Executives
Jeremy Warnick – Corporate Communications Manager
Randy Ortiz – President & CEO
Donald Peck – EVP & CFO
Analysts
Bill Dezellem – Tieton Capital
Chris Owen – Plaisance Fund
LoJack Corporation (LOJN) Q1 2012 Earnings Call May 1, 2012 8:30 AM ET
Operator
Good day, ladies and gentlemen, and welcome to LoJack’s First Quarter 2012 Financial Results Conference Call. At this time, all participant lines 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 would now like to turn the conference over to Mr. Jeremy Warnick, sir, you may begin.
Jeremy Warnick
Good afternoon, and thank you, everyone for joining the call today. Our moderator is Randy Ortiz, Chief Executive Officer and President of LoJack. He’ll be joined on the call by Donald Peck, Chief Financial Officer. An archive of the webcast will be available through lojack.com in the Investor Relations section.
Any statements during this call that are not statements of historical facts are forward-looking statements. These forward-looking statements are based on a number of assumptions that involve a number of risks and uncertainties, accordingly actual results could differ materially. For further information regarding the forward-looking statements and factors that may cause such differences, please see the warning regarding forward-looking statements on our Form 10(k) for the year ended December 31, 2011.
I’ll now turn the call over to Randy Ortiz.
Randy Ortiz
Okay, thank you, Jeremy, and good afternoon everybody. It’s a pleasure joining you on the call today, and we certainly appreciate your time and interest in the LoJack business.
I’m going to begin the call today with an overview of our business results in the first quarter, along with a few observations on our domestic and international businesses, and then I’ll turn the call over to our CFO, Don Peck, who will provide a detailed review of our first quarter 2012 financial results and of course an update on our guidance for the financial outlook of 2012.
I’ll then provide my observations on the auto industry and specifically the growth we are seeing in the US market. Having just completed by first full quarter leading the LoJack business, I’d also like to update you on opportunities that I see within the organization and the plans we have to best position LoJack to achieve our budget in 2012. Then we’ll close by opening up the call for any questions you may have.
First of all LoJack team is pleased with our first quarter performance delivering overall revenue growth of 13% and growth in our North American Segment of 21.3% over the same period a year ago. The domestic retail auto industry grew 11% in the first quarter and even after netting out the acceleration of our extended warranty contracts in Q1, which Don will review in detail later, we still grew the total US business at a 10.1% clip.
Our growth this quarter demonstrates our progress in closing the gap between year-over-year industry growth and the growth of the LoJack business. Additionally, on the industry front, although this is a bit counter intuitive, oil prices have not dampened new car demand in the US market, due in part to today’s vehicles that are more powerful and certainly more fuel efficient than ever before and that’s according to recent report by the Environmental Protection Agency.
The outlook for the domestic retail automobile industry for the remaining portion of the year is strong, with analysts projecting approximately 10% year-over-year sales growth which should equate to at least 1 million additional retail units versus a year ago.
While our inventories have been tight in the first quarter, manufacturer plant production line should exceed the annual growth rate for quarter two which would increase our online inventories thereby reducing dealer trades and lowering the hurdle for our preinstalled programs. Industry analysts LMC Automotive and IHS are projecting second quarter production of 3.6 million units or about a 16% growth over the same quarter year ago.
Finally, dealer performance is very strong especially within some of our key national accounts and with our agent segment, which grew 46% significantly outpacing retail industry growth. We also continue to see improvement in the fundamentals of LoJack US automotive business, including the LoJack retention rate of our dealer base as well as increases in unit sales per selling dealer and the number of new selling dealers. These improvements, in my opinion, are a reflection of strong automotive market as well as our solid value proposition for both dealerships and consumers.
Brand rotation, a favorite topic of LoJack in the past, continue to impact us going into the first quarter, but at lower rates than we’ve experienced in previous quarters. This improvement is a result of the continued increase in inventories and of course sales performance among the Japanese brands, specifically Toyota as well as continued increases in penetration rates against domestic brands. Toyota and Honda retail sales grew 9% and 4% respectively, according to Automotive News and Toyota is expected to have another very strong month in April, the early estimates calling for at least a 10% improvement over a year ago.
