VOXX International Corporation
Q3 2012 Earnings Call Transcript

Published: 10 Jan 2012

[Operator:]

Good day, ladies and gentlemen, and welcome to Audiovox Fiscal Third Quarter Results Conference Call. My name is Carmen, and I'll be your coordinator for today. [Operator Instructions] I would now like to turn the call over to your host for today, Mr. Glenn Wiener. Please proceed.

[Glenn Wiener:]

Thank you, Carmen. Welcome, everybody to Audiovox's fiscal 2012 third quarter 9 months results conference call and webcast. Today's call is being webcast on our website, www.voxintl.com, and can be accessed through the Investor Relations section. With us today are Patrick Lavelle, President and Chief Executive Officer; and John Shalam, our Chairman of the Board. We're all out here in Las Vegas for the Consumer Electronics Show. Mike Stoehr is dialing in from our New York office. Before we begin, I'd like to quickly remind everyone that except for historical information contained herein, statements made on today's call and in 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. Risk factors associated with our business are detailed in the company's Form 10-K for the fiscal year ended February 28, 2011. We released our results after market closed yesterday. If anybody needs a copy, please feel free to call my office. Additionally, it can be downloaded on our website in the Investor Relations section, as can our Form 10-Q, which was also filed after market. We're very excited to be speaking with you today, and at this time, I'd like to turn the call over to Pat.

[Patrick M. Lavelle:]

Thanks, Glenn, and good morning, everyone. I'd like to begin by wishing you a healthy and happy new year and all the best in 2012. As Glenn indicated, we're here at the Consumer Electronics Show in Las Vegas where yesterday we released over 30 new product announcements. We are looking forward to the potential 2012 brings for VOXX International and our shareholders. Our fiscal Q3 sales were nearly $44 million or 26.7% higher than Q3 2011, driven by 3 factors

[Charles Michael Stoehr:]

