VOXX International Corp (VOXX) 2014 Q4 法說會逐字稿

Welcome to the VOXX International year-end conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would like to hand the conference over to Glenn Wiener. Sir, please go ahead.

Thank you, Karen. Good morning, everyone. Welcome to VOXX International's FY14 year-end results conference call. Today's call is being webcast from our website, www.VOXXintl.com. That's www.VOXXintl.com.

It can be accessed in the Investor Relations section of our website. We also have a replay available for those who are unable to join us.

We filed our Form 10-K this morning. Our apologies for the delay; we literally had a last-minute hiccup, an administrative issue getting foreign paperwork through. Everything is now in order. You can find the 10-K on our website in the SEC Filing section.

Before turning the call over, I would like to remind everyone that except for historical information contained herein, statements made on today's call and webcast that would constitute forward-looking statements are based on currently available information. The Company assumes no responsibility to update any such forward-looking statements. Risk factors associated with our business are detailed in our Form 10-K for the fiscal year ended February 28, 2014.

Additionally, management will be on site at the B Riley investor conference in Santa Monica next week presenting on May 20. The following week, we'll be at the Cowen conference in New York City on May 29. We also have plan to be at the Jefferies conference in June, following at the Needham conference thereafter.

At this time, I would like to turn the call over to our President and CEO, Pat Lavelle. Pat?

Thank you, Glenn. Good morning, everyone. Before I cover our fiscal year performance and outlook for FY15, I would like to address our fourth quarter first as it obviously came in lower than we had anticipated.

As you know, we had very strong third quarter with heavy load-ins in preparation for a strong holiday season at retail. Unfortunately, that strong holiday season did not really materialize. When I spoke with you in January, I had to lower our top-line estimates for the fiscal year based on a slower December.

You need look no further than the business press to see retailer after retailer reporting disappointing sales and earnings in virtually every category. In fact, industry-wide sales reports have indicated this past winter posted the lowest retail sales since 2009.

We suffered as well, as the slow retail environment impacted every one of our retail segments: our consumer accessories, premium audio, and automotive sales. This was the sole reason for our top-line miss.

Additionally, I would like to address the impairment charge we took in the quarter. Based on the top-line miss in the fourth quarter, indications of near-term shortfalls and longer term forecasts, we have determined that it is proper for us to impair certain intangibles which are carried on our books.

Therefore, we have made an accounting adjustment and have taken a $57.6 million non-cash charge for certain intangibles in our automotive, premium audio and consumer accessories segments. This non-cash charge in no way affects our ability to run our business or financing we have arranged. Mike will cover this further in a few minutes.

Outside of retail this past quarter, business conditions were and will remain stable. Our OEM business continues to post strong numbers. As I look at our contracts in place, those pending and our prospects moving into FY15, I believe this segment will continue to post strong results.

Overall, taking everything into account and despite the past issues at retail in our fiscal fourth quarter, we maintained our direction that we are positioned for modest growth this year and more so in the coming years. Consumer confidence is on the rise, with March figures posting the highest in years. While one month does not make a trend, industry and financial analysts believe the economy will show improvement and not just in the US.

Hiring and manufacturing are up. The all-important car sale indicators continue to remain strong. In addition, while our performance was lower than expected, we not only met our cash flow target of $40 million, we also paid down a considerable amount of debt and improved our debt position February-over-February by $65 million and as of May, by $82 million over February of 2013.

As far as the fiscal year, we reported net sales of approximately $810 million which were about $15 million to $20 million lower than I forecasted in January. Within our automotive segment sales were down approximately $4 million versus last year.

We had indicated throughout the year that satellite radio and fulfillment sales as well as results from our Venezuelan operation would be lower. Total fulfillment sales came in roughly $17 million below the prior year, mostly in satellite radio, as more and more vehicles are coming equipped with satellite radio which impacts the aftermarket sale.

The political environment in Venezuela also continues to have a negative impact on that operation. As a result, Venezuela sales were down approximately $8 million versus last year. Offsetting this is growth in both our domestic and international OEM business.

We are seeing expansion in our customer base as well as significant new technology development which is part of the reason why our expenses are up. We are investing in R&D. We are investing in the future.

Moving forward, we believe the establishment of VOXX Hirschmann will expand product placement opportunities even more. With new technologies coming to market, our growing OEM platform and the longer-term nature of OE contracts, we should see continued growth in this segment for years to come. While Mike will walk through the numbers, I want to point out total automotive sales, excluding Venezuela and fulfillment sales, were up almost 6%.

Within our premium audio segment, sales were down about 2%. Again, retail in the fourth quarter was the primary reason as we were tracking to our internal projections for the first nine months of the year.

Sound bars and new music systems are in high demand and getting great reviews. While volume is high on these product, they do represent a product mix shift from sales of traditional 5.1 surround sound speakers.

We have been heavily marketing the Klipsch brand. There were a number of key promotions which we believe will help raise brand awareness. Those efforts combined with new sponsorships and endorsements should help drive sales.

