Q3 2023 VOXX International Corp Earnings Call
Speaker 3: Good day and thank you for standing by. Welcome to the VOCS fiscal 2023 third quarter results conference call. At this time all participants are in a listen only mode. After the speaker's presentation there will be a question and answer session. If you ask a question during this session you will need to press star 11 on your telephone.
Speaker 4: Please be advised today's conference is being recorded. I would now like to hand the conference over to your hosts, Glenn Wiener, Investor Relations. Please go ahead.
Speaker 5: Thank you, Michelle. Good morning and welcome to Box International's fiscal 2023 third quarter conference call. Yesterday we followed our Form 10Q and issued our press release and this week we'll be posting an updated investor presentation. Documents can be found in the investor relations section of our website at www.boxintl.com.
Speaker 6: information contained herein. Statements made on today's call-in 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 Form 10-K , for the period ended February 28, 2022.
Speaker 7: Thank you for your continued support, and it's my pleasure to now turn the call over to Pat.
Speaker 8: Thank you, Glenn, and good morning, everyone.
Speaker 9: As you know, we had the CES show last week and I just returned. I have to say it was great to see that the show was back in full strength with an estimated 120,000 people in attendance this year. As many of you know, CES by far is the biggest event of the year for the CE industry.
Speaker 10: Last year while we were live at the show, the attendance was a fraction of what it normally is. And getting back to close to pre-COVID numbers is good for the industry, and we hope a sign of things, good things, to come.
Speaker 11: As for our Q3 results, our sales came in approximately 25% less than Q3 of last year, and roughly around 25% less than what we projected.
Speaker 12: what happened
Speaker 13: On the automotive OEM side, our customers still have difficulty securing chips. In one case, with Stellantis, we lost production and revenue for part of November and most of December as a result.
Speaker 14: We plan based on customer projections, and when they can't keep production lines up and running due to supply chain issues, it impacts us.
Speaker 15: In the automotive aftermarket and in the CE segment, declines were primarily driven by softness in the economy, higher interest rates, a slowdown in discretionary spending, and how the retailers have been responding.
Speaker 16: We're anticipating the most recent moves by the Fed will continue to slow the economy as we look out over the next few quarters. So again, we should have more sales of Ankyl and Pioneer products, which should help offset some pressure and lead to growth and bottom line improvements.
Speaker 17: Our gross margins were down 90 basis points versus last year, but up 270 basis points sequentially compared to the second quarter.
Speaker 18: We've instituted a number of programs to improve gross margins, not just price increases, and we expect margins to continue to trend upwards.
Speaker 19: Our operating expenses were down over 20% compared to last year's third quarter and over 11% sequentially.
Speaker 20: We have been vigilant in our capital allocation and we've taken a lot of costs out of our business.
Speaker 21: Now, similar to when COVID hit, some of the reductions will be temporary and we will be adding some expenses back as our business normalizes and we see more stability in the economy. But, we're looking at every part of our operations to see where we can reduce things.
Speaker 22: improve efficiencies and lower our cost base. So sales were below expectations, margins were down year over year but trending upwards, and we significantly lowered our overhead resulting in an operating profit of 2.3 million and an adjusted even of 9 million in the quarter.
Speaker 23: As for the segments, I'll start with automotive.
Speaker 24: automotive sales were down 13 million with OEM sales up modestly and aftermarket sales driving the decline.
Speaker 25: While OEM grew year over year, growth was held in check by the supply chain issues faced by our customers, and I estimate we lost between $9 and $10 million of projected sales, with the biggest shortfall at Stellantis.
Speaker 26: Rear seat entertainment programs with Ford and Nissan are progressing but at lower volumes than projected, and we have new vehicle models coming online over the next few quarters with several customers.
Speaker 27: Additionally, new programs with Subaru for Remote Start kits help drive the year-over-year improvement.
Speaker 28: We were also awarded a new interior lighting program from another major OEM, an award estimated to be approximately 30 million over five years.
Speaker 29: We expect to begin this program in Q4 of this fiscal year starting on a few vehicles with a plan to expand onto six or more over the lifetime of the award.
Speaker 30: As for the aftermarket, we expected some softness, but not at the levels we experienced.
