VOXX International Corporation (VOXX) Q1 2024 Earnings Call Transcript

VOXX International Corporation (VOXX -2.13%)
Q1 2024 Earnings Call
Jul 11, 2023, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day and thank you for standing by. And welcome to the first-quarter results conference call. At this time, all participants are on 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 introduce your host for today's conference, Glenn Wiener. Please go ahead.

Glenn Wiener -- Investor Relations

Thank you and good morning, everyone. Welcome to VOXX International's fiscal 2024 first-quarter conference call. Yesterday, we filed our Form 10-Q and issued a press release, both documents of which can be found in the Investor Relations section of our website at www.voxxintl.com. Speaking from management today will be Pat Lavelle, chief executive officer; and Michael Stoehr, senior vice president and chief financial officer.

Our president, Beat Kahli,is also with us today, and following prepared remarks, all will be available during the Q&A portion of the call. As a reminder, next week on Thursday, July 20th, we'll be hosting our fiscal 2023 annual meeting of shareholders. This will be a virtual meeting held at 10 a.m. Eastern, and shareholders can attend by visiting www.virtualshareholdermeeting/voxx2023.

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 would constitute 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-K for the period ended February 28th, 2023. Thank you for your continued support, and it's my pleasure to now turn the call over to Pat.

Pat Lavelle -- President and Chief Executive Officer

Thank you, Glenn, and good morning, everyone. The market remains challenging, and the impact is reflected in our first-quarter results. The retail environment is tough globally, and while we have a number of good things materializing throughout our segments, the economy remains a primary obstacle near term. Q1 net sales were down roughly 13% with the automotive segment down 3% and the consumer segment down approximately 17.5%.

Our business continues to be impacted by changing consumer patterns, higher interest rates [Technical difficulty] Everyone who's not speaking, mute, please. Thank you. Higher interest rates, all-time high credit card debt, and continued production issues at our OEM customers. And I can tell you VOXX is not alone.

Our peers are facing the same issues we are. We are not losing market share. And in some areas, we're expanding, and this bodes well for long term. We've been around for over 60 years for a reason, and we remain steadfast in moving forward with our growth plans while, at the same time, managing our expenses and capital.

But near term, with Best Buy, Target, Walmart, and many other retailers reporting weaker outlooks for 2023, it's about maintaining and capitalizing opportunistically. As for our automotive segment, our OEM business was up over 21% driven by higher volumes with Ford, Stellantis, and Nissan for our rear-seat entertainment systems. We have seen some increases in customer production but not in all cases, and chip issues appear to be easing but we're still being cautious. Margins are tight based on current contract pricing, and we are working to mitigate this with production shifts to Mexico, which began in fiscal 2023 and will be mostly complete by the end of our second quarter.

Volume remains pretty consistent with Ford, and we're continuing to develop the RSE systems for model year 2025 vehicles. Volume with Nissan and Stellantis picked up somewhat, with Stellantis -- excuse me, someone is typing. Please stop. Volume with [Inaudible] and we're now supplying the evolved system for the Wagoneer and the Cherokee and Pacifica.

Let me hold on. Someone is typing. Would you please stop? Thank you. We are now supplying the evolved system for the Wagoneer, the Cherokee, and the Pacifica, entailing higher growth in the OEM RSE category with some customer production-related issues as some plants have been slowing down for various reasons.

On the other hand, chip supply has been improving, which is a good sign for the industry. Looking out, our OEM business remains poised for growth due to a number of reasons. First, the OEM production is becoming more consistent and should increase. Second, the demand for vehicles remains very high.

And third, we have a number of large multiyear long-term contracts in place across several of our OEM product lines with new programs coming on in fiscal 2024. The automotive aftermarket continues to be challenged due to a lack of cars and the overall retail environment. There hasn't been much change since I reported last quarter other than our aftermarket customers working through their inventory positions from the prior year. Dealers and distributors are continuing to watch inventory levels closely as they don't want to repeat the issues they had last year.

