Q2 2020 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Voxx International 2022nd quarter results Conference call.
At this time, all participants I know listen only mode.
So to speak of presentation, there will be a question and answer session.
Ask a question during this session you'll need to press star one on your telephone.
Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero.
Now I'd like to hand, the confidence to your speaker today, Glenn Wiener Investor Relations. Please go ahead Sir.
Good morning, and welcome to box International's fiscal 2022nd quarter results Conference call I Trust, everyone out a chance to review our press release, which was issued yesterday after market close along with our Form 10-Q , which was filed with the FCC both documents as well as our updated investor presentation can be found in the Investor Relations section of our website.
Today's call is being webcast live on our website and can be found in the events and presentations section a replay will be available approximately one hour. After the completion of today's call for those who are unable to join.
Speaking from management today.
The Pat Lavelle, President and Chief Executive Officer, and Michael Stoehr, Senior Vice President Chief Financial Officer, John Shellum, Chairman and founder of boxes also with us and all executives will be available for commentary during the Q and a portion of our calc following management's remarks.
Boxes undergone a significant realignment of its business over the past several quarters, which will continue in fiscal 2020 progress has been made and as Pat will note. The company is on track for profitability in the second half the year as you move closer to our third quarter results announcement and in calendar year 2020, we intend to get more active in telling our story to prospective investors and analysts.
As we believe there are compelling opportunities to further unlock shareholder value, especially with some of the long term development that will address.
I'd like to remind everyone that except for historical information contained herein statements made on todays 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.
Thanks for the period ended February 20, Eightth 2019, I'd like to thank you all for your continued interest in box and at this time I'd like turn the call over to patent though.
Good morning, everyone and thank you Glenn.
As we address that our fiscal 19 year end call. We are proactively taking steps to improve our infrastructure stabilize our business lower fixed cost and returned box. The profitability. We made a lot of progress to date and there is more of that we've done throughout fiscal 2020 to ensure we are positioned to.
Achieve our goals in the years to come and in turn enhance value for our shareholders.
Near term there are two factors that are leading to lower volumes for both our OEM and aftermarket products one lower car sales that we've seen this year with global car sales down approximately 3% through July and down at Warner quarter percent in the U.S. year to date.
And to the timing of end of life and the start of new programs. We do not believe this will be a long term trend. However, given recent awards.
We have received from our OEM customers.
For the second quarter comparisons.
Consolidated net sales declined by 18.6 million end of this over 70% of the of the decline was in our automotive segment, which has historically been one of our more consistent stable and profitable segments. We are expecting automotive sales to be down year over year that was communicate.
In previously and our near term outlook has not changed however, as we look out over the next few years. We believe this segment will be one of the key growth drivers for our business.
During the second quarter Vox automotive was awarded the next generation our assay program. That's rear seat Entertainment program with one of the Big three US automakers. This program will launch in calendar year 2021 on model year 2022 vehicles.
As a total value of approximately 275 million over a five year period.
In addition.
Nissan awarded US another RSC program for the Amato slated to begin in August of 2020, which will run for two years.
We will be launching a new RSC program for the linking Aveed later this quarter and we believe and we've recently added new business with Ford for the expedition X LT, which will begin midyear in 2020.
There are a number of other programs that have been in development, which are nearing final stages of testing and evaluation and based on what we have won and what is in the pipeline our automotive electronics segment could be poised for growth towards the end of fiscal 2021 and significant growth in fiscal 2020.
The two which would be sustainable based on the long term nature of the programs. This is what is driving our optimism.
On our consumer electronics segment.
They posted a sales decline of 5.3 million due to the softness in the European market and declines in domestic accessories regarding the domestic the domestic business sales were down 1.8 million due in part to the S.K. you rationalization program and the discontinuance of.
Several products, which we had discussed previously however, our domestic business outperformed our budget both in the second quarter and year to date, and we continue to show year over year growth in the wearable category based on our position as the distributor of Apple Samsung garment fit.
Good and strive activity trackers.
During the second half of the year, we will be expanding distribution of reception connectivity and power products to new countries in the APAC region and launching new products in the remote control karaoke antenna and audio categories. We are actively managing inventory, reducing our risk and focused.
