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

All right, I think we can go ahead and start. I'm Brian Jalijali, Head of Investor Relations for IMI. Joining us today are our CEO, Robert -- Louis Hughes; our CFO, Robert Heese; our President, Jerome Tan; and our VP for Finance, Lau Dela Cruz. I'll start it off just going through some general market outlooks that are affecting IMI and the rest of the EMS industry. On a GDP basis, the latest forecasts out of the IMF, World Bank are typically a steady growth rate across the world. There are pockets that are experiencing better growth, some that are lagging behind. Like Japan is forecasting a slower growth for this year and a slight recovery next year. The European zone is showing steady growth from '23, '24 and '25. They were lagging behind the other regions coming out of COVID, but it looks like they'll be making the recovery in the next 2 years. There is some uncertainty in China at the moment with the upcoming U.S. presidential elections. The bookmakers in the States are saying that -- like some bookmakers are saying that Trump is slightly more favored to win over the democratic candidate. And the analysts are saying this would mean a doubling down on the tariffs between U.S. and China; and the aftereffects that would go into some industries, particularly the Chinese export into the U.S. We'll go into more detail about how that affects IMI in particular. Aside from that, there is a continued recovery of the supply chain. We've been talking about the component shortage for the past 2, 3, 4 years; and finally, we feel like we're in a good spot. There is still some recovery left to be experienced, but we're now in a good spot where lead times are close to normal levels. There is less need for expedited shipping and -- wherein that should translate into the IMI numbers moving forward. And it's been a long time coming and we're excited that the market finally corrected itself. A couple of days ago, I'm sure a lot of you might know, there was some fear of recession in the U.S. market. That triggered a huge selloff in a lot of the Asian markets. I think it started in Japan; and then filled out -- filtered out to the Hong Kong and the Chinese, Taiwanese markets. A U.S. recession would have worldwide effects. It would continue to decrease discretionary spending, which would affect a lot of the industry, not just IMI, so we're keeping an eye on that; working with our customers; making sure our forecasts are on point, they're tight and they're realistic. And we will continue to monitor that and update all the analysts as we see things moving forward. Moving specifically to the automotive market. The tariffs I was talking about from the U.S., particularly with a Trump win, with a Republican win, it will have a lot of effect, some negative, some positive. A negative, of course, well, with China, it will make it harder for the U.S. -- or more expensive for the U.S. to import from China, which would drive a lot of the business to Mexico and other Asian countries like the Philippines and particularly Mexico. And I think this is one of the advantages of IMI. Our wide geographical footprint really puts us into strategic locations where we can take advantage of whichever trends emerge from the macroeconomics of the world. We see a lot of OEMs opening shop in Mexico, a lot of demand in onshoring some of the business into the North American region. And we're hard at work at making sure that our Mexico facilities are on point. We have a new team in place in Mexico, a bunch of new talent in Mexico working hard. And if -- they're starting to bear fruit. Louis will talk about it a few slides later, but we're really excited about what we're seeing in Mexico right now. And it's been some trouble in the past couple of years, but we really think there's a turnaround in our Mexican site in the near future. Persistent high interest rates have slowed down, and customer purchasing of new vehicles. There's also a bit of a cooling down of the EV forecast, probably related to the reduction in discretionary spending, but the forecasts are still saying EVs will eventually outpace ICE vehicles, internal combustion engine vehicles, by 2030. They're saying ICEs will fall below 40% in 2030, which is a good news for IMI because, although a lot of our products, our automotive products, are platform agnostic, meaning they can go into ICEs -- they can go into hybrids. They can go into dedicated EVs. There is significantly more electronic content now in EVs and hybrids compared to ICEs, so the more electronic component in the car, the more we can -- the more IMI can get involved and extract value and maximize value out of the market. There is some challenges in the way of EV charging. A lot of the companies that started to go into EV charging, it's been -- they find it's been a challenging business to run. And we see that with some of our customers, some slowing down of forecasts as the market corrects itself -- and gravitates towards a specific platform of EV charging per region. And it'll just take more -- I guess it's a chicken and egg. It's either you get more EV cars on the road or you start with the EV charging. Right now I think there's more EV charging facilities in China and in Europe, where their business models need more vehicles on the road, EV vehicles on the road, before they're -- before they start turning a profit and before their investments start to make sense. So government subsidies will play a large part into making sure that happens, but the trend is definitely going in the right direction. It's just a matter of how long it will take to -- for the market to get there. On the industrial market outlook. This has been a challenging market for the rest of the industry and IMI. What happened was, the industrial market during COVID, during the peak of the component shortage, there was a lot of, I guess, panic buying going on. They wanted to make sure they're able to fulfill orders, so there was a large stockpiling of stock, of orders across all levels of the supply chain. And now that the component shortage has normalized, now a lot of levels of the supply chain are sitting on inflated levels of inventory and there's a need to trim that level down into more manageable sizes. So that's what's -- that's what we were seeing in the industrial market. There's a slowdown in orders as our customers work through existing stock. And that slowdown in the economy is not helping because, if there aren't any buyers of the existing stock, then it just takes that much longer for them to trim it down to their ideal levels, but the good news is the forecasts. Some forecasts have been delayed, but few have actually canceled, so I think, we think it's just a pushing out of the demand, that they will eventually catch up in the future periods; and we're ready for that. We have great customer relationships with our industrial customers. And we're constantly in communication, collaborating with them, making sure that IMI and the customers are ready for that. Big talk about AI integrated security and connectivity applications. I guess AI is more a -- aside from NVIDIA, I guess, AI is really more a software play, but as AI gets integrated into more and more platforms, more and more applications, then that just translates into IMI building new models for customers, coming out with new platforms; that we can help them build not specifically the AI software, but the hardware side is definitely where IMI can maximize value. Aside from the [ AR ] market, we also have some new wins in the energy storage market. Some of the disadvantages of renewable energy is really the cyclical nature of just how it works. Solar only works when there's sun. Wind energy only works when there's wind. And to maximize, to harness the potential of these renewable energy sources, there's a need for energy storage to make sure you're able to extract as much energy as you can when it's available, store it and distribute it effectively and efficiently when it's needed. So we're seeing some demand from that market in our industrial segment and we're looking forward to chasing after more wins in that market. We believe it's a megatrend that we can play a part of. As I mentioned earlier, after the initial -- the aggressive initial rollout of EV chargers, it has slowed down recently, as now it's the vehicles' turn to catch up, but still, with less than 40% ICE by 2030, there is going to be demand for chargers. And we will help address that need. Going on to financials, I'll pass you over to Robert Heese, our CFO, who will go through the quarter's financials and the half's financials. Robert?

