VOXX International Corp. (NASDAQ:VOXX)
Q2 2017 Earnings Conference Call
October 13, 2016, 10:00 AM ET
Glenn Wiener - GW Communications, Investor Relations
Pat Lavelle - President and Chief Executive Officer
Michael Stoehr - Senior Vice President and Chief Financial Officer
James Medvedeff - Cowen and Company
William Caton - First Wilshire
Good day, ladies and gentlemen, and welcome to the VOXX International Results Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded.
I would now like to turn the conference call over to Glenn Wiener, Investor Relations. Please go ahead, sir.
Thank you, and good morning, everyone. Welcome to VOXX International’s Fiscal 2017 Second Quarter Results Conference Call. Our call today is being webcast on our website, www.voxxintl.com, and can be accessed in the Investor Relations section.
We also have a replay for those who are unable to join us this morning. We filed our Form 10-Q with the Securities and Exchange Commission and issued our press release over PRNewswire yesterday. Both copies can be found on our website in the IR section under SEC filings and news releases, respectively.
Joining me this morning and speaking for management will be Pat Lavelle, our President and Chief Executive Officer; 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 and risk factors associated with our business are detailed in our Form 10-K for 2016 period ended February 29, 2016.
I want to thank you all for continued support and interest in our company. We're excited with the road ahead. And at this time, I'd like to turn the call over to our CEO, Pat Lavelle. Pat?
Thank you, Glenn, and good morning, everyone. I'll begin today with a recap of our second quarter results and then I'll follow with a few remarks on our outlook before turning the call over to Michael.
We reported a 3.3% increase in net sales driven by growth in our consumer accessories and premium audio segments, while sales are off approximately 1% year-to-date, we are building momentum and we still expect to show year-over-year improvements.
Our second quarter gross margins of 29.2% are consistent with last years Q2 and inline with our budget. And our total expenses were down more than $4.5 million or close to 9%. This includes the addition of EyeLock expenses, and we continue to be vigilant in managing our cost structure.
We posted an operating loss of approximately 800,000 for the quarter, a more than $6 million improvement compared to last year's second quarter. And net income attributable to VOXX of $3 million marks a $7.4 million year-over-year improvement.
Lastly, we reported EBITDA of $6.7 million compared to an EBITDA loss of $1.7 million, and on an adjusted basis, our EBITDA of $6.9 million is up over $2 million. We are starting to see a positive shift in our business.
Looking at our segments, the automotive sales were down $4.4 million for the quarter and $13 million for the six-month comparisons. When taking into account our licensing of Jensen, sales on an apples-to-apples basis were down $1.4 million for the quarter and $6.7 million for the six-month period.
What's driving this is while aftermarket sales are lower due primarily to the Jensen licensing, our OEM sales were down slightly, as well in certain North American - North American market where contracts are reaching end of life in fiscal '17 with new launches scheduled for next year.
Internationally, sales of antenna and tuner products continue to grow. With the new contracts we've been awarded over the past 1 to 2 years alone, we are confident that this segment will be a growth driver for years to come.
I'm pleased to report that during the second quarter, we were awarded additional OEM business valued at over $45 million, which includes further volume increases of our Bluetooth Wi-Fi antenna with Daimler, and new antenna awards with Volkswagen, both existing customers with contract spanning from 2017 through 2030
Two new contracts with Audi for our LTE automotive incentives, a smart antenna award with a leading satellite communication company, which will begin in our fiscal third quarter, and two awards for the new customer which cannot - which I cannot announce at this moment, but these are for two versions of our dual feed GNSS antenna.
And also for the second year in a row we have been recognized by Daimler Trucks North America as one of the masters of quality suppliers. The fact that only 7% of their suppliers have earned this prestigious award is a testament to our engineering, sales, and service capabilities.
Based on our year-to-date performance and recent reports on domestic vehicle sales, we now expect automotive sales to be down for the year. However those declines will be partially offset by growth in our international business.
That said, the book business we have and the expected start dates of the new program makes us confident in our ability to drive growth in this segment next fiscal year and beyond.
Over the past three quarters alone we've secured approximately $380 million in new business, and our pipeline continues to build. For the second quarter, our gross margins are holding firm up 60 basis points, and our expenses are down over 700,000 as we’ve made cuts in our SG&A to fund R&D and product innovation. Even with the modest sales decline in Q2, profitability is consistent with last year's second quarter.