Thing on products that have better margin structures and are more sustainable lifecycles consistent with the strategy I outlined on our past two calls.
Our domestic premium audio business was down modestly compared to last year's second quarter, which was a strong quarter for that group a positive when you consider that we had very strong load ins of the new reference Premier and reference base home speakers last year that obviously did not repeat.
Again this year year to date premium audio sales are up close to 4%.
Sales of premium mobility, and premium wireless and Bluetooth speakers are showing nice growth new distribution with snappy JV contributed to growth in the commercial installation channel and the launch of our new T. five series headphones helped drive growth within the mobility category and the launch of new sound bars.
Drive sales of audio system speakers clips is performing well and we expect that will continue into the second half of the year.
In our biometric segment, we launched a new XT outdoor perimeter access product line in Q2, and we launched the latest version of our nano NXT perimeter access product with all new upgraded software.
During the quarter. These products were in beta testing with customers and potential partners and should help drive sales and income improvements in the fourth quarter via touch business is moving slower than we had anticipated but still holds the same potential as we've indicated on past calls.
A positive development for Eyelock. This quarter is in the healthcare space as we have been approved by a major company, which unfortunately I'm not at Liberty to disclose by name, but what I can say is that we anticipate that we will begin billing for NRT in the fourth quarter and throughout fiscal 2021 and this contra.
Fusion in addition to other businesses that I've been awarded should significantly lower Eyelock operating loss, which has been already improved by 600000 in the second quarter and by approximately 1 million year to date.
There are three other primary primary programs Eyelock is working on which although they will not contribute to fiscal 2020 results could have meaningful impact on their business over the next two to three years. One is in the gaming industry. Another in the automotive industry and the last is in the security into.
Street.
As a result of the considerable amount of custom engineering involved with each potential customer.
A lot krogers programs have been slow to materialize, which has been frustrating for us and our shareholders and we recognize that and we've addressed what we can't control by lowering our cost which has helped lower cash outlays and reduce operating losses, we are getting much closer to wider scale adoption of biologics.
Technology and believe the next six to 18 months will validate high locks position in the industry and potentially lead to other avenues of growth and profitability for box.
A few other updates before turning the call over to Mike.
As you saw from our announcement on October 2nd we closed on our real estate sale and Paul Heim generating net proceeds of approximately $9.7 million.
And that same release, we announced that HF has rescinded the deal due to their inability to obtain financing at the agreed upon price and our refusal to renegotiate the price that business, which includes both aulbach in schwaiger is profitable and we rather keep it as part of blocks then sell it as a discount aspire.
Actually since following our restructuring as it generates cash and EBITDA, if another opportunity to divest materializes, we will evaluate it as we do with all of our business segments and groups.
We are still realigning certain areas of our business investing in innovation and looking to expand distribution partnerships across all three segments. We are executing on the share repurchase program as we're able to in the open market and we will continue to do so as we believe our stock is under.
The value and repurchasing shares represents a good use of capital.
We're also looking at potential acquisitions that could strengthen our business further and improved EBITDA and cash flow, though we are not looking to leverage our balance sheet or overpay for any business or businesses.
We are executing on the initiatives we've outlined during our year end call and we expect to be profitable in the second half of the fiscal year with that I will turn the call over to Mike for review of our results and the balance sheet.
Hello.
Thanks, Pat Good morning, everyone similar to the second quarter results. The majority of the sales declined for the six month period within automotive electronics segment, which represented close to 90% of our total year over year decline.
And the majority was in our OEM business for the reasons Pat address.
Dissipating the second half of the year to be lower than the second half of fiscal 2019, but based on the launch of new vehicle models. The year over year comparison should level off and potentially show a modest increase in Q4.
Consumer electronics segment sales were up 2% year to date, but above our initial forecast premium audio auto sales continue to increase based on new products brought to market and expanded distribution.
Year to date are up close to 4%, it's Pat noted.
Sales of audio products reception products and Wearables continue to trend upwards offset by declines in the European markets.
Gross margin in the second quarter were down 220 basis point with the biggest decline in our automotive electronics segment.
