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Audiovox Corporation (NASDAQ:VOXX)

F1Q11 (Qtr End 05/31/10) Earnings Call

July 13, 2010 10:00 a.m. ET

Executives

Glenn Wiener - IR

Patrick Lavelle - President & CEO

Michael Stoehr - SVP & CFO

Analysts

Thomas Kahn - Kahn Brothers

Jim Barrett - CL King

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2011 Audiovox Corporation Earnings Conference Call. My name is Ann and I will be your coordinator for today's call. As a reminder, this conference is being recorded for replay purposes. At this time, all participants are in listen-only mode. (Operator Instructions). We will be facilitating a question and answer session following the presentation. (Operator Instructions). I would now like to turn the presentation over to your host for today's call, Mr. Glenn Wiener, Investor Relations. Please proceed, sir.

Glenn Wiener

Thank you Ann and welcome to Audiovox's Fiscal 2011 First Quarter Results Conference Call. As you know, today's call is being webcast on our website, www.audiovox.com, and can be accessed in the Investor Relations section. With us today are Patrick Lavelle, President and CEO and Michael Stoehr, Senior Vice President and Chief Financial Officer.

Before we begin, I'd quickly 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 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 our Form 10-K for the fiscal year ended February 28, 2010.

Our press release can be viewed on our website as can the live webcast of our conference call. At this time, I would like to turn the call over to Patrick Lavelle. Pat?

Patrick Lavelle

Thanks Glenn and good morning everyone. Yesterday we reported first quarter results after the market closed. Our sales were up close to 9%, our gross margins increased 1.7% coming in at 20.8% and we posted a profit of $1.1 million and earnings per share of $0.05 compared to a profit last year of approximately 500,000 or $0.02 a share.

Mobile and electronic sales were up 47% with 26% of that increase attributed to the new OE business from our acquisition of Invision and 21% a result of increases in our core mobile and security categories.

International sales were up 36% largely due to the Schwaiger acquisition and we are able to post this increase despite a 12% decline on foreign currency exchange rates driven by the weakening euro.

All of these positive results offset lower sales in our consumer and accessory groups which were down 18.4%.

While we showed improvement over the last year’s first quarter like most companies, we are still feeling the affects of an economic recovery that is materializing slower than I think anyone has expected. As I have stated on the last call we believe Audiovox is well positioned to be profitable, though our profits will be dependent not only on the domestic recovery but also on the state of the global markets and the corresponding impact to our top-line. Long-term, we remain very positive about our prospects. During the first quarter we had several product lines experience good growth, excluding the addition Invision which resulted in significantly higher OE sales.

Our mobile group was up compared to last year. This was driven by higher after market sales in our core security and mobile video along with new sales from FLO TV and additional security sales from the Omega distribution agreement.

We are encouraged by the positive signs pointing to a continuing automotive market recovery. While car sales are still well below levels of years past, they are improving month-to-month and year-over-year. Many of the OEs are reporting growth and May numbers came in 19% over the last year.

JDPower’s estimates that car sales are tracking to a 11.3 million for the year up from April's estimates of 11.2 million and on an annualized basis are tracking closer to 11.7 million. While by no means is the automotive industry in a robust growth pattern since sales are still significantly below pre-recession numbers, it appears that sales have stabilized, and reports on 2Q and 3Q output look promising.

I am happy to report we began our first shipments of rear-seat entertainment for the Ford Expedition and Lincoln Navigator in August. We have begun to deliver the BMW X1 and have been advised that we are now through to the BMW X3 which sales are anticipated for the latter part of the fiscal year. In addition, we expect to benefit from new promotions at Chrysler on FLO TV and GM on rear-seat entertainment. We believe there is significant opportunity for Audiovox to share in the growth and recovery of the automotive industry through our existing business relationships as well as through the expanded OE reach that the Invision acquisition has provided.

In the aftermarket, FLO TV continues to be a major focus of our mobile products. This quarter, Best Buy will begin selling the FLO TV automotive system as well as the first portable DVD with FLO TV built in. We've also started shipping several FLO ready systems in our mobile video and Jensen lines that allow FLO TV to be controlled directly by the video system. Sales of the FLO TV handheld were up in the quarter and we continue to expand distribution. And finally, we are gearing up for the remote start selling season with three distinct lines from Prestige, Code Alarm and now Omega that cover virtually every distribution channel.

Our consumer and accessory business remains challenged by the weakness in consumer spending and high unemployment. In addition, we are experiencing a slow recovery in the supply chain which has caused a shortage of some key parts that affected retail sales in the first quarter. We expect these shortages to ease in the second half.

