Audiovox Corporation F1Q09 (Qtr End 05/31/08) Earnings Call Transcript

Jul.11.08 | About: VOXX International (VOXX)

Audiovox Corporation (NASDAQ:VOXX)

Q1 2009 Earnings Call

July 11, 2008 10:00 am ET

Executives

Glenn Wiener – IR

Patrick Lavelle – President & CEO

Michael Stoehr – Sr. VP & CFO

Analysts

Jim Barrett – CL King & Associates

Operator

Good day ladies and gentlemen. Welcome to the 2009 first quarter Audiovox corporate earnings conference call. I would now like to turn the presentation over to Mr. Glenn Wiener; please proceed.

Glenn Wiener

Welcome to Audiovox’s fiscal 2009 first quarter conference call. Today’s call is being webcast on our website www.audiovox.com under the Investor Relations section.

With me this morning is Patrick Lavelle, President and CEO and Michael Stoehr, Senior Vice President and CFO. John Shalam is also here with us and will be available during the Q&A portion of the call.

Before turning the call over to Patrick the following Safe Harbor. 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 responsibility to update any such forward-looking statements. The following factors among others may cause results to differ materially from the results suggested in these forward-looking statements.

These factors include but are not limited to, risks that result in changes in the company's core business operations; our ability to keep pace with technology advances; significant competition in the mobile and consumer electronic businesses and accessories 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 numerous statements or other actions. Risk factors with our business, including some of the factor set forth herein, are detailed in the company's Form 10-K for the period ended February 29, 2008 and in our Form 10-Q for the period ended May 31, 2008 which was filed after market close yesterday.

At this time I would like to turn the call over to Patrick Lavelle.

Patrick Lavelle

Thank you Glenn and good morning, welcome to our fiscal 2009 first quarter conference call. Yesterday we reported sales of $144 million, an increase of 12.5% over the first quarter of last year. We also reported a net loss from continuing operations of $5.2 million, both well below our internal expectations.

When I spoke with you on our last call I stated that we anticipated a weak economy and reduced consumer spending would continue to impact our performance in the first quarter. This was true but even more so then we had forecasted, as consumer confidence continues to evaporate. Consumer electronics and accessory sales continue to be negatively affected by the overall slowdown in consumer spending and our mobile group has been impacted by increasingly lower new car sales, particularly in the SUV category where many of our higher margin products are designed to go.

This is not new; car sales have been weaker for quite some time and we have accounted for this in our planning. However the recent surge in gas prices has further cut into sales of the larger vehicles. No one predicted $140 to $145 per barrel at this time last year, or last quarter for that matter. This increase and many other issues have affected consumer buying decisions on all non-essential products. We are not immune to the overall downturn in business which continues to impact not only Audiovox but most consumer goods companies today.

In spite of what is happening at retail we are confident that we will still post in increase in sales over fiscal 2008 but due to the unsettled nature of the markets we are uncomfortable making a formal projection at this time. I will continue to provide updates on future calls as we better understand the pulse of the markets.

Looking at our first quarter performance, electronic sales were $113.7 million compared to $95 million in the first quarter last year. Accessory sales were $30.8 million, down approximately $2.5 million. The increase in our electronic sales is due in part to the acquisitions made last year, higher sales in [core] alarm products to retail and the OEs and increased volumes in our international operations. Accessories were [off a bit] due primarily to the downturn in the economy. As a percentage of net sales electronics were 78.7% compared to 74.1% in the first fiscal quarter last year and accessories were 21.3% and 25.9% for the same period.

Our mobile multimedia products continued to hold leading market shares. The most recent MPD report puts Audiovox and Jensen with number one and number two market share in this category respectively. Additionally, with the XM and Sirius merger nearing completion we expect sales to improve as consumer confidence in satellite radio returns. Every quarter it’s asked, so I’ll reiterate my belief, we do not anticipate any material changes in the satellite radio category this year as it takes time to integrate acquisitions and there are differing technologies in the two companies.

We remain XM’s number one provider of satellite radio products in the aftermarket and as you know have a history with Sirius on the OE level as well. We are monitoring this situation closely and will keep the market informed as things materialize.