Based on lower OEM sales and under absorption of labor.
As new OEM programs begin margin should return to more historical levels and that segment.
Second quarter decline in consumer electronics segment was primarily related to product mix. The negative margins in the biometric segment was due to startup costs related to customer and beta test samples of new product launches.
For the year to date period gross margins were down 90 basis points was only minor declines on a gross dollar basis, and the consumer electronics and biometric segments.
The drop was in automobiles motive and we expect modest sequential improvements in both the third and fourth quarters.
I'd also like to note that margins were affected by tariffs the terrorists impacted margins as early tariff increases were not passed onto the customer.
The latest round to tap increase habit passed on in the form of price increases to our customers, but certain customers have a time bar before these increases go through.
We are working to lower the impact of the targets by moving production out of China in conjunction with on manufacturers not all products can be move and the products. We are successful and moving will still carry higher labor costs than Chinese manufactured products.
Total operating expenses were down $11 million of close to 26% when comparing the second quarter periods and declined by 10.6 million I guess over 14% for the year to date comparisons.
For the second quarter, we had a 900000 dollar decline in selling expense due to lower commissions and lower headcount as we have realigned our business clips. However has increased headcount to support both current and future growth and new product development.
DNA expenses, excluding the share grants to our CEO was down approximately 300000 as we had declines in office expenses legal fees third party fees and office salaries as a result of the accounting treatment for the share grants, we took a noncash charge of approximately 1 million.
Engineering and technical support expense declined by approximately 1 million with the majority of the decline in R&D. This was principally as a result of eyelock transitioning from outside contractors to in House engineering.
I'd also I'll also note that last year's second quarter included intangible asset impairment charges of 9.8 million.
Excluding the impairment charge total operating expenses declined by approximately 1.2 million or 3.7%.
For the six month period comparisons.
Total operating expenses declined by $10.6 million by just over 14%.
Excluding the impairment charges last fiscal year's pickup from the favorable counterfeit lawsuit and noncash charge for stock based compensation Opex declined by approximately 3.8 million or 5.7%.
You will see more expense reductions in the second half of the year based on the steps we've taken to realign our operations, both domestically and abroad.
As for other income and expenses in the fiscal 2022nd quarter. We had in other income of 1.7 million compared to other expenses in second quarter fiscal 2019 of 2.7 million.
Interest in bank charges declined by 230000 equity and income and equity Investee declined by approximately 370000 and other net increase by approximately 300000.
The two biggest items are as follows.
We recorded investment gain in this years second quarter of approximately 800000 related to the fiscal 2018 sale of our investment in Rx networks as a portion of the craft cash proceeds was subject to hold back provision, which was released this quarter.
Additionally, in the fiscal 2019 second quarter, we recorded a $3.5 million apparent on our Venezuela investment properties.
You can see other income and expenses broken out in our press release and Form 10-Q for the six month period.
Operating losses for the second quarter comparisons improved by 3.7 million and the net loss attributable to Vox improved by 14.8 million.
For the six month comparisons are operating loss improved by 1.7 million and the net loss attributable to box improved by 14.6 million.
Lastly, we reported and adjusted EBITDA loss of 700000 for the fiscal 2022nd quarter and a loss of one point million for the six month period. This compares to an adjusted EBITDA of 4.3 million and 5.8 million for the three months and six month periods in fiscal 2019.
The breakdown EBITDA EBITDA to adjusted EBITDA is in our press release, and then our Form 10-Q filing on page 41.
In our fiscal 2019 year end call, we had discussed anticipated losses in the first half of the year as we work through our corporate realignment the shift in automotive market has been more meaningful impact that we had initially forecasted however, we move into the second half of the year, we are anticipating.
Realty on an operating basis on both third fourth quarters and expect to show year over year improvements.
As for the balance sheet.
Cash and cash equivalents of August 31, 2019 was 39 point threemillion as compared to 60 million as of May 31, 2019. The cash uses is based upon seasonal working capital needs to fund operations.
As we mentioned in our Form 10-Q , we have temporarily suspended our vendor finance programs as we do not need the funding.
If we had used the program our cash balance for August would've been approximately 9 million higher.