Net sales in the consumer accessories were up over 13% for the second quarter and up 2.5% through the first six months. Gross margins were down modestly, 80 basis points for the quarter and 50 basis points for the six-months mainly due to products mix. The margin decline, however, were more than offset by actions we took to lower core overhead in light of the added expenses from EyeLock.
Some of the sales highlights for the quarter, our reception category continues to perform well as we maintained our number one market share. We are starting to build momentum in sales of 360Fly action cameras following the launch of our 4K model last quarter.
We have added sales of our project nursery baby monitors, a new category for us this year in the growing and lucrative baby monitors. And our international sales were also up primarily due to upgrades to the digital broadcasting platform in Europe, prompting new equipment sales.
The third quarter has started off on the right foot, and we have a strong retail placement for the all-important holiday season. Our 808 brand of Bluetooth speakers has quickly grown from the top three brands in the under $100 price segment. We have broadened our assortment, expanded retail distribution, and have several new 808 branded products that will be unveiled at CES 2017.
I'm pleased to report the launch of our of the first ever combined TV reception device with a built-in Wi-Fi extender, a new VOXX solution which will be launched by two of our largest retail partners WalMart and BestBuy.
August marked the introduction of our project nursery branded lineup. This, as I said, is a new category for us, and it will take time to build volume. However, initial feedback from our retail partners and consumers has been positive. We have promotions underway for our baby monitors, and we'll begin promotions for infant sight and sound projectors in Q3.
We also have a number of new product expansions planned for the calendar year 2017. We have a new partnership agreement with Striiv, a developer of wearable technology, another new market and technology and we will manage the sales and distribution of the Striiv product lines and expect sales to begin in our fiscal third quarter.
Lastly, EyeLock. September marked the first shipments of our perimeter access product, one of the largest financial institutions in the country. Tyco is our integration partner on this groundbreaking project. We also continue to work with a large government agency to develop a multimodal next-generation biometric identification solution.
Additionally, with the introduction of an Iris solution on Samsung Galaxy 7 we have received additional inbound interest regarding our technology. There is a lot of activity and even more potential and we remain focused on building out our solutions portfolio for a number of large global markets with increased activity in the automotive, datacenter, and healthcare sectors.
We are most proud of the strides that we have made in premium audio. We made the investments that were needed to drive innovation, built out our leadership and technology teams and entered new categories, all of which increased our potential.
Net sales for the quarter were up 15.5% and year-to-date are up 12.6%. Gross margins increased as well 30 basis points for the quarter and 150 basis points year-to-date and expenses were down $6.9 million, the last year's second quarter included $6.2 million of non-cash asset impairment charges for a net decrease of 700,000 in overhead for the quarter.
Driving the sales increases are higher volumes of our HD wireless and Bluetooth speakers. Our newest sound bars, which include wireless subwoofers. Our home entertainment lines and headphones sales driven by our new Bluetooth models.
International sales were off slightly and we also had a modest timing related decline in sales of commercial speakers. Overall though, products introduced in last year's fourth quarter have continued throughout the first half of the year and we are selling well. We have every reason to believe this trend will continue. We have a good flow of orders carrying into the holiday season and a number of new products, just a few which were launched at the recent IFA and CDF [ph] shows.
We debuted our new Klipsch stream system, a complete line of sound bars, wireless speakers, audio converters and amplifiers all of which featured DTS Play-Fi multi-room wireless technology.
We also showcased four new reference sound bars, each featuring HDMI 2.0 and the ability to pass through 4K Ultra HD. And we introduced a line of dynamic landscape speakers and DSP amplifiers designed for the custom installation market.
In summary, business conditions are improving, while sales are roughly in line with fiscal 2016 year-to-date, remember that we said as we began fiscal '17 that we expected to see an increase in the second half and that remains true.
Our margins of 29.4% are up and we continue to track to plan and expenses are essentially flat year-to-date and this includes approximately $8.5 million related to EyeLock. We're effectively managing our business and our overhead and we expect to be profitable in the second half of the year.
Beyond that, we have a strong foundation to build on as we move into next year, especially with several new automotive contracts starting.
At this point, I'll turn the call over to Michael to touch base on our balance sheet and then we'll open it up for questions. Mike?
Thanks, Pat. Good morning, everyone. I'd like to make just a few quick comments around our income statement and then I'll address our balance sheet before we open up the call for questions.
As for the second quarter we reported a $4.5 million decline in our operating expenses. Last year's second quarter included $6.2 million of intangible asset impairment charges, so the expenses were up $1.7 million, excluding this.
