VOXX International Corporation
Q4 2013 Earnings Call Transcript

Published: 15 May 2013

[Operator:]

Good day, ladies and gentlemen, and welcome to the Q4 2013 VOXX International Corporation Earnings Conference Call. My name is Marie, and I will be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. And now I'd like to turn the call over to today's host, Glenn Wiener. Please proceed.

[Glenn Wiener:]

Thank you very much, and welcome to VOXX International's Fiscal 2013 Year End Results Conference Call. Today's call is being webcast on our website, www.voxxintl.com, and can be accessed in the Investor Relations section. We also have a replay available for those who are unable to join us. With us today are Pat Lavelle, President and CEO, who's calling in from overseas; Michael Stoehr, Senior Vice President And Chief Financial Officer; and John Shalam, Chairman of the Board. Before we begin, 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, and the company assumes no responsibility to update any such forward-looking statements. Risk factors associated with our business are detailed in our Form 10-K for the fiscal year ended February 28, 2013. We'll begin today's call with remarks from Pat, followed by Michael, and we'll then open up the call for your questions. If you have any follow-up questions thereafter, please feel free to call my office. I'll be more than happy to address them. We had a good year, and we're looking forward to an even better one next year. And at this time, I'd like to turn the call over to Mr. Pat Lavelle.

[Patrick M. Lavelle:]

Thank you, Glenn, and good morning, everyone. I'd like to start with a recap of our fiscal year performance and then provide background on some of our latest product offerings and programs and conclude with remarks on our fiscal 2014 outlook. Mike will then follow my remarks with more financial details. Despite the challenges, we and most companies continue to experience, given the struggling global markets, we had one of the most successful years in the company's history, actually posting the third-highest bottom line results. Gross sales came in at $933 million, with net sales after returns and MDF funds at $835.6 million. Gross margins were 28.3%, which was in line with our prior guidance. Our EBITDA was $60.7 million and our adjusted EBITDA was $67.7 million, which is higher than our prior statements and due to the strength of our fourth quarter. We also generated free cash of $30 million in fiscal '13. On one end, our domestic operations performed to expectations, and in some cases ahead as we continue to see strong growth in our OEM and modest growth in premium audio and accessories. This growth was somewhat offset by softness in the automotive aftermarket and weakness internationally in the Eurozone countries. Those issues, along with our SKU rationalization, translates to the following full year top line impact

[Charles Michael Stoehr:]