Yes. Good afternoon, everybody. So just start looking at some breakdown of our business and carry on through a few slides on that. And then later on, we can open up the floor to questions after Lou kind of summarized it. For Q2, our automotive segment has been impacted by a [ 6.6% ] decline primarily due to our noncore business. In the core automotive business, it's been growing modestly in the first half, so that business is relatively stable. There's -- it's been a bit of mix up and down in the automotive sector, the success of some low-cost EVs in China and some OEMs rethinking next-generation [ stats due to their ] deferring some programs. We've had some delay in some steering applications, but those will get caught up in future periods. And that's been offset by growth in our Serbia operation, which was up 79% over the same period. So that business is growing quite nicely, but it's all tempered by kind of uncertainty in the automotive market, which had some impact on our new business pipeline activity. In the non-auto sector, which is primarily our industrial business, it's had a sharp decline from the -- compared to the prior year. And this is due to the exit of our STI business that we've divested and also some strategic reduction in some of our lower-margin businesses. In addition, some of our key industrial customers are impacted by a delay in start of production for some [ program ] transfers. They're experiencing some slowing demand, as Brian had mentioned earlier; and still carrying over some higher inventories, which have some impact on our revenue. Next slide, Brian, just on region breakdown. These are the regions of where we have our production. This is our -- from our core business. In Philippines: With only 8% decline, Philippines, in Q2, is starting to recover. We had a 28% decline in Q1. We expect more recovery as the late programs start to ramp in the second half. China, slowing demand for EV charging and some disengagement of some commoditized customers is leading to a large 24% decline in Q2. In Europe, it's basically holding flat with the prior year despite the decline in industrial. So automotive is kind of offsetting the decline in industrials in Europe. And then Mexico, as we've previously mentioned, this delayed start of production for a major steering program, but that's expected to start ramping in the second half, so the decline in Mexico should start being mitigated in the second half. Next slide, [ Brian ]. Do you want to take that...