Revenue in the company’s international segment for the first quarter of 2012, was $6.3 million, down 13% from the $7.2 million in the same quarter last year, and Don is going to provide additional financial detail for both the domestic and international segments during his comments.
LoJack Italia revenue increased 3%, in spite of a 21% decline in automotive registrations in Italy during the first quarter of 2012. We now have over 22,000 subscribers in Italy which is a 52% increase from the subscriber base at the end of the first quarter last year, and revenues from International segment were down 13% of course against the backdrop of global economic issues, particularly in Europe where easier markets were down 7.7% in the first quarter, as well as the uneven demand patterns inherent to this segment of the business.
We continue to make progress on our new territory developments and on the international front in an effort to stabilize and of course then grow the LoJack business internationally.
Revenues at LoJack Supply Chain Integrity, better known as SCI, our cargo subsidiary, increased 26% in the first quarter due to continued growth in high value cargo markets, particularly in the pharmaceutical and tobacco segments and also new initiatives in tough monitoring for retail inventory specifically electronics and acceleration in air based cargo monitoring programs also prime growth contributors.
Our commercial demand was very strong in the first quarter with a 129% revenue growth over quarter one of 2011. We saw a growth in both the rental and construction markets, both of which are growing again after significant slowdowns in 2009 and 2010. Within the rental market, 2012 year-over-year revenue growth is expected to be close to 7% fueled by increased demand as the construction industry recovers as well as a shift to equipment rental where the economic benefits of the rental model have more customers adopting this approach and the uncertain atmosphere of early market recovery.
There are a number of factors contributing to our growth in this segment, but the core is LoJack equipment recovery solution that delivers a solid return on investment and LoJack equipment recovery solution that finds the stolen equipment.
Finally, before I turn it over to Don, I’ve spend a significant amount of my time in the field listening to our customers throughout the first quarter and continue to see positive trends specifically in the US market that are favorable to everyone in the value chain.
The improved market performance we saw in Q4 has accelerated right into Q1 with the SAR averaging $14.2 million and our full year industry estimates raised approximately $14 million which amounts, as I said to about a 10% growth rate over 2011. I’ll provide more detail on our plans for 2011 along with additional comments on the automotive market following Don’s detailed financial review. Don?
Donald Peck
Thank you Randy, and good morning everyone. As I review our first quarter financial results today, all the comparisons will be to the first quarter of 2011, unless otherwise noted.
Consolidated revenue for the quarter grew 13% to $34.3 million from the first quarter last year. Within our North America segment, revenues increased to 21%, with US revenue for the quarter increasing 26% and Canadian revenues decreasing 13%. In the United States, our unit volume was up 11% over the same quarter last year with dealer unit volume up 5% and with the success that Randy described in our commercial division, our unit volume there was up 129% quarter-over-quarter.
In addition, during the first quarter of 2012, we transferred the servicing and liability obligations for a second and final portion of our preexisting extended warranty contracts to a third-party, thereby eliminating any additional services or liability exposure for these contracts. As a result, approximately $3.1 million of previously recorded deferred revenue that was being recognized over time was accelerated and recognized as current revenue during the quarter.
Gross margins on these transferred contracts was approximately $2.9 million. As with last quarter, this transfer of our obligations to a third party will serve to better align the income statement and cash flow statement impact of these extended warranty service agreements going forward. In the future we do not expect to transfer any further extended warranty contracts generated in past quarters.
Revenue from our international segment for the quarter was down 13% quarter-over-quarter coming in at $6.3 million in the first quarter of 2012 compared to $7.2 million in the same quarter last year. We experienced a 15% decrease in our international licensee product revenue as a result of a 32% decline in unit volume partially offset by a 25% increase in average pricing. We did not deliver on any orders to Brazil during the quarter, but we are continuing to conduct business with our Brazilian licensee.
As we’ve discussed for several quarters, we continue to experience significant variations in the order patterns are some of our licensees, which will continue to impact both revenues and gross profit percentages on a quarterly basis.
