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

All right. I think we can go ahead and start. Good afternoon, everyone. Apologies for the delay and the timing is a bit later than our usual. We're all over the world right now. Louis is in Serbia, Robert and I are in Czech Republic, Lau is in the Philippines. Also joining us today is -- yes, I think that's the team joining us today. Jerome, our President, is on the call as well to answer any potential questions. Let me go ahead and start. So, this is our earnings call for the third quarter of 2024. Just a quick market outlook. These figures have not yet taken into consideration the win of Trump in the U.S. yesterday. But the key messages here is, as you can see, there's some weak growth in the Eurozone. We felt that last year and this year, and it reflects pretty directly on IMI numbers. We've been struggling on -- actually, our customers had faced challenges, and that reflects on the ordering patterns that we've seen on the IMI side. Although we do see it getting better, inflation is going to keep improving from 6.7% last year to 5.8% this year. And the analysts, the IMF and World Bank see it going down to 4.3%. So friendlier for businesses as we move forward into 2025. And this easing of inflation will lead to the recovery of discretionary spending being in the automotive space. Most consumers see purchasing of cars as more discretionary and extra. So as that comes back, we expect the automotive market to recover as well. The last bullet on intensification of protection policies, it would exacerbate trade tensions, although it's not necessarily a bad thing for IMI. As you know, we have a pretty wide geographical footprint. Our Mexican facilities can cover the NAFTA region. We have multiple sites in Europe. We have China for China. We have Philippines who can export to many different regions. So, an onshoring trend, if that continues, would fit into the IMI strategy. So, we're not too worried about what the Trump administration would bring if trade tensions do increase in the coming 4 years. On the automotive side, as I mentioned, the high interest rates in the past couple of years have reduced discretionary spending pretty significantly. Aside from that, it couples with the slowdown in the adoption to EVs. From studies, they're saying that raising the charging time and availability of charging infrastructure remain at the top concerns of consumers on why the adoption to EV has not happened as quickly as most analysts have forecasted. Although it's just a delay. And the world will still continue to EV. It's just a matter of when we reach critical mass of cars on the road and charging infrastructure ready to accommodate that. But the good news is IMI does still serve both ICE and EV markets. So, if the transition takes longer than expected, then we keep serving the ICE market for as long as they need the components. And when EVs actually do their full launch, then IMI is also there to serve that market. Aside from that, the range anxiety in charging times, the consumers are more and more price sensitive now. And China has emerged with a lot of low-cost alternatives. We're not even talking about the BYDs, the great walls. There are even cheaper alternatives out of China now and consumers are paying attention, and it's segmenting the markets and really putting pressure on pricing strategies even of the top players that IMI mostly serves. Moving on to the industrial market. It seems like it's all connected because EV is down. We classify EV charging infrastructure in our industrial market. So, because EVs have slowed down, the charging market has slowed down as well. But again, it's just a delay. It's going to come back, and we're ready to serve whichever players emerge as the top players in each of the regions. Aside from that, IMI's industrial segment is mostly security controls, IoT applications, smart home applications. So, the Chinese real estate market showing signs of recovery after new government measures that really targeted the Chinese real estate market. It bodes well for IMI. We serve a lot of our industrial market out of the China sites and a recovery of this segment would help recover some of the revenues that have slowed down in the region. Unfortunately, the inflated inventory levels that we've been talking about the past couple of quarters, it still continues. We still feel it, especially in our Philippines sites that also serve the industrial market. But as demand recovers and as our customers start to trim down their inventory, this will eventually recover in the coming quarters. Last bullet here is we see a lot of companies coming out with their net zero goals and their ESG policies. And with that comes a greater demand for sustainable energy applications, their solar panels. But more importantly and where IMI can contribute is energy storage. It's very electronics heavy, electronic storage, batteries. This kind of technology IMI has expertise in, and we will be able to serve that market as it keeps growing. Moving on to the financials, I'll pass you over to our CFO, Robert Heese.

