VOXX International Corporation
Q1 2016 Earnings Call Transcript

Published: 10 Jul 2015

[Operator:]

Good day, ladies and gentlemen, and welcome to the VOXX Fiscal 2016 First Quarter Results Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will be given at that time. [Operator Instructions] As a reminder, this conference is being recorded. I'd now like to turn the call over to your host for today, Mr. Glenn Wiener, Investor Relations. Sir, you may begin.

[Glenn Wiener:]

Thank you, Ben, and good morning everyone. Welcome to VOXX International's fiscal 2016 first quarter results conference call. Today's call is being webcast on our Web site, www.voxxintl.com. It could be accessed in the Investor Relations section of the site. We also have a replay available for those who are unable to join us this morning, and the detailed information was issued in our press release yesterday after market close. We filed our Form 10-Q with the Securities and Exchange Commission, and again issued our press release over PR Newswire yesterday. Both documents can be found on our Web site in the IR section under SEC filings and News Releases respectively. Speaking for management this morning will be Pat Lavelle, President and CEO; and Michael Stoehr, Senior Vice President and Chief Financial Officer, both of whom will be available for questions after our prepared remarks. Before I turn the call over to Pat, 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. Risk factors associated with our business are detailed in our Form 10-K for fiscal 2015 period, ended February 28, 2015. We recently presented at the Jefferies Conference, we'll be presenting at B. Riley in September, and look forward to keeping the market up-to-date on our progress. And at this time, I'll turn the call over to our CEO, Pat Lavelle.

[Pat Lavelle:]

Thanks Glenn, and good morning everyone. Yesterday, we reported our first quarter results, and for the most part the quarter came in as expected. We reported revenues of 164.4 million, about 3.5 million below the guidance we provided in May, much of which was related to the last of the West Coast port issues. When comparing revenues versus the prior year, we are approximately 22 million lower, with the Euro accounting for about 14 million of the decline. Mexico was roughly 5 million lower due to the change in our distribution strategy in last year's first quarter. The remainder was due to the port slowdown, with minor impacts across most of our product lines. On the other hand, our gross margins, which we guided to 28%, came in at 29.2%, up a 120 basis points. Product mix and new products in the first quarter helped drive margins. And based on Q1 performance and expectations for 2Q, we are maintaining our margin guidance at 29%. Our expenses of 48.8 million were in line with the guidance we provided on our last call, and 4.7 million below last year's first quarter. We had some higher R&D and labor expenses associated with product development in our automotive group, and professional services were also up related to lawsuits we initiated to protect our IP. This was more than offset by lower selling, general and administration expenses as a result of lower overhead and the impact of the Euro. Taking this all into account, we posted an operating loss of approximately $765,000, which is in line with the $700,000 to $800,000 loss we projected on our last call. Looking at our business segments within automotive, our contract with Jaguar Land Rover for our new multi-digital tuner module is on track to begin this month. As I noted on our conference call in May, this contract should generate approximately $58 million over the next three years. Our multi-tuner contract with Daimler Benz slated to begin in December is a five-year contract that we estimate could range between $110 million and $180 million. We have begun shipping our 4G antennas to Audi, and we're nominated for Porsche and Skoda 4G antennas, with contracts that are expected to be approximately 40 million during the life of the award. Furthermore, we're in discussions with the VW Audi Group to possibly expand the 4G program to other VW models. Last week we issued a press release formally announcing our rear seat entertainment contract with Cadillac, where we will be supplying our RSE solutions, and our Klipsch Image ONE headphones, marking the first time we'll be introducing Klipsch products to the OEM channel. And following up on my remarks from the last quarter when I announced our new EVO-based rear seat entertainment contract with Mazda, we have also won a program with GM, beginning in model year '18, which should represent new business of approximately 20 million annually during the life of the contract. Automotive, although down from the prior year, is up in the OEM segment when factoring in the Euro conversion. And we have a number of new products in development, including our intelligent antenna solutions. We have recently announced launch of our new M2M gateway unit, which provides advanced communications in connectivity for heavy-duty truck and equipment fleets, with the first deployments in August by leading telematic service provider, Inthinc. And we are currently testing our newly developed solar-powered asset tracking module for dry containers and trailers with an unprecedented 10-year lifespan. We have already begun field trials of the asset tracker with major carriers in both the U.S. and Europe. We also have been working on a new DVB-T2 TV tuner, and expect this to launch in European markets in 2017, initially with the BMW 7 series. And finally, during the second quarter, we concluded a deal with Dual Electronics to license our Jensen branded aftermarket car audio business, effective August 1. This strategy will allow us to transition resources to other growth areas within our business. Within premium audio, our new Reference Series speaker lines are gaining traction and we continue to grow placement at retail, despite that sales in the category are down, however, margins are trending upwards. Our professional team that manages custom commercial installation recently exhibited at InfoComm in June, and debuted the Klipsch K1 Series II speakers that we expect will help continue the growth in our commercial business. The Klipsch products continue to receive accolades from a variety of industry pundits. The Klipsch GiG music player was voted the best design portable speaker and one of the top 10 best portable Bluetooth speakers in the market by Heavy.com [ph]. CE Pro issued their top 100 brand analysis of 2015, and Klipsch ranked in the top five of many audio categories. Lastly, in June, we were named Legacy Audio Component Vendor of the Year by ProSource, a significant award within our industry. In the third quarter, we expect to deliver WiSA wireless 5.1 and 7.2 home theater systems and a new line of Bluetooth soundbars that we expect will improve our overall audio sales. In consumer accessories, we have new products launching from Acoustic Research in the indoor and outdoor Bluetooth speaker category, new products from 808 Audio, and a number of new reception products under the Terk and RCA brands, which we first showed at CES. Some of the new developments that we believe will generate new business are

