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Audiovox (NASDAQ:VOXX)

Q4 2005 Earnings Conference Call

February 14th 2006, 10:00 AM.

Executives:

Patrick M. Lavelle, President and CEO

Charles Michael Stoehr, Senior Vice President and Chief Financial Officer

Glenn Wiener, Financial Investor Relations

Analysts:

John Bucher, Harris Nesbitt & Co.

Richard Greenberg, Donald Smith and Company

Operator

Good day ladies and gentlemen and welcome to the Fourth Quarter 2005 Audiovox Corporation Earnings Conference Call. My name is Angela and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be conducting a question and answer session towards the end of this conference. If at anytime during the call you require assistance please key * followed by a 0 and a coordinator will be happy to assist you. As a reminder this conference is being recorded for replay purposes and now I would like to turn the presentation over to your initial host of today’s call, Mr. Glenn Wiener. Please proceed sir.

Glenn Wiener, Financial Investor Relations

Good morning everyone and welcome to Audiovox’s fiscal 2005 Fourth Quarter and Year-end Conference Call. As the operator mentioned, today’s call is being webcast from the company’s website www.audiovox.com under the Investor Relations section and a replay has been arranged for those who are unable to participate today. The replay will be available approximately one hour after the completion of the call or by dialing 888-286-8010 and entering pass code 15867938. Fiscal 2005 fourth quarter and year-end results were released yesterday after market close. If you have not received a copy of the announcement you can obtain one by calling my office after the completion of this call or by visiting the company’s website. Additionally, our Form 10-K for the year ended November 30th was filed this morning, it can be found on our website under SEC filings. Now, to the matter at hand, speaking from management this morning will be Patrick M. Lavelle, President and CEO; and Michael Stoehr, Senior Vice President and Chief Financial Officer. Both will make opening remarks before opening up the call for questions.

Before getting started, I have been instructed by legal council to read the following Safe Harbor statements. 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 or uncertainties. All forward-looking statements made are based on currently available information and the company assumes no responsibility to update any such forward-looking statement. The following factors among others may cause actual results to differ materially from the results suggested in the forward-looking statements. These factors include, but are not limited to risks that may result in changes in the company’s business operations, our ability to keep pace with technological advances, significant competition in the mobile and consumer electronic business, relationships with key suppliers and customers, quality and consumer acceptance of newly introduced products, market volatility, non-availability of products, excess inventory, price and product competition, new product introductions, the possibility that review of our prior filings by the SEC may result in changes to our financial statements, and the possibility that the stockholders or regulatory authorities may initiate proceeding against Audiovox and/or and our officers and directors as a result of any numerous statements or other corporate 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 year ended November 30th 2005. Thank you again for you participation, and at this time I would like to introduce Patrick Lavelle, President and CEO of Audiovox Corporation.

Patrick M. Lavelle, President and CEO

Thank you Glenn and good morning everyone. I would like to start today’s call by briefly reviewing our fourth quarter and year-end results while addressing the business and industry issues that have impacted our performance. I will then turn the call over to Michael, who will provide more insight into our financials. Yesterday we reported fourth quarter sales of $156.3 million, which is an increase of about 5% versus the fourth quarter last year. For our fiscal year, however, our sales were up 4% coming in at $539.7 million compared to $563.7 million in fiscal 2004. We reported a net loss per share from continuing operations of $0.37 compared to a loss per share of $0.10 reported in the fourth quarter of last year, and for the year net loss per share from continuing operations was $0.30 compared to breakeven reported last fiscal year.

Including discontinued operations, we reported a fourth quarter net loss per share of $0.46 compared to a net income per share of $3.02 in the fourth quarter last year. Note, however, that last year’s net income included a $3.05 per share gain in the sale of our cellular business. Mobile electronics represented 63% of our sales versus 72% last year. Consumer sales were 37% this year versus 28% last year. Michael will cover our financials in just a few moments, but before he does, I would like to address the inventory write-down taken this quarter to explain why we have taken these charges now and will position us in the future.

The inventory write-down covers three very distinct areas. The largest at 6.8 million relates to discontinuance of certain aftermarket product lines and products. The second represents 2 million and relates to the end-of-life OE products and the third to the normal obsolescence cycles of the electronics industry. Let me cover the largest component first. We have discontinued the Audiovox navigation and Audiovox Rampage and Prestige autosound lines done as part of a long-term plan put into effect when we purchased the Jensen brand. And purchased because we believe that it was stronger than our existing ones in the autosound category. Our business strategy has been to launch our own Jensen products and based on network and consumer acceptance, eventually, move all of our autosound business to the Jensen and Phase Linear by Jensen brands.

