Q4 2022 VOXX International Corp Earnings Call
Good day, and thank you for standing by and welcome to the box International fiscal 'twenty.
22 fourth quarter results conference call.
At this time are in a listen only mode. After the speaker presentation. There will be a question and answer recession to ask a question. During this session you will need to press star one on your telephone. Please be advised that today's conference is being recorded and if you require any further assistance. Please press star zero.
I'd like to hand, the conference over to your Speaker today, Glenn Wiener. Please go ahead.
Paul.
Good morning, and welcome to Boston Internationals fiscal 2020, Q4th quarter and year end conference call yesterday, we filed our Form 10-K and issued our press release and documents can be found in the Investor Relations section of our website.
At Www Dot box I N T L Dot com, an updated investor presentation will be posted later this week.
We will have prepared remarks, and Pat Lavelle, President and Chief Executive Officer, and Michael Stoehr, Senior Vice President and Chief Financial Officer.
After which we will open up the call for questions. John Fallon Chairman is with us today and available for questions and answers as well I would like to remind everyone that except for historical information contained herein statements made on today's call and webcast that would constitute forward looking statements are based on currently available information. The company assumes no responsibility to update any such forward looking statements.
And I would like to point you to the risk factors associated with our business, which are detailed in our Form 10-K for the period and we're at 28 2022 I'd like to thank you for your continued support of box and it's my pleasure to now turn the call over to Pat.
Thanks, Glenn and good morning, everyone.
I'll start today with a few comments on our yearend and fourth quarter, and then focus on the upcoming year.
I'm quite proud of the box team and how they performed during a year of full of economic turbulence.
And issues beyond our control that impacted our performance and that of many of our key customers.
Despite this revenue was up close to 13%.
All segments grew year over year, and we reported adjusted EBITDA of almost $40 million.
During the year.
We acquired the young Kyo and Integra brands and formed a JV with Sharp Corporation.
We established a new licensing and distribution agreement with pioneer.
We added international brands through distribution agreements at our 11 T C subsidiary.
We had our first full year owning directly to electronics, where we expanded our product portfolio and extended our leadership in automotive security and safety.
And we continued to win new multiyear OEM awards in Automotives with two New awards received since fiscal year end.
These positive developments have opened up new avenues for growth and I believe higher profitability in the future.
Shortages will continue to have an impact near term on OEM production and.
The number one obstacle for our OEM customers.
Thanks in part to our decades long relationships with many of our suppliers, we have been able to manage through many of the supply chain issues and continue to secure inventory to meet our customers' needs.
We have increased our inventory carry to allow for additional lead times in procurement and shipments.
This would require a higher volume of inventory well.
But enables us to serve our customer base better and with minimal distribution.
Although the overall container and chassis situation at the ports has improved the COVID-19 shutdowns in China are a concern and if this continues will disrupt supply for many companies. We are watching this closely to get ahead of it.
And finally, we continue to negotiate price increases with our customers in the fourth quarter to offset higher costs and believe these actions have improved our margin structure going forward.
As for fourth quarter comparisons total revenue was up modestly gross margins improved and the increase in operating expenses was primarily due to the Yankee acquisition and the establishment of Calypso, Australia we.
We were profitable with operating income of $3 2 million and reported adjusted EBITDA of $9 $3 million.
The consumer segment revenue was up $3 4 million with premium audio driving the growth gross margins improved by 360 basis points and should continue to get stronger as we ramp up production at uncle, resulting in higher profitability.
I said, our automotive segment continues to be impacted by component and chip shortages for vehicle production that led to all of our OEM customers missing delivery targets.
Revenue was down $1.9 million and gross margins declined by 610 basis points again, due primarily to the increased cost of components.
We continue to negotiate with our customers to revise pricing to reflect higher component and shipping cost and if not successful we may be forced to refuse some new orders.
Although these challenges will exist moving into 2020 three.
We expect our automotive business to grow based on all of the New awards that we'll launch over the next few years.
Additionally, this will be the third year in a row that car manufacturers have not kept up with demand and this to me is an indication that even in an economic downturn demand for new vehicles will be very high.
So let me, let me jump into the segments.
Staying with automotive.
During fiscal 2023 first quarter I am pleased to announce a new multiyear award from Oshkosh defense estimated to be approximately $45 million to start it with a potential value of over $140 million.
Vox automotive will be providing a newly developed camera system to Oshkosh that will be used in the U S. Postal service's new fleet of next generation delivery vehicles.
The initial program.
<unk> will be for 50000 vehicles and is expected to grow to 165000 vehicles over the lifetime of the contract.
