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Audiovox Corporation (NASDAQ:VOXX)

Q3 2009 Earnings Call

January 12, 2009 10:00 am ET

Executives

Patrick Lavelle – President & CEO

Michael Stoehr – SVP & CFO

John Shalam – Chairman

Glenn Wiener – GW Communications

Analysts

Jim Barrett – CL King & Associates

Richard Greenberg – Donald Smith & Company

Operator

Good day ladies and gentlemen and welcome to the Audiovox third quarter earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call, Glenn Wiener.

Glenn Wiener

Welcome to Audiovox’s fiscal 2009 third quarter conference call. Today’s call is being webcast from our website www.audiovox.com under the Investor Relations section. With us today are Patrick Lavelle, President and CEO, Michael Stoehr, Senior Vice President and Chief Financial Officer, and John Shalam, Chairman of the Board.

Before turning the call over to Patrick, the following Safe Harbor language. 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 electronics businesses and accessory businesses, 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 their actions.

Risk factors with our business including some of the factors 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 November 30, 2008 which was filed after market close on Friday, January 9.

We greatly appreciate your interest in today’s call and thank you for participating today. At this time I’d like to turn the call over to Patrick Lavelle

Patrick Lavelle

Thank you Glenn and good morning everyone. During my remarks today I will touch on our fiscal 3Q performance, spend a few moments on several key business partnerships that were announced a few days ago, and recap the products that we introduced at CES where we returned last night.

I will also provide some color as to what to expect moving forward. Michael will then walk you through our financial results before we open up the call for our questions.

I am pleased to report that despite the economic turbulence worldwide the quarter was the biggest sales quarter in the company’s history for electronics and accessories. Given the economic recession and escalating job losses, this was no simple feat.

The results of our third quarter signaled the core strength of this company to our customers, vendors, and competitors. Our brands, our products, and our people have created the momentum that we must have to carry us through the fourth quarter and into next year.

We announced three significant developments last week. The first our agreement with Sirius XM, the second our strategic partnership with Sony computer electronics to imbed Playstation 2 in rear-seat mobile entertainment products, and the third, our alliance with Qualcomm’s Media FLO to bring live digital TV to the car.

The past several months have been quite active to say the least and while the economy and managing our overhead to match sales is still a priority for us, we have also spent time seeking new opportunities that we believe will pay off for us as the economy improves.

Let me cover the quarter first, on Friday we released our results for fiscal 2009 third quarter and nine-month period. We reported sales of $196 million which were up 6.6% over the third quarter last year. Our consumer sales were up significantly, 92.5% in the third quarter and 105% year-to-date driven by higher sales of camcorders, clock radios, and digital media players.

This increase comes despite the fact that last year’s third quarter included sales in LCD flat panel, and portable navigation, two categories that we have exited for retail during the year. We maintain our leadership positions in the mobile and RV TV markets in these categories.

We participated in several Black Friday promotions and thanks to new categories from the most recent RCA acquisition have increased our presence at retail and have more distribution points then ever before. In addition to the positive sales results gross margins in the consumer group improved over 800 basis points in the 3Q year-over-year comparisons.

Our accessory group did experience a decline in third quarter sales of approximately 2% and for the nine-month period accessory sales are off roughly 9.5%. We believe this decline is directly attributable to the industry-wide decline in consumer electronics as accessory sales are normal attachments to electronic sales.

However despite the lower sales margins have held firm and came in flat in 3Q 2009 versus 3Q 2008. Unfortunately at this moment the mobile side of our business is being hardest hit by the economic and automotive crisis.

Auto sales are the lowest they’ve been in over 26 years and there are no signs that this will change anytime soon. We have anticipated a slowdown albeit not at the sales levels it has reached and continue to manage our inventory and reduce overhead expenses wherever we can.

I will add that we believe there could be an uptick in the second half of 2009 with the economic stimulus packages in place. Despite the decline in mobile sales and the state of the automotive industry our margins have held steady and are off only 1% year-to-date.

We believe that we are performing better then our competition given our product and channel diversity and our cash position we will weather this storm, and in fact, see long-term growth opportunities for Audiovox in the mobile category.

Now I’d like to talk a little bit about the business announcements we made last week. They are important in that they give us advantages over competition as well as expand our distribution. Our intention has always been to continue to develop technologies and innovate solutions with the consumer electronics experience, whether at home or on the road.

