LoJack's CEO Discusses Q3 2012 Results - Earnings Call Transcript

| About: LoJack Corporation (LOJN)

LoJack Corporation (NASDAQ:LOJN)

Q3 2012 Earnings Call

November 1, 2012 8:30 am ET


Randy L. Ortiz – President, Chief Executive Officer and Director

Donald R. Peck – Executive Vice President and Chief Financial Officer


William J. Dezellem – Tieton Capital Management, LLC

Chris Owen – Plaisance Fund

Bobby Melnick – Terrier Partners LP

William J. Dezellem – Tieton Capital Management, LLC


Good day ladies and gentlemen, and welcome to LoJack’s Third Quarter 2012 Financial Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to [Scott Delman]. Sir, you may begin.

Unidentified Company Representative

Thank you Kevin, and good morning everyone and thank you for joining today’s call. This will be archived on LoJack’s website www.lojack.com. The call is hosted by Randy Ortiz, LoJack’s Chief Executive Officer and President and Donald Peck, Chief Financial Officer.

Randy will review LoJack’s operations and recent achievements. Don will review the financial highlights for the quarter and update you on the Company’s full year 2012 guidance. Randy will make some closing comments about the Company’s future growth initiatives, and then we will open the call for your questions.

During the call, management will make reference to adjusted EBITDA, non-GAAP net loss, non-GAAP net loss per share, these metrics that are non-GAAP financial measures which the Company believes helps investors to create a meaningful understanding of changes in LoJack’s core operating results. And then also help investors who wish to make comparison between LoJack and other companies on both a GAAP and a non-GAAP basis.

For more information on the GAAP, non-GAAP financial measures, please see the table for reconciliation of GAAP results to non-GAAP measures included in this morning’s earnings release. The table has more details of the GAAP financial measures that are most directly comparable to non-GAAP financial measures and the related reconciliation between these financial measures.

Also any statements during this call that are not statements of historical fact or forward-looking statement. These forward-looking statements are based on a number of assumptions that involve risks and uncertainties. Accordingly actual results could differ materially. For further information regarding the forward-looking statements and factors that may cause such differences please see the warning regarding forward-looking statements on our Form 10-K for the year ended December 31, 2011.

With that, I’ll turn the call over to Randy Ortiz.

Randy L Ortiz

Okay, thank you Scott and good morning everybody. We appreciate your joining us for today’s conference call, so let me start by briefly reviewing our financial results. As Scott mentioned, Don will provide a detailed look in just a few minutes.

In the third quarter, LoJack generated revenue of $32.7 million, this was driven primarily by U.S dealer business. Now adjusted for some non-recurring deferred revenue recorded in Q3 of last year, revenue was up 6% year-over-year. And as a result of continued supply chain and manufacturing efficiencies, our Q3 gross profit margin increased to 55.4%, 390 basis points ahead of the same period in 2011.

The U.S. retail automotive market grew 17% in the third quarter, while the LoJack dealer business posted growth of 11%. The 6 point difference marks a significant improvement over prior year results when the GAAP was 14 points. And based on our October numbers, the fourth quarter of 2012 is off to a very strong start as we are making progress toward not only matching the industries performance, but exceeding it.

Units per selling dealer increased 16% during the third quarter, reflecting the strong performance of our strategy to increase penetration of the top volume U.S. dealer groups. Agent sales performance continue to be a strong contributor to growth as well, with a 25% year-over-year growth this quarter.

Now let me give you a closer look at the revenue story for the quarter as well as some of our growth initiatives. On a macro level industry trends were favorable in the third quarter, which also contributed to our domestic volume growth. Pan Am consumer demand continues to be a driving for us behind the auto industry recovery. Selling prices have remained relatively stable. Our manufacturer’s incentives have stayed relatively low.

For the full-year, analysts are projecting 2012 retail volume around 11.8 million units, which would be 14% ahead of the 2011 pace. Market share changes in the domestic market continued into the third quarter, with no surprise Toyota and Honda continuing to outpace the market in year-over-year growth, which can have a favorable impact on our business as you know.

We expect brand sales variability to moderate being in quarter four and we will continue to focus on growing our sales on all brands and all models in order to mitigate the impact of unanticipated market share shifts similar to what we experienced last year with the natural disaster in Japan impacted specifically Toyota and Honda.

Our pre-install business as a whole is growing nicely. In fact the total number of dealers participating in the pre-install program is up 70% year-to-date. This program delivers significant value to dealerships and consistent with our goal of improving the LoJack consumer experience at the dealership and provide a growth platform generating long-term value for the dealer, while building on the outstanding brand recognition we have in the marketplace.

Further more, our emphasis on large accounts is really starting to take shape. As you know, we reorganized our U.S. sales team in July to reflect the leverage provided by the largest accounts in the country. Over the past three quarters, we met with many of these industry leaders, reacquainted them with the LoJack brand, introduced ourselves as a new management team and talked in-depth about how LoJack can fit into their organization objectives.