Mass production is slated to begin this year in our fiscal third quarter with revenue realized over the next four to five years for the first 50000 vehicles.
We're also working on other projects related to this program noise.
Noisemakers for their electronic vehicles still sensors and in vehicle speakers, which could increase the total value.
Although no firm contracts are in place for these items.
Amazon fire TV for Ford and Lantus and the evil program with Nissan are in production and as I stated on our last call volumes are coming in less than expected due to lower production from the car manufacturers.
As you may recall.
On our fiscal 2022 third quarter call. We increased award projections for the Ford rear seat Entertainment program to $80 million and spoke of other opportunities in progress.
I am happy to report those opportunities have now turned into awards and we've revised the program up substantially adding new vehicles, while extending the program through 2027.
The new programs cover various model years for the aviator explore navigator and expedition and now brings the total expected value of four awards to over $200 million.
There are additional programs, we're discussing with Ford, which we hope will lead to more awards throughout the year.
Our relationship with Ford remains very strong.
As far as the Lantus, We've previously announced awards for approximately $400 million covering the Pacifica Wagoneer, Cherokee and Dodge Ram vehicles, ranging from model years 2022 through 2026.
In light of all of the parts shortages and delayed production, we are taking a prudent approach and expect this to be revised downward.
We were recently advised by Ti, Texas instruments that are chip allocation slated for this November has been moved back to January 23.
And therefore to combat any further delays in this program we presented another options just the lantus a newborn utilizing an alternative chip.
If acceptable we expect a quick validation and would be in position to resume resumed production in August and with minimal disruption.
If everything is agreed to we're hopeful we can catch up through the lifetime of the award as market conditions improve and based on the pent up demand I mentioned.
We should know more by next quarter.
And it was just yesterday, that's the lantus to announce that they are rescinding some of the burdens and contract terms for North American suppliers, and we are hopeful that the alternatives that we have proposed or decided on quickly.
Additionally, truck manufacturers are producing strong numbers and we have previously announced new programs with companies such as Daimler truck pack car Volvo and that will start this.
This bodes well for our OEM business with trucking companies as the numbers. They have projected are being met despite the fact that they are only accepting approximately 55% of the orders. They are getting according to the one of the most recent wall Street Journal reports.
If the Lantus approves the new board.
We should see strong growth in our OEM business. This year, if we can only ship the inventory on hand through two Q, our OEM business may be flat in the fiscal year, but will pick up thereafter.
Lastly, our aftermarket business continues to grow.
From $65 million in sales in fiscal 2020, nearly doubling to $118 million in fiscal 2021 and $136 million. This past fiscal year, our brands products and distributors continue to drive this group.
Moving on to consumer.
The consumer segment sales grew from $280 million in fiscal 2022 398 million in fiscal 2021 and this past fiscal year to $434 million due largely to the growth in premium audio.
Premium audio sales have doubled over the past two years coming in at $344 million this past year.
Sales are coming in roughly at targets, but even here we've experienced some challenges securing chips for sound bars, and Wi Fi modules used in <unk> receivers, which hindered some of the growth in Q4.
Despite chip issues, we still grew during the year and as soon as the chip supply loosens up we believe we have opportunities to expand beyond plant.
My view Ivanka, all remain very positive and we believe we can grow this group to over $200 million.
Over the next two to three years.
We have new clips products coming to market this year with expanded distribution.
We had strong growth within 11 T C and our international business performed well both in the EMEA and APAC regions, we expanded distribution in China, Hong Kong, Taiwan, Vietnam, and Thailand, and opened our first South Korean distributor insult.
In Australia, we established our own direct operation and will be more competitive in this important marketplace.
In fiscal 'twenty, two we launched the clips heritage Speaker line introduce the first clip sound bars, with Dolby Atmos technology and established the Mclaren and PGA partnerships.
We set up distribution for esoteric and TEAC brands sold through 11, Tc and captured higher market share in target EMEA regions.
The Big story of course was <unk>, which will drive growth within the consumer segment. This year.
Within our biometric segment, although sales were relatively flat for both the fourth quarter and fiscal year, we have a number of projects, which are set to launch in fiscal 'twenty. Three we have new projects beginning in the banking sector.
And in automotive and will expand within healthcare as we've discussed previously.
Additionally, we have new management in place, we have significantly reduced overhead and we expect financial improvements as we move through the year.
In closing.
There are already hurdles lining up for this year the supply chain remains a concern as securing chips will continue to be challenging.
As indicated we need to modify our program what's the lantus.
We also have the <unk> arbitration ruling which is now in U S District Court in California, with the judge expected to rule on our motion to vacate or modify the award on June 3rd.
