VOXX International Corporation

Good day, and thank you for standing by. Welcome to the Vox International Fiscal 2022 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. To ask a question during the session, you will need Star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press Star 0. I would now like to hand the conference over to your speaker today, Lynn Weiner of Investor Relations. Please go ahead.

Thank you. Good morning, and welcome to Vox International's fiscal 2022 third quarter conference call. Yesterday, we followed our Form 10-Q and issued our press release, and this morning, we uploaded a new investor presentation, and all documents can be found in the investor relations section of our website at www.voxintl.com. Today, we have prepared remarks from Pat Lavelle, President and Chief Executive Officer, and Michael Storr, Senior Vice President and Chief Financial Officer, after which we'll 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'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, 2021. We're coming off a very active week in Las Vegas at CES 2022, and next week on January 19th and 20th, we will be presenting at the Sedota Conference. Let me end by wishing you all a happy new year, and I'd like to thank you for your continued support of Vox, and now it is my pleasure to turn the call over to Pat. Pat?

Thank you, Glenn, and before I start, I would also like to wish everyone a healthy and prosperous new year. You know, last year, we had one of the best third quarters in our history. And this year, we did not repeat at those levels given the strength of last year's Q3. But overall, we had a strong quarter. We outperformed our plan, exceeding our latest projection for revenue, margins, and operating income. And nothing has changed with respect to our outlook. We see growth and improved profitability going into next fiscal year and beyond, especially with the new OEM award we received this past quarter from Stellantis, which is estimated to be approximately $125 million. Before I cover the results, I want to address the Sea Guard Electronics Arbitration. They are a former supplier of ours, providing stolen vehicle recovery systems. and we signed a supply agreement with them in 2007, and more than 10 years later, they filed claims for breach of contract and patent infringement. Throughout the process, we have been advised by legal counsel that the case was unlikely to go against us, and if it did, our exposure was not material, a few million dollars at most. Based on that advice, the company did not specifically disclose this matter in footnote 24 to its financial statements, which covers contingencies. The initial damages that were sought were 10 million. And the day before the fact witness portion of the arbitration concluded, Sea Guard amended its claim and sought $40 million. The arbitrator allowed this to happen and awarded Sea Guard $39.4 million of damages. Needless to say, we were shell-shocked by this. There's no other way to say it. And we are going to fight it. We have reviewed our legal options and made a motion in the arbitration proceeding to modify the interim award based on the plain language of the supply agreement. If this motion is unsuccessful, we intend to seek the California court to vacate or modify the award on legal and equitable grounds. While the initial award is for $39 million, We are not paying this out. Rather, we took a charge this quarter, which is reported in other income and reflected on our balance sheet. Just about every law firm we spoke to afterwards concurred with our initial assessment and believed the arbitrator's ruling was egregious as to the calculation of damages, it was inequitable, and that she overstepped her authority as an arbitrator. We hired a new California-based national law firm to represent us to vacate or modify the award, one specializing in these types of situations. Currently, we have three options, seek a modification or reconsideration of the interim award, seek to have the court vacate, modify, or correct the interim award, or negotiate. We are aware of the challenges in having an award overturned, challenging but attainable. and are confident we will get the case heard. We have been advised there is precedent for modification given the facts of the case, how this process unfolded, and the legal basis of the ruling. Our balance sheet is strong, and we have cash and substantial availability on our credit facility. And again, we are not paying out cash at this time, and should the ruling be overturned or modified and result in a lesser amount, we will reverse the charge accordingly resulting in a potential positive pickup in net income. The process could take up to a year or more until it's resolved and we are going to exhaust all options. Now let's move to the business in the third quarter. As I stated, We did not repeat the exceptional performance of last year's fiscal third quarter, but we did beat plan and remain on track to finish the year on a positive note with significant growth prospects ahead. In Q3, we reported net sales of 192 million, down less than 5%. Had it not been for some OEM customers pausing production due to their chip and part shortages, we would have come in around last year's Q3. Gross margins while down year over year were about 100 basis points higher sequentially compared to Q2 and came in better than forecast. The second wave of price increases we instituted are having a bigger impact, offsetting the higher cost of doing business. Our automotive