Yes, yes, sure. So new business programs that have been closed in 2024 first half amount to a much smaller number [ that ] many of you have seen in previous presentations. One of the things that we are trying to do is to update or amend our policy for the forecasting of new business programs. I think, in the past, some of the forecasting that we had done may have been a bit optimistic. And so we're challenging and pushing back on the sales team to make sure that the programs that are closed and are won are delivered with really good estimates on the -- at least the first 2 years to maybe 3 years of business that, that program will deliver. That will help our operations teams to size CapEx and manufacturing equipment that's required and the people that are required. One of the things you're going to hear us talk about as we go forward here and in next meetings [ and additional ] meetings is our footprint and how much capacity is required and optimizing the footprint that we have against business that we have so that we can drive the highest possible margins. So $58 million is the amount of revenue that comes from first half programs that have been closed. I think some of the exciting business to mention are our continued success in the automotive business as it relates to lifters and sensors. We're particularly good at these combined electromechanical applications as a company, where we combine things like injection molding together with SMT and final assembly and test. And so we won a few programs there. And we've also won, importantly, here in the Philippines a new program with lidar in the active safety space within automotive. That's a particular market that I am really bullish on and that our sales team is especially bullish on. And so I believe we have the right capabilities when it comes to zero-defect manufacturing and critical quality for these really, really high-profile, complex applications in automotive safety, active safety. So -- and then lastly in the -- on the industrial side, LED lighting and LED battery management applications are big for this company. And our capabilities are nicely set against it, so we had a nice win there for Eastern Europe, in Bulgaria, in the first half. So...

Next slide, Brian. So overall, quarter-on-quarter, the softness in the industrial segment which we talked about earlier has declined our overall revenue from $290 million in Q1 to $276 million in Q4, but our GP margins actually improved because of better product mix. Moving over to operating income. After removing the impact of some onetime items which are primarily again related to our noncore businesses, our operating margin has improved to positive numbers, after being negative over the last 3 quarters. Similar to the operating income, our net income is also now positive after removing the impact of the onetime items; and have been negative, again, over the last 3 quarters, so we're starting to move back into the right direction. EBITDA is showing a similar trend and basically recovering from the lower numbers we had in prior 3 quarters. Next slide, Brian. For the capital structure, our balance sheet ratios are steady compared to last year, the end of last year. Please note that we have paid down $35 million of our debt, while the cash was only down marginally. We've been able to significantly reduce our AR and inventories, leading to positive cash flow from operations, so we've been able to pay down the debt without impacting the cash significantly. Next slide, Brian. CapEx is -- given our softness in revenue that we're reporting, we're managing our CapEx very -- we're managing our costs very tightly as well, but CapEx specifically was only $4.9 million in the first half. The expected CapEx for '24 will be well below the prior year. We're going to continue to manage CapEx very tightly and only basically adding to CapEx as it -- if it helps generate additional revenue [indiscernible] business. So next slide, Brian.

Thanks, Robert. At this point, we'll let Lou go through some of the key takeaways for the half and for the second quarter and what we think are the items that are really going to drive the near- and medium-term future of the company. Lou?