For me, these meetings have reinforced the value of our strong brand, the value we deliver to consumers and the important economic contribution we can make to the business performance within these key accounts. The engagement with the largest volume retailers that I’ve outlined together with the strong pre-install value proposition and improved dealer training, strong sales support and consumer marketing are going to provide additional support to increase penetration within the large account segment.

We have a solid platform for growth within this segment as we are currently doing business with 62% of the top 125 dealer groups. Now industry dealer side we are working hard to organize our sales team around understanding and communicating LoJack’s core strengths, an outstanding brand, unique integration with law enforcement, a broad distribution network that encompasses 28 states and 30 countries and a product that is by far the best technology for stolen vehicle tracking and recovery.

Our goal is to leverage the extraordinary recognition and trust in the LoJack brand. And we will do that by developing new products to delight our customers, broaden our relationship with the consumer, and of course the dealer and build on our brand attributes of safety, security and protection.

Our one new product that we expect will increase our domestic growth and expand our brand positioning in the quarters ahead is the LoJack total recovery system. This comprehensive product combines the benefits of our core stolen vehicle recovery product with additional layers of security that includes protection against identity theft as well as LoJack for laptops.

Nearly 60 dealers are participating in an initial pilot; the total recovery system program in Texas and in California. And the product is being well received by these partners. The average attachment rate which measures the number of total recovery system packages sold as a percentage of LoJack unit sales is more than 50% with the top selling dealers averaging an attachment rate of greater than 70%.

We believe TRS has a potential to be a very successful initiative for LoJack in expanding the brand appeal as well as providing our dealers with compelling consumer offer.

Second, during the past year we’ve introduced new sales training initiatives to guide our sales force in working more cooperatively and effectively with the dealer community, that is showing dealers how LoJack’s value-added products and services enable them to be more successful. The next step for the TRS pilot is an expanded regional launch planned for the first half of 2013.

We believe the total recovery system fits nicely with our philosophy of working with our customers to maximize the return on their investment by purchasing tangible value added products sold through the F&A office which as I've mentioned on previous calls, is a major profit center for the dealership. The success of that targeted sales initiative is reflected in our higher penetration per selling dealer and the growth of our agent business.

Another significant growth opportunity for LoJack is in our commercial business. In the third quarter, unit volume of our commercial business was up 23% year-over-year as we continued to gain sales traction with commercial customers.

Our self powered stolen vehicle recovery system for construction equipment continues to garn national attention. In fact the product was recently recognized as one of the contractor’s top 50 new products of the year by the readers of Equipment Today magazine.

Now let me turn to the international business, where the picture is more uncertain of course in our domestic operation. Ongoing import restrictions in Argentina along with a widening economic crisis in Europe continue to adversely impact the business.

International revenue declined 20% in the third quarter. Our Argentinian licensee has made significant progress to resolving the trade barriers in preventing the importation of our product there, although we cannot confidently predict that those restrictions will be lifted before the end of the fiscal year.

Just to put the issue in context, we had anticipated increased demand for our product in Argentina, would have allowed us to ship more than 10.7 million of product we delivered there last year. In his remarks, Don will explain this issue in the context of our full year 2012 guidance.

Now one bright spot on the international map is Italy, despite a steep decline in Italian automobile registrations in Q3, subscriber base for our stolen vehicle recovery product in Italy increased to almost 26,000, up 46% from the same period in 2011.

Before turning it over to Don, let me discuss our recent settlement of the California wage-and-hour class action litigation against the company. It was announced two weeks ago the company has agreed up to $8.1 million to resolve all remaining claims associated with this litigation. This amount is significantly less than the $30 million that we have previously estimated as the upper hand of possible loss in this case. This agreement puts a long standing issue behind us, certainly protects the strength of our balance sheet and liquidity resources. And as a result, I believe we’re better positioned to focus on new business opportunity and improve our long-term financial performance.

So with that, let me turn it over to Don to take you through the financials.

Donald R. Peck

Thank you Randy and good morning everyone. As I review our third quarter financial results today, all comparisons will be to the third quarter 2011 unless otherwise noted.

U.S domestic revenues increased 1% over the same quarter last year. When we reported our third quarter results last year, I mentioned to you that a change in accounting standards led us to accelerate the recognition of a portion of our deferred revenue related to our early warning product that had a positive impact of $1 million of additional U.S revenue in the third quarter of last year. We did not have a similar adjustment in the current year. Removing the effects of this 2011 adjustment, our U.S revenues grew 6% in the third quarter of 2012, as compared to the same quarter last year, and an 11% increase in domestic dealer unit volume.

Our average revenue per unit decreased 4.6% between periods, as a greater proportion of our installations in the current quarter were installed using our preinstalled model versus the same period last year. As to be expected, our preinstalled product is sold at a lower price to our dealer customers than those units installed one at a time.

As Randy mentioned, our commercial unit continues to outperform posting a 23% increase in unit volume during the quarter over the same period last year. International licensee revenue declined 23% to $6.8 million from $8.8 million in the third quarter of last year.