And of course, there is inflation that is impacting the consumer.
However, we have momentum and opportunities for expansion across all of our segments.
I'm confident in our ability to generate both top and bottom line growth this year and moving forward.
The awards received the acquisitions, we have made and some of the programs we have in place or are pursuing should ensure this.
Higher volumes out on Q increased automotive aftermarket sales higher OEM business and a strong pipeline for Iraq are key factors that should drive our success our margin should improve based on the steps. We have taken this past year, providing cost stabilize we expect fiscal 'twenty three.
To be more normal in terms of our seasonality.
Lower in the first half and significantly stronger in the second half.
It should drive profitability.
Thank you and at this time I'll turn the call over to Michael for the financial review Mike.
Thanks, Pat Good morning, everyone I'll make a few comments with respect to our fourth quarter and year end comparisons and then move to the balance sheet before we open up the call for questions.
Starting with revenue fourth quarter revenue increased by approximately $1 4 million with the CE segment up $3 4 million in the automotive segment down $1 9 million.
Within consumer premium audio product sales grew by $8 million and other CE product sales declined by $4 6 million.
While the segment grew we were impacted by the supply chain and chip shortages and last year, we had more holiday promotions. Additionally, the decision was made to hold back the launch of reference and reference premiere speaker lines to fiscal 2023 first quarter.
During the year over year sales increase was driving the year over year sales increase was approximately $20 million of higher sales through 11, PC, which includes the <unk> acquisition and revised distribution and license agreement with pioneer and higher sales in Germany.
Within automotive OEM product sales were up $1 5 million, an aftermarket product sales declined by $3 4 million.
The new rear seat entertainment programs with Ford Atlantis, and Nissan helped drive OEM.
As Pat noted volumes were lower than forecasted due to the supply chain shortages, which also impacted our aftermarket business.
Driving OEM was also higher volumes with the Oems producing trucks.
Comparing the annual period, we reported sales increase of $72 3 million or 12, 8%.
The automotive segment was up 22, 4% with OEM product sales up over 40% and aftermarket product sales up over 15%.
OEM rear seat entertainment sales grew by $13 3 million as a result of the new programs.
We also had a $4 $9 million increase in sales of OEM automotive safety electronics.
The <unk> segment was up 9% with premium audio product sales up close to 15% and other CE product sales down eight 6%.
The big driver of growth was our <unk> subsidiary with sales growth of approximately $45 7 million year over year.
Moving to gross margin.
For the fourth quarter, we reported consolidated gross margins of 26, 8% an increase of 70 basis points.
Automotive segment gross margins were down 610 basis points, and we're inversely impacted by higher supply chain, our supply chain costs.
And additional costs related to the new OEM programs.
CE segment gross margins improved by 360 basis points due primarily to higher sales to 11 Tc.
For the annual comparisons consolidated gross margins declined by 140 basis points, but gross profit increased by $10 $9 million.
Automotive segment gross margins declined by 40 basis points and CE segment gross margins declined by 180 basis points.
Net operating expenses.
For the fourth quarter operating expenses increased by $2 2 million we.
We incurred higher engineering and technical support expenses of $1 7 million related primarily to the <unk> acquisition and a 900000 increase in general and administrative expenses, which were driven by higher depreciation and amortization expenses and office expenses.
Selling expenses increased by approximately $500000 also in last year's fiscal fourth quarter.
We incurred a $1 3 million intangible asset impairment charge related to a trademark and our CE segment.
In fiscal 'twenty two versus fiscal 'twenty one.
<unk> expenses increased by $25 5 million.
We had higher head count and related salary and payroll expenses higher advertising and wealthy higher office and occupancy costs related to the new <unk> subsidiary and a full year of dei subsidiary expenses.
And higher depreciation and amortization.
The bigger drivers the bigger drivers of the increase were higher engineering and technical support expenses up $10 6 million.
And which were primarily related to direct labor and related expenses related to head count and higher R&D expenses in support of some new OEM programs and new products.
Lastly, we incurred acquisition costs of $3 6 million up $3 3 million year over year. This relates to the <unk> transaction in a joint venture established sharp.
As an offset we incurred also incurred $1 3 million intangible asset impairment charges in fiscal 'twenty, 'twenty, one, which I just covered.
With respect to total other income and expense the $2 $3 million declined for the fourth quarter comparison, primarily results to lower income at our 50 50 joint venture assay reported as equity and income of equity Investees.
For the annual comparisons this increased by approximately 500000.
Staying with the annual comparisons you'll see the $39 4 million expenses labeled in term Arbitration Award.
This relates to the <unk> arbitration, which Pat spoke about earlier.