Yes. So takeaways that we'll leave you with are as it relates to the business at IMI in the first half and how we're looking forward. The EV business and programs associated with EV were the rage, have been the rage over the last few years. The Chinese -- out of our China facilities where we really try to focus on China for China, the EV programs that we were involved with that we had closed and going through [ MBI ] with have been -- 2 of those programs have been deferred. And so -- as some of the traditional OEMs that we do business with, global OEMs, rethink their pricing strategy and, candidly, their ability to compete in that market. Soft demand in the industrial market that we had talked about earlier, that Brian mentioned and Robert mentioned earlier has delayed our customers in bringing in as -- the forecasted quantities in the first half. I do believe we have good indication from customers in the industrial segments that we serve that their business will be stronger, that their inventories are balanced now and that their orders for the second half will be more consistent. And that is, I think, especially true in the security market that we serve; and also in the HVAC, the sensing and automated control of HVAC. And so I think we're pretty bullish on the second half, as compared to the first half, in industrial. So I guess some of you may know that, over the last few months, we've been focused on streamlining the company, the organization and the organizational structure; make it flatter; and to simplify the structure; and make everyone's role very clear from an accountability perspective. So made a lot of changes. There's been senior management changes. There's been mid-level management changes and there's been individual contributor changes, so I think the company will come out of this a lot more efficient in its ability to execute on behalf of our customer base. And I think that people will all feel better about knowing specifically what their KPIs are and knowing what they are specifically accountable for and, importantly, what they are not accountable for, so I'm excited about our prospects as we come through these initiatives that we've executed on over the last few months. We are continuing to work on optimizing our manufacturing and office footprints around the world to match the market requirements from our customers and to also try to prepare for what may be coming in the market in future quarters and out-periods, so you'll hear more about that as we go along this year, but please know that a big part of my effort specifically is to work on our footprint and to make sure that our footprint is optimized around where our customers want to see us and when -- yes, and, importantly, where they don't want to see us. Reassessing the customer portfolio. We have some customers that are customers that we lose money on, that are not good customers for our business and that don't provide us with the kind of returns -- well, any returns, so we really need to figure out how to divest those customers, especially when the customer may put an entire facility at risk. So we really are, with the sales teams, program management teams, factory and site folks, taking a hard look at our customer portfolio and making -- and we'll be -- you'll see us be making some critical decisions, some of which are within our control and some of which are not, but you can bet on the fact that we are going to be thoughtful about it. And we will make good decisions and we will execute on those decisions. We won't kick the can down the road. Driving and increase market share, increase share from a sourcing perspective on our direct material spend. What -- I come to this position with pretty strong background in sourcing. Between 70% and 80% of the value we bring to our customers in this business is brought from beyond our four walls, so we source it. And in many cases, this company is in a place where the sourcing that we do is controlled by our customers, so one of our very strong initiatives is to step back into the sourcing process; and to take a much more active role there in sourcing from vendors that we know, that our team knows to be best in class around the world. And this is especially true in the mechanical area. These are things like sheet metal stampings, die casting, machining, magnets, springs, everything you can think of that makes up a product mechanically. This is something that we will bring to the table here on behalf of our customers, and we will bring our customers great value in the process. I think it will differentiate us with customers and I think it will help to improve our margins. Lastly, completed the delisting from the New York Stock Exchange and the deregistration from the SEC. So I think that allows us, frees us up to do some of the things that we may need to do there. IMI management teams are focused on leading business recovery. And future restructuring activities, as discussed earlier, have been started already with -- and as with respects to VIA and are going to be continuing in the second half, so stay tuned. And that's the wrap.

All right, thank you, Louis. Thank you, Robert. At this point, we'll open the floor up for any questions.

I did get a private e-mail asking about Mexico since some of the drags of the company that we've been talking about the past few quarters has been STI, VIA and Mexico even before those 2 acquisitions. We've already divested away from STI. VIA, as we mentioned, we already -- we have identified management leaders taking a hard look at the -- just focusing specifically on turning-around the business. The deregistration and delisting will eliminate a lot of the unnecessary costs related to being listed in the New York Stock Exchange, so that should mitigate the operational challenges in the company, but I guess, Louis, could you talk more about Mexico? What are we doing about Mexico?

I'll take that, Brian. Thanks. I'm 2 months into this job, so that's one thing I want to [ preface, preference ] these comments that I'm about to make about Mexico. So it's early days for me as it relates to Mexico. Without sugarcoating this: Our situation in Mexico isn't good and we have been losing money there for a long time. And there are -- there is a specific situation there with a customer that is causing us [ duress ], so yes, we have to decide what our future is going to look like in Mexico. And we have to do that quickly because the company cannot afford to take losses in Mexico, sustain those losses continuously because it drags down the rest of the group, the group, by the way, which is performing really well. So stay tuned. I think you're going to see action taken. One of the things that you can count on with myself and Robert and others on the management team is that we will be kinetic. We will act and it will be in the best interest of the investors.

All right, thank you, Lou. Any other questions from the group? Can we expect a positive net income for the third quarter? Unfortunately, we do not give out guidances, but I think -- from the actions that we've been talking about, I think an improvement in the margins isn't too far along. There are a lot of positive steps being taken by new management, Lou and Robert. So we can't just say specifically when that's going to happen or [ where we see ], but I think we're all excited about the effects of the actions we were taking in the past couple of months and will continue to take as we go along. I have another private message here. I get another question: Is the worst over? What do you think, Lou?

