ABC Technologies Holdings Inc.

Greetings and welcome to ABC Technologies' third quarter fiscal 2021 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during today's conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Nathan Barton, Director, Investor Relations. Thank you, sir. You may begin.

Thank you, and thanks to everyone for joining us today for ABC Technologies Q3 Fiscal 2021 Earnings Conference Call. With me on the call are Todd Scheppelman, President and Chief Executive Officer of ABC Technologies, and David Smith, Chief Financial Officer of ABC Technologies. This call is being webcast live on ABC Technologies' Investor Relations website, and the webcast and accompanying slides will be available for replay for 12 months following this call. The content of today's call is the property of ABC Technologies. It can't be reproduced or transcribed without prior consent from the company. Before we begin, I'd like to remind you that today's call will include forward-looking statements within the meaning of applicable securities laws, which are subject to various risks and uncertainties that could cause our actual results to differ materially from these statements. Any such statements should be considered in conjunction with cautionary statements in our earnings release and risk factor discussions in our filings with the Canadian securities regulatory authorities on CDAR. Please refer to slide two of the presentation for additional information. We assume no obligation to update any of these forward-looking statements or information unless required by law. I want to remind our investors that we are on a fiscal year that began July 1st, 2020. All references to Q3 fiscal 2021 are to our fiscal quarter ended March 31st, 2021. And Q3 fiscal 2020, our fiscal quarter ended March 31st, 2020. References to fiscal 2021 are to the 12 months ending June 30th, 2021. I also want to note that while ABC shares trade in Canadian dollars, the company reports its financials in U.S. dollars. With that, I'd like to turn the call over to Todd Scheffelman.

Thank you, Nathan, and good morning everyone. We're excited to welcome you to the first earnings call as a public company. I will provide some brief background on ABC Technologies for investors that are new to our story, talk about the Apollo transaction, discuss market dynamics in light of the recent global semiconductor shortages, and update you on business developments. After my remarks, David will discuss our financial results for the quarter, and I will end up with an update on our guidance. First, for those of you that are new to the ABC technology story, some brief background. As a leading manufacturer and supplier of custom, highly engineered technical plastics and lightweighting innovations to the global automotive industry, we provide leading edge solutions in the interior, exterior, under hood, and under dash systems of the vehicle that address OEM's most pressing needs, those of fuel efficiency, battery range, and consumer comfort. Our products are powertrain agnostic, meaning that we are ready for the EV future that is in front of us now. We are already seeing solid new EV-related business wins with meaningful EV revenue coming to ABC in the near future. ABC has a strong market position across our product segments and leading shares in many of our individual product lines, such as running boards, spoilers, cargo load floors for CUVs, SUVs, and pickup trucks. along with HVAC and washer systems across multiple vehicle lines. We have content on over 75% of the light vehicles produced in North America, including strong representation across the top 15 models produced in North America. Our footprint consists of 28 manufacturing facilities, and we serve a portfolio of more than 25 OEMs around the world, many for almost a half a century. We principally sell directly to OEMs as a Tier 1 supplier, shipping to approximately 90% of the OEM production facilities in North America. ABC maintains our innovative leadership through more than 600 skilled professionals in the organization with technical roles and backgrounds. We have over 300 patents, 150 new product, process, and material-based innovations, including many first-to-market solutions. We maintain 139 proprietary resin compounds and formulations that are approved by our OEMs, for exclusive ABC use. In addition to our technical expertise, ABC differentiates itself through our unique vertical integration, including product-specific design machines, process equipment and tooling that is manufactured in-house, as well as our proprietary resin formulation and compounding capabilities. We are continually innovating, not just in lightweighting, but in manufacturing process, material science, and improving production cycle times that have allowed us to generate leading margins, which we expect to see return to pre-COVID levels upon resumption of normal OEM production schedules. The automotive industry is still in the early innings of vehicle lightweighting, and we expect our portfolio of solutions to continue to improve upon products made traditionally of heavier materials. This is expected to generate higher per-content vehicle margins and free cash flow which we will deploy internally or through strategic acquisitions. Investors can read