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

Welcome, everyone, to IMI's 2024 First Quarter Analyst Briefing. Thank you for making the time to join us today. As with the previous briefings, Jerome will go through some of the region and industry segment updates before Lau dives into more detailed financials and results for the first quarter. We'll open up the floor to questions towards the end of the call. And yes, you can go ahead and start. Jerome, take it away.

Do we want to introduce Robert first?

Sure. Yes. Joining us today is our new CFO, Robert. He's our new CFO. Our new CEO, Louis Hughes, is, unfortunately, stuck in a flight right now, which was delayed. So he'll be joining us for the Q&A section. But with us right now is Robert. Robert served as Chief Financial Officer for multiple publicly traded and private equity companies. He has over 20 years of senior level finance experience in diversified industries, including manufacturing, technology, financial services and many others. So thank you, everyone, for joining us and welcoming Robert to the team, really looking forward to working with him and...

Thanks, everybody. Good to be on board.

All right. Welcome Robert. So we can start the briefing. So let me start off with the segment update. This time, we're just focusing on our 2 main segments, which are the automotive and industrial segments. Since IMI have exited from STI or the Aerospace segment late last year. And also given that remains to be a publicly listed company in the U.S., unfortunately, we are limited in terms of the information we can provide to VIA specifically unless it's been disclosed in the U.S. So with that, just give you some backdrop in Q1. So we are seeing the effects of efforts from various central banks which are keeping interest rates high to combat inflation, and that is driving some slowdown in the global economy, particularly in the U.S. So if you look at the Q4 GDP growth rate, versus Q1, it's dropped from 3.4% year-on-year, a normalized growth rate to 1.6%. In Europe and China, however, we're seeing some improvements in Q1 versus Q4 of last year. This slowdown of the global economy is also driving business and consumers in holding off some of its investment and spending, which we are seeing as a result of our backdrop of our Q1 results as well. If you look at our automotive segment, in particular, we are still seeing a positive growth, 4.5% year-on-year, driven mainly from ramp-up of new businesses that we've started last year in Serbia and the Czech Republic. And these are projects related to the EV. So EV is continuing to drive a lot of the new programs and the growth rate. Although albeit it's a bit slower given some of the challenges in China where they have overcapacity. And then in Europe where they have some reduction of subsidies. So that's also having a slowdown on the EV overall market. But despite that, that's driving the growth in the overall automotive segment. We do see some softness in Q1 for the Automotive segment. Although if you follow a lot of the Tier 1s and OEMs, most of them are still reaffirming their forecast for 2024. Thereby, we expect improvements to come later part of this year, Q2 to Q3 onwards. There is also uncertainty in the market and therefore, with the softness in what's happening in the automotive segment, there are some drive by the OEMs to do price reductions. And this is one of the challenges that we're seeing. So if you look at the -- later on when we show the Q1, the pipeline is actually down or the new wins for automotive segments. -- effectively come down in the first quarter of this year, mainly from -- with the uncertainty, lower RFQ request at the same time, consolidation of platforms. So less projects to be bid on and also increased competition. For IMI, however, the contribution margins for automotive despite these challenges, we are still able to maintain our contribution margin in Q1. The bigger impact we see is from the Industrial segment, where the recovery of the supply chain last year led to aggressive buildup in inventory in these segments, middle of last year to late last year. And as the global economy slows down, a lot of the purchase orders in Q1 that we're seeing has been pushed out. And so the segment is working its way towards clearing a lot of the inventory in the pipeline. So that's why we're seeing a significant drop in our industrial segment in Q1 compared to last year. We do expect new projects to ramp up also second part of this year. So I think that some positive sign that it will continue to improve towards the second half and as more certainty comes with regard to central bank efforts in terms of starting to stimulate the economy through rate cuts. Despite the drop in the revenues in this segment, we are seeing improvements in our contribution margins versus last year. So through much better direct material costs and improve production efficiency. China remains to be a challenge, although we're seeing some -- I think if you follow the news yesterday, China has shown some positive growth, better than expected. But in the meantime, the real estate market continues to be a drag, impacting industrial segments also in our facilities in China. Moving on to the next page on the region updates. You'll see on the region update, Philippines is where we see the biggest drop. Most of the industrial segments are coming off of our Philippines manufacturing sites. There are still some pockets of component shortages and logistics delays and Philippines said, the backlog of about $4.3 million in Q1, which we are able to fill in Q2. So that's been pushed into Q2. A number of new projects, as I mentioned, are also expected to ramp up in the second half. So we expect Philippines to recover part of its lost revenue in quarter 1. For China, it's severely impacted by our EV charging customer where the demand for its older model of EV charger has slowed down and its new model has been delayed and was recently launched, but the take-up is a bit slow given the various platforms in the market buying for or competing for setting the standards in China. So we're seeing increased competition in the EV charging space in China. We also continued to see decline in the telecom infrastructure business and this is driven a lot by increased competition with local EMS, so as the local customers, particularly Huawei, starts to look at reducing their cost if they've looked at getting alternative sources from local EMS themselves. So this remains to be very competitive. And this -- as we discussed or mentioned sometimes before, this is not one area that we want to continue to build and continue to lose margin. So we are maintaining our margins, and that's impacting also our revenue on this space. Our Europe performance remained strong, given that there are a number of new projects, particularly in the mobility space, which are ramping up, as I mentioned. And I think the Europe economy is better than expected. So we expect to see continued growth in Europe for the remainder of this year and into next year. For Mexico, we are flat in Q1. We are seeing businesses move though with the geopolitical situation. Some of the customers have transferred some of our productions outside of North America into Mexico. So we expect that to ramp up starting in Q2 and Q3. We have a new project where the new steering application in the older models that we serve is winding down and this new -- unfortunately, this new project was delayed. But I think we expect that to start production later on this year, probably Q2. So that would help Mexico return to growth starting in Q2. Moving into the program wins in Q1, as you can see, significant decline from $51 million in Q1 2023, down to $23 million. And this is, in particular, we think that it's impacted by the slowdown of the global economy, continued uncertainty. So a number of our customers holding on the projects or holding off on new projects and also increased pressure given the slowdown in the economy to reduce the prices. And therefore, a number of our customers are consolidating also their platforms by having multiple platforms in automotive and particularly they're trying to consolidate so that they have less platform, bigger ticket sizes, but less projects to award. So that's the current environment that we're in. We're seeing softness in our program wins. We are seeing in terms of activities, more activities in Europe in Q1, where we have a lot more wins. In addition to our mobility also in the industrial segment, which is one segment we want to continue to focus on where it's relatively higher margin compared to mobility. So that's my update. I'll turn it over to Lau for the financial update. Thank you.