No cash has been paid yet, but it is recorded as an expense on our income statement.
Lastly, we reported adjusted EBITDA of $9 3 million in fiscal 2022 fourth quarter compared to $11 $9 million in the comparable fiscal 2021 period.
And adjust.
Adjusted EBITDA for fiscal 2022 came in at $39 3 million as compared to $47 2 million in fiscal 2021.
You can find a reconciliation of net income attributable to box to EBITDA and adjusted EBITDA and both our press release and Form 10-K.
Moving to the balance sheet, we ended the year with $27 8 million in cash and cash equivalents as compared to $21 2 million as of November 32021, and $259 4 million as of February 28 2021.
As Pat indicated earlier, we are using cash due to due to inventory purchases based on increased lead times and securing inventory for customers anticipated needs during the year.
We expect to use our cash and depending on the outcome of the CCAR arbitration utilize our bank facilities throughout the first half of 2023 to fund operations.
As we are returning to more historical seasonal patent cash and sales should ramp up in the second half of the year Accordingly.
Our total debt position was $13 2 million as of February 28, 2022.
<unk> to $13 1 million as of November 32021, and $7 1 million as of February 28, 2021.
Our total debt consists of $6 6 million for a Florida mortgage.
$1 9 million for a euro ABL for box, Germany.
And $4 7 million related to the shareholder loan payable to sharp as part of the joint venture capital structure.
The latter two are German ABL and channel alone were not present in prior year ago period.
Total long term debt less cash debt issuance costs stood at $9 8 million as of fiscal 'twenty, two compared to 6 million for fiscal 'twenty, one comparable periods.
This concludes my remarks, and operator, we are ready to open up the call for any questions.
Thank you Mike as a reminder.
Okay.
As a reminder.
<unk> you mean, you will need to press star one on your telephone.
Drawing your question press the pound key please stand by we compile the Q&A roster.
Our first question comes from the line of Tom <unk> from D. A Davidson your line is open.
Great. Thanks, Pat So I have three questions I'll go one at a time. So the first question I have is can you talk about your efforts to mitigate inflation beyond increasing prices.
Yes.
We talked about.
Price increases that we've had but we've also.
Move production.
In some categories outside of China to get away from some of the tariffs.
Lower cost for us we've also.
And not only with the Atlantis, but within the entire group within consumer or the automotive side have been redesigning boards through.
Out the year.
To get to chips that either we can.
Procure or get to pricing of chips that are lower so a host of different things have been going on to mitigate.
The cost increases that we've seen.
We don't expect to see that much of an increase over last year four.
Container shipments.
But we are starting off the year at a much higher point than we started off last year four.
Container cost and freight in.
We are dealing with.
Surcharges on outbound freight inbound.
Inbound as well.
But we believe that we're doing everything we can to mitigate.
The increases and not and avoid.
Further increasing prices.
Excellent.
The three three questions is can you talk about consumer demand across product categories.
Automotive consumer electronics, it sounds like what you're describing is that demand is still very strong across all your product lines, but I just wanted to hear that from you.
Yes.
We have strong demand again, where in many cases I'll take consumer first.
We're still ramping up production of bond deal and we.
We believe that the.
We're not meeting demand at this particular point.
And once we're able to start bringing up production, we will be expanding our distribution.
Because there are many markets now that are essentially on hold.
So we see strong demand there.
Then certainly the.
The demand for new cars is very very high and it really depends on.
A loosening up of the chip situation with the car manufacturers.
I made I made mentioned that even in an economic downturn. They have not met demand. The demand is just building.
So.
On all sides of our business.
We see good demand on the biometric side.
With all the cyber security and everything we see strong demand and we do see more companies moving to a biometric solution.
Excellent that's a third and final question.
Wanted to hear your current thoughts on M&A. It seems like youre going to be if you haven't already.
Senator with some very attractive opportunities the signaling that valuations are starting to come down.
Mhm.
We've always been looking.
And we have our investment bankers that are always bringing us potential acquisitions that will continue throughout the year.
If we if we decide that we want to move ahead on a particular company.
We have the financing in place that would allow us to do that.
But first things first we want to make sure that we can bring in sufficient quantities of our existing products and everything else to meet the.
The demand that we have.
Great. Thanks for taking my questions Pat.
Okay. Thank you.
Our next question comes from the line.
Brian <unk> from Imperial capital.
May begin.
Yes. Thank you very much so let me start off with the settlement and then I'll jump over to some other questions.
Potential settlement.
It's roughly $40 million that is kind of a worst case scenario is that correct.
Yeah.
Okay and would that be paid out as a lump sum as a worst case scenario lets say a year or two after all the appeals process.