We expect our cash position to increase in the third and fourth quarters at we bought in the inventory and we'll be moving it throughout the remainder of the fiscal year.
Additionally, we announced on October 2nd we completed the sale of our pull high and real estate and proceeds from the sale will be used to pay down our euro be euro asset based lending obligations, while providing additional working capital fund our German operations.
Our total debt position stood at 14 million as of August 31st.
Representing a decline of 3.6 million since Gulf fiscal year end and decline of 2 million since May 30 Onest.
The decline compared to the fiscal year end is due to a lower outstanding balance on the euro ABL and lower mortgage debt for our German and flowers properties. The company intends to pay down by October 30, Onest, the approximately 5.6 million of asset base debt and our German operations.
We have sufficient cash on hand to fund our operations. We also have available 140 million domestic credit facility with nothing outstanding.
Balance sheet remains strong and we are maintaining the flexibility needed to continue to invest in R&D.
To support future automotive premium audio and biometric programs and repurchase our stock in the open market as we are able to.
That concludes my remarks, and we're now ready to open up the call for questions.
Thank you.
Thank you as a reminder to ask a question you wanted to press star one on your telephone.
Your question pressed upon key please standby, while we compared to Q1 day Avastin.
And our first question comes from Thomas Comic Con brothers.
Your line open yeah. Good morning, I think you're making progress.
And this is good how many shares did you buyback in the last quarter.
202000, Tom.
And you're going to continue to buy back.
Yes thats it.
Yes, yes.
Getting plant.
I would recommend that you gentlemen listened to.
The quarterly calls.
John as Pat.
You folks.
That you've had for the past three of four years, because they all have this optimistic spin to them.
And I think what we have to do now is sort of.
Tempur in some way the quarterly calls on the optimistic spin.
And just trying to stick to reality and to the facts, So I'm, saying John listen to the last four five years and Pat.
And Mike and tell me if I'm wrong doing he is something that you folks don't here.
And after you know you cry will so many times people don't believe you.
So what we need is listen to the calls on making a recommendation I've only been in the investment business for 40 years, some a new player here.
Don't have optimistic spin and positive projections I think it's better off if you back off that approach. Thank you.
Thank you Tom.
He is the one thing that.
I hear what you're saying Bud.
I think it's imperative that we advise the shareholders that as I just did that during the second quarter. We were awarded a major program. This is the production program.
For one of the Big Dthree car manufacturers.
I will start in 2021 on 2022 vehicles.
We believe that this particular contract.
Lot of not only will lead to others because of the new technology that we're bringing to market that will showcase at CES. This year.
But this is a production program. So this is this is based on the number of vehicles that they sell and we expect that that business is going to be in the range of $275 million the other gradually.
At this gets a little excellent and it's all very good but I stand by what I said with respect to the last four or five years and the quarterly calls and what have been said I think it would be informative.
And I stand by what I said to try to back off.
Let the good news come as surprises a few will.
I guess, that's the way I would flooded.
We're better off than that way I also commend you on share repurchases thats, the smartest way to build shareholder value with our stock where it is and John I would encourage you to do more if it don't be diffident. Thank you.
Thank you Tom.
Thank you you have grown.
And our next question comes from Sheldon Grodsky Klatsky Associates. Your line is now open.
Thank you.
How many shares were granted to the chief executive.
There were 200000 shares granted in the.
The second quarter.
Okay. So it's almost the same thing that was a repurchase.
Okay.
Yes.
Okay.
I would encourage you.
Speaker.
Okay.
I agree with everything you said necessarily but I would encourage you to.
Buyback as much as you start because as you can.
I don't think it's going to every good cheaper.
So the time is right.
We agree and we have a 3 million share.
Repurchase authorization, and we plan to move along and purchase.
One of the the Windows are open for us to purchase.
Thank you.
As a reminder to ask a question you wanted to press star one on your telephone.
Our next question comes from Badlands with BMO Capital Management. Your line is now open.
Hi, Thanks Korea.
Taking a question.
So.
First of all.
Pat in the prepared remarks, you said that he and the press release.
And overall operating losses declined the first half of the year now.
