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

All right. Good morning, everyone. Thank you for taking the time to join us today. We'll be presenting 2024 full year numbers as well as some look into the Q4 figures as well. Joining us today is our CEO, Louis Hughes, our CFO, Robert Heese; and our VP for Finance, Lau Dela Cruz; and myself, Brian Jalijali, Head of Investor Relations. I'll start quickly by having a brief look at the market outlook and the external factors that affected IMI and the rest of the EMS electronics business. So as we can see, GDP growth for the world pretty stable in 2024 and into 2026 forecast at about 3.3%. But there are pockets that are doing better and some pockets that were significantly affected by geopolitical uncertainty and regional uncertainty, specifically the Eurozone, which did hit IMI figures quite significantly, and we'll show that in the later slides. Bulgaria, Czech and Serbia facilities in IMI did see a lot of softness in demand from our customers and their customers. And we're hopeful that the recovery in 2025 and 2026 will ease the ordering patterns and some of the disruptions that we have been seeing. Worldwide global inflation, the folks at the IMF World Bank are saying that the disinflationary environment -- the disinflationary trend will continue. And this is good for IMI and our partners as well. The high inflation rate environment really put a damper and constrain the investments that we could make and the expansions plan. So we saw a lot of platform push-outs, ordering push-outs that we hope will recover as the inflation and the interest rates go down hand-in-hand. There are some global uncertainty. There is some global uncertainty left with Trump taking his position in the States. There is some back and forth in retaliatory tariffs. We will talk about that later on. But the wide geographical footprint of IMI, it really helps mitigate a lot of these effects in that we're able to supply our customers on a regional basis as opposed to going across continents across the oceans. And that's really helped IMI really shine in this environment and will let IMI shine in the future. Moving on to one of our major markets, the automotive market. As mentioned, the inflationary environment really led to cautious consumer spending on the vehicle sold side. And that's really trickled down to our customers and their customers. So there was less demand for nonessential features. As you know, the safety standards are becoming more and more the norm and enforced on a regulatory basis. So car -- just 10, 15 years ago, cameras were seen as an extra to vehicles. Now they come pretty standard as well as a lot of the safety features. This just bodes well for IMI's business. Cars still continue the trend of more and more electronic content per unit sold. And we see that continuing on with the adoption to electric vehicles and autonomous driving. So though they have come in slowly -- slower than expected, but the trend is still there. We're still going to get to the end goal of safer, more sustainable cars in the future. There is a rebound expected in 2025, driven mostly by the continuous easing of the supply chain constraints and improved consumer confidence. Despite the pace of adoption to EV falling below expectations, the investments do continue, specifically in autonomous driving market. We see Waymo in the states rolling out autonomous-driven cars mostly starting in the U.S., but I do know they are starting to branch out into other developed countries. And with this proof of concept of safety and reliability, we should continue to see that trend moving forward. On the industrial market, IMI historically has been a strong performer in the industrial security market, biometrics, access controls. And now we're seeing a trend of -- in the similar segment, but an evolution of security, I guess, there's now a growing need for real-time monitoring and threat prevention that safeguards critical infrastructure. Aside from that, one of the emerging markets is energy storage as sustainable energy becomes more and more a factor in the world. It is not a constant energy source. So there is a need for energy storage, specifically. It's easier to think about it in solar energy, and that you know that solar energy isn't available 24 hours, but with battery systems and energy management systems in place, it is a possibility today that some homes are powered 100% by solar energy even throughout the night. There is also significant expansion in Internet of Things devices and sensors within industrial settings that enable real-time data collection and predictive maintenance. So a lot of the world is moving to Industry 4.0 and connectivity and applications and devices for Internet of Things really help enable that. And IMI is right there in the thick of things able to supply, able to provide solutions that will enable and support this development in the world. Moving on to the financials. I'll have Robert talk through some of the revenue numbers and Lau will talk through the quarterly figures and margins. Robert?