However EyeLock added approximately $4.1 million of expenses during the quarter. Excluding the impairment charges and EyeLock related expenses, our core overhead declined by $2.4 million.
I'd also like to point out that R&D expenditures totaled $8.7 million for the quarter, up $2.7 million versus quarter two of last year. EyeLock accounted for $2 million of the R&D increase and remainder was spread out through our VOXX Hirschmann and premium audio. For the six-months R&D increased by approximately $8 million.
It was little change in other income expenses for the comparable quarters, interest and bank charges increased by approximately 200,000, equity and income of equity investees increased approximately 100,000 and other net remained unchanged.
We had an income tax benefit of $2.3 million in fiscal 2017 second quarter, compared to $2.5 million last year’s comparable period. However during the three months ended August 31, 2016 and based on anticipated results for the full fiscal year and year-to-date losses we do not believe fiscal 2017 will yield a tax benefit and therefore we are using 45.1% as a basis for our annual effective tax rate, excluding any discrete items.
This is higher than the statutory rate of 35% primarily due to an income tax provision resulting from the increase in deferred tax liabilities related to investment life [ph] intangibles. The effective tax rate for three and six months ended August 31, 2016 is a benefit of 236.3% and 43.1% respectively, compared to a benefit of 35.8% and 29.9% respectively in the comparable prior periods.
At August 31, 2016, the company had announced their tax position liability of 5.1, including interest and penalties. The other recognized tax benefits include amounts related to various US federal state and local and foreign tax issues.
We reported net income of $1.3 million for the quarter compared to a net loss of $4.4 million. A net loss attributable to our non-controlling interest in EyeLock was $1.7 million, resulting in net income attributable to VOXX of $3 million versus a net loss of $4.4, an improvement of $7.4 million.
Our cash position as of July - as of August 31 was $4.9 million versus $11.8 million as of February 29, 2016. Cash receivable net were $81.1 million, down $5.9 million. Our inventory position stood at $160.8 million, up $16.8 million and this was principally due to a higher inventory in support of product load-ins planned for the third quarter within our consumer accessories and premium audio segments. As a result, our accounts payable net was $71.3 million, up $15.5 million.
Our total debt as of the quarter-end, less our current portion of long-term debt and less debt issuance costs, stood at $92.9 million, as compared to $88.2 million, an increase of $4.7 million.
The increase was primarily in our domestic credit facility which amounted to $87.5 million at quarter end, as compared to $72.3 million at our fiscal year end. The main outstanding factor was the removal of $5.7 million mortgage associated with our mortgage repayment in conjunction with the amendment to our credit facility. Additionally our euro asset-based line of credit declined by approximately $1 million. You could find a breakout of our debt position in 915 of our Form 10-Q.
As of August 31 our excess availability related to our revolving credit facility borrowing base was $26.9 million versus $21.4 million as of May 31st. As the company continues to generate cash flow from operations, we believe we have sufficient resources to support our EyeLock investment and the working capital needs of our company. Also and as I've mentioned in my remarks last quarter, we expect to be generating positive operating income and EBITDA in fiscal '17 and will invest strategically to drive growth and improved profitability and future cash flow. Pat?
Okay. Operator, we're ready to take calls.
[Operator Instructions] Our first question comes from James Medvedeff with Cowen and Company. Your line is open.
Hi, good morning. And thanks for taking my questions.
My first question is on the automotive business, so I think you said $380 million of new contracts in the last nine months, $45 million this quarter. But how should we think – and yet sales were down in that segment.
When do the new contracts coming in sort of take over from the old contracts rolling off, so that – when should we begin to see some growth in that business…
Yes, we expect to see growth in next year. What happens normally is as the – within our North American business, as we reach the end of life for a particular project, the manufacturer slows down the purchasing of the product to move out their inventory, and then the new launch will start.
We have launches scheduled in May of next year for a number of new vehicles, with GM and with Lincoln and where we have announced previously, and we believe that the volume generated by these new contracts because they’re on additional vehicles more than what we have right now will drive growth in our North American business. And within our European business, our book business is showing a fairly nice improvement as we look into our fiscal '18, '19 and '20.
Thanks. And then the gross margin in that business up 60 basis points year-over-year, about 130 basis points versus the first quarter. How sustainable is that and what's driving it?
Normally what happens is that we are constantly starting new projects, I mean, new programs are coming in, and it's a bit of a product mix where we have some higher margins in certain categories than in others.
