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Audiovox Corp. (NASDAQ:VOXX)

F3Q08 Earnings Call

January 10, 2008 10:00 am ET

Executives

Glenn Weiner - Investor Relations

Patrick M. Lavelle - President, Chief Executive Officer, Audiovox Corporation

Michael Stoehr - Senior Vice President and Chief Financial Officer

John J. Shalam - Chairman of the Board

Analysts

Analyst for Lyron Bentovim -SKIRITAI Capital

Jim Barrett - CL King & Associates

Mike Neary - Neary Asset Management

Richard Greenberg - Donald Smith and Company

Operator

Good morning and welcome to the third quarter 2008 Audiovox Corporation earnings conference call. My name is Katina and I will be your coordinator for today. At this time all participants are in a listen only mode. We will conduct a question and answer session towards the end of this conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to hand the presentation over to your host for today’s call, Mr. Glenn Weiner of Investor Relations. Please proceed.

Glenn Wiener

Thank you and good morning and welcome to Audiovox’s fiscal 2008 third quarter results conference call for the period ending November 30th. Today’s call is being webcast on our website, www.audiovox.com under our Investor Relations section.

Fiscal third quarter were released yesterday after market close and our form 10-Q was filed as well. That can be found on our website under our SEC filings. Speaking for management this morning will be Patrick M. Lavelle, President and CEO, and Michael Stoehr, Senior Vice President and Chief Financial Officer. John Shalam is also here with us. Both Michael and Pat will be making opening remarks before opening up the call for your questions and before we get started, I would like to read 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 responsibilility to update any such forward-looking statements. The following factors, among others, may cause actual results to differ materially from the results suggested in these forward-looking statements. These factors include but are not limited to risks that may result from changes in the company’s core business operations, our ability to keep pace with technological advances, significant competition in the mobile and consumer electronics businesses and accessory business, 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 statements or other 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 28, 2007.

Thank you again, and at this time I would like to turn the call over to Patrick.

Patrick M. Lavelle

Thank you, Glenn, and good morning, everyone. I’m here with our chairman, John Shalam at CES 2008 in Las Vegas and online is Mike Stoehr, our CFO, who is dialing in from New York. As most of you know, just days ago we closed on the acquisition of Thomson’s RCA audio/video group and I’ll cover that detail in a few moments. I’m very happy to note that here at CES we have won 12 consumer electronics innovation awards, the most that any one CE has and I will cover those shortly as well. But first I’d like to recap our third quarter performance highlighting some of the key drivers to our results. After my remarks, Michael will cover our financials in more detail and then we’ll open up the call to questions.

We reported sales of approximately $184 million, an increase of 21% compared to our fiscal third quarter last year and net income of $4.7 million or $0.20 per diluted share. On an operating basis, operating income came in at $5.6 million, a 229% increase over Q3 last year. Excluding the $244,000 non-cash charge related to the RCA accessory acquisition, our operating income was $5.9 million.

Our accessory group recorded sales of $44.6 million compared to $3.6 million last year. Of course, this increase is a result of our acquisition strategy to enter the accessory business and the ensuing sales of Thomson, Oehlbach and Technuity, all acquired during the year. As intended, the addition of the accessory business is helping to improve overall margins and spread fixed overhead across a larger sales base.

Electronics sales were off a little over 6%, coming in at $139 million. On the consumer side, the industry-wide shortage of LCD panels intensified and continued to impact our sales of LCD TVs, portable DVDs, and digital picture frames. We simply were unable to obtain sufficient supply to meet our customer demand. We estimate the impact of these product shortages to be approximately $20 million of lost sales for the quarter. Although we had previously cautioned regarding the supply issues, the situation worsened as we ultimately did not receive planned shipments.

Sales of certain mobile products were also down this quarter as the OEs continue to offer programs that cut into the aftermarket for mobile video such as the recent holiday promotion that included a free rear seat entertainment system with a vehicle purchase. Competition at the OE level will continue and to help counter it, we remain committed to introducing new technologies that are faster paced and providing product solutions for a broader variety of vehicles than the OEs provide, such as in-dash entertainment and navigation systems for mid and lower priced vehicles, a wider range of remote start systems and more headrest options for rear seat entertainment, just to name a few.