Thanks, Brian, and good morning to everybody. The automotive segment is still remaining soft, although you can see from the quarter-on-quarter trend is the decline is starting to slow now from the annual numbers that we've had. So we're cautiously optimistic as we go forward into 2025 that this trend will stop or even reverse into a positive trend. We won $120 million of new business secured in '24. We started winning a lot more business. I think in the last half of the year was a bit of a slow start and picked up as we went forward. The delayed ramp-up of some steering application project has been resolved and is now starting to ramp, started ramping in Q4 and will progress into the next quarters of the year. So that's some good business -- good news for us. On the VIA Optronics side, they're shifting some projects to the consignment model. It will mean that there'll be less revenue being generated from VIA but we will be getting better margins and less capital -- working capital requirements. So that's a little bit of a shift in the business model for VIA. On the nonautomotive side, still tough, 34% down year-on-year. Again, the trends slowing a bit in quarter-on-quarter, it was a 27% decline Again, a lot of this was driven by a focus on exiting low-margin business, particularly in China. Inventory balance issues with customers have started narrowing, and we're starting to see a bit of a pickup in orders from these customers that had inventory issues. And then our growing footprint in industrial sensors and our refocusing. Brian mentioned earlier on the security markets, and we're identifying additional opportunities on renewable energy and a renewed focus on data center products. So the sales team is -- and Lou can speak to that later if somebody wants to do, but the data center is kind of a growing area for us. And we've got some decent $77 million of new business won in '24. Next slide. Just on the region-on-region updates. From a Philippines perspective, again, Philippines impacted by softness in the automotive market, which was leading to a weak demand on our [indiscernible] segment. but this is partly offset by growth with certain customers on industrial payment systems, which is a bit of a growing business for us as well. Again, we mentioned earlier about the gradual recovery of customer inventory situations and the restructuring of local and global support functions, a lot of which are in the Philippines will enhance the profitability of the Philippines business going forward. On China, a significant decline quarter-on-quarter. Again, we've previously announced the shutdown of our Chengdu site. Some of that business has been transferred to other China sites and some of it wasn't transferred. So there's a decline in revenue on that. And that will actually be helping our margins overall. The Chengdu site wasn't that profitable. So we're losing some low-margin business there. End of life telecom products, but we're also kind of reconsidering participation in the segment given the low margin nature of the market. Again, our focus is on margin, not on revenue. And then the sites have benefited from cost reduction initiatives with more restructuring activities implemented -- being implemented in 2025. So soft revenue in China, you can see down 22% year-on-year and 32% in the quarter. We're really focused on the cost side to drive profitability in China. In Europe, the European demand remained soft. You can see the quarter revenue was down 15% in Europe. That's on uncertain European geopolitical situation with the Russia, Ukraine situation. And also, as Brian showed earlier on the GDP slides, Europe was not really growing in 2024, and that's had some impact on our business. And we're also experiencing some transition as some customers transfer within our European sites shifting from one site to another site, and that's had a little bit of impact on the volume being produced by the sites. And lastly, Mexico down 11% year-on-year. But as we mentioned earlier, the new generation of the steering application is now beginning to ramp up. So we're expecting the revenues for Mexico to start increasing with that and other programs that are coming online in Mexico. Next slide. I'll hand this over to Lau.