On the OEM side, during the quarter we made our first shipment of the GM bi-directional transmitter for vehicles equipped with GM factory remote starters. Mopar has awarded us the contract with their rear-seat entertainment program for Chrysler and this is set to deliver in August. Recently Toyota Motor Sales expanded their program with us to include our new next generation headrest system for their Toyota Sienna. In Europe the 2009 Porsche Panamera, two new 2008 Toyota models and the BMW X5 will all have rear entertainment systems from Audiovox.

In Venezuela we have begun shipment of our car audio system, the [Avayo and Spark], a new contract won late last year. All in all I believe these new programs will help mitigate the weaker car sales and the overall softness in the automotive market both at OEM and also after market.

In consumer electronics we have a number of RCA digital products that are launching during the second and third fiscal quarters. Some of these have been ticked for Black Friday promotions with major retailers such as Wal-Mart, Best Buy and Circuit. MPD has listed Audiovox with number two market share in portable DVD as sales have improved in this category with the shortage of LCD screens abating. In addition we will launch an internet radio under the acoustic research brand to compliment AR’s re-emergence as a high technology product line that will focus on wireless products and high end radios.

Our international sales were up $7.6 million or approximately 48.2% over the first quarter of last year helped in part by the strong euro. However the EU is focused on curbing inflation which may create a greater chance for an economic slowdown in the EU countries. We are starting to feel the impact in our sales though our margins remain healthy at this time.

Of greater concern to me is the skyrocketing cost to do business that has significantly impacted our margins, profits and the sustainability of certain product categories. Despite a modest increase in sales, we reported a loss this quarter primarily due to: (1) a lower top line that did not enable us to realize as much efficiency as we had hoped; (2) [inaudible] cost basis; (3) and our decision to exit the portable nav category. Transportation expense on both international inbound containers and domestic freight has risen dramatically. Fuel surcharges in some cases are as high as 38%. Rising oil costs lower our first gross margin.

In addition, our margins have been impacted by a higher cost of finished goods from our China manufacturers as they [inaudible] with accumulated increases in labor, raw material, fuel related expenses and foreign exchange appreciation. They simply cannot hold the line. I believe these price increases are not the traditional short term or periodic spikes we have when supply is short and demand is high. These increases are likely to be sustained over the foreseeable future and based on that belief we have advised our customer base of an across the board price increase to cover the additional expenses we are incurring in manufacturing and transportation.

The new pricing started to go into effect July 1st, and I anticipate that it will take most of the second quarter to stabilize margins and bring them back to the levels that we have projected. In years past we have exited non-profitable business lines, or ones that do not meet our profitability targets. After taking a long and hard look at industry trends and the highly competitive and mature markets with lowering ASPs, we have decided to exit the portable nav business. Although this has been a growth category in consumer electronic it is not where we see that we can grow market share and meet gross margin targets.

The category is dominated by five companies who combined have a 96% market share and of those five, three account for 88%. These market leaders have been very aggressive in their pricing strategy for Black Friday and Christmas promotions, especially in light of our opening price point making it very difficult. These price moves were made after we spoke last quarter and as I’ve said make it increasingly difficult to meet necessary levels to sustain our position in the category. Therefore our decision to exit now. During the quarter we have taken a $2.9 million charge to [inaudible] inventories of our portable nav equipment and eliminate the expenses associated with the sale and support of these products.

By exiting the business altogether, the impact to our top line is expected to be approximately $15 million annually. Looking at the overall picture, our inventory positions are in line and there is no one product category that we believe is at substantial risk at this time. As I’ve said before, the consumer electronics industry changes rapidly with new technologies constantly arriving and others maturing and even commoditizing. From time to time this market shifting may cause us to choose or limit our exposure or exit business lines like the one we are announcing today. But bear in mind that new technologies also give us opportunities to grow and we expect that to continue.

The state of today’s economy demands that every single aspect of our business be under constant review. We are looking aggressively to find cost savings and productivity improvements and we integrate and maximize the synergies of our recent acquisitions. We have raised prices to help minimize the effect of rising costs and restore or margins. We have eliminated slow moving and marginally profitable products and product lines that put a drag on our margins. We continue to scale back expenses in each of our domestic operations as we achieve the synergies we identified in each acquisition and we are looking at every expense and line item to manage our business most effectively during this downturn.