Our consumer accessories segment saw the biggest decline with sales off just over $18 million. Keep in mind that in addition to the retail weakness during the year, we exited roughly $15 million of lower margin products which was anticipated.

While there will always be product obsolescence, we believe that many of the end of life product issues we have faced over the last few years are now behind us. We should post respectable increases as a result with up side based on strong consumer demand, new product development and expanding retail distribution.

Factor in the anticipated down turns in sales in Venezuela, fulfillment sales and exited product categories and you'll see that our other businesses were up from the prior fiscal year, even with the negative effect of retail sales in the fourth quarter. The total impact of these three factors alone was approximately $40 million in lost revenue. In addition, we are seeing positive results in our international business posting overall sales gains of 3.2%.

Now to address FY15 and what we see in the marketplace, throughout this past year when asked, I have indicated organic growth of around 3% for FY15. Barring any significant deterioration in the economy or any one-time events, I believe this should be attainable with up side if some of the bigger projects and opportunities we're working on deliver in time to affect sales for the year. Some examples of products and categories that I believe will drive growth is, we have a strong OE presence and with our new technology combined with more and more wireless connectivity into vehicles, this will help us expand in this market.

Recently, we were awarded two new rear seat entertainment system contracts with OEs that will utilize our 4G eHub technology. In addition, we recently were awarded a EUR36 million extension of our antenna business for Volkswagen and Audi. Currently, we have a number of RFQs that we are pursuing which we believe will lead to additional new business for us in the coming years.

Car Connection sales are also expected to grow this year. Building on our earlier momentum with Sears and Pep Boys, we are planning a new major retail launch in June which will favorably impact subsequent quarters. We expect to announce with one or two major insurance carriers in the second quarter.

These programs are designed to provide users of Car Connection with substantial discounts on their vehicle insurance premiums. Residential installations of home theaters should grow as home sales rebound. New sound bars and our completely new line of speakers and headphones from Klipsch that launch in June at Best Buy should also fuel sales.

Growth in Bluetooth wireless speaker product from Klipsch, Acoustic Research, Magnat, Heco and the 808 brands will help expand the category for us. The introduction of our new emergency preparedness line under the Champ brand is another new category that is showing potential with key retailer response being very good.

Our entry into the imagery market with our 360Fly action camera and 360Micro cell phone accessory as well as the new iris authentication products in the biometrics market, both ventures from our newly restructured VOXX electronics subsidiary, should help us expand our distribution and sales more so as we move into next fiscal year. Of course, there will always be some things which have the potential to hold back sales, which is expected for our business. This year, they will likely include a continued decline of fulfillment sales and some exiting of lower margin product but not to the extent that we've seen over the past few years.

Also, digital TV tuner sales for select OEM customers will be lower, as those customers transition from the current DVDT tuner to the next-gen DVDT 2 digital tuner. In automotive, we expect sales to be flat with this year.

Once again, these numbers take into account the anticipated declines of fulfillment sales, little or no business from Venezuela and the digital tuner transition. The latter piece is really just about timing, as we anticipate the following year comparisons will be favorable.

Offsetting this will be growth in our antenna business and continued traction in both rear seat entertainment and security. We have a strong global OEM customer base, solid contracts that will carry us for multiple years and access to technology that I believe separates us from the competition and positions us for growth.

In premium audio, we are anticipating a slight decline in FY15, roughly 1% to 3%, but while top-line sales might be effective, profitability in this category should increase. During this past fiscal year, we embarked on several programs designed to strengthen the Klipsch brand and its commitment to quality. We elected to exit certain retail channels and limit distribution to maintain the integrity of the Klipsch brand as well as its gross margins so that our retail partners know we thoroughly support their commitment to our brand.

At the same time, we have increased our very visible marketing programs such as the Kings of Leon tour, sponsorship of the Sarah Fisher Hartman Racing team, and the Indianapolis Grand Prix, to name a few. We believe that this year, we will see the first tangible evidence of the impact these increased sponsorships and promotions will have on the brand.

In our consumer accessory segment, we expect to see double-digit increases of between 12% and 13%. There will be continued growth in our new line of charging products, Bluetooth wireless speakers and also from our line of 808 audio products.

In addition, Schwaiger and Oehlbach are expected to post increases as the economy in Europe improves. The growth in this category will also be driven by new products. VOXX Electronics will be introduced in action cameras and biometrics. Both slated for summer and fall introductions.

Due to the timing of these launches, we expect only a small impact on this fiscal year. However, over the next two to three years these categories should be big drivers that will represent significant growth and diversification for our Company.

Additionally -- a part of my future optimism stems from several projects we're working on now that are in various levels of development and the reason for the increases in our R&D spend. We continue to expand our activities in the field of asset tracking. Later this year, we will launch a robust solar powered module with a minimum 10-year life without the need for a further power supply. We plan to sell this product into the container and trailer tracking markets, leveraging our existing network provider partnership with AT&T.

As I mentioned earlier, Car Connection is growing on every level. We are in discussion with a major international carrier to bring that technology to Europe and here in the United States. We are beginning the rollout of Car Connection into new retail outlets and Car Connection fleet to new fleet management companies.