Hello. Good morning, everyone. So I'll be presenting more details on the financials. And just to note that since we only have VIA, the non-wholly-owned subsidiary, for this quarter, we'll be presenting the VIA together with the core business since we still cannot disclose yet the information of VIA. And hopefully, once VIA has completed its the registration, we can revert back to the previous presentation and showing separately the core business. Okay. So on the Q1 performance, the revenues are lower compared to last year by about $57 million. And just note that there's still STI from last year, which is about $22 million. And well, we had decreased by almost $42 million compared to last year due to some early terminations of their automotive costs -- some of the automotive customers. The core business decreased by 5%, mainly from the Philippines due to the slow ordering trend for the end consumer industrial customers. And also the continuous depletion of inventories at the customer side. In China, particularly the Shenzhen telco infrastructure demand as well as some of the industrial and medical customers also declined. And our Chengdu business also slowed down because of the cold market acceptance on the intelligent EV charging system and also the tight competition in the EV charging segment. These declines were offset by the expansion of Serbia and increased automotive sales in Jiaxing, in our Czech Republic and Bulgaria. On the gross profit, our gross profit margin at 8% is lower than last year, mainly due to the sales mix as a result of higher share of our high [ BOM ] projects, which have ramped up beginning second half of last year. But these projects are quite big and would contribute to the utilization of the factory. So in terms of dollar amount, it will have a positive impact. The operating income, however, of the core business remains positive at 2.4%, which is just a marginal decline from last year's 2.5% from the significant reduction in GEE mainly from people costs as we are realizing the savings from the rightsizing activities that we have done some time in December. Also, we have some lower cost like professional fees and the reduction of provision for inventory obsolescence. The VIA costs, however, remains to be on the high side due to the elevated costs incurred in relation to the activities as a listed company. Which -- when -- hopefully, when they get delisted, they expect to reduce it significantly towards the following quarters. So on the non-GAAP net income, the core remains to be positive despite a 30% increase in the interest expenses from last year because of the increased interest rates. And we also have an unfavorable FX position for Q1 of 2024. And it is -- although lower than last year by $2.8 million, mainly from the lower GP as a result of the lower revenues. Then on the non-GAAP EBITDA, the core business stands at 5.1% lower than last year's 5.7% due mainly to the reduced revenues. Okay. On the next slide, please. Nothing much to highlight on the capital structure. Maybe just to highlight only the reduction in loan -- in the loans of about $16 million and we expect to reduce further the loans in the coming months. We are trying to reduce our debt service and as of Q1, we have already paid $16 million from the -- since we have generated positive operating cash flows for Q1. Next slide, please. On the CapEx, we incurred CapEx of $5.9 million for Q1, and this is mainly from the expansion of our Serbia factory. So our Serbia factory has an ongoing Phase II expansion because of the new programs and new businesses coming in and also some transfers of the businesses from the other side. So these are more expansionary CapEx. And I think that's my last slide. We'll turn you back to Jerome.