It goes through kind of the worst.
Yes, if we were if we were to lose.
Mitigating.
This award.
It would be paid out once that decision is made.
Okay, and then in terms of revenue impact.
Because of this how does this impact you in terms of having to change your product or anything else in the near term.
In terms of kind of 2023 revenue.
And this this cases sold.
It does not impact us.
At all from a revenue standpoint.
Okay.
Good then I'll move on to another line of questioning real quick.
In terms of your long term guidance that you gave a little while ago.
Getting to $1 billion and.
And talking about that.
That kind of growth or are you still out there behind that and you still see that.
That is the Gulf.
Absolutely you know with the.
Additional awards that we've won from Ford now.
We are talking to a number of other car manufacturers that.
Haven't have interest in purchasing from us.
Talking to them, if we can work out a deal we'll be adding to that business.
And as I've said repeatedly we expect that the <unk> business for us could could exceed $200 million in sales as we ramp up as we are able to procure more parts and everything else. So when I do the math.
From where we are to add the additional business. Most of the awards that we've won in automotive are ahead of us. So we expect to see strong growth in the automotive business as these programs launch as the car manufacturers get back to somewhat of a normal market.
Where they can produce the number of vehicles that they want to produce that all bodes well for sales increases over the next few years and when I do the math.
We will exceed.
$1 billion.
Okay and then last question is on 'twenty three guidance. It was kind of open ended.
Can you talk about single digit growth double digit growth what kind of margin expansion is there any parameters that you could I know theres a lot of unknowns out there given the supply and there's a lot of unknowns again demand remains strong.
We could see double digit growth.
You know again, it all depends on whether or not we're going to get the componentry that we need which we think we will the big caveat.
Thats out there is whether or not we have COVID-19 shutdowns, which starts delaying.
Shipments out of the ports.
Which which.
It's really unpredictable what China may do with the Covid policy. So those are the things that that are out there, but the demand remains strong in each one of the segments that we're in.
As I mentioned.
Lantus program, which they agreed to R. R.
Our modification on our proposal for a new board and chip.
We can have that ready for them in August .
And that would give us good growth because right now where it stands with the Ti and the chip allocation, we've received they're going to be out for the second half of the year. If they don't move ahead with our proposal.
No.
They do that I think will have significant growth this year.
Great. Thank you.
Thank you Brian .
Once again that strong one for questions online.
Our next question comes from the line of Alex Albertini from extra capital.
Begin.
Hi, there guys I'm just wondering can you just provide us with a bit of color on the inventory builds so I'm just looking at the.
Inventories actually have been up over the quarter and through the holiday period.
And you know that.
One thing so we've actually mentioned this last time is we track.
Your imports coming through sources like Penchi that it looks like you're bringing in less product, but but but inventories slightly up and then the other question I had is if you can.
Tell us a bit more about what <unk> has contributed to top line. So far so when I break down that top line figure this quarter.
How much of that is coming out of the new business, you've acquired and I'm just trying to get a feel for what like for like sales are stripping out on Q4 adjusted gross yield.
Okay, but how do you want me to take the inventory.
Yes, you can talk about the inventory base with the inventory position of the company approximately.
Greater than 60% is related to the consumer group.
And of that we have a larger portion of float than we normally do and that's the inbound product that's coming into us because of our transit times have moved out.
Okay, I see okay Ari.
Gary and the extra 60 days of inventory just to be it used to take US 30 days to bring in inventory from overseas now.
Order to be sure of your your guidance to your customers, who are now being forced to bring give ourselves 90 days.
I know you are you.
On purely on exposed to spot rates or do you have some some capacity attracted.
No. We have we have contracted carriers and things like that we go on spot rates.
Sales spike in or this.
The issue with no marketplace stuff like that okay as far as far as <unk> through our 11th TC operation, We grew by almost $47 million in sales year over year.
So.
We expect.
That would continue.
To grow.
At very strong levels, the only thing holding us back.
<unk> is the ability for our manufacturing partner sure.
To be able to ramp up production part of the problem of ramping up production, obviously use getting secure and the chips and parts and everything that we need but it is getting better every month.
And we anticipate that.
The supply that we will receive will give us significant growth within this category.
There are many markets.
Where inventory is dry and as soon as we're able to.
<unk> been able to secure that we'll be able to secure some some long term business in those marketplaces.
Okay. Thank you.
Thank you once again, that's wonderful questions.
For questions.
And I'm not showing any further questions in the queue. This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.
Thank you all for your interest in blocks I look forward to this year and I appreciate the time you've taken today.
Good day.
[music].
Okay.
Yes.
<unk>.
[music].