We have submitted our bid with the Mexican government to potentially be a major supplier of product as that country moves from analog to digital. You may recall the significant bump in sales we experienced domestically a few years back when that transition occurred in the US and more recently in Germany.

As we move into FY15, I want to remain cautious when guiding as we've seen strong sell-in at retail for the past three years only to see sell-through suffer for various reasons. Unfortunately, the fragile economy forces us to plan much of the same in our FY15 numbers. Of course, should the economy continue to improve and we experience positive year-over-year changes at retail during the next holiday season, we could do far better than the 3% growth we're guiding to.

For FY15, we see top-line sales in the $825 million to $830 million range, again, with some potential up side that I will revisit when we get to the second half of the year. Gross margins are projected to come in a little above 29% for FY15, we were at 28.4% this year. The higher number is based on product mix we're projecting and newer products coming to market.

Operating expenses which were held in check in prior years increased in FY14 as we: implemented a modest 3% cost of living salary increase; increased spending to support promotional activities of our premium audio and select consumer accessory brands; and increased our engineering and R&D teams by 10% to over 300 engineers to support OEM and various other projects. We will continue this in FY15.

We are investing in our infrastructure and in our R&D teams to stay ahead of the technology curve. While this will lead to an uptick in overhead, it will also lead to stronger top-line performance in future years.

Overall, operating expenses should increase about 4% to 5%. I expect EBITDA to be comparable with FY14, approximately $54 million to $55 million. Cash flow continues to increase. We should do better next year based on lower capital expenditures.

We're paying down debt quicker than we had budgeted. We exited the year with total bank debt of $88 million, well under the sub-$100 million we had anticipated at the beginning of last fiscal year and the total Company debt of a little over $109 million which represents, again, a $65 million improvement.

I would like to address one other topic before my closing remarks. We've recently announced a $3 million strategic investment that equates to an approximate 10% holding in EyeSee360. This investment builds on our exclusive distribution agreement for 360-degree action camera and its related accessories and demonstrates our commitment to them and to the category.

We believe the technology that EyeSee360 has developed far surpasses what's in the market today providing a full 360-degree/240-degree view in HD quality with the largest field of view of any camera in the market. It will allow consumers to capture real-life experiences like never before.

As I've said before, our growth strategy is not only to develop products but also to invest in new and exciting technologies and categories. This is one such investment that we believe will not only grow sales but also allow us to share in the positive financial growth of the category.

We continue to look at new technologies and companies and will stay on this path to identify the next-generation growth drivers for our industry and our business. To that point, we remain active in the M&A arena. We will be prudent and cautious in any new acquisition.

That said, we do believe that over the coming quarters, there is potential for additional M&A activity. Any deals, should they materialize, are expected to be accretive in year one.

In summary, we are confident with our composition and potential. Our story has not changed.

The fourth quarter was not specific to VOXX but rather the industry as a whole. Our relationships and placement with our OEM partners and our retail customers remain at an all-time high. From a bottom-line perspective, the next two to three years should shape up to be our best yet.

With that, I will now turn the call over to Mike. We'll go through the numbers. Then we will open it up for questions. Michael?

Thanks, Pat. Good morning, everyone. I'm going to focus my remarks on the fiscal year comparisons and provide color around the fourth quarter before moving on to the balance sheet. While sales were lower than anticipated, I will reiterate Pat's comments that the weather conditions in the US this past winter and the impact it had on retail sales during the fourth quarter is really the primary reason for our top-line miss.

On the other hand, we continue to generate good cash flow and exited the year with better debt reductions than we planned. We're executing on our strategy and feel good about our prospect over the next few years, especially with some of the newer product lines and product categories.

Now for our financials. All comparisons are for the fiscal year ended February 28, 2014 and February 28, 2013. We reported sales of $809.7 million versus $835.6 million, down 3.1%. Automotive segment sales were $412.5 million, down 1%.

Both our domestic and international OEM business continues to grow. Domestic OEM sales were up 2.3%. Our international business was up 9.7%. Discounting Venezuela, international OEM sales were up 15.4%.

Our fulfillment business, primarily satellite radio, had the biggest impact on our year-over-year comparisons, as fulfillment sales were down almost $17 million. When taking into account Venezuela and fulfillment sales, our other automotive business was up 5.8%. During the fourth quarter, automotive sales declined both on the OEM level and in the aftermarket, as we had to contend with the retail environment and one of our largest OEM customers sold fewer vehicles which impact results.

Premium auto sales were $189.2 million, down 2%. Our domestic business was down 3.7%, though we did see growth from new product such as sound bars, Bluetooth and wireless speakers and new cinema products. International sales were up 1% with the first half of the year soft followed by a much stronger second half.

For the fourth quarter, sales were impacted again due to a soft retail environment and lower headphone sales. We also moved out of older products to make way for our new higher margin product introductions this year.