Yes, thank you. As you thoroughly try to do an executive summary. So as I mentioned and as Laurice showed, the automotive market continues to be driven from growth coming from our European and Chinese regions. We do expect also Mexico to start catching up once the start of production of the new programs kick in. Despite the pressures that we are getting also from our customers, given the softness in the market, we are still able to maintain our contribution margin in the automotive space. In the Industrial segment, EV is to suffer from excess inventory in the pipeline and also the lower demand driven by pushout of investments from the businesses and as well as end consumers. So we are hoping that this excess in the pipe can be cleared out in the next quarter or so, so that we should be able to see some improvements in growth in the industrial segments in the second half. And I think we are -- with Robert and Lou coming in, I think the emphasis is also to revisit our -- continue to look at our overhead expense to see how we can be more -- or simplified the organization, reduce costs and to align or rightsize our structure, given the current softness that we're seeing in the top line. And then as we disclosed earlier, we had some challenges in terms of filing our 2023 IMI Group financials but that has already been resolved. And I think I don't know allow the share, but we will be -- we have finalized the audit of the year of 2023, and we would be able to release an unqualified opinion on the IMI group very soon. So I think those are my key takeaways from this quarter. I guess we can open it up for questions. Brian, right?

Brian, you're on mute.

Sorry about that. Yes, we were -- we wanted to introduce the new leadership in IMI. Really excited to have both Lou and Robert on board. Lou, unfortunately still stuck on of light. I think he's about to land in a few minutes. But maybe, Robert, if you add a few words to share with some of the analysts and investors who joined us today.

Yes, too much time. I've been working in Asia for about the last 25 years and about the last 20 as a CFO at a group level. I have been mostly with manufacturing. I did work briefly a couple of times in financial services. But my background is primarily manufacturing, and that's my focus and I do intend to give my experience to IMI from a manufacturing -- I'm a real operations guy and so we'll be really diving into the operations and working to improve margins and we think -- this is a really good company. It just needs to get a little bit of refocus going, and we're very confident that things are going to improve in the future.

All right. Thank you for that, Robert. We at IMI are very excited. It's refreshing to have fresh ideas on board and really looking forward to the changes that are going to come in the tweaks needed to bring the company back to better profitability. With that, let's open up the floor to any questions. And we'll have all of us on board to answer them.

There's a question ion the chat.

Yes. A quick question here. Is it the worst for IMI? Maybe Jerome would have the best idea?

I think a lot of the disruptions that we saw in the last couple of years, I think that pretty much is normalized. So I think my view is the worst is over. The only thing that we still have to continue to watch on is the -- how the economy shapes up in the different regions. Hopefully, that will also turn positive as the central banks start to see that the inflation has maintained and start to go down and start working them on trying to improve or reduce interest rates and stimulate the economy. So that would really help turn around the business and the global economy. So I think the worst is over. So we're hoping on the top line, that can also be improved second half of this year and into next year.

Maybe I'll just depend on Jerome's comments. From an operational standpoint, we have a big focus on margins. And so we'll be driving a number of initiatives. It will take a while to get implemented, but they will be implemented during this fiscal year. And that's our main focus coming in, Lou and I coming in, we'll be focusing on margins, margins, margins.

All right. Next question is IMI stock is at an all-time low. We are trading at around [ 1.60 ] for the past week or two. What will the company do to address this?

