Earnings Transcript for VOXX - Q2 Fiscal Year 2024

Operator: Good day, and thank you for standing by. Welcome to VOXX Fiscal 2024 Second Quarter Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today Glenn Wiener, President and Chief Executive Officer. Please go ahead, sir.

Glenn Wiener: Thank you, Norma. Appreciate it. Good morning, and welcome to VOXX International's fiscal 2024 second quarter conference call. My name is Glenn Wiener, President and CEO of GW Communications, Investor Relations firm for VOXX. Yesterday, we filed our Form 10-Q and issued our press release, both documents of which can be found in the Investor Relations section of our website at www.voxxintl.com. Speaking from management will be Pat Lavelle, Chief Executive Officer, and Michael Stoehr, Senior Vice President and Chief Financial Officer. Their remarks will be followed by questions and answers. As for today, I'd like to remind everyone that except for historical information contained herein, statements made on today's call and webcast that constitute forward-looking statements are based on currently available information. The company assumes no responsibility to update any 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, 2023. Thank you for your continued support, and it's my pleasure to now turn the call over to Pat.

Pat Lavelle: Thanks, Glenn, and good morning, everyone. Not much has changed since our first quarter remarks and -- in July. As the global markets remain challenging, consumer spending is down, and the automakers are still having production issues. With that said, we saw some modest improvements in our business this quarter, which helped combat the overall softness in the economy. As we look out into the second half of the year, we expect to seek top-line growth compared to fiscal 2023 and to be profitable. The extent of our growth and profits, however, will be very much dependent on the state of the car markets, especially now with the UAW strike and, of course, the consumer. We're doing what we can to combat anything that comes our way. And in 2Q, we took significant actions to do just that. We initiated a significant restructuring program

Michael Stoehr: Thanks, Pat, and good morning, everyone. We reported total second quarter net sales of $113.6 million, a decline of approximately $12.1 million. Within this, Automotive segment sales were down $1.8 million, Consumer segment sales were down $10 million, and Biometric segment sales declined by approximately $100,000. While sales were down year-over-year, they were up sequentially by $1.7 million, and we're expecting improvements in the second half of the year. Within Automotive, OEM product sales increased by $1 million and aftermarket product sales declined by $2.8 million. And within the Consumer, Premium Audio product sales declined by $16 million, while other CE product sales increased by $6 million. We reported gross margins of 25.2%, an improvement of 190 basis points compared to second quarter last year and an improvement of 60 basis points sequentially. Automotive margins were essentially flat and increase was driven by the improvement in our Consumer segment, which we anticipate will continue. If Automotive volumes materialize as our customers expect, we should see improvements in our Automotive segment as well as with the relocation of manufacturing to Mexico now complete and other changes we've made to our infrastructure and supply chain. Our operating expenses improved by $2.1 million year-over-year as we continue to lower our costs. Selling expenses declined by $1.8 million or 15.5%. G&A expenses declined by $1.6 million or 8.5%. And engineering and technical support expenses declined by $400,000. As Pat noted, during the second quarter, we initiated a large restructuring program to lower our costs further in light of the current environment and incurred restructuring expenses of $2 million in fiscal 2024 second quarter compared to $200,000 in the comparable fiscal 2023 period. Excluding restructuring expenses, total operating expenses for the comparable second quarter periods declined by $3.9 million or close to 10%. We reported an operating loss of $8.5 million compared to $10 million in the second quarter of last year and a net loss attributable to VOXX of $11.1 million compared to $10.9 million. EBITDA in the second quarter was a loss of $5.4 million and adjusted EBITDA was essentially flat. This compares to an EBITDA loss of $6.8 million and adjusted EBITDA loss of $3.3 million in the second quarter of fiscal '23. I'll note, EBITDA and adjusted EBITDA improved on a sequential basis by $2.2 million and $4.9 million, respectively. Through the first six months of fiscal 2024 compared to fiscal 2023, net sales were down 11.3%, with Automotive segment sales down 3.9% and Consumer segment sales down 14.5%. Again, as Pat noted, we anticipate year-over-year growth in the second half of the year. Gross margins of 24.9% improved by 30 basis points, and we expect further improvements in the second half of the year as well for the reasons Pat covered. Operating expenses improved by 3.8%, or 6% when excluding restructuring expenses and acquisition costs. On an operating basis, we lost $19.9 million compared to a loss of $16.7 million and net loss attributable to VOXX in fiscal 2024 six-month period was $21.8 million as compared to a net loss of $16.7 million. Lastly, we reported an EBITDA loss of $13 million and an adjusted EBITDA loss of $5 million. Moving on to the balance sheet. As of August 31, we had cash and cash equivalents of $5.9 million, which compares to $5.2 million as of May 31 and $6.1 million as of our fiscal 2023 year-end of February 28. Our cash receivable declined by approximately $21 million and our inventory position declined by approximately $1 million compared to fiscal 2023 fourth quarter. Our inventory position declined by approximately $10 million sequentially. And as we move through the inventory during the holiday season, we expect our inventory balances decline further. Our total debt stood at $42.8 million as compared to $39.2 million as of February 28. The increase in total debt was driven by a $4.1 million increase in our borrowings associated with our domestic credit facility, offset by a $250,000 decline in our Florida mortgage and a $200,000 decline in the amount owed on the shareholder loan payable to Sharp as part of our joint venture. Total long-term debt, net of debt issuance costs was $41.2 million as of August 31 as compared to $37.5 million as of February 28. Excuse me, as I said, our operating expenses improved by $2.1 million year-over-year. So, this ends my remarks. And operator, we're now ready to open the call for questions.