We have done that organically and through acquisition and now we are proud to add alliances with Sirius XM, Sony Playstation, and Qualcomm’s Media FLO that will provide us tools to continue to deliver on our promise.

There are reasons these industry giants have chosen Audiovox as their partner. We are a strong company with a great portfolio of respected brands. We can react quickly to market situations and can bring enough resources to any partnership.

Our stability, financial strength, and commitment to this industry have been our hallmark for over 45 years. We announced a new agreement with Sirius XM satellite radio. Audiovox has had a long-standing relationship with XM and in the past has been a supplier to Sirius as well.

With this new agreement in place we will become the new merged company’s primary supplier of both XM and Sirius satellite radio products in the aftermarket and we expect this new agreement to more then double our sales in fiscal 2010.

We believe satellite radio is a very viable and competitive technology that will continue to grow. With this two-year agreement we have secured our position as the number one aftermarket hardware supplier for the category.

In fiscal 2009 we expect to do about $50 million in satellite sales and next year this should exceed $100 million. There will be a fixed margin similar to the distribution agreement we entered into with XM in 2005.

Higher overall sales however should enable us to better leverage our overhead structure and generate higher gross profit dollars.

Second, last week we also announced an alliance with Sony computer electronics to bring Playstation to the car. This is a very exciting partnership and is testament to Audiovox industry standing as a trusted supplier and technology innovator.

This is an industry first. Playstation imbedded in dropdown overhead mobile entertainment systems and Playstation systems that can retrofit to any factory system on the road today. We believe that by adding the well-respected Sony Playstation to our mobile entertainment systems we continue to lead the market and increase our presence at retail while further differentiating ourselves from the competition. Financial impact of this deal will begin to materialize in the third fiscal quarter of next year.

And finally our alliance with Qualcomm’s Media FLO USA to bring FLO TV service to the US automotive market for the first time. This alliance will transform the in-vehicle entertainment experience by delivering live TV with a variety of news, sports, entertainment, and kid’s programming over an advanced multicast network that has been built from the ground up.

Together we will provide consumers with a high quality TV experience in a moving vehicle unlike anything seen in the industry today. This is yet another example of our technological leadership and commitment to innovation.

And we believe the partnership with Sony and with Media FLO will give us the opportunity to develop the most innovative rear-seat entertainment systems in the world.

These three announcements really signified what the future for consumer electronics will be and that is the delivery of content, whether it be games, video, satellite radio, or live TV. The devices that deliver the most content will be the winners and the companies that deliver them will be the most successful and that is where we plan to be.

As I mentioned before we have just returned from the Consumer Electronics Show where once again we were recognized as one of the most innovative companies in the industry taking home eight CEA innovation awards for engineering and design excellence in audio and video accessories, in home theater accessories, in headphones, wireless speaker systems, and in-vehicle video.

Although the products we introduced are too numerous to mention I would like to highlight just a few. Our RCA Small Wonder line digital camcorders led our consumer line and the flagship Easy 209HD, our new [Web Slinger] [inaudible] excellent reception. The [Web Slinger] is our sleekest and slimmest high definition point-and-shoot camcorder.

With the ability to record in 1080P HD quality, capture high speed sports or action video, and capture single frames as well with one-touch upload to You Tube and built-in HDMI connectors for easy connection to your HD TV, this unit is the most versatile camcorder in its class and with a retail price of $119, it is a tremendous value for today’s cost-conscious shopper.

Acoustic Research our high-end audio brand introduced two internet radios with built-in WiFi connectivity and free content partnerships with Slacker and Weather Bug. A new AR tabletop radio line and the innovation award-winning AR wireless speaker conversion system that is impervious to interference rounded out our high end Acoustic Research audio offerings.

For our mobile group in addition to the Playstation and FLO TV products I discussed earlier, the Jensen mobile line brought out several models with more connectivity options then any systems on the market today, most of them right out of the box to let consumers add iPods, Bluetooth, navigation, satellite radio, and more, Bluetooth, safety, and convenience products launched in both the Jensen and Audiovox lines.

In accessories currently Audiovox through our RCA One For All and Acoustic Research brands holds number one unit share in universal TV remotes. We plan to capitalize on the trend towards higher end more sophisticated universal remote controls and with that we introduced two new Excite models, the Excite Touch and Excite Color which will give us position in this growing market segment.