Thanks, Pat. Good morning. With the change in our reporting structure, we have a lot of information to cover. I'm going to tailor my remarks to the way we reported in our Form 10-K, and hopefully this will provide you with a better insight into our operations and performance. We reported net sales of $385.6 million, an increase of $128.5 million or 18.2%. Within this, automotive sales were $427 million, up 43.7%, driven by the additional -- driven by the addition of Hirschmann and gains in our domestic OEM business, such as new programs with Ford and Nissan, which began in the second quarter. We also got a tick-up from new product sales, mobile iPad and iPod interfaces. Offsetting these increases were declines in the domestic aftermarket for mobile audio and satellite radio products. Internationally, automotive sales were up due to Hirschmann, but down in the aftermarket, due to slower car speaker sales in Europe. OEM products accounted for approximately 33% of total sales in fiscal '13 versus 19% to 20% in fiscal '11 and fiscal '12. Premium auto sales were $193 million, up $1.6 million year-over-year or 0.8%. Our sales of headphones increased by 14.4%. Sound bars, which is a relatively new category, was up over sevenfold. Offsetting these increases were the impact of Europe, where we had approximately a 19% decrease in sales. Consumer Accessories sales were $214.3 million, down $1.3 million or 0.6%. This number is a bit misleading, however, as declines were due to us exiting lower margin categories, almost $12 million in sales throughout the fiscal year. Adjusting for this planned exit of these product lines, our domestic business was up 5% year-over-year as much of the increase was driven by growth in the wireless speaker category, and increased sales of portable power lines and power supply systems. Internationally our sales declined 8.6%. In fiscal year '13, automotive comprised 51.1% of our total sales. Premium auto was 23.1% and consumer Accessories was 25.6%. This compares to 42% for Automotive, 27.1% for Premium and 30.5% Consumer Accessories in fiscal year '12. Our 5 largest customers represented 28% of total sales, which is consistent with recent years and one customer accounted for more than 10% of our sales. As Pat mentioned, the euro translation impacted our top line by approximately $17.6 million. Our gross profit margins came in at 28.3% in fiscal year '13, versus 28.7% in fiscal year '12, slightly higher than our prior guidance, but down 40 basis points for the comparable periods. As we just reported, we now break out gross margin percentage for each of our business segments. In the automotive segment, our gross margins increased 220 basis points to 25 -- 26.9%. This was primarily due to the acquisition of Hirschmann, higher sales of OEM-related products and the net impact of the currency devaluation in Venezuela. Offsetting this increase was a decrease in sales of higher margin car speakers in Europe and unfavorable swings between hedged costs and related sales. Gross margins in Premium Audio segment declined 410 basis points to 33.9%. However, this is not a product sales-related. It's primarily the result of one, higher inventory provisions, both for warranty; and the cost of moving our Asia warehouse facilities. The mix, given the impact of lower international sales in Europe, also impacted margins. In our Consumer Accessories segment, we saw 110 basis point increase to gross margins to 25.9%. This was all due to the product mix as we sold fewer low-margin consumer products and more of our newer higher margin product lines such as wireless speakers and some of our charging and power products. The strong increases we've seen domestically were offset somewhat by the European environment. Margins should continue to trend upwards, and our goal remains to get our gross margins over 30%. Operating expenses of $195.1 million increased by $36 million, though a percentage of sales increased marginally by 0.9%. Excluding Hirschmann, operating expenses, which were $43 million, our core overhead declined by $7 million or 4.4% despite increases in advertising and marketing to raise awareness of our product lines and expand both our distribution and consumer adoption. Excluding Hirschmann, the increases in operating expenses were partially offset by a reduction in our depreciation expense, headcount reduction in some of our other operating groups, lower commissions tied to net sales, these are non-Hirschmann sales, lower occupancy cost as we purchased the Klipsch headquarter in fiscal '13 and lower professional fees as patent lawsuits have ended. We reported operating income of $41.7 million versus operating income of $43.9 million last fiscal year. Other net for fiscal year '13 included net charges in connection with the patent suit of approximately $2.7 million and losses on foreign exchange contracts of roughly $2.7 million, which were incurred with the Hirschmann acquisition. These charges were partially offset by one, income recorded and related to the favorable settlements received by Klipsch of approximately $1.1 million

[Patrick M. Lavelle:]

Okay, Mike, thank you for your detailed report. And now we'll open the call to any questions.

[Operator:]

[Operator Instructions] Our first question comes from line of Scott Tilghman from B. Riley.

[R. Scott Tilghman:]

Wanted to touch on a couple of things. First, Pat, you were breaking up a couple of times at least on my end, and I wanted to clarify that the revenue guidance, the $842 million, excludes any numbers from Venezuela, whereas the $836 million in round numbers for 2013 does include Venezuela. Is that correct?

[Patrick M. Lavelle:]

Yes, that's correct.

[R. Scott Tilghman:]

Okay. Second, just looking at the cost trends, and then Mike, to your point about overhead increasing, we see selling sort of ticking up here in the fourth quarter, G&A ticking up even though we had a lower revenue level than in the fiscal third quarter. Is that part of that increase kicking in there, or is there some other dynamic at work that caused the uptick in expenses relative to the revenue line?

[Charles Michael Stoehr:]

No, the advertising as I said we have been advertising more, and there has really I think if you kind of take out the Hirschmann, you'll see that -- our actual compensation expenses haven't risen yet.

[R. Scott Tilghman:]

And then let me -- last and then I'll get back in queue, but the engineering line has been fairly consistent adjusting for acquisitions and saw that number come in significantly lower here in the fourth quarter. Just wondering what was causing that.

[Charles Michael Stoehr:]

Actually I look in the fourth quarter, I don't see an engineering labor line. But this year versus last year?

[R. Scott Tilghman:]

Right. It looks like it was about $5.9 million. You're backing into it with the full year results you offered versus $6.9 million in the third quarter. Just wanted to get that -- some of the upfront money on the Hirschmann contract or is there something else at play there?

[Charles Michael Stoehr:]

I'm sorry. I'm actually looking at this year versus last year. You kind of caught me by -- no, nothing major. We have actually, as we said, we had some headcounts reductions internally here, not related to the Hirschmann people as I've said. So we have reduced some of the engineering expenses.

[Operator:]

And our next question comes from the line of Mike Malouf from Craig-Hallum Capital Group.