The majority of this myth relates to our business in Argentina, were import and currency restriction persist. We have shipped no units to Argentina since January. We continue to work closely with our Argentine licensee and in its effort to petition the government to allow the importation of our product, but to-date our licensee has not received the okay to import. At this point, it appears the importation issues will most likely remain unresolved until early next year.

The variation in timing of orders from our Ecuadorian and Peruvian licensee accounted for the remainder of the reduction in last year’s volumes. As we have discussed for several quarters, variations in ordering pattern of our international licensees are expected to continue. This will continue to affect both revenues and gross profit percentages on a quarterly basis.

We continued with the delivery of unit to our Brazilian licensee during the quarter. Also as expected our shipments to South Africa accelerated from the second quarter to the third quarter of this year and we expect it will continue to accelerate in the fourth quarter of this year. Revenue from our Italian operations increased quarter-over-quarter despite the economic difficulties there. In fact revenues grew 11% in the same period last year.

Our subscriber base has climbed almost 26,000 from 24,280 at the end of the second quarter, and 17,800 at the end of the third quarter last year. Revenue related to our all other segment increased by $303,000. Our SCI cargo business increased 43% to $981,000, while our SafetyNet business increased 24% to $45,000.

In total, our revenues in the third quarter of 2012 was $32.7 million up from $31.7 million in the second quarter of this year and down from $34.5 million in the same quarter last year.

Consolidated gross profit as a percentage of revenue was 55.4%, up from 51.5% in the same quarter last year and well ahead of our corporate goal of 50%, reflecting continued supply-chain and manufacturing efficiencies, which reduce the manufacturing cost of our product as well as a shift in our product mix among our international licensees.

2011 third quarter adjustment to accelerate Early Warning deferred revenues and related costs last year also brought down our third quarter gross profit in that quarter by approximately 72 basis points.

Looking now at operating expenses, putting to one side the charges related to the California wage-and-hour class action litigation, which were taken this year and last year. Our operating expenses were $17.8 million this year, an increase of 6.5% from $16.7 million in the same quarter last year. The increase was due primarily to personnel costs with new hires mainly in domestic sales and operations.

Outside legal expenses were up slightly from the same period last year and totaled $1.4 million for the quarter. As we reported, we have now reached a tentative settlement with the California wage-and-hour litigation, while we expect there will be continued activity and expenses as the settlement in new agreement proceeds towards final approval. We do not believe our legal expenses related to that case will be as expensive as they have been.

In contrast, we have a hearing date in the liability phase of the Brazilian licensee arbitration set for March 2013. As a result, we do expect to have significant upside legal expenses related to that case over the next couple of quarters as that matter moves toward resolution.

During the third quarter of 2012, we recorded a $6.9 million provision for our recent settlement of the California wage-and-hour litigation or $0.40 per diluted share. During the third quarter of last year, we recorded a provision $1.6 million or $0.09 per share related to the same set of Class Action cases. We have identified these charges separately on our quarterly income statement as well as in our reconciliation of net loss to adjusted EBITDA.

Our operating loss for the third quarter was approximately $6.5 million compared to an operating loss of $492,000 for the same quarter last year, driven mostly by the difference during the period of the provision for the California legal settlement.

We had adjusted EBITDA of $1.8 million in the current quarter as compared to adjusted EBITDA of $3.1 million in the third quarter of last year, primarily due to lower volume and higher operating expenses partially offset by a higher gross profit percentage.

In other income and expense, during the third quarter of the 2012, we had $229,000 negative valuation adjustment in our investment in Absolute Software common stock due to the reduction in the market price of their stock, down from a $348,000 negative valuation adjustment in the same period last year.

Our foreign exchange gain or loss for the quarter went from a loss of $622,000 last year down to a loss of just $14,000 this year. This exchange gain or loss relate to the impact of currency fluctuations on our inter company balances mostly euros and Canadian dollars, which are – we are always looking to minimize.

Income tax expense for the third quarter of 2012 reflects a provision for our Irish subsidiary.

Net loss in the current quarter was approximately $7.3 million or $0.42 per share compared to a net loss of $1.8 million or $0.10 per share in the third quarter of 2011. Without the provisions, the settlement of the California litigation this year and last, we would have recorded a $0.2 loss per share this quarter, compared to a $0.1 loss per share in the same quarter last year.

The company had positive cash flow of $4.1 million in the current quarter. Our $7.3 million of net loss included the provision of $6.9 million for the settlement of the California litigation. We’ll pay the bulk of the settlement once the court provides final approval, which we expect will be some time in the middle of next year.

We also had approximately $1.45 million of non-cash stock based compensation and depreciation. Balance sheet changes had a $3.3 million positive effect on operating cash flow, as accounts receivable and inventory on hand decreased last quarter. We had capital spending of $1.1 million during the quarter, as we made additional investments and technology licenses and in computer equipment.

