VOXX International Corporation

Welcome to the fiscal 2023 second 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 the question during the session, you will need to press star 11 on your telephone. I would now like to hand the conference over to your speaker for today, Glenn Wingner, Investor Relations. You may begin.

Thank you, and good morning. Welcome to Vox International's fiscal 2023 second quarter conference call. Yesterday, we filed our Form 10-Q and issued our press release, and this morning, we posted an updated investor presentation. All of these documents can be found in the investor relations section of our website at www.voxintl.com. Today, we'll have prepared remarks from Pat Lavelle, President and Chief Executive Officer, and Michael Storrs, 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 updating 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 28, 2022. I'd like to thank you all for your continued support, and I would like to now turn the call over to Pat.

Thanks, Glenn, and good morning, everyone. Last quarter, I talked about the challenges we face given the state of the global economy, and our primary issue remains the industry-wide availability of chips as this continues to slow down OEM production, and the overall state of the economy has resulted in lower inventory levels and purchase by retailers. We knew the first half would be difficult, and it was. We expect the second half to be better, though we have tempered our outlook as our customers work through market obstacles. We recently adjusted prices and implemented cost control measures, some of which are short-term, others which will lead to lower operating cost basis when conditions improve. Nothing has changed with respect to our optimism once economic conditions improve. I believe we remain positioned to drive both top and bottom line growth and enhance many of our market leading positions. Through the first half of fiscal 23, sales were down approximately 9%, gross margin declined by 180 basis points, expenses were up 3%, and we posted an adjusted EBITDA loss of 3.4 million compared to an adjusted EBITDA of 14.7 million in the first half of fiscal 22. We projected a top-line decline and a loss through the first half, though conditions in the second quarter were weaker than anticipated. And this is not just for Vox, but our industry as a whole. Global economies are facing geopolitical shocks. The world is still recovering from COVID in different places. And we are experiencing inflation rates that we have not seen in decades. Inflation has driven up costs for business and prices up for consumers, and the Fed has indicated they will continue to raise interest rates to slow the economy further. The Vox has been through recessions before, and we will get through this one. Looking back over the past two years, we posted strong operating results amidst COVID and the supply chain problems. This year has been harder, as the economy has worsened in the US and globally. We can manage costs and inventory, but we cannot control the impact chip scarcity has on our customers and lower consumer spending has on our major retailers. And therefore, we have taken aggressive steps to lower operating costs. And I believe that with the new businesses we've added over the last few years, and the strength of our brands and market placement, we will be positioned to offset the weakness that the market is experiencing and that we anticipate. Within our automotive segment and the first half's comparisons, our OEM business was relatively flat in spite of the fact that I believe the automotive industry has been in recessionary territory for the past three years. The availability of chips has created problems not only for the car makers, but has prevented us from meeting demand as well. On our Q1 call, I discussed the fact that we had offered an alternative shift to Stellantis where we would be able to meet their demand. We presented a solution, and I am happy to report today that the modifications have been validated and approved, and we will resume shipments towards the end of this month. This should help drive increases in our automotive OEM business in the second half of the year. Our programs with Ford remain on schedule, albeit at lower volumes than projected given the same challenges. But we were awarded new business last quarter, which increased the total value of the programs. Conditions have been getting somewhat better, and we recently launched the evolved rear seat entertainment system for the navigator and the expedition vehicles and are in process of finalizing programs for the aviator and the explorer. Other OEM programs are progressing, and many of the contracts awarded through VSM will be starting in fiscal 2024. To offset the run-up in labor costs in the U.S., we began transitioning some of our OEM production lines to Mexico. And I spoke about this on our Q1 call. Our first line is now up and running, and we expect to be fully operational by the end of November. Labor costs are roughly half of what they are in the U.S., and the cost to operate is less as well, which will help improve margins and profitability. Our OEM business at this point is positioned very well. As you know, we have received approximately 750 million of new awards, most of which still remain in front of us. Our aftermarket automotive business is down $12.3 million through the first half due to the economy and the impact on our business with new car dealers and mobile retailers. The good news is we are now entering the winter season, traditionally our strongest selling season within the aftermarket. With the DEI acquisition, we now own most of the top-selling brands, and through the integration synergies that we've realized, we expect greater profitability in our aftermarket business for the full fiscal year, even on lower sales. So to sum up automotive, tips are the biggest issue, and this is going to persist. New vehicle models and programs start soon, which should lead to growth. OEM margins should improve with the move to Mexico, recent price increases, and managing the supply chain effectively. We have a steady flow of new OEM awards over the next several years, building on top of our normal base of business, and we have several more opportunities on the horizon with other OEM