Q1 2023 VOXX International Corp Earnings Call
Speaker 2: goodday and thank you for standing by. Welcome to the box. International fiscal 2023 first quarter results conference call. I would now like to hand the conference over to your speaker today: Glenn, winner with Investor Relations.
Speaker 3: Thank you, good morning and welcome to box international's fiscal 2023 first quarter conference call. Yesterday we thought our Form 10 -q initied our press release, and those documents can be found in the Investor lation section of our website, ATW voxinpl com.
Speaker 3: An updated presentation will be posted later this week.
Speaker 3: Today we will have prepared remarks from patlevelle President, Chief Executive Officer, and Michael stotorre, Senior Vice President and Chief Financial Officer, after which we'll open up the call for questions.
Speaker 3: I'd like to remind everyone that, except historical information contained here, end 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'd like to point you to the risk factors associated with our business, which are detailed in our forms: 10-K for the period ended February 20 eighth two thousand and 20 two.
Speaker 3: At this time. It's my pleasure to turn the call over to patlevl that.
Speaker 4: Thanks going, and good morning everyone.
Speaker 4: Last quarter, I provided a lot of detail about our segments and outlook. I ended my remarks noting that we expected fiscal 2023 to be more normal in terms of our seasonality, with the second half driving profitability, and that remains the case: a slower start to the year and, we believe, a strong second half, even in light of slowdown in consumer purchases and car sales.
Speaker 4: In a few minutes, Mike will provide a Q1 financial recap before we open up the call for questions.
Speaker 4: My focus today will be on business segments and some of the key growth drivers and near-term hurdles.
Speaker 4: Starting with automotive. As you know, the global gasthirity of chips is hitting the car manufacturer is particularly hard and it continues to impact both our OEM and Dam the market automotive business.
Speaker 5: Our OEM customers are producing what they can, but the lack of chips is leading to much lower car production and it is estimated to be down 20% year-over-year, coming in between 13 per and 14 million new light trucks and cars.
Speaker 5: In fact, the last time car sales drop below 14 million was in two thousand and eleven.
Speaker 5: Additionally, since a significant percentage of our aftermarket business is done with new carard dealers.
Speaker 5: The shortage of inventory on their lots is also impacting our automotive aftermarket sales.
Speaker 5: We expect the chip shortages to remain well into 2023, but we are working through this and still expect growth in the segment, based on projected orders from customers and new programs that are expected to launch in the balance of this year.
Speaker 5: While as shortages will persist, we are starting to see a slowdown in other industries that utilize chips, like computers, laptops and crypto mining machines.
Speaker 5: And if this continues, there is the possibility of several chip manufacturers pivoting and allocating more chips to the carmakers, which could alleviate some of the near-term pressure.
Speaker 5: Another area that has been a concern is the run-up in labor costs in the United States, which has negatively impacted OEM gross margins.
Speaker 4: Although we have mitigated some of the impact of price increases more as needed to improve margins.
Speaker 4: And thus we will move some of our OEM production lines to Mexico, where labor is roughly half the cost. We expect our facility to be ready in August and to be in a position to start shipping products in the start of our fiscal third quarter.
Speaker 4: These are the hurdles within the Automotive segment near term.
Speaker 4: Our longer-term outlook based on the programs we've been awarded RFQ's pending our relationships, plus the massive pent-up demand for new cars is very strong.
Speaker 4: And that is because over the past approximately three years, we have been awarded $75 million in new OEM awards, most of which are in front of us over the next five years.
Speaker 6: We have some large fqrfq' still pending, which could represent another three million of awards or more over the same time frameon our year-end call in May, I talked about the new awards with Ford and with Oka's defense, both of which were Q1 evense. The oshosh award was estimated to be 45 million to start and has a potential value of over one hundred and forty million.
Speaker 4: I also spoke last quarter about other programs we were pursuing with them and I'm pleased to announce that we will be supplying osh tilt sensors, shock sensors in vehicle speaker systems and an electronic vehicle sound system for their EV modelsthe initial awards received now total approximately six million over the first five years of the program.
Speaker 4: A note, however: this is a 10 -year program and this only represents the first tranche.
Speaker 4: We expect to complete validation in our fiscal fourth quarter and we will begin realizing revenue in fiscal 2024 first quarter.
Speaker 4: With respect to Ford, our relationship remained strong beyond the new awards we announced, which total over two million through 2027. we continue to discuss additional programs.