Hi. Good morning, everyone. So I'll be presenting some details on the quarter 4 performance. So to start with the revenues. The company posted Q4 revenues of about $257 million. This is a 6% decline from previous quarter and 12% lower than the same quarter of last year. On the blue bar, which is the core business, we have a decline of 7% versus the previous quarter, and this is coming from the softness in the European auto demand due to the geopolitical situation. As mentioned by Robert, there has been some transition with regard to our internal customer transfers within our Europe facilities. So that's causing some disruption in Q4 and also the effect of the last time build for the remaining businesses in Chengdu, which is dominated by the EV charging business since we have ceased the operations for Chengdu in December. Compared to last year's Q4, there has been a decline of $54 million or about 19%, which is mainly driven by lower demand in the automotive space and some end-of-life customers for Chengdu, for also some in Mexico and the Philippines. And there has been some end-of-life models with no replacement models yet. So we wish to to have replacement models for those type of businesses in the next few quarters or few years. Then just to discuss about VIA on the gray bar. VIA has posted revenues at the same level as the previous quarter and significantly better than last year, mainly from the increasing volumes for the display customers and some recovery of backlogs in Q4. Moving on to the GP margins. Yes, for the GP margins, there is a slight increase in Q4 at 7.9%, but we actually have a one-off item for the GP from the cleanups that we did in Q4 that resulted to a reported GP much lower at 6.8%. So while the contribution margin has been improving, so that's the sales less the direct cost compared to previous quarters. The effect of the lower revenues are kind of resulting to lower fixed overhead utilization. So that we hope to be recovered once we stabilize the revenue levels. And normally, Q4 is a low revenue quarter. So that's the effect on the margins. Compared to last year, the decline is highly driven by sales mix with the increasing trend for high material cost customers. But the other direct cost and fixed cost has already improved from the cost optimization and the improvement in the operational efficiency. Moving on to the upper right chart, which is the operating income. The Q4 normalized core operating income has quite a decreasing trend, which is the effect of the revenue softness. We have some slight increase in the GEE in Q4 for contracted services. But on a full year basis, our GEE has significantly decreased already from a full year $63 million level in 2023 to $55 million in 2024. And this was the result of the rightsizing activities that we have done in the past quarters. While, VIA, our operating income is slightly better by $800,000 from the decreasing trend of the fixed overhead and GEE. And this is also -- sorry, a result of the cost-cutting initiatives that they have done? So just to note that in Q4, if we compare the reported operating income or operating loss compared to the normalized, there is a gap of about $20.6 million as we have done a bunch of cleanup. So we won't carry them over to 2025. So from the $20.6 million one-offs affecting the operating income, about $12.5 million of this are provisions made for some end-of-life businesses in the automotive segment. So some are -- mostly our inventories. And we have some additional restructuring costs in Q4 of about $4.9 million, mainly from the China facilities. And there is additional VIA one-off of $2.5 million. Then on the lower left on the net income. The core net loss in Q4 is negative $2.1 million. And this is mainly the miss in the operating income of $900,000 plus there's additional gap of $2.9 million from the nonoperating income which is mainly coming from the FX position, the gap is around $1.1 million because Q3 was actually a ForEx gain position, while Q4 is a ForEx loss position. And there were some increase in interest expense from the repricing of loans. The effect is 300,000. And the others are just tax effect of the one-offs that we carved out from the normalized. So VIA was better at operating income level, but there's also additional FX loss impact of $1.8 million. that causes the net loss to increase further. On the nonoperating income, there are additional one-offs of about $15 million. $12.8 million of this pertains to the impairment of goodwill. So we have fully impaired the goodwill in VIA and also some goodwill sitting in the books of -- goodwill pertaining to the IMI U.S. and the Czech Republic and some fixed asset impairments of around $2.6 million. For the EBITDA, EBITDA is lower than the previous quarter, mainly from the revenue miss and the effect of the FX. But -- because usually, we include the FX gain or loss in the EBITDA computation. But if we back it out, that would even out the Q3 and Q4 at 3.7% for the group. And if we're going to look at the core business only, the EBITDA would be at 4.7% in Q3 and in Q4. I think that's it from my end. Anything to add, Robert?

Yes. No, I think you covered it. I think that just the message for 2024 is we put a lot of effort into cleaning up the balance sheet, so that's why there's a lot of one-offs that you can see in Q4. We wanted to start off 2025 with a clean balance sheet. And we've restructured the business. And so we really want to start off 2025 on a clean slate.

Yes. So the next slide, I think...

We'll pass it back to Robert.

Yes, sorry. So I think our ratios are pretty well in line. We've paid down some debt. We had an additional $13 million of debt repaid in Q4. Our cash is at a comfortable level with additional credit lines available. We have roughly around $150 million in liquidity available. So we're in good shape from a liquidity standpoint. All of our balance sheet ratios are within the targets that we have. There's obviously a deterioration in the book value per share because of a lot of the one-off activity that we've done in 2024. And as we return to profitability in 2025, we will start growing our book value per share. Next. And then last, a quick one. Again, we took a very, very disciplined approach to CapEx this year given the poor operating performance of the group. We spent under $10 million. We will also take a very disciplined approach in 2025 for our CapEx as well. So again, 2025 numbers are going to be below historically what we spent on CapEx, and we're just really focused on cost improvements and getting more efficient in our operations and not -- we're just going to be very disciplined on our cash. That's the main message here. Next slide. Okay. Lou, I'll turn it over to Lou.