Our Canadian debt increased by $698,000. We did not purchase any shares of LoJack’s stock on the open market during the quarter, 1,281,613 shares remain in our Board approved repurchase authorization.

Our cash and cash equivalent balance on September 30, 2012 was $45.6 million, compared to $49.6 million at the end of last year. As of September 30, 2012, we had approximately $13.4 million of debt outstanding against our Canadian credit agreements with borrowing availability of another $9.9 million on the revolving line of credit. We are in compliance with all financial covenants.

Stock based compensation in the quarter was $457,000. Depreciation and amortization was $1 million during the quarter.

Turning briefly now to our year-to-date performance our domestic revenues improved 10% during the first nine months of the year with our U.S. dealer volume up 8% and our commercial volume up 55%. The lumpiness of our international revenues and the effect of the Argentine import restrictions were evident during the first nine months of the year with our international licensee business so far this year down 25% over the same period last year. The revenue from our Italian subsidiary was up 10% for the first nine months of the year.

Our gross profit percentage for the first nine months of 2012 was 54% or 320 basis points better than our performance during the first nine months of last year. 120 basis points of that improvement was due to the gross profit realized in the transfer of extended warranty contract liabilities during the first quarter of 2012 with the other 200 basis points of improvement resulting mostly from product mix as well as supply-chain and manufacturing efficiencies.

The increase in our operating expenses excluding the provisions for class action litigation settlement went from $51.4 million last year to $55.1 million this year, which relates mostly to increased personnel costs as well as an increase in year-to-date consulting and outside legal expenses, partially offset by decrease in depreciation expense.

With regard to our guidance for full-year 2012, we’re adjusting our guidance to – based on the complements of factors affecting our business in the fourth quarter. As we noted in our three previous earnings calls, the growth in the U.S retail automotive market has sub-strengthened our domestic revenues. International revenues have remained volatile particularly in light of Argentina’s trade restriction.

At this point, we do not expect the Argentina import issue to be resolved before year-end, but we hope that we will have a clear pathway to ship product to Argentina and meet the continuing demand for LoJack product there probably in the new year. To give some further context, during 2011, our shipments to Argentina totaled $10.7 million for the year with $7.7 million of those shipments occurring in the fourth quarter of 2011.

For full-year 2012, we reaffirm our expectation that domestic revenues will be higher year-over-year positioning us for growth in the U.S revenues this year and beyond. However, while we expect increased shipments to our South Africa licensee during the fourth quarter, we did not expect them to be sufficient to offset the postponement of sales to Argentina, particularly in the fourth quarter, which has historically been our most active quarter of shipments to our major international licensees.

Therefore, we are reducing our revenue guidance for the year and currently expect that our 2012 full-year revenues will total between $132 million and $134 million. In addition, we expect full-year 2012 adjusted EBITDA will total between $5 million and $7 million. While we are disappointed in this revision to our projected 2012 performance, the growth in U.S revenues combined with the expected resumption of shipments to our Argentinian licensee early in the New Year positioned us well for a successful 2013.

With that, I will turn it back over to Randy.

Randy L. Ortiz

Okay, thank you, Don. Looking ahead, we're focused on extending the success and growth of our domestic business as Don pointed out by enhancing the awareness of our brand with the consumers to the productization and marketing of our pre-install program.

As I noted in my opening remarks, this business is off to a very strong start in the fourth quarter. Our goal simply put is to more fully leverage the LoJack brand promise of safety, security and protection through new products and services that expand our relationship with the consumers, enhance the ability of our dealer partners to grow their revenue streams and broaden our offerings in the complimentary applications and markets where we believe we can create a strong competitive advantage.

Our strategy is designed to enable LoJack to achieve long-term profitable growth. And the most effective way to do that is by leveraging our technology leadership, certainly our relationship with dealers and law enforcement agencies and our exceptional brand recognition. And I believe the initiatives I’ve discussed today, will do just that.

So with that Don and I will be happy to take any of your questions. We turn it back to the operator.

Question-and-Answer Session


(Operator Instructions) Our first question comes from Bill Dezellem with Titan Capital Management

William J. Dezellem – Tieton Capital Management, LLC

I go on through a long list that coming off please. But first of all, the average attach rate of the total recovery system you said was 50% what does that mean? Are you saying that 50% of the cars that are sold at the dealers that are under the beta?

Randy L. Ortiz

No, Bill, this is Randy. What are we saying is that the 50% of the LoJack units sold have an attach rate of the identity theft recovery and the LoJack for laptops of 50%.

William J. Dezellem – Tieton Capital Management, LLC

That is helpful. And would you help us understand the revenue impact – just help us walk – I guess help us understand the financial model of what the total recovery system does to a LoJack sale?

Randy L. Ortiz

Again our revenues from the dealer are some what higher, not substantially higher. What they charge the ultimate consumer is up to them.

William J. Dezellem – Tieton Capital Management, LLC

Thank you. And then let me shift to the agent business for a moment. You said, that business was up 25%, if we heard correctly on the call. Would you please dive into some more detail surrounding that? It sounds like success, for us please.