In 2005, based on for the successful relaunch of the Jensen brand the prior year, we stopped bringing in new sound products under the Audiovox, Prestige, and Rampage and began closing our existing products. Additionally, the private label programs for Circuit City ended as well. We have essentially completed the closeouts and at this point the only sales under these brands that remain are returns and refer these goods, all of which can only be sold at distress gross margins.

Every year at the CE show in January, manufacturers announce post-polity pricing that sets new floors for pricing. Based on our review of prices after the show it became apparent to us that it would actually cost more to refurnish and handle the remaining inventories in these product lines than it would be to write them down. Newly established selling prices from the competition on similar product will be lower than what we could charged for these discontinued items. As an example, if it takes 35% to handle, refurbish, and ship a product, but its value is only $0.30 on the dollar. It is just not economically wise to refurnish. The same situation exists for our versatile video line.

In Q1 last year, I announced that we would exit the Video-In-A-Bag business as a response to the continued decline in the marketplace. By Q3, we had sold the bulk of our new product inventories and since that time most of our sales had been returns and refurbished models. Now, with post-holiday prices on portable DVD players reaching an all time low, we will be forced to sell the balance of this obsolete inventory $0.30 on the dollar, which simply does not make economic sense. Therefore, we have taken a charge on the remaining inventories of this brand as well as closing out the private labor liquid video program for Circuit City in favor of Jensen. As I said a few minutes ago, 6.8 million of the write-down can be attributed to these discontinued aftermarket products and brands. The second element of the write-down relates to OE products. By their nature, original equipment products have distinct life cycles, as they are developed for a particular vehicle model or particular model here.

At the beginning of 2006, we also evaluated the remaining inventories for several OE products that had reached the end of their life and determined that the remaining inventories would not be purchased by the customer and would have to be scraped or liquidated and finally there is the portion of the write down that relates to the normal obsolescence cycle of the electronics industry. Two factors control that lifecycle, one is technology and the other is relatively new and relates to price erosion by a new form of competition coming from our customer rather than manufacturers. The lifecycle of most consumer electronic products is short affected by technology developments that make manufacturing cheaper and create price erosion. This paves the way for the introduction of subsequent models of the same type of product often with more features and for less money than the original. As a result, Audiovox and many other consumer electronic suppliers write-down product every quarter. This obsolescence cycle is not going to go away. Technological advancements will continue and we are grateful that they do, as new product is the lifeblood of our company.

In addition, in recent years, big-box retailers sourcing products direct under house brands are becoming bigger components of price erosion issues. They bring in product on the direct basis and establish lower opening price points, which in turn effectively lowers all levels in the category. Our gross profit margins for the year were 11.3%, which is off considerably from the past year and well under the targets for our electronics group. Our margins were negatively affected by several factors. The write-down of discontinued brands in OE products, the shift to more consumer electronic sales that are at traditionally lower margins. Low margins on the satellite radio sales of Plug-N-Play unit were almost half the year. Increased trade cost associated with selling more units at lower prices to achieve the same sales targets.

Increases in freight cost to accommodate our growth of larger size LCD TV products and more MDF funds associated with the increase in the big box retail sales. For 2006, we are actively reviewing all operational issues with the intent to further reduce shipping and handling cost and mitigate the effect they have on gross margins. We have hired a new Senior VP of Operations with extensive logistics management experience, who comes to us from a $10 billion consumer electronics giant. We are looking to streamline our operations, force efficiencies, and simultaneously position us for growth.

In 2006, we do not expect to discontinue any brands or product lines. Therefore, we do not anticipate a reoccurrence of the charges taken this year. Also, our new arrangement with XM, which I will cover in a minute, should eliminate a recurrence of the write-downs on our Plug-N-Play systems that were taken in 2005. These steps coupled with new higher margin products scheduled for the second half should help us attain more traditional margins for 2006.

Now, if I may, I would like to address the year. The end of 2005 knowing that the year would be marked by substantial challenges, one of our largest product categories: mobile video was undergoing a major market shift and by the third quarter satellite radio, which had been pegged as one of our growth drivers for 2005 also underwent a dramatic change. We had just acquired Terk and we are working hard to assimilate them in to our marketing and distribution mix and finally we are adjusting to the divestiture of our cellular company and a subsequent changes to our administrative structure. All this in addition to the normal challenges of the consumer electronics business.