Thanks, Robert. So the key takeaways, I think this is what's important. The message is that we've drastically reduced the overhead of the company, the fixed overhead and SG&A in 2025. Typically, companies every year are increasing these totals because of pay increases and the like. So in our case, we're going to take about $24 million out of this and that equates to about a 20% reduction in our overhead for factory and SG&A. We didn't really get the -- we didn't really realize or see this in 2024 because we started to make these changes in the middle of the year when we came on as the new management team, and we're going to start to really see the value of these changes, well, starting in Q1 2025, so this quarter, and beyond. So what do we do? I think we've talked to a lot of this in previous meetings, but simplifying the org and removing things like our business units and relying on our sales team to focus on customer profitability and revenue, putting the onus for quoting and execution on the factories, removing noncore departments. We had a large number of engineers at the company that we're focusing on product design. We're not doing product design going forward. We are focused on manufacturing engineering, automation engineering, quality engineering. We're really focused on our roots as an EMS company. And so that's something that we decided would be important for us to get back to. Decentralize some of the support functions. The supply chain, the entire supply chain side of the business, that's customer service, buying, planning. That was all centralized to a location in Malaysia. For a company of IMI size, that's a difficult thing to do because you start to lose touch with what's happening with customers locally. And so I believe that this is a big part of what caused some of the inventory issues that the company had come into. And so by decentralizing the supply chain function back to our sites and our regions. It helps us be closer to customers. It helps us to manage the supply relationships as it relates to a lot of the ups and downs that are happening right now in customers' forecasts. So we have to be really close to that. And I think that I see that getting better in each of our regions quarter-over-quarter. So -- and then just basically -- just basic accountability across all levels, that's something that's super important for an organization like ours. So the sales team being accountability -- being accountable to drive and own profitable revenue, and also the sales team being involved with Robert and his team as it relates to inventory turns, as it relates to days to pay. All of these typical cash conversion metrics that until the middle of last year, I don't think the company focused enough on. So Robert is really leading that effort, but the sales team and sales leadership is very engaged with him in that effort. So as we seek to improve our cash conversion, we also seek to improve our margins. And there are certain customers, certain accounts where both the cash conversion and the margins are really not acceptable and are dragging the company down. So we are in those cases, trying to improve the business relationship with those customers. And then if we can't, they are, in fact, going elsewhere. So you are seeing some loss of revenue to -- well, the market but also to some of the moves that we're making to try to write some of the commercial relationships that we do have. Rationalization of footprint. So you know that the U.S.A. site was shuttered. That just -- the finishing touches were put on that this month. Japan as a commercial rooftop is shuttered. Malaysia is shuttered. Singapore is shuttered. We are drastically reducing our footprint in China. That's a work in progress. But I think that we were smart to get ahead of this last year, right, when we came on board, we started this process. I don't see SMT being a very profitable business in China going forward. It's -- there's a lot of pressure on electrical conversion because to get country of origin outside China, you have to go after substantial transformation and to get substantial transformation, you have to do SMT and PCBA and full assembly and test outside China. So with the number of companies in China doing SMT and the amount of business that's leaving China is getting super, super competitive there and that's driving margins down and making the business picture more and more difficult. So this is a work in progress. Stay tuned. You're going to see continued change there. But for the better, we've got a great team in China, a great leadership team there. And so with some of these changes that we're making, I foresee us doing fine in China going forward. Effects of the restructuring from the second half of 2024 aren't fully realized and probably won't really be fully seen on a quarterly basis until Q2 or Q3 of this year. So that's important, right? It's taking some time to realize some of the benefits of the changes that have been made. There's one thing that I think we should clear up on the logistics side, we aren't adding logistics. There's been some news articles out there that we're getting into the logistics business. No, we're not. We've made some changes. We had a distribution hub in Singapore. We closed that down and moved that to the Philippines because we already operate in the Philippines. We have enough square footage for it. It's much more efficient. So having that internal logistics capability to support all of our sites through a distribution hub, it's kind of a hub-and-spoke idea for consolidating shipments. So we're doing that now out of the Philippines rather than Singapore. And we've got some customers that we're growing relationships with where we're actually shipping to their customers directly. So it's -- they trust us enough on our quality that they're enabling us to ship direct to drop ship direct to their customers. So we needed to have the right licenses in place to be able to do these things in the Philippines. The last thing to mention is the Stock Appreciation Rights program. I think it's -- this is something that came out a few days ago, something that will be formally announcing the next quarter, but to just get out in front of that and explain this. Today, IMI doesn't have an employee stock ownership or an option program. And most public companies have between, say, 5% and 25% of the company being owned by the employees. And not having employees involved in the ownership, I think we miss an opportunity to get senior members of the management team and some of the critical individual contributors aligned with the shareholders. So I think this is going to be a great move for us. I want you all to know that it's going to be based on performance, certain performance metrics being hit, along with time for the vesting to take place. And it's going to be based on future improvements in share price. So people aren't going to get any benefit if the value of the company doesn't improve. And it's nondilutive. Robert, you might mention the details on that basis.

