VOXX International Corporation

Q2 2022 Earnings Conference Call

10/13/2021

spk11: Good day and thank you for standing by. Welcome to the VOX International Fiscal 2022 Second Quarter 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. To ask a question during the session, you will need to press star, the number one on your telephone. If you require any information, assistance, please press star zero. I would now like to turn the conference over to your speaker today, Glenn Miner.
spk17: Thank you. Good morning and welcome to Box International's fiscal 2022 second quarter conference call. Our press release was issued yesterday after the market closed and we followed our form 10Q with the SEC. Both documents can be found in the investor relations section of our website and an updated investor presentation will be posted later. Today, we will have prepared remarks from Pat Lavelle, President and Chief Executive Officer, and Michael Storr, Senior Vice President and Chief Financial Officer, after which we will open up the call for questions. 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 ended February 28th, 2021. Also note, management will be presenting at the Sedoti Investor Conference on December 8th and 9th and hosting one-on-one meetings with investors throughout the two-day period. We have also registered to present at the Imperial Capital Security Conference on December 14th with more details to follow. There are other events we are evaluating in the remainder of the calendar year, and we will update our investors accordingly. I'd like to thank you all for your continued support of Vox, and it is now my pleasure to turn the call over to Pat LaValle.
spk07: Pat?
spk04: Thank you, Glenn, and good morning, everyone. In light of what we experienced this past quarter, I'm quite pleased with our performance. If you consider all of the one-time events, especially considering the worldwide economic turmoil that we've all encountered over the past year, the Vox team has done a good job navigating through what we believe was the worst of the supply chain shortfalls. The initial price increases that we instituted have taken effect, And due to the rapid increase in the second quarter of container prices, we instituted a second wave of price increases in September. We have the inventory on hand to deliver in our all important third quarter. In addition, we have added new or alternative suppliers to increase component availability. We changed our ordering protocols to compensate for longer lead times and even modified boards to utilize alternative chips. We believe all of these measures combined will give us more flexibility in terms of how we manage the business in the quarters ahead. Revenues grew almost 12% in Q2 and are up 40% through the first six months year over year. And this was accomplished despite missing a few inventory turns, which were expected due to the corresponding shipping delays. Gross margins. primarily in our consumer electronics segment, were impacted by the supply chain and the added costs associated with freight and warehousing. And while there will be some continued pressure, the good news is that we expect less of an impact coming out of this calendar year. The increase in our operating expenses were primarily due to a full six months of DEI compared to two months in fiscal 21. higher employee costs as we brought back furloughed employees and restored salaries. We also added expenses associated with some of our larger and new OEM programs and had higher professional fees to support Bianchio and galvanize due diligence and transactions. For the six-month period in fiscal 2022, we had an operating loss of $3.1 million versus operating income of $400,000. Taking into account one-time non-recurring expenses, our operations actually performed better than the first half of last year, especially with the $5.7 million increase in professional fees, $4.8 million of which we consider non-recurring, and roughly $2.9 million of added expenses for NRE and labor, and extra warehouses to hold inventory in Asia waiting for shipments. On an adjusted EBITDA basis, we reported 14.6 million versus 10.7 million for the first halves of fiscal 22 and 21, an improvement of 3.9 million. Looking ahead, we anticipate continued growth in the second half of the year, with Q3 a little under and Q4 above the prior year. We expect to be profitable in both quarters, and the variance from the prior year to this year is primarily in an engineering and tech support, as we expect to see an increase of approximately $9 million year-over-year to fund growth-related programs, nearly $5 million of which relates to the addition of Antioch's engineering team. I will add some comments with respect to next fiscal year in my closing comments, but needless to say, there is a lot of momentum at Vox. Our automotive electronics segment grew by 40% in the second quarter, and revenues are up 77% through the first half of the year. The second quarter comparisons, our aftermarket business was up 34% with the added contribution from our DEI subsidiary. Our OEM business was up 53% due to new rear seat entertainment programs with Nissan and Stellantis, both of which began this past quarter and should ramp up in volume as customers increase production. And we have Ford starting in the fourth quarter, which will be added boost to the top-line revenue. We also saw increases in automotive safety and security products. For the six-month comparisons, our automotive segment grew by 77% with aftermarket revenue up over 81% and OEM revenue up approximately 70%. Keep in mind, this growth was achieved despite all of the shortages and delays which impacted not only our aftermarket dealers, but placed a significant strain on our OEM customers as well. The environment worsened this past quarter