q4 operating income, just to note that the reported operating loss of $2.2 million includes one-off restructuring costs that we have executed in December amounting to about $1.2 million. While we are already start -- while we already started the restructuring of some of our costs, the savings will be realized beginning 2024. And hopefully, this will be simultaneous with the normalization of the production for the programs that are still ramping up and they will start to ramp up in 2024. While our Group GP improved versus Q3 despite the low revenues and also our continuous effort to improve the factory efficiencies, the operating loss increased in Q4 because it's offset by higher selling and admin expenses due to some year-end bookings, also some people cost inflation and additional inventory provisions that we have booked. Compared to last year's Q4, the gap was highly driven by the lower sales in the industrial and the consumer markets. Then on the net income on the lower left, the Q4 reported net loss of $23.9 million includes the partial impairment of the goodwill and also impairment of assets with a net impact of $23.7 million. So if we take it out, this will result to $1.8 million, which is slightly improved from that of Q3. And one of the reasons is we have also received some government incentives in China and Serbia aggregating to $1.4 million in Q4. And these are the usual -- the regular incentives that we receive for economic and industrial enterprise incentive bonds and the 10-year incentive program for our Serbia factory. Then finally, the decrease in the reported EBITDA for Q4 versus Q3 of $1.9 million is mainly coming from the total FX gains that we booked in Q3, while the increase in the non-GAAP EBITDA of $1.8 million versus Q3 is after excluding the impact of the one-off restructuring costs, that's the $1.2 million. And also, we also take out the unrealized FX gains in Q3. So with this, the non-GAAP EBITDA of $10.3 million is pretty much aligned with the 2022 Q4 EBITDA dollars, but the ratio had improved compared to the last quarter and also last year. On the next slide, please. So on capital structure, we managed to limit our bank borrowings and only incurred additional loans of $13.3 million for the year to fund the new programs in Mexico, in Czech Republic and also in the Philippines. Also, we spent some of it for working capital requirements. And prior to the sale of STI, we had some interim funding to STI, which will be payable by the buyer in 2 years together with the sale consideration. On cash flows and liquidity, our cash decline was mainly for investing activities with a total of $27 million of CapEx for the year. But just to note that we were able to achieve positive operating cash flows of $6.8 million for 2023 from improved working capital management with the specific focus on the -- on managing our inventory levels. This is actually a big improvement from last year's operating cash flows of almost negative $50 million. And as you may know, our equity declined significantly by almost $100 million, mainly due to the one-off losses for STI and the additional impairment losses. But despite that, our balance sheet remains to be robust with a current ratio of 1.43:1 and debt-to-equity ratio of 1.15. And our book value per share is currently at PHP 6.95, while we currently trade at around PHP 2. And finally, on the CapEx. So as mentioned in the previous slide, we incurred a total of $27 million of CapEx for the year, and approximately 48% of these CapEx are new programs in Serbia, Mexico, Czech and the Philippines. And these new programs are mostly for the mobility customers. And some of the programs already started during the second half of 2023, while the others will go mass production in 2024. . I think that's the last slide from my end. If I can turn over to Brian for the Q&A. Thank you.

[Operator Instructions] I guess while we're waiting for questions, we have been getting a lot of e-mails about the recent announcement of VIA planning to delist from the New York Stock Exchange. Perhaps this is a good forum to address what's happening in VIA and how does that affect IMI, for Jerome and Lau.

Go ahead, Brian. I think you have also shared what is the...

Sure. Yes. So yes, so basically, any -- VIA have made their own disclosures on their website regarding the mechanics of the delisting process and what that entails for their company. We will refer you to that press release but in terms of its effect on IMI, the delisting process itself does not entail specific financial concerns for IMI at the moment, although the delisting moving forward will free up a lot of the expenses, a lot of the resources we've allocated towards keeping the listing on the New York Stock Exchange and the registration of the U.S. SEC. So moving forward, a lot of the resources will be freed up, both cash and management attention go towards that, right?

And also just to note, IMI owns the ordinary shares of VIA and not the ADR or ADS, American Depository Shares. So in that respect, also no impact for IMI. It would be mainly the holders of the American depository shares that would need to either convert or maybe sell down if they don't want to receive ordinary shares of the German AG company.

Okay. We have a question here. Can we expect a positive net income this Q1 2024?