Consumer accessory sales were $206.3 million, a decline of $18.4 million or 8.2%. This is primarily a result of: a $15 million of exited products; the retail environment in the fourth quarter; and lower international sales, part of which was due to the fact that we did not anniversary set-top box sales from the prior year. As Pat noted in his remarks, we're just about done exiting categories that have had a large impact on our year-over-year results.

Turning to gross margins, our gross margins were 28.4% versus 28.3% for the comparable quarters, a 10 basis point increase. We began the year with a target of 28.8%. We're tracking to that number for most of the year.

During the fourth quarter, margins were a bit lower than anticipated overseas. We moved some products out to make way for our newer offerings domestically. We experienced modest declines in the automotive aftermarket.

For the fiscal year comparisons, automotive gross margins increased 130 basis points due to strength overseas and the product mix shift towards more remote start products. Lower Venezuelan sales held margins in check; if the political situation changes for the better, this would have a positive impact for us.

Both our premium audio and consumer accessories segment saw gross margin declines of 170 basis points and 100 basis points respectively. Lower international sales, the discounting of certain products, held margins in check. This was offset by better margins in our growth category, namely sound bars, Bluetooth and wireless speakers and fewer sales of lower margin product that we exited throughout the year. We are anticipating margins in excess of 29% in FY15.

Before moving to expenses, income and EBITDA, I want to address the impairment charges. During the FY14 fourth quarter, we conducted our annual assessment of goodwill and intangible assets. As a result of this analysis, an impairment charge of $32.2 million was recorded for goodwill.

Also recorded an impairment charge related to our trade names for various brands of $22.8 million. Lastly, we abandoned our Technuity business and restructured the marketing and use of a domain name resulting in an impairment of $2.6 million. These impairments totaled $57.6 million.

I will provide an overview of our financials now, both with and without the impairment charges. Operating expenses for FY14 were $267.6 million versus $195.1 million. Excluding the impairment charges, operating expenses were $210 million, up $14.9 million. This $14.9 million increase is principally due to the restructuring charge of $1.3 million for the ERP upgrade and a $12.1 million increase at Hirschmann.

Within this: One, our selling expenses increased by $3.7 million mostly due to higher salary and compensation expenses principally at Hirschmann where we added personnel to support both new and existing programs and due to higher advertising and marketing expenses at Klipsch and in support of new consumer accessory product lines. Two, general and administrative expenses increased by $4.2 million principally due to increased salaries and payroll benefits as we added personnel at Hirschmann.

Three, the biggest component of the year-over-year increase was in our engineering and tech support line which increased by $7.2 million. This was related to several new projects at Hirschmann, an increase in our R&D spend and higher labor costs with new personnel. These were for the new projects prior to customer reimbursement for non-engineering costs which will be reimbursed at a later date.

Four, these expenses were partially offset by: reduced occupancy costs at the RCA Klipsch level; lower costs in temporary personnel; lower professional fees; lower provisions for bad debts; and customer reimbursements for OEM-related expense.

Operating expenses for the fourth quarter excluding the impairment charges were up $5.1 million. Hirschmann's expenses increased $6.8 million.

Selling expenses and R&D were up primarily as a result of what I just covered. We added a number of new engineers and are engaged in a number of automotive projects.

We also had an increase in our advertising and marketing expenses which were offset by lower G&A expenses due to lower executive salary costs. For FY14, we reported an operating loss of $37.4 million with the impairment charges. Excluding these non-cash impairment charges, we reported operating income of $20.2 million versus $41.7 million in FY13.

The variance is due to lower sales volume from the prior year and higher operating expenses and recognition of certain reimbursement for certain expenses which was carried in other income. We had planned for the expense side, but the sales shortfall in our fourth quarter was the big driver.

I will add, consistent with my remarks last quarter, that we expect to save approximately $4 million next fiscal year as a result of our ERP implementation and facility consolidation as these projects are now complete. We had approximately a $900,000 decline in our interest and bank charges for the bank obligation as we continue to pay down our debt.

Equity in the income of equity investees related to our joint venture ASA was $6.1 million versus $4.9 million in the prior year as ASA continues to do better and expand its business. Other net was virtually a $14.7 million swing as FY14 included funds received from a customer of roughly $4.4 million, as well as funds of approximately $5.6 million received in the class action settlement.

There was also approximately $900,000 related to recovery of funds from Circuit City that had been previously written off. Other net also includes a net loss in foreign currency of $1.1 million partially offset by a $200,000 gain in the devaluation of the Venezuelan B. These charges were also further offset by an accrual of $1.2 million for the estimated and actual patent settlements with third-parties for FY14.

As for last fiscal year, other net includes net charges in connection with a patent suit of $2.7 million and losses on foreign exchange contracts of $2.7 million incurred in conjunction with the Hirschmann acquisition. These charges are partially offset by income related to a favorable legal settlement at Klipsch of $1 million and rental income of approximately $1.1 million.

For the quarter, our interest expense decreased $300,000 due to lower debt levels. Equity income of equity investees increased by approximately $150,000. Other net saw a $6.1 million swing from last year principally as a result of the patent settlement which occurred last year in the fourth quarter.