On the positive side, sales of mobile audio products were up 23% over Q3 last year. Jensen continues to be the number one selling mobile multimedia system in the US and Audiovox maintains its number one market share in this category. Sales of XM satellite area also contributed significantly to our mobile audio sales. Finally, we experienced growth in the mobile business of our international operations in Germany and Venezuela, allowing us to post a modest increase of 4.6% in our overall mobile business.

Despite the improvements, I must say that the quarter’s performance was really somewhat mixed. On the one hand we are executing our strategy and getting positive results from the acquisitions; however, there are market factors that have affected overall consumer sales which are creating downward pressure. The short-term industry drivers and the overall health of the economy have curtailed our growth to a degree; however, with the new product introduced at the show in Vegas here and the new sales from our acquisition, I expect the company to grow this year and next.

Our gross margins came in at 19.1%, roughly in line with last quarter, and up 240 basis points over the third quarter of last year. The contributions from our acquired business, combined with the impact of our efforts to improve margins in our core electronics, has led to these improvements. Raising our margins remains a top priority for me.

Overhead was up due to the acquisitions; however, when we strip out acquisition overhead, our core overhead was actually down $600,000 for the quarter. We evaluate our cost structure on a constant basis and expect additional overhead reductions as we incorporate the new acquisitions and lower quarter overhead to match lower core sales.

As I said at the beginning of the call, we are here at the Consumer Electronics Show in Las Vegas and please excuse what I would call Vegas voice. After a week in Vegas we start to lose it after a while. We’re here in Vegas where the emphasis is on new products and innovation. Our design teams are on the right track and have won, as I said, 12 CES innovation product awards across our various product lines. Some of our products on display that have gotten a lot of attention: we are showing 4 new acoustic research wireless modules or models featuring wireless technology developed by Audiovox engineers. Early product reviews of these systems have been very favorable and they are set to deliver this month. The new products include a complete 5.1 system, wireless sub, and modules that convert any speaker to wireless. In addition, the 2008 acoustic research line also includes a high performance table top radio line with five new product offerings.

Under Jensen, we hold 5 of the top 10 positions in mobile multimedia today and with our new product line, I hope to increase our market leading position. Our new Jensen mobile multimedia piece, one of several introduced here, won a CES innovation award for a truly differentiated product. This is a new 6.5 in touch screen, multimedia receiver that is satellite radio ready, has navigation, HD radio, and Bluetooth, offering all of the latest digital technology and connectivity in a one source media hub. In satellite radio, we have the XM direct 2 that allows users to listen to their XM radio through their satellite ready car stereo and it is the only flashable smart adaptor on the market today. It works with any satellite-ready head unit and allows software downloads via the internet to accommodate all the different protocols from all models from Alpine, Clarion, Eclipse, Jensen, JVC, Kenwood, Panasonic, Sony, or any of the other aftermarket radio providers.

Under Audiovox, we’re launching two new digital message centers that are truly innovative. They are digital picture frames that not only display your photos, they also function as complete message centers and feature audio and video message capabilities through built in cameras and recorders. The units are designed to be used in the kitchen, which is the hub of most family activities, and utilize a unique refrigerator mounting system. This is one of the items that we have had unbelievable press coverage here at the show.

In accessories, we’ll have a number of new products under the acoustic research, RCA, and Terk brands. The new acoustic research wireless remotes manage and move content from your TV or PC and include popular home automation features. Last but by no means least, RCA audio/video, one of the newest additions to the Audiovox product portfolio, made its debut here at CES with an expanded line of affordable small wonder camcorders, a new and improved lineup of RCA Gem line digital media players featuring highly competitive prices and easy rip media software as well as MPEG4 players and a brand new internet clock radio. Based on the media and customer response, we believe we are well positioned to enter the spring selling season with a full arsenal of new and exciting products.

For the last 12 months we have been very active carrying out the plans that I have outlined in previous calls. We closed on five acquisitions and we spent approximately $100 million on the acquisitions with the potential of adding $300 million to $350 million in sales, much of that at higher margins than our core business. Some of these acquired sales will replace some core business being lost to maturity in some of the markets that we serve and some of the business will represent completely new sales to us.