But we expect things to loosen a bit as we move into the fall and winter seasons. As for our consumer segment, sales were down roughly 17.5%, and it was all in premium audio as other CE product sales were up almost 36%. More than half of the growth was in wireless speaker category as we captured sales both in the U.S. and Canada and expanded our Costco program, Germany accessory sales were up over 77%, and Schwaiger sales nearly doubled as the new balcony power product we introduced in fiscal '23 is doing very well.

We expect sales from these two new programs to help offset economic softness and potentially drive growth this year. The premium audio category has been hit hard, and it's not just due to the economy and retailers. We saw a big uptick in premium audio sales when COVID first hit and over the following year as people were staying at home and making purchases for their home. Now, we're seeing the opposite as discretionary income is being spent on travel, restaurants, and other services.

The global environment is worse off today than it was at this time last year. On the other hand, the supply chain, which over the past year has led to significantly higher costs, longer lead times, added storage and shipping, and product scarcity has improved dramatically, which should help margins improve. As for the quarter, sales were down across categories, brands, and geographies. We spent the past several months, in fact -- rather the better part of the past year looking at new opportunities where our premium audio lineup could excel and offset some of the global economic pressures while continuing to drive innovation in our existing lines.

One of our new innovations is our Klipsch Reference Premiere-powered subwoofers which are doing extremely well and leading to increased market share. Another is our Gig XL and Gig XXL party speakers, marking our entrance into the hottest category in CE right now with new products slated in the coming months. We will also be launching our new Klipsch Music City portable Bluetooth speaker line, which will expand our presence in the category. And we've received strong advanced orders that bode well for this category.

And lastly, we will be launching a new Klipsch Plexus, a new soundbar coming to market late in the second half of the year. This is a connected audio sound system, the first-ever product developed in tandem by Klipsch and Onkyo. The category will continue to be pressured through the year though new products should help offset the pressures we're expecting as we'll expand the distribution of Onkyo and Pioneer-related products, especially in China where Pioneer has recently expanded our license. Partnerships are also new sales drivers, and there are a few that we believe will help drive growth in the years ahead.

Our flagship brand, Klipsch, is in homes, cinemas, commercial establishments, on the water, and soon will be on the road as Klipsch Reference Premiere speakers will be on the first-ever Dodge Ram EV truck, two trim levels with the Ram 1500 Tungsten, and the Ram Rev Tungsten with a state-of-the-art 23-speaker audio system that, in fact, will blow you away. And we've had a partnership with MasterCraft for years supplying Klipsch speakers in MasterCraft boats. Soon, Klipsch will be integrated into luxury Crest pontoon boats and Aviara day yachts, expanding this relationship further. Other programs with Hard Rock, Margaritaville, PGA, and others will continue.

A few years ago, the premium audio market saw an unusually high volume of stay-at-home purchases and an equally fast downturn since. Everyone experienced it. The market will continue to be challenged due to this and the continued slowdown in the economy. New products will help this year.

And when market conditions begin to improve, our consumer segment results will as well. Lastly, our biometrics segment. Sales of 1 million were in line with last year in Q4 of fiscal 2023 but were light compared to budget due to timing as some projects move slowly throughout the quarter but will continue throughout the year and drive growth in fiscal '24. We're moving forward with the healthcare program that I've covered for several calls.

Our authentication solution was validated by third-party testing and accepted by our customer to be incorporated into their next-generation medication dispensing solution. We're working on any final design changes through the third quarter with production expected to start in fiscal '24. This customer plans to expand our technology implementation across three other product lines, and discussions are underway. We are also working with several pharmaceutical companies selling our logical authentication devices, which are used to authorize approved personnel into their manufacturing execution systems.

As you may recall, in Q3 of last year, we developed a proof-of-concept program for a nationwide rental car agency. This program is in testing at Dulles and Reagan Airport and, if successful, will roll out in many additional -- additional locations. Our business with nuclear power plants in the U.S. continues as well, and we are working with several operators throughout the U.S.

to deploy EyeLock technology to secure physical access, which should bring our total to 20 nuclear facilities domestically. Within the financial space, we continue to work with Axiom Bank to complete the development of the IRIS biometric token for their banking-as-a-service solution. And we are also discussing with our largest financial customer and update to all EyeLock physical access systems that they have installed throughout the years to our newest FXT system. In closing, we anticipate fiscal '24 will be difficult due to the uncertainty of the global economy and the continued impact of shifting consumer preferences.