Speaker 6: While nothing is official yet, we are optimistic that we're well positioned on a new RFQ we are pursuing, which could be awarded within the next one to two quarters.
Speaker 4: As for scallantis, as you know, we've been awarded a significant amount of business, approximately four million of awards running through 2026. however, we have still not fully resolved the chip challenges which may impact some of these programs.
Speaker 4: As reported last quarter, we presented another option to them.
Speaker 4: A new Board utilizing an alternative chip and today I'm pleased to report that sanus has approved the design and NRE to develop this and we will be working to validate the Board.
Speaker 6: Obviously depending on how fast we can move new price negotiations, we should be in a position to start catching up in our third quarter.
Speaker 4: Our Automotive segment is poised for strong growth in the coming years, with approximately four million in awards with stlantis, 200 with Ford, six million awards with oshksh defense, over three million in awards with Nissan, three million in awards at VSM with heavy duty truck manufacturers and over three million award in awards for accessory security and remote starts with multiple manufacturers.
Speaker 4: These are firm awards in our pipeline between now and 2026 for the most part, and we have quotes in place with an additional awards in excess of three hundred million.
Speaker 4: And we are confident in our position to secure them, giving our technology and the limited competition in this space.
Speaker 4: Therefore we could be looking at over one billion in OEM awards over the next five years, and this is what's driving our optimism, despite near-term supply chain issues.
Speaker 4: Moving on to the consumer segment, consumer segment sales were down in Q1 both for premium audio products and other CE and accessory lines, largely due to many of the big box retailers cutting inventory immediately after their first quarter results.
Speaker 4: As our fiscal first quarter starts in March, this had a direct impact on our Q1 results.
Speaker 4: Demand from consumer look consistent, but the big box retailers simply just cut back on buying, and we are watching this closely and'll adjust purchasing schedules to keep pace with consumer sentiment.
Speaker 6: Although segment revenue came in lower year-over-year, it did surpass our internal projections for the quarter.
Speaker 6: Despite some economic pressures, there is positive momentum building.
Speaker 6: Demand for unyo and pioneer products has been very strong since we completed the transaction in September of last year.
Speaker 6: Back then we took steps to secure the longer lead items, some as much as 42 weeks out, working through the supply chain issues as best we could.
Speaker 4: Many of these items start coming in towards the end of the summer and we will be positioned in the second half of the year to ramp up production and grow revenue.
Speaker 4: And support not only our North Americans and Australian customers, which we have been doing for the past year, but begin expanding worldwide sales of these products where interest remains high.
Speaker 6: Near term. The addition of the Alio Integra pioneer pioneer Elite, tiac and esoteric electronic brands should help offset any pullback by the consumer and we expect to significantly grow our overall audio business.
Speaker 4: In addition, over the next two quarters, new product launches should trigger an increase in demand for clips and yammo products, as we will be introducing in all all new models across several categories, including our new reference line, yamo home theater systems, portable speakers, sound bars and subblers.
Speaker 4: As for the Biometric segment, while revenue was small this past quarter, there were several positive developments which, over the next several quarters, should start changing the financial picture of this segment in a positive way.
Speaker 4: During our fiscal 2023 first quarter, the Miami automoall and installed a complete yelock perimeter access program for building setaccess network closets, hazardtorous material location, garages and lots. They plan to roll out the elock program to an additional 25 dealership locations that they own. We also plan to add this program to our automotive aftermarket group.
Speaker 4: As to the status of the health care company I've talked about for roughly past two years. The testing phase has continueed to go well and we are on track for a soft launch towards the end of fiscal 2020 -three to get systems into the field. Since this is a completely new machine for our customer, it will be monitored to make sure all functions of the machine are working properly and then they plan a full commercial launch.
Speaker 6: I'm hopeful that before the year is out, we will be able to disclose the details both on the products and the customer we are targeting. Another opportunity is through maribeni Corporation, our partner since 2020, who is distributing EyeLock technology in Japan, with a focus on the broader Asia Pacific market.
Speaker 6: We are currently working together with them developing a logical access product for farmer- four point zer in Japan and expect more opportunities with maribi as Japan opens up from COVID-19.
Speaker 6: At this point. This sums up the activity at box during the first quarter and what we are facing in terms of both headwinds and opportunities.
Speaker 4: The second quarter will be a bit light, given some of the OEM challenges and continued chip and vehicle shortages in automotive and slower purchasing by some of the big box retailers as they adjust inventory positions.