Yes. This is a Stock Appreciation Rights. It's not a stock option program. So it will be based and it's not dilutive on that basis. And the vesting period is going to be a few years down the road, there's no immediate impact on shareholders today.

Okay. So that's the wrap on the key things that I wanted to leave you with. I think the -- maybe a couple of things on the commercial side or the sales side. We have completely restructured the sales teams. We are -- we were for a while remotely covering a number of the customers. Some of that started during COVID, I guess. And so a very high percentage of the company's customer base is out of Europe, and we were trying to service them from Asia. That's a really difficult thing to do and I think the effects of that were being felt. And so our salespeople going forward will be where the customer is. So they will be physically in front of the customer and working with and developing multifunctional relationships at all of our customers, especially our key top 20. So I think we're going to see some real positive in that. We're trying to enter the data center or AI space. We're opening up a couple of nice relationships with very large suppliers into that market. So we'll be a Tier 2 there. But I feel like that business is going to grow for a long time coming, and it's really important for IMI to be in that segment. The last thing I'll say is that our footprint at IMI is really well positioned as it relates to a lot of the dynamics for isolationism, protectionism that we see taking place in the U.S. with tariffs and that I think we're going to see taking place in other countries going forward. So the Philippines is a very close friend to the U.S. And as it relates to that, I think we're going to see very favorable conditions in the Philippines as it relates to tariffs, especially as it relates to the tariffs that might be given on this latest announcement on April 2, where it's reciprocal. The Philippines doesn't have high tariff on U.S. product so you never see them get mentioned in any of this. And in Mexico, I think ultimately, we're going to be in really good shape there. 90-plus percent of what we build there is covered under USMCA. The other 10% we're working on now to get coverage under USMCA. I believe firmly that the USMCA category will not see incremental tariffs going forward. And so that's going to be a real benefit. I do think that Mexico and Canada will have to put the same tariffs on China that the U.S. does. I think that's going to be a mandate. And so we're doing a lot of work in advance to supply to source outside China on components and materials, which is something that the company hasn't had to do in the past, and it's something we're working feverishly on now to be ready for that potential reality that's coming down the road. So I think that's key takeaways.

Awesome. Thank you, Louis. Thank you, Robert. Thank you, Lau. At this point, we'll open up the floor for any questions. There's a question here. Are we out of the woods? Is the worst over?

Yes. So I'll take that. Is the worst over? I believe that in Q4, we -- all the things that had been, I think, kicked down the road a little bit, maybe some of the kind of hopeful thinking about certain pieces of business that weren't working out where customers have either declared bankruptcy in the case of Canoo or other customers were not delivering on their commitments as it relates to assets and capital equipment that we had purchased which were dedicated to them and inventory that we were trying to hold on to and hopefully trying to find homes for we wrote that down, right? And so we needed to clean up the balance sheet. We needed to be ready to go forward in 2025 to achieve much better performance metrics and to hit a goal to be a profitable company, right? So is the worst over? I think so. Are we out of the woods? I think we have a ways to go to realize the true -- to realize the performance that at least I have set in my mind. So we're not going to see that in Q1 or Q2, I think we probably need a few more quarters. But one thing I think that we're really trying to work hard on is to build some trust with you all and try to show you that we are continuously improving every quarter. So we hope to show you better numbers in Q1 that you're going to feel good about and then have a path to continue to grow beyond that.

There's another question here, Lou, that perhaps you could take. Is the USMCA, is it compromised due to Trump's big tariff to Mexico? What will be your alternative if such thing materialize?

