ABC Technologies Holdings Inc.

Greetings and welcome to ABC Technologies Q2 Fiscal 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. 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 this conference over to your host, Nathan Burton, Vice President, Investor Relations. Thank you. You may begin.

Thank you, Operator, and thanks to 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 will be available for replay for 12 months following this call. Content of today's call is the property of ABC Technologies, cannot be reproduced, or transcribed without written prior consent from the company. Before we begin, I would 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 and subject to cautionary statements in our earnings release for the last completed fiscal quarter and risk factor discussions in our filings with the Canadian Securities Regulatory Authority that can be accessed on the company's profile on CDAR. I would also invite everyone to review the non-IFRS measures and key indicators, as well as the forward-looking statements of the company's filings for the last completed fiscal quarter and the risk factors section in the company's annual information form for the fiscal year of the company ended June 30, 2022. We assume no obligation to update any of these forward-looking statements or information unless required by law. I also want to note that any third-party data concerning the market and economic data referenced in today's call is the intellectual property of such third parties, and the company makes no representation as to the accuracy and completeness of such market and economic data. I want to remind our investors that we are on a fiscal year that began July 1st, 2022. All references to Q2 fiscal 2023 March of the three months ended December 31st, 2022, and Q2 fiscal 2022 to our fiscal quarter ended December 31st, 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. Good morning, everyone, and thank you all for joining us today. During our last earnings call, I spent some time outlining ABC's new customer-focused operating model that we implemented to reduce complexity while aligning our technical teams around our three product groups and our commercial teams around our customers. Over the last three months, our leaders and their respective teams have made meaningful progress in executing their mandates. Beginning on the commercial side, The sales team has continued to sharpen their top line focus and cost discipline by strengthening both the customer facing as well as related support functions to make sure we're not just growing revenue, but meaningfully improving profitability. While this has resulted in ABC being more selective about its commercial pursuits, we are focused only on programs that will allow us to increase both our total profitability as well as improve margins. The commercial team has also been laser focused on pursuing labor and material cost recoveries from our customers, as we've discussed in prior quarters and as you've seen many of our supplier peers announce this quarter and last. I'm happy to report that we're seeing many of these conversations come into resolution and have realized a significant amount of our targeted recoveries from some of our major OEM customers. Next, the operations team has continued to prioritize quality, on-time delivery, and improvement within some of our underperforming lines that we've spoken about at a high level on prior calls. By focusing daily on plant level economics and proactive management of KPIs, as well as our management talent operating the plants, we are seeing signs of improvement in areas of operational weakness, and we expect these will bear more economic fruit in the coming quarters. Finally, linking both these functions, our engineering group is focused on enhancing our product and our process strategy across our full network of plants and product suite, standardizing best practices, and implementing centers of excellence across the operating base. These initiatives form the building blocks of our value creation strategy, complemented by our M&A and operational transformation agenda, where we've seen some exciting and meaningful developments over the last few months. Just before the end of the quarter, ABC entered into a definitive agreement to acquire WMG Technologies for $165 million with additional potential earnouts related to profitability targets. WMGT is a leading Tier 1 and Tier 2 exterior supplier to major global automotive OEMs with facilities across North America. The transaction is subject to customary closing conditions and regulatory approvals, and we anticipate the acquisition will close during Q3 fiscal 2023. WMGT brings with it strong operational history as a family-owned Canadian business that parallels ABC's own story. Founded two years apart, both companies built strong legacies guided by intentional and focused leaders. Six plus years after our own transition from being a family-owned business, we look forward to welcoming WMGT into its next exciting chapter as part of the ABC family. offering, expands our injection molding technical expertise, and brings additional value-add tooling in-house. From a customer standpoint, WMGT will further strengthen our relationship with GM and Ford while bolstering our growing relationship with Toyota. Subsequent to the end of the quarter, on January 18, 2023, ABC and Interweb reached a mutual decision to dissolve the two companies' North American joint venture. The transaction closed on February 1st, 2023, as ABC sold its equity interest in the venture, pursuant to the relevant share purchase agreements. Both companies will