[Ross Licero:]

This is Ross Licero on for Mike. I had a couple of questions. First you said there were several OEMs that you won for the automotive business that you couldn't really go into detail on, but could you just give us a little more color around the size of the contracts? Are these new customers? Are you just increasing business with current customers? A little color would be helpful.

[Patrick M. Lavelle:]

I'm sorry. This is primarily new business with existing customers. At this particular point, until we have everything formal, I think I'll hold back on providing any more detail. But these are new wins for some existing projects where we will get the next program. And then these are also wins for new technology that we haven't provided previously. So that's rather exciting, those new wins. I'll hold until I can formally make some announcements.

[Ross Licero:]

Okay, great. That sounds exciting. And with your new business pipeline, can you let us know how is that looking right now?

[Patrick M. Lavelle:]

The pipeline looks good. Again, we have some new program that I announced, one with Daimler-Benze. A portion of that business is also under NRE where we get paid upfront for the developing the portion of the program. So until we deliver the product, we are still generating income off of the NRE. And then the new projects that we're winning, the Daimler-Benz program is completely new to us. These are multi-tuner modules that will house the AM/FM section, the satellite section, the TV tuner section. And we will build these for each geographies marketplace, so that the car manufacturer does not have to go out and retest every time there's a change to -- let's say the center stack. That's very closely propositioned to retest all their radios when the design changes for the center stack. So this technology and putting all the tuners for one geographic market like Europe and China and the United States into one tuner pack that can interface with the center stack will save millions of dollars of testing and engineering time for the OEM. So we're pretty excited about those multi-tuners.

[Ross Licero:]

Okay, great. And I just got one more. For the Dyle launch, it looks like it's been pushed back in the fourth quarter. What's driving that and is that -- how do guys factor that into your guidance for this year?

[Patrick M. Lavelle:]

We have very, very little sales posted or projected for it, and it will be very late in the fourth quarter. This is a -- this really stems from what MCV and one of their vendors, their chip manufacturer vendors are doing. The chip manufacturer is a little late on the program and therefore, it's all pushing it back for us because MCV needs that chip. We need to get that chip to build out the product.

[Ross Licero:]

Okay, great. So the contracts with the content providers have been negotiated and that's all settled?

[Patrick M. Lavelle:]

That's all settled, that's all done. We're just waiting for the chips so that we can continue doing our end.

[Operator:]

[Operator Instructions] And we have question and it comes from the line of Scott Tilghman from B. Riley.

[R. Scott Tilghman:]

Just wanted to circle bock on the product exits. You talked a little bit about some of the Eurozone softness in the first half of the year. Obviously, the euro is closer to parity against last year, so less of an impact there. But thinking about the product exits, will those be fairly evenly spread over the course of the year or are you doing more early on? How should we think about that in terms of the pace of revenue during the four quarters?

[Patrick M. Lavelle:]

You'll see as we exit the category, you'll see that we will not make that particular sale in that particular quarter and that will be -- that will follow our year, whether it's -- we have higher incident of sale in our third quarter for our Christmas quarter. So we'll follow the year, the way you would normally see it. But some of these categories, when we run the numbers, it's -- at best case at times it's trading dollars. And we have much, much better use for our dollars. So we made the call to exit these categories. This is part of the CE space. We reached end-of-life, ASPs dropped to a point where it doesn't pay any longer. So -- and again as I indicated, we have no exit loss with any of this. These are all planned, and it's better to have a planned exit than to be forced out when the business just goes down. So that's pretty much what we're doing.

[R. Scott Tilghman:]

Okay, and then second, when the Car Connection program and the OBD devices, I know you've talked about being in discussions with some of the insurance companies previously. Anything new to report there in terms of potential opportunities going forward? Or is it still just in the discussion stage?

[Patrick M. Lavelle:]

Scott, until we have more formal information, I mean all of the insurance companies we are talking to are interested. They're engaged, but they are large companies. And like our OEM business, putting a program together will take some time. But I can tell you the interest level is high, and we are positioned with our partners and our product very well.

[Operator:]

We have no further questions at this time. [Operator Instructions] We have no further questions.

[Patrick M. Lavelle:]

If there are no further questions, I want to thank you for joining us this morning. I would like to express the company's appreciation for your interest and support. And I wish you all a good day.

[Operator:]

Thank you, ladies and gentlemen. That concludes of the conference for today. Thank you for joining us. You may now disconnect.