Thanks, Pat. Good morning, everyone. I'll go through our third quarter and 9-month results, and I'll make some comments on balance sheet and expectations for the full year. Net sales for fiscal 2012 third quarter were $206.8 million versus $163.2 million in the third quarter last year, an increase of $43.6 million or 26.7%. We reported electronic sales of $165.9 million, a 35.3% increase and accessory sales of $40.9 million, up approximately 1%. Klipsch sales for this 2012 fiscal third quarter were $51 million, and this primarily led to the increase. Additionally, our mobile OEM business and our international operations both reported increases for the comparable third quarters, what offset the strengths of these groups were declines in Consumer Electronics and in audio, primarily satellite radios. For the comparable 9-month periods, net sales were $530.5 million versus $422.8 million, an increase of $107.7 million or 25.5%. Electronic sales were $425 million, up 36%, and accessory sales were down 4.4% at $105.5 million. Driving the increase in Electronics were the same factors, approximately $125.6 million in sales from Klipsch and the growth in both our mobile OEM and international operations. Internationally, electronics, accessories and mobile were all up to the comparable 9-month periods. What offset stronger growth in this segment was primarily the continued weakness in the domestic economy, though in our third quarter, particularly in Accessories, we saw a reversal of that trend due to several new product introductions and a slight pickup in holiday sales compared to last year. Additionally, mobile sales were somewhat impacted early on in fiscal 2012 as a result of the supply shortages caused by the Asian tsunami, which is now behind us. Now to continue to transform our product offerings, our gross margins for the 2012 third quarter came in at 28.9%, a 770 basis point improvement over last year's third quarter and a 120 basis point improvement over our second fiscal quarter. As for the 2012 9-month period, our gross profit margins were 27.8% compared to 21.1%, up 660 basis points. There are several factors that are driving margins upwards, including continued increases in our mobile OEM business, which carries higher margins on our aftermarket products; sales of high-performance premium speaker products, this is the Klipsch acquisition; reduced emphasis on low margin CE products such as camcorders, clock radios, digital players and lower sales of the filming products. Besides improvements in our product margin, the company has experienced improvements on our inventory provisions for obsolescence and warranty. As we have pointed out in several previous calls, our continued emphasis in process improvement has resulted in lower warehouse assembly costs, which impacts our gross growth margins favorably. The company's margin improvement was not just due to the Klipsch acquisition. And while Pat raised our gross profit outlook for the fiscal year, please keep in mind that in any one quarter, we can have a shift towards more consumer or fulfillment-type sales which could affect margins. As stated, we anticipate closing our fiscal 2012 with a gross profit margin of approximately 27%, which is above our initial projections of 25%. Operating expenses for the 3 and 9-month periods for fiscal 2012 were $41.4 million and $117.3 million, which represents an increase of $12.2 million and $32.3 million over the comparable fiscal 2011 periods. As a percentage of net sales, operating expenses increased to 20% and 22.1% as compared to 17.9% and 20.1% for the comparable 3 and 9-month periods. The increase in the expenses was primarily related to Klipsch, which accounted for $9.8 million in our fiscal third quarter and $29 million for the 2012 9-month period. The pre-Klipsch overhead for the comparable periods was up $2.4 million in the third quarter and $3.3 million for the 9-month period. A portion of this increase through the third quarter was nonrecurring professional service fees related to our patent infringement case. Looking at our operating expenses, after taking to effect the impact of professional fees, selling expenses were flat and the only major increase in G&A expenses not related to Klipsch was increased compensation due to the company meeting its performance targets or goals. All in all, our operating groups had continued to reduce or restructure their overhead as we continue to implement synergies and savings through the system changes or overhead integration. We expect this to continue through our next fiscal year. We reported operating income of $18.4 million versus $5.4 million in the third quarter of last year, and for the 9-month, $30.1 million versus $4.1 million; $13 million improvement in the third quarters and $26 million improvement for the 9 months as a result of improved margins and cost structures of our company. Other income decreased by approximately $3.9 million during the comparable third quarters, and approximately $8.4 million for the 9-month period, so the interest expense, fees and amortization of deferred financing costs related to new credit facility as a result of the Klipsch acquisition. Additionally, other income decreased due to a $2.6 million charge related to a patent infringement judgment, the absence of gains on foreign exchange contracts, which were recorded in fiscal 2011, and an other-than-temporary charge recorded during the 3 and 9-month periods in fiscal 2012 of $48,000 and $1.2 million, respectively, related to our investment in Bliss-tel. For the 9-month period, equity and income of our equity investees increased $636,000 and for the 9-month period, $907,000. This is related to continued profitability in our joint venture with ASA, which continues to experience growth in several of its markets, which includes special vehicles, not only RV, but commercial and heavy-duty vehicles. Net income was $8.9 million and $14.8 million for the 3 and 9-month periods in fiscal '12, compared to $3.9 million and $5.6 million for the same periods. As Pat said, earnings per diluted share were $0.38 versus $0.17 for the third quarter, and $0.64 versus $0.24 for the 9-month comparisons. Adjusted net income was $9.1 million or $0.39 a share, compared to $4.3 million or $0.19 a share for the third quarters of 2012 and 2011, respectively. And for the 9-month period, adjusted net income was $16.2 million or $0.70 a share in fiscal '12, compared to $6.2 million or $0.27 per share in fiscal '11. The effective tax rate for the 3 and 9 months ended November 30, 2011, was a provision for income taxes of 40.9% as compared to 34.5% and 24.1% for the comparable prior periods. The effective tax rates for the 9 months ended November 30, 2011, is different from the statutory rate, primarily due to state and local taxes and differences between U.S. and foreign tax rates and no tax benefit provided to the impairment charge of Bliss-tel. We reported EBITDA of $18.7 million for 2012 fiscal quarter versus $8 million in last year's third quarter, a $10.7 million improvement. Adjusted third quarter EBITDA, taking into account Klipsch transaction costs and charges for stock-based compensation, was $19.1 million versus $8.5 million. For the 9-month period, EBITDA was $37.1 million versus $14.7 million, and adjusted EBITDA was $39.4 million versus $16 million. For your reference, the 9-month comparison for adjusted EBITDA includes a $1.6 million of Klipsch acquisition cost and adjustment in differences of approximately $700,000 in stock-based compensation. As Pat mentioned in his remarks, our bottom-line performance for the first 9 months of the year was ahead of plan, and given that we're halfway through our fiscal fourth quarter now, we feel comfortable raising our prior EBITDA guidance for fiscal 2012 of $42 million to approximately $44 million. Our goal next year, of course, is to do even better. Moving to our balance sheet. Operating activities provided $27.7 million during the 9 months ended November 30, 2011, principally due to net income before depreciation and amortization, an increase in accounts payable on accrued expenses, partially offset by increased accounts receivable. Investing activities used cash of $169.3 million, of which $160.3 million was used for the Klipsch acquisition, and CapEx through the first 9 months of fiscal 2012 was $2.2 million. Additionally, AR turns were 4.3 compared to 4.4 for the comparable 9-month period, and our inventory turns were 3.1 versus 3.2 as we entered into the heaviest selling season of our fiscal year. As of November 30, we had a working capital of $201.9 million, which includes cash and short-term investments of $18.8 million, compared to working capital of $258.5 million and cash and short-term investments of $98.6 million as of February 28, 2011. The decrease in cash was primarily related to our Klipsch acquisition. Our fiscal third quarter was our heaviest selling season and requires the most working capital throughout the year. At this time, we don't see any product category at risk and our inventory position is relatively clean similar to last year. Our cash position will begin to ramp up in the fourth quarter as we collect the $163.5 million in receivables and our loan position will drop. The balance sheet continues to generate cash flow based on our business model, and consistent with my past remarks, barring any additional acquisitions, we should be in a position to pay down the ABL within 2 to 2.5 years of acquiring Klipsch. In closing, as we continue to remain cautious about the overall macro view of the national and world economy, our sales will come in a bit later than initially projected but our bottom-line performance has benefited by better margins due to increased sales in our higher-margin product areas and continued focus on operating expenses. We've made a lot of progress and we've positioned well moving into the fourth quarter. I'll give the call back to Pat. Pat?