Our mobile electronic business, which consists primarily of mobile video, satellite radio, car audio, security, remote start, and mobile accessories at sales of $339 million, down almost 16% from the prior year. This reduction in sales was due primarily to the changes in the mobile video market. Excluding mobile video, sales in the mobile electronics group grew 10% year over year. Mobile video, once one of our biggest growth drivers continues to suffer from the ongoing shift from Video-in-a-Bag systems to lower cost, lower featured portable DVD players and the increased presence of OEs offering mobile video systems as standard equipment, not to mention, with continuing decline in SUVs. The changes in the mobile video marketplace have prompted us to exit the Bag business, and discontinue our versatile video brand so that we can concentrate our efforts on innovative installed video solutions such as our new removable DVD-PC headrest player and smaller footprint overheads that expand sales opportunities beyond SUVs to the new smaller crossover vehicles and passenger cars. We have introduced new headrest systems and overheads including ones with larger screens, not available at the early level and even dual screen overheads.

Customized solutions that should restore margins to more historical levels. Our DVD show product, which you heard a lot about last year, was recently named one of the ten best products by David Pogue of The New York Times and sales of this product continued to grow. As I said before, our dollar sales in mobile, mobile video that is, will not be what they were in the years passed, as the category has changed, but it is still a very viable market and one that we plan to continue to capitalize on. Despite the negatives of the past two years we remained a market leader and have been for five years in a row. We continue to introduce innovative products like the dual screen overhead that just won a CEA design award, our third in three years. We got strong relationships in place with our power retailers, OEs, and the 12-volt specialist. And finally, we expect mobile video to return to more traditional margins in 2006, as we have seen a 7% improvement to mobile video margins in the fourth quarter.

In satellite radio, we enjoyed strong unit sales despite the well publicized issues impacting the category. As you know, in the third quarter, one of our major competitors dropped prices on their plug-n-play units by half, which resulted in us adjusting pricing and taking an inventory write-down of $3.7 million for on-hand inventory. Unit sales for satellite radios were strong, however, we knew that product write-down would impact our fourth quarter sales as we moved through our Plug-N-Play inventories at pricing levels that were half of what we had anticipated and that little or no gross margin.

During last quarter’s call, I also said that we would need to change our business model in this category to mitigate exposure to the volatility of the market and prevent future recurrences, we have done that, and believe we will be able to maintain profitability in this category despite market changes that may occur. The agreement with XM should help us to achieve our goal of becoming the number one supplier of XM products in the aftermarket. We are excited about our product lineup in 2006, and especially with the new XM express Plug-N-Play unit and the exciting XM passport, an Audiovox exclusive.

For those of you who do not know about it, passport is the next generation of XM product. It is approximately 40 times smaller than the original trunk mount XM radio tuner introduced just four year ago and it will let an XM subscriber move the XM service from one passport compatible product to another, allowing them to receive XM satellite radio on many devices with only one subscription. The tiny passport cartridge contains the entire XM tuner needed to deliver XM satellite radio to a wider rate of XM ready products including home stereo, home theatre systems, DVD players, mini/micro shelf systems, car radios, clock radios, and boom boxes. The XM passport is inserted into a docking station connected to the product or is inserted directly into a port built in to the unit. During 2006, a wide variety of passport compatible products will hit the market. For manufacturers like Yamaha, Xenon, Onkyo, Pioneer, Sony, LG, JVC, Samsung, and a host of others and all of these units must use the Audiovox passport.

Car audio proved to be one of the brightest sparks of 2005, as market receptiveness to our Jensen mobile multimedia line was so good that sales in this category more than doubled over last year. At the CE show, we introduced a new series to the Jensen line called Intellicar. These products take advantage of the latest technology such as bluetooth, touch screens, satellite radio, navigation, windows media, iPod, and mp3. As the convergences of impart communications, navigation, and entertainment continues, we expect our Jensen Intellicar products to position us as a dominant player in this category.

In 2006, we will enter the growing portable GPS market with products in both our consumer and mobile electronic lines. Two consumer models will be available in the spring and the mobile unit shown on CNBC during the CE show will be ready in the early summer. All will be XM passport compatible and the mobile unit will double as an XM Plug-N-Play receiver, as well as a GPS unit. We believe the uniqueness of this particular GPS product will allow us to hold margin in a category that is growing very quickly and likely to see consumer electronics light margins as the competition pushes this product to a commodity level. We are expanding our collision avoidance product line as this category also is being catapulted into the media spotlight, thanks to legislation before Congress and that stopping the thousands of childhood deaths. We have a full line that includes backup sensors, rear-observation cameras, and two innovative products; a license plate frame camera and trailer hitch system. Again, this is a niche market, which should give us full margin.