Speaker 31: Several categories were down due to less foot traffic at retail, but it was really the aftermarket security category where we had the biggest shortfall.
Speaker 32: Softness at retail hurt sales and a good portion of our distribution base had inventory left over from last year. So the volume of ordering has also been slower as they know they can get supply when they need it.
Additionally, approximately 50% of our aftermarket remote start and security business is with new car dealers and there simply aren't enough cars on the lot.
We had a lot working against us in Q3 on the automotive side, but despite it all, the segment posted a $3.1 million pre-tax profit versus $4.8 million in Q3 of last year.
Looking ahead, we expect this segment to grow, but there will be some issues as our customers work through capacity constraints.
The sheer volume of programs continues to grow and even with conditions as is, this should generate OEM growth near term with much larger growth prospects ahead as the market improves. The volume of programs continues to grow and even with conditions as is, this should generate
We have also taken costs out of our operations and have worked to mitigate the higher cost of doing business. These actions, coupled with our New Mexico production facility, which is now operational, could also lead to improved gross margins, especially with more normalized volume.
As for the consumer segment, sales declined by approximately 27% and approximately 90% was in premium audio. Again, the economy is soft and retailers are buying differently based on excess inventory levels.
This had a big impact on sales as premium home theater systems domestically were down over 30 million dollars and other consumer sales were down over 9 million in Europe .
Offsetting this decline was an increase in sales of Ankyo and Pioneer products, which made up for most of the European softness.
Demand remains very high for Ankeo and Pioneer and we expect growth to be more prevalent in the quarters ahead. I'll add that we also had some supply chain and production constraints during Q3, which curtailed some projected sales, but we are working closely with our partner Sharp and our other suppliers to ramp up production.
to serve not only North America but open up production globally in India, China, Japan, and the EMEA region.
I've said this before, I believe we can regrow this business to over 200 million in the next few years.
Prices of products have gone up significantly due to inflation and the supply chain. In-store traffic is lighter than pre-COVID times. Retailers have been struggling with inventory levels for most of the year and many are missing their numbers.
Retail purchasing has slowed and buying patterns are changing as they know that they can secure inventory when needed, and discretionary spending is down.
Although consumer holiday related spending from November 1 to December 24 rose by 6.7% according to MasterCard's spending pulse, the electronics category declined by over 5% and the survey didn't even account for automotive, which we know is in recessionary territory.
We expect conditions will improve and while the market may be volatile.
We have a lot of new and exciting products coming to market under various consumer brands
Eclipse Reference Premier subwoofers and Cinema One soundbars will be introduced this year.
Klipsch powered monitors, the 7s and the 9s, and a series of Klipsch and McLaren branded speakers and audio systems as part of our ongoing partnership and relationship with McLaren.
Nuonkyo, Pioneer and Pioneer Elite and Integra receivers will be introduced this year and a host of products under the Magnat, Echo and YAMO brands among others.
We also introduced a number of new products at the show last week for remote controls, wireless speakers, hearing aids, and connectivity and reception products.
For wireless speakers under the AR brand, we will be shipping to Costco, US, and Canada for the first time ever where we're enjoying their business both in Canada and the United States simultaneously.
We're hoping these programs will help offset the challenges we're all facing. Retail is tough right now. All you have to do is turn on the news to see what's happening.
The global economic environment has changed over the past year and we're hopeful of a recovery in the second half of 2023. We're planning as if the status quo will remain and could get worse based on recessionary fears in the U.S. and market environments globally. With that said, we're hoping to see a better future for the U.S. economy.
We're closely managing inventory and taking a conservative approach with our retail partners. We're also working to enhance margins and lower our costs, and when conditions improve, we'll be in a very strong position to drive bottom line returns and continue to increase market share.
Lastly, our biometric segment.
While sales were down modestly, we have a number of new programs with various customers under development. There is a lot of activity at iLok right now, and we believe we'll begin to see top-line increases and improving bottom-line performance.
Within the financial services, and as I discussed on our last conference call, I-LOK won a new program in Axiom Bank last quarter to deploy its Banking as a Service solution, and development should be completed by the end of our Fiscal 24 first quarter. We are receiving NRE payments to cover certain development costs.
and we'll build monthly based on reaching product development milestones.
within healthcare. We officially begin what we believe will be the last round of testing with the big healthcare account we've been talking about. Testing will begin the week of January 23rd and we expect results to be delivered by the end of February .
will have a clearer sense of the program and its impact thereafter.