[Patrick M. Lavelle:]

Okay, Michael. Thank you, and we will open it up for some questions.

[Operator:]

[Operator Instructions] The first question comes from the line of Matt Spratford from Sidoti & Company.

[Matthew Spratford:]

Just had a couple of quick questions on OEM. First, I was just curious if you could give us the percentage of OEM revenues through the first 3 quarters of '12?

[Patrick M. Lavelle:]

Our OE business is in excess of $100 million at this point through the year.

[Matthew Spratford:]

All right, fair enough. And then I was just curious, maybe you could comment on maybe ASPs on OEM systems?

[Patrick M. Lavelle:]

Well, because of the fact that we provide not only Electronics in our rear seat entertainment systems and also the headrest and all the supporting material, the average selling price would be higher than some of the other products that we would sell in the consumer groups and products like that. It wouldn't reflect on the actual price range, though.

[Matthew Spratford:]

I got you. Maybe an ASP on the rear seat systems, if you could maybe expand on that a little bit?

[Patrick M. Lavelle:]

I wouldn't go there, Matt. That's confidential information.

[Matthew Spratford:]

Okay, no problem. Just 2 more quick ones for you. Considering your existing relationship with Bentley and on the fact that they just announced a new SUV, can we expect maybe an OEM system award for that?

[Patrick M. Lavelle:]

Well, we're working on a number of systems for them, for their vehicles and the ones that we have slated for introduction for this quarter are for existing vehicles. But once you develop a relationship with an OEM manufacturer, your chances of winning additional contracts are much greater, providing you are providing a quality product at a competitive price.

[Matthew Spratford:]

Got you. Just one more, any update on a potential Klipsch show in our OEM partnerships?

[Patrick M. Lavelle:]

No. We have not -- we really haven't even started that at this particular point other than some exploratory questions. We're focused right now, really, on business on our remote start products, our rear seat entertainment and some of the other automotive products that we've been selling, like lane departure and rear observation.