Good morning, good afternoon, good evening, depending where you are. I think on the following few slides, we do have a bit more granular information than we've presented in the past because our VIA subsidiary is delisted now. So, we're able to share a bit more information than we had in the past. Following on with the kind of market update that Brian just gave you, we can see there's clearly softness both in our automotive and our nonautomotive segments. I think automotive was a bit more flattish in the first half of the year. But clearly, in Q3, we're seeing some falloff in automotive demand. We do remain capable of supplying markets both in the internal combustion segments and EV platforms. But just overall automotive buying patterns have been a bit disrupted. You've seen on Brian's economic update slides, the growth in Europe was very anemic. That's obviously having a very big impact on the automotive market. And so, we're seeing some falloff in demand for our own products. We're also impacted an existing steering application product that we have. There is a demand drop-off kind of part and parcel with the overall automotive market delayed, but we've also had some delay in some ramp-up of some new products, steering products that are coming, ramping up now as we speak, but did have some impact as they were delayed. There was very little production in Q3. Our Serbia operation continues to grow. 7% quarter-on-quarter, 36% year-on-year as we continue to expand that facility and continue to focus attention on it. And then VIA, as we'll see in some later numbers, we had a loss of orders from some automotive customer and another mobility camera customer is facing bankruptcy proceedings. So that's had some impact on the overall group numbers. The nonautomotive segment is a similar trend to what we've -- it's actually picked up a little bit. The numbers for the first half were very bad for the nonautomotive. You can see it's still declining in Q3, but declining at a slower rate. We have exited some low-margin telco. We've been repeating this over the last few quarters. And as there's a year-on-year comparison, we still figure into the analysis, but we have gotten out of margin telco customers, particularly in China. And so that has some impact on the top line, but actually will improve the bottom line of the company. And as Brian mentioned earlier, EV charging customers facing some demand challenges in the Chinese market. And also, the comparative the divestment of AI is in the comparative figures. There's also some falloff in the VIA numbers as well. So, all in all, for the quarter, disappointing quarter, from a revenue perspective. And as we get into the next year, Q4, maybe not going to show a better improvement. But I think as we get into 2025, we're expecting things to start turning around. Can we go to the next slide? Yes. So just from a region-by-region perspective, the Philippines revenues down was more industrial in the Philippines. And of course, that's been weak. But we have been aligning the cost structure in the Philippines to be more in line with that lower revenue. So, we'll start seeing some improving margins from there. China, both from a year-to-date perspective and a quarter-on-quarter perspective, are down 18%. Again, as I mentioned earlier, continued strategic disengagement from low-margin customers had an impact on that revenue. And also, the EV charging customer is facing big challenges. So that's had an impact. But we are starting to see good benefits from our cost reduction initiatives, and we're holding our margins in China. Europe, large customer demand being redistributed among IMI sites, which will improve our future profitability as we make those transitions, there's some delay in revenue. And also, the market is also impacted by the lower growth in the European market overall. So, you can see in the quarter, numbers are down from Q3 and were flat kind of on a year-to-date basis. Mexico, that's the primary location where the steering applications are slowing down. So, a pretty big impact in Q3 and a significant impact on a year-to-date basis. But we are actively promoting our plastics capabilities in our Mexico facility, and that will drive some additional revenue stream for the site as we move forward. Just from a group perspective, and here's where we're getting a little bit more detail now than we've provided in the past. You can see for Q3, revenues somewhat flattish, but the mix between the core business and VIA has kind of been shifting around a bit, overall, our margins are down. There was a significant drop in Q3 from the VIA subsidiary as they had some mix shift and also because of some of the lower revenue in the core business that's also had an impact on our margins. Also, in Q3, we did have some sale of raw materials to try and clean up some of our inventory. And when we sell raw material, that goes at a very low margin. So that had some impact on our margins as well. That's not a continuing issue. It's more like a onetime cleanup, which has sort of a onetime negative impact on our margins. Operating income is slightly down, better than what we've had earlier in the year, but it's still down a little bit from where we were in Q2. And net income is holding somewhat flattish. Our core business is solidly profitable and EBITDA, again, positive, not a great number for Q3, but we do expect that one to be improving as we get into 2025 as well. Capital structure, again, we continue to pay down debt. We're very focused on that. Our long-term debt has declined with principal payments, and we've been aggressively taking down our short-term debt. So, our net debt position has dropped about $40 million. Our ratios either stable or improving. And again, as we get into Q4, we'll be continuing to work on paying down debt as well. CapEx, we spent $6.9 million in the 9 months of the year. We fully expect to be under $10 million for the year. So, we've been keeping control on our CapEx spending is quite significantly lower than earlier years, and that's just to maintain cash and to pay down the debt. We will probably have higher CapEx in the next year as we expect to fund some projects that we have in the pipeline. But this year, it's very CapEx disciplined to maintain cash and pay down debt. So key takeaways, the electronics market is challenging. IMI core business has been profitable, and we're continuing to realize cost realignment measures, might not be able to see it all in the numbers yet, particularly in Q3, we should start seeing some more benefit showing up in the numbers in Q4 and we definitely see them in 2025. We've done some significant restructuring. We're going to be closing our U.S. facility, which has been earnings drag. We closed our Japan office, another drags. We've radically downsized our Singapore office and closed our Malaysia office. So, there's some good cost savings that have been -- these are realized now. So, this is good progress. We're continuing to look at footprint rationalization just to make sure that we have the right amount of square footage of manufacturing space relative to the revenue that we have, and we can basically have larger sites at better margins. So, this is a continuing focus and will be into the early part of next year. We do continue to focus on direct material cost improvements. Through the identification of alternative components, increasing the share of IMI control bill of materials and just really aggressive chasing on cost savings on the material cost front to improve our value-added margin from the revenue we get. So, this is a very aggressive focus. And then core fixed factory overhead and SG&A reduction annualized at $25 million in 2024. Again, not all of those numbers are showing up yet and will be as we get into next year, but we made a very aggressive focus on reducing costs to, again, better match the cost base with the revenue that we have. And aside from the operational improvements, we have financial initiatives implemented to improve that profitability. We reduced the debt level by $50 million, reducing interest expense in a high-rate environment. And this is continued to focus on the finance team, and we'll continue to work on any excess cash that we have will be used to pay down short-term debt. I think that's it.