As you know, we started 2007 with the acquisition of the Thomson consumer electronics accessory business which included the RCA brand and effectively put us into the accessory business with a significant presence. The RCA strengthened our product portfolio and our industry position. It also expanded our distribution network, opened up new sales channels, and improved our R&D capabilities which is a very important factor to us long term. We formed Audiovox Accessories Corporation so that we can maintain and enhance our product development and marketing focus in this new business. During the course of the year, we also added Technuity and the Energizer brand to our accessory group domestically to further strengthen their product offerings.

Now, after probably two years of negotiations, on December 31st we acquired Thomson’s consumer electronics audio/video business outside of Europe. We now have the worldwide rights to the RCA brand for AV products except TVs. We acquired approximately $400 million in sales, though we intend to keep roughly $150 million and license out the rest to Multimedia Device, a Chinese manufacturer, for an upfront payment of $10 million and future royalty payments. We believe that this transaction will essentially give us $150 million in sales and a royalty revenue stream at very little cost, and Mike will walk you through those numbers in a bit.

Internationally, we added two companies to our European business unit, Oehlbach and Incaar and these acquisitions added an accessory and an OE component to our international business and I’m happy to report both are doing very well.

In addition, part of the most recent acquisition from Thomson includes an international component in that we have established Audiovox Mexico, utilizing the former Thomson operation, and expect this not only to give us local presence in this growing market, but also allows us to expand the distribution of the entire Audiovox line. We believe that international sales will be an important aspect to our growth over the coming years, not just in the short term.

While we have generated good momentum so far in 2007, I must temper expectations as we enter the fourth quarter. While we expect positive contributions from our acquired companies in the fourth fiscal quarter, we also anticipate additional transition costs for the RCA A/V and Technuity during what is historically our slowest period.

As we enter fiscal 2009 beginning March 1st, I believe you’ll see the positive impacts that our acquisitions will have on our operating and financial performance, and barring any further downturns in the economy or any unexpected occurrences, we believe we are positioned well with Audiovox, Jensen, RCA, Acoustic Research, Energizer, and our other brands. Positive cash position with little debt, I believe Audiovox is on the right path for strong growth and the ability to generate sustainable returns for our shareholders.

I’d now like to turn the call over to Michael to go through some of the financials.

Michael Stoehr

Thank you, Pat. Good morning, everyone. Since Pat covered our quarterly performance in his opening remarks, I will cover our results for the nine month period. I will also review the balance sheet, cash flow, and provide an insight into anticipated financial position.

Sales for the nine months of 2008 fiscal year were $460 million, an increase of 27.6% compared to the first nine months of fiscal 2007 which had sales of $360.6 million. This increase is attributable to the growth of our accessory business as sales grew for the nine months by $108 million as a result of our acquisition of the Thomson and Oehlback?? accessory business. Please note, we only had one month of sales revenue for Technuity as the transaction closed on November 1st, 2007.

For the fiscal 2008 nine month period, we reported accessory sales of $118.9 million compared t o $10.8 million in the comparable period and this represented 25.8% of our sales for the first nine months of fiscal 2008 versus 3% last year.

Sales for electronics was $341.2 million for the nine months ending November 30, 2007, compared to $349.8 million for the nine months ending November 30, 2006, a decline of 2.5%. This occurred primarily in our consumer goods group, which was off 33% for the nine months to date. The majority of this decline occurred in the third quarter as a result of low unexpected holiday sales and the continued impact of industry-wide shortage of LCD panels.

Offsetting a decline in the consumer good sales, sales of our mobile audio products, which include Jensen, Phase Linear, and satellite radio. The mobile group sales were up approximately 6% and sales of our German and Venezuelan operations were up 32% during the nine month period compared to last year. As a percentage of sales, electronics was 74.2% for the nine months period of 2007 compared to 97% last year.