Speaker 7: And of course.
Speaker 4: Consumer confidence as we navigate inflation and recession wors.
Speaker 5: But as I've said, we have some positive offsetting factors and believe the third quarter, based on the inventory we have on hand or aflowat, will provide us with everything we need to deliver a strong second half of the year.
Speaker 8: Hello, they are for point.
Speaker 9: exc me at this point. I'd like to turn the call over to Michael for the financial review: micel.
Speaker 10: Thanks PAT. Good morning everyone. I'll start with a recap of our first quarter results and then provide a balance sheet update as of quarter-end, along with a few other corporate updates, before we open up the call for questions.
Speaker 10: All comparisons are for the fiscal 2023 and fiscal two and 22 first quarters ended may thirty-one.
Speaker 10: We reported total net sales of 128.7 million down eight point three million or 6%.
Speaker 10: Each of the segments reported lower sales for the reasons PAT outlin in his remarks: predominantly supply chain constraints, chip component and part shortages, lower vehicle production and higher inventory at some of the big box retailers, resulting in lower purchases during the quarter.
Speaker 10: Our automotive electronics segment posted sales of 39.6 million down three point one million or 7%, and.
Speaker 10: Oem product sales were up one point eight million and aftermarket product sales were down four point nine million.
Speaker 10: Our consumer electronics segment posted sales of 88.9 million, down five point two million, with premium audio product sales down one point six million and CE accessory sales were down three point five million.
Speaker 10: And Biometric segment sales were approximately one thousand as compared to two thousand in last year's fiscal quarter.
Speaker 10: Consolidated gross margins were 26%, down 100 basis points.
Speaker 10: This was principally due to the automotive electronics segment, as gross margins declined 480 basis points due to higher material and shipping costs, increases in tariff and lower than normal margins in some of our rear seat entertainment programs due to the above factors.
Speaker 10: As new programs come online and as we work through chip design and pricing with salanthis, we expect segment margins to improve.
Speaker 10: Consumer Electronics segment gross margins improved 80 basis points and this was principally due to the higher sales of acio and pioneer products.
Speaker 10: While the Biometric segment gross margins improved 480 basis points, the dollar impact was essentially flat to comparable period.
Speaker 10: Total operating expenses of 39.9 million, increased by two point nine million or 8%.
Speaker 10: Selling expenses increased by approximately eight thousand, with seven thousand related to the 2022 consumer electronics cell, which was held in person this past year and held virtually in the period prior fiscal year period.
Speaker 10: General and administrative expenses increased by approximately five thousand, as we had a three thousand increase in depreciation and amortization, principally as a result of the aky K K purchase agreement which closed September 2021.
Speaker 10: We also had a three thousand increase in benefit expenses, higher fees related to tax and licenses of approximately two thousand and a two thousand increase in insurance expenses.
Speaker 10: As an offset to these increases, professional fees declined by approximately six thousand due to lower legal fees incur in the quarter.
Speaker 10: Legal fees relate to the seguard arbitration case and the absence of consulting fees related to the ilyelock distribution agreement were galvanized in prior fiscal year period.
Speaker 10: Lastly, engineering and technical support expenses increased by two point two million, principally as a result of the iok K purchase agreement and outside labor for certain projects.
Speaker 10: As a result of lower sales and gross margins and higher operating expenses, we reported an operating loss of six point seven million as compared to an operating loss of four thousand in fiscal 20- 22 first quarter.
Speaker 10: As Pat mentioned, we expect to show some improvement in the second quarter and consistent with historical seasonality profitability in the second half of the year, especially with onio production ramping up.
Speaker 10: Total other income expense net was, is a loss of two point two million in fiscal 2023 first quarter as compared to total operating income net of two point six million in the comparl fiscal two thousandy and 22 period.
Speaker 10: For the same periods, interest and bank charges was 730.528 million.
Speaker 10: And equity and income of equity investes, which relates to our 50% noncontrolling ownership, interest and assa electronics, was one point six million compared to two point seven million prior core prior year coarter.
Speaker 10: assa has experienced the same headwinds as we have this quarter. In fiscal 2023 23 first quarter, we recorded an additional accrured interest expense of one million related to the interim arbitration award which is pending the judge's ruling.
Speaker 10: Other net which includes a net noncash foreign currency translation loss of two point four million.
Speaker 10: The majority of this translation loss was mainly due to the shareholders and working capital loans in the akyo K K joint venture, which was carried in Japanese yen.