Our size and product depth is allowing us to make inroads with a customer base increasingly interested in consolidating their vendor partners to reduce their own costs. We have improved our position at retail across the board. We continue to introduce new products with their higher gross margins into all of our lines. Innovative new products remain key drivers of the consumer electronics business and Audiovox as well.

And we continue to investigate new product categories and markets keeping pace with technological developments that might signal the next trend. Our first quarter was weak as we knew it would be. We are very mindful of the concern that higher energy prices will hurt consumer spending which accounts for more then two-thirds of the US economy. And finally as far as our plans for acquisitions we will maintain the schedule I announced on the last call, which is to take most of this year to complete the synergies that drove our acquisitions last year but be prepared to re-enter the M&A market towards the end of the year.

Despite all of the negative economic data and the state of global markets I remain optimistic about Audiovox’s future. We’re not happy with our first quarter results and we do anticipate that the current economic climate will continue to impact our second quarter. I’ve previously announced $8 million in targeted cost cuts with lower sales volumes expected, we are in the process of reviewing our overhead structure and we will make additional cuts so we are positioned to be profitable.

We have a light debt load, a positive cash position and will aggressively manage our business through this uncertain period. I’d like to thank you for your time and support and I’ll now turn the call over to Michael and then we will open it up for some questions.

Michael Stoehr

Thank you Patrick; good morning everyone. I will begin discussing our first quarter and then provide some details on our balance sheet. For the first quarter of 2009, sales were $144.6 million, an increase of 12.5% compared to $128.3 million that we reported in the first quarter of last year. This increase as Patrick noted was a result of higher sales in our electronics group offset by declines in the accessory group.

The accessory sales were $113.7 million compared to $95 million, an increase of 19.7%. The increase was a result of higher sales in our consumer group as a result of, one, sales of the RCA audio video acquisition and increased sales in our regular consumer business and finally increased sales in our security line. These increases were offset by declines in the mobile audio and video groups.

Accessory sales were $30.9 million and declined 7.2% compared to $33.3 million in the first quarter of last year. The decreases in sales were a result of lower accessory sales in the United States and Canada offset by increases of Oehlbach in Europe and our recent Technuity acquisition. Gross margins were 15.6% for the first quarter of 2009 versus 18.1% for the first quarter last year. Our margins were impacted by four major factors: (1) As a result of the review of our portable navigation product line, as Patrick outlined, and also the amount of capital that we would be required to go onto the second generation, we have chosen to exit this product group.

This exit from the nav line required us to take a provision of $2.6 million on the remaining $5.6 million in inventory and an additional provision of $300,000 for tooling and other related costs. This provision represents approximate 2% impact on our margins. Our gross margin adjusting for these provisions was 17.6%. (2) Our vendors raised our prices as a result of their higher labor costs, energy with related costs on production and the devaluation of the United States dollar. (3) Increased costs of inbound freight from vendors to our warehouse locations whether by ocean or air freight; again this was due to higher energy costs. And (4) increased outbound freight costs to our customers as a result of increased fuel charges and as Patrick mentioned, upwards to 38%. We are currently implementing price increases in many of our key product categories to offset the impact of these higher costs.

Operating expenses were $30.4 million for the quarter, an increase of $5.6 million versus $24.8 million last year. Included in overhead were the operating expenses of the RCA audio video, in-car and Technuity acquisitions which were not included last year. The expenses related to all our recent acquisitions, which was accessories, audio video, Oehlbach, Technuity, were $10.9 million for the quarter.

Further our core overhead was impacted last year by the reduction of a call/put liability calculation which did not occur this year. Excluding this benefit the core overhead adjusted for acquisitions was down approximately 3.7%. As a result of the current state of the economy we had a smaller increase in sales then anticipated. The effect of energy costs on our freight expense, increased vendor prices, the discontinuation of the portable navigation line, all of which impacted our margins and finally the increased overhead plan to support anticipated higher sales which did not occur, we reported a loss of $5.2 million or $0.23 a share versus $121,000 of profit or $0.01 a share last year from continuing operations.