segment was impacted by temporary pauses at OEM plants and tighter margins due to price increases. Higher operating expenses were primarily a result of R&D and engineering expenses within the automotive segment to support new OEM launches and the addition of the Onkyo engineering team. Operating income of $7.8 million was down $10.4 million year-over-year, and adjusted EBITDA of $15.5 million down $9.2 million. But again, our bottom-line performance came in above planned. I'll give you a quick snapshot of our year-to-date performance through Q3. Total net sales are up 71 million or close to 18%. Gross profit margins are down 240 basis points due to the sharp run-up in supply chain-related costs, but gross profit dollars are up 9.4 million due to higher revenue. An adjusted EBITDA of 30 million is down 5.3 million. Considering the difficulties posed by part and labor shortages and price increases, transportation and warehousing cost increases, the global pandemic in 2020 and its resurgence in 2021, we have managed through it all. We thought fiscal 21 was tough managing through COVID, but I have to say in my 40 plus years of doing business, fiscal 22 has been the most challenging by far. All things being equal, I am proud of the team. We've grown, we're profitable, and have many paths to create value. Let me move on to the segments for the quarter. Automotive segment sales were up year over year by about $100,000, with OEM product sales up $4.4 million and with aftermarket down $4.3 million, primarily due to chip shortages and some delays as we moved from air freight to boats. Driving our OEM business were RSE programs with Ford, Stellantis, and Nissan, and ongoing business with the top heavy-duty truck manufacturers such as Daimler Truck, Paccar, Volvo, and Navistar. While these events have driven OEM sales growth, volumes have been less than initially expected given chip and part shortages and the starts and stops with our customers' productions. In light of the price increases, we constantly negotiate with suppliers and customers and even more so in recent months. As we incur higher costs, we must cover them. We got some pickup from the second wave of increases we instituted last quarter and expected to see a bigger impact in the fourth quarter as some contracts required a notice period before taking effect. By the end of the year, The automotive segment will have nearly doubled from where we were in fiscal 2020. We're expecting more significant growth in the years ahead based on the awards that we have secured. The good news that I have to report today is the new OEM award with Stellantis. Our original award with Stellantis was for approximately $300 million. Based on their revised projections, the award forecast now is about $275 million. And this covers the Chrysler Pacifica, the Jeep Wagoneer, and the Jeep Cherokee vehicles for model years 2022 through 2026. We received an additional award for the Dodge Ram covering model years 2024 through 2026, which is estimated to be approximately $125 million. So Stellantis now represents awards of approximately $400 million. With Ford, we received an initial award for $75 million covering the Lincoln Navigator and the Ford Expedition for model years 2022 through 2024. This award is now projected at $80 million. And we have the $20 million award from Nissan for our EVO system, and we have a variety of awards from the truck manufacturers and Tier 1 suppliers for approximately $30 million some spanning as long as 10 years. This equates to approximately $530 million in OEM awards we have received over the past two and a half years with production in its early stages. There are three other things driving our optimism for automotive. I talked about adding other potential customers for Amazon Fire TV prior to the supply chain outbreak. COVID and the industry environment held back negotiations on projects, but more recently we've begun to see increased activity, and this bodes well for future growth as any additional OEM business would layer on top of our core and the incremental business we've already been awarded. DEI has performed better than projected, and they added strong brands and a powerful distribution network. We are the clear-cut leader in aftermarket security and remote starts with the best-selling products in the market. VSM, as I indicated, has received a number of long-term OEM awards while expanding its customer base. We have production secured for many years out and new products coming to market. Adding new OEM channels and product lines was a big reason behind this acquisition and it's beginning to show results. You can summarize our automotive segment in a sentence. We continue to win new OEM awards with a lot of room for growth as we penetrate new customer accounts. Moving on to consumer electronics. Consumer electronics segment sales declined by approximately 6.7% in the third quarter, as we expected, and are up 11.2% year to date. Premium audio product sales last year benefited from exceptionally high order volume with more stay-at-home purchases and new sales from the ProMedia speaker launch. We took steps in the first half of the year to secure inventory to meet customer demand, and we succeeded. The acquisition of Onkyo further strengthened the segment with 7.8 million in higher sales over Q3 of fiscal 21. We are aggressively working with Sharp to rebuild manufacturing and distribution, and the demand is certainly there. Barring any additional supply chain issues or unforeseen events, we believe