This is technically true because on a GAAP basis last year, you had a $9.8 million noncash charge. So my question is do you think Thats a fair statement I mean is that the way we're really looking at this to say that we had improved operations because we don't have a charge this year.
Well I mean, I think but what Mike and showed is that we take when we took out all the onetime charges. We did have a further reduction in our overhead both in the quarter and year to date.
Yes, but on an operating basis, we lost more money.
Excluding the charge.
Correct, I mean, adjusted EBITDA, which I think is more relevant in this case with all that.
Puts and takes both quarters.
We were down significantly year over year in this first half.
Yes, we were in the first okay, alright, and that here's my anticipated.
That's that's fine it is anticipated and they didn't expect anything different but I think its a.
It's not a fair statement to say that operations improved in the first half the year expenses were down.
Excluding the charge I'll give you that but operating profit was was I mean really on a GAAP basis. You are your statement as factually correct.
But I don't think anybody who is looking at that saying, Hey, we had an $9.8 million impairment charge.
Noncash last year. So we're going to say things are better this year, they're just not in so I think thats a it's.
It's an unfair statement to put out there and we can either agree or disagree on that but I think it's not.
It's not a correct statement so.
Loan on the stock buyback what are the limitations on the buyback.
You guys have you can buy what 25% of average daily volume or something like that yes, Mike you want to answer that question, Yes. It said said, 25% of the average through weak volume.
Okay. So the average three week volumes that are too, yes, I think it's three weeks.
Okay. So that's about what 40 or 50000 shares as average volume.
That's correct.
Okay. So.
Mike I guess my question question is when you guys. It said that the stock is very undervalued, where everybody thinks is undervalued, it's covered by cash and real estate whatever maybe not now that we didn't several one division.
But it's on the some of the parts I think we all agree to stock is undervalued. So why so little in the buyback.
One of the problems. We had is that because we have our first quarter and our year end kind of roll around is bound to say monthly. We got started late and then we have not when we announced the quarter. Okay will come in so days. After this call I understand so why not put a.
Tenbfive Dash one plan in place to buyback in the.
When you're blackout.
We'll take it under consideration.
I mean it this is simple way to go instead of being blacked out for a month of the stock goes to 351, because the market tanks because of.
The president of the announces some tariff or something like that you say gosh I wish we could be buying but we can't I mean, if you did you guys are really serious about buying back 3 million shares at around these prices you should put a tenbfive plan in place and say, we're going to buy the HBV. You know are 25% of Eightv every day.
I mean yesterday about 70000 shares and the open market, there's plenty of sellers out there. So it's not a problem to get stock I realize you guys came by 70000 shares, but there's no reason to be blacked out for.
Whatever it is four to six weeks every quarter.
So.
I just I would say good okay. Those are there seems to drill them.
I appreciate your commentary margin will certainly the groups into consideration.
Okay.
So the German accessory business that we had sold that these guys backed out.
Sounds like you guys did not want to renegotiate.
So is there no financial penalty for them not closing.
It was part of the.
First of where we're restricted as to what we can say regarding.
India is a precise.
Okay over a number there were few Mac clauses in the agreement and that was one of them.
Okay.
All right. So this automotive program sounds.
Great, but when you give me the details on this again, you're saying it's going to start.
In.
Calendar year 21, or your fiscal year 21.
Our fiscal 21.
Which is next time.
Year.
Our.
No excuse me calendar year 2021 on model year 2022 vehicles. So we're really out for two years from just PR. Yes. We are okay. Okay. So we're not going to see a lot of.
On the automotive business could be down meaningfully for.
The next couple of years.
We have were flattish appearance, what we have new programs already announced as is the modest program starts next year the.
Yes.
Program should start.
In our third quarter.
And then we have the XL T program. So there are other programs that will start that will offset end of life that we expect to see some growth in the category but.
When you look at the.
Projection on the larger program that I announced its approximately $55 million a year that should start.
In 2020.
One calendar year.
Okay. So that is on a run rate of last year's auto as what Onesixty Yep.
Okay. So is this.
Go ahead, I'm, sorry, that's a sizable increase on top of the Onesixty nine I understand.
Is it going to be replacing no potentially other business that has lost.