On the balance sheet, net cash provided from operation was $25.7 million principally as a result of reductions in accounts receivable, inventory, and vendor receivables. Our cash balances increased to $70 million from $39.3 million February 29th. Accounts receivable turns were 5.5x and inventory returns were 3.7x. Our working capital was $276.3 million which includes and cash and equivalents of $70 million compared to $275.8 million as of February 29, 2008 which includes cash and cash equivalents of $39.3 million.

We also are beginning to have reviewed and continue to adjust our buying in light of the current economic situation. I’ll turn the call back to Patrick and we can begin the questions and answers.

Patrick Lavelle

Thank you Michael. If anyone has any questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Jim Barrett – CL King & Associates

Jim Barrett – CL King & Associates

Could you talk a bit about the pricing you took on July 1st, first of all have any of your customers resisted the price increase?

Patrick Lavelle

Everyone resists, but most everyone knows what’s happening and we’re not the only company that is coming to them now. Everybody tried to hold the position as much as they can but with the cost increases coming from the manufacturing base and the cost to bring products in and ship products around, everybody understands that there needs to be an adjustment. We have started the process in some cases, our contract with customers require us that we advise them and give them 60-days notice for them to accept the increase. That’s why I’m saying it’s taking most of this quarter in order to get the price increases in place.

Jim Barrett – CL King & Associates

Do you expect to fully recover the inflationary costs that Audiovox has experienced with these price increases and can you provide us with a range in terms of what the price increases have been?

Patrick Lavelle

We will recover the increased costs. Our margins—we have very competitive margins within this industry so there’s not anything that we can give up. We will be getting our margin back to where we have projected it to be and where it needs to be. I will refrain from giving you any hard numbers as that is--that could be used against me competitively.

Jim Barrett – CL King & Associates

In terms of your vendors do your contracts with them state that they’re required to give you 60-days notice before taking pricing?

Patrick Lavelle

In some cases yes, in some cases no. We have been working with them to forestall any increases for quite some time. The problem in China is that this is a cumulative effect of a number of different factors that are finally getting to the tipping point where they cannot absorb these increases any longer. You know, when we first heard and we first had our first appreciation where the renminbi went against the dollar, they absorbed it. But when you take it and you keep moving it and the appreciation of the renminbi is about 14% since it started to change, you take that. You take the fuel-related expenses on top of that, raw material expenses on top of that; they just can’t hold the line. And then one of the things the China government did early this year in January, they made law changes that are pushing up labor costs approximately 30%.

Michael Stoehr

Also our inventory is turning so fast that we take the price increases right through very quickly.

Jim Barrett – CL King & Associates

And then finally Patrick, although I think you did touch upon it in that you said you have improved your position in retail across the board, well when I look at the core business in the aggregate have you maintained shelf space, have you maintained listings with retailers?

Patrick Lavelle

Yes, sure, we have not lost any position at retail. There was one program that we had initially knew when we took over the accessory group that would go away and we knew that when we bought the company. Subsequent to that we have added on retail, we’ve recently added a larger retailer to our accessory group that should give them a nice boost but our core business, our consumer business, that core is up over last year primarily driven by the fact that the LCD shortages have abated and we’ve gotten back to more normal sales of those products. But our position at retail is stronger today then it has ever been. We have more SKUs at more retailers, more major retailers, then ever before. So from a retail standpoint I think we’re positioned very well.

On the automotive side, we have more business with the OEMs, and our business with the OEMs are not like what we would see with Delphi or Vistion. These are much smaller programs, these are more niche programs; programs that they do need especially in light of their lower sales, they are pushing accessories. So we are positioned better there as well.

As far as the general after-market whether it be retail or expeditor, our position remains the same so what we really need is a rise in retail sales of either vehicles or retail sales in general to move our products off the shelf.

Operator

There are no further questions at this time.

Patrick Lavelle

Thank you all for calling in this morning. Thank you for your support of Audiovox and I wish you a good day and a good weekend. Thank you.

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