we can reach sales of 125 million next fiscal year, with a goal of reaching 200 million as we expand worldwide. The addition of Onkyo, Integra, and the pioneer brands, along with Klitsch and our other speaker brands, gives us the ability to offer our retailers and consumers a much wider assortment of complete, sophisticated home audio solutions. Year-to-date premium audio sales are up 16.7%. At CES, the premium audio company showcased its 2022 product lineup. It's another year of a lot of excitement. We had strong media coverage and customer interest. And I'm just going to go over three of the new lines we debuted, but you can read more about them on the CLPS website. The CLPS Jubilee is the new flagship product of the Heritage Speaker Series. It is a horn-loaded two-way loudspeaker incorporating the latest acoustic technology and designed to deliver the ultimate in listening experience. The CLPS Jubilee is priced at $35,000 a pair. The new Klipsch reference speakers features Tractrix horns for high frequency reproduction, resulting in sound stage quality of audio. Lastly, the McLaren edition of our Phibes powered speakers features a high efficiency DSP amplifier for high resolution and ultra low mass carbon fiber for enhanced performance. This takes the best from both McLaren Racing and Klitsch. Staying within consumer, our other CE product sales, primarily accessory lines, were down 5.7% year-over-year in Q3 and 5.3% year-to-date. Nothing was out of the ordinary. Sales were down modestly across several categories due to limits on inventory supply and some decisions we made to address rising costs in lieu of certain sales. Our customer relationships remain very strong and we expect to expand with some key accounts in the coming year. For example, our Sensation program has done very well with Costco Canada and we secured the fiscal 23 program with more than two times the volume. Our reception programs with Walmart have been very strong in the U.S. and we will be adding additional SKUs to our lineup and have expanded programs with them and other retailers throughout North America. Overall, we're operating a smaller but profitable business, which globally should be 90 to 100 million in sales. We're always looking to enhance our product lineup and remain focused on stable and profitable growth. Moving on to biometrics. The biometric segment remained relatively flat for the quarter and is up 15.6% year to date. We received our first payment from Galvanize following approval of the agreement at our annual meeting of shareholders, and the cash received will be accounted for on our balance sheet, not flowed to the gross profit as initially informed. This is because Galvanize has the right to convert to equity based on the value it pays to ILOC in the future. But during the quarter, we made progress with respect to current projects and secured future awards. First, the healthcare award we received, we are on schedule for beta launches in the coming quarters and deployment in late 2022 with a ramp up thereafter. Through galvanize in Q3, we were awarded new business from a Switzerland based customer in life sciences and entered into an MSA and license agreement with a home healthcare and AI diagnosis company. Additionally, we are working on a prototype for an auto mall in Miami, And if successful, we plan to roll this out through our automotive aftermarket group. Delivery is set for Q1 of fiscal 22. And during the third quarter, ILOC also was awarded a small piece of business from a U.S. government agency. We also made a change in management, appointing Alan Eibach to the role of president of ILOC. Based on his extensive background and knowledge of the markets, he is the right individual for the job. He has over 25 years of experience in technology, has served as the CEO of technology companies, including Data Transfer Solutions, a business he co-founded and successfully ran before it was sold to SNC-Lavalin, one of the largest companies in Canada. He has very strong relationships with target customer accounts, particularly with government agencies. There are several projects ILOC is currently working on that have great promise. And as we have learned from the past, these do take time, especially when discussing embedded solutions and the modifications that are typically required. Some of the more recent work is centered around access control systems, authentication software for healthcare professionals and pharmacies, and embedded applications in large volume public settings. In closing, we continue to perform well in what is a very challenging environment. We remain on track with our sales forecast for the fiscal year with the only caveat being the car manufacturers keep to their production schedule. Next year should show growth with scheduled OEM launches and the addition of Onkyo. Gross margins have and should continue to improve modestly near term, especially as the automotive price increases take hold and OEMs return to more consistent production. And operating expenses are in line with our prior comments, with the second half increase primarily related to Onkyo R&D and automotive engineering. Let me make it clear. We are not chasing growth at the risk of losing profits. We are focused on securing long-term profitable partnerships. We have proven to be agile and disciplined, and with the foundation we've built over the past few years, believe the company can drive significant top and bottom line improvements. At this point, I'll now turn the call over to Mike.