I think as Robert says, at the end of the day, it's really the performance of the company, right? So as Lou and Robert come in, the focus will really be on margins, how do we improve the margins. So at the same time, I think with the new team we will then be more actively engaged with the investor community to communicate our plans and strategies on how we are looking to what are the steps that the team will be taking to be able to improve that margins and help share the story so that there's more traction from the investment community to understand what we've gone through and where we think IMI would go towards in the future. Robert, do you want to add anything?

Yes. I think all we can do is the proof will be in the numbers as we go forward. And so just watch how we perform over the next few months until we get to the end of the year. That's how the performance of the stock will get turned around. It's the numbers.

Yes. And just jumping off of that for the fund managers analysts on the call right now, we are we do want to reach out to the investment community. We have a lot of interesting ideas in place that we stake we really turn the performance around. So please help us get the word out, get in touch with me, that set of meetings, that is joint roadshows and really spread the word and it's an interesting time to invest in IMI, again, at an all-time low. But as Robert said, it's a great company. The fundamentals are there, and we really think that we can turn this around. I think Lou just joined, I think. Lou, are you on? I saw his name pop up for a bit. But -- Lou, you're on mute actually.

I'm muted. Sorry, I was mute. I am here, yes.

Yes. Welcome to the call, Lou. I'll do a quick introduction. With us right now is Louis Hughes. Yes, extensive C-suite experience with over 25 years in the global mass industry. He has specialized in automotive and medical, manufacturing, consumer electronics with sales and supply chain management. So a very rich and diverse experience that we think is really going to help IMI turn around this financial performance. Go ahead, Louis.

Yes. So I'm really not sure exactly what I'm jumping into here, but I just jumped off a plane. I was up visiting a customer today in the Bay Area, San Francisco, USA. So Brian, if you want me to give a quick review of some of the things that we're doing. Is that the idea?

Yes. Actually, that was the next question to talk about. What are your ideas, what are your initial plans. I know it's early. It's only been 10 days since you joined, but do you have any initial plans that you want to share?

Yes. So I think the -- so there's a few kind of major themes that we're trying to focus on. One of them is the restructuring of the company to streamline the organization to make it more efficient. And so we've been looking at and ideating about how to do that. And we think there are some pretty simple things we can do to enable the organization to be a bit flatter and to have less silos. And so I think in the next 2 months, we're going to be reorganizing the company to improve the communication and improve the efficiency and execution and also reduce some costs because our SG&A is high compared to our competition, and our factory overhead is high compared to our competition. So those things are -- that's going to be one of the first things that we attempt to do. The next thing is sourcing. We have, I think, a great opportunity in IMI to take advantage of improving our sourcing execution, especially on the mechanical side. So I come from a long history of mechanical sourcing. These are things like dye cast components, machine components, plastics, magnet, springs, you name it, screws and bolts. We can do that a lot better, and we will. And so our value add over material, which is a big metric that's used in the EMS space, is well below 30% today. And our goal is to drive that up over 30% in the coming 12 to 18 months. And we think that is achievable. The other thing that is top of mind for us right now is our execution within the factories and our footprint that we have. IMI is a global company, and that's why a lot of customers pick us because we've got a great footprint in Southeastern Europe. In Mexico, in Philippines and in China. But some of those -- some of our square footage, I think, could be optimized. We have a lot of square footage in China today. And maybe it's not as effective. That's where footage maybe isn't as valuable as it once was. So I think you'll see us in short order, begin to reallocate our space and our footprint to match the desires of our customer. And I think we can do that pretty effectively and pretty efficiently. So those are -- we're talking about three things that we can do pretty quickly to improve our performance. I think those are three things that we can do pretty quickly. So...

That's great. Thanks, Lou. Next question we have here is, is there a new technology you're looking at? I guess I could take a crack at this. We have been at the cutting edge of technology in EV, ADAS, automated driving for the past decade almost. And I think now more than a new technology, it's more shifting the production and the business towards a more scale approach to these technologies. Since EVs and automated driving used to be like novel technologies in the market. But now it's the adoption is increasing across these megatrends. And it's really pivoting towards a more mass scale production of these technologies. And we're seeing that from our Tier 1 customers and the OEMs as well. But Jerome, are there any other new technologies that we're looking at?