Randy L. Ortiz

Yeah I guess the – what I would point out Bill, we’ve reinforced this on several calls. It’s just our continued effort to go out and forge relationships with the agents out in the marketplace. So we’ve continued to do that. In one agent group in particular, Portfolio Express sales has really done a good job for us in particular on the west coast which is obviously stronghold for LoJack, and given us access to some dealer groups and we didn’t have access to before.

So this is just basically a model of working together with these agents, so we said that in many ways, control access to the dealerships leadership team, the decision makers, business office that in fact we didn’t have access to before. So they offered LoJack as one of the portfolio products as opposed to dealing LoJack as competition to the products they sell in the F&I office. Remember we compete for the consumer share-of-wallet and obliviously, if we are not working with some of these agents, once again, they view us as competitors. So, just a combination of some continued hard work to expand those relationships.

We actually brought in an additional head on the agent business to handle the development of our East Coast operations and that just happened basically a couple of months ago. So it’s a priority of mine to continue to grow that business because certainly with our focus on the largest dealer groups, some of those groups are by-and-large, the access is controlled by these agents. And so we need to work with them and not in many instances in the past compete with them.

William J. Dezellem – Tieton Capital Management, LLC

Thank you. And then you had mentioned, I believe the number was 62% of the top 125 dealers you are doing business with today. How does that number compared to say Q3 of a year ago, what percentage of the top 125 were you working with then?

Randy L. Ortiz

Yeah, generally, we haven’t really tracked that closely, Bill, because quite frankly we are looking at those dealerships on a couple of different definitions the least of which is those that would do 100 plus on the preinstalled front. So we don’t have the specific apples-to-apples comparison for you, but certainly it’s an initiative that we are growing every single month.

And I would tell you too, some of these dealers that we do business with, I wouldn’t characterize as being actively involved with LoJack, hence one of the reasons we pursue the preinstalled platform because in my view the preinstalled approach is a way for us to have a ongoing dialog in relationship with these dealerships at the post triumph zone, the sales team trying to sell them one at a time. That really allows frees up because of the commitment the dealer makes to focus on the sales initiatives and the education of the LoJack value proposition with the sale consulting to the dealership and of course the people in the business office.

So we don’t have the specific apples-to-apples comparison from a year-ago, and quite frankly this as we’ve shared, there was a different focus a year ago that was much more fragmented and wide spread to all dealer groups, not just to focus the top line dealer groups.

And just to add one more comment to that. In my view, before going to be involved in the changing phase of retail, we have to be better partners with these larger dealer groups, because in a lot of ways, they are the ones that are investing in new initiatives to interface with the customer and in a different way. They will be the ones that drive the change in automotive retailing, and once again as they move toward fewer and more streamlined menu in the F&I office, having the LoJack preinstalled on the vehicle ensures us that we are in the discussion when the customer hits the F&I office.

And hopefully we’re into discussion further upstream when the customers researching vehicles with a specific dealer and in conversation with the sales consultant. So that’s the logic behind the strategy and of course to be fully transparent we will continue to report on that growth basically from strategy inception, because it’s difficult to compare from a year ago.

William J. Dezellem – Tieton Capital Management, LLC

Thank you. I appreciate that detail. And one final question and then I will hop back in queue. And that is South Africa, I believe in the opening remarks you've mentioned that that country’s licensee shipments have accelerated and you expect them to accelerate further in the fourth quarter. What is happening there and why are you seeing the shipments accelerate?

Donald R. Peck

This is Don. It is part of a normal ordering pattern, but also that sector has had recent success in expanding their market. So they are demanding more units as well both good news.

William J. Dezellem – Tieton Capital Management, LLC

And so the expanding market, well clearly they’re expanding too. Is that within the country or to neighboring countries, what are you referring to?

Donald R. Peck

It is within the country and it's a result of some direct marketing initiatives that they have undertaken recently.

William J. Dezellem – Tieton Capital Management, LLC

Great, Thank you both.

Donald R. Peck

Thank you, Bill.

Randy L. Ortiz

Talk to you later.


(Operator Instructions) Our next question comes from Chris Owen of Plaisance Fund.

Randy L. Ortiz

Good morning, Chris.

Donald R. Peck

Hi, Chris.

Chris Owen – Plaisance Fund

I'm wondering if you could just talk about your international business outside of Latin America and is there a way to look at how it's growing and obviously, sequentially the business increased which is normal and but if you excluded Argentina and Peru and Ecuador, as well as Brazil, is that the – are those the key issues there?

Donald R. Peck

This is Don. Yes, they are. The other geographies were about flat from last year.

Chris Owen – Plaisance Fund

Okay. And then you’ve spoken in the past about making International more predictable. Can you comment on any progress or potential solutions there?

