VOXX International Q4 2023 Earnings Call Transcript

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May 16, 2023

There are 6 speakers on the call.

Operator

Good day, and thank you for standing by. Welcome to VOXX International's Fiscal 2023 4th Quarter and Year End Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Glenn Weiner, Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you. Good morning and welcome to Box International's fiscal 2024 Q4 and year end conference call. Yesterday, we filed our Form 10 ks and issued our press release And this morning, we posted an updated investor presentation. Documents can be found in the Investor Relations section of our website at www.vox intl.com. I'd be more than happy to send them along upon request as well.

Speaker 1

Today, we'll have prepared remarks from Pat Lavelle, Chief Executive Officer and Michael Stohr, Senior Vice President and Chief Financial Officer. After which, we'll open up the call for questions. Biyadh Kalia, our newly appointed President is also with us and will be available during the Q and portion of our call. I'd like to remind everyone that except for historical information contained herein, statements made on today's call and webcast that would 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 ks for the period ended February 28, 2023.

Speaker 1

Thank you for your continued support. And I would now turn the call over to Pat.

Speaker 2

Thank you, Glenn. While we had a lot of positive developments and continue to win new business globally, fiscal 2023 was certainly a challenging year. We were faced with a myriad of roadblocks throughout, OEM customers shutting down production, retailers cutting back on orders, Inflation and fears of recession globally, which had a big impact on consumer spending and our retail business. Supply chain issues improved during the year, but the hangover of high cost on inventory lasted throughout the year. Chip scarcity was a major issue and coming to some of our expected automotive OEM growth.

Speaker 2

Virtually all of our competitors and industry peers have been feeling the pinch and we continue to see layoffs, particularly across the technology and consumer sectors. We have been vigilant about controlling costs while working to enhance margins To offset some of these pressures, as we look into fiscal 2024 and particularly the first half, we see more of the same With respect to the global economy, we hope to see better conditions in the second half of the year with some possible easing by the Fed And lower costs due to an improved supply chain. Chip supply is also expected to improve. In fact, we've seen more availability in recent months, which I think bodes well for our OEM business. Our view of the opportunities ahead has not changed, and we remain confident that when there is a return to a more normalized operating environment, VOXX is poised for significant growth and value creation.

Speaker 2

As for fiscal 2023 and our results, 2023 sales were down 16% year over year. Gross margins declined by 160 basis points And operating expenses excluding the non cash impairment charges declined by over 5%. We reported an operating loss of $27,300,000 and an adjusted EBITDA of $8,600,000 in fiscal 2023. Both, however, were down versus fiscal 2022. Again, it was a tough year with the sales coming in below expectations, particularly in the second half of the year.

Speaker 2

We made a lot of internal changes to realign and lower costs during the back end of fiscal 2023 and into this year. Automotive segment sales declined by approximately 26,000,000 With OEM sales up $8,000,000 and aftermarket product sales down close to $34,000,000 Our OEM sales growth was driven by some of the new contracts we've been awarded for our rear seat entertainment systems with Stellantis, Ford and Nissan. We also had higher OEM sales of remote starts and security projects, driven by higher business with Subaru and some other programs. Our truck business declined despite several new customers and awards, but the pipeline remains strong. Overall, while OEM sales were up in fiscal 2023, growth was curtailed by ongoing supply chain issues faced by our customers, And we estimate approximately $18,000,000 in lost revenue as a result during the year.

Speaker 2

The automotive aftermarket business was hit hard for several reasons. 1, aftermarket customers Took heavy inventories of remote start products last year to ensure they had adequate supply for the season Given the supply chain issues, this left an overhang which impacted this year's business, but should not be as big a factor in fiscal 2024. We also saw a 30% decline in sales of aftermarket satellite radios as one of our key retailers cut back on purchases for most of the year. And 3, Roughly half of our aftermarket business is done at new car dealers and there was a scarcity of vehicles on the lots throughout 2022. Moving into fiscal 2024, we are anticipating growth in automotive.

Speaker 2

To the extent, it will be dependent on more consistent And chip availability and more consistent OEM production. We didn't expect such a big drop in the aftermarket and Assuming things begin to normalize, we should see an uptick in aftermarket sales as well. Moving on to our Consumer segment, Net sales declined by 17.6 percent with the majority of the decline in Premium Audio. The weak retail environment And Q3 continued into the 4th quarter and our sales came in considerably below the prior year and our forecast. It's been a challenging environment and consumers continue to pivot away from CE products for the home, which during COVID, as you know, was very strong and we believe this has pulled some sales forward.