Our gross margins increased 180 basis points to 18.8% compared to 17% for the nine months ended November 30, 2006. Gross margins were favorably impacted by the increased sales of our accessory group as a result of our acquisitions. Accessory sales have a higher margin than some of our other products. We also experienced improved margins in the electronics business. We have also seen the positive impact in our margins through the better buying programs and management of our inventory.

These improvements were partially offset by higher warehouse and assembly costs associated with the transition and integration of our acquisitions during the year and higher warehousing and shipping costs within our existing operations.

We also experienced high warranty costs as a result of increased accessory sales. Accessory products have a higher warranty cost on our existing lines. For the last two quarters we reported gross profit margins in excess of 19% and as accessory products continue to increase as a percentage of our sales, it will have a favorable impact on our gross margins. We anticipate an upside and our margins year-over-year though as Pat mentioned, we are watching the fourth quarter closely.

Finally, there is still room for improvement in our margins as some of our recent initiatives and investments in systems continue to address costs related to shipping, freight, warehousing, assembly, and warranty.

Our overhead increased approximately $15 million for the nine months to $78.7 million versus $63.7 million last year, but as a percentage of sales, decreased to 17.1% compared to 17.7% in the similar nine month period last year. Overhead before acquisitions declined approximately $1.8 million or 2.9% as there was $16.8 million of incremental costs related to our acquisition of Thomson, Oehlback, Incaar, and Technuity.

As Pat had indicated, we expect to incur additional costs in the fourth quarter and some into our first quarter next year to integrate and transfer the assets of the recent Thomson AV and Technuity acquisitions into Audiovox. Once these businesses are totally integrated and with continued review and improvement to our existing overhead, we anticipate operating expense as a percentage of sales to decline.

Operating income for the nine Monday the of fiscal 2008 was $8 million, compared to operating loss of $2.5 million in the prior year period, an improvement of approximately $10.5 million. This is a result of increased sales, improved gross margins, and overhead control.

The effective tax rate for fiscal 2008 nine month period was a provision of 30.3% compared to a benefit of 22.7% in the similar prior year period, a difference of $4.4 million. This increase in the effective tax rate is due to lower tax exempt interest income earned on our short term investments and increased income from operations.

Net income from continuing operations for the nine month period in fiscal 2008 was $8.5 million compared to $4 million in the similar period last year. Including discontinued ops, we reported income of $10.6 million or $0.47 per share nine months compared to net income of $3.4 million or $0.15 per share in the similar period last fiscal year. Continuing operations reported $0.38 per share for nine months versus 18% nine months last year.

Before I discuss the balance sheet and cash usage, I would like to outline the process of our latest acquisition, the Thomson audio/video business, which closed December 31st 2007. There were two parts in this transaction, Audiovox’s purchase of the audio/video business and the subsequent licensing arrangement with Multimedia Device Limited. The present and future cash outlays for this purchase are $19.7 million upfront cash payment fixed marketing fees and trademark payments. This amount also includes one payment which will be due in 2009. We paid $6.4 million which is a payment for inventory and warranty expense for a total of $26.1 million. The $26.1 million payment will reduce as follows as a result of the Multimedia Device Limited licensing agreement with Audiovox. These payments are a $10 million upfront payment, a $4.6 million payment for inventory used by Multimedia for its field of use.

This brings our cash outlays to $11.5 million to obtain $150 million in sales. The agreement calls for payment by Audiovox on RCA branded audio/video product sales for years 2010 through 2014, of which there is a guarantee of $1 million per year for 5 years. Our agreement with Multimedia requires a royalty payment beginning January 1, 2008. We feel in this short period of time there will be a positive inflow of cash in excess of our purchase price.

For the nine months ended November 30, 2007, the following is a summary of our cash flows: Usage. We financed increased receivables of $62 million, increased inventory of $34 million, increased as receivables $12 million, we paid for acquisitions approximately $28.4 million. This does not include the Thomson audio/video acquisition which closed on December 31st. We had CapEx of $5.8 million and repurchased common stock of $1.4 million, we paid debt primarily in Germany and Venezuela for $5.1 million with a total cash usage of $150.2 million.