So what President Trump has done initially, there's been a lot of changes, right? So if you track all of this, there's been 5 or 6 announcements, and so it does get confusing. But the latest scenario that we're in is the tariffs, the 25% tariff on Mexico and on Canada, those are in place for today for every commodity that is not covered by USMCA. And so food, beverage, a lot of the kind of things that don't have to do with electronics are not covered under USMCA. So he's put that off until early April, April 2, which is the same day the reciprocal tariffs get announced. And so my belief, my operating vision for the company is that the USMCA category -- but by the way, a package agreement that in the first term, President Trump and his team created, right, because it was NAFTA and there were a lot of changes and updates made to it to create USMCA. So I don't think he's going to destroy that. I don't think he's going to mess with that. I think that there has been a lot of effort to stem the fentanyl trade. And so he's using the tariff to try to get everyone's attention on that. And I'm hoping -- I can say this that right after he came in, our port in Manzanillo, where we bring most of our product in from most of our supply in from went from little to no disruption to lots of disruption. The military -- the Mexico military being there, every container getting checked. So things changed quickly. And I think the benefit of that is that Mexico and the U.S. get closer. And so I'm expecting good things for USMCA going forward.

And Lou, I can just add in a couple of more comments. Generally, with our contracts with our customers, we're not directly impacted by the tariffs. We don't have to pay the tariffs. Our customers need to pay the tariffs. So there's no direct impact on our margins. However, obviously, if our customers are impacted by tariffs, there could be a slowdown in our demand. But I just want to say from a contractual standpoint, we're protected on the tariffs by and large.

Thanks, Robert. That is true.

Any other questions? Feel free to type them in, please. Can we expect a positive net profit margin in Q1? We typically do not give forward-looking statements or guidance. But I'll give Lou some leeway here. I know he's very excited about 2025. What are your views in a general sense, Lou, on how Q1 is going to look?

Yes.

I think I'll just add a couple of sense, yes, we don't give out any numbers from a forecast perspective, but we're very optimistic on how our forward-looking numbers. And we may still continue to see some softness on the revenue side, particularly in the first couple of quarters, but we've done a lot of work on the cost side. So we expect that -- you could not see those improvements in 2024. You will see those improvements in 2025. So wait for this next meeting, where it will be a lot more positive.

Okay. We have another question here. In the AI push, can we get more flavor about your expectations on that front?

Yes. There -- this AI push is a real thing. The growth of data center business is something that's happening all of the major EMS players. And the ones that I think are performing the best are very exposed to this growth. So this growth is massive and so we have to get -- we have to find a place for ourselves in this world. I don't see us finding a place for ourselves directly with the data center builders, but I do see us having great opportunities with the folks that supply into that market today to build their products. So stay tuned for announcements on that. I think in Q1, we'll be making -- at the end of Q1, we'll be making some. And this is something that we started. This is an initiative we started when I joined in the midyear last year time frame. And we hope to be able to show some results for that in Q1 we'll see.

Another question here. How are we looking at VIA? So for VIA we are considering all options for VIA. Nothing to announce at this point, but we're also not sitting back just as we've done a massive realignment restructuring program for the IMI core business. VIA has also been doing their own rightsizing initiatives. As you've seen in the numbers, the net loss has been narrowing. So it is trending positively at least. There is still a ways to go. But yes, nothing to announce at this point, but we have very dedicated people looking into VIA and improving those numbers as well. If you have anything to add, Lou or Robert, feel free?

I think you covered it. I don't know if Lau has anything. Lau is also more involved with VIA.

Nothing to add. I think the focus now is also improving the business, and they have been rationalizing the cost and they have a lot of headcount reductions as well, efficiency improvements and so on. the revenues will be kind of soft, but it's more shifting some arrangements. I think Robert also mentioned that, but they are looking at improving the margins with those arrangements with the customers.

Okay. I think that's about it. We are coming up to the time allotted for this meeting. If anybody else has any other questions, feel free to e-mail me, [email protected] and we'll get back to you very quickly. Thank you, Lou, Robert, Lau. Thank you, everybody, for taking the time to join us. Yes. Have a good day, everyone. Thank you.

Thanks, Brian. Take care. Bye-bye.

Thank you, everyone. Bye.