The new Excite Touch can control up to 18 devices with simple and easy setup right from the remote. With the world’s largest code library built in, just simply point and shoot at your component and the device will automatically sync.

The Excite Touch can control devices behind doors or out of sight. You can even easily customize the remote for each family member to select their favorite channels when they use the remote. At $249 retail, these units will position us very well against competition and I expect good placement within our existing account base.

In TV reception, Audiovox also holds number one market share under our RCA and Terk brands. In just over one month TVs will be switching to all digital broadcasting which should lead to higher sales of antenna-related products.

In home networking the ARHD Powerlink system, another innovation award winner transmits and receives high definition signals from the source to the display using the home’s existing electrical wiring.

At our booth we had new innovations in almost every category and the attention we received was unlike any other in our corporate history. I’m very excited with our lineup for the coming year and believe over time our commitment to drive technology innovation will lead to increased market penetration and greater share for our family of brands.

In closing I am very pleased with our third quarter performance and the steps that we have taken throughout the year to control our costs and maintain and expand our margins where possible. While the third quarter was positive, I must remind everyone of the current economic climate.

The state of the overall global markets is very weak and no one is pointing to a sign of recovery near-term. That is why we are highly focused on managing our overhead, in light of and in anticipation of weaker sales.

On an annualized basis we have taken our over $20 million in overhead expenses and we continue to look at our cost structure and inventory position to operate lean and effectively and to reduce our exposure.

Continued weakness in the economy could negatively impact our fourth quarter performance which is traditionally our weakest, however, make no mistake we believe we have taken the necessary steps, and made intelligent investments that will position us well as the markets emerge from this recession.

Our portfolio of brands is the strongest in our company’s history. We have more distribution today then we ever had and our retail presence continues to grow. We have a number of new products planned, some of which will be industry-firsts which should help build our presence even further.

And most important we are not dependent on financing and have about $20 million in cash on hand which should ramp up further by the end of the fiscal year. We have the financial resources to weather this recession and provide us with the capital to fund our operations and to pursue the right acquisitions at attractive long-term values.

Regardless of the near-term outlook I am very confident in our company’s ability to emerge a stronger organization. As I said before there is a reason companies like Sony, Sirius XM, and Qualcomm sought to partner with Audiovox, and when all is said and done, our company through Audiovox, RCA, Jensen, Acoustic Research, and the many other brands in our stable, will be recognized as a market leader capable of generating sustainable returns for its shareholders.

I’d like to thank you for your time today and your continued support and with that I will now turn the call over to Michael.

Michael Stoehr

Thanks Patrick, good morning everyone. For the third quarter sales were $195.6 million and increase of 6.6% compared to $183.6 million that we reported in the third quarter last year. Electronic sales were $152 million, up $13 million or 9.4% compared to $139 million last year that we reported for our third quarter.

Sales were up primarily due to sales generated from the RCA AV operations and increases in our international sales in Mexico and Venezuela. The increase in electronics was offset by greatly reduced sales this quarter in portable navigation and flat screen TVs as we exited these lines earlier in the year.

Also offsetting the increases were the overall state of the US economy and lower car sales. This had an adverse impact on our mobile AV business lines but we still continue to show growth in our [code] OEM business.

Accessory sales were $43.7 million down from $44.6 million reported last fiscal quarter as a result of the overall decline in the general economy. Accessories decline was partially offset by incremental sales generated from Technuity which we acquired in November of last year.

Technuity sales for the quarter were approximately $3.1 million. Gross margins were 19.9% compared to 19.1% in the third quarter last year. Our margins were positively impacted by two factors. Price increases instituted in fiscal 2009 second quarter began to take effect in fiscal third quarter and consumer gross margins in consumer electronics were considerably higher due to a number of new product categories introduced this year under the RCA brand as Patrick outlined earlier.

Offsetting this increase were lower sales of accessory products in mobile electronics which typically carry higher gross margins in the consumer electronic products.

Operating expenses were $27.3 million for the quarter, a decrease of $2.1 million versus $29.4 million last year. The decrease in total operating expenses is primarily due to our expense and workforce reduction programs partially offset by $4.3 million of costs related to Technuity and RCA AV operations compared to $274,000 in the same period last year.