Speaker 2

Premium audio sales declined roughly $70,000,000 year over year with the majority in home separates category. However, our market share has been holding steady and our brands and placements are not the issue. We've been impacted by recessionary pressures And inflation, the pivot and the overall softness in the CE category. And we're not the only ones having this issue. We're seeing it pretty much across the board.

Speaker 2

Sales of Onkyo and Pioneer related products were up $33,000,000 year over year, Though lower than we projected due to a combination of supply chain constraints and the retail environment. We're planning for continued softness throughout the year. However, growth will come from launches of new products to expand distribution of ONKYO and Pioneer and Entegra brands globally into India, China, Japan And the EMEA region. We are launching new Klipsch Reference Premier subwoofers, new Cinema 1 Soundbars, new Klipsch powered monitors and new Onkyo Pioneer and Pioneer Elite and Integra receivers. We will also be entering a new and growing market this summer with Klipsch's first ever wireless party speaker line.

Speaker 2

This category Has become an important audio segment and is growing. In the second half of the year, The new all electric Ram 1500 revs will launch and will feature the Klipsch Reference Premier Audio System With a powerful state of the art 23 speaker audio system. While no stranger to automotive, this is a major placement for Klipsch And one of several vehicles we believe will materialize in the coming years. Our placement remains strong, New markets and channels are part of our plan and growth over the second half comparables should be attainable. Other CE product categories and sales were down roughly $7,000,000 for the year.

Speaker 2

But in the 4th quarter And for the first time ever, we began shipping wireless speakers under the Acoustic Research brand to both Costco U. S. And Costco Canada. This category was up for the year, helping to offset some of the other declines, primarily due to the retail environment. Our accessory sales in Germany were essentially flat year over year and obviously due to the difficulties That we see in Europe due to the problems that they have there.

Speaker 2

We have a number of new product launches In our accessory business, some of which I highlighted on our last call, but just a few weeks ago, We announced the entrance of RCA into the multibillion dollar hearing aid market with an assortment of products. The FDA's recent ruling created a new category of over the counter hearing aids enabling consumers to purchase hearing aids directly from stores or online retailers without medical exams or prescriptions. There are close to 30,000,000 Americans in the U. S. Alone that could benefit from hearing age ranging in ages, But the greatest amount of hearing loss is in those aged over 60.

Speaker 2

RCA has been one of the most Well known and trusted CE brands for a century and is a brand that appeals to this target demographic well. We rolled out an aggressive direct response TV campaign across major TV networks, social media and on Amazon dotcom. This is the beginning launch and a category we believe could open up new channels for growth. Additionally, our European accessory group introduced a new solar program for houses and apartments that will generate power directly into the home's electrical This has proven to be very popular considering the drastic increase in electricity rates due to the conflict in the Ukraine. This technology has been approved in Germany, Austria and the Netherlands.

Speaker 2

And based on quick sell through of initial inventories In response from our customers, we expect this category will drive growth for our European accessories group. Moving on to biometrics. The biometrics sales came in at $1,000,000 up close to 19% year over year And we're also up in the Q4. We are expanding various programs that we've been awarded and are in the process of pursuing others, which have potential to scale. With respect to the healthcare company, we have been working with well over the past number of years.

Speaker 2

I am pleased to report that we have passed the final rounds of testing and have been approved for production. We'll have a greater sense of timing and the impact over the next Several months, we are excited to have finally been approved as we are now an authorized Iris authentication provider to them And there are other products and equipment that they manufacture that we can expand into. Our work with Acxiom Bank continues And we remain on track to complete the development of our IRIS biometric token for their banking as a service solution by the end of this quarter. And we continue to expand business in high throughput facilities such as auto dealers, rental agencies and other infrastructures We will have multiple access points, multiple drivers and where security and control is paramount. Our work with the Miami Auto Mall continues And our proof of concept is currently in testing with a major car rental company.

Speaker 2

Additionally, I am pleased to report that EyeLock's Access control systems are now installed at 13 nuclear power plants, up from 4 The prior quarter as this industry recognizes the ease and high level of security that iris biometric offers. There are various R and D projects underway, which we expect will result in new commercial solutions, Continue to improve throughout the year as we seek to reach profitability. As I said, It was a challenging year in 2023 and it's a challenging start to fiscal 2024. And we are going to be cautious in managing our business and look to new launches and addition of new market segments to drive growth. Before I turn the call over to Mike, I'd like to extend my sincere appreciation and gratitude to Peter Lesser, Who has served on the VOXX Board for the past 20 years.