We expect markets to remain hard-pressed. Many economists are expecting that we'll be in recession in this fourth quarter or first quarter of next year. Therefore, clearly, more action is needed. We began adjusting overhead in the second half of last year.

And given the outlook, we will be making necessary adjustments to our infrastructure and expenditures, adjusting to meet reality. We are completing the move to Mexico to improve all -- overall automotive OEM margins. We are adjusting our workforce based on expected fiscal '24 sales volumes and realigning to ensure we're operating effectively and supporting customers. We're actively managing G&A, looking at all expenses, both internal and external, and we are implementing brand and product rationalization programs in order to get a better ROI.

Although we anticipate near-term softness, some of it should be mitigated by the positives we are seeing and the things we are planning for. As example, improvements in the supply chain should help improve margins. Chip availability should help our OEM customers stabilize production. New OEM programs have started next year and beyond.

We have new premium audio products set to launch this year. We have begun delivering our new Klipsch party speakers, entering the fastest-growing segment of the audio business. We'll be expanding geographically with Onkyo, Pioneer, and Integra. Premium audio partnerships, I discussed, are expanding.

Our accessory business has been growing with the introduction of our new solar product and expanded distribution. And we have a number of biometric projects which should drive growth and lead the segment to profitability. At this point, I'll turn the call over to Michael, and then we'll open it up for questions. Mike?

Mike Stoehr -- Senior Vice President and Chief Financial Officer

Thanks, Pat. Good morning, everyone. With respect to our first-quarter results, all comparison is over the periods ending May 31, 2023 and May 31, 2022, respectively. Total net sales of 111.9 million declined by 16.8 million, or 13.1%, with automotive down 1.2 million, consumer down 15.6 million, and biometrics flat.

Within automotive, OEM sales were up 3.6 million, and aftermarket sales were down 4.7 million. Within consumer, premium auto sales were down 22.3 million, and other CE sales were up 6.7 million. Pat spoke to the drivers for the segments in his remarks, so I'll move on to margins. Gross margin of 24.6% was down 120 basis points for the comparable first-quarter periods with automotive down 120 basis points, consumer down 190 basis points, and biometrics was immaterial on a gross-profit basis.

Automotive segment margins were adversely impacted by lower sales of security products and aftermarket remote -- remote systems, which traditionally carry higher margins as well as lower margins on some of our current OEM and rear-seat entertainment programs while we're -- which -- which we are addressing. Consumer segment margins were down year over year, primarily due to lower sales of premium audio products. Moving through the fiscal year and as we start cycling through our inventory, coupled with improvements in the supply chain, we should see gross margins increase. Total operating expenses were 39 million, a 1 million, or 2.4 %, improvement for the comparable periods.

Selling expenses declined by 1.1 million due to lower commissions, salaries, and credit card expenses. Our G&A expenses increased by approximately $400,000 with professional fees and travel expenses higher for the comparable periods. We also had approximately 100,000 increase in restructuring-related expenses associated with the transition of some of our OEM production to Mexico, which, as Pat noted, will be mostly complete by the end of this quarter. And our engineering and technical support expenses declined by roughly $100,000.

Acquisition costs also declined by $100,000 as these costs were incurred only in the prior-year period. As a reminder, the costs relate to the asset purchase agreement signed with Onkyo and the JV with Sharp. We reported an operating loss of 11.4 million, compared to an operating loss of $6.7 million in Q1 of fiscal 2023. Total other expenses in Q1 of fiscal '24 were 1.6 million, compared to total other expense of 2.2 million in Q1 of fiscal '23.