Our core operating expenses decreased 21.6% or $6.1 million. Managing our cost structure in this economy is a key focus for Patrick and the entire Audiovox team. Our selling expenses were down close to 15% primarily due to workforce reductions, decreased commissions, lower travel entertainment, and trade show expenses.

This is partially offset by $922,000 of selling expenses related to Technuity and RCA acquisitions. G&A expenses were down 2.6% and engineering and tech support off 6% primarily in payroll costs. Offsetting these declines were approximately $3.5 million expenses for Technuity and the RCA AV group, higher professional service fees as a result of intellectual property costs, and a small increase in bad debt reserves.

As a result of increased volume, higher gross margins, and reduced overhead we reported operating income of $11.7 million versus $5.6 million in fiscal third quarter last year an increase of 108%. And income from continuing operations before tax of $10.7 million versus $6.7 million last year.

During the third quarter of fiscal 209 our joint venture recorded an inventory write-down of LCD TVs of $1 million due to price competition and lower sales in the RV market. As a result we reported a charge of $500,000 on the equity income line.

Additionally recorded income tax expense of $4.8 million in the third quarter this year versus $2 million the same period last year primarily as a result of less tax-exempt interest income. Net income was $6.5 million or $0.29 per share compared to $4.7 million or $0.20 in the similar period last year.

For the nine-month period net sales were up 5.9% to $487 million, electronic sales were up 10.6% and accessory sales were off 7.4% principally due to reasons previously outlined. Gross margins were 17.8% compared to 18.8%. The nine-month period ended November 30, included a $2.9 million charge during the first quarter which impacted our gross profit by approximately 100 basis points.

Additionally gross profit was impacted by a higher energy, transportation, labor, material costs, and foreign exchange increases versus the US dollar which we experienced in the first six months of the year. This was offset by price increases which took effect in the third quarter.

Our operating expenses were $86.6 million versus $78.7 million for the nine-month period last year, an increase of $8.1 million. These increases occurred mainly in the first six months of the year in office salaries and benefits, professional fees, depreciation, and amortization.

Core overhead expenses were down close to $5 million in the comparable year-over-year periods offset by $12 million in costs from recent acquisitions and a $947,000 charge for workforce reductions.

Net loss for the nine-months ended November 30, 2008 were $1.1 million or a loss of $0.04 per share compared to $8.5 million net income or $0.38 last year. We used cash of $26.7 million for operations for the nine-month period this year primarily in accounts receivable as a result of sales increases compared to cash used of $92.9 million for the same period last year.

The company used less cash for its operating activities due to improved inventory turns, a decrease in vendor receivables, an increase in accounts receivable and inventory expenses, and improved AR turns. This was partially offset by a decline in net income from continuing operations.

Our accounts receivable turns were 4.9 versus 4.6 last year and inventory turns were 4.2 versus 4.0. As of November 30, 2008 we had working capital of $268.8 million which included cash and cash equivalents of $13.9 million compared to working capital of $276 million as of February 29, 2008 with cash and cash equivalents of $39.3 million.

Currently our cash position is $22 million and we expect to ramp back up to medium eight figures by end of fiscal year as we have been cautious in our buying over the next several months.

On December 31, 2008 we sold certain assets and liabilities to our subsidiary American Radio. The transaction did not post any gain or loss but our headcount was further reduced by 55. As of January our total headcount is 823 people versus 999 February 29, 2008, a decline of 18%.

We continue to remain cautious in the fourth quarter in light of the current economic turmoil. We are watching our purchases, we have cash reserves, and our balance sheet remains strong. As Patrick has outlined we continue to take steps to reduce overhead and operating expenses.

I’ll now turn the call back over to Patrick and we will be available for questions.

Patrick Lavelle

Thank you Michael, at this time if anyone has any questions we are available to answer them.

Question-and-Answer Session

Operator

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

Jim Barrett – CL King & Associates

Could you talk a bit about the Sirius deal, first of all what will the company’s incremental working capital be, how should we look at warranty expense from the product that’s already been sold, likewise how should we look at returns for a product that’s already been sold prior to your taking on the business.

Michael Stoehr

Let’s start with the working capital investment, we will be in increments over a period of time putting in probably eight figures which would include accounts receivable and inventory. As for warranty we will be filing an 8-K that has some outline of what the warranty procedure is but basically we have the risk of processing the warranties, the actual treatment and rebuilding and repairing of the warranties go to Sirius.