There will be some programs that that will during the period that will be coming up.
Towards end of life, but we're in discussions with all of our current customers.
About.
Either developing a new.
Rear seat entertainment program for them or some sort of continuation.
We will be announcing.
CES show.
Some of the details around our new product and we think what we're developing.
Is going to be something that.
Many of our existing customers will want to deliver.
Okay.
So.
On the acquisition divestiture front, what is I think you said that this German business is still you're happy to still run it is profitable, but did you say like comment that you would be willing to sell it if somebody else came along or the buyer kundera.
There are other interested parties.
That have expressed interest in this company and of if we deem their offers realistic and acceptable to where we are we would divest the game plan was.
Is to bring the the dollars that we have invested in Germany bring them to the United States and replace those sales in that EBITDA with the domestic operation, where we can leverage our existing overhead better.
Yeah and generate more profitability.
I think thats sound strategy.
So that would go back to I mean as you guys are in discussions about I don't know what else is going on.
But when you have the open window and you want to buy back stock.
If a deal comes up that's meaningful that would black you guys out for potentially the whole quarter.
We are trying to close some things. So when you have you open window.
You can set up attendee plan in just run after the next three quarter for three months or whatever.
I don't know Theres no question about the Tenbfive program you were you recommending makes sense okay.
So the all right, let's get to the Eyelock here I mean, I see that you extended alone again that you're lowering interest rate, which doesn't really matter because they get to have claimed the payback. So.
Yeah, I mean, the via touch, which I think I had indicated on previous calls it does that sound.
I don't know I, just don't I don't even understand appointed it but it's not being rolled out is it fast track holding out it's rolling out now they are now starting to deliver machines, they've had theyve had their own delays in getting everything started but they are rolling out and what we can see based on the interest that they have in the customers.
They have lined up.
The volumes are substantial for them.
The other program that we announced is one that we've been working on for long time.
Again due to the competitive nature of.
With customer we're working with in the industry that they're working with they do not want us to talk about it.
But it's a it's another substantial program and will validate the.
The the Iris authentication technology that we have.
There is another program.
That will be able to announce at CES.
Within the automotive space, but could be very interesting for them and then there's the the X C. In the NXT products that I talked about.
That are now.
In beta test these products have to be tested they have to be integrated with backend subsea security systems. So when we deliver a new product is a lot of testing that has to go on.
And we're in the process of doing that and if everything goes well, we'll see the sales of VX season, and IXYS pick up sharply.
So why don't we look at.
The potential for them.
I have the potential is good iris authentication is real it's secure and ice I do believe that you're seeing more and more interest in iris because of that security so and the fact that it's an opt in program it's not facial.
This is a program where the consumer has to opt in but it is more secure than any other form of biometric on the market.
Okay and can you can you.
On the health care thing that you didn't loans that you can't hold who the customers can you describe what's a program is for is it the access to a facility or is it access to pharmaceutical products that are.
Hi, My if I'd describe it and then.
I'll probably in for infringe R&D has not going to describe it understood. Okay. That's all I have thanks.
Thanks, Brett very helpful.
Thank you.
And our next question comes from Eric Egan, a private Investor. Your line is now open.
Hi, a during the call it relates to sorry to hear you went over this but the new contract you now.
The main three OEM for up to two Arsone billion over what time period, that's a five year period.
From its surprising exception yep.
And then so you think the until we get there.
Two years from now the automotive segment should see revenues, maybe around 30 million a quarter until then.
You know based on again there are other factors I mean, if we go into a recession we.
Definitely car sales get hit we don't know if we'll see the recession next year or possibly thereafter.
But we have new programs that are starting that I've announced that will.
We will come and commenced during that period of time before we launch this this larger program.
But on top of that.
We may do tuck in acquisition into our automotive group that will will further support them during this period.
So these are some of the things that we're looking at but all in all I would it would expect that we would exceed where we are right now in revenue.
Okay. Thank you very much I appreciate you well.
Thank you.
Not showing any further questions at this time I now like to turn the call back over to management for any further remarks, well. Thank you all.
Thank you for your import.
I I. Thank you for your interest in our company I wish you a good day and a good weekend.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.