[Michael Stoehr:]

Thanks, Pat. Good morning everyone. [Technical difficulty] company expenses and other income, and then the transition to the balance sheet before we open the call for questions. As Pat noted, our operating expenses declined by 4.7 million. Selling expenses were down 1.6 million. G&A expenses were down 1.9 million, and engineering and technical support expenses were down 1.2 million. Please note the operating expenses were impacted by the Euro conversion by approximately 4 million. Irrespective of the Euro, we did have lower salary and payroll expenses associated with headcount reductions that were implemented on fiscal 2015 fourth quarter, and lower occupancy costs as we closed one of our offices in France. We also had lower advertising expenses, though that was primarily related to timing associated with new product launches and campaigns. While our engineering and tech support was down for the comparable quarters, we did have increases in salary expenses at Hirschmann as more engineers were brought to onboard to support some of our OEM programs and RFQs in process. We report an opening loss of 765,000, compared to an opening loss of approximately 400,000 in the last year's first quarter, and in lines with our prior guidance. Other income and expenses declined by 650,000, versus last year, with approximately 300,000 related to changes in net foreign currency gains, interest income, and rental income; equity and income of our equity investees with 1.6 million, versus $1.9 million. There were virtually no changes in our interest and bank charges, 1.6 million from both first quarter periods. As noted in our Form 10-Q, the effective tax rate for fiscal 2016 first quarter was 62.9%, compared to 12.2% to comparable period last year. The effective tax rate is different from the statutory rate due to the impact of the tax law change in Indiana, with lowered the state tax rates, and changed the state apportionment rules. As a result, our Indiana R&D credits, which are part of our ongoing federal tax programs are no longer realizable. This resulted in the valuation allowance of approximately 600,000. The tax provision you see is a non-cash item. We reported a net loss for the quarter of 700,000 as a result of tax law changed, or a loss of $0.03 per diluted share versus net income of 500,000 or net income of $0.02 per diluted share. As for EBITDA, we report EBITDA 4.6 million versus 6.1 million, and adjusted EBITDA of 4.9 million versus 6.2 million. Yearly adjustments for both quarters were for stock–based compensation, 230,000 in fiscal 2016 first quarter, versus 75,000 last year. Now, for our balance sheet; our cash position as of May 31, 2015 was 7.1 million, versus 8.5 million as of February 28, 2014. Cash receivable declined by 13.4 million, and our inventory decreased by 1.7 million, offset by increases in inventory pressures [ph] as we prepare for fiscal year '16 projects. Our total [technical difficulty] May 31, 2015, which is inclusive of all mortgages, capital leases stood at 90.2 million, compared to 96.7 million, as of May 31, 2014. The change relates to capital lease obligations and bank debt. Our bank obligations were 66.9 million, versus 69.6 million at the end of last year's first quarter, a decline of approximately 2.7 million. Total leverage at the end of fiscal 2016 first quarter was 2.37. There wasn't a lot of activity or noise in our fiscal first quarter comparisons. And our plans over the coming quarters are to continue to use free cash from operations to pay down debt and potentially for M&A activity. We continue to remain [ph] flexibility to execute our strategy, and seek out complementary businesses or products that can help drive sales and improve our bottom line performance. This concludes my remarks, and we'll now open up the call for questions. Pat?