Speaker 10: The translation loss was caused by the recent collapse ity N versus the dollar. Net loss attributable to box was six point five million as compared to net income attributial box of two point seven million and comparable fiscal 2022 period.
Speaker 10: Lastly, adjusted EBITDA in fiscal 2023 first quarter was a loss of approximately $1 thousand as compared to an adjusted EBITDA in fiscal 2022 first quarter of eight point two million.
Speaker 10: This adjustment includes three point nine million and nonoperating cash for the FX losses and interim award expense.
Speaker 10: Moving on to the balance sheet.
Speaker 10: As a may thirty-first 2022, we had cash and cash equivalents of five point seven million as compared to twotwentytwenty-seven, eight thousand as of February twenty-igh twent thousand twenty- two.
Speaker 10: The principal use of cash was increased. Increased inventory purchases due to the state of transportation issues we discussed.
Speaker 10: As a result, we increased our inventory carry by an additional sick gcase.
Speaker 10: Additional cash was used for the usual paydown of accounts, pable and accrued expenses from the fiscal 2022 fourth quarter.
Speaker 10: Total debt as of May 31 twentthousand and 22 was 16.3 million as as compared to 13.2 million as of February twenty-eighth twent thousand and 22.
Speaker 10: This increase is primarily related to the five point six million increase in our domestic credit facility used for inventory purchases.
Speaker 10: Partially offsetting. This is the reduction in our euro asset-based lending obligations for vox Germany.
Speaker 10: A quick note regarding the cguard Litigation.
Speaker 10: As noted in our press release and Form 10 -q filing, in February 2022, we recorded an accrual for the ininterim arbitration award in the amount of 39.4 million.
Speaker 10: During the three months ended may thir-one twentthousand 22, we accrued an additional charge of approximately one million representing interest due on the awards, which will only be paid if confirmed and not vacated by the U's district court or an appellate court.
Speaker 10: On March fourteenth, ciguard filed the petition to confirm the partial final award and on April twenty-fifth we filed the opposition to their petition.
Speaker 10: On may thirty-first, the court ordered the matter taking under submission for decision without oral hearing.
Speaker 10: We have been advised by counsel that a judge's ysician could take weeks or months, at which time we will provide an update.
Speaker 10: This concludes my remarks operator. We're now ready to open the call for questions. Thank you, and as our reminder to ask a question, simply V Star one on your telephone. one moment Please, while we compiled a QA roster.
Speaker 2: My first question is.
Speaker 2: My moment and please.
Speaker 2: From Brian broughttenber with Imperial capital. Please go ahead.
Speaker 11: Yes Thank you very much. On a couple quick questions, I believe you said in your comments that second quarter is going to be slightly better than first quarter. Is that what I heard? Just want to make sure that you heard the comments correctly.
Speaker 6: Yes Brian , normally. Again, going back to the seasonality of our business, second quarter normally improves over first. The one caveat is whether or not the OEM manufacturers are able to continue the to take the inventory that they've projected for the quarter.that's something, when we get their atreleases would indicate what they're going to be able to build based on what chips they have to build cars. So that's the only caveat for the quarter.
Speaker 11: Okay So in the automotive you expect to see some improvement sequentially? How about the consumer division? Do you expect to see some sequential improvement from first quarter?
Speaker 6: Yes we do, would normally improve over the second quarter, over the first. Normally the first quarter is the weakest quarter of the year when we go back to a more seasonal business model, which we believe now that a lot of the pandemic impacts that we've had are really behind us. From how it change the quarters.
Speaker 4: We're seeing as first quarter normally our weakest bills in the second and then bills strong into the third and then fourth quarter is normally better than the first and se.
Speaker 11: Okay and then in terms of gross margins- and automotive was obviously weak in the first quarter, you expect to see a sequential improvement also, right?
Speaker 6: Well the thing is that that we in some areas we're still negotiating price increases, But as we move some of the production out of the U's, we expect that we'll be improved margins somewhat and get back to some historical level of margins within the OEM space.
Speaker 11: Okay and then in terms of foreign currency, that was a big hit in the first quarter. It was that a onetime event. You would expect more foreign currency losses like you experienced. I think it was two point two million UST, really.
Speaker 4: It's really coming from the strength of the dollar. The end was probably around 10.51 thousand sometime this year, last year. This year it's now sitting at 136. So we had to Mark to market the credit facility that we had given to our own operation. And then the euro, which is essentially at parodity the first time since in 20 years.