Donald R. Peck

I would just say this Chris, is that, the way we'll ultimately make it more predictable is by implementing a market representation strategy that fundamentally changes and expands our footprint in the international markets because certainly as you well know, I mean, the markets of Argentina, Brazil, South Africa, by-and-large drive the business and of course Europe right now is obliviously being depressed by the economic lows there. So not a lot of good news coming out of Europe other than early in the year, we got some – a little bit on an uptick from our Tracker UK licensee.

But for us, it’s a longer term strategy of expansion and then looking at right market representation footprint Pan-European, Pan-Latin America, Pan-Asia-Pacific over time. And that’s longer term future work that is one of the key work streams of our corporate development department. It’s certainly one that we’ve already undertaken. And that’s the way we’ll make it more predictable, because at this point in time, obviously, it’s – and you have the distribution spread out with few players when you have an issue like Argentina, it certainly has a significant impact on our international business.

Chris Owen – Plaisance Fund

Great. And then turning to the domestic business, it sounds like you are – although you grew this quarter, you are a little disappointed in the volumes, but the fourth quarter has started off well. Can you talk about – there is also a kind of release to that brand rotation, can you sort of help us where you are in terms of your volume progress in the U.S.?

Randy L. Ortiz

Yeah, so I would say this, give the fact that we put the company to the largest sales reorganization in the history of the company as recently as July. I wouldn’t tell you that I’m disappointed, quite frankly, I am very optimistic based on the third quarter results, and we continue and make good strides closing the gap against industry. And based on when we started October, I said, I mean our goal is to match and exceed industry performance, which I believe we’re on course to do.

The issue for us with respect to brand rotation, I think by and large resides specifically with Honda, less so with Toyota and parcel that was the loss of one very large preinstall account early in the year to a competitor that we’ve recently recovered. And then, with respect to Honda in particular a combination of it taking longer than anticipated to I guess reenergize our business when the inventory was being replenished and also a slight uptick in leasing in Honda, which generally speaking is not necessarily good for LoJack.

And then the feedback we got from our field organization is also the impact that some other variable marketing programs have had on our business, not the least of which are on a characterizing industry as steer step incentives, which are very, very lucrative, volume driven incentives which are just gets the dealer focused on moving the volume through the dealership and making sure they close deals very rapidly as opposed to maximizing the PVR in the F&I office.

So the view from the field is that’s having an impact on the Honda business. And Honda has been running some very aggressive steer step incentives for the good part of the second and third quarter. So the good news is, is that as we focus on these large dealer strategy and I think what you are going to see in the fourth quarter is some significant catch-up and brand the rotation. But there is no doubt that the Toyota and Honda brand rotation, while it had some beneficial impact, we haven’t kept pace with their market growth.

Chris Owen – Plaisance Fund

And then the improvement in October will that relate to an improvement in Honda or just business ex-Honda?

Randy L. Ortiz

Business across the board quite frankly and probably will reflect our focus on large volume dealer groups and certainly some early success in our pre-install strategy.

Chris Owen – Plaisance Fund

Okay. And then perhaps finally, you’ve been at the company for nearly a year now. Can you sort of give us the big picture, it sounds like you’ve clearly have accomplished a lot in the sales reorganization, but where do you see your key accomplishments and what do we outside the company perhaps dealt to have recognize?

Randy L. Ortiz

Yeah, great question. I would tell you this. it’s – getting the company focused on a very specific strategy that connects us to the – for lack of a better description, the connected car ecosystem and focusing LoJack on its auto industry roots and reinforcing our brand attributes of safety, security and protection, looking to develop the domestic business, first and foremost as a real move to stabilize the company and obviously stabilize it and then move it forward and start to grow it again.

The implementation of a pre-install strategy, which quite frankly will be the platform that we will use as we replenish a cycle plan that we’ll enhance our product offerings based on our solid foundation of stolen vehicle recovery. So if you’re thinking about an opportunity to grow products and services as we look into other opportunities in the telematics space, there is no question that we need a platform to operate from.

Having the LoJack device on – in a pre-install strategy on the vehicle allows us to enter into additional dialogue with dealers as opposed to going out every single time and selling a new product and service in a one-off fashion.

I would also tell you that I’m pleased to – taken the steps to develop an actual corporate development office to help us with our strategic vision and ultimately the tactical deployment of the plan. And so the plan you will go something like this, taking our brand positioning, developing new products that people want and value, so we can extend the LoJack brand globally.

Secondly, making sure we’ve got the right distribution channel and the right market representation foot print both domestically and internationally. And then, last but not least, taking a look at how we properly allocate our capital to stabilize, grow and then transform the business.

And that’s easy to say tough to do, and I think we've made some very, very big strides into organizing this place till you go tactically deploy that strategic vision, which is being an integral part in the connected car aftermarket and that is a large and growing business by all accounts the connected car business is a $30 billion business today and growing. And we think there is a very significant roll for LoJack in that future, but it starts with us absolutely strengthening our position in the U.S domestic market and then working to reconfigure and stabilize and grow our international business.