Our 2006 mobile electronics lineup is strong with depth of product and respected brains. We expect to get back to traditional profit levels in this category making mobile electronics the profit driver it has been for most of our history. Sales in our consumer electronics group grew almost 25% year-over-year has we posted the best CE sales in our company’s history. Strong demand for LCD flat panel TVs and our portable DVD players fuel this growth as LCD TV unit sales more than double and according to NPD we achieved the #2 market share position in the portable DVD category.

In LCD TV, the 2006 product lineup features larger screen size. LCDs in 32” and 37” models and new 42” and 50” plasma models introduced at CES, which we anticipate will be in stores by summer. Our success in this program continues to be with regional power retailers and smaller chains again, an example of successful niche marketing. Unit sales of our portable DVD products were up 88% this year and dollar sales were up 38% despite a nearly 25% decline in average selling prices. This is one product category that has really been affected by retailer direct import programs.

Although portable DVDs did represent a growth area for Audiovox in 2005, we are watching this category, as we believe it will have substantial volatility in 2006, as prices continue to erode, particularly on the entry level units. However, to offset part of this volatility, we have structured a new arrangement with our manufacturers, which will share our exposure on product life cycles, price erosion, and returns. And perhaps the most exciting product shown at CES was our brand new and very innovative home speaker concept, Home Decor, which we are marketing under the Acoustic Research brand. Not only does this line mark the resurgent of the AR brand, it is also an independent design concept that we believe will forever change the way speakers fit into a home. The AR brand although respected was virtually invisible in the market when we acquired it from Record-con (phonetic) several years ago. We knew that its relaunch would require a product line with the same high-quality that was the signature of AR for years.

Home Decor meets these criteria as it marries high-performance with high style, fitting into a consumer’s lifestyle whether it is contemporary, modern, traditional, or classical. Response to Home Decor at the CE Show was nothing short of phenomenal. The press swarmed our booth and customer reaction was very gratifying. We are working right now with our retail partners to develop merchandising concepts that will ensure that consumer gets the story at the retail level. The first products are due to arrive in about two months and we expect to see Home Decor at retailers by summer.

To sum up let me say this, 2005 was a transition year were many different business issues were addressed. We rationalized our product lines. We rationalized our product SKUs. We said we would clean up the inventory position to pave way for new product introductions and healthier margins and we believe we are there. We said we would modify our business model in satellite radio and we have. We said we would focus on re-launching the Jensen brand; we did and are very happy with Jensen’s performance and potential, as well as the potential of AR with our Home Decor launch. We built on the Terk acquisition with our recent partnership with XM. We said we would reduce the administrative overhead and we have.

New product introductions have been our hallmark and 2006 will be no exception. All of the products introduced at CES should command higher gross margins, but remember we will place most of these products late in the second quarter with their impact to our numbers coming mostly in the second half. There is potential for Audiovox to grow both organically and through acquisition. Our focus for 2006 is return to the profitability levels of the recent past.

Before turning the call over to Michael, I would like to make one final statement. The Audiovox portfolio of brands is stronger than it has ever been with enough flexibility among brands to virtually eliminate channel conflict. Our fortunes are not tied to anyone category and we have a wide variety of products available in every segment. We are aligned with the right technology partners and manufacturers and have competitive advantages in securing products thank to our sites. Our distribution network is wide and no single customer represents more than 10% of our business. We had realigned our organization to operate more efficiently and are placing a greater emphasis on improving our systems and controls in customer support and finally we begin 2006 with over a 160 million in cash to invest in our business and strategic acquisitions and let me assure you that the search for the right acquisition is ongoing and very active. Make no mistake we are committed to a far better 2006. At this point, I would like to turn the call over to Michael.

Charles Michael Stoehr, Senior Vice President, Chief Financial Officer, and Director

Thanks Pat, good morning everyone. Now, consolidated sales for the first quarter were $156.2 million versus $148.8 million last year. Sales in our consumer group increased 12.7% with $63.1 million for the quarter versus $56 million last year. Consumer accounted for 40% of our total revenue in fourth quarter 2005 versus 37% last year. Sales of our mobile electronics were $93 million versus $92.8 million last year. The increase in consumer sales as Pat has explained was from the higher sales of LCD TV and a strong demand for our portable DVD players. Mobile electronics experienced a decline in mobile video revenue, which was offset by increases in Jensen, Terk, and satellite radio sales.