Within this, interest and bank charges increased by 800,000 as we had higher borrowings outstanding on our facility compared to last year. Equity income of an equity investee, which is our 50-50 joint venture with ASA Electronics, was 1.6 million, essentially flat. And we recorded an expense of 1 million for the interim arbitration award related to the Seaguard arbitration in both fiscal year periods. Other, net improved by 1.4 million, primarily due to the positive changes in foreign currency.

We reported an EBITDA loss of 7.6 million, compared to a loss of 4.2 million. And we reported an adjusted EBITDA loss of 4.9 million, compared to a loss of approximately 100,000 when comparing Q1 of fiscal '24 and 2023. As of May 30th -- moving on to the balance sheet. As of May 31st, we had cash and cash equivalents of 5.2 million, as compared to 6.1 million as of our fiscal '23 year-end on February 28th.

Our accounts receivable decreased compared to fiscal 2023 fourth quarter due to lower sales. And our inventory position increased due to the new products we brought in for our wireless speaker programs and the new solar power product we launched in Germany. We will continue to lower our inventory balances as unconditional purchases are approximately 90 million at the end of fiscal 2024 Q1, compared to approximately 171 million in comparable fiscal '23 periods. Our total debt stood at 36.7 million, as compared to 39.2 million, a 2.5 million reduction.

This was principally due to a 3.4 million reduction in the amount outstanding on our debt domestic credit facility, offset by a 1.1 million outstanding on our euro ABL for VOXX Germany, which was not present at year-end. Our Florida mortgage declined by approximately 100,000, as did the amount owed on the shareholder loan payable to Sharp as part of the joint venture. Total long-term debt, net of debt issuance costs, was 33.9 million as of May 31st, as compared to 37.5 million as of February 28th. The company has available the senior secured asset-based facility with a committed availability of up to 165 million, with availability as of May 31st, 2023 of 71.3 million.

Our -- our availability under normal conditions would be higher as this formula takes into account the amortization of the real estate properties in Florida and the Seaguard arbitration. We anticipate a ruling by the court on Seaguard matter to occur on or before August 3rd as we previously communicated, and we are preparing for it. Operator, we're now ready to open the call for questions.

Questions & Answers:

Operator

And thank you. [Operator instructions] And our first question is going to come from Thomas Forte from -- oops, one moment, please. And pardon -- pardon me, Thomas. Thomas from D.A.

Davidson, your line is now open.

Tom Forte -- D.A. Davidson -- Analyst

Yes, hi. Good morning. So, I had a couple questions, Pat. So, can you put the current challenging macroeconomic environment in a longer-term perspective? So, going backwards, you kind of have the Great Recession as the most recent example of a really in a recessionary period.

I recognize there was a pretty significant recession, but can you compare what you're seeing today with prior recessions such as that one as a starting point?

Pat Lavelle -- President and Chief Executive Officer

All right. Well, the first thing is -- is that we did not see -- the big impact that we're having right now is the strong run-up in sales when everybody was home. And now, we're seeing, you know, a major shift in preferences by the consumer. They'd rather be doing more experiential things.

So, it's a little bit different. You know, a home theater system or speaker system, or some of our bigger products are not something that you buy every two years. So, there was a pull forward, a buy forward, as we say, you know, when everybody was home. So, we're expecting, you know, probably another year.

As far as the higher-end systems, more costly systems, it would take to roll through, you know, first off, the recession and then the pivot. And then -- but it can be offset by some of the new things that were coming out with the new Plexus soundbar would be new for us. The party speakers is a fast-growing business. We expect to dominant -- dominate in that space so we can offset some of that weakness in the other areas.

But I would think that this stretches out through the balance of the year and sometime into next year as well.

Tom Forte -- D.A. Davidson -- Analyst

OK. That was very helpful. Thank you. And then, on the automotive front, can you -- you touched on this in the prepared remarks, but can you explain the current situation? It sounds like the supply chain issues, for the most part, are in the rearview mirror, and that the challenge today is -- I'm trying to understand what the challenge is today if it's not supply chain.

Is it also the macro, or is it something else?