For the quarter, we reported an operating loss of $59.6 million. Excluding the operating charges, we reported an operating loss of $2 million compared to an operating income of $12 million in the comparable FY13 period.

Net income. With the impairment charges, we reported a net loss of $26.6 million or a loss per common diluted share of $1.10. This compares to net income of $22.5 million or income per common diluted share of $0.95 in FY13. Excluding the impairment charges and related tax effects, we reported net income of $21.7 million and net income per common diluted share of $0.90.

Net loss for this fiscal year was favorably impacted by the impairment charges related to goodwill, amortizing and non-amortizing intangible assets and long-lived assets as well as restructuring charges, sales declines attributed to the European market and the economic and political conditions in Venezuela. This is offset by a better performance of our equity investment, ASA, lower acquisition and professional fees, payments received related to contract shortfall and favorable class action settlements, which I have covered previously.

For the fourth quarter, we reported a net loss of $49 million. Excluding the impairment charge and related tax effect, the net loss was $700,000 or a loss of $0.03 per diluted share. This compares with net income of $10.3 million and net income per diluted share of $0.43.

Moving on to EBITDA, with the impairment charges, we reported an EBITDA loss of $3.1 million. Without the impairment charges, EBITDA was $54.5 million. This compares to EBITDA of $60.4 million in FY13.

Once again, there was a lot of activity for the comparable periods. We reported adjusted EBITDA of $46.5 million as compared to $67.5 million in FY13.

Let me walk you through these adjustments. For FY14, we adjusted $4.4 million cash received for the contract shortfall payment, $4.4 million cash received for net settlements, $940,000 for Circuit City recovery and approximately $200,000 in relocating our Asia warehouse. This is offset by $1.3 million in restructuring charges related to Klipsch and the ERP upgrade, $641,000 in stock-based compensation and $57.6 million for the non-cash impairment charges for total FY14 adjustments of $49.6 million.

For FY13, we adjusted $2.7 million related to the loss on foreign exchange contracts due to the Hirschmann acquisition and $1.6 million in acquisition related costs, $1.7 million for net settlements, approximately $800,000 in charges related to the change in our Klipsch warehouse in Asia, $435,000 in stock-based compensations. This equates to a total adjustment in FY13 of $7.1 million.

The effective tax rate for FY14 was an income tax benefit of 0.2% on a pretax loss of operations of $26.7 million. The effective tax, excluding the impairment charges and related tax effect, the effective tax rate in FY14 was an income tax provision of 29.8% on pretax income from operations of $30.9 million as compared to a provision of 36.9% on pretax income of $35.7 million from continuing operations in the prior year.

Now to our balance sheet. Our cash position as of February 28, 2014, was $10.6 million versus $19.8 million as of February 28, 2013. Our total debt as of February 28, 2014, which is inclusive of mortgages, capital leases and bank debt, stood at $115.3 million compared to $180.8 million as of February 28, 2013. When comparing these periods, the breakdown is as follows: bank debt worldwide was $91.7 million versus $156.4 million; capital lease obligations was $6.1 million versus $5.8 million; worldwide mortgages were $17.5 million versus $18.6 million; reduced our total debt in one year by $65.8 million.

Our worldwide bank debt includes $88.7 million of borrowings under the revolver versus $155.1 million last year. As of today, our bank debt is now $67.2 million with availability of $137.8 million. Our balance sheet continues to improve.

Additionally, CapEx for FY14 was $15.3 million and for FY15 we anticipate CapEx will be between $12 million and $13 million. However, please note, we are currently reviewing our office and plant infrastructure with a goal to reduce our fixed facility costs in the future. If we pursue changes in the upcoming fiscal year we could, of course, impact our CapEx and cash flow -- and cash flow.

But again, will result in lower expenses on a go-forward basis. Subject to the above, we anticipate cash flow north of $40 million in FY15.

Pat covered our outlook for the year, so at this time, I will turn the call back to Pat and we'll open up the call for questions. Pat?

Okay, Michael. Thank you. At this time, you guys can fire away.

(Operator Instructions)

Sean McGowan, Needham & Company.

I have a couple of questions, we'll see if we can get through them. In terms of the current business, we're almost finished with the first quarter. Can you give us some sense of how the retail climate is going? That's general.

But then more specifically, if could you comment on your expectations for the timing of revenue in the various segments and expenses as well? Because you've made some comments before about some of these new products being back-end loaded and some of the investment needed to support the unveiling being front-end loaded. So a little color on what we should expect in terms of timing? How current business is? Thank you.

Okay. As far as current business, obviously, you look at the month of March, we had more of the same in March as we had in January and February, with some bad weather that curtailed retail business; however, we are seeing a strengthening in the market. Car sales are starting to pick up. So activity is picking up. The month is it not over. We do have some shipments that could be held up due to a flood that was in China. If we missed the sale this month, obviously, it is going to fall into the second quarter. But really no big surprises as we look at our first quarter numbers.