Speaker 2

Peter has provided invaluable oversight and Strategic direction to the Board and management throughout the years, leveraging his vast experience in the CE industry. After a long and distinguished career, he has decided to spend more time with his family and will not be standing for reelection at our fiscal annual shareholder meeting. All of us at VOXX would like to thank him for his contributions, and we wish he and his family well. I would also like to take a moment to discuss the Board's nomination of Steve Downing to serve as Director of our company. Steve is currently the President and CEO of Gentex, a global company serving the automotive industry and one with a market capitalization of nearly $7,000,000,000 He's had a very successful and distinguished career Serving in various leadership roles at Gentex throughout the past 2 decades.

Speaker 2

Having worked with Gentex and at times competing against them, we couldn't be happier to have someone of Steve's caliber join our Board. We look forward to working more closely with him both as a Director and as a partner looking for ways to build the Voxgentech's relationship. And at this point, I want to thank you and turn the call over to Mike. Michael?

Speaker 3

Thanks, Pat. Good morning, everyone. I'll review our Q4 results and then close with a few comments around our balance sheet Before we open up the call for questions, Q4 net sales declined by $27,400,000 with automotive down $1,100,000 Consumer down $26,400,000 and biometrics up approximately $300,000 Within our automotive segment, OEM product sales were up Approximately 44%. Our OEM growth was driven primarily by increases at Ford for both our EVO systems And higher sales of Stellantis as the chip situation eased somewhat. We also had higher sales remote start and security systems related to new programs with On the other hand, our aftermarket business declined by approximately 22% due to higher inventory stocking by customers at The decline in consumer segment was primarily in premium audio category With premium audio product sales down by approximately 32%.

Speaker 3

We had lower sales of premium home theater, Wireless speakers and mobility products domestically and lower sales under our magnet, Mac Audio and HEICO brands internationally. The decline was driven primarily by the state of the global economies and both lower retail and consumer purchasing. Additionally, other CE product sales increased by approximately 14% due to the growth in wireless speaker categories And higher sales of reception products domestically and higher U. S. Sales due to the new solar program.

Speaker 3

Biometric sales were up approximately $300,000 for the comparable periods. Gross margins of 25.4% was down 140 basis points for the comparable 4th quarter periods. Automotive segment margins were up 5.30 basis points, Consumer segment margins were down 4 50 basis points and biometric segment margins were close to 40% compared to negative gross margins in Q4 of fiscal 2022. We expect to see gross margins improve throughout the year as the cost $47,600,000 representing a $6,900,000 increase. This includes approximately 8 $700,000 in non cash impairment charges.

Speaker 3

Excluding these charges, our operating expenses declined for the comparable 4th quarter periods by 4.3%. Selling expenses declined by $1,900,000 due to lower commissions and salaries and a decline in website and credit card expenses, which was partially offset by a modest increase in advertising and trade show expenses among other factors. G and A expenses decreased by 700,000 Due to lower executive management bonuses and a decline in office expenses, partially offset by higher restructuring related expenses, Engineering and tech support expenses were essentially flat. We also had $400,000 decline in acquisition costs associated with the Onkyo acquisition and our joint venture with Sharp. Inclusive of non cash impairment charges, we reported an operating loss of $12,900,000 for the fiscal 2023 4th quarter compared to operating income of $3,200,000 in Q4 of fiscal 2022.

Speaker 3

Total other income net was $200,000 up approximately 300,000 Interest in bank charges increased by $900,000 We had an expense of $1,000,000 related to interest associated With the CGuard arbitration and as discussed a ruling is expected by August. Lastly, we reported adjusted EBITDA of $3,000,000 as compared to adjusted EBITDA of $9,700,000 in comparable fiscal 2022 Q4. Moving on to the balance sheet. We had cash and cash equivalents of $6,100,000 as compared to $27,800,000 As of February 28, 2022, and $8,500,000 as of the end of our fiscal 2023 Q3 On November 30, 2022, total debt was $39,900,000 as compared to $13,200,000 At the end of fiscal 2022, total debt stood at $47,200,000 as of November 30, 2022, a sequential reduction of $8,000,000 Our total debt for the comparable year over year periods increased due to $29,000,000 outstanding on our domestic credit facility, which was used to fund inventory, The additional variances related to a $500,000 payment reduction on our Florida mortgage and a $600,000 decline in our shareholders loan payable sharp as a result of the strengthening of U. S.

Speaker 3

Dollar versus the end. To close, we expect sales to be modestly lower for the first half comparable in fiscal 2024 and then increase thereafter. Gross margins are expected to improve throughout the year and our operating expenses while expected to increase Should decline as a percentage of net sales, thus a better fiscal 2024 for VOXX Operator, we're ready now to open up

Operator

and wait for your name to be announced. Please standby while we compile the Q and A roster. Our first question comes from the line of Brian Rutenberg from Imperial Capital.