with a number of car manufactured shutting plants due to lack of parts. We expect this to normalize as we move into next year and more capacity comes online. Our consumer electronics business grew by approximately 2% in the second quarter, and almost 28% year-to-date. Premium audio product sales grew by approximately 10% in the second quarter and over 42% through the first six months, which offset declines in other CE product sales. A majority of the CE segment product sale declines related to inventory and chip shortage, which in turn led to production delays, and there were continued store closures in Europe. This also impacted premium audio product sales, but we are still growing and expect this to continue. During the quarter, we had increases in sales of premium wireless speakers and wireless computer speakers and higher sales of premium audio in Europe. For the six-month period, we grew in virtually all premium audio categories. Eleven Trading Company saw a sales increase of 11.4 million in the second quarter and 17.7 million when comparing the six-month period. As most of you are aware, we closed on the acquisition of Onkyo's home entertainment AV business in September, which is our fiscal third quarter, and this transaction holds great promise for our company, both in terms of growth and added profitability. And lastly, our biometric segment sales remain relatively flat for the quarter comparisons, but was up 27 percent for the six-month period. We're expecting this segment to post more meaningful revenue increases and smaller losses as we begin to realize future contributions from the galvanized distribution agreement, our new healthcare customer, which ramps up next year, and other smaller projects we have been awarded. Overall, we have performed well given the environment. I'd like to shift now to our outlook as we're quite bullish on our prospects. This optimism is based on the contracts we have been awarded, the new additions to the Vox family of brands and products, and a lot of behind-the-scenes momentum which has been delayed because of the global supply chain issues and should start to come back to life as things begin to gradually improve. With Amazon's Fire TV, we can offer our customers more content than anyone. Based on the investments we have made over the past two years, we are the clear-cut leader with our technology and expertise. This past quarter, we began shipping to Stellantis and Nissan, and soon we'll be delivering to Ford. Based on what I've been told by our OE customers, automotive production is anticipated to increase, and the capacity constraints should begin not only to stabilize but improve over the coming quarter. This bodes well for growth and incremental bottom-line profits. We have resumed conversations with several other OEMs that have been in limbo for a good part of the year due to supply chain issues, and we believe we will see additional incremental awards layering on top of our core. Even without this, we are still positioned to double this business by next year compared to fiscal 2020. Our outlook has not changed. VSM is doing very well and puts us in new product categories and new OEM channels. DEI has grown since we acquired them and solidifies our position in several automotive security categories. Premium Audio continues to be a strong growth driver, and that will intensify with the addition of the Ankeo acquisition and new licensing agreement with Pioneer. I indicated on my last call that we should do approximately $50 million in sales this fiscal year. And provided we don't have any additional shipment issues, we should do a little bit better than that. As we ramp up production and rebuild distribution with a focus initially on North America, we believe we can reach over $125 million in sales next fiscal year. And as we expand globally, we expect to exceed over $200 million. As we are now the owners, we expect to see gross margins at our 11TC operations improve as well. With the anticipated revenue increases, margins more in line with historical premium audio products, 11TC should be a significant contributor to our bottom line. Now, we normally don't provide guidance, but given all that has transpired, we'd like to offer some direction for the third and fourth quarters. Our outlook is based on customer projections and what we have done to date, and barring any unforeseen events, we feel comfortable with the following statements. We expect sales to be up modestly in the second half of the year, with the third quarter below and the fourth quarter above the prior year periods. Fiscal 2022 sales should come in around 640 to 650 million, and we believe higher by potentially double digits in fiscal 2023. Gross margins should be more stable based on our actions to date. We will have additional expenses associated with startup costs for OEM programs and Donquio's operations and expect higher gross profit contributions next fiscal year. Expenses will be more normalized as the reductions associated with furloughs and salary reductions were essentially back to base levels in last year's third quarter. We don't expect to incur the level of professional fees that we had in the first half, and we will be reporting comparable numbers for DEI. Total operating expenses in the second half are expected to be approximately $9 million higher in the second half of last fiscal year, with $8 million related to the addition of UNCIO. Selling expenses and G&A expenses are expected to be mostly in line with the prior year. Based on what we've accomplished this year, I believe we've positioned the company for greater profitability as we move into fiscal 2023 and beyond, and we have set our sights on exceeding $1 billion in sales over the next few years. And with that, I'll turn the call over to Mike for further detail. Mike?