We're also continuing our work with Integral to develop and roll out iLocks Myris Logical Access Solution for Big Pharma.
Within automotive, there was a lot of inbound interest at CES last week and we will be discussing solutions with two of our larger OEMs in the coming quarters.
We have a proof of concept being developed for one of the large car rental agencies, and this program mirrors the one we have in process with the Miami Auto Mall.
With respect to that program, it's progressing and we've completed the access control installation for their parking garages and lots, and we'll be rolling out the system to their other 25 dealership locations shortly.
This past quarter, ILOC installed its access control system at four nuclear power plants in the U.S. and conversations are underway to deploy solutions at other plants throughout the country.
Momentum is definitely building and we have a number of other projects in development across several sectors, security, government, industrial, and gaming for example, which we believe will lead to more business for ILOC in fiscal 2024 with several large global enterprises.
with strong brand names and reach. Our pipeline is growing, we have lowered expenses significantly, and with the launch of our health care and banking solutions, we should see strong growth and drive the segment to profitability.
In closing, my comments from last quarter remain a tough first half with challenges that will persist into the second half of the year, but a profitable second half on the steps we have and continue to take to improve the business.
We expect a tough fourth quarter, but to be profitable, and we expect improved performance in fiscal 24 based on fiscal 23 comparables and due to OEM and Ankyo and Pioneer contributions.
We have a lot of good things happening at Vox in all of our segments.
We just need to weather the storm and I am confident that we will.
With that, I'll turn the call over to Mike, and then we'll open it up for questions. Michael?...
Thanks, Pat. Good morning, everyone. As Pat provided a thorough review of the Q3 performance drivers, I'll focus my remarks on the P&L and balance sheet.
I'll keep my remarks to the third quarter and we can address any year-to-date questions thereafter.
Net sales declined by $48.8 million with automotive down $13 million, consumer $35.6 million and biometrics down approximately $100,000.
Within automotive, OEM product sales grew by 600,000 and as Pat mentioned, supply chain issues our customers faced and resulting production shutdowns in some cases curtailed our growth.
We had higher sales at both code and Envision and a modest decline in sales at VSM. And as Pat mentioned, we're in the process of transitioning production to Mexico and will be fully operational shortly.
Aftermarket sales were down 13.6 million with security and satellite radio products accounting for $11.8 million and $1.2 million of decline respectively.
with the remainder spread across various categories and some offsets.
Within consumer, premium audio product sales declined by $31.4 million. We had lower sales of premium home theater and wireless speakers, which rode the year-over-year decline as retail traffic has been down and retailers are taking in less inventory due to economic concerns and higher borrowing costs.
Ockew and Pioneer related product sales were up $9.4 million for the comparable
third quarter periods, which offset the decline in European premium audio product sales of 9.4 million.
Premium audio sales are now around pre-pandemic levels, but we do anticipate increases as OCO and Pioneer related production ramps and distribution is expanded globally.
Additionally, other CE product sales were down 4.2 million and it was really spread out across many categories due primarily to retail environment domestically with international sales essentially flat.
Biometric sales were down 100,000, but anticipated to grow in the future quarters given the volume of products now underway and new projects under development.
Gross margins of 26% were down 90 basis points, with automotive up 80 basis points, consumer down 170 basis points, and biometrics down.
Throughout the year, we have put in place various programs to address the supply chain issues, hire tariffs, the cost of materials and shipping, container and warehousing costs, and have instituted several rounds of price increases to offset higher costs.
We began to see a greater positive impact in the third quarter and believe we have room for improvement, especially on the automotive side as certain aftermarket categories increase in volume and OEM production normalizes.
We will also see improvement based on certain OEM production relocated to Mexico where our facilities are expected to be fully operational shortly.
To put this in better perspective, gross margins in Q3 were up 140 basis points over the first half of the fiscal year, with automotive up 130 basis points and consumer up 160 basis points.
even with the challenges we faced.
We reported operating expenses of $34.8 million, down a little over $9 million for the comparable periods, with SG&A and engineering and technical support down for the comparable periods.