When we look at the growth, where we see the growth coming from this year, we're essentialy looking at, as I indicated during my speech, that we're expecting to see flat business within the automotive space. We're expecting to see flat to a little down in the premium audio. The growth is going to be coming from the new introduction of product that is slated for September introduction this year. And those -- both of those projects are on time. We anticipate that they will launch and give us the additional sales that will drive growth for the year.

The expenditure of R&D is a little further out. Since we acquired Hirschmann and Invision, half of our business is now manufactured by us. That business requires a tremendous amount of R&D because it is our own technology that we are making. Some of that new technology is very exciting for us and can mean future business of significant amount.

But the product has to be worked on. It has to be developed. We do have some contracts that we're working on. Others, we hope to close. But that's where the R&D expenditure -- you're going to see that this year. You are going to see it some next year. You will see some of those sales start to happen next year.

Okay. Then in terms of the gross margin improvement that you are looking for, what product segments or product areas would you expect to be driving that? Or do you expect to see it across all of them?

No. I expect to see it primarily within the premium audio space. We have made strong effort over the past six months to limit distribution to maintain profitability within that space for us and our customers. That's where we will see the improvement.

Okay. I didn't hear you talk, Pat, about the digital product, the digital antenna with the Roku connection. What's your outlook for that product?

That product has been delayed, although that product is still slated for the end of this year.

Okay. Then last, a very general question. Your guidance for 2014, even at the high-end -- or rather for FY15, the high-end of that guidance is lower than what you put up in 2013. So I'm struggling to reconcile that with the problem here in the fourth quarter being a one-time weather-related thing. It seems like it must be something bigger than that?

Well, one of the problems that we have is when we're looking at these numbers. Over the last few years, we were impacted by various things that impacted the fourth quarter. Whether it be the talks in Washington the year before that pulled everybody out of the market at Christmas, or whether it was the weather that pulled everybody out this Christmas.

What we're looking at -- we're baking in a Christmas like we've had over the last three years. That's a weak Christmas. Until we see something strengthen to where we can feel more positive about retail sell-through, not our load-in going into Christmas, but retail sell-through, we are going to be very cautious in how we guide.

Okay, thank you.

You're welcome.

Rob Stone, Cowen and Company.

I wanted to follow-up a little bit on the expense subject, as well, with respect to linearity. I think in past conversations, you had talked about needing to do some spending ahead of the launch of the new camera product. Or, is there somewhere along the way a lump of expenses relative to quarters that was in your guidance for the full year amount? That's my first question. Thanks.

As far as the expenses for the launch, you are going to see that happen in the first half of the year. Then you'll see some sales in the second half of the year. So what we're anticipating are expenses in marketing, expenses in product development, that we will have no revenue against, but that will then start to change as the product starts to deliver.

Okay. In Mike's comments, he reminded us about the planned savings from the ERP system, $3 million or $4 million. Pat, I think you said operating expenses overall would be up 3% or 4%. So net-net, you will actually have an increased investment a bit bigger than the 3% or 4% counting the ERP system. I wanted to make sure I understood the magnitude of your --

Yes. No, you're absolutely right. The 4% to 5% increase is net of the savings that we had last year. Again, this is being driven primarily by two areas. That is the additional marketing spend that we have for some of our premium audio products, our consumer accessory products. The biggest expense coming from the increase in engineers that we brought on late in the year last year to work on various different projects so that we can ensure, number one, that we meet launch dates of contracts we've already won. But also work on some of the newer technologies that we believe are going to be very, very exciting for this Company in the years ahead.

So given the lead time on that type of OE project with the new engineers and investment you're making there, over what time period do you think you can see a reversal of these trends where you would have some operating leverage and revenues growing faster than expenses? Is that two years out? Three years out?

Some of the projects will start at the end of our FY15, okay? The bulk of the projects will start to fall into FY16, where we deliver the new tuners for Daimler Benz that we're working on. As you know, we won a $160 million contract there.

Those programs will be in the latter part of next year; the start of production for those products. But then they take us out until 2021, 2022. That's the nature of the OEM business.

Okay, great. My final question is on the equity investment in the EyeSee360 business. Can you provide any color on the rest of the ownership? Is that a business that you would be then sharing the potential with others down the road? Or possibly bring the whole thing in house?

Well, there's another larger investor in there, Catterton Partners and there's VOXX certainly in there. Our thinking behind that is that as we work hard to build the sales, we think we're going to generate a lot of value through our efforts in 360, the Company. We wanted to make sure that we were in a position, number one, to benefit by that, but also as things progress, we may want to take a bigger portion of the Company.

Great. Thank you.

You're welcome. Thanks, Rob.

Scott Tilghman, B Riley.

Wanted to touch, actually, on three items. The first, as you look over the next 12 months, you have a number of launches and contracts in play that have been discussed. I was wondering if maybe you could categorize the group that you would identify as the top tier, the ones that you're most excited about that you think have the most growth potential, not just for this year but also into next year?

Well, that's a two-part question, Scott. What we see this year, as I indicated, is the new product that we're launching later in the year. That's our Myris product, our MicroFly product, those are the two products -- two categories that we see growth in. As I indicated we are going to have some changeover with tuners with some of our OE customers. We'll see a dip this year as we jump into the new technology.