So make no mistake about it, step one was to get the domestic business sorted out and start to grow again. And all the while not ignoring international, but making sure that we get the right market rep plan in places well. I will also tell you that one of my goals coming in was to remove the cloud of litigation hanging over this company. And the two biggest clouds obviously were the California wage-and-hour case, Rutti I and Rutti II, and of course the ongoing litigation with our Brazilian licensee.

We have accomplished one and as you know on an active dialogue with our licensee in Brazil to look to settle that situation before arbitration gets finalized in the first quarter of next year. We made a lot of progress there, when I came to the company the whole dialogue with this licensee in an outstanding debt of over $1 million and he was not placing any orders. We’ve had numerous face-to-face meetings, ongoing dialogue, and we will be meeting with them again shortly.

And so basically paid off is principal debt for LoJack and is in process of paying down interest in penalties on that debt. And then as Don mentioned, he is actively ordering VLUs again, which is obviously helpful when we have the lumpiness of the Argentina situation.

Chris Owen – Plaisance Fund

Great. Thank you so much.

Randy L. Ortiz

You are welcome.


Our next question comes from Bobby Melnick with Terrier Partners LP.

Bobby Melnick – Terrier Partners LP


Donald R. Peck

Good morning.

Bobby Melnick – Terrier Partners LP

Someone new to this story so, if these questions or comments reflect ignorance, apology preemptively, just a quick clarification. The EBITDA guidance prior to today was what for 2012?

Donald R. Peck

Sure our guidance before today was that our EBITDA as a percentage of revenue would be similar to what it was last year.

Bobby Melnick – Terrier Partners LP

Okay so using the $145 million to $151 million, it would have been around $11 million, is that fair?

Donald R. Peck

That's fair.

Bobby Melnick – Terrier Partners LP

Okay, so my question is this. I am not doubting you sincerity, I am not doubting you optimism, and I am not doubting your conviction that you believed that sales would have been up 3% to 7% which is what you said back in August. I guess, what I am observing is that, the visibility of sales for your company like for a lot of companies is not quite as high as the visibility for expenses which is to say, you have a reasonable assessment of what your expenses are and off times you find your self unfortunately clueless about what your sales will be.

And I guess given that context, my question is the following. Why is this company committed and wedded to a $70 million or $75 million cost infrastructure, specifically, if you go back and again I'm new to this story so I don't know all the ins and outs of your business, but when I go back and look even at a cursory glance, back many, many years ago when the company was very, very profitable, which of course it hasn’t been for four, five years. Now, you did a $146 million of revenues and $60 million of expenses.

Donald R. Peck


Bobby Melnick – Terrier Partners LP

Interestingly since that time your gross margins as a percentage have gone up, but the problem is that your sales since that year, and I am excluding all the legal which are we hope non-recurring. So just looking at the cost infrastructure your sales since that time has declined 9% based upon the midpoint of the range you gave today. You are not profitable and your costs have gone up 20%.

So it strikes me that sure you can introduce new products and hope they are ticking and hope that the international markets recover and hope that the domestic markets recover. But hope is not profits which you can’t control, that strikes me is your expenses. And it seems to me that it is either an willingness or an ability to get those expense numbers down.

Parenthetically and then I’d like you to talk as I am not here to lecture. I would not be making this comments if I thought that your company was running lean and mean and bareboned. But again as a new comer to the story, the only specific expenses I see are some of those that are depicted in your proxy statement. And again even at a cursory glance last year there were eight gentlemen who earned between call it $0.5 million and $2 million, and you’ve seven directors who made between $115,000 and $129,000. This for a company that last year was barely profitable burning a $1 million dollars, $1.4 million and it sounds like again this year will at best be barely profitable.

Certainly it’s an earning return on capital that would justify your not liquidating. So okay that’s my observation, and I’m trying to understand why as new comers to the company who are not burdened with legacies you don’t go in there and say hey, we don’t know what our sales are going to be, we think they are going to be good, we’re enthusiastic about the dealer response, but hey, we can’t control our sales and we need to take $10 million or $15 million of expenses out of this company, because we are actually running the company for the owners not for the management and the Board of Directors who get compensated apparently irrespective of consequences?

Donald R. Peck

Okay, let me start answering your questions by saying, in the recent past the company has done, particularly in the 2007, 2010-2011 timeframe, has reduced it's workforce significantly. So in terms of your kind of lean and mean versus, we actually came into this year with quite a lean staff and one that was not positioned to leverage the growth that we saw in the U.S. market.

So we have increased staff particularity in sales and operations, in the areas where we have indeed succeeded in leveraging that growth which has been the domestic market. Now in terms – I think your point is well taken with regard to the expense base and particularly the leverage that is in the business once we are successful in stabilizing growing and then transforming the business. This is a property model with tremendous leverage in it, so our challenge to your point is to grow the top line so that most of that can drop to the bottom line.

