VOXX International Corporation
Q2 2014 Earnings Call Transcript

Published:

  • Operator:
    Good day, ladies and gentlemen, and welcome to the Second Quarter 2014 VOXX International Corporation Earnings Conference Call. My name is Jackie, and I will be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to Mr. Glenn Wiener. Please proceed.
  • Glenn Wiener:
    Thank you, Jackie, and welcome to VOXX International's fiscal 2014 second quarter results conference call. Our call today is being webcast on the 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. We had a very active quarter on the IR front, presenting at Imperial Capital and Craig-Hallum, and we're going out on the road each month. Tomorrow, we'll be in Boston and next week in Chicago, and we've -- we are slated to produce at the Wedbush Securities Conference in December; and following the Consumer Electronics Show in Las Vegas, we'll be presenting at the Needham & Company conference in January. We feel good about the future direction of the company, and on behalf of the team here at VOXX, we'd like to thank you for your continued interest and support. Before we begin, 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, and the company assumes no responsibly 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. And at this time, I'd like to turn the call over to Pat Lavelle, President and CEO of VOXX International. Pat?
  • Patrick M. Lavelle:
    Thank you, Glenn, and good morning everyone. Yesterday, we reported our second quarter results, which essentially tracked in projections with a few exceptions that Mike and I will cover during the course of this call. Let me start off by reiterating our prior guidance for the year and reaffirm that during the first 2 quarters, our business is tracking in line with our plan. We reported sales of $183.8 million, off $7.9 million or just over 4%. On our most recent calls, I referenced 3 factors that would impact our top line throughout this year, and consistent with those comments we projected continued attrition in aftermarket satellite radio sales. We planned for the elimination of certain lower margin consumer product lines and Venezuela sales continue to be impacted by the uncertain political climate there. The total impact of these 3 issues in the second quarter was approximately $7 million off our top line. With the anticipated pickup in the second half of the year, our core business is expected to grow, particularly sales in our automotive OEM customers. Gross margins were 29.4%, which is 90 basis points ahead of last year's second quarter. Gross margin continue to track in line with our prior guidance of 28.8%, with potential upside that will be driven by product mix. Overhead was up $4 million, with most of the increase related to R&D costs due to the number of OE projects we're working on and a higher compensation expense due to a 3% salary increase we implemented this fiscal year. We had higher payroll benefits due to a pickup last year, which didn't repeat this year. And finally, we had additional costs associated with the ERP upgrade I've spoken about and the one-time consolidation expenses at Klipsch, which will lower our fixed overhead in future years. Our operating income was down due to lower sales for the quarter and the higher expenses I just mentioned. However, we are tracking to plan for the fiscal year. Offsetting a number of these one-time charges were 2 favorable events this quarter, resulting in total other income of approximately $5.4 million. The first, a settlement of a class-action lawsuit started several years ago against a number of LCD panel manufacturers, and the second, a recovery from the Circuit City bankruptcy. This made up a majority of other income, and resulted in net income of $4.9 million versus $3.7 million in last year's second quarter and earnings per share of $0.20 versus $0.16. Last week, we reported EBITDA of $13.4 million versus EBITDA of $13.1 million in last year's second quarter, up slightly for the comparable periods. Based on results and our expectations for the back end of the year, we're comfortable with our EBITDA guidance of $62 million. I'm now going to shift to some of our operating segments and make some brief remarks on products and programs. Next quarter, we'll be reporting from CES, where we'll have some lots of exciting product news to share. Within automotive, our automotive segment was up modestly for the quarter, as aftermarket satellite radio sales and the Venezuela situation impacted results. Offsetting this was the continued success in our OEM business globally. The automotive market continues to grow. In the U.S., we're expecting over 16 million new car sales this year, and the international markets that we operate in appear to have stabilized, with China sales offsetting some of the weakness in the Eurozone. In addition to higher car sales, having a direct benefit on our business, we've also seen better penetration rates within some of our programs. For the quarter, our OEM business, excluding Venezuela, was up 12.7%, and through the first half of the year, we're tracking almost 19% higher than in fiscal '13. Moving forward, we have strong business, secure with many of the leading global OEMs, including Ford, General Motors, Mercedes, BMW, Audi, the