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Tom Forte with D.A. Davidson. Your line is now open.

Tom Forte: Great. Thanks. I had a couple questions. I'll go one at a time. So, first, congrats on the Gentex investment. Pat, can you talk at a high level about your opportunity to monetize EyeLock on a near-term and a longer-term basis?

Pat Lavelle: Well, when we look at Eyelock, as I said, the final prototype went over to our customer. We expect that everything will go well with that prototype. And production for their particular machine is scheduled for the middle of next year, which we believe we will be on it. It is a long-term program. I can't get into much detail on it at this point, but it is a long-term program which will have material positive impact on EyeLock.

Tom Forte: And then second question, can we talk about sell-in and sell-through? So, are you seeing any change in behavior for large consumer electronics retailers when we think about their willingness to add inventory? And then, in the sell-through part, do you think consumers are responding favorably to increased promotional activity within the consumer electronics category, or do you feel like that's not very effective in today's current environment?

Pat Lavelle: Well, I think that when we look at sell-in, we look at the retailers being quite conservative with what they're taking in. We have not seen issues with their sell-through. So, they apparently are taking the proper amount of product coming in. There will be promotions throughout the holiday season. It's generally our biggest quarter. But obviously, there's been a change in consumer behavior with credit cards being at all-time high, interest rates on credit cards being very, very high, and we know that we see shrinking savings accounts on consumers. So, some of the pent-up money that was sitting around since COVID is being spent. And when we see the problems, geopolitical, we see gas rising, putting more pressure on the consumer. But like I said, I think the retailers are bringing in what they perceive that they are going to be successful in moving out, and we think they will.

Tom Forte: And then, is it too conservative to think about the consumer electronics category and think about historical refresh rates? So, I think there's a school of thought that in the consumer electronics category and the home category, there was a massive pull forward on COVID. So is it too conservative to just think of historical refresh rates for Premium Audio and things of that nature and that's when things could rebound?

Pat Lavelle: Yeah, I mean, what I had indicated on the call that I said that we think the markets would be hard pressed well into next year. When you're looking at the home theater and some of the things for the home that we sell, the refresh rates, it's not like a car where you move it out every two or three years. So, the buy-forward or pull-forward that we had seen during the pandemic when everybody was locked in, I think we've got another year or 18 months before we start to see a more normal pattern in consumer purchasing of consumer electronics for the home. There might be certain categories that will do well. Like I mentioned, our party speakers, it's a fairly new category. So that's something that we believe will do well. But the typical product, we see that it'll take some time to get back to normal.

Tom Forte: Great. Lastly, as it pertains to the auto worker strike, I would think that you may be buffered/protected to the extent that I think historically you're in some of the most popular products within Stellantis, and it was my impression that they had built inventory perhaps in anticipation of the strikes. So, how should we think about -- how can we monitor the strikes and the potential impact on VOXX?

Pat Lavelle: Well, when we look at that, some of the plants that we receive product from have not closed or have not been shut down at this particular point, but we did see a slowdown in ordering. If the UAW strike continues longer, we will see a lagging effect on inventories on the dealer's lots, which will impact our aftermarket automotive sales. And certainly closure of any plants that we pull merchandise or vehicles from will have an immediate effect on the automotive business. However, we have gains with our heavy-duty truck manufacturers, fleets, and other OEMs outside of the big three automakers that are part of the UAW strike. So, it's a little bit of a mixed bag. We are seeing increases in the other sectors of our OEM automotive business, but it could be offset by some slowness due to closures.

Tom Forte: Thanks for taking my questions, Pat. Appreciate it.

Pat Lavelle: Very good, Tom. Thank you.

Operator: Thank you. [Operator Instructions] I'm currently showing no further questions. I'd like to hand the conference back over to Mr. Pat Lavelle for closing remarks.

Pat Lavelle: Okay. Thank you. As we look into the third quarter, as I said to Tom, it's been our -- historically, our third quarter. We have a number of different programs that we do have scheduled for the quarter. So, we're looking at growing our business sequentially and, hopefully, the cuts that we put in place are significant enough for us to turn profitable for the balance of the year. I want to thank you for taking the time and coming on the call this morning, and I wish you all a good day.

Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.