spk01: Thank you, Pat. Good morning, everyone. Rather than walk through all of the three- and six-month comparisons, I'm going to provide additional background on some of the sales and expense drivers and break out non-routine and non-recurring expenses. I believe this will provide more clarity on our results for the first half of the year. As for revenues year-to-date for the compatible six-month periods, as Pat noted, both our aftermarket and OEM business was up significantly in the first half of the year. On the OEM side, key drivers were the start of the Nissan rear seat entertainment programs for Armada, QX80, higher sales from Stellantis as we started the Evolve program with Amazon's Fire TV, and higher sales from Ford. Component shortages certainly curtailed some of the growth, but we expect to make it up as production volumes increase. In the aftermarket, we had strong increases in vehicle security and from our DEI subsidiary, and modest increases in the video and telematics categories. Satellite radio fulfillment sales were down due to limited receiver production for several months this year. Premium audio product sales were up, and growth is anticipated to continue. We saw increases in the traditional passive and subwoofer categories in mobility products with the launch of several new headphones, and in the new cinema sound bars and computer speakers. Our German operations were up as many of the COVID-19 restrictions were lifted, and as we discussed, we added approximately 17.7 million in sales from 11TC as this subsidiary was formed in the second half of last year. The supply chain issues curtailed some of our expected growth, both for premium audio products and in several CE product categories. Regarding our gross margins, our gross margins in fiscal 2022 second quarter came in 370 basis points lower than the prior year period. We estimate that added costs related to the supply chain issues, expenses to cover additional warehouses in Asia, for example, and higher freight and fuel costs was approximately $1.6 million for the quarter, with the majority tied to premium audio. Similarly, for the six-month compatible periods, gross margins came in 260 basis points lower year over year, though growth profit dollars increased by almost 16 million. The dollar impact was approximately 2.2 million for the six-month period. Keep in mind, there were also higher costs of doing business throughout that drove margins lower for the CE segment, and we believe we've covered the bulk through our price increases and other steps taken, as Pat talked earlier. As for expenses, there were several expenses that came back as a result of the COVID restrictions implemented in fiscal 2021, and others that were non-routine and non-recurring in nature. Of the $10.4 million increase, Q2 of fiscal 2022 versus Q2 of last year, we had $3.1 million of professional fees related to transactions, We had $1.7 million in higher overhead at DEI as we owned them for roughly two months in Q2 of last year and the full quarter of this year. We had $1.5 million related to furloughed employees and salary and bonus reductions which were imposed during the COVID lockdown last fiscal year. And we had $1.1 million in non-reimbursed NRE expenses and additional outside labor expenses related to a new OEM program. The rest of the increase is related to commissions, e-commerce sales, web and advertising expenses, and additional R&D. Taking all of the increases into account, we estimate approximately 4.8 million of the increase is considered non-reoccurring. For the six-month compatible periods, operating expenses increased by 19.4 million. 5.4 million relates to DEI, owning them for six months versus two. $4.8 million is for professional fees. $3.5 million is for furloughed employees and salary and bonus reductions. $1.5 million is for NRE and outside labor. The remainder is mixed across SG&A and engineering and tech expenses. Of this, $6.3 million is considered non-reoccurring. Note that the acquisition costs and non-routine legal fees are taken into account in our adjusted EBITDA calculations. The total impact was approximately $2.7 million for the second quarter comparatibles and $4 million for the six-month comparatibles. We grew nicely dealing with the supply chain terminal. It did, however, have a big impact on our gross margins, some of which will be offset in the third and fourth quarters given the second wave of price increases and hopefully more stabilization in the markets. We were aggressively procuring what we need when we can, and we took some added steps, which added costs, to ensure we had as much inventory on hand as we can for the second half of this year. That was a strategic decision as is the investments Pat spoke of in R&D given the volume of automotive awards that we have been awarded and new programs we believe we are well positioned for in the future. We don't expect this level of professional fees as the transactions with Accio and Galvanize were behind us, and we're not expecting NRE expenses of this magnitude in the second half of the year. Through the first six months of fiscal 2022, Our operating income is down 3.5 million, though the increase of professional fees made up more than the difference. Net income attributable to Vox is up 4.1 million, and adjusted EBITDA is up 3.9 million. Moving to the balance sheet. As of August 31st, 2021, we had cash and cash equivalents of 41.1 million compared to 36.7 million as of May 31, 2021, and $59.9 million as of fiscal 2021 year-ended on February 28th. The roughly $18.3 million decline since year-end takes into account cash usage of $8.4 million to fund Accio's operations in the form of a note, which was satisfied and paid off as part of the transaction close on September 8th, and the remainder was for general working capital purposes. We funded the remainder of the Accio transaction this quarter, and we will be ramping up cash outlays as we typically do, as this is our largest selling season. Cash is expected to come back to normal levels at the end of the fourth quarter. Our total debt stood at $7.7 million as of August 31st, 2021, compared to $7 million as of May 31st, and $7.1 million as of February 28, 2021. The increase relates to an 800,000 usage of our $8 million Bureau loan in Vox Germany as we purchase more inventory for the third quarter. Our only U.S. debt is related to our foreign mortgage, which stood at $6.9 million as of August 31, and compared to $7.1 as of year-end. Total long-term debt, net of debt issuance cost was 5.2 million compared to 6 million for August 31st and Feb 28th, periods respectively. We have the cash and access to capital upon our acquisitions, invest in growth, continue to pursue strategic transaction that can positively impact our business and generate returns. That concludes my remark. Operator, ready to open the call for questions.
spk11: As a reminder, to ask a question, you will need to press star, the number one on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Your first question comes from the line of Tom Forte from DA Davidson. Your line is open.