Speaker 4: That's going to give us lower profitability as we convert euro into dollars in our European operation.
Speaker 12: Okay and then yes, and then last quick question in terms of shipping container cost. Pre pandemic you were a couple thousand dollars a container. I think that you went do it high in the 20 -plus thousand per container may be higher where you now. What do you see in terms of shipping costs on a per container basis?
Speaker 5: Depending on where it's going- East Coast, West coast- it can range from anywhere from 11 to 16- 17 thousand trick container. It is still high when we compare to what the historical pricing was, but it doesn't appear as if it's going to be jumping up into the two thousand range as we see the consumer pullback and as we see lower sales in the United States.
Speaker 4: I think that you're seeing that across the board with the Fed making their changes. It will destroy some demand and that should moderate any increases that we see as we move into the Christmas holiday season.
Speaker 5: The other thing we, because of the issues, we brought a lot of product in early to make sure that we had it. So, between what we have- an inventory- and what we have- a float that is due to arrive just prior to the holiday season, we feel pretty comfortable. We have everything that we need, only in the Barn for Christmas.
Speaker 13: Great Thank you. Thank you one woman for our next question.
Speaker 14: Next question is from Victoria James with the a Davidson, Please go ahead, Victoria.
Speaker 14: Next question is from Victoria James, with the a Davidson. Please go ahead, Victoria. Thank you for.
Speaker 15: My question. I've got two questionions. I will ask them what your updated thoughts on how inflation is impacting your business and to what extent price increases are mitigating that impact.
Speaker 16: All right. So the question: I can hardly hear you, but you're saying that the price. You're asking whether the price increases that we've introduced over the past year is that mitigated some of these issues.
Speaker 14: operatated. Could you have or ask the question like you barely here. Yeah Victoria Please, if you can get closer to your microphone. Your volume was kind of lowyes.
Speaker 17: soris, this Oka little better. Yes, Thank you. Ok, Sorry about that. Yes, I was asking: can you give your updated thoughts on how inflation is impacting your business and to what extent price increases are mitigating that impact?
Speaker 5: Well obviously, when you look at some of our business, which would be the more promotional items and things like that- when the consumer is facing fuel, food and increased home prices, we see a slowdown at that level. We are seeing it now. A lot of the big box retailers had seen it and the price increases that we've had.
Speaker 4: Has helped increase and improve the margin structure and offset a lot of the higher cost of bring products in, but they're not mitigating any volume drop to do to the consumer pulling back.
Speaker 4: At this particular point, we have not seen any strong pullback from, let's say, the luxury market, where a lot of our premium audio products are sold, and that remains to be seen. If the Fed continues the tghtan and the market and the stock market continues to go down, the wealth effect would effect the luxury market at some point.
Speaker 6: We haven't seen that in any major way at this point. And then, if I may ask another question, my second question is: given persistent challenges, how should we think about the role of China in your supply chain, as well as your ability to diversify out of China in the future?
Speaker 5: welland since the tariffs was put in place by the former administration. We have moved a lot of our manufacturing out of China into either back into Malaysia or Taiwan or into Vietnam and some into Mexico. So we're trying to mitigate that as much as possible however when you really look at the situation.
Speaker 6: A lot of the raw material. No matter where we're producing the product and doing the finished goods, a lot of the raw material is still coming out of China. We are cognizant of the situation. We are trying to move as much as we can So that we have a good balance within our manufacturing capability across the world in locations that have the capability of doing the type of manufacturing we need.
Speaker 13: Thank youthank you, and I'm not showing any further questions in the que sir.
Speaker 4: Okay I want to thank you for joining us this morning and the interest that you have in box. I know it's. There's a lot of headwinds facing the entire economy here in the United States and across the world, but be rest assured that we are doing everything that we can to mitigate some of these and, as I indicated, based on the pipeline that we're looking at going forward.
Speaker 6: The increased business with the OEMs as they get past some of their problems, and the addition of the new electronic lines that we have within premium audio, we think we can go a long way and offsetting weakness and still generate good growth in this fiscal year. So thank you and enjoy the rest of the day.
Speaker 2: Thank you and this concludes today's conference. Thank you for participating in your may now disconnect or moment and pleasethe conference will begin shortly to raise your hand during QA. You can dial Star one conference dial and 10 and press pound when finishedthe conference will begin shortly. To raise your hand during QA. You can dial Star one