You will recall the transition from analog to digital TV dramatically increased antenna sales for the first half of fiscal 2010. We continue to maintain the number one market share under the RCA brand and have a great presence at retail but do not expect to reach fiscal ‘10 levels in this category.

Our new line of Acoustic Research remotes sold well in the first quarter and should gain more traction over the coming quarters. We are on schedule to launch our one for all smart remote and our Zentral remote lines later this summer which broadens our portfolio. The voice activated remotes introduced at CES under the RCA brand are in stock and we expect these new product introductions to lead to higher sales and increased market share in the TV remote segment for our accessory group, maintaining our number one position in unit sales.

One new product that has been getting a lot of attention in the press and CES and more recently CTIA is AirPower. AirPower was developed in our RCA labs. It is an innovative power product that we believe will revolutionize charging for a host of consumer products. It's in the final stages of development and testing is proceeding well. I've discussed this product on prior calls and we'll provide more details as we get closer to the launch date which is expected in the second half of the year.

Overall in consumer and accessories, we were able to improve our retail placement with the addition of significant new customers. We are well positioned to capitalize on any improvement in consumer spending at retail. As I mentioned earlier, international sales were up 36% for the quarter, largely as a result of last year's Schwaiger acquisition, growth in OE sales to Porsche and increased sales in our Oehlbach accessory line.

However, the European economy is more tenuous than ours and the decline in the Euro will negatively affect sales on a consolidated basis throughout the year. I do expect our European business to expand as the economies in Eastern Europe improve and our exports to these countries increase. Venezuela on the other hand is a different story. Our sales were literally cut in half for the first quarter due to the recent steps taken by the Chavez government to control the monetary supply.

This has limited not only our customers, but also our own ability to convert bolivars to dollars, which is necessary for us to procure components. We expect the severe controls imposed by the government will impact sales for the balance of the year, and we are waiting to hear from the Venezuelan Central Bank as with their latest rules which have not been finalized.

Venezuela accounts for less than 2% of our overall sales, so the impact to top line revenue has not been that dramatic. Overall, our margins came in well above Q1 last year. We're still projecting margins in the 18% to 19% range for the year; of course, the product mix will dictate which end of the spectrum we fall in, and there is potential upside. Our overhead is also in line with our plan though it increased as a percentage of sales in the comparative first quarter.

We added approximately $3.3 million in overhead with our acquisitions in Schwaiger and Invision, which is not in the fiscal 2010 comparisons. And when we take into account the timing differences on some charges for the quarter, which Mike will detail, our quarter overhead is essentially flat with last year. I believe we have the right infrastructure going forward especially as we gain more synergies through our brands, our people and our business segments.

Overall, we expect to continue to operate profitably in spite of the difficult global environment. New product introductions and growth in the automotive sector positioned us well. We are also confident that some of the new accessory products slated for the second half will also improve performance. We are operating lean. Our balance sheet is in very good shape, and our cash position continues to grow.

We've made some very strategic acquisitions, which have helped us offset some of the weakness brought about by the economy, and when things turn we believe we can grow Audiovox as it stands now to a $650 million to $700 million company without many changes to our overhead. We are also still active on the M&A front, looking at acquisitions that can further strengthen our brand portfolio and distribution. I appreciate your continued support, and I'd like to take this opportunity to thank all of the employees at Audiovox who made personal sacrifices to keep our company strong.

I believe that as we emerge from this recession, we will find ourselves in a position to capitalize on growth from every segment. With that I'll turn the call over to Michael and then we'll open it up for some questions. Mike?

Michael Stoehr

Thanks Pat. Good morning everyone. Net sales for the first quarter were $130.3 million, an increase of 8.8% over $119.8 million reported in the first quarter last year. Electronic sales were $94.5 million, an increase of 19.6%, and accessory sales were $35.8 million, down 12.3%.

The increase in our Electronics Group is primarily due to higher sales of mobile products, partially as a result of our acquisition of Invision. We also experienced higher sales of security products both from our core OEM group as well as new sales from our recent Omega security distribution agreement. Overseas, our OEM business also increased. FLO TV products also contributed to an increase in our overall mobile sale as we do not have FLO TV in our line up in the first quarter of last year.

Finally in our Mobile group, we experienced increases in our video product line. These increases in Mobile were offset by declines in audio and satellite and radio products. In consumer, sales of our digital players and clock radios increased but this was offset by lower sales of core CG products primarily DVD products.

As a percentage of sales, electronics represented 72.5% for three months and in May 31, 2010 compared to 62.5% in the same period in 2009. Accessory sales declined by approximately $5 million for the comparable first quarter periods mainly due to the fact we did not anniversary sales of digital antenna products that we had in the first quarter of last fiscal year. These sales related to analog to digital TV transition that took place in early 2009.