spk14: Great. First off, Pat, congrats on navigating an incredibly challenging environment very well. The first question I had, and I had a handful, is at a high level, Pat, you sound more optimistic about your business this quarter versus last quarter. A, would you agree with that statement? And if you do agree with that statement, what are the three reasons for the increased optimism?
spk04: Well, I mean, when we look at what transpired, I mean, we did close on the Onkyo transaction. That was very positive. We closed on the galvanized. We have started shipping our OEM programs. We have the additional Ford coming on. So, you know, where we see this business is layering on the existing business that we have. And that gives us a great deal of optimism as we look into next year when we believe that a lot of the supply issues and chip shortage issues will start to abate somewhat. It's not going to be immediate, but it will abate, and that will give us higher production at car manufacturers, more dealers' cars sitting in dealerships across the country. That's very positive for the automotive business. And then the demand that we're seeing globally for Onkyo and Pioneer is very strong. And as we move into next year, Sharp will be adding another factory in order to make sure that they can supply the demand that we have. So it all looks very positive.
spk14: Great. All right. So then my other question is, first off, congrats on the Onkyo deal. Can you give your current thoughts on M&A opportunities just at a high level and what you're seeing as far as pricing?
spk04: Well, I mean, you know, we have our eyes on a couple of strategic acquisitions that we would like to pull off in a year or two. There's no rush at this point. I want to make sure that the entire team is capable of digesting everything all the work that we've done this year and make sure that everything is solid there. But there are a number of companies that in some cases we've had preliminary conversations with that we think Vox would be the desired acquirer if they were to sell. And, you know, part of our strategy going forward, our strategy to get, you know, up to a billion dollars in sales is is obviously laying around the new business that we've achieved. We're thinking that we could lay around between Onkyo and the new OEM awards, about $250 million on top of our business that we have now. That brings us close to $900 million, and then an acquisition of a $100 million or $150 million company would get us there. So that's definitely part of the strategy. As far as the cost, we will be very, very diligent in making sure that we do not overpay. I think our history shows that we've been able to do some very strong acquisitions at competitive prices, and I think we'll be able to do that again.
spk13: Great. Thank you, Pat. Thanks for taking my question.
spk04: Thank you, Tom.
spk11: Your next question comes from the line of Stephen Dennis. Your light is open.
spk06: I've got a couple of questions. I'm a private investor. I've been on your calls for quite a while, and I've lied to stock for quite a while. You make a statement in the quarterly report. You say we expect growth to continue in the second half of the year and to be up 15% for the full fiscal year. What does that relate to? What numbers are being used to come up with that?
spk04: The numbers that we're using are the projections that we have from our customers that are, you know, placing orders. We have promotions scheduled for the second half, and if we're able to make sure that we deliver in the second half, which we believe between what we have in the box, so to speak, that we will be able to achieve our third quarters and what we have coming in in the third quarter for the fourth quarter, that we will be able to achieve, you know, that type of result.
spk06: So it's actually not based on any concrete numbers. It's just a projection. It's not based on earnings per quarter. Okay. The other question I have is in the last couple of, at least the last couple of quarterly earnings reports, you mentioned a company stock buyback. It appears to me, based on public knowledge, that Mr. Colley has bought over 4 million shares. That seems to be the company's repurchase is through Mr. Colley. Is that correct? Is the company going to be buying any shares?
spk04: First off, the company bought about a million two shares over the past quarter. Okay. Mr. Cowley's holdings were not acquired in the third quarter or in the second quarter. They were acquired over, I believe, an almost two-year period. Okay.
spk06: All right. I'll just relate one other thing. I live in Florida. You're a Costco investor. And both Bradenton and Sarasota constantly have your product.
spk15: Yep.
spk06: They're always there. It's always well displayed.
spk04: One of the things that we were asked over the past quarter is, is the business sustainable? And with Costco sustaining the program with us and adding, we have a big program going with the Costco right now for the holiday season. So Costco has become a very strong account, and that will continue.
spk06: My comment is that, you know, every day it's supply chain, it's supply chain, but our product is in Costco all the time.
spk04: Well, we've worked very hard to make sure that we have the inventory. We stepped out in the early part of the second quarter to make sure that all the production facilities were firing on, you know, And we unfortunately had to take on additional warehousing in Asia to hold the goods because of the delays with getting them on boats and everything. But I think that's going to be proven to be the right strategy going into the third quarter.
spk05: Okay. Hope so.
spk04: Perfect. Thanks, Stephen.
spk05: Thank you.
spk11: I am showing no further questions at this time. I would now like to turn the conference back to Paul. Patrick Lovell.
spk04: Well, thank you all. Once again, thank you for the support of Vox. It has been, and it's not just this past year, over the last two years, it has been very, very challenging. But as I said earlier, I believe the Vox team has performed exceptionally well remotely and now coming back to work and working through all the logistic issues that we've had. So we're anticipating that we will be able to finish the year on a strong note. I want to thank you and wish you all a good day.