It's too early to tell. So I'm -- I will tell you that there's a lot to be optimistic about with respect to this company, but there's also a lot to be concerned about, so there's a lot of work that has to be done. And we are not out of the woods, so I don't want to send the message that this is going to be easy, but at the same point, this company has great customers. There's even better people. It's a great footprint. And so we're going to -- we're -- our job as leaders is to empower and enable that, right? And that's what we're going to do, and I'm hoping or counting on seeing positive results from that in out-quarters.

All right, thank you. I got another private message. With the slowdown in the EV market and their forecasts, is IMI -- will IMI continue to focus on that specific subsegment of automotive?

It depends. And it depends what happens in EV. So I think that one of the things that we seek or strive for is balance, is diversity in everything that we do. And so the first part of that comes from balancing our revenue and our market focus beyond automotive, into industrial. We -- our percentage of business in industrial, I believe, needs to grow a bit more. I believe we have opportunities to support medical business in the Philippines. And these are opportunities that are leaving China as supply chain strategies change, especially in the U.S., so yes, I think that -- I think diversity is going to be really important. That -- so that doesn't mean getting out of EV. That's not the right approach, right, but it does mean balancing how much business we want in EV. And so we -- I think we're pretty well balanced right now and -- between what we do in electromechanical, these are the sensors, lifters and wipers and things like this; against what we do on the BMS side, battery management and charging. And so I think we just have to continue to keep that same level of focus on being intentional about what customer programs we go after, not having customers choose us. Us choose customers, right? So you're going to see that intentionality brought to the commercial team as we go forward.

Thank you. I have another one here. Without getting too political, does the -- as a company, do we favor -- is it more favorable for a Republican or a Democratic win in the U.S.?

Honestly, I think we win either way. And I think the reason for that is that, if you listen to the pundits who are out there -- and I'm not one of them, by the way. They argue that, well, if there's a Democrat that gets elected, then there might be geopolitical concerns or risks because some of the other powers might get aggressive. And so especially in the China, Taiwan [ mix ], something may happen there that creates risk. And so it means that customers are going to want to continue to diversify their supply chains outside of that region and build even second sources of supply outside that region. And then if a Republican gets elected, I think we're going to see probably a much more aggressive attitude about tariffs. If some of what the Republican leadership is talking about now from a policy perspective comes through, we could see doubling in tariffs on China. And of course, that would be good for us because our footprint, especially our large footprint in the Philippines to a great degree being, I think today probably underutilized -- I think there are great opportunities for this company to take more of that business that is shifting from China to Southeast Asia.

Okay, thank you. I just wanted to reemphasize a point that Lou made earlier. We do have Chinese facilities, but they are majority China for China, so they serve the domestic market, so not directly affected by the tariffs. And part of the customer portfolio reassessment that we're doing is really trying to double down on that China for China in IMI facilities-wise and make sure that we distance ourselves from any potential trade wars or tariffs in the future.

Yes. Brian, it's multinational companies who are our customers who want sources of supply in Europe, North America and Asia and specifically China, so as they chase that local market, they have a partner there that helps them achieve their goals [ in that market ].

Well said. Another one here: Is the hydrogen car a threat or still a friend with regards to the IMI business?

I don't have much to comment on there, Brian.

Okay. Yes, I guess, with most markets, it's really our customers who dictate the demand that filters through to IMI. So if it emerges as a leading candidate for future platforms, then -- a lot of our automotive products are agnostic. And I don't see a reason why we can't serve that market too. So yes, as long as are cars being built, we're in there, I imagine...

Yes. Just as the EV markets began to come around, our -- we are a Tier 2 supplier in automotive, right? We are supplying to Tier 1s who then supply to the automotive OEMs. We have some cases in EV now where we're actually Tier 1 because these EV customers prefer to run up the value chain a little bit. We're very careful there, so hydrogen car, even when it comes out and is successful, I think you can depend on seeing IMI there.

Well said. I think that's about it for the questions. For any other questions, feel free to e-mail me at [email protected]. Thanks again to everyone for taking the time to join us today. Thank you, Louis, Robert, Lau, Jerome. Good afternoon, everyone. Thank you.

Thanks.

Thank you. Bye-bye.

Thank you.

Bye.

Thank you.