To fund this we had $8.5 million in earnings, $14.3 in miscellaneous cash such as the cash from our joint ventures, exercise of options, increased AP and AE, and finally we utilized $127.4 million from our cash and investment accounts.

As of November 30, 2007, we had working capital of approximately $293 million which included cash and short term investments of $28.9 million compared with working capital of $306 million as of February 28, 2007 and cash and short term investments of $156.3 million.

The reduction in working capital is principally related to the acquisition of Technuity in November. AR terms improved. They were 5 times versus 4.2 nine months last year. Inventory terms were approximately 33.9 for the nine months versus 4.1. There’s a little distortion there and we took $5 million worth of inventory from Technuity in the last month of the year.

After the close of the Thomson audio/video transaction, the company currently has low eight figures of cash in our investment accounts and we anticipate by the end of the fourth quarter we’ll have mid eight figures of cash. We have no domestic debt, a small amount of overseas debt, about $5 million, and anticipated strong balance sheet going into fiscal 2009. We intend to integrate the acquisitions and review our internal process for more efficiencies.

Thanks, and I’ll return this back to Pat.

Patrick M. Lavelle

Michael, thank you, and now I’d like to open the calls to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Lyron Bentovim -SKIRITAI Capital.

Analyst for Lyron Bentovim -SKIRITAI Capital

Hey guys, this is CJ. I wanted to get a little more color about in the press release you had mentioned a $6.3 million increase in operating expenses from the acquisitions. How much of that was one time versus what we can expect going forward?

Patrick M. Lavelle

I’ll let Mike talk to the specific numbers but in the quarter the only one time expenses we really would have had would have been with the Technuity as we just brought that in. We didn’t have much one time expenses in the expense of the RCA A/V group. Those transition expenses will really start to happen in the first calendar quarter.

Michael Stoehr

CJ, this is Mike. Pat’s correct. There was a slow pick up we had from valuation, a couple hundred thousand dollars. We do intend to see some improvements. As Pat had mentioned, as we continue the integration and we continue to move them further into the systems but there will be some increase. That increase will about hold for next year.

Analyst for Lyron Bentovim -SKIRITAI Capital

Which line item is that in?

Michael Stoehr

That would be in G&A.

Analyst for Lyron Bentovim -SKIRITAI Capital

Okay. So the number we had for Q3 we can expect going forward maybe with a slight uptake?

Michael Stoehr

Yeah, for that purposes.

Analyst for Lyron Bentovim -SKIRITAI Capital

Okay and then looking at the bigger picture and looking out over the next 12 to 18 months, you guys have acquired a significant amount of revenue since the beginning of the last year and you’ve already put up $460 million in revenues through nine months and tack onto that another $150 million from the most recent Thomson deal, the CE deal outside Europe, and assuming the base business can maybe get say $120 million or $140 million of revenues, you’re looking at $730 million to $750 million in revenue on a go forward basis for fiscal 2009 and at a 19% margin, it seems like you guys have a very compelling story to tell and with a significant amount of SG&A leverage. My big question is, are you guys going to be attending any conferences? What does your marketing schedule look like in terms of getting out and talking to investors?

Patrick M. Lavelle

Let me just say this. The first thing that we’re going to do, you’re 100% right that we s pent a lot of time and the acquisitions were the focus that we had last year. The focus that we’re going to have as we go into 2009’s fiscal year is going to be transitioning and squeezing down the overhead on all the acquired assets. Although we have done that through the year, there are still areas where there is duplication, there are synergies that we had identified going in that we have not gotten to yet as far as bringing down that overhead, so from a management standpoint we’re going to be spending a lot of time in 2009 bringing down and tightening down on the overhead and squeezing out any duplication that exists in the acquired operations. With that said, we do have plans to be out to speak to the financial community to tell the story. We believe that we’re in a good position, we’ve got a good story to tell, our sales will be growing based on the acquisitions, some of the new products that we’ve seen and the response to the new products that we’ve seen here at the show are giving me some very good confidence that we might even see some significant growth in some of our mature products if we can get around some of the issues that we were faced with last year so yes, we will be out and we will be planning conferences. Most likely we’ll be doing three conferences in 2008, something like that.