spk11: This concludes today's conference call. Thank you for participating. You may now disconnect. Thank you. Thank you. Thank you. Thank you.
spk08: Thank you.
spk11: Good day and thank you for standing by. Welcome to the VOX International Fiscal 2022 Second Quarter 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. To ask a question during the session, you will need to press star, the number one on your telephone. If you require any assistance, please press star zero. I would now like to turn the conference over to your speaker today, Glenn Miner.
spk17: Thank you. Good morning and welcome to Box International's fiscal 2022 second quarter conference call. Our press release was issued yesterday after the market closed and we followed our form 10Q with the SEC. Both documents can be found in the investor relations section of our website and an updated investor presentation will be posted later. Today, we will have prepared remarks from Pat Lavelle, President and Chief Executive Officer, and Michael Storr, Senior Vice President and Chief Financial Officer, after which we will open up the call for questions. 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 ended February 28th, 2021. Also note, management will be presenting at the Sedoti Investor Conference on December 8th and 9th and hosting one-on-one meetings with investors throughout the two-day period. We have also registered to present at the Imperial Capital Security Conference on December 14th with more details to follow. There are other events we are evaluating in the remainder of the calendar year, and we will update our investors accordingly. I'd like to thank you all for your continued support of Vox, and it is now my pleasure to turn the call over to Pat LaValle.
spk04: Pat? Thank you, Glenn, and good morning, everyone. In light of what we experienced this past quarter, I'm quite pleased with our performance. If you consider all of the one-time events, especially considering the worldwide economic turmoil that we've all encountered over the past year, the Vox team has done a good job navigating through what we believe was the worst of the supply chain shortfalls. The initial price increases that we instituted have taken effect, And due to the rapid increase in the second quarter of container prices, we instituted a second wave of price increases in September. We have the inventory on hand to deliver in our all-important third quarter. In addition, we have added new or alternative suppliers to increase component availability. We changed our ordering protocols to compensate for longer lead times and even modified boards to utilize alternative chips. We believe all of these measures combined will give us more flexibility in terms of how we manage the business in the quarters ahead. Revenues grew almost 12% in Q2 and are up 40% through the first six months year over year. And this was accomplished despite missing a few inventory turns, which were expected due to the corresponding shipping delays. Gross margins. primarily in our consumer electronics segment, were impacted by the supply chain and the added costs associated with freight and warehousing. And while there will be some continued pressure, the good news is that we expect less of an impact coming out of this calendar year. The increase in our operating expenses were primarily due to a full six months of DEI compared to two months in fiscal 21. higher employee costs as we brought back furloughed employees and restored salaries. We also added expenses associated with some of our larger and new OEM programs and had higher professional fees to support Bianchio and galvanize due diligence and transactions. For the six-month period in fiscal 2022, we had an operating loss of $3.1 million versus operating income of $400,000. Taking into account one-time non-recurring expenses, our operations actually performed better than the first half of last year, especially with the $5.7 million increase in professional fees, $4.8 million of which we consider non-recurring, and roughly $2.9 million of added expenses for NRE and labor, and extra warehouses to hold inventory in Asia waiting for shipments. On an adjusted EBITDA basis, we reported 14.6 million versus 10.7 million for the first halves of fiscal 22 and 21, an improvement of 3.9 million. Looking ahead, we anticipate continued growth in the second half of the year, with Q3 a little under and Q4 above the prior year. We expect to be profitable in both quarters, and the variance from the prior year to this year is primarily in an engineering and tech support as we expect to see an increase of approximately $9 million year-over-year to fund growth-related programs, nearly $5 million of which relates to the addition of Antioch's engineering team. I will add some comments with respect to next fiscal year in my closing comments, but needless to say, there is a lot of momentum at Vox. Our automotive electronics segment grew by 40% in the second quarter, and revenues are up 77% through the first half of the year. The second quarter comparisons, our aftermarket business was up 34% with the added contribution from our DEI subsidiary. Our OEM business was up 53% due to new rear seat entertainment programs with Nissan and Stellantis, both of which began this past quarter and should ramp up in volume as customers increase production. And we have Ford starting in the fourth quarter, which will be added boost to the top-line revenue. We also saw increases in automotive safety and security products. For the six-month comparisons, our automotive segment grew by 77% with aftermarket revenue up over 81% and OEM revenue up approximately 70%. Keep in mind, this growth was achieved despite all of the shortages and delays which impacted not only our aftermarket dealers, but placed a significant strain on our OEM customers as well. The environment