In regards to the write-down during the fourth quarter, if the post holiday pricing reviews that included information of chains while heading this Consumer Electronics Show, as well as the year-end review of original equipment products and other products. We decided to increase our inventory write-down for obsolescence by $8.8 million or $5.3 million aftertax over our normal quarterly obsolescence reserves for a total provision of $10 million for the quarter or an aftertax charge of $6.1 million dollars. The provision includes charges for discontinued products, discontinued product line, and end-of-life products in various programs.

Approximately $5.2 million or 60% of this increased provision is to write-off inventory, which will no longer be sold through our distribution system. This actually will eliminate the impact of these discontinued products have on the sales of current products. In addition, a portion of the provision is for inventory that will be sold as it is at a reduced price. Gross margin for the fourth quarter was 6.2% versus 16.3% last year. This is a result of inventory provisions of 10 million, Plug-N-Play satellite products sold at cost or close to cost for the reasons we discussed in the third quarter.

Shift in our sales mix from mobile consumer electronics, as our consumer electronics traditionally carry a lower gross margin. Increased rate and range of course that relate to larger size product shipments and an increase in number of shipments. Offsetting some of these negative impacts were improved margins in mobile video, Jensen, Code, and Terk products. Although, mobile video revenue has shown declines, the gross margins improved during this quarter versus last year.

Overhead for the quarter was $23 million versus $29 million last year. This was a result of reductions in salaries, professional fees, and selling expenses including advertising, TV, and tradeshow expenses. In addition, the fourth quarter reflects cost reduction programs put in place at the end of the second quarter. During the fourth quarter, we also wrote down the remaining balance of shares that we held in the Shellsoft Corporation.

The net loss from continuing operations was $8.3 million with a loss per share of $0.37; including discontinued operations the net loss was $10.2 million with a loss per share of $0.46. Included in discontinued operations with the completion of the sale of a Malaysian operation, this created an aftertax charge of $2 million or $0.09 cents per share. For the full year, Audiovox recorded net sales of $539.7 million at 4.2% decrease from $563.4 million for fiscal 2004. Mobile sales were $339 million and consumer sales were $200 million, an increase of 24.9%.

Gross profit margins were 11.3% versus 15.9% last year. This is partial result of lower margin in the early part of the year in our mobile video group and a $16.9 million charge to inventory. The charge was made up of $7.9 million to discontinued products and product lines, $3.8 million charge related to satellite radio as previously discussed and $2 million for end-of-life OE products and a 2.3 million normal obsolescence charge.

The shift in sales for consumer electronics as I mentioned in the fourth quarter also impacted us fiscal year, again as margins for consumer electronics are traditionally lower than mobile. It was a positive impact of margins from Jensen, Code, Terk, and Audiovox LCD TVs. During the last half of the year mobile video sale our margins also showed signs of improvement. Overheads for the fiscal year declined as a result of reduction plan, which began to take effect in the second half of the year.

For the first half of fiscal year 2005, overhead increased by $4.1 million versus last year. For the second half of fiscal 2005, overhead declined $6.7 million versus last year. During the second half of fiscal 2005 expenses declined of course in most categories with professional fees and salaries among the higher amounts. We also had $3 million in expenses associated with the Terk acquisition during fiscal 2005, which did not occur in fiscal 2004. The net loss for the year from continuing operations was $6.6 million or $0.30 per share. Our cash flows show use from operations of $42.1 million. Of this cash use, approximately $41 million was for the payment of income taxes, primarily as a result of the gain in sale of cellular.

Our working capital for fiscal 2005 was $340 million versus 361 in 2004. Impact in the change in working capital was the purchase of Terk for $15 million. Our accounts receivable returns have improved to 4.4 times, inventory returns also have improved from last year, even when adjusted to the write-down. As of today, our cash balance is $162 million versus $123 million at the end of fourth quarter 2005. This is an increase of $39 million. This comes from reduction of inventory balances as our buying programs take effect and also reduction on accounts receivable.

During the fourth quarter, we repurchased 150,000 shares of our common stock for approximately $2 million. Today, we have also announced the change in our fiscal year from November 30 to February 28 and the change in our SIC code. The fiscal year they change will bring up fiscal year aligned with our normal seasonal patterns and will allow a better view over the company’s annual performance. Our quarterly reporting dates will remain the same. The change in the SIC code places us in a more realistic peer group.