We've already won the contracts for the new technology, but there's a timing difference. So based on what we're doing and based on the fact that we're focusing on the profitability. By focusing on profitability within our premium audio, it will cost us some sales. So that's why we're talking about lower sales to flat sales there. The real growth for this year is going to be coming in our accessory business where these two categories are placed.

As we look into next year and future years, then you will see our automotive business with the contracts that we've already won -- you will start to see our business grow as we deliver the Daimler program, as we deliver the new 4G antennas, as we deliver some more of the tracking smartphone antennas. Then on top of all this, there are a number of new programs that we are working on that -- I have to be careful here, but they can be hundreds of millions of dollars of new business that we are working on where we are developing the new technology, where we're not just making this because we want to make it.

We're making it because we either have a relationship, we've been asked to develop a product. It doesn't necessarily mean we've currently won an award of new business, but we're confident we will. That's where the bulk of the R&D is right now, where the technology we're working on could be very, very exciting for this Company.

That's a big change for this Company over the way we were over the last 10 years, where we were primarily spec-ing product and having it made in a third-party manufacturing facility. Here, we are making our own technology -- new technology that will be unique to the industry. That is where we expect to see some significant new business in the years ahead.

That actually ties in nicely to my second question. I was going to ask about the R&D strategy, given that over the last two years the approach has been to build a portfolio of capabilities. It sounds like you're seeing opportunity to build within the verticals that you have already.

The question is, are there others out there that are in some of these new and exciting areas where you do see some tuck-in opportunities? I know you touched on the M&A topic briefly. Or are they really categories where the technology is evolving so quickly it needs to be addressed up-front and you don't really see the opportunity to buy the capabilities and therefore have to add the engineers?

One of the things that we see as opportunity is the ability to strengthen each one of the existing categories. In some cases, the strengthening would be by bringing in technology that we don't possess, and bringing in an acquisition that brings us new technology and engineers with that discipline.

When we bring in and develop new product, it is a big barrier to entry for competition. There, once again, we can be unique. We can generate good margins in that business. The other areas where we look at where opportunities exist may be different brands -- outside -- this is outside of technology, but different brands and different distribution that would strengthen our other existing segments. So we look at all of them. We will weigh them on their merits.

That's helpful.

Last thing, I just wanted to revisit guidance for a minute. I think we've beaten this quite a bit. But going back to the January comments, low single-digit growth on the $825 million to $830 million that was originally expected for FY14, it sounds like the holiday uncertainty for this year is a lot of what's bringing the top-line outlook down.

My question is really on the expense side. Have there been any changes in your expense outlook for this year relative to what you were thinking ago few years ago? Or is most of the pull-back in the EBITDA guidance relative to what we could have expected, really a function of the lower sales levels and therefore some de-leveraging?

As far as I'm concerned and I had indicated in the opening, the miss on our top-line was solely driven by the weakness at retail caused by the weather. As far as our expense, Mike talked about the $4 million in savings that we will enjoy this year now that the ERP system is up and some of the restructuring is over and some of the severance is done. Those are real savings. We will continue to look at each one of our operations. We're continuing to look at consolidation of facilities so that we can bring down our fixed overhead. But for the most part, it was driven by the top-line miss.

Let me ask it a little bit differently. I'm looking at FY15 rather than at fourth quarter. The R&D spending plan, is that any different today than what you were looking at four or five months ago?

It's up. As we have won some additional new business this past year, in order to meet the launch dates for that business, we had to bring in some additional new -- some additional engineering. That's why you saw the 10% increase in our engineering, was primarily within our automotive group.

Great. Thank you.

You're welcome.

(Operator Instructions)

[Kivi Chen], Manresa Capital.

I appreciate your time hosting the call today. I have a quick question for you. So EBITDA reported for this year, if you exclude the impairment charges, as I understand it is $54.5 million. Is that right?

Correct.

Correct, right? I wanted to refer back to the comments on your third quarter call in January. So at that time, the EBITDA guidance was upgraded from $62 million to $65 million, right?

Right.

So basically there was a little bit of a gap between the $65 million and the $55 million that was actually reported, so it made a $10 million gap. I understand that you mentioned the weather as being the key factor that hit the sales. But I want to think a little bit about -- what I don't really understand and would appreciate some sort of help in understanding or color, is that the nine months -- in the same call, the nine months EBITDA that was reported, I remember is $50.3 million. So the way I look at it right now is that spending on January 9, we have half the fourth quarter past. Then we knew that the nine months EBITDA was $50.3 million.

We thought that -- the implied thought was that the fourth quarter we are going to generate $15 million of EBITDA to give the guidance of $55 million, right? In actual fact from January 9 until February 28, which is only like six or seven weeks, we only generated $5 million of EBITDA, which is the reported $54.5 million. So instead of the implied EBITDA of $15 million, which was implied by the guidance on January 9, we only achieved $5 million EBITDA, which is quite a huge miss. I was wondering what happened in the six weeks between January 9 and February 28 that was different between what was modeled -- what was guided and what was actually achieved in FY14? Thank you.