worsened this past quarter with a number of car manufactured shutting plants due to lack of parts. We expect this to normalize as we move into next year and more capacity comes online. Our consumer electronics business grew by approximately 2% in the second quarter, and almost 28% year-to-date. Premium audio product sales grew by approximately 10% in the second quarter and over 42% through the first six months, which offset declines in other CE product sales. A majority of the CE segment product sale declines related to inventory and chip shortage, which in turn led to production delays, and there were continued store closures in Europe. This also impacted premium audio product sales, but we are still growing and expect this to continue. During the quarter, we had increases in sales of premium wireless speakers and wireless computer speakers and higher sales of premium audio in Europe. For the six-month period, we grew in virtually all premium audio categories. Eleven Trading Company saw a sales increase of 11.4 million in the second quarter and 17.7 million when comparing the six-month period. As most of you are aware, we closed on the acquisition of Onkyo's home entertainment AV business in September, which is our fiscal third quarter, and this transaction holds great promise for our company, both in terms of growth and added profitability. And lastly, our biometric segment sales remain relatively flat for the quarter comparisons, but was up 27% for the six-month period. We're expecting this segment to post more meaningful revenue increases and smaller losses as we begin to realize future contributions from the galvanized distribution agreement, our new healthcare customer, which ramps up next year, and other smaller projects we have been awarded. Overall, we have performed well given the environment. I'd like to shift now to our outlook as we're quite bullish on our prospects. This optimism is based on the contracts we have been awarded, the new additions to the Vox family of brands and products, and a lot of behind-the-scenes momentum which has been delayed because of the global supply chain issues and should start to come back to life as things begin to gradually improve. With Amazon's Fire TV, we can offer our customers more content than anyone. Based on the investments we have made over the past two years, we are the clear-cut leader with our technology and expertise. This past quarter, we began shipping to Stellantis and Nissan, and soon we'll be delivering to Ford. Based on what I've been told by our OE customers, automotive production is anticipated to increase, and the capacity constraints should begin not only to stabilize but improve over the coming quarter. This bodes well for growth and incremental bottom-line profits. We have resumed conversations with several other OEMs that have been in limbo for a good part of the year due to supply chain issues, and we believe we will see additional incremental awards layering on top of our core. Even without this, we are still positioned to double this business by next year compared to fiscal 2020. Our outlook has not changed. VSM is doing very well and puts us in new product categories and new OEM channels. DEI has grown since we acquired them and solidifies our position in several automotive security categories. Premium Audio continues to be a strong growth driver, and that will intensify with the addition of the Onkyo acquisition and new licensing agreement with Pioneer. I indicated on my last call that we should do approximately $50 million in sales this fiscal year, and provided that we don't have any additional shipment issues, we should do a little bit better than that. As we ramp up production and rebuild distribution with a focus initially on North America, we believe we can reach over $125 million in sales the next fiscal year, and as we expand globally, we expect to exceed over $200 million. As we are now the owners, we expect to see gross margins at our 11TC operations improve as well. With the anticipated revenue increases, margins more in line with historical premium audio products, 11TC should be a significant contributor to our bottom line. Now, we normally don't provide guidance, but given all that has transpired, we'd like to offer some direction for the third and fourth quarters. Our outlook is based on customer projections and what we have done to date, and barring any unforeseen events, we feel comfortable with the following statements. We expect sales to be up modestly in the second half of the year with the third quarter below and the fourth quarter above the prior year periods. Fiscal 2022 sales should come in around 640 to 650 million, and we believe higher by potentially double digits in fiscal 2023. Gross margins should be more stable based on our actions to date. We will have additional expenses associated with startup costs for OEM programs and Donquio's operations and expect higher gross profit contributions next fiscal year. Expenses will be more normalized as the reductions associated with furloughs and salary reductions were essentially back to base levels in last year's third quarter. We don't expect to incur the level of professional fees that we had in the first half, and we will be reporting comparable numbers for DEI. Total operating expenses in the second half are expected to be approximately $9 million higher in the second half of last fiscal year, with $8 million related to the addition of UNCIO. Selling expenses and G&A expenses are expected to be mostly in line with the prior year. Based on what we've accomplished this year, I believe we've positioned the company for greater profitability as we move into fiscal 2023 and beyond, and we have set our sights on exceeding $1 billion in sales over the next few years. And with that, I'll turn the call over to Mike for further detail. Mike?
