VOXX International Corporation
Q1 2009 Earnings Call Transcript

Published: 11 Jul 2008

[Operator:]

Good day ladies and gentlemen. Welcome to the 2009 first quarter Audiovox corporate earnings conference call. I would now like to turn the presentation over to Mr. Glenn Wiener; please proceed.

[Glenn Wiener:]

Welcome to Audiovox’s fiscal 2009 first quarter conference call. Today’s call is being webcast on our website www.audiovox.com under the Investor Relations section. With me this morning is Patrick Lavelle, President and CEO and Michael Stoehr, Senior Vice President and CFO. John Shalam is also here with us and will be available during the Q&A portion of the call. Before turning the call over to Patrick the following Safe Harbor. Except for historical information contained herein, statements made on today’s call and on today’s webcast that would constitute forward-looking statements may involve certain risks and uncertainties. All forward-looking statements made are based on currently available information and the company assumes no responsibility to update any such forward-looking statements. The following factors among others may cause results to differ materially from the results suggested in these forward-looking statements. These factors include but are not limited to, risks that result in changes in the company's core business operations; our ability to keep pace with technology advances; significant competition in the mobile and consumer electronic businesses and accessories business; relationships with key suppliers and customers; quality and consumer acceptance of our newly introduced products; market volatility; non-availability of products; excess inventory; price and product competition; new product introductions; and the possibility that a review of our prior filings by the SEC may result in changes to our financial statements; and the possibility that stockholders or regulatory authorities may initiate proceedings against the company and/or our officers and directors as a result of any numerous statements or other actions. Risk factors with our business, including some of the factor set forth herein, are detailed in the company's Form 10-K for the period ended February 29, 2008 and in our Form 10-Q for the period ended May 31, 2008 which was filed after market close yesterday. At this time I would like to turn the call over to Patrick Lavelle.

[Patrick Lavelle:]

Thank you Glenn and good morning, welcome to our fiscal 2009 first quarter conference call. Yesterday we reported sales of $144 million, an increase of 12.5% over the first quarter of last year. We also reported a net loss from continuing operations of $5.2 million, both well below our internal expectations. When I spoke with you on our last call I stated that we anticipated a weak economy and reduced consumer spending would continue to impact our performance in the first quarter. This was true but even more so then we had forecasted, as consumer confidence continues to evaporate. Consumer electronics and accessory sales continue to be negatively affected by the overall slowdown in consumer spending and our mobile group has been impacted by increasingly lower new car sales, particularly in the SUV category where many of our higher margin products are designed to go. This is not new; car sales have been weaker for quite some time and we have accounted for this in our planning. However the recent surge in gas prices has further cut into sales of the larger vehicles. No one predicted $140 to $145 per barrel at this time last year, or last quarter for that matter. This increase and many other issues have affected consumer buying decisions on all non-essential products. We are not immune to the overall downturn in business which continues to impact not only Audiovox but most consumer goods companies today. In spite of what is happening at retail we are confident that we will still post in increase in sales over fiscal 2008 but due to the unsettled nature of the markets we are uncomfortable making a formal projection at this time. I will continue to provide updates on future calls as we better understand the pulse of the markets. Looking at our first quarter performance, electronic sales were $113.7 million compared to $95 million in the first quarter last year. Accessory sales were $30.8 million, down approximately $2.5 million. The increase in our electronic sales is due in part to the acquisitions made last year, higher sales in [core] alarm products to retail and the OEs and increased volumes in our international operations. Accessories were [off a bit] due primarily to the downturn in the economy. As a percentage of net sales electronics were 78.7% compared to 74.1% in the first fiscal quarter last year and accessories were 21.3% and 25.9% for the same period. Our mobile multimedia products continued to hold leading market shares. The most recent MPD report puts Audiovox and Jensen with number one and number two market share in this category respectively. Additionally, with the XM and Sirius merger nearing completion we expect sales to improve as consumer confidence in satellite radio returns. Every quarter it’s asked, so I’ll reiterate my belief, we do not anticipate any material changes in the satellite radio category this year as it takes time to integrate acquisitions and there are differing technologies in the two companies. We remain XM’s number one provider of satellite radio products in the aftermarket and as you know have a history with Sirius on the OE level as well. We are monitoring this situation closely and will keep the market informed as things materialize. On the OEM side, during the quarter we made our first shipment of the GM bi-directional transmitter for vehicles equipped with GM factory remote starters. Mopar has awarded us the contract with their rear-seat entertainment program for Chrysler and this is set to deliver in August. Recently Toyota Motor Sales expanded their program with us to include our new next generation headrest system for their Toyota Sienna. In Europe the 2009 Porsche Panamera, two new 2008 Toyota models and the BMW X5 will all have rear entertainment systems from Audiovox. In Venezuela we have begun shipment of our car audio system, the [Avayo and Spark], a new contract won late last year. All in all I believe these new programs will help mitigate the weaker car sales and the overall softness in the automotive market both at OEM and also after market. In consumer electronics we have a number of RCA digital products that are launching during the second and third fiscal quarters. Some of these have been ticked for Black Friday promotions with major retailers such as Wal-Mart, Best Buy and Circuit. MPD has listed Audiovox with number two market share in portable DVD as sales have improved in this category with the shortage of LCD screens abating. In addition we will launch an internet radio under the acoustic research brand to compliment AR’s re-emergence as a high technology product line that will focus on wireless products and high end radios. Our international sales were up $7.6 million or approximately 48.2% over the first quarter of last year helped in part by the strong euro. However the EU is focused on curbing inflation which may create a greater chance for an economic slowdown in the EU countries. We are starting to feel the impact in our sales though our margins remain healthy at this time. Of greater concern to me is the skyrocketing cost to do business that has significantly impacted our margins, profits and the sustainability of certain product categories. Despite a modest increase in sales, we reported a loss this quarter primarily due to