even more about the business in our investor presentation that is posted to the company's website. Now let's go into the quarter results. First on slide four, David will provide additional data on our financials and his remarks. But at an overview level, our revenue and adjusted EBITDA for the third quarter of $218 million and 25 million respectively, were both down year over year due to the supply chain disruptions that have been widely reported in the media, which impacted both our OEM customers as well as the resident supply base. While I don't want to discount results that did not hit the mark for our high expectations we have of ourselves internally, we delivered a number of highlights in the quarter that we are proud of, including our successful IPO listing in February, a refinancing of our credit facility that provides significantly improved terms and pricing, as well as operations that were firing on all cylinders prior to the semiconductor-related volume reductions and stoppages at our customers. We received an additional Quality Award of Excellence from Toyota, our third year in a row winning this recognition. We received some great news in new business wins in the EV space, And the bottom line is that ABC is continuing to execute the plan we laid out for you leading up to the IPO. Despite the near-term headwinds, we see a lot of reasons to be positive, both on the longer-term macroeconomic environment and the overall ABC story. Though there is still a high level of uncertainty as to when the supply chain headwinds that are currently affecting the industry will abate, We expect the impact to be transient in nature, and we are confident that this has not altered the long-term growth trajectory or solid operating fundamentals of our business. The demand macro is very strong, with great consumer pull for vehicles, as well as extremely low inventories in the vehicles that they want. Moving to slide five, we've quantified the major impacts that specifically affected ABC in the quarter. I think it's important to point out that prior to the large number of OEM semiconductor-related shutdowns beginning mid-quarter, ABC's results were ahead of our guidance. If we adjust for these exogenous factors, we would show a very strong third quarter in the books. Impacting us first and foremost was the global semiconductor shortages to our OEM customers, which has forced widespread production shutdowns across the industry. You'll see in the lower left Almost 1 million units in the first half of the calendar year have already been removed by OEMs in North America based on IHS estimates from mid-April. Note that these estimates were issued prior to announcements this week and last on additional production shutdowns due to semiconductor shortages from several North American OEMs. This lost production is targeted by OEMs to be made up, especially given the lower inventory situation at dealers, which we'll discuss on the next slide. but we don't believe that this makeup will occur until ABC's next fiscal year. While the production stoppages across all OEMs and vehicle types have happened, management estimates that the semiconductor-related volume losses have shaved $34 million of revenue from the quarter and almost $10 million of adjusted EBITDA. As you've likely read in the news, these chip shortages are continuing in our current fiscal fourth quarter, and will unfortunately continue to impact our OEM customers and AVC. Industry estimates vary widely as to the depth and duration of the semiconductor shortages going forward, but we note again to investors that underlying vehicle demand remains robust and the OEMs have stated that they will work to make up these lost volumes as the semiconductor supply chain recovers from current shortages. A second issue, which was not as large in our Q3, but we expect to have a slightly greater impact in Q4, was the financial impact from rising resin prices, which were at 10- to 15-year highs. Resin represents the largest component of our material cost, and over the last year, COVID-related logistics issues have caused resin shortages in North American market that we're already seeing elevated prices. Against this constrained supply backdrop, Winter storms Uri and Viola hit the U.S. Gulf Coast, causing major petrochemical plants that provide key feedstocks to the resin industry to be taken out of commission for a number of weeks, temporarily driving prices even higher. These same winter storms forced additional production stoppages across OEM factories in the southeast, as snow and ice prevented movement of goods and people in the areas for almost a week. Management estimates the combination of resin and winter storms negatively impacted the quarter by approximately 6 million in revenue and 3 million of adjusted EBITDA. While the production volatility associated with semiconductor shortages will linger for a bit longer, the winter storms are, of course, behind us, and we expect resin prices to stabilize in the second half of the calendar year as feedstocks are restored and expected additional capacity comes online. At the same time, we are also looking forward to an increase in vaccinations that will lead to a significantly lower impact of COVID-19 across the supply chain, within communities where we do