work together to unwind the partnership and transition full ownership to Interweb over the coming months. As you might gather from these developments, ABC continues to focus on creating value through the accumulation and rationalization of assets and products to improve our performance, and set the business up for greater focus and success in the future. We are confident that this approach will position ABC to deliver value for our employees, our customers, and our investors. We believe the landscape and the economic environment will continue to present us with strategic opportunities that can improve our product portfolio and financial profile. With that, I'll move on to a snapshot of our financial results for the quarter. Revenue for the quarter increased nearly $118 million against last year to $321 million. This top line growth was supported by significantly improved industry volume versus the prior year period, nearly $50 million of contribution from the acquisitions of Carl Etzel and DLH Bowles, which were completed in Q3 fiscal 2022, along with recoveries from our customers. While we started to see some cost pressures begin to abate during the quarter, resin for example, gross margin continued to be negatively impacted by inflationary pressures on labor, freight, and overhead costs. Offsetting these negative margin pressures during the quarter were the previously mentioned successful inflationary recoveries with certain customers. Discussions with several other OEM partners are still ongoing, and we expect to reach conclusion with these in the coming one to two quarters as well. In general and going forward, we anticipate continued and regular collaboration with our OEM partners as we navigate the complexities of an evolving macroeconomic environment together. And finally, adjusted EBITDA for the quarter came in at $41.7 million and adjusted free cash flow was negative $9.3 million. David will provide further details on our financial results in his remarks. Now moving on to an overview of the industry this past quarter. Well, quarter over quarter, North American vehicle production showed a slight decline from 3.7 million vehicles in calendar Q3 to 3.6 million in calendar Q4. This past quarter saw year-over-year industry volumes up 8.1%, which helped drive some of our improved revenue for the quarter. Additionally, full-year production in calendar 2022 grew 9.7% year-over-year, to 14.3 million vehicles. We are hopeful that the worst of the supply chain related OEM production slowdowns are behind us, and we'll see continued improvement in calendar 2023. We saw some divergence between the production and sales environments in calendar 2022, with U.S. sales declining by 7.9% over the same period as new car prices hit an all-time high in December, supporting an inventory recovery while highlighting the potential for demand realignment. With roughly 1.58 million vehicles on dealer lots, an average inventory of 33 days, we're seeing promising, though somewhat muted signs of an inventory rebuild with the U.S. inventory at a 20-month high as of December 2022. Looking forward, an anticipated mild U.S. recession in the first half of calendar 2023, paired with improving supply chain dynamics, is expected to continue to curb inflation. which we are hopeful will have the impact of reducing operating costs while allowing for production to continue to grow in order to refill the inventory funnel to a greater degree. Finally, I'll review some of the commercial highlights from the fiscal second quarter, including important launches and wins, before you hear from David about the details of our financial performance. In the quarter, we launched 19 programs in total. Though a majority of these launches were in North America, we had a continued success with our Japanese OEM customers, launching interior system products on the high-volume Honda CR-V and HVAC ducts on the Lexus RX. We also launched HVAC and fluid systems on the F-250 and F-350 Super Duty trucks, two of Ford's most popular heavy-duty vehicles. Moving on to wins in the quarter. We had 13 different business awards for a total of $8.2 million in annual sales, which is a bit slower than some recent quarters, but was expected due to the holiday period and a brief lull in major quoting activity on some of our largest customer major platforms, which we expect will pick up later in the fiscal year and into next. Even with a slower quarter, ABC won Fluid Systems, Air Induction, and HVAC on a future South American GM vehicle. as well as both HVAC and flexible products on a future small Toyota SUV. Of our total awards in fiscal Q2, 45% were electric vehicle wins made of four unique platforms. And while global production capacitizes towards battery electric vehicles and plug-in hybrids, it's worth mentioning that North America continues to lag on electric vehicle adoption relative to China and Europe, who are the regional EV leaders. As such, ABC continues to balance its focus between representation on electric vehicle platforms, as well as major high-volume internal combustion engine platforms with meaningful staying power, which we believe will continue to be the most profitable and predictable production plan going forward. From a commercial perspective, along with the benefits I noted earlier, our acquisition of WMGT will also bring with it opportunity to diversify and expand our customer and platform base. In particular, we are excited about the increased exposure to Japanese OEMs like Toyota as well as Ford, including major exposure to F-150, the best-selling vehicle in the U.S. With that, I will now turn the call over to David.