Randy L. Ortiz

Hey, Bob, this is Randy Ortiz, and you’re right. Well, Don and I are new to the company and let me give you some observations having spent 30 years in the auto industry and cognize of the – the dynamics of the aftermarket. I would suggest to you, if you go back to LoJack's most profitable days, for all instance some purposes and that little to know competition in the retail automotive business. GPS was not really all that well understood and the installation rate and vehicles was fairly nil because the margins in new vehicles, well they’ve declined over the years, the transformation is really paying a lot attention to the business office and the proliferations of products sold through the F&I office are a bit different today than they were then.

I would also tell you to Don’s point that because of the reductions in force of the company went through as result of the fallout in the U.S. auto industry, a lot of that headcount came out of field organization. And as a result, the relationships with the largest automotive retailers out there had attribute significantly to the point where, I think, people were questioning whether LoJack was still around because nobody called on them anymore.

So market dynamics have changed, certainly the competitive set of what competes for share-of-wallet in the F&I office has changed significantly and the phase of retailing in the U.S. automobile business continues to change largely being dominated by the AutoNation’s, the Penske’s, the Group 1’s, the Sonic’s are really are the ones that we need to reestablish strong relationships with to grow the business.

And some of that relationship building require speed on the street, talking to the people to very top and the middle level of the company and the people that actually operate on the store level. And so I would suggest to you that while I agree with your assessment that we need to be very vigilant on cost and manage expenses very aggressively, there hasn’t been enough focus on top line growth and that’s where we are positioning the company to do.


Our next question comes from Bill Dezellem with Titan Capital Management.

William J. Dezellem – Tieton Capital Management, LLC

Relative to Argentina, specifically, does Argentina normally have a disproportionately large Q4, meaning that they that they have a seasonal uptake?

Donald R. Peck

This is Don Peck. They have traditionally ordered the greatest amount in the fourth quarter driven not so much by seasonality in their business, but in order to get volume discount at the end of the year.

William J. Dezellem – Tieton Capital Management, LLC

All right. So this fourth quarter, we will see a disproportionately large negative impact from those import restriction than we had in the prior quarters of this year?

Randy L. Ortiz

And indeed, last year in the fourth quarter, we shipped to them $7.7 million worth of product on a total sale of $10.7 million for the year. So yes, we will have a big hold at bill because that $7.7 million will most likely not recur.

William J. Dezellem – Tieton Capital Management, LLC

Understood. That’s actually quite helpful and we would never get to that large. Next question relative to Argentina, you I think mentioned, it’s not in the press release in the opening remarks that the Argentine licensee is making progress relative to the import restrictions. Would you describe what it is that you are referring to there and I guess on the surface, I think of this as a bigger issue than just the Argentine licensee, so I would have thought the issue would have been much larger than their ability to make progress for their situation?

Randy L. Ortiz

So again, the issue is focused on Argentina because of the government restrictions on imports into that country. At a high level what they are requiring is people who are importing to also export a similar amount of goods in order to get if you will, credits to allow them to import. So the focus of our Argentina licensee has been to work with the government to pull together a plan where they can export other products having nothing to do with automotive or anything else to get sufficient credits to allow them to import. That is where they have made significant progress today. They have not yet completed those efforts and will be in the short term reporting their progress to the government with the hope that they’ll get a positive indication from the government that they will be allowed to start the importation process again.

William J. Dezellem – Tieton Capital Management, LLC

That's helpful and then finally, do you believe that there is pent up demand in Argentina so that when these, the import restrictions are lifted or they find their counter balancing exports, that you are going to have some pent up demand to sell or are the automobiles that otherwise in Argentina would have had the LoJack unit installed, but that demand has been fasciated by some other option.

Donald R. Peck

Yes, so to answer that question Bill. We visited with the Argentinean licensee little over a week ago. The answer to that question is, yeah there is real market demand. It is increasing. Now make no mistake about it, based on the fact that they ordered a significant amount at the end of last year, that coupled with their ability to recycle is obviously held them over for now.

So they've been able to meet most of the market demand although their indication to us is that they could probably be doing a bit more if they could get the values in, but make no mistake about it in the near term, meaning early next year, they will stock out and when that happens they will be out of inventory, they will be out of their ability to recycle and then there will be a real threat that they could loose market share if in fact we don't have a resolution to this importation restriction.

Randy L. Ortiz

But the indication so far is they are not loosing market share, it's not being replaced by competing products.

William J. Dezellem – Tieton Capital Management, LLC

Great, thank you both.

Randy L. Ortiz

Thanks Bill.


I am not showing any additional questions at this time. I'll like to turn the conference back over to Mr. Ortiz for further remarks.

Randy L. Ortiz

Okay, well thanks everybody. I appreciate your time this morning. Certainly as I said in my remarks, we feel strongly we are absolutely on the right path with respect to our domestic strategy and continue to work on our initiatives and efforts in the international space to stabilize and grow that business as well. As always, we appreciate your interest and support of LoJack, and we will talk to you at the end of the year. Thank you.


Well, ladies and gentlemen, this does conclude today’s presentation. You may now disconnect and have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!