VW Group, Nissan, Jaguar, Land Rover, Bentley and others. These programs include smartphone app remote starts, Android rear seat entertainment systems, digital TV tuners, 4G and smart antennas and new technologies such as the multi-tuner pack and new eHub mobile server that we will be launching next year. We believe all of these new products have the potential to drive meaningful, organic, OEM sector growth for the company. Before moving to our other 2 segments, I'd like to make one general comment about the overall retail environment. We saw a modestly stronger U.S. economy in the first quarter, though there was a slowdown in 2Q. All signs now point to increases in the second half of the year, and recently, the Consumer Electronics Association came out with a report projecting 4% growth in this year's holiday season versus last. Additionally, and as I had mentioned on last quarter's call, we have good retail load-ins, and we're anticipating a strong 3Q as a result. Internationally, there continues to be weakness. The Eurozone, however, is showing signs of stabilization, but there's still softness in consumer spending, which is affecting our European operations. We expect some softness to continue in fiscal '14. However, our international sales overall for the first half of the year are up close to 5%. In premium audio, we reported a sales decrease of $3.9 million, which is all attributable to the Eurozone. Our domestic operations are faring well, and we're showing increases in the sound bar and sound-based categories, as well as increases in sales of our newly introduced Klipsch music sets. While our sales were off in 2Q and are down 3.8% through the first half of the year, we still maintain our prior guidance of approximately 9% growth based on the introductions of our new sound bars, sound bases and music centers. In music centers, the Klipsch gig and the Klipsch KMC 3 will be promoted aggressively this holiday season. We'll also be introducing our new Klipsch Stadium Music Center this fall, set to retail at $2,000. Additionally, we'll be shipping our new Magnat and Heco music centers and sound bars for this holiday season in the European markets. Some of the new and exciting promotional campaigns we have planned. Klipsch recently announced its strategic partnerships to sponsor the Kings of Leon's world tour, one of the hottest bands in the world. The Kings will take the Klipsch live music experience on the road with 26 North American dates, followed by Europe, the Middle East, Africa and then down under to Australia. Klipsch has expanded its live music venues, which now include Klipsch amphitheaters in New York, Miami, Los Angeles, Toronto and Indianapolis. Klipsch has also been very aggressive in promoting its partnership with LiveNation and in promoting our heritage as keepers of the sound, re-creating a live music experience for consumers across the country. And Klipsch has recently expanded its sports marketing efforts, and now has on board as brand investors
  • Charles Michael Stoehr:
    Thanks, Pat. Good morning, everyone. I'll begin with the results of our operation for the 3 and 6-month periods, ended August 31, 2013 and August 31, 2012. For the 3-month period, net sales were $183.8 million, a decline of 4.1%, and for the 6-month period, net sales were at $376.8 million, a decline of 2.3%. While sales were down, this was anticipated, and we are comfortable with our prior guidance. As we stated last quarter, the retail environment in the second quarter both domestically and abroad was slow, but we have a number of product load-ins set for this third quarter which should boost sales -- to boost sales in the second half of the year. On a segment basis, Automotive sales for the quarter were $99 million, up 0.2% and $203.8 million for the 6-month period, up 2.4%. As expected and planned for, our aftermarket business was down with fulfillment sales of satellite radio products comprising the bulk of this, as with sales in Venezuela, given the current -- in Venezuela, given its current currency and government restrictions. Offsetting this, however, was our global OEM business, which continues to grow. For the comparable quarters, our domestic OEM business was up 7.2% and our international OEM business was up 8.6%. Excluding Venezuela, our total OEM business sales were up 12.7%. For the comparable 6-month period, our domestic OEM business was up 11.4% and internationally, we are up 14.7%, and again, without Venezuela, up over 18%. We continue to add new programs and new OEM customers, and some of the newer products Pat talked about should continue to drive growth in this segment for years to come. Premium audio sales for the quarters were $40.8 million versus $44.7 million, and $81 million versus $84.2 million for the 6-month period. While the category year-to-date is down, we still anticipate high-single-digit growth for the year, as we have a host of new products coming to market, very strong third quarter load-ins and several new promotional campaigns, primarily at Klipsch. We have been impacted mostly internationally. Knowing that, our Domestic business is up 2% year-to-date. There was a decline on our Consumer Accessory segment. We reported sales of $43.5 million versus $47.9 million for the comparable quarters