Yes. That's it. Thank you, Robert. We'll open the floor now to any questions any of the analysts might have. [Operator Instructions]. Don't be shy. We like to answer questions.

Maybe, Lau, without trying to put you on the slot, do you want to just add a few words?

Yes. Thanks, Robert. So here in Serbia, which is one of our bright spots at IMI in Eastern Europe, the market for automotive and industrial has been slow. And so that's been a drag for us while we optimize both our infrastructure and our footprint and our overhead. So, we're working through that as we speak. But I believe we're really, really well set up right now for a go-forward path with some of the changes that have taken place globally, the election of President Trump will, I think, be a really good thing for us with our footprint in Philippines and Mexico to supply into the U.S. I believe that things that our customer outlook with some of our key industrial accounts, especially is looking really good. I have been spending a lot of time with our customers. Yesterday, I was up in Ireland with one of our key accounts. And I think all the initiatives that we're working on, on the material side to grab control back on the BOM, which over the past few years, we have lost ground on, I think, is really going to help us from a margin perspective. So, I'm bullish. I think we've got a lot of good things happening. And I think now it's a matter of us that we do have our plan set and we do have our team in place to just have our heads down and execute. And that's what we'll be doing over the coming quarters.

All right. We do have some questions here about the Trump win, which Louis addressed. But yes, a Trump win, if it means trade tensions, then we have our Mexican facility to serve the American market. So, if anything, it could be a positive for IMI. How it affects the global EV space? Hard to tell at this moment. I think a lot of the analysts are also holding their opinion as of the moment. So, I guess it's a wait and see.

Brian, from my perspective, the global EV space will -- I don't think President Trump is in any way against the EV market. I think he's against subsidies to support the EV market, government subsidies. So, I think it's going to be all about the cars themselves offering customers what they want, right? So, addressing range anxiety and addressing cost are going to be 2 of the big things. And I think with battery technology that's now out there, that's in development today, I believe that EVs ultimately are the future, albeit it's been set back by a year or 2 because the technology that's currently out there isn't capable of serving customers' needs. But I do believe, looking at what our customers have in the pipe right now that those key issues that consumers have as it relates to cost and range are going to be dealt with. And once those are dealt with, we're in a fantastic position to take advantage of the growth in that business. There's so much more electronics, so many more electronics in an EV than there are in a combustion engine that just plays right into our strength. So, it's really just a matter of time for us and our key customers. And so, I believe that we're going to be really, really successful in that segment when it breaks out.

Great. I guess just staying on topic here. Do you have any view on Trump's tariff plans if it affects IMI and how?