Analyst for Lyron Bentovim -SKIRITAI Capital

Okay, great and you didn’t do any last year, correct?

Patrick M. Lavelle

No.

Analyst for Lyron Bentovim -SKIRITAI Capital

Okay so I think that as an investor is a step in the right direction because I look at the numbers and if you look at the market cap today, $250 million, and I think Mike had said mid eight digits in cash, if you subtract that out and you look at the multiple, it’s very compelling, at least according to my model, so I definitely applaud the fact that you guys are getting out there and are going to hit up some conferences. That’s all I have.

Patrick M. Lavelle

I tend to agree. Thank you.

Operator

Your next question will come from the line of Jim Barrett representing CL King. Please proceed.

Jim Barrett - CL King & Associates

Good morning, everyone. Actually I had a follow up on the question from the last caller. Pat, you indicated the company is going to be squeezing out overhead going forward but Mike I thought you indicated that we should use the Q3 run rate for G&A as a very rough proxy in terms of what your overhead is going forward, so I’m trying to reconcile those two comments.

Patrick M. Lavelle

Obviously we’re going to see an increase in overhead with the personnel and some of the assets that we had to bring in to employ the Technuity people and the new AV group from RCA so I wouldn’t model the overhead on this year’s numbers. We’re going to see an increase. What I’m talking about when we get through some of the meetings that I’ve got prepared for February and March, both at Technuity and at RCA, as we transition in, we will be able to take out some overhead that exists today and I’ll give you a perfect example. We have a lot of product that is set to reset in April with RCA A/V so I had to bring over absolutely every bit of engineering that is going on right now to ensure that we meet timelines for the new product introductions. I believe there is some savings in those areas, especially overseas, and that’s where we’re looking that we’ll be able to start squeezing down and complementing the work that we’re doing overseas with what we require.

Jim Barrett - CL King & Associates

Okay, good, and Pat, if I look at the accessories business, with the addition of Technuity, how should investors view the current annualized top line in that business? I know you’ve given some previous thoughts on that.

Patrick M. Lavelle

With what Technuity’s going to add?

Jim Barrett - CL King & Associates

Exactly.

Patrick M. Lavelle

We think we have some opportunities to grow the business with Technuity. It is one of the reasons why we thought it was a good property. They had some cash constraints on them that prevented them from maximizing their sales and we think we will also be able to pick up certain territories that they were not able to take advantage of so we’re probably looking in the $30 million range this year for what we can do but when we valuated the deal we were looking at sales much higher than that. It’s going to take us a while to get there but we think with some expanded territory and getting the depth of Audiovox distribution network behind them that we can grow them significantly.

Jim Barrett - CL King & Associates

Okay, terrific. Last but not least, Mike, could you comment on the status of trade inventories of a high/low, or are they where they should be, and comment at all on your own inventory levels?

Michael Stoehr

You mean the customer’s inventory levels?

Jim Barrett - CL King & Associates

Yes.

Michael Stoehr

I’ll leave that one to Pat. Ours are following our normal seasonal patterns so that’s the reason why you’re starting to see we’re beginning to cash up. Sales were a little bit slow in December but we had to start to cut the buying back a little bit. Pat, do you want to comment on the trade?

Patrick M. Lavelle

As far as the trade, I don’t think it’s any guess by anybody that it was a softer Christmas. Consumers seemed to be pulling back. Car sales are coming in I guess at 1998 levels and I had a number of meetings previous to the Christmas season where going in we felt very, very confident that the new products that we were introducing for Christmas and the fact that we were loading in the load ins that were being projected that we would have a good Christmas selling season. We were disappointed as I indicated and we did not receive some shipments that were planned due to the shortage and that had an impact, there’s no question. I’ve given you that number, but there was a general softness that we can feel in the rest of the Christmas buying patterns and it seems as if the consumer pulled back and I think the numbers at retail are starting to reflect that.

Jim Barrett - CL King & Associates

Exactly. Okay, thank you both.

Operator

Your next question will come from the line of Mike Neary representing Neary Asset Management.

Mike Neary - Neary Asset Management

Hi, I had a couple questions. You mentioned that you spent about $100 million on the acquisitions. How much profit did we buy?