We are also pleased to note that the completion of our 404 audit, we had no material weakness and our controls have been defected. Of the results for the actions we have taken this year, we really have a strong balance sheet with strong cash positions. We will not be providing specific financial guidance at this time. However, I would like to make a few statements regarding our expectations for the year. As Pat mentioned, we anticipate that our revenue and profits during the second half of 2006 would be greater than the first half as we begin to realize the impact of new product introductions within both the mobile and consumer segments.

Given the seasonality of our business and considering the due dates for the quarter since change of our fiscal year, we should expect our first quarter ending May 31, second quarter ending August 31, and third quarter ending November 30 to show sequential improvement in our sales margins and profit. Our fourth quarter, which will end on February 28th 2007 will be our slowest. This will also occur this year where our quarter ending December 1 through February 28 will be called the transitional quarter.

We have already taken significant steps to reduce our overhead, however, there is always room for improvement and our new Senior VP of Operations will be looking at a number of ways to make it better. As we move into the third quarter ending November 30th we anticipate our gross margins will return to more historical levels on higher sequential sales. For the full year, we expect to be profitable despite the fact that overall sales will be flat for 2005. We have a number of exciting feature-rich and higher market price across all lines, which have always done, will replace sales of lines that have reached maturity. We believe that we have the right mix that will positively impact profits and place us in a better position for sustainable growth of profits in 2004. Thank you and I am here to address any of your questions, Pat.

Patrick M. Lavelle, President and CEO

Thank you Mike and at this time I would like to open up the calls and take your questions. Please refer your questions to Mike or myself, operator.

Questions-and-Answer Sesssion

Operator

Ladies and gentlemen if you would like to ask a question please key * followed by 1 on your touchtone telephone. If your question has been answered or you simply wish to withdraw your question you may press * followed by 2. Questions will be taken in the order received. Please key * 1 to begin the question and answer session now and gentlemen your first question will come from the line of John Bucher with Harris Nesbitt & Co. Please proceed.

Q – John Bucher

Thank you guys, I would like to follow up on Michael’s comments on expectations for 2006. I understand that you expect to be profitable in 2006 and that you are expecting revenues to be flat with 2005?

A – Charles Michael Stoehr

Yes John, this is Michael. That is correct.

Q – John Bucher

Okay, I am just wondering putting the change in the fiscal year aside and putting 2006 aside, I am just wondering if you can share with us the company’s target financial model, what are your expectations for gross margin, operating margin, and if you can do that also by segment consumer and mobile electronics?

A – Charles Michael Stoehr

John, as we said, we really do want to, we are not rally giving any guidance.

Q – John Bucher

I am not asking for guidance. I am just asking about its for when, I am just asking for what the target financial model is.

A – Charles Michael Stoehr

I am going to come to that, so as I said we expect the margins to come back to positional levels. We expect some reduction in the overheads of the company and that will first cross the lines and that you will see most of the increase in sales and margins in the back half of the year.

Q – John Bucher

Okay, I think in the past you’ve indicated that you are comfortable with a 5% operating margin, again I am not putting any timeline or any calendar or fiscal year purely because is it still a 5% operating margin, the company’s overall target sort of financial model that we should be thinking about?

A – Patrick M. Lavelle

John, how are you, this is Pat Lavelle.

Q – John Bucher

Very good sir.

A – Patrick M. Lavelle

Yes, that is still our target as far as reaching it. Obviously we are looking at placements of the new product that we brought in. It is a little early to tell as to what the sell-through is going to be, but based on historical levels that is our target.

Q – John Bucher

Okay.

A – Charles Michael Stoehr

John, this is Michael again. I just want to just in reference to the next year, we will see where, we are expecting an increase in mobile electronics year-over-year.

Q – John Bucher

Okay, and then now turning to some of the fiscal 2006 specific items. Can you give us an idea whether you indicated some future efficiencies in overhead. What should we expect as far as OpEx expenses year-over-year, should they be flat on an absolute basis and also if you could just give us an idea on what your expectations are for tax rate?

A – Charles Michael Stoehr

Okay, you can look into OpEx expenses being down year-over-year and the tax rate, what you need to do John is when you see the interest income that we pickup that is half the tax, so what you need to do is you subtract that from the pretax line and rate it back depending on what you see and use 35% for federal and 47% for sale.

Q – John Bucher

Okay great, and then finally before I sort of yield before, if you will permit me, Patrick, I am just wondering if you gave a lot of nice commentary about the individual segments and subsegments there in some of the new products. It sounds like every thing is on track for launch in this fiscal year. Can you give us an idea, which are, if you rank order products in terms of profit margin as a percentage contribution? Can you give us a high-level, not going through your whole portfolio, but just by rough subsegment or category of products, give us a field for which are the most profitable or more profitable? Thank you.