This made up approximately $8 million of the decline. Some of our other accessory products experienced lower sales volumes as a result of the economy and cautious spending on the part of the U.S. consumer.

Offsetting these declines were growth in our International Accessory business, both our existing Accessory lines and new sales added from our Schwaiger acquisition. As a percentage of net sales, Accessories represented 27.5% compared to 31.1% for the periods ended May 31, 2010 and '09 respectively.

I'll add that our recent acquisitions of Schwaiger and Invision represented $18.3 million in sales for the first quarter. Our international business was up substantially in comparable first quarter periods, 36% primarily due to the reasons I just outlined but our business was also adversely impacted by the strengthening of the U.S. dollar versus the euro and the economic and political climate in Venezuela.

As a note, majority of our assets in Venezuela are in cash deposits with the Central Bank and we do not fund its operations through the U.S. panel [ph].

Gross margins improved by 170 basis point to 20.8% compared to 19.1% last year. Although Accessories which typically are higher margin products represented a small percentage of our sales mix, our margins were favorably impacted in the electronics group with higher OEM sales which require higher margins, improved margins in our existing product lines coupled with new product introductions and reduced cost and freight warehousing as we continue to review and adjust these costs if needed. Our overhead increased $5.9 million to $28.5 million. This increase was a result of several factors. One, overhead of $3.3 million associated with the Invision, Schwaiger acquisitions which were not included in fiscal 2010 first quarter.

Two, we recorded a $1.1 million expense for professional fees which will not repeat in the following quarters. This is probably subtly [ph] due to timing in how we book these expenses. We recorded expenses of $428,000 for employee stock options which will repeat in the second and third quarter of this year.

This is related to the second half vesting of options granted in September, 2009. During the third quarter 2009, we reported $1.1 million in option cost. Third quarter of 2010 will be $428,000 [ph]. A portion of the increase, approximately $300,000, was due to the reinstatement of a portion of the salary reductions which were implemented throughout last fiscal year. This will also continue throughout this year. And as disclosed, the increase only applies to executives below -- to employees below the VP level.

And finally we have large bad debt recoveries related to the automotive industry of approximately 350,000 last year first quarter which did not occur this quarter.

Cumulatively this represents $5.5 million of the overhead increase. Our headcount for both periods ended May 31 was 945 employees this year versus 789 employees last year, an increase of 156 employees. We added through the acquisition of Schwaiger and Invision 220 employees. Our decrease in core employees is 10%. We believe that we have the right overhead structure based on anticipated sales but as we have done in past periods we continue to evaluate our core structure to see if we can derive greater synergies and efficiencies, particularly within our acquired businesses.

Interest and bank charges represent bank obligations for Audiovox Corporation and Audiovox Germany and interest of capital leases. Equity income in our equity investees increased due to higher equity income of ASA as a result of increased business in all of its core areas.

Other income increased approximately $1 million for the comparable periods due to gains on foreign exchange contracts in our German operations during the first quarter 2011. Also during the first quarter we successfully completed the transfer pricing discussions with Canadian Tax revenue and gained a $1 million refund for previous taxes paid. Our net income was $1.1 million versus 473 [ph] last year or $0.05 a share versus $0.02 a share.

Onto the balance sheet. Operating activities provided cash of $21 million, principally due to decreased accounts receivable. A portion of this cash was used to pay down a $5 million bank debt that we got for the Invision acquisition and we also increased Invision's inventory position by approximately $5 million to get to the necessary levels of production (inaudible) to improve our margins.

Our AR inventory turns were 5.3 and 3.3 during this quarter versus 4.4 and 4.2 first quarter last year. Till March 31st we had a $10 million secured credit line for temporary short term working capital and limited credit needs. We replaced this line with a $15 million three-year facility. We currently do not have any direct borrowings and we primarily use this for letters of credit if they're required by our suppliers.

For the first quarter, the company had working capital of $240.2 million which includes cash and short term investments of $83.6 million, compared to working capital of $239.8 million on February 28th 2009 which included cash and short term investments of $69.5 million.

The increase in cash is primarily due to lower ARs, partially offset by higher inventory as I just discussed, lower accounts payable, improved [ph] expenses and repayment of bank obligations. Our cash position is up approximately $14 million for the fiscal year end. It should be noted that cash deposits of $7.1 million in Venezuela carries long term securities not in our consolidated cash balances. If we include Venezuelan cash, our pro forma cash and new [ph] cash balances are $90.7 million.