[Operator:]

The next question comes from the line of Scott Tilghman from Caris & Company.

[R. Scott Tilghman:]

Wanted to really touch on a strategic question. With the announcements yesterday, you hit on consumer, you hit on OEM, you hit on just the distribution model rather than the traditional homegrown model. Going forward, how do you think strategically about balancing the different growth vehicles, with international and domestic, with OEM versus consumer and then with the distribution model versus the homegrown model?

[Patrick M. Lavelle:]

Well, I mean, when we look at -- we look at each group, when we look at them separately for their, number one, their ability to grow organically. I think we're seeing a change. That's in a long time coming in certain categories within the automotive group, and I'm specifically talking about the aftermarket where we're seeing new products come to market like the location-based products that can give us new products, new categories to bring to retailers, to bring to distributors and car dealers that will give us a new category and new sales. Well that is very normal within the aftermarket 12-volt [ph] business. New categories come up, the car manufacturers have not put them into their vehicles yet, and it gives the aftermarket a chance to grow sales and incubate the product, which will eventually move into a car. So we see some of the new product categories that are coming through on the automotive side as giving us the ability for organic growth there. When we look at the consumer business and we look at product introductions from [indiscernible] around their new AirPlay sound systems. Again, essentially a new category for them to sell to where you can stream wirelessly from any of your smart devices directly to the speaker, and you can have these placed throughout the house. Completely new category for us at Klipsch, it should give us some good organic growth. Same thing with headphones. Our headphone business, our in-ear business has done very, very well over the past year. This is a category that Klipsch had traditionally not been in, but is doing very well as far as placement and market share, and we see growth in that category. Now when I take that and I look at international, we have the same opportunities internationally as we have domestically, so we see our international sales growing because of the things that I've just mentioned. On an OEM basis, with the new Android-based units that we are developing and planning for market, we see additional growth there within our OEM customers as they look to expand their product offerings and stay relevant with the type of rear seat entertainment products that they're offering. And then finally, on the fulfillment side, we are constantly being approached by partners. We have a number of great partners, whether it's Sirius XM, QUALCOMM, Sprint that recognize Audiovox's unique position in the marketplace where we have the logistics, we have the engineering, we have the customer contacts, we have the ability to market and bring products to market quickly. And that's an advantage for them. So we have, in many cases, very good opportunities to expand that business as well. So strategically, we are looking at each one of them, how can they grow organically, and I don't have any set specific number as I want my fulfillment sales to be this or the OEM sales to be this. Each group has their ability to grow, and we're looking to maximize that potential in each group.

[R. Scott Tilghman:]

Great. And then one quick follow-up, I know it's early here at CES but there has been a number product introductions. Are there any innovations here that either make you think you have a new potential product category coming down the pike or that there may be an attractive tuck-in in the category where you could be or are operating right now?

[Patrick M. Lavelle:]

I think, what I just said, like some of the location-based stuff is new category that I think the retailers and customers will embrace as a new way to make sales. The new stuff that we're introducing under AR, as far as the home theater power conditioning product, I think has got -- although it falls under power conditioning and surge protection, it's a completely new concept that I think the market will embrace. We have a number of new products that we're very excited about.

[John J. Shalam:]

Scott, this is John Shalam. Just to add a little bit to that, I think the big emphasis here at the show is in connectivity. Everybody's showing products that expand your reach with your cellphone, your iPhone or your various devices to stay in touch 24/7, but there's also a major emphasis now on health-related products and electronics, and we see this as potentially a strong growth product area in the future.

[Operator:]

[Operator Instructions] .

[Patrick M. Lavelle:]

Okay. If there are no more questions, I want to thank everybody for joining us this morning. We're very excited about what's happening at the show, and we're leaving here right now and on our way to the show. So hopefully, we'll be able to report on our next call some very, very good results emanating from the show. Have a great day, and thank you.

[Operator:]

This concludes the presentation for today, ladies and gentlemen. You may now disconnect. Have a wonderful day.