A – Patrick M. Lavelle

Okay, our mobile electronics product normally and traditionally has been almost profitable that would be our security products or accessories or backup sensors and things like that. This year, we expect to see a much, much better contribution coming from mobile video, which historically had given very good margins. We expect that our Jensen car audio line should improve as far as the margins that they have given us last year. We are expecting to see 3% or 4% improvement in margins there. The lowest margin contributor that we have in terms of percentage is products within our consumer group, okay, and that we expect to be down a little bit from last year based on some of the price erosion and some of the direct importing that we are seeing.

Q – John Bucher

Okay, thank you very much. I will get back in the queue.

Operator

Again, ladies and gentlemen for any questions please key *1 now. Gentlemen your next question will come from the line of Richard Greenberg with Donald Smith and Company. Please proceed sir.

Q - Richard Greenberg

Good morning guys.

A – Charles Michael Stoehr

Good morning.

A – Patrick M. Lavelle

Good morning.

Q - Richard Greenberg

From the stock buyback, Mike, you know, for a long time we talked about this and you guys have been hesitant, you do not want to husband your cash for the potential acquisitions, has there any change of strategy there, can we assume that you will continue with that, I mean what is your current status on that buyback?

A – Charles Michael Stoehr

Well you know if at some point the price becomes attractive to us we will step-in and purchase as we have done in the fourth quarter, but our game plan is to use our cash, to invest in improving the efficiencies of this company, but also as we have stated many times to find the right acquisition, the right strategic acquisition that to improve our overall margin structure, and that has not changed.

Q - Richard Greenberg

Okay, and just on the acquisition, you guys have been successful in buying kind of out of favor companies at reasonable prices, but I think recently you talked, you know, that may not be possible anymore and it sounds like you may buy more established companies, but there is always a price with that. Is that a correct statement and then, you know, what areas are you specifically looking at Mike?

A – Charles Michael Stoehr

Richard, that is a correct statement, we are looking at a number of different companies and not all of them would be a company that may be distressed. However, let me say this, we will not overpay for any acquisition. So, even though it may be the company that we are looking for, if we do not feel that the pricing is correct, we will pass on it. There are a number of opportunities. There are number of companies that we are engaged with as far as having conversation and I think it gives us the ability to put together the acquisition that we are really looking for here.

Q - Richard Greenberg

Okay, and just back on this whole margin expense issue that we discussed. You know, really if you look at your operating expense level unless I do not use any specific dollar guidance, but let me just pick a number of, $82 million versus the $88 million you did last year. On $540 million of revenues that is about 15%. Now, I think it would be hard for us to say that your overall gross margin is going to be above 17%, may be you can hit that in mobile, as you have in the past, but you assume or you wouldn’t. I am really having a tough time seeing not substantial revenue growth, which you are not anticipating, how you can possibly achieve any reasonable operating margin with this kind of expense level.

A – Patrick M. Lavelle

Okay, well, one of the things that we are looking at this year as we compared to last year, we think we are going to see a shift back to a little bit more mobile electronic business, which should help improve the margins. With that said, we do not anticipate to close out the number of lines as we did this year and those resulting charges. Additionally, we expect improvement in our mobile margins within mobile video, within Jensen, and within our core mobile electronics. So, that coupled with reducing some overhead, we think should put us in position where we will be profitable.

Q - Richard Greenberg

Okay, is it worth on a long-term basis, is it too aggressive to say that overall for the company that the company can achieve margins higher than say 17% or 18%.

A – Patrick M. Lavelle

No, I would…

Q - Richard Greenberg

Can you really achieve margins much higher than that?

A – Patrick M. Lavelle

I think that if we look at our margin structure again based on the mix that we have, we think that eventually we can get to a point north of 18%.

Q - Richard Greenberg

Okay, just one part of the point, you know, you guys have over $17 stated for value, you know, you have paid acquisitions and you assume you are going to get a return on that, so I am going to deal with stated bulk and uptake of the intangible, and if you just say any decent company should be able to earn 10% return on equity, that would $1.70 and I think you guys would be thrilled if you could even get to $1 over the next couple of years. So, is something wrong here, and you really got to be thinking about whether it makes more sense to say, you know do as you did with the cellular division. Hey guys, we think this is a brand value here that somebody else would pay a premium for and we should really think about selling the company, because with this operating expense structure were never going to get a 10% return on shareholders equity, I am not even sure you are going to get a 6% to 7% return on equity. Well, I really think that you guys can keep spinning your wheels and every couple years we are going to be looking at inventory write-downs and destruction of tangible equity through write-downs and goodwill through acquisitions, but it is very hard for me to see you achieving a reasonable return on our equity.