In summary, we continue to monitor the global economic situation and believe we are positioned for higher profits in future periods. We remain prudent in our programs, we are watching our overhead and inventory positions carefully and our balance sheet remains strong. Let me turn the call back to Pat.

Patrick Lavelle

Okay, Michael, thank you. And now we're ready for some questions.

Question-and-Answer Session

Operator

(Operator Instructions). And our first question comes from the line of Thomas Kahn with Kahn Brothers. Please proceed.

Thomas Kahn - Kahn Brothers

Pat, can you walk me though FLO TV? In other words, if I go into a car dealer and I buy like an SUV with screens, let's say in the back built in. Do I ask them for FLO TV? Do I pay extra? How does this whole process work?

Patrick Lavelle

Okay. There are two products, primary products within FLO TV. One is a hand held that is sold at retail. The other is a 12 Volt product that is sold through the car dealers. The 12 Volt products could be added to anyone of our products which are FLO ready or it could be added to the factory system that's in the vehicle when you purchase it.

The dealer should offer the product to you because we have a number of car dealers on the program, and they can add it to the system and they will – we’re making some changes to the program, but we had the first, the first year's bundle whereby you would have the service and the hardware all in one price that they would put into the price of the car.

Thomas Kahn - Kahn Brothers

So let's say right now, do you have any dealer in the New York area, OEM dealer, and if I went in and was going to let's say buy or lease a car, and by the way I'd like FLO TV and they say no problem and they adjust the quote in some way for that.

Patrick Lavelle

Yes. We have about 5,000 dealers on the program right now. We have many dealers in the New York area, and yes what they will do is they will add the hardware to the -- your factory system (inaudible) purchase an aftermarket system like one of ours, and then they will add the FLO module to it, and your system would be able to receive live TV.

Thomas Kahn - Kahn Brothers

Is anyone promoting this in the dealerships? I mean are there signs or placards or something?

Patrick Lavelle

Yes. We have in all the dealerships, all 5,000 dealerships that we have, they all have displays, working displays, literature, banners, everything to call out the FLO TV program. Additionally Qualcomm as you know who runs FLO TV is also advertising heavily for the service.

Operator

And our next question comes from the line of Jim Barrett with CL King.

Jim Barrett - CL King

Hi. Pat, could you talk about strategically the fit between Invision, and your current OEM Rear Seat Entertainment Systems, should we expect to see reduced overhead going forward by virtue of the fact that you brought Invision, where you have acquired Invision. I mean how should we look at that?

Patrick Lavelle

Well, Invision is a different operation. They actually manufacture a lot of the components right there in Florida. That is different than what we were doing. The bulk of our OEM business was on Security and Remote Start product. We did have mobile video. We did compete with Invision for the OEM business. At this particular point, we are combining our sales, and we are looking at the synergies that exist on mobile video, and we will be working with our engineers, their engineers, their production people and everything to fine tune the operation and make sure that we pick up the synergies that exist between the two operations.

Jim Barrett - CL King

Understood, now Invision, Schwaiger appeared to have added on a pro forma basis about $0.03 per share last year in Q1. I think Mike you indicated what the sales were this year, can you comment at all on what their profitability was?

Michael Stoehr

Jim, we didn't have Schwaiger and Invision first quarter last year.

Jim Barrett - CL King

Could you repeat that?

Michael Stoehr

We didn't have Schwaiger or Invision first quarter last year.

Jim Barrett - CL King

No I understand that. But in reviewing the 10-Q it appeared as if pro-forma numbers were provided for last year.

Michael Stoehr

Yes. Those numbers -- really that's the estimates that we make prior to the final evaluation. Invision and Schwaiger did contribute profits to the company. I really don't want to disclose what they are.

Patrick Lavelle

Both operations were profitable to the core.

Jim Barrett - CL King

In terms of your wireless battery charger, you mentioned, is there any patent pending on that product and could you comment on the competitive landscape?

Patrick Lavelle

Yes, there are patent pending. We filed for number of patents during the development process of this product. There are competing systems out there whether they be solar or power mat but we have not seen anything on the market or introduced by anyone that does exactly what this unit will do. Besides adding solar, the device will capture if you are in a Wi-Fi hot spot, it will capture the energy emanating from that hot spot and store it and convert it, so that it can be used to charge a DC product, cell phone, laptop, portable DVD player, whatever it is.

Jim Barrett - CL King

Okay thanks, Pat, and thank you both.

Operator

(Operator Instructions). And we have no further questions.

Patrick Lavelle

Okay, if there are no questions, I would like thank you on behalf of management for your interest in Audiovox and wish you all a good day. Thank you.

Operator

Ladies and gentlemen, we thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a good day.

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