So you won’t see a large warranty reserve up for sale of B goods or destruction, you’ll see more of handling charges that go from us to bring the product back from customers to the factories. And the third is there is a transition period as we get into this agreement where we are not responsible for the warranty charges which will be passed on to Sirius.

Jim Barrett – CL King & Associates

Can you tell me where the 1% royalty payments from Multi Media device are showing up in the income statement.

Jim Barrett – CL King & Associates

It will be in the gross profit.

Jim Barrett – CL King & Associates

That would be in gross profit.

Michael Stoehr

Yes, its cost of goods.

Jim Barrett – CL King & Associates

Could you talk about considering what’s happened in the world at large what the acquisition pipeline, how it looks at this point.

Patrick Lavelle

Our strategy as we had indicated in the past was to take 2009 physical or 2008 calendar and pull in all the acquisitions that we’ve done and get the synergies out. We are pretty much completed with that and now actively looking at particular opportunities that present themselves to us and are out aggressively seeking. Obviously with the economy the way it is, there is some very good properties that are out there that may be facing some difficult times considering the market conditions.

So based on that we believe there is some good opportunities that we will see during calendar year 2009.

Jim Barrett – CL King & Associates

My recollection is that the Board did not have a big interest in taking on debt to make future acquisitions, is that still a fair statement?

Patrick Lavelle

We are debt adverse, but if the right property becomes available to us and the margin structure and all the metrics [inaudible] we will do what we have to do to acquire it.

Operator

Your next question comes from the line of Richard Greenberg – Donald Smith & Company

Richard Greenberg – Donald Smith & Company

I’m wondering could you give us a bit of help on gross margin guidance going into the next year. If you could give us an overall target it would be helpful but in lieu of that could you also just give us some of the impact from these new products particularly the Sirius deal and how that would tend to move the margin.

Patrick Lavelle

We would, depending upon the mix of our business as we move into our fourth quarter and into our first quarter it will skew the margin. If we sell more mobile video products which carry more of a margin, more accessory products, will have a positive impact there.

In the case of Sirius it will have a depressing effect because the margin structure is based on more of a fulfillment type basis where we’ve eliminated a lot of risk in doing business and therefore did not have to charge that on our margins, so that would have a lowering effect on our overall margins.

But I think what you can look at is what we’ve done last year as far as our margins. We are working with many manufacturers right now to negotiate lower costs on a go forward basis but also in light of some of the softness that you will see at retail, we may have to get a little bit more aggressive in our promotional efforts.

Richard Greenberg – Donald Smith & Company

But is it reasonable to, on an ongoing basis to assume something along the lines of an 18% or 19% gross margin?

Patrick Lavelle

Yes, that’s reasonable.

Richard Greenberg – Donald Smith & Company

On the operating expense and congratulations because you have done a great job there, going forward because it really is impressive that you’ve managed to drop your operating expenses in this third quarter versus the second on a much higher sales base, so just going forward what could we look for on an annual basis, is something in the range of $100 to $110 million on the existing sales base that you’re expecting without further acquisitions, is that sort of the target now or is there some percent level, just some guidance there.

Patrick Lavelle

Well basically, if you looked at the way we did our acquisitions and we did an acquisition late in 2007 where we had all the people come over and all the expenses come over in our fourth quarter last year and into our first, so our overhead was bloated with that but based on where we are right now, I think you can look at the overhead structure that we’re currently running at and of course if we do not have another major acquisition I would think it would be pretty consistent with that.

Richard Greenberg – Donald Smith & Company

Your stock is so darn cheap and certainly on a long-term basis and its selling below any really long-term book value etc. is a buyback at this price a possibility or do you really want to [husband] your cash for the economic uncertainties and for future acquisitions.

Patrick Lavelle

I would think the most prudent step for us to take would be to watch our cash very closely because there is uncertainty that’s still out there. We don’t really see the economy improving until possibly the second half of the year and then we do strongly believe that there will be good opportunities presented to us and we want to be able to take advantage of that.

Operator

There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.

Glenn Wiener

I’d like to thank everybody for their continued support. If anybody has any follow-ups please feel free to call the office or management and we will be in touch. Thank you again.

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