As Randy indicated in his remarks, our revenue from our operations in Italy increased 2% quarter-over-quarter despite the economic difficulties there. We now have over 22,000 subscribers, up from 20,000 at the beginning of the year and 14,500 at the end of the first quarter last year. Revenue related to our all other segment increased by $147,000. Our SCI cargo business increased 26% to $850,000, while our SafetyNet business decreased 36% to $54,000.
Our consolidated gross profit for the quarter increased 24% to $18.7 million. Consolidated gross profit as a percentage of revenue was 54.4%, up from 49.6% in the same quarter last year.
Turning further to our North American segment, gross profit as a percentage of revenue for the first quarter was 53.5%, up from 49.4% last year. This increase relates primarily to the sale of extended warranty contracts during the quarter. Gross profit as a percentage of revenue for our international segment and the current quarter was 56.4% as compared to 48.3% last year. This increase in international gross profit percentage is due in large part to the mix of licensees who purchased product during the first quarter.
Our consolidated gross profit percentage without the sale of the extended warranty contracts during the quarter would have been 50.6%, again above the margin for the same period last year and ahead of our corporate goal of 50% margin. Operating expenses of $19.3 million in the current quarter represents a 9% increase over $17.7 million recorded in the same quarter last year. The increase is in due primarily to personnel costs with new hires in mailing and operations, sales and IT, as well as anticipated increases in outside legal counsel fees.
Our operating loss for the first quarter was approximately $645,000 compared to an operating loss of $2.6 million for the same quarter last year. We achieved a positive adjusted EBITDA of $1.4 million in the current quarter as compared to an adjusted EBITDA loss of $198,000 for the first quarter last year, primarily due to higher revenue and a higher gross profit percentage.
In other income expense, interest income is down from $730,000 last year to $38,000 this year due to decreased interest income on outstanding accounts receivable from some of our international licensees. During the first quarter of 2012, we had a $514,000 positive evaluation adjustment in our investment in absolute software to come in stock.
Our foreign exchange gain and loss went from a gain of $722,000 last year to a gain of just $8000 this year as we look to minimize the impact of foreign exchange gains and losses on our financial performance. This exchange gain or loss results from the impact of currency fluctuations on our intercompany balances. We also recorded a $127,000 dividend from our Mexican licensee during the first quarter of 2012.
Income tax expense for the first quarter of 2012 reflects a provision for our Irish subsidiary. We did not record any benefit for current year domestic net operating losses, nor did we record a foreign tax benefit or foreign tax losses.
Net loss in the current quarter was approximately $300,000 or $0.02 per share compared to a net loss of $1.6 million or $0.09 per share in the first quarter last year. The company had negative cash flow of $4.6 million in the current quarter. Our $300,000 net loss included approximately $2.1 million of non-cash stock based compensation and depreciation. Balance sheet changes had a $7.5 million negative effect on operating cash flow, including a $2.7 million increase in inventory and a $4.8 million decrease in deferred revenue. We also had capital spending of $300,000 during the quarter and our Canadian debt increased by $700,000. We did not make any repurchases of our common stock in the first quarter of 2012.
Our cash and cash equivalent balance on March 31, 2012 was $44.3 million compared to $49.6 million at the end of last year. As of March 31, 2012 we had approximately $11.9 million of debt outstanding against our Canadian credit agreement with borrowing availability of another $17.1 million available on that revolving line of credit. We are compliant of all of our financial covenants. Stock based compensations in the quarter was $872,000 and depreciation and amortization was $1.2 million during the quarter.
Turning now to our guidance for 2012, as we explained on our last earnings call, we are expecting returning growth in the US retail automotive market this year, which we expect will positively impact our revenues. We also expect that our international revenues will continue to decline in 2012 and will continue to be volatile until we complete our efforts to open up new territories. We have restarted those new territory development efforts but we do not expect to see significant incremental revenues from new territories until 2013 and beyond.
