ABC Technologies Holdings Inc.

Greetings and welcome to ABC Technologies first quarter fiscal 2023 earnings conference call. At this time all participants are in 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 then zero on your telephone keypad. As a reminder this conference is being recorded. I would now like to turn this conference over to your host, Nathan Barton, Vice President, Investor Relations. Thank you. You may begin.

Thank you, Operator, and thanks, everyone, for joining us today. With me on the call are ABC's President and Chief Executive Officer, Terry Campbell, and David Smith, Chief Financial Officer of ABC Technologies. This call is being webcast live on ABC Technologies' Investor Relations website. 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 cannot be reproduced or transcribed without prior written consent from the company. Before we begin, I would like to remind you that today's call will include forward-looking statements in 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 review the disclaimer on slide two of the earnings 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 1, 2022, All references to Q1 fiscal 2023 are to the three months ended September 30, 2022, and Q1 fiscal 2022 are to our fiscal quarter ended September 30, 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 Terry Campbell.

Thank you, Nathan, and good morning, everyone. Last quarter, I joined you on this call just two and a half weeks into my tenure as the new CEO of ABC. I introduced a new perspective that I plan to bring to the organization that would build on ABC's existing strengths while guiding the company into its next phase of growth. And today, roughly four months into my tenure, I'd like to discuss the financial and operational progress we've made, as well as unveil a little bit more of our plans. To begin with, on slide four, you will see in the dotted red box some exciting additions to ABC's leadership team that will help us focus on serving our customers better while pursuing operational excellence. We've appointed a seasoned group of automotive leaders to focus on product, process, customer, and operational excellence. These are individuals who have deep knowledge and decades of experience in manufacturing car parts and, this is critical for us, are familiar with our OEM customers and their expectations. Mike Fritz, as EVP of operation, leads the manufacturing, costing, and capacity functions, where his primary focus will be on safety, quality, operational excellence, continuous improvement, and plant profitability. As EVP of product and process engineering, Phil Gorella's team leads product management, design, and engineering, as well as process engineering. His team will be focused on establishing a governance model and providing technical guidance on the product and process engineering and design standards. The sales organization, under our new EVP of Customer Experience, Leonard Rowland, is now split by OEM customer, simplifying the number of touchpoints for our customers and strengthening those relationships. And finally, driving competitive advantage through M&A will be a primary part of John Lohr's scope as the new Chief Transformation Officer, whose broader mandate also includes the development and execution of enterprise-wide business transformation programs and the development of our strategic plan. These new leaders will be a key driver in the success of our new business operating model. Slide five outlines some of the key distinctions between our legacy model and our reorganized customer-focused operating model. These changes we've made have allowed us to remove unnecessary complexity and variability from our business while building upon subject matter expertise and aligning the technical community around our three product groups. And embedded throughout this new operating model is a philosophy of standardization and best practice transfer to drive operational excellence and efficiency across our entire business. This includes building upon the strengths and successes of our best performing existing operations, as well as incorporating new best practices and capabilities acquired through M&A. For example, our recent acquisition of Carl Etzel has provided us not only with greater scale in Europe, but also expanded our technical capabilities in interior products and expanded an important new customer relationship with Daumler. DLH Bowls deepened our leadership in fluids management while also growing our automation assembly knowledge. And finally, though these organizational changes were implemented in order to simplify our business and streamline our processes, they also benefited our cost structure. In the quarter, we right-sized ABC's corporate headcount to drive roughly 15 million annualized cash savings before tax and 7.5 million annualized EBITDA savings. With that said, let's move on to the slide seven for a higher-level overview of our results for the quarter. Despite the persistent and negative impact of supply chain and logistic issues on vehicle production, revenue increased to $318.9 million supported by top-line contribution from DLH Bulls and Carl Edsel. Unfortunately, inflationary headwinds continue to result in degraded margins well below the targets that we previously communicated. And as you might expect, these headwinds have only heightened the importance of the operational cost improvements being driven by our new leadership team, as well as the price recovery conversations we've been having with our customers. I'm happy to share that in recent days we've reached successful conclusions on these cost recovery negotiations with select customers. You will see the associated impact flow through our financials in coming quarters. We're still in discussions with several others and are hopeful that we will reach a favorable resolution in the coming weeks. And finally, before I move on from this slide, adjusted EBITDA for the quarter came in at $23.9 million and adjusted free cash flow was $2.4 million. Moving on to slide eight for an overview of the industry. The auto market continues to respond poorly to the acceleration of near-term inflation, which has resulted in downgrades to production growth forecasts, as well as notable rumblings of an economic downturn or possibly even a recession. As a result, the narrative in the auto sector has begun shifting from concerns about supply constraints towards demand destruction, which you can start to see in the data presented here from IHS. As a management team, we are acutely aware of the effect that softening demand has on OEM production levels, which just further elevates the importance of the cost reduction measures and operational improvements we are currently putting in place. These types of broader market trends are outside of any management team's control, but as we wait for things to normalize, we are committed to executing our operational reorganization and playbook to build a more efficient and resilient business. On the left of this slide, you can see the total U.S. inventories remain depressed, though on a slight improvement path since October 2021. With roughly 1.35 million vehicles on dealer lots and average inventory of 30 days, U.S. inventory broke a 35-month streak of year-over-year declines, increasing for the third straight month, though inventories are still clearly at one-third the levels at which the industry operated for most of the decade prior to the pandemic. Now shifting our focus to the production environment, improving production inventory restocking from 2023 onwards expected to alleviate pricing pressures for end users, generally retail and fleet customers. Production results over the course of the quarter have clearly shown improvement, but week to week, OEM output remains volatile and far from normal. This has included ongoing shortly downtime at customer plants with logistics and labor issues adding to constraints. As the market remains volatile, IHS has continued to play catch up to the macro picture with 5.5 million units coming out of the forecast for 2022 to 2025 between January and October. However, IHS still expects a very robust 4.1 million vehicles on average produced each quarter from calendar 2023 through 2029 or later. Moving to slide 9, where you will see some of our important launches and product wins during the fiscal quarter. In the quarter, we launched HVAC products with our growing Asian OEM customer base on both the Toyota Tundra and Honda Civic. We also launched air induction products on the Cadillac Escalade V Sport, the highest-end vehicle in GM's truck and SUV platform. Finally, we launched our high-temperature turbo duck on the Stellantis Global Medium engine. an inline four-power plant that spans across multiple platforms, including most of Jeep's lineup. In terms of business wins in the quarter, we also won both interior and exterior systems for a U.S. OEM SUV, as well as exterior systems for a U.S. OEM truck. Under our new commercial organization, we have decided to revise the way we report our business wins, opting for an annual sales volume metric as opposed to lifetime wins. We feel this metric is more transparent against the previously reported lifetime revenue, which can vary widely based on program length. And finally, 75% or $26 million of total awards this quarter were electric vehicle wins, made up of five unique electric vehicle platforms with four different OEMs. With that, I will turn the call over to David.