[Michael Stoehr:]

Thank you Patrick; good morning everyone. I will begin discussing our first quarter and then provide some details on our balance sheet. For the first quarter of 2009, sales were $144.6 million, an increase of 12.5% compared to $128.3 million that we reported in the first quarter of last year. This increase as Patrick noted was a result of higher sales in our electronics group offset by declines in the accessory group. The accessory sales were $113.7 million compared to $95 million, an increase of 19.7%. The increase was a result of higher sales in our consumer group as a result of, one, sales of the RCA audio video acquisition and increased sales in our regular consumer business and finally increased sales in our security line. These increases were offset by declines in the mobile audio and video groups. Accessory sales were $30.9 million and declined 7.2% compared to $33.3 million in the first quarter of last year. The decreases in sales were a result of lower accessory sales in the United States and Canada offset by increases of Oehlbach in Europe and our recent Technuity acquisition. Gross margins were 15.6% for the first quarter of 2009 versus 18.1% for the first quarter last year. Our margins were impacted by four major factors

[Patrick Lavelle:]

Thank you Michael. If anyone has any questions.

[Operator:]

(Operator Instructions) Your first question comes from the line of Jim Barrett – CL King & Associates

[Jim Barrett:]

Could you talk a bit about the pricing you took on July 1st, first of all have any of your customers resisted the price increase?

[Patrick Lavelle:]

Everyone resists, but most everyone knows what’s happening and we’re not the only company that is coming to them now. Everybody tried to hold the position as much as they can but with the cost increases coming from the manufacturing base and the cost to bring products in and ship products around, everybody understands that there needs to be an adjustment. We have started the process in some cases, our contract with customers require us that we advise them and give them 60-days notice for them to accept the increase. That’s why I’m saying it’s taking most of this quarter in order to get the price increases in place.

[Jim Barrett:]

Do you expect to fully recover the inflationary costs that Audiovox has experienced with these price increases and can you provide us with a range in terms of what the price increases have been?

[Patrick Lavelle:]

We will recover the increased costs. Our margins—we have very competitive margins within this industry so there’s not anything that we can give up. We will be getting our margin back to where we have projected it to be and where it needs to be. I will refrain from giving you any hard numbers as that is--that could be used against me competitively.

[Jim Barrett:]

In terms of your vendors do your contracts with them state that they’re required to give you 60-days notice before taking pricing?

[Patrick Lavelle:]

In some cases yes, in some cases no. We have been working with them to forestall any increases for quite some time. The problem in China is that this is a cumulative effect of a number of different factors that are finally getting to the tipping point where they cannot absorb these increases any longer. You know, when we first heard and we first had our first appreciation where the renminbi went against the dollar, they absorbed it. But when you take it and you keep moving it and the appreciation of the renminbi is about 14% since it started to change, you take that. You take the fuel-related expenses on top of that, raw material expenses on top of that; they just can’t hold the line. And then one of the things the China government did early this year in January, they made law changes that are pushing up labor costs approximately 30%.

[Michael Stoehr:]

Also our inventory is turning so fast that we take the price increases right through very quickly.

[Jim Barrett:]

And then finally Patrick, although I think you did touch upon it in that you said you have improved your position in retail across the board, well when I look at the core business in the aggregate have you maintained shelf space, have you maintained listings with retailers?

[Patrick Lavelle:]

Yes, sure, we have not lost any position at retail. There was one program that we had initially knew when we took over the accessory group that would go away and we knew that when we bought the company. Subsequent to that we have added on retail, we’ve recently added a larger retailer to our accessory group that should give them a nice boost but our core business, our consumer business, that core is up over last year primarily driven by the fact that the LCD shortages have abated and we’ve gotten back to more normal sales of those products. But our position at retail is stronger today then it has ever been. We have more SKUs at more retailers, more major retailers, then ever before. So from a retail standpoint I think we’re positioned very well. On the automotive side, we have more business with the OEMs, and our business with the OEMs are not like what we would see with Delphi or Vistion. These are much smaller programs, these are more niche programs; programs that they do need especially in light of their lower sales, they are pushing accessories. So we are positioned better there as well. As far as the general after-market whether it be retail or expeditor, our position remains the same so what we really need is a rise in retail sales of either vehicles or retail sales in general to move our products off the shelf.

[Operator:]

There are no further questions at this time.

[Patrick Lavelle:]

Thank you all for calling in this morning. Thank you for your support of Audiovox and I wish you a good day and a good weekend. Thank you.