On the whole, we reiterate our guidance that we expect that our consolidated revenues for the full year of 2012 will increase 3% to 7% over 2011 levels. With domestic revenues growing for the year and positioning us well for continued future growth, while we expect international revenues will continue to decline and remain quite lumpy quarter over quarter. We also reiterate that we expect our adjusted EBITDA as a percentage of revenue for 2012 will be generally consistent with what we achieved in 2011. With that, I will turn it back over to Randy.
Randy Ortiz
Okay, thank you Don. As I said in my opening comments, I would like to take the call beyond the first quarter of 2012. As I said, I joined LoJack about six months ago with a confidence in our ability to significantly improve the company’s performance by building on the solid foundation of strong financials. Certainly a well recognized and respected brand, a unique relationship with law enforcement, and of course the opportunity to build on a global distribution network. I'm happy to report after these first six months we are more confident that we can build on these strengths and certainly we leverage the recovery of the US domestic auto industry to accelerate our top and bottom line growth within the business.
So let me start with the US automotive market. The US industry is definitely in recovery mode and that momentum we are seeing in 2012 we believe will serve LoJack well. So let's talk a little bit about consumer demand. Consumer demand for new vehicles is strong. The scrappage rate for the perceivable future is going to be 14 million units per year. The average age of vehicles on the road is at an all-time high, nearly 11 years old, which in my career in the auto industry, this is about three years beyond what I grew up with.
Interest rates are at record lows, while at the same time consumer credit quality or credit worthiness has improved, and tension to buy new vehicles continues to increase and dealer demand for profitable, value-added back-end price is increasing. A portion of the industry decline in 2008 and 2009 was due to sub-prime buyers leaving the market because of tightened credit and this has begun to ease a more sub-prime financing is showing up according to CNW research.
On the new vehicle front, new vehicle margins will continue to see downward pressure in large part due to pricing transparency for the consumer. In the parts and service aspect of the business, there is pressure on revenue there as well, both in the warranty and retail repair business and that’s driven by the improving quality of vehicles, the extension of maintenance cycles and of course the reduction of units in operation coming out of the declines of new vehicle sales particularly in 2008 and 2009.
Also, in order to maintain profit levels, dealers are increasingly relying on reliable and compliant products like LoJack increasing their profit levels. In many instances, revenue from the F&I office, the Finance and Insurance office, is somewhere between 3% and 5% dealer revenue, but can contribute as much as 15% of the dealer’s gross profit, so obviously a very important department.
Additionally, we think there’s likely going to be rebalancing of market share in 2012, as both Honda and Toyota discuss plans to recapture market share lost in 2011. Toyota is confident that strong sales of its new Camry, coupled with a launch of 19 new or refreshed vehicles will help them regain share that they lost in the US market, primarily due to supply interruptions caused by the tsunami and of course the floods in Thailand.
Gas prices continue to rise within the first quarter as the level off but is yet to dampen demand for new vehicles. Estimates vary but the consensus of the demand will remain strong into the mid to high $4 per gallon range and new supplies coincident with rising gas prices there have been an increase in the sales of compact and subcompact vehicles. Now this is consistent with the short term behavioral changes we’ve seen with historical temporary gas price hikes, but it’s unclear how a sustained period of high gas prices would impact manufacturers’ model mix particularly given consumer preference to stay with their current vehicle type and improving fuel economy across the fleet.
Additionally, in 2008, there was only three cars that offered 40 miles per gallon, today there are 36 models that can attain 40 miles per gallon. SUVs and trucks follow a similar pattern, in 2008 there were 20 models that offered 25 miles per gallon or better. Today there are 40 that meet or exceed that threshold of 25 miles per gallon. So the bottom line, the economy is stronger than it was in 2008 and the industry is better prepared to handle $4 per gallon in the marketplace.
Also wanted to make the point that we’re not relying slowly on changes in the marketplace to improve our performance. We’re aggressively implementing a growth plan within the company that will include the following.
First of all, I think it’s important to become a data driven company, so to that end, we have bolstered our sales planning and analysis team and placed them in our marketing group to provide greater insight in the auto industry, into production, it’s inventory management, and brand and nameplate movement, and of course vehicle transaction prices, and the transaction data that drives the finance and insurance offices.