[Pat Lavelle:]

Thank you, Mike. Operator?

[Operator:]

[Operator Instructions] And our first question comes from the line of James Medeveff of Cowen & Company. Your line is open. Please go ahead.

[James Medeveff:]

Thank you. Good morning, guys.

[Pat Lavelle:]

Good morning, James.

[Michael Stoehr:]

Good morning, James.

[James Medeveff:]

Just a couple of quick ones here, could you go through that tax situation again? What would taxes have been if it weren't for the R&D credit situation in Indiana?

[Michael Stoehr:]

You would have seen a tax credit of about $200,000.

[James Medeveff:]

Of about 200,000, okay.

[Michael Stoehr:]

Right. The effective tax rate that you can use for your models is 36.5%.

[James Medeveff:]

Okay.

[Michael Stoehr:]

The good news is we'll be paying less state income tax in Indiana due to the change.

[James Medeveff:]

Right. So then on the FX impact, I've got the revenue impact; I've got the operating expense impact. How did FX impact cost of goods sold?

[Michael Stoehr:]

No, that's included in P&L page, and any dollar obligations that we have from the Euro side has been hedged.

[James Medeveff:]

Okay. Then, so these -- the extra spending on the IP litigation, can you put a number around that and give a sense of how long you expect it to continue?

[Pat Lavelle:]

I would say within -- probably we'll see something within a $2 million expense, but that is pretty much consistent with the activity we have on most years when it comes to IP, whether we're protecting IP or fending off litigation.

[James Medeveff:]

So nothing unusual on a full-year basis, it just [technical difficulty]?

[Pat Lavelle:]

It's just the timing that as to when we started these IP litigations, that is the difference, but we deal with IP issues on a regular basis.

[James Medeveff:]

Okay. Great, that's all I have got for now. Thank you.

[Pat Lavelle:]

Okay, James.

[Operator:]

Thank you. [Operator instructions] Our next question comes from the line of Scott Tilghman of B. Riley. Your line is open. Please go ahead.

[Scott Tilghman:]

Thanks, good morning.

[Pat Lavelle:]

Hi, Scott.

[Michael Stoehr:]

Hi, Scott.

[Scott Tilghman:]

I have a few questions here, so I will just run through them quickly. First off, can you quantify what the annual impact of the Jensen licensing deal will be?

[Pat Lavelle:]

On revenue?

[Scott Tilghman:]

Yes.

[Pat Lavelle:]

Probably anywhere from -- probably in the $12 million to $14 million range as far as top line revenue.

[Scott Tilghman:]

Right. No, that's helpful. Second, was there any NRE received this quarter?

[Pat Lavelle:]

Not anything appreciable. We're expecting an NRE payment in the second quarter.

[Scott Tilghman:]

Okay. Barring any holdup with the negotiations with management, any sense of what the unit potential for the 360 can be?