Pat Lavelle -- President and Chief Executive Officer

Well, there's still a little bit of supply chain issues on the chips that were needed. And sometimes, chips are used to do other critical things in the vehicles. And therefore, the chips that they need to do, let's say rear seat -- rear seat, you know, are taken to use other more critical, you know, functions of the vehicle. That's one.

The other thing is there is a buildup of inventory with some of our customers, and that's -- that's changing production forecasts and things like that. Sales may not be as strong as they produced. We are, you know, seeing the consumer being impacted by the sticker shock of coming in and buying some new cars. So, I think that what we're seeing, based on some of the production cuts that we get advised of at the time, is a combination of all of it.

And, you know, I think that the car manufacturers, you know, are -- are struggling to meet demand but, at the same time, in vehicles that they are building. They're not seeing the sell-through. And I think that will change over time as they adjust with either interest rate reductions or lower prices on some of the vehicles.

Tom Forte -- D.A. Davidson -- Analyst

OK. And then, going back to your original answer, as a longtime follower of the consumer electronics industry, if we had a pull forward -- and I agree with you that we did -- we're -- in the early stages of the pandemic consumers bought a lot of consumer electronics. Do you have a historical proxy? Is it just the typical refresh rate for the products? And when consumers normally, you know, buy the next set that you're gauging on?

Pat Lavelle -- President and Chief Executive Officer

Yeah, I mean, you know, the true audiophiles buy equipment often, OK? But when you look at, you know, the impact that COVID had on the buying patterns, like I said, you know, that was in 2020 and 2021. And that's why I'm saying, you know, 2022, we started to see it. We'll see it all this year, and it will probably start to improve somewhat as we move into 2024 that you'll start to see normal buying patterns again.

Tom Forte -- D.A. Davidson -- Analyst

OK. Then last question, and thanks for taking all my questions. This, I think, is a repeat from last quarter, maybe the last two quarters. But as the supply chain costs have improved, can you talk about your strategy on potentially reinvesting some of the improvement in -- in promotional pricing?

Pat Lavelle -- President and Chief Executive Officer

Yeah, well, the thing is -- is that, you know, when -- at the height of the -- the supply chain problem, we were seeing what would normally be 30 days on the water. We were -- we were experiencing, depending on where the product was, coming as high as 97 days, which means that, in order to protect the holiday season and things like that, we had to bring in a lot of excess inventory. And that excess inventory is impacting storage costs, and it is preventing us to get, you know -- some of it, not all of it, is preventing us from getting new pricing based on lower cost of freight and, in some cases, negotiated better prices for the -- you know, for the same product. So, we expect that we'll probably see another quarter of inventory being moved out.

And everything coming in now would be coming in at lower freight rates and -- and, in some cases, better pricing with the -- you know, that we've negotiated. So, I would -- I would estimate that, you know, we will see an improvement month over month throughout, you know, the balance of the year and then start to get back to historical levels of profitability within the premium space. Especially because of the size of the equipment, the freight component was -- was crazy on it. And therefore, now that we're back to pretty much pre-pandemic levels on pricing that we should see pricing come down.

And you will see adjustments to pricing to move out inventory that we want to move. And then, you'll see adjustment in retail pricing based on lower costs, so we can maintain, you know, a competitive nature with our competition.

Tom Forte -- D.A. Davidson -- Analyst

Great. Thanks for taking my questions, Pat. Appreciate it.

Pat Lavelle -- President and Chief Executive Officer

You're very welcome, Tom.

Operator

And thank you. And one moment. And I am showing no further questions. I would now like to turn the call back over to Pat Lavelle for closing remarks.

Pat Lavelle -- President and Chief Executive Officer

All right, very good. If there are no further questions, I'd like to thank you for your interest in VOXX, coming on the call today. And I wish you a very good day. Thank you.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Glenn Wiener -- Investor Relations

Pat Lavelle -- President and Chief Executive Officer

Mike Stoehr -- Senior Vice President and Chief Financial Officer

Tom Forte -- D.A. Davidson -- Analyst

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