spk01: Thank you, Pat. Good morning, everyone. Rather than walk through all of the three- and six-month comparisons, I'm going to provide additional background on some of the sales and expense drivers and break out non-routine and non-recurring expenses. I believe this will provide more clarity on our results for the first half of the year. As for revenues year-to-date for the compatible six-month periods, as Pat noted, both our aftermarket and OEM business was up significantly in the first half of the year. On the OEM side, key drivers were the start of the Nissan rear seat entertainment programs for Armada, QX80, higher sales from Stellantis as we started the Evolve program with Amazon's Fire TV, and higher sales from Ford. Component shortages certainly curtailed some of the growth, but we expect to make it up as production volumes increase. In the aftermarket, we had strong increases in vehicle security and from our DEI subsidiary, and modest increases in the video and telematics categories. Satellite radio fulfillment sales were down due to limited receiver production for several months this year. Premium audio product sales were up, and growth is anticipated to continue. We saw increases in the traditional passive and subwoofer categories in mobility products with the launch of several new headphones, and in the new cinema sound bars and computer speakers. Our German operations were up as many of the COVID-19 restrictions were lifted, and as we discussed, we added approximately 17.7 million in sales from 11TC as this subsidiary was formed in the second half of last year. The supply chain issues curtailed some of our expected growth, both for premium audio products and in several CE product categories. Regarding our gross margins, our gross margins in fiscal 2022 second quarter came in 370 basis points lower than the prior year period. We estimate that added costs related to the supply chain issues, expenses to cover additional warehouses in Asia, for example, and higher freight and fuel costs was approximately $1.6 million for the quarter, with the majority tied to premium audio. Similarly, for the six-month compatible periods, gross margins came in 260 basis points lower year over year, though growth profit dollars increased by almost 16 million. The dollar impact was approximately 2.2 million for the six-month period. Keep in mind, there were also higher costs of doing business throughout that drove margins lower for the CE segment, and we believe we've covered the bulk through our price increases and other steps taken, as Pat talked earlier. As for expenses, there were several expenses that came back as a result of the COVID restrictions implemented in fiscal 2021, and others that were non-routine and non-recurring in nature. Of the $10.4 million increase, Q2 of fiscal 2022 versus Q2 of last year, we had $3.1 million of professional fees related to transactions, We had $1.7 million in higher overhead at DEI as we owned them for roughly two months in Q2 of last year and the full quarter of this year. We had $1.5 million related to furloughed employees and salary and bonus reductions which were imposed during the COVID lockdown last fiscal year. And we had $1.1 million in non-reimbursed NRE expenses and additional outside labor expenses related to a new OEM program. The rest of the increase is related to commissions, e-commerce sales, web and advertising expenses, and additional R&D. Taking all of the increases into account, we estimate approximately 4.8 million of the increase is considered non-reoccurring. For the six-month compatible periods, operating expenses increased by 19.4 million. 5.4 million relates to DEI, owning them for six months versus two. $4.8 million is for professional fees. $3.5 million is for furloughed employees and salary and bonus reductions. $1.5 million is for NRE and outside labor. The remainder is mixed across SG&A and engineering and tech expenses. Of this, $6.3 million is considered non-reoccurring. Note that the acquisition costs and non-routine legal fees are taken into account in our adjusted EBITDA calculations. The total impact was approximately $2.7 million for the second quarter comparatibles and $4 million for the six-month comparatibles. We grew nicely dealing with the supply chain terminal. It did, however, have a big impact on our gross margins, some of which will be offset in the third and fourth quarters given the second wave of price increases and hopefully more stabilization in the markets. We were aggressively procuring what we need when we can, and we took some added steps, which added costs, to ensure we had as much inventory on hand as we can for the second half of this year. That was a strategic decision as is the investments Pat spoke of in R&D given the volume of automotive awards that we have been awarded and new programs we believe we are well positioned for in the future. We don't expect this level of professional fees as the transactions with Accio and Galvanize were behind us, and we're not expecting NRE expenses of this magnitude in the second half of the year. Through the first six months of fiscal 2022, Our operating income is down 3.5 million, though the increase of professional fees made up more than the difference. Net income attributable to Vox is up 4.1 million, and adjusted EBITDA is up 3.9 million. Moving to the balance sheet. As of August 31st, 2021, we had cash and cash equivalents of 41.1 million compared to 36.7 million as of May 31, 2021, and 59.9 million as of fiscal 2021 year-ended on February 28th. The roughly 18.3 million decline since year-end takes into account cash usage of 8.4 million to fund Accio's operations in the form of a note, which was satisfied and paid off as part of the transaction close on September 8th. And the remainder was for general working capital purposes. We funded the remainder of the Accio transaction this quarter, and we will be ramping up cash outlays as we typically do, as this is our largest selling season. Cash is expected to come back to normal levels at the end of the fourth quarter. Our total debt stood at $7.7 million as of August 31st, 2021, compared to $7 million as of May 31st, and 7.1 million as of February 28, 2021. The increase relates to an 800,000 usage of our 8 million euro loan in Vox Germany as we purchase more inventory for the third quarter. Our only U.S. debt is related to our foreign mortgage, which stood at 6.9 million as of August 31, and compared to 7.1 as of year end. Total long-term debt, net of debt issuance cost was 5.2 million compared to 6 million for August 31st and Feb 28th, periods respectively. We have the cash and access to capital upon our acquisitions, invest in growth, continue to pursue strategic transaction that can positively impact our business and generate returns. That concludes my remark. Operator, ready to open the call for questions.
spk11: As a reminder, to ask a question, you will need to press star, the number one on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Your first question comes from the line of Tom Forte from DA Davidson. Your line is open.
spk14: Great. First off, Pat, congrats on navigating an incredibly challenging environment very well. The first question I had, and I had a handful, is at a high level, Pat, you sound more optimistic about your business this quarter versus last quarter. A, would you agree with that statement? And if you do agree with that statement, what are the three reasons for the increased optimism?