We’re also aligning our resources to drive volume with the US top volume dealer groups, we are also participating in expanding our relationship with agents. The agent expansion program will provide us access to many of the large dealer groups that LoJack did not have access to in the past. Working with agents instead of competing with them, we’re already achieving outstanding growth through the agent relationships.
By the way, as an aside, the agent business in the first quarter, as I said in my opening remarks, grew 46% year-over-year, clearly outpacing the industry growth. We would also be increasing our integration with our dealer partners, we want to become an integral part of the customer relationship management equation with the dealers, and have a dialogue with the end user, the consumer.
So what does that mean in layman's terms? Being involved and scheduling LoJack installations, establishing a link, so is to be integrated with dealer management systems, so scheduling and installation of LoJack becomes an integrated affair between LoJack, our dealer partners and the customer to improve satisfaction and of course owner loyalty. Bottom-line, must be easier to do business with.
We also want to leverage the value and trust our customers and dealers have in the LoJack brand and the unique relationship we have with law enforcement. We are currently piling a LoJack for leases [ph] product to ensure we have an attractive offer for both the consumer and the dealer. We’re pleased with the rates, some months running 25% of sales, this is an important growth opportunity for us.
This month, we began field testing the LoJack Total Recovery System, which includes LoJack for laptops and an identity theft recovery product, in addition to our stolen vehicle recovery system. This package provides a comprehensive set of solutions for the consumer and a profitable product for our dealer partners.
We’re also looking to leverage dealer and agent interest in reinsurance, which has been a tried and proved wealth building mechanism for many dealers, primarily in the area of service contracts. Also we’ll be working on some public relations programs that will link our dealers more closely with the competitive advantage we have with law enforcement, and we’re looking to increase consumer and dealer engagement with the brand, increasing our emphasis on data driven integrated marketing communications that are built on a solid digital media platform.
We certainly want to focus on building the LoJack brand through our social media and new web presence, and as you can imagine our recovery stories are great fodder for social media outlets.
Also as Don mentioned, we will expand our international presence, it's time to restart the international market development activities and that’s what we've done. We've already started dialogue in several new markets.
Additionally, our areas of focus will be to make sure that we rationalize our portfolio of businesses, make sure that we're getting the most value from our resource investments as we continue to review each and every one of those business and each segment to make sure that we're developing timetables for them to succeed.
So the bottom line, there are many exciting internal and external opportunities for LoJack. I have great confidence we can take advantage of these opportunities. We are participating in the U.S. auto market with many important trends that favor us in 2012 and beyond. We’ve got a solid set of plans built on a strong balance sheet, certainly an enviable brand, a unique relationship with law enforcement and a broad distribution network that spans beyond the contiguous 48 states. I am happy to be here at LoJack, and I am looking forward to strong performance for this company during 2012.
Now I’ll turn it back to our moderator and it’s time for us to take your calls. Thank you.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Our next question is from Bill Dezellem of Tieton Capital Management, your question please.
Bill Dezellem – Tieton Capital
Hey, thank you. I have a group of questions here. First one is revenues were up 13% in the first quarter, but your guidance remains at 3% to 7% for the full year, would you please discuss what looks like there’s potentially a lining up to be conservative revenue guidance for this year?
Donald Peck
This is Don Peck. We did have $3 million of extended warranty contracts being sold in that revenue number in Q1. So we expect that our Q1 performance will outpace what our overall rate will be for the full year.
Randy Ortiz
I think the other thing that we have to be mindful Bill, this is Randy Ortiz, as Don indicated we’ve characterized as lumpy or an uneven international marketplace, and certainly, Europe is not having a good go of it. One of our other key markets Brazil is flat year-over-year. So, I would say the international marketplace is the big questions mark for us that would tamper our projections and keep us in 3% to 7% range.
Bill Dezellem – Tieton Capital
That’s helpful. And then speaking of international, would you please go into some more detail on the issue of new territories and where it is that you’re directionally thinking and how you are wanting to accomplish that expansion?