Speaker 4

Yes. Thank you very much. Your last statement that you just made, I just want to go over that again Because that seemed to be very significant in terms of guidance or at least your broad guidance. In the first half of twenty twenty four, fiscal twenty twenty four, you expect revenues to be down at all categories. Is that right or just

Speaker 2

Overall, I would think that as I indicated before, there are some areas where we're Expecting growth due to like in our accessory group, we expect to see growth in the Q1, due to the programs that they have Place that they are shipping both on the acoustic research program that we have placed at Costco And then also the new hearing aid program and the newer the new solar program That's in Germany. As far as the car business, it all depends on what we see happening With production as the car manufacturers are still planning production and then last minute Advising us that they're not producing. So, but if they do produce, I would expect to see increase in the OEM sector. The regular retail business is still soft. We expect it to be soft as we move into this year.

Speaker 2

Okay.

Speaker 4

So to summarize then let's just talk total revenue in the first half of the year is going to be weaker than the first half of 2023, is that correct in terms of the summary?

Speaker 2

Yes. I mean, I think What we're looking at for the full year is an increase, okay, Pretty much across the board with the second half increases coming primarily from Premium audio, okay, and the aftermarket, which are their normal heavier seasons as far as sales. We have as I indicated, we have a number of new products launches on the premium audio side that will Yes, some of it will come in, in the second quarter, but it will impact the 3rd Q4 more And that is also the traditional heavy selling season for remote start and security product, Which is a main product category within the aftermarket.

Speaker 4

Okay. And then in terms of gross margin, just to drill down one more You expect gross margins to improve from in 2024 versus 2023. Is that what I'm hearing?

Speaker 2

Yes. Mesa, what we have is a lot of the inventory that we're starting the year with This inventory that came in, because we had to stretch our supply chain out so far, we had to bring in inventory And a lot of that inventory came in on the high priced containers. So now as the container costs are getting back to normal, Okay. As we move into the year, that replacement product coming in will be able to generate a better margin Then the inventory that we're sitting in that's sitting in the warehouses right now. So we see a gradual improvement throughout the year of margins just based on the cost of bringing this in.

Speaker 2

So for example, I mean last year, We went from $3,500 a container. In many cases, we were paying $20,000 Okay. In the case of our premium audio, if you take $3,500 but you can only get 2,200 units in that container, that's roughly $17.50 a unit. But at $2,000 it's now $100 a unit. So we could only raise our margins and our prices So much, otherwise we would have absolutely killed off all the sales.

Speaker 2

So as we move back to normal prices for bringing product in, Okay. We expect that we'll be able to do 2 things. 1, make our pricing more competitive And lower and raise the margins that we get.

Speaker 4

Great. And then just last question on the container costs, Where are we now? You talked about where you've been on containers, but since that's one of the major Factors, where are your container costs running right now? Are they $5,000 $8,000 $4,000

Speaker 2

No, they're lower than that. I mean, it ranges from where it's coming in, but it's getting close to where it was historically.

Speaker 4

Hey, closer to the 4,000 and the 20,000. Yes.

Speaker 5

Okay. Yes.

Speaker 1

Okay.

Speaker 4

Great. Thank you very much.

Speaker 2

Thank you, Brian.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Tom Forte from D. A. Davidson.

Speaker 5

Great. I've got 5 questions. I'll go one at a time. So can you talk about the strategy of potentially investing some of that in margin improvement On this lower supply chain costs, such as the containers, investing that in price to drive sales?

Speaker 2

Yes. I mean, as I just said, I mean, some of the price increases that we have put in place could fail sales. And as we adjust pricing, As the cost of product coming in is lower, we can be more we can do 2 things. We can be more competitive On the ultimate price to the consumer, but start to restore normal margins on these products.

Speaker 5

Okay. And then can you talk about channel inventory and have things changed versus last quarter for the better, for the worse?

Speaker 2

Yes, the inventory channel inventory is coming down. We're moving through inventory. Obviously, we've got to place orders for new inventory and that will be coming in, but we are seeing an overall drop In total inventory that we're carrying at this point. And that's been a concerted effort because there's also a cost of holding on to excess inventory.

Speaker 5

Okay. And then on the auto related sales, to what extent at all, if at all, Are you impacted by the higher interest rates?