[Pat Lavelle:]

Yes, we believe that there's some strong potential for the unit. We are starting off with an exclusive launch, so the volume that we're looking at is volume that we want to manage. We have to ramp up production. We don't want to come out too quickly. We're going to manage the launch and manage the distribution. As the manufacturing ramps up, we will then start adding on customers. But that's one of the reasons why we started off with an exclusive. We want to make sure that we will be able to handle all sales that we have coming in.

[Scott Tilghman:]

And then how long will it take you to ramp production?

[Pat Lavelle:]

The thing is that, as they start producing the units we expect to see improvements on a weekly basis. I'm not concerned that the ramp is going to those back. But seeing as it is, an initial ramp up, we'll play that by ear, and see how that goes. But I would not expect it to last more than a couple of months until we can get to a level that we feel comfortable.

[Scott Tilghman:]

So not an issue heading into the holidays?

[Pat Lavelle:]

No, I don't think so.

[Scott Tilghman:]

Okay. You talked about the initial EyeLock enterprise shipment, and you also talked about a number of potentially interested parties, but who is going to be at the initial enterprise market? Do you have customers lined up, or are you working with other distributors who may be looking to sell that product into smaller businesses or something like that?

[Pat Lavelle:]

Well, EyeLock has a number of interested enterprise customers that we will be working with. EyeLock has been courting and marketing to these people for quite some time. So we will be working with EyeLock to identify all those potential customers, and start to deliver the product. And then the other thing that would be interesting for us is the development of the perimeter access systems, that we were not marketing or selling before, that would be in addition to the enterprise systems. The enterprise systems are the ones that would work with the computer to eliminate your passwords. The perimeter access systems will be the ones that will allow you to use your iris to gain access to restricted areas, and things like that. That's where we get -- that's where EyeLock has received a number of -- or a lot of interest from, both large financial firms and government agencies.

[Scott Tilghman:]

Got it. On the universal tuner, we have been talking about that for a number of years, and you're finally getting -- going live. What type of interest have you had from the other manufacturers or even from Daimler on expanding across the product line, given that it is a relatively small portion of the fleet?

[Pat Lavelle:]

Well, basically we have good interest from the car manufacturers. They believe this is the way to go. As you know, this product is a product that we make for the radio manufacturer. So depending on who the radio manufacturer is, whether or not our board will be sourced or Daimler or anybody else would dictate to the radio manufacturer that it's our board that they want to use. We do have a number of other RFQs that we are working on right now, but nothing that has been solidified.

[Scott Tilghman:]

And then last question for me. You talked again about M&A potential. I am just curious what type of flow you are seeing these days?

[Pat Lavelle:]

We've been quite active in interviewing a number of different companies. I can say that we've been active in each one of the segments. And I would expect that we may see some activity in the next coming months.

[Scott Tilghman:]

Great. Thank you.

[Pat Lavelle:]

Okay, Scott. Thank you.

[Michael Stoehr:]

Thanks, Scott.

[Operator:]

Thank you. [Operator instructions] Our next question comes from the line of Greg Palm of Craig Hallum Group. Your line is open. Please go ahead.

[Greg Palm:]

Hi, guys, it's Greg on for Steve Dyer today.

[Pat Lavelle:]

Hi, Craig.

[Michael Stoehr:]

Hi, Craig.

[Greg Palm:]

A quick one on the negotiations with 360, can you go into any more detail on that? Is it based on like an exclusivity or is it based on haw you guys might recognize revenue?

[Pat Lavelle:]

I wouldn't go into the details of it right now because we're still in the process of negotiating. But it also is going to allow us and the -- what we hope, on both sides, is that through the negotiation we will end up with a more robust program. And that's what we're working towards.

[Greg Palm:]

Okay. But, I mean, are you pretty confident that you will get everything settled so you can launch in August?

[Pat Lavelle:]

Yes, at this particular point. There's certain things like shareholder approval, and everything that has to be get done on their side. That is something that's outside both parties' control really, so that's something that could slow it down. But as far as the parties are concerned, I think we'll be okay in getting it done.