Again, I don't -- I think we don't provide the forward-looking statement. I think you'll see some of the improvements that we've tried to do in the -- at least on the optimizing the overhead costs and the improvement in the raw material prices, the thing that we would be looking out for is really on the top line, whether it will remain at the same level as 2023 or it will continue to soften. So at this -- I think we're seeing some softness. So we will have to, I guess, disclose at that time when we have our Q1 results. But that's kind of the challenge. I think in terms of the top line, there is some softness that we're seeing, again, as a number of our customers try to clear the excess inventory. So that's some of the things that we're noting in Q1. I don't know, Lau, if you -- anything you want to add? .

Yes, nothing really to add. But we are expecting all our efforts to improve our cost structure to at least compromise for the slowdown in the market. .

All right. There's another question here. It's regarding the share price that we're trading at around PHP 2 at the moment. We are aware of this. And again, as Lau and Jerome mentioned, there have been streamlining activities over the past few months, and we are trying to address the costs as the uncertainty in the market remains. So on the profitability side, all hands on deck. Everybody in IMI is working on that. And we are reaching out to potential investors. It is an attractive price to buy at PHP 2. So I guess on my end, we are actively reaching out to investors and sharing our vision of how we think IMI is going to move forward in the short and medium term, the growth prospects and how we think we can successfully bring back better profitability to the company. All right. Another question here. Do we have top line and bottom line comparables excluding STI for Q4 and 2023? As Lau mentioned earlier, we are no longer able to share financials just for the IMI wholly-owned subsidiaries and the non-wholly-owned subsidiaries since doing that will expose the VIA optronics numbers. And we are sensitive to the rules and regulations of the New York Stock Exchange, and we're not able to disclose ahead of VIA. So at this point, we're not able to do that anymore, as we've done in the past. .

What we can do is once we finalize or once we have finalized the 2023 audit, then we can show the comparable Q4 without STI. .

Correct. Yes. We'll release the information as soon as we are able to. . Another question is delisting also on the table for IMI. Perhaps, Jerome, you can take that?

There's no current plan. In other words, there is no plan to delist IMI. So that's the short answer. And there's no discussion in that regard as well. .

Okay. Another question. You mentioned some nonrecurring items earlier regarding restructuring costs, government incentives, impairment costs in Q4. Do we have a recurring profit figure? Basically, I would treat these bar charts, the non-GAAP metrics that we're showing as the recurring profit figures for the company. This presentation will be available on the website for everybody to download. So yes, so these -- the numbers on the bar charts have been adjusted and normalized to take away any of the one-off nonrecurring transactions that happened in each quarter. Another question. Any thoughts on share buybacks?

I think share buyback at this point, we would rather deploy our cash to improving the business operations of IMI as opposed to a share buyback, at least at this point in time. And also given the -- still some continued uncertainty in the business in the global economy. So we'd rather redeploy the cash, if ever, to improving IMI operations or reducing our cost of debt, yes.

Will there be dividends for this year, Jerome?

I believe we -- I think our practice is if we have a profit year, then we will give out dividends. So since 2023, we're showing a significant loss. And also, as I mentioned, in terms of cash, we want to make sure that the IMI has continued to be able to reduce its debt and therefore, reduce higher cost of funding. So not likely will happen in dividends this year, or I mean, for 2023 to be paid on this year.

Another question here. Is the worst over? Are we on the path to recovery?

I think in terms of the disruption in the supply chain, we believe that, that part is over. So things are starting to normalize. And we are looking at -- there is a path to recovery. So as we continue to streamline and it's not over, right? So we will be looking at our cost structure also in -- also looking at our footprint, there might be opportunities also to consolidate. But we believe the worst is over. Also the global economy, although there's a lot of uncertainty now, it's -- it wasn't as severe as we had initially thought, right? So that's the factor that's still difficult to assess at this point in time, whether we'll start to see more clarity in terms of the overall global economy improvement. But in terms of the different factors affecting our EMS in terms of the higher freight costs or logistics costs, shortage of components, I think those parts are -- the worst is over. .

Okay. I think that's about it. If there are any other questions, please e-mail me at [email protected], and we'll get back to you as soon as we can. Jerome, Lau, if there's anything you want to end this call with?

No, I'm okay. I think I've shared the some of our outlook and also some of the things that we're doing to continue to work on driving improvement in our margins. So we will continue to -- we look at our cost structure and see how we can further streamline that to be more competitive. .

All right. Great. Once again, thank you to everyone for taking the time to join us today. And we appreciate your support for IMI and looking forward to hearing from everyone. All right. Thank you. Bye. .

Thank you, everyone.

Thank you. Thank you, everyone.

Bye.

Bye.