Patrick M. Lavelle

Let’s see, I’d have to add that up. Mike, do you have those numbers?

Michael Stoehr

Basically what we looked at when we purchased this, not to beg off on that question, but some of the businesses that we bought were stressed so that the income that came in came through our integration into our systems. As Pat had mentioned, I think Pat we said we picked up sales of approximately $350 million?

Patrick M. Lavelle

The $300 million to $350 million. Those are all of our acquisitions. I could give you a number, a ballpark, and what we’ve done with Technuity and the RCA A/V because we’ve just looked at those numbers. Somewhere around $40 million in gross profit generation based on what we’re taking in in sales.

Mike Neary - Neary Asset Management

Okay and what would that be on an operating basis?

Patrick M. Lavelle

The cost for us to bring it in, there are going to be some incremental costs as I said because when we do these operations and when we do these acquisitions, we normally keep the marketing teams, the sales teams, and the product development teams. The back end of the business, the financial, the computer, the logistics side, normally blends right into the existing Audiovox infrastructure, and that’s where we’ve been able to take out overhead and all the acquired assets is really on the back end. We maintained the sales people to maintain contact. We maintained the marketing people to maintain product expertise as well as the product development and engineering teams to be able to focus and build product in those specific areas that we acquired.

Mike Neary - Neary Asset Management

Okay, let me look at it. Maybe look at it this way. It looks like incrementally our operating profit was up about $10.5 million year-over-year for the nine months and the big acquisition we made in January of Thomson, I guess would have accounted for all that since our core sales were down slightly, is that accurate?

Patrick M. Lavelle

Not really. In our core business, our mobile business is up and yes, it does help the overall picture. One of the things that you’ve got to look at is we have a certain amount of fixed overhead so adding the accessory business spreads out a lot of costs over those new sales but I think we’re getting contribution from pretty much across the board. Our European operation, our Venezuelan operation are all profitable, so it’s essentially putting more sales on top of an overhead structure that is fixed and the reason why it’s fixed is because we knew we were bringing in and acquiring companies so we knew we had to have a certain core overhead which gave us the capability to handle the sales that we bring in so that we can take out the back end of the acquired companies.

Mike Neary - Neary Asset Management

I understand.

Michael Stoehr

Pat, that’s correct. As Pat mentioned, we have margin improvement in both our groups, we had improvement in our international companies, and then we had contributions from the acquisitions that we made. That would be the transition costs.

Mike Neary - Neary Asset Management

Okay, but for the nine months, would our company have been profitable without the acquisitions on an operating basis? In my eyes we weren’t.

Michael Stoehr

We report as a single unit and we really don’t report that.

Mike Neary - Neary Asset Management

Okay but when you buy these things --

Michael Stoehr

It helped.

Mike Neary - Neary Asset Management

Yeah, you don’t buy revenue, you’re buying them because you think they’ll generate some profit.

Patrick M. Lavelle

Absolutely, and they have contributed, there’s no question about it.

Mike Neary - Neary Asset Management

Okay and going forward, when you buy revenues, what type of obsolescence rate do you look at? You buy $150 million in revenue, do you assume that declines a few percentage points a year or how do you look at that?

Patrick M. Lavelle

It depends on what we buy and as I said in the case of Technuity, we think that Audiovox taking over can give them capabilities and a breadth of distribution that they didn’t have so we’re looking to actually growth that business and we think we can grow that business significantly over the next 2 or 3 years. When you get into the businesses that we took over from Thomson for the A/V group, we maintained, if you look at the field of use and the categories that we had mentioned, we maintained camcorders, camcorders is a growing category. We maintained digital audio, another growing category, and digital voice recorders, so the categories that we brought in are ones that we think we can grow. We also maintained the clock radios which to everybody sounds very, very mature but when you look at clock radios, number one, RCA has the number one market share in clock radios, and when you take into account things like internet radio, HD radio, satellite radio, iPod, mp3 docking, the replacement market for clock radios can be very, very big, so we may lose a point or two on a transition or something like that but in every one of the acquisitions, we’re looking to from what we purchased.