Randy Ortiz
Right. So as you're probably aware of we don't have presence in the Middle East. We have no presence in Asia Pacific. So certainly there are plenty of markets there that are available to us Bill. We are not getting into specific markets yet because we’re in confidential discussions with the potential licensees, but suffice to say those are two targets for us and we'll – we’ve been prioritizing international markets based on first starters, the opportunities on stolen vehicle recovery, but certainly other segments of the business that may be interesting to LoJack.
Bill Dezellem – Tieton Capital
Are there businesses that may be interesting to LoJack, what do you think of that?
Randy Ortiz
Insurance, insurance fleet management, some of the other areas that our licensees are conducting business in other markets.
Bill Dezellem – Tieton Capital
That’s helpful. And to make sure that we are clear, when you make reference to the expansion in the international markets, you are talking about doing that with licensees as opposed to the go with a loan approach that you took with Italy.
Randy Ortiz
That is correct, that’s the plan right now. That’s correct.
Bill Dezellem – Tieton Capital
And then one additional question, and I’ll go back in the queue, and that is Italy. Would you discuss your view of Italy from this point forward?
Randy Ortiz
I would say that’s another one, Bill that we’re going to have to watch closely. Certainly we are pleased with the growth that has been going against the tide of a market that's down over 20%. But from my perspective we have to really make sure that we start to grow the dealer business there. We’ve just started in that space. We’ve really been, by and large, in the insurance space, the rental space, and we’re looking to grow the dealer part of the business. So that’s key for us is to make sure that we continue to have a presence in the – or start to grow our presence in the dealer space and move that business towards a profitable status. But it starts with getting more subscribers and certainly going from 14,500 a year ago to 22,000 puts it on the right trajectory. But that’s against the back drop of obviously a very uncertain Italian economy.
Bill Dezellem – Tieton Capital
Thank you.
Randy Ortiz
Don, do you want to add anything?
Donald Peck
No.
Randy Ortiz
Thank you, Bill.
Operator
Thank you. [Operator Instructions] Our next question is from Chris Owen of Plaisance Fund. Your question please.
Chris Owen – Plaisance Fund
Yes. Good morning. And congratulations on the strong domestic results. As we look at that marketplace, it seems that in unit terms you grew roughly in line with the overall market, but obviously you’re disadvantaged by the Thai and also Japanese OEMs. Is there a way to sort of decompose how much market share you took versus how much your growth simply reflects the industry?
Randy Ortiz
I don’t think we can do that Chris, but I would tell you this. Certainly being heavily indexed to the Japanese brands, Toyota’s performance in particular falls our way. But make no mistake about it, as we talked about – there has been a closing of the gap between the LoJack performance and the performance of the industry, and some of that comes on the heels of better performance with some domestic brands like Ford, GM and Dodge in particular. So as I said in our previous earnings call, I’m definitely focusing the team on expanding our footprint of dealers and brands that LoJack conducts business with.
Chris Owen – Plaisance Fund
Great. And then you referred to in the past that you have been working on the scheduling integration with dealers and you referenced again your adding dealer analysis people to the marketing group. Is there – can you share any anecdote or sort of milestones in terms of the progress in your new sales initiative?
Randy Ortiz
I would just say that we are just starting – we did a pilot with AutoNation, and we felt that very good results with respect to the number of customers we could schedule on the first call but it’s early days. So, on two fronts, we are looking to integrate so we can better understand what goes on in their business office, all of our key customers or key clients. But even more importantly, having the analytical capability in our marketing department in sales planning and production analysis, to understand more closely industry trends that would impact our business. And that goes beyond just the new vehicle sales piece of it. Understand what’s going on on the competitive front with products like extended service contracts, GAAP insurance, tire and wheel, many variety of products that gets sold in the F&I office that would compete for share of wallet with LoJack. So certainly Dave, certainly that’s what that has to be done and we are focused on that.
Chris Owen – Plaisance Fund
Great. And then taking account of the extended warranty, is there any way to sort of look at how you would expect gross margin to evolve in the domestic business over the course of the year?