A – Patrick M. Lavelle

Okay, well Richard I understand what you are saying, but when you look at this company, this company is very flexible, we have the resources to do the things that we think could generate good income for this company. The traditional business model that you have seen us in the past does not necessarily mean that we have to operate within that traditional business. We have many opportunities in front of us. We can grow organically, but the acquisitions that we do should change our company significantly and put us in a position where we can generate the type of profit dollars that you are talking about. And these are intent to continue to grow this company both organically and through smart strategic acquisitions, even if it means some of those acquisitions are in businesses that we are not in today.

Q - Richard Greenberg

Okay, thanks.

A – Patrick M. Lavelle

You are welcome.

Operator

Gentlemen you have a follow-up question with John Bucher with Harris Nesbitt & Co., Inc. Please proceed.

Q - John Bucher

I was wondering if you could talk about some of the products, Patrick that you mentioned where you might be able to move to the higher end of your historical gross profit margin ranges. You did mention the portable navigation area. Can you give us an idea, I mean is that still probably going to be, you know, very niche or ain’t it for 2006 or does that become a substantial contributor on the mobile side, and is that one the products that you are alluding to, that categories of products that you are alluding to that could lose profitability? And then just I know you touched on it to my last question a little bit, but if you could also go into some of the specifics. I am guessing that the passport products, which if you could also confirm with us, still on track for a spring launch, does that product again involves maybe a small piece of overall revenues, it should also have higher profit margins, I am guessing?

A – Patrick M. Lavelle

Well in the case of the GPS, at this particular point this year we are looking at being more of a niche, as far as, the differentiator is the fact that it has remained XM Plug-N-Play and GPS, all in one. We believe it will be the only one on the market. It will allow us to be different and therefore hold some sort of a margin better than what we expect to see in normal GPS handheld portables, okay. That is related for the second half of the year. Depending on the placement, which we think will be pretty good, then we have to wait and see the sell-through, and if we are priced aggressively, but enough where we can make some good margin. I think we could have some good success with topline revenue on that item, okay. When we look at, the second part of your question was on what product?

Q - John Bucher

The passport and just other products that might have, you know, come into the higher end of that historical range in gross profit margins?

A – Patrick M. Lavelle

Okay, well the passport will be at the end of the year. Our real increase in XM sales this year will come from our express unit, okay, the express Plug-N-Play, which is doing very well in gaining some very good acceptance and that will be of better margins than we have experienced with satellite radio. Based on our arrangement with XM, we have eliminated a lot of the volatility in this category. I bet it is not that margins that we would normally run mobile product, but certainly because of the back-end cost being eliminated we would be able to hold more of the margin that we are getting.

Q - John Bucher

Okay, thank you very much and then on the final question. Just on the brands that you are discontinuing. You still have the rights to Prestige and Rampage and I think there is one other brand that is also, you still own those rights?

A – Patrick M. Lavelle

Oh, yes we do, Rampage, Prestige, Pursuit these are all Audiovox owned brands.

Q - John Bucher

And then Richard, I think in the previous set of questions, you know, kind of alluded to, you know, the company’s current evaluation and whether brand winner of themselves might be approximating, you know, fairly significant percentage where the market evaluation is. Any thoughts strategically on what you can do, because I think there are other brands that you have also sort of besides the core Jensen brand or other, either whether it is cross licensing deals or selling those brands, any type of thoughts to that?

A – Patrick M. Lavelle

Yes, we are in the process right now of setting up a licensing program that we anticipate that will help generate addition license income on some of the brands that we own. We are in the process of doing that right now. We do have license income and we are expecting that we have a good opportunity to expand that.

Q - John Bucher

Okay, thank you for taking the questions.

A – Patrick M. Lavelle

You are welcome John.

Operator

Gentlemen at this time I have no further questions within the queue.

Patrick M. Lavelle, President and CEO

Okay, well I want t o thank everyone for your interest in joining us this morning. I look forward to speaking to you again and please have a nice day. Thank you.

Operator

Ladies and gentlemen we thank you for your participation in today’s conference. This does conclude the presentation, you may now disconnect. Have a wonderful day.

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Source: Audiovox Q4 2005 Earnings Conference Call Transcript (VOXX)
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