and $91.2 million versus $101.9 million for the comparable 6-month periods. International sales were off 17.4% for the quarters and 22.2% for the 6 months with much of this driven by the declines in Germany, as last year sales were boosted by the pickup of set-top boxes with the transition from analog to digital broadcasting and also a slowdown in the German subsidiaries' traditional markets. On the domestic side, we're still getting good traction at retail, with traditional big box stores, discount stores and the hardware chains for our Bluetooth wireless speakers, safe charging and power lines and our PSAs. We also continue to exit certain lower-margin product lines, and during the quarter, exited approximately $2.3 million. Over the 6-month period, we exited close to $5 million in sales. Additionally, and like in premium audio, we have good load-ins for the holiday season and anticipate strong domestic sales, offset by the international markets. Our gross margins came in at 29.4% versus 28.5% for the comparable quarters, a 90-basis point improvement. For the 6-month period, gross margins were 28.8% versus 27.3%, a 150-basis-point gain. The automotive group was the biggest reason for this, as gross margins increased 200 and 160 basis points for the 3- and 6-month periods. There are a few contributing factors
  • Patrick M. Lavelle:
    Okay. Thank you, Michael, and we'll now open it up for questions.
  • Operator:
    [Operator Instructions] And your first question comes from line of Mike Malouf with Craig-Hallum Capital Group.
  • Michael Fawzy Malouf:
    I have a couple of questions. First off, on the gross margin side, I know that fulfillment revenue continues to go down and the low-margin commodity consumer electronics continues to be less of a percentage. And I'm just wondering, when do you think we'll start to get that percentage on gross margins higher than the sort of 29% that it's been stuck at for the last few quarters? And I think you have a target of over 30, so just some comments on that.
  • Patrick M. Lavelle:
    As you've heard me say, we continue to see lower satellite radio sales. So that [Audio Gap] [Technical Difficulty]
  • Patrick M. Lavelle:
    Okay. The fulfillment business is down. However, we do have a number of opportunities that would add to our fulfillment sales because we do get a good return on it. So basically, what we're looking at is exiting the lower margin commoditized product. When the opportunity presents itself, we will add to our fulfillment group. And as the mix changes, as we do more and more of our OEM business and more and more Premium Audio, it will start to push the margins up. But in my estimation, as part of our plan, is to continue to acquire companies with stronger margins. It is part of our criteria when we look at new companies and the combination of all those effects and acquisition at higher margins, a better mix in terms of Automotive and Premium Audio, and that should drive margins north of 30%.
  • Michael Fawzy Malouf:
    Okay, great. And then a couple of questions on acquisitions since you bring it up. Can you give us a sense of the environment out there with regards to the opportunities? Are they in any particular area of your three-pronged strategy or maybe something new? And I'm wondering if you get a sense as you look through some of these acquisition potentials, what kind of valuations that people are looking at these days?
  • Patrick M. Lavelle:
    Well, right now, our strategy is to look within the [Audio Gap] of the categories. Our infrastructure can be leveraged against acquired companies. So we are focusing our search for our next acquisition within the 3 segments that we're in. As far as valuations, you're going to see valuations depending on the company all over the place and depending on who we're competing with, whether we're competing with a strategic buyer or a private equity buyer. But I would say that depending on the company, you're going to see it anywhere from probably maybe 6x to 8 or 9x.
  • Operator:
    And your next question comes from the line of Lee Giordano with Imperial Capital.
  • Lee J. Giordano:
    Can you talk a little more about the retail load-ins and the improvements you're seeing in the back half? Do you have visibility both in Q3 and in Q4 for that? And is that the main reason you're confident that the consumer's turning around at least in your categories?
  • Patrick M. Lavelle:
    Okay, basically, what we see is, obviously, we see the load-ins for the third quarter because we're bringing the merchandise in we're delivering now. As far as fourth quarter, we're still working off of projections that we're getting from our customers, and they appear to be good and that's why we're quite bullish about the third quarter. But it is not only driven by the consumer stepping up and buying more. We have a lot of new product that we've introduced for this quarter. Our Bluetooth speakers are being very well-received by the market. Our music centers are being well-received. The sound bar business is growing for us. So we anticipate when we get a little combination of strength with the consumer, but the success of the introductions that we have in some of our newer products for retail that it should shape up to be a decent quarter.