business, and at our customers. Quickly on slide six, you can see that there's a lot to look forward to on the demand side for the industry. OEM production of just 3.6 million vehicles in our third quarter is expected to rebound steadily up to 4.3 million vehicles quarterly over the next 12 months, and average almost 4.2 million vehicles per quarter through the end of 2028. Based on OEM comments, when semiconductor supply and therefore vehicle production normalizes, they expect to be running hard to refill the inventory channels, which are currently estimated to be at critically low levels of just 34 days versus 70 to 80 days under normal circumstances. This along with the strong economic signals we see and the aging North American vehicle fleet all bodes well for multiple years of growth ahead for the industry and for ABC. On slide seven, I'll also touch briefly on some of our important launches and product wins for the quarter. The Ford Bronco is a big program for Ford and an important new program for ABC with multiple product groups represented on this vehicle. The new Nissan Pathfinder where we again have multiple product groups represented, further diversifies our OEM portfolio. And we are launching product on the new Jeep Grand Cherokee as well. We've also had some large new business wins in the quarter, including approximately $220 million in lifetime revenue on a U.S.-based OEM's CUV platform, a significant pickup truck win of $60 million in lifetime revenue, And you can see we've been very active on the EV platforms where we had 10 new product wins, almost 100 million in lifetime revenue in the quarter, and we were also actively engaged in large numbers of additional EV program targets. On slide eight, I'd like to touch on our important transaction with Apollo. Last month, Apollo Global Management agreed to acquire a majority stake in ABC. According to the agreement, which is described in greater detail in the company's news release dated April 13th, Apollo will purchase 51% of the outstanding common shares of ABC for $10 per share Canadian from our existing majority shareholder, Cerberus Capital Management. We've had a great partnership with Cerberus for the past four plus years, and they will continue to be involved in the business as minority owners going forward. We view the investment by Apollo as a strong endorsement by a global investment leader, indicating that they see tremendous value in the ABC management team and the ABC platform. We think that having Apollo in our corner will provide ABC with additional resources to help us push our plan forward more rapidly, and we look forward to a highly collaborative relationship with them as we continue to grow our business both organically and through acquisition, to better serve our global customers with industry-leading products. I'll wrap up on slide 9 by saying that ABC remains on great operational footing, and we are ready to deliver at full capacity when these supply chain disruptions subside. In the meantime, we are continuing to push the ball forward with ongoing programs focusing on cost efficiencies, capital utilization improvements, capacity efficiency, and overall best practices, with these savings falling straight through to the bottom line. We are winning significant amounts of new business and we've again been approached by several OEMs regarding takeover business from their current suppliers. This is a testament to our strong confidence that the OEMs have in us and is one of the many areas we are continuing to diversify our customer portfolio. ABC is also working with OEM design teams early in the concept phase to bring new and innovative products to the market. We'll talk more about some of these exciting innovations in future quarters. We have even more in store to enhance our lightweighting value proposition, from improved functionality in the interior passenger compartment to new recyclable biomass materials and even ways to better utilize the front trunk or frunk of electric vehicles. We are bidding on large amounts of EV content with the OEMs, and we're involved with an interesting EV design project here in Canada called Project Arrow, the first all-Canadian electric vehicle. We are incredibly well positioned to benefit from the accelerating transformation towards electric vehicles, as well as the ongoing secular trends toward higher consumption of pickups, crossovers, and SUVs. From a macro perspective, and especially beneficial to ABC, consumer demand for vehicles is extremely robust as evidenced by last month's U.S. SAR of 18.5 million vehicles, with almost 80% of these vehicles being light trucks, the segment from which ABC derives over 90% of its revenue. Pickup truck inventories are extremely low, at levels 60 to 70% below their five-year averages, and the semiconductor shortages have caused a pent-up demand for the OEMs to get product back onto dealers' lots. Finally, as this is our first quarter as a public company, I'd like to close my remarks by thanking our employees who responded to the challenges posed by COVID over the past year with unwavering professionalism. I value their contribution immensely, and they deserve our sincere gratitude for the tremendous resiliency and courage that they have shown. With that, I'll turn it over to David.