customers. Automotive remains on track to generate strong returns and we will work with our customers to help them get to the near term. Moving on to the consumer segment. The consumer sales segments were down approximately 14 million with both premium audio and other product sales due to the impact of inflation and the shift in consumer discretionary spending. All non-essential leisure products are feeling the pinch TVs, gaming systems, video systems, and laptops, to name just a few. And our major retailers have lowered their levels of inventory carry because of lower sell-through and the fact that they know the supply chain is full and they can avail themselves to product quickly. Within premium audio, sales of premium home speakers and wireless speakers were down 24.5 million, but this was offset by an increase of $18.4 million in sales of Onkyo and Pioneer products and a $3.7 million increase in sales from our Pack Australia subsidiary. We own some of the top selling brands in the industry and our placement globally remains very strong. But the reality is that with the state of the economies and a decline in consumer discretionary spending, volume for premium audio products, will be less than what we initially forecasted. At Onkyo, we continue to ramp up production and are in position to meet retail consumer demand this year. Our Onkyo business was up in the first half and we expect increases through the second half and more so in the future as we open up distribution in other parts of the world beyond North America. Near term, in light of the economic factors in play, again, industry sales of audio products are expected to decline. But as we expand distribution throughout the world for Onkyo, Pioneer, and Integra products, we expect to offset that decline. Other CE products were down in the first half, but we have new placement at key retailers for our acoustic research outdoor speakers, which will positively impact this fourth quarter and into next fiscal year. We expect other CE products to perform better as people are once again coming together with fewer restrictions in place for the holidays. Our accessory business in Europe is down primarily due to the drop in currency. With Schweiger's market leading position at do-it-yourself retailers, we could see a boost with more sales in this category resulting from inflation. As for our biometric segment, we streamlined operation and enhanced distribution resulting in significantly less expenses with more efficient management. With sales relatively flat to the comparable six-month period, our operating expenses are down close to 40% and our operating loss improved by over 40%. In fiscal 22, we added a new distribution partner, Galvanize Partners, And during the second quarter of fiscal 23, they announced a new program with Axiom Bank to deploy a custom biometric device to enable touchless, highly secure authentication technology for the financial industry. We are working closely with Galvanize to utilize our technology to streamline the authentication process for financial transactions while enhancing security in a touchless and mobile environment. Our business with the Miami Lakes Auto Mall is progressing. This program is designed to increase lot protection of their vehicles. We expanded the program last quarter to include perimeter access for the corporate infrastructure, which includes business access, hazardous material location, and garages. We have moved through all installation approvals and will roll out the program to their other 25 dealership locations. Recently, we want to deal with the city government of Leon in Mexico to accurately identify prisoners in correction facilities, as well as for access control for their 911 call sectors. The program has expanded into other sectors within the city and to other areas within the state of Guanajuato. And ILOC's IXT devices are now being used for authentication in city government buildings as well. The project with Marubeni Corporation in Japan continues, and we are working with them to develop a logical access product for Pharma 4.0 in Japan. And lastly, although we remain in testing with the healthcare company we've been discussing, there are no pertinent updates at this time. But ILOC is working with companies in the financial services, security, government, industrial, automotive, and gaming sectors. The pipeline is building as is interest in our technology, and we believe the financial picture at ILOC will continue to improve. To close, we expect to be profitable in the second half of the year, though the level of profitability is truly dependent on the economy, our customers, and the supply chain. Based on the first half and our revised outlook as a result of customer projections, we took significant actions over the past few months to cut costs across the board, like we did when COVID hit. We have looked at all aspects of our business to identify costs that can be reduced without losing our ability to operate, meet launch dates, and exceed customer expectations. I estimate that we have implemented actions both operational improvements and expense reductions totaling approximately $16 million out of the second half budget for fiscal 23. This consists of freight surcharges, vendor reductions, container reductions, patent expirations, terminations, executive and board pay cuts, and more. We have and continue to look at duplication within our structure and ways to operate more efficiently. And not all of these actions will be permanent, but when things do improve, we should operate on a lower cost basis, similar to what transpired in fiscal 21 and 22, excluding costs related to acquisitions. Again, this is not the first time Vox has faced an economic downturn. We have been in business for over six decades, and we will get through this and be stronger. As we move into fiscal 24, If everything remains as is, no better, no worse, our performance should improve with new OEM programs, expanded production and distribution for Onkyo and Pioneer products, and the other initiatives underway across each of our business segments. There's no doubt it's been challenging, and we're working through it. But I firmly believe the best is still to come for Vox and our shareholders. I want to thank you, and now at this time, I'll turn the call over to Michael. Mike?