With selling expense within selling expenses, which declined by 2.5 million, we had lower commission expense of 1.5 million and approximately a 600,000 decline in salary and bonus expenses.
expenses, within G&A expenses which declined by $3.8 million.
Salary expense declined by $2.4 million.
Legal and professional fees declined by $700,000.
and we incurred approximately $300,000 of restructuring related expenses related to our new OEN Mexico facility.
Bad debt expenses also declined by approximately $300,000 as we had more reserve releases compared to the prior year.
engineering and technical sport expenses declined by 2.5 million, with 2.2 million related to headcount reductions in the biometric segment, which took place in the fourth quarter of the last fiscal year, and lower development expenses in other segments.
Lastly, direct labor expense declined by approximately $400,000.
As you know, from our remarks last quarter, we instituted stringent cost containment and expense reduction programs.
Given the market environment and many of these changes are reflected on Q3 results, with more to materialize in Q4.
As for other income, which increased by $38.1 million, this was principally due to the Segar Arbitration Award, which accounted for $38.5 million of the year-over-year variance.
Additionally, interest in bank charges increased by $700,000.
equity and income of equity investee, which is for our 50-50 joint bench with ASA declined by 200,000 and other net improved by 600,000. And this is primarily related to net foreign exchange currency gains in fiscal 2023.
third quarter compared to net foreign currency losses in the comparable period
principally due to the dollar strengthening versus the N.
We recorded an income tax benefit of $4 million compared to a benefit of $600,000 in fiscal 2022, third quarter.
This resulted in net income attributable to VOX of $7.4 million or $0.30 per share compared to a net loss attributable to VOX of $28.1 million or a loss of $1.16 per share, inclusive of the Segar
Lastly, IBITDA was $7.7 million and adjusted IBITDA was $9 million as compared to an IBITDA loss of $24.8 million and an adjusted IBITDA of $15.8 million in the comparable fiscal 2022 third quarter.
Moving on to the balance sheet and comparing our balance sheet as of November 30, 2022 to December 28, 2022.
We had cash and cash equivalents of $8.5 million compared to $27.8 million.
Total debt was $47.2 million as compared to $13.2 million.
The increase in total debt is primarily related to the 37 million outstanding on a domestic credit facility which was used to fund inventory in quarter three and quarter four and we'll begin to see this decline as we bring inventory to more normalized levels.
The additional variance is related to a $400,000 payment reduction in our Florida mortgage and a $700,000 decline in our shareholder loan payable to SHARP as a result of the strengthening of the U.S. dollar versus the N.
We continue to manage our working capital and expect our balance sheet to improve. We are preparing for a weak global economy and believe we have taken the right steps to stabilize and improve our business going forward.
Operator, I'm ready to open for questions.
Thank you. If you have a question, please press star 11 on your telephone.
For one moment while we compile the Q&A roster.
And our first question comes from the line of Isabella Sun with DA Davidson. Your line is open, please go ahead.
Hi, this is Isabella from Dave Davidson. I have one question and one follow-up question. So from a cost margin standpoint, how should investors think about impact of declining container costs on your result for the remainder of this fiscal year? And can you give your initial thoughts on next year? Yeah, as we see
But what we also will have to do is balance that reduction in cost with lowering some of the prices that we offer our product at so that we can remain competitive and make sure that we are maximizing top line revenue as well. So it's going to be a balance.
we do expect that it will allow us to increase margins, at the same time offering the consumer more competitive prices.
Thank you for answering that. So my follow-up question for you is, as a long-time industry participant with VOCS at CES since the beginning, what were your thoughts on the CRCS and what were the implications for VOCS?org and how note-taking may be Can you Mrs. Ok both jetty and enriche
As I indicated when I opened this morning, the show was in our estimation well attended. It exceeded the expectations of CTA. I thought that the attendees were quite positive coming into the year..
With some of the new things that we were showing at the show We are we have generated a good amount of interest with them and we'll be speaking with them over the next You know month or two We will be performing some Demonstrations some proof of concepts
especially with one of our newer products that we introduced. And that is a pediatric heat stroke device. We're working with a major OEM on that, on a proof of concept. So these are all the things that develop at the show, and that hopefully...
you know, will turn into some solid business on a go-forward basis. But I thought overall the attendance was up, the mood was good, and the meetings that we had were very, very positive.
some solid business on a go-forward basis but I thought overall the attendance was up the mood was good and the meetings that we had were very very positive. Thanks for taking my question.