Donald Peck
Sure. Again our corporate goal is to have consolidated gross margins at 50%. Historically international outpaced domestic and we expect that to continue, but they should blend into a 50% of above rate.
Chris Owen – Plaisance Fund
Okay. And then, is there any thought as to how legal expense may trend over the next few quarters with the quarters run rate being probably at the right level?
Donald Peck
As we mentioned on the Q4 call, we do expect legal expenses to be high, particularly in the first half of this year as we are getting ready for trial in two particular cases. So continue to look for legal expenses to be unnaturally high in the first half of this year.
Chris Owen – Plaisance Fund
Okay. Thank you.
Donald Peck
Thanks Chris.
Operator
Thank you. Our next question is from Bill Dezellem of Tieton Capital Management. Your question please.
Bill Dezellem – Tieton Capital Management
Thank you, a couple of follow ups. The first one is that inventory moved up a fair amount in the first quarter versus the Q4. Would you please discuss what your thinking is there?
Donald Peck
This is Don Peck. We were a little under resourced at year end. So we are pulling back up to what I would say is more normal levels of what we want to have on hand for our – both domestic and our international licensees.
Randy Ortiz
I would also just say to Bill that we had looked at planning a pilot program with one of our key national accounts that is going to be staged later in the year so we built up some inventory to support that, and ultimately with the restaging of that pilot which will likely end up in probably the third quarter of this year, you will see the push for that inventory. But to Don’s earlier point, we thought that we were running a bit low in inventory to begin with. But part of the inventory level is due to the stocking and preparation for a pilot that didn’t come to pass.
Bill Dezellem – Tieton Capital Management
And would you please discuss what that pilot is going to be, what it is that you are going to be trying and what you are hoping to learn?
Randy Ortiz
Well, in this particular pilot, Bill, it was going to look at doing an early warning with every single LoJack to develop a different value proposition. When we had a discussion with a specific client, we shared with them what we were doing on identity theft recovery and LoJack for laptops. And so they wanted to look at those results before they made a decision on which direction they wanted to go. Early warning approach or potentially bundling something different like identity theft recovery and LoJack for laptops.
Bill Dezellem – Tieton Capital Management
And then would that also include the early warning in addition to the identity theft and LoJack for laptops?
Donald Peck
It could potentially, yes.
Bill Dezellem – Tieton Capital Management
Okay. And then, the agent business is something that I'm just going to beg ignorance on, and ask that would you just please discuss the agent, where the agent fits into the auto industry and if there is a difference between large dealers and small dealers? Where do they fit in, how they fit in? And maybe what LoJack has not done in the past versus what you are doing now or wanting to accomplish? I guess also what the potential conflicts or friction points are with the agents and really the opportunity you see going forward.
Randy Ortiz
Sure. Well a couple of things. First of all, their rule in the industry, the agent network basically for all intents and purposes is a way for a dealer or dealer groups to organize their business office. You heard me make my comments about the amount of profit that emanates from the finance insurance office. It’s very important that dealers maximize revenue and profit opportunities through the F&I office. That has become increasingly more difficult to do with the proliferation of products out there for F&I managers to sell.
So in lot of ways I guess the evolution of the agent model came from having a group that could organize all these products and provide a very focused approach to a dealer or a group of dealers to basically take that headache away from the individual dealer or the dealer group. So it’s a way for them to organize the products and plan for a volume of profitability with one touch point, as opposed to having to manage relationships with a variety of different supplier product. And so they provide a very good service for many large dealer groups and some large single point or metropolitan dealers.
They can do everything from service contracts, providing your reinsurance products, GAAP, wheel and tire, you name it. So they are basically representing a variety of different products they package together in the best possible approach in concert with the dealer to maximize their profitability. Where it becomes a – what’s going [inaudible] for us in the past is where they had access to specific dealerships and in order to get into the F&I office and specific dealerships you had to go through the agent.