Mike Neary - Neary Asset Management

Okay, great, and last question, you gave a general sense on cash for year end, you know, we’re at $56 million now, we’re going to spend $20 million, get $10 million back, so I don’t know what the working capital needs are. Can you give me just a better guesstimate of where we should end up cash for the year?

Michael Stoehr

We should end up as of February 28th s I said in the mid eight figures.

Mike Neary - Neary Asset Management

I mean, we’re at mid eight figures now, aren’t we?

Michael Stoehr

No, we’re at low.

Mike Neary - Neary Asset Management

Okay, I thought we had $56 million in cash.

Michael Stoehr

Mid figures is possible.

Mike Neary - Neary Asset Management

What is our total seasonal working capital swing? Is it $50 million of inventory and receivables we billed and then reduced per year roughly?

Michael Stoehr

If we’re not doing any acquisitions next year, which inventory will come in, you’re in that range depending upon the sales that we move. But the big usage of seasonal needs is in the third quarter.

Mike Neary - Neary Asset Management

Okay and has there been anything done on the share buy back other than the shares bought last quarter?

Michael Stoehr

No, we did not buy anything.

Mike Neary - Neary Asset Management

Refresh me, there’s 2 million shares authorized to buy?

Michael Stoehr

We have approximately 1.7 million left in the vault.

Mike Neary - Neary Asset Management

Great, thank you very much.

Operator

Your final question comes from the line of Richard Greenberg representing Donald Smith and Company. Please proceed.

Richard Greenberg - Donald Smith and Company

Good morning, guys. Hey Pat, just on your comments on gross margin and hoping to continue to increase that from the 19% current level, could you give us some sense of what your ultimate target would be there and where are you going to get the further increases from here unless you make further high margin accessory acquisitions, but with the current mix of business, how much can you increase it and how’s that going to come about?

Patrick M. Lavelle

We’ve been increasing and our core overhead has been moving up throughout the year. We’ve worked very hard on lowering costs and trying to raise prices in some areas and raise our core business. The natural increase that we will feel, the normal increase that we will feel as the mix changes, as we move into more accessory business will certainly help pull the overall margin up. There is one thing that can put some downward pressure on our margin this year and that is the new acquisition that we’ve done with Thomson is that traditional core CG or consumer levels. Obviously if sales materialize as we expect, that could put some downward pressure on the overall margin but based on what we paid and based on the overhead we’re bringing in, that will still give us a better bottom line, but as the mix changes, the margin will change. We’ve indicated that we thought we could get north of 20% but that’s hard to gauge at this particular point depending upon how much business we do with the new acquisition.

Richard Greenberg - Donald Smith and Company

Okay. I guess what I’m driving at here is once again if you do let’s just pick out the number $730 million of kind of ongoing sales without further acquisitions, and if your expense level is $120 million, it’s going to move up a little from the third quarter level due to RCA, but then you guys are going to be cutting it as to time as you get the synergies. $120 million over $730 million, well that’s a 16.5% operating expense level and if your margins, even if you can get them up to 20% and you’re not even sure you can, that’s only a 3.5% operating margin level so without... It sounds like you really need dramatic further growth in revenues just internal revenues to kind of get anywhere close to your 5% ultimate goal.

Patrick M. Lavelle

Right and I think what you’re going to look at, I think you’re going to see a combination of all three. You’re going to see top line growth, you’re going to see overhead come down as a percentage of sales, and you’re going to see hopefully the margins improve somewhat based on the mix that we will have a full year of sales of accessories where we did not have that last year. don’t forget Technuity is on the accessory side, their margin structure is a little bit better, so we’re going to be working all three sides to get to that 5% target.

Richard Greenberg - Donald Smith and Company

Okay. Thanks a lot.

Operator

Gentlemen, there are no further questions.

Patrick M. Lavelle

Okay, ladies and gentlemen, thank you for calling in this morning and thank you for your support of Audiovox. Have a nice day.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes your presentation. You may now disconnect. Good day.

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Source: Audiovox F3Q08 (Qtr End 11/30/07) Earnings Call Transcript
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