  • Lee J. Giordano:
    Great. And can you provide any updates on Venezuela as far as timing of when that might -- that situation might improve and the potential going forward?
  • Patrick M. Lavelle:
    Well, if you look at any of the articles that are being written, they are really starting to decay as an economy. I do not -- I cannot see how long the existing government can stay in power with the problems that are going on in the country, whether it be shortage of materials [Audio Gap]. When that's going to change, I would say it's anybody's guess.
  • Operator:
    And your next question comes from the line of Scott Tilghman with B. Riley.
  • R. Scott Tilghman:
    Wanted to touch on some timing issues. One, if we go back to last year, there was sort of an acceleration, it seemed, of some of the product exits, and obviously, that's continued this year. When does that begin to slow down, knowing that there's always some exiting taking place, but there was a concerted effort to get rid of some of that lower margin commoditized product? And related just from a timing issue, you're thinking about the set-top box component in Germany, when does that begin to fall out of the numbers from a year-over-year comparison?
  • Patrick M. Lavelle:
    Okay. The first, as far as exiting the categories that we had focused on because of their commoditization, I would say that that's going to end this year, and that's why we're looking at some stronger organic growth in the balance of our product lineup because we're not eliminating sales and then coming up with new sales. There are certain categories that we're pretty much out of now. So we won't see that happening as much. I think you will see a normal end-of-life process as we move into next year. As far as the set-top boxes, pretty much true. All of our fiscal '13, we had good set-top box sales and the comparison will last through all of our fiscal '14.
  • R. Scott Tilghman:
    Okay. And then follow-up and sort of an accounting or bucket issue for Mike. Looking at the ERP and consolidation expense of this quarter and a favorable recovery last year, how does that hit the various line items?
  • Charles Michael Stoehr:
    I think, actually, if you look at it on the charges for Klipsch, we had -- some was in warehousing costs, a large portion was in the G&A. About $400,000 was up in warehousing and the rest of it was in G&A.
  • R. Scott Tilghman:
    And then just thinking about the R&D spend that you called out, obviously, a number of products coming to market, planned on coming to market. When do you expect the normalization there?
  • Patrick M. Lavelle:
    Well, the thing is if we continue to win new opportunities and new business, we're going to continue to have some R&D expense associated with new business. Right now, we expect that some of the new projects that we're working on, we'll start to see sales in 2015. We have a number of opportunities that we're assessing right now. So R&D expenses, as we move into next year, could come up a little bit as we win new business.
  • R. Scott Tilghman:
    And my last question, just on a related front, obviously, you had the Mercedes contract signed last year on the tuner program. Any updates in terms of other manufacturers that are looking at that and are interested, and where you might stand in signing some new contracts?
  • Patrick M. Lavelle:
    It's a little too early to say, but there's interest throughout the industry on what we're doing there. We've been able to secure an additional program with Jaguar, Land Rover for the same concept. So as our -- as the product gets developed and our teams bring it out to the market, I think that we'll see wider acceptance.
  • Operator:
    And your next question comes from the line of James Medvedeff with Cowen & Company.
  • James Medvedeff:
    Most of mine have been answered, but let me just ask, are you able to provide any additional color on the new products that might be shown at CES?
  • Patrick M. Lavelle:
    We have a number of new products that we're introducing this year. You'll see iterations of different versions of them at CES. Our new antenna with wireless streaming in there will be shown at the show, but there's a host of different products that will be presented by each one of our segments, and I expect that it will be a very exciting show for us.
  • James Medvedeff:
    Great. And would you just run through exactly how big Venezuela is to each of the 3 segments?
  • Patrick M. Lavelle:
    Venezuela is primarily Automotive and we had indicated -- I believe we indicated that it was $12 million to $14 million on my last call.
  • Operator:
    As of this moment, we have no further questions.
  • Patrick M. Lavelle:
    Okay. Well, I want to thank everyone for joining us this morning, your support of the company, and I look forward to this coming quarter and the introductions of all our new products at CES. Have a good day, and stay dry.
  • Operator:
    Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a great day.