Speaker 2

Well, I think that's going to be another challenge for the car manufacturers. Look, I've been doing this a long time and I know that the car manufacturers and the dealers will react and not going to sit Phil, I do expect to see as the interest rates become more and more of a problem purchasing a new car, I do expect to see that the car manufacturers themselves will be offering low interest loans to buy car, no interest loans to buy cars, which are traditional things that they've done in the past. What we're looking at here is 3 years' worth of pent up demand that has not been met. And it's our feeling as even though we may see a, let's say, a mild recession Coming into the second half of the year, I do think the car manufacturers are poised and ready To offset some of those higher interest rates.

Speaker 5

Okay. And then From your vantage point, do you think consumers are spending more money on travel and services and that's impacting your results?

Speaker 2

Absolutely. I mean, every indicator when we look at the entire CE category, when we look at things for the home, we definitely see the pivot. We're in the 1st 2 years of COVID. It was very strong for and it's obvious. I mean, people were sitting at home, they want Do something, they either worked on their home or they wanted to improve their entertainment systems.

Speaker 2

And in some cases, consumers bought forward. They bought during the recession during COVID when they may have waited a year or 2 more to replace their TV or sound system. But if you look at the numbers that were up with the recent report that came out, airlines are up, Dining out is up, vacationing is up and that really unfortunately is coming at the expense of CE spending for the home And general home spending.

Speaker 5

In that regard though, can you talk about what's the historical refresh rates And how do you think that might change in the current cycle, if at all?

Speaker 2

Well, I mean, it depends on the type of product. I mean, the new technology will come in and kind of obsolete Obsolete some of the technology that is there making it different. That's why we're looking at new products. The party speakers are a very hot category right now, very, very easy to use Bluetooth connections. So some of those products We'll generate interest this year.

Speaker 2

But I mean if you're looking at a home theater system, A refresh rate on home theater system is really a new technology coming through that obsoletes the existing one Well, makes it a better experience. So there is a long lead between an initial purchase and a replacement And that's what we're

Operator

feeling. All

Speaker 5

right. And then last one, and thanks for taking my questions. Can you compare and contrast the current macroeconomic environment with the Great Recession and start of the pandemic? I feel like there's been a lot of talk about The recession is not in the GDP numbers yet, but I understand that there's housing related sales have slowed. Home Depot had some pretty poor results today.

Speaker 5

But from your vantage point, how does this compare with the Great Recession? How does this compare With the start of the pandemic, I think you've talked before about how the current situation may be unique because the unemployment rate is still quite low.

Operator

Right.

Speaker 2

And that if there's any bright spot, it is that the consumer Has been somewhat resilient because of the low unemployment rates. What's lacking here is what we saw in COVID, The government money that a lot of people received is has been spent, and we're seeing The impact of higher gas prices, food bills and everything really impacting the lower end of the marketplace, Okay. The more affluent consumer is spending more time traveling, going on vacation. So it's hard to compare the Great Recession to the beginning of COVID. COVID everything shut down, everybody stopped traveling, overhead was dropped considerably and then sales took off in certain categories.

Speaker 2

I do believe and I've been saying it is that there is a big pent up demand for new cars. The car manufacturing in the United States has not met demand for 3 years. And the difference is cars wear out. It's not like a home theater system That would sit in your home, it can work for years. So I do believe that there's a good chance we'll see higher car sales.

Speaker 2

And again, I do knowing the car manufacturers and the only car dealers, they're a very competitive group and they're going to fight for business and they're going to fight for the consumers' dollar.

Speaker 5

Great. All right. So, sorry, you inspired me to ask one more. So, valuations on a lot of assets have come in. Can you give your current thoughts on strategic M and A?

Speaker 2

At this particular point, we're always looking, okay? If there is an opportunity that presents itself that we think is compelling, we will move. But as I indicated on my opening remarks, we're going to be very conservative with our spend Until we can really see how the market is shaping out, so that we can make sure that we can not only launch all the products that we have Coming in, but do the marketing and everything to drive those sales. So it's going to be depending on what we see And what the market is shaping up to look like in 2020 in our fiscal 2024.

Speaker 5

Thank you, Pat, for taking all my questions. Appreciate it.

Speaker 1

Thanks, Tom.

Operator

Thank you. At this time, I would now like to turn the conference back over to Pat Lavelle for closing remarks.

Speaker 2

Okay. I know disappointing results based on what you heard this morning. When I look at VOXX and the brands that we have, the placement that we have across the world And the expansion that we're planning, it gives me hope that we can see growth this year modest. We have a lot of new product coming and that should help add to it. And with a lowering of the products, The problems that we've seen over the years that supply chain and chips and things like that, that should give us more opportunity to get our products on to more and more cars.

Speaker 2

I want to thank you for taking the time to listen today and I wish you a good day.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.

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