[Greg Palm:]

Okay. Then moving to the Auto segment, you talked about a whole slew of new awards or RFQ you are going after. Trying to get a feel for how many of those are maybe incremental versus how many of them are maybe replacing old ones that you had. And if they are replacing old ones that you had, are they coming at a higher cost this time? Maybe you could just talk about that a little bit.

[Pat Lavelle:]

Basically, what I've indicated on like the multi-digital tuner, that's a new product. We never sold that product before, so that's a whole new business. The rear seat entertainment business that I had indicated to you with GM, is like 20 million incremental new business, because we already do business with GM. And then some of the asset tracking product is also all new. And when we look at the potential within our asset tracking business, when we're looking at container companies with worldwide distribution containers all over the world, that could be a very large incremental business for us. So, most of what I've talked about is not replacement. We are winning 4G antennas for the first time and there were no 4Gs prior to that. So, most of everything that I have just talked about would be new business.

[Greg Palm:]

Okay, great. Thanks for the color. I'll hop back in the queue.

[Pat Lavelle:]

Okay, Greg.

[Operator:]

Thank you. And our next question is a follow-up from the line of James Medvedeff of Cowen & Company. Your line is open. Please go ahead.

[James Medvedeff:]

Thanks, and thanks for taking the follow-up question. I just wanted to follow-up a little bit more on the Q2 revenue guidance. Are you able to break that down in terms of what the mix might look like or what the growth rates might look like for the three segments?

[Pat Lavelle:]

Well, the thing is that we haven't broken it down, and what we're looking at is what impact is the Euro going to have on most of it? Obviously, with the divestiture of the Jensen audio line, we will see a lower sales within the automotive space, but pretty much I would say close to in line with where we were last year, other than the impact of the Euros.

[James Medvedeff:]

Okay. And then I don't believe you have put out any revenue guidance for the full year, is that correct?

[Pat Lavelle:]

Yes, we are only doing the -- on revenue. We are only doing the quarters because of the issues that we've seen with either bad weather -- When we are asked to project for Christmas and we haven't even started with -- I mean Black Friday deals, it's difficult to really pinpoint where you are. So we've opted this year to project revenue on the quarters.

[James Medvedeff:]

Okay, and that's understood. Then can you talk a little bit about what's happening in the auto aftermarket business?

[Pat Lavelle:]

The auto aftermarket business, we had some decline primarily in our satellite radio, which is expected, because we have an exclusive arrangement with Sirius XM in the aftermarket. But as more and more cars come through with satellite radio, the aftermarket will decline somewhat. And we were a little bit behind, nothing that I'm concerned with on some of our security products in the first quarter.

[James Medvedeff:]

So would you pick up the difference on the OE side as satellite radio becomes original equipment rather than aftermarket?

[Pat Lavelle:]

No, we do not participate in satellite radio on the OEM side. Our arrangement with satellite radio is for the aftermarket only.

[James Medvedeff:]

Okay. And then finally, could you -- where do we stand on the West Coast -- ongoing saga on the West Coast?

[Pat Lavelle:]

Unless something else happens I would say that we're pretty [technical difficulty]. We had a few shipments that got hung up that we thought would make it into the end of the quarter. They didn't. Those shipments would fall into the second quarter, but I would think the backlog is pretty much over for us.

[James Medvedeff:]

Okay, great. Thanks again for taking [technical difficulty] questions.

[Pat Lavelle:]

Okay, James.

[Operator:]

Thank you. And I'm showing no additional questions in the queue. I'd like to turn the conference back over to Mr. Pat Lavelle for any closing remarks.

[Pat Lavelle:]

Okay. Well, thank you. Thank you for your interest. We are looking forward to our second quarter. There is a lot of very exciting opportunities that we hope to be able to report on in the future. I want to thank you for your interest, and I wish you all a good weekend.

[Operator:]

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may all disconnect. Have a great rest of your day

[Pat Lavelle:]

Thank you.

[Michael Stoehr:]

Thanks.