Thank you, Isabella.
Thank you and one moment for our next question.
And our next question comes from the line of Bruce Oliphant with Oppenheimer. Your line is open. Please go ahead. Thank you. I want to do channel checks and go to Costco. And starting in November when I was doing my channel checks at Costco, I noticed that the...
klept's product I couldn't even find. And then when I proceeded to go weeks later, I saw the product there, not in abundance, and I asked some sales people there about the product.
and they made a comment that A, the product wasn't selling well, and that whatever was there, if I was just there buying, I should buy it because the product was going to be discontinued. So I was curious to know...
At that stage, going into the holiday, it just seemed, did we have the CLEPS product available and really what's the situation with Costco regarding the product?
We maintain Costco as a valued customer and the way the programs work with them, we present new products and different products because it's not like they keep the same product on the shelf all year long. They do offer promotions and things like that.
We offered this year, we offered Ankyo receivers that we thought met the requirements that we had for the program. Some of the other programs are selling out and we expect that we will replace those programs and those products with newer offerings as we move into next year.
But you Costco remains a good strong account, but it's not our only account So therefore, you know some of the product that is there But you know is not is not some of the product that they have is not also some of the product that we offer through, you know specialty premium audio manufacturers or retailers
starting probably in February where we start to deliver, but it's really a spring launch. So our relationship with with Costco continues to be strong. Thank you.
Thank you and one moment for our next question.
And our next question comes from the line of Matthew Chin with Apollo. Your line is open. Please go ahead.
Oh, hi, I'm actually a private investor.
I have a general and then a specific question concerning the joint venture with SHRP. The general question is
Could you please comment on the relative significance, perhaps in percentage terms, of the business of the joint venture to the significance to the business of the premium audio company and then the overall significance of the business of the premium audio company to the overall company?
When we look at our relationship with Sharp, Sharp was the primary manufacturer of the Ankyo before we were to take them over. Part of the acquisition is that we worked very closely with Sharp.
and we became partners in the acquisition of the Japanese Ankyo company.
and our relationship remains where Sharp manufactures the product. which we jointly...
own the company that develops the product and PAC, our premium audio company, is the arm that markets and sells the products worldwide. They are a key supplier to us. They own, as we reported, approximately 24% of the Japanese operation.
As far as premium audio, premium audio in our consumer segment is the largest segment we have. And you know, obviously I've announced that some of the sales were down from last year, but we do maintain number one market share and...
premium loudspeakers. We have few years. This is just really a result of what's happening in the economy. We expect to maintain number one market share in our speaker business, but we are also increasing market share that we have in receivers.
Ankiyo and Pioneer. So an important segment within the entire box operation.
Okay, thanks. And the specific question I think might be for Mike.
because in note two of the...
10Q, you state that a Gordon growth model is used for expected payments made beyond the last year of projections. So I'm wondering what's the last year of projections and then for the growth model, what's the the Piano Motion?
discount rate and growth rates assumed in the growth model.
Thank you.
Mike, do you have that?
You muted Mike
This is Michelle. It actually looks like when Mike went on mute, he disconnected himself.
Hello.
All right.
You know what what we'll do is we'll get back to you with that. You know, with the answer to that question. I'll have a great contact.
Sounds good. Yeah, thank you.
Thank you.
Thank you and I'm showing no further questions at this time and I'd like to turn the conference back over to Pat for any further remarks.
Okay, as I said, based on the economy and what we see happening in the economy, we will adjust, we will remain nimble. Hopefully, the Fed can achieve a soft landing and we can move forward.
We do have a number of new automotive OEM awards that will start this year and later into the year. And again, the expansion of Onkyo and Pioneer Worldwide will help offset a lot of the decline that we may see in the general overall economy.
I want to thank you for joining us this morning, and I thank you for your support of Vox. Have a great day.
This concludes today's conference call. Thank you for participating. You may now disconnect, everyone. Have a great day.
Thank you.
The conference will begin shortly. To raise your hand during Q&A, you can dial star 11.