Yes. So, I think that we are in the very best places we could be in and our plan to downsize our footprint in China that started back in May was a really good plan. I strongly believe President Trump would be reelected. And so, I think that assessment was correct. And we'll take our -- by next year, end of Q1, our goal is to significantly reduce the footprint in China so we can serve our customers with the needs that they have in China and not be looking to export out of China. And I really believe the Philippines and its good relationship with the U.S. is a really strong option as well as Mexico. And I think all of our work in Mexico over the past 5 months has been super important to have us prepared and ready to serve customers who must onshore to NAFTA. So, I think we're perfectly situated with our footprint and our capabilities to take advantage of the changes that are coming with the President Trump administration.

Great. Thanks, Louis. Another question here on our plans to downsize China. I can take this. Our perspective now is no stone that concerns. So, we are assessing all options available on how we can right size the support structure and align it with the dynamic market environment. So yes, downsizing or a consolidation of sites is an option, but nothing to disclose at the moment. But yes, we are looking into all options available to us.

Maybe I'll take the GPM question. So, the gross margin in Q3 was down. It was a few factors. One of them was, I think, product mix shift in the VIA subsidiary, which brought down VIA’s margins that had some impact on our group margin. Our core business revenue was down in Q3. That also had an impact on our -- obviously, we have fixed costs, which we are bringing down, and it will continue to come down, but didn't come down fast enough relative to revenue in Q3. And then one other significant factor is the sale of raw materials. We've been actively managing our inventory levels, and we've taken the opportunity to sell out some of the raw material that we had in inventory. When you sell out the raw material, you're selling at an extremely low margin, like 3%, and so that always has a negative impact on your margin, but it's more like a onetime impact because to the extent that we don't sell any more raw materials, say, in Q4, you're not going to see that negative impact. It's the worst over. I think without kind of being explicit about it, look for a really nice 2025. 2024, not a good year for IMI. And I won't make comments about Q4, but we're looking for a lot more better looking 2025. We spent a lot of time and effort reducing our costs, examining our footprint, bringing down material costs, rationalizing our headcount, and that is all going to show up in the numbers next year. It's hard to see the numbers this year because we have severance costs and impairment costs and all that kind of things that are happening this year. We'll get all the benefit next year.

Does IMI also serve Tesla? Unfortunately, not something we can comment on. So, we do disclose some customers when the customers themselves make a press release announcing IMI as a manufacturing partner, but typically not something we can comment on. Thoughts and plans for VIA.

Yes. On VIA, I think similar to the approach that the group is taking on IMI, we're also looking at rightsizing VIA. I think the challenge with VIA is during the last couple of years, they've been pushing for higher price passing on the inflationary increases to the customer. Unfortunately, with China coming down, a lot of the China competition has also reduced their prices. So that allowed the customer to go into some of the second source, right, so which VIA has unfortunately lost some position given that. But they have now rightsized the company. They have exited from being publicly listed, which in itself carry a lot of the costs related to being a public company in the U.S. Some examples are director and officers' insurance, which is significantly higher than if you were a private company. Also, the cost of compliance in terms of audit requirements being a publicly listed company that requires very detailed line-by-line accounting. So, they have this year exited from the New York Stock Exchange and deregistered. So, a lot of the compliance costs will be going away. I think the savings that we will see next year at the VIA level amounts to about I think, about EUR 5 million or EUR 6 million related to the compliance issue. At the same time, they've also cut a lot of the cost in terms of headcount. They have downsized their footprint, specifically in Germany, where they have lost, I think, one of the major automotive customers, they have lost in Germany because of the second source the customer found. So, they have exited from that space that they have in Germany and also downsizing their HQ in Germany. So, in terms of headcount, the German operations, they've cut about 70% of their workforce to right size and to meet the much lower demand. On China, they're investing on automation that would make the Chinese operations to be more efficient aside from the low-hanging fruit that they've undertaken. So, I think similar to IMI, the cost base has been rightsized. The one that they are now currently working on to build is really on the top line. So, they are now going back to the customer with a more competitive pricing and gaining traction in bringing back the customers that they have lost. So, we would see the benefit of the rightsizing of VIA next year as well as improvements on the top line. So those are some of the actions that the VIA management team has been working on and focusing on.

All right. I think that's about it. For any other questions, feel free to e-mail me directly at [email protected]. Thank you once again to everyone for taking time to join us today. Thank you, Louis, Robert, Lau, Jerome. Appreciate it. Thanks, everyone. See you next quarter. Take care. Bye-bye.