But I would expect that we would be able to maintain somewhere where we are right now you know, as far as our margins, as the new programs come in.
Thanks. Premium audio, I guess, the main question I have there is the decline in gross margin versus the first quarter, now maybe first quarter was unusually high, but could you just talk about how the sort of the progression of gross margin in that business?
We expected gross margins to stay pretty well constant. If you look back over our quarters, we're seeing gradual improvement and this again comes as we introduce new product, we have the ability to set the new prices. So we're anticipating that we'll be able to hold margins pretty much where we are right now.
Okay. And so that would be a decline, if you stayed at around 33% in your fiscal third quarter, that will be a decline year-over-year, is that…?
No, I think you're going to see us somewhere in the 33% to 34%.
Okay. That's great. And then consumer accessories, again a margin decline year-over-year and quarter-over-quarter, what's driving that?
I think you'll see - I think that is you are going to see that more as a normal. As we enter into some of the new products, some of them are more consumer electronics than consumer accessories where you would generate higher margins on accessory products.
So we have a mix of new product development where we can see that you know, it’s falling into the accessory category or it’s falling into the consumer electronic category.
So with some of the new products that we are introducing, they are falling into the consumer electronics category which will have a lower margin structure, but normally have a higher volume of sales.
Okay. Thanks. So I think you covered the decline in – I am sorry, you talked about R&D and that was down nicely quarter-over-quarter and it's nice to see that you are moving money out of G&A into R&D, I think that’s the right thing.
So the question I have is G&A down sharply, couple of million year-over-year and couple million quarter-over-quarter is this the new run rate for G&A or does that go back up in the second half?
Well, if you recall in the statement that we made, we had a $6.2 million impairment last year, okay. So when you take that all into consideration, this is the run rate that we have right now, will it, yes it will – we are tweaking it. As we enter new categories, we need to bring on some new engineering resources and things like that.
So I think we are going to be pretty consistent at this particular point in time, but as some of the new products take hold, we're going to have to support those new products with more engineering and things like that.
So you'll see some increases in overhead, in the premium audio space and possibly the accessories space. And then depending on the new projects and how we work the contracts, whether the NRE is in the selling price or whether the NRE comes in as a check that will move the needle on our R&D within the automotive space up and down.
But all in all, I would say that we would stay pretty consistent, I am not going to let the overhead expand too much because obviously we've got – we're focused on the bottom line.
Okay. And just point of clarification on the tax rate, when you say 45% is that for the remaining two quarters or is that what the full year average…
Its full year, that was the full year average. We look to the third and fourth quarter that there will probably be tax charges because it is for tax credits with the intangibles.
These are non-cash charges by the way.
Okay. That’s great. Thanks for thanks for that. I'll get back in the queue. Thank you.
Okay. Thank you.
[Operator Instructions] And I am showing no further questions at this time.
Okay, everyone. Well, thank you for attending this morning and for your continued interest in VOXX, hold on one second.
And we do have a question from the line of Bill Caton with First Wilshire. Your line is open.
Hey, good morning. Solid quarter, good to see things starting to turn around here. My question is on EyeLock. So you – your Tyco installation you landed financial institution, how do you think about that is this - is it a small installation, is it firm-wide at the financial institution, anymore detail you could talk about in terms of…
I can't give too much detail because obviously it revolves around security of the bank, but it is a number of location, data point, data rooms and things like that that they are looking to protect with our solution.
We have a number of large security partners, whether it be Tyco or Stanley or some of the other value add suppliers. So this we believe is the start where the vetting process of our system at this institution has gone on for over two years, and I do believe that the fact that we are making the installations now, it's not a small number of the installations, I think will help our overall business as the other banks become aware of what they are doing.
Okay. And in this instance was – was this Tyco's relationship or did you guys - did you use secure this relationship and then utilize Tyco…
We have been working with Tyco for a number of years, but we also work directly with the financial institution. I would say was a joint effort. We obviously had to work very closely with them to incorporate our system into their overall security system.
Okay. Great. Thank you.
Thank you. I am showing no further questions at this time. I'd like to turn the call back to management for closing remarks.
Okay. Once again I thank you for attending, I am sorry for the fact that we move days, but we wanted to make sure that we got pass the Jewish holidays and had everybody available for the call. I thank you for your interest in VOXX and I wish you all a good day.
Ladies and gentlemen, thank you participating in today's conference. This concludes the program and you may all disconnect. Everyone have a great day.
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