Now, if in fact the agent felt that there was a theft deterrent or stolen vehicle recovery product that competed with LoJack, there is a pretty good bet that we couldn’t get into those stores because the dealer would always defer to the agent what do you think. And so rather than continue to butt heads with agents and some of big groups we decided, in some instances, if you can’t lock them join them, and see if we could come up with a proposition that made sense for them financially but also gave us access to stores that we couldn’t get into.
So we could either hit the ball and say we are not dealing with agents and we are just not going to call on these stores, which would have been a mistake, or work with them and say, here is LoJack, here is our value proposition, does it fit your portfolio of products and will you represent LoJack. And Mike Sullivan and our marketing team have done a great job developing that process a year ago, developing good agreements with our agent partners to make sure that they perform at a level we like, they represent the LoJack product and we don’t end up being diminished against the backdrop of a bunch of other products to get presented by an agent. But in a nutshell it’s – I think it’s a good approach for us to get access to stores that we would never be able to penetrate without their support.
Bill Dezellem – Tieton Capital Management
That’s really helpful and so what percentage of the dealers of the US auto sales, more importantly do the agents represent and now that you have been working with the agents for, it sounds like roughly a year, what friction points or points of conflict are there with the agents that you are finding?
Randy Ortiz
Yeah, so of the 17,000 dealers out there Bill, I couldn’t give you a specific penetration number for the variety of agents that are out there. I don’t have that number at my fingertips. But I would just tell you that with respect to potential friction points I think we are pretty clear upfront in what the value proposition should be. Ultimately the only friction we would see as our people continue to visit dealerships and make sure that the LoJack brand is properly represented, is just understanding how the agent is presenting the value proposition against the backdrop of the other products they represent in those dealerships as well.
Bill Dezellem – Tieton Capital Management
And so, coming back to the percent of the industry that the agents represent, I don’t have any perspective whether it’s 1% or 90%. Can you share to some level of significance?
Randy Ortiz
I guess in my experience it would be – I would say north of half of the dealers have some relationship with an agent. But like I said, that’s just from my auto industry experience and I haven't done a specific study on it. So – and that can vary, right, because honestly they could be representing one product or they could have the total suite of products that are – that a dealer and/or a group would represent. But honestly I don’t have the specific number but it’s significant in the auto industry.
Bill Dezellem – Tieton Capital Management
And so, I’ll get off here after this, but does that imply that up until some time ago here that LoJack was essentially zeroed out of – let's just call it half of the industry?
Randy Ortiz
It doesn’t imply that at all, because as I said some agents would not have any stolen vehicle recovery product. So we wouldn’t be competing head to head. It doesn’t imply that there would be a block at all these dealers. In some instances the agent would just – along with the dealer principle would say, hey, you have to compete but certainly what we have seen in some of our metropolitan markets that it was important to be able to get access to some of the stores that we were pursuing through agents and we could have just said look, we are not going to participate, they are going to keep us out, or we are going to work with them. Like I said the decision was made to work with them.
But you can’t – there is not going to – even if we go around the country and pick the studied number and it will fluctuate day to day because we pick up and lose dealers just like every other supplier. It’s not a fair comment to say that 100% of the agents have products that would have kept LoJack out of the marketplace. That’s not true.
Bill Dezellem – Tieton Capital Management
Thank you. It’s actually really helpful.
Operator
Thank you. [Operator Instructions] I'm showing no additional questions at this time. I would now like to turn the conference back over to Randy Ortiz for any further remarks.
Randy Ortiz
Okay. Well thank you everybody for your participation and interest in LoJack. Certainly as you have noticed from our first quarter results we feel comfortable that we are on the right track for a good and successful year. We have been buoyed by the recovery of the US auto industry and certainly our growth against that industry growth and closing the gap that we have seen in recent years. So that obviously is good news for LoJack and certainly we are keeping an eye on the uneven international economy and how it impacts the auto industry. But certainly LoJack has a bright future. Don and I are pleased to report the first quarter results. We look forward to talking to you again soon. Thank you.
Operator
Ladies and gentlemen, thank you for your participation. That concludes the presentation. You may disconnect, and have a wonderful day.
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