spk04: Well, I mean, when we look at what transpired, I mean, we did close on the Onkyo transaction. That was very positive. We closed on the galvanized. We have started shipping our OEM programs. We have the additional Ford coming on. So, you know, where we see this business is layering on the existing business that we have. And that gives us a great deal of optimism as we look. into uh next year when we believe that a lot of the supply issues and chip shortage issues will start to abate somewhat it's not going to be immediate but it will abate and that will give us you know higher production at car manufacturers more dealers cars sitting in in dealerships across the country that's very positive for the automotive business and then the demand that we're seeing globally for Onkyo and Pioneer. It's very strong. And as we move into next year, Sharp will be adding another factory in order to make sure that they can supply the demand that we have. So it all looks very positive.
spk14: Great. All right. So then my other question is, first off, congrats on the Onkyo deal. Can you give your current thoughts on M&A opportunities just at a high level and what you're seeing as far as pricing?
spk04: Well, I mean, you know, we have our eyes on a couple of strategic acquisitions that we would like to pull off in a year or two. There's no rush at this point. I want to make sure that the entire team is capable of digesting everything all the work that we've done this year and make sure that everything is solid there. But there are a number of companies that in some cases we've had preliminary conversations with that we think Vox would be the desired acquirer if they were to sell. And, you know, part of our strategy going forward, our strategy to get, you know, up to a billion dollars in sales is is obviously laying around the new business that we've achieved. We're thinking that we could lay around between Onkyo and the new OEM awards, about $250 million on top of our business that we have now. That brings us close to $900 million, and then an acquisition of a $100 million or $150 million company would get us there. So that's definitely part of the strategy. As far as the cost, we will be very, very diligent in making sure that we do not overpay. I think our history shows that we've been able to do some very strong acquisitions at competitive prices, and I think we'll be able to do that again.
spk13: Great. Thank you, Pat. Thanks for taking my question.
spk04: Thank you, Tom.
spk11: Your next question comes from the line of Stephen Dennis. Your light is open.
spk06: I've got a couple of questions. I'm a private investor. I've been on your calls for quite a while, and I've lied to stock for quite a while. You make a statement in the quarterly report. You say we expect growth to continue in the second half of the year and to be up 15% for the full fiscal year. What does that relate to? What numbers are being used to come up with that?
spk04: The numbers that we're using are the projections that we have from our customers that are, you know, placing orders. We have promotions scheduled for the second half, and if we're able to make sure that we deliver in the second half, which we believe between what we have in the box, so to speak, that we will be able to achieve our third quarters and what we have coming in in the third quarter for the fourth quarter, that we will be able to achieve, you know, that type of result.
spk06: So it's actually not based on any concrete numbers. It's just a projection. Not based on earnings per quarter. Okay. The other question I have is in the last couple of, at least the last couple of quarterly earnings reports, you mentioned a company stock buyback. It appears to me, based on public knowledge, that Mr. Colley has bought over 4 million shares. That seems to be the company's repurchase is through Mr. Colley. Is that? Is the company going to be buying any shares?
spk04: First off, the company bought about a million two shares over the past quarter. Okay. Mr. Cowley's holdings were not acquired in the third quarter or in the second quarter. They were acquired over, I believe, an almost two-year period. Okay.
spk06: All right. I'll just relate one other thing. I live in Florida. Your Costco in both Bradenton and Sarasota constantly have your product.
spk04: Yep.
spk06: They're always there. It's always well displayed.
spk04: One of the things that we were asked over the past quarter is, is the business sustainable? And with Costco sustaining the program with us and adding, we have a big program going with the Costco right now for the holiday season. So Costco has become a very strong account. and that will continue.
spk06: My comment is that, you know, every day it's supply chain, it's supply chain, but our product is in Costco all the time.
spk04: Well, we've worked very hard to make sure that we have the inventory. We stepped out in the early part of the second quarter to make sure that all the production facilities were firing on, you know, at full capacity. And we unfortunately had to take on additional warehousing in Asia to hold the goods because of the delays with getting them on boats and everything. But I think that's going to be proven to be the right strategy going into the third quarter.
spk05: Okay. Hope so.
spk04: Perfect.
spk05: Thanks, Stephen. Thank you.
spk11: I am showing no further questions at this time. I would now like to turn the conference back to Paul. Patrick Lovell.
spk04: Well, thank you all. Once again, thank you for the support of Vox. It has been, and it's not just this past year, over the last two years, it has been very, very challenging. But as I said earlier, I believe the Vox team has performed exceptionally well remotely and now coming back to work and working through all the logistic issues that we've had. So we're anticipating that we will be able to finish the year on a strong note. I want to thank you and wish you all a good day.
spk11: This concludes today's conference call. Thank you for participating. You may now disconnect.
Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

-

-