No. I think as Robert and Lou emphasized, the focus is really on how do we become more efficient, how do we expand our margins. So I think at the moment, that's the focus, new technology, probably not short term, but more towards later part once we get our organization set up more efficiently and effectively.

Awesome. Next question, I guess, is for Lau and Robert. How is the CapEx for full year 2024? Does the company have a new fundraising plan? According to the PBS cash flow CapEx and interest expenses consumed most of the operating cash flow.

Let me take this -- sorry. Yes, let me take this first and Robert, you can add. So the expected CapEx for the year should be similar to the levels we had in the past years, maybe about approximately $25 million. And the decline in cash really is coming from CapEx and inventories. So for the CapEx, the focus for 2024 is more on the expansion of the Europe businesses. And as mentioned earlier, Serbia is also expanding and we're supporting the growth for our Europe sites. And we're trying to reduce the loans to improve our debt service. And maybe Robert can add to that as well as on the funding plans.

Yes. I mean I think you kind of covered it. We want to use our internally generated cash to fund CapEx. We have been paying down the loans as low mentioned earlier. We probably want to continue doing that a bit more and fund our business internally. I think we have reasonably high levels of debt at the moment. We don't want to add to it. I think we want to move that down.

Okay. So we'll start with the questions that we received so far. For any other questions, as always, feel free to e-mail me, ir@global-imi.com and we'll make sure to address those questions through e-mail. Sorry, one more question just came in. What about long-term goals? I guess this is more for Lou and Robert. What are long-term goals? What is your vision for IMI long-term wise?

It's -- I guess, I've been hired to come in and look at the short term and try to improve execution in the short term. But I guess I would tell you this that customers, the kind of customers and the kinds of applications that we chase after, I think that from my experience in the past, some of the best -- some of the best business is business that is more mechanically oriented. So these are box build applications where you've got multiple mechanical components that have to come together as an assembly where it's a complex mechanical assembly. So I think that we're going to try to get more into that, and we're going to be happy with the medium volume, higher mix business because there's great margin in that business. And I think across our factories, we're set up to excel at that business. And some of our competition, companies like Flex and Jabil, and Celestica, the big guys -- well, they don't want that business, and they don't chase after it. So I think that we're going to find that our sweet spot is in that area. And the customers that we do business with today appreciate our flexibility and our ability to turn on the dime and move quickly for them and meet their needs. And I think that's important. We have to start paying attention. We start paying more attention to those customers and those applications. The customer I was with today is a perfect example of that in the industrial market. So I think you're going to see us really get back to that. And I would also tell you in the long term, I don't think China is -- I don't think the market in China for a company like IMI is going to get any better in the next 3 to 5 years. So I think the fact that we have such a large base of operations in the Philippines within Asia, gives us a great advantage compared to other EMS companies. All that space that we have in the Philippines, the workforce that we have in the Philippines that speaks English fluently, our customers, our Western customers in Europe and the U.S., they love that. They appreciate that. The fact that it's one of the lowest cost labor countries in the world, they appreciate that, especially when it's higher mix, medium volume where they can't make great investments in automation. Again, another leverage point for us to focus on. So I think that we're going to be really smart about the customer applications we chase after and the time and energy we put into them. And I think you're going to see the returns in that, maybe not so much in revenue, but in margin and bottom line performance for the company. So that -- if we have -- if I have a long-term goal it's the types of customers and the types of applications that we focus on and that we bring back to close for the company. I don't know if Robert or Brian or anybody else has any -- or Jerome has anything to add to that.

No.

No. That's great.

Yes. Well said. All right. Next question is how does the China slowdown affect the company? The slowdown was really triggered by the Chinese real estate market. We're not directly involved with the Chinese real estate market, but there are ripples across the Chinese economy like the auxiliary industries like smart homes, a lot of networks were hit with a recent downturn. So just consumer spending has affected IMIs, China industrial and automotive businesses go to a certain degree. So Yes. That's some of the reason of the downturn in China as well. But Jerome, do you have anything to add on China?

Yes, I think just what Lou said, that as you say, there is a slowdown in China. There is also more pressure inside China, where a number of the local customers now started looking at local EMS for lower prices. So that's why we do have some opportunity to revisit the footprint within China and see how we can optimize the square footage that we have. So I think that's going to be the impact from the slowdown in China. But as any slowdown is, it's not forever, right? So that normally would then start to also improve and turn around. So we just want to make sure there's a balance as well.