Okay. On my call, yes, I did raise our guidance from $62 million to $65 million, primarily due to some income that we had received from one of our OEM customers. However, when we met on January 9, we had pretty much our top-line revenue for December. We knew where that came in. We knew that there was a shortfall. I cautioned everybody and lowered our guidance at that particular point.

We did not have financials on January 29; we were at the CES show. But as we moved through balance of the year -- of the quarter, which was the rest of January and February, two things happened. One is, we knew we had a shortfall in top-line revenue in December, but until the financials were complete, we did not understand some of the impact to our margins. Because when you look at our projections year-over-year, our margins was also impacted.

We had -- we missed approximately $30 million of top-line revenue that we were projecting, we missed that in the fourth quarter. When you look at our margins, where we were, where we projected, you'll see that is the sole reason for our miss, when we go from $55 million to $65 million.

I see. Thank you very much for the color. I really appreciate it. I think it makes a lot of sense. So I just wanted to confirm that it was just a top-line miss that driven -- the miss -- the gap in the EBITDA is not -- just to be sure, there's no -- we didn't lose a contract that was the price --

No, no, in fact our -- we did not lose one position at retail. We did not lose any business. It, as I said, was driven by the top-line miss, driven by the softness at retail. Then we had to respond and that's why there was some margin miss, because we had to start moving product to clear product for our upcoming launches, which are happening now.

Yes. That's fine. I totally appreciate that. We are longtime investors. So we totally understand the long-term nature of the investment. We do not invest for the quarter. So I just wanted to be sure there was no new competitor coming in, collapsing pricing, or losing of business or whatever it is.

Nope.

So it was just the weather that drove the weak retail and the top-line miss? Is that a correct understanding?

That is correct.

Okay, great. If I have time, can I ask a second question about the 360Eye investment?

Yes.

Yes, sure. So I just want to understand a little bit more about -- again, I appreciate the 360Eye investment. I am as optimistic as you are on the growth potential of this product. So, I just wanted to understand a little bit more about how -- if this product is successful, it can help VOXX the Company, because you mentioned that we have a 10% position in the 360Eye Company.

In the public releases up to this point, we have been described as an exclusive distribution partnership. So, I just want to understand a little bit more color around how that partnership will work? Would we buy things from 360Eye the Company at some kind of wholesale, then make the spread on the retail spread? Or how exactly would VOXX benefit from this arrangement?

Okay. Obviously, I can't divulge the terms of our agreement, but basically we're an exclusive -- we have an exclusive arrangement with them. We are not a distributor of theirs. We do not buy product from them. We have the product made according to their specification and according to their licenses. They own a lot of IP in the space.

They selected us as their distribution partner, but we will have the product manufactured. We will bring the product in. We will sell the product. Their program works off of the IP and the value that their IP generates. The better we do, the more valuable their IP becomes, not only in the action camera space, but in every application where you can see the use of a 360 high resolution camera. So that's where we see there's good potential for 360 to continue to grow, even beyond the space that we're involved in.

Yes, absolutely. As I said, I'm really optimistic about the growth potential. I just wanted -- maybe I'll rephrase the question. I understand a little bit about the financial impact. How does it positively benefit us? Do we make money only as a result of our appreciation in the equity, the 10% equity that we invested with them? So that's one way we can make money. But as we sell the product on a per-piece basis, do we get also cash as we sell? How should we think about the financial impact of the success of this product on VOXX?

Okay. The success of this product will be on us selling it when we make a normal margin. It's our product. We bring it in. We sell it. We make a margin on it. That's going to be how Audiovox, or VOXX International, makes money on it.

So we only keep -- when I say we, VOXX International. VOXX International only keeps 10% off the profit?

You've got to look at two ways. One is, an investment in the 360 Company. The other is, we've developed product using the 360 technology that we can sell to the market. We will make money doing that.

I see. Okay. I think that makes a lot of sense. I understand it now. I am understanding much better now. Thank you very much for your time.

You're welcome.

Rob Ammann, RK Capital.

I appreciate all the detail on the FY15 guidance on expenses and all the different line items. The EBITDA guidance, is it fair to say that the EBITDA guidance and adjusted EBITDA would effectively be the same? You're not contemplating any kind of -- as many puts and takes in the numbers for FY15?

Well what we're looking at -- we don't expect to see as many puts and takes. But what happens during the course of the year sometimes you can't really predict that. But looking at our budgets on a go-forward basis, the improvements where we didn't -- we're not going to have the puts and takes like we had this year, we are improving sales by approximately $25 million. We are improving margins a little bit. So that's where we're going to generate the profitability.

This is Mike speaking. We just look for normal EBITDA flow.

Okay. So, I mean, it seems like any of the puts and takes would flow into EBITDA, but not affect adjusted EBITDA. So what I'm trying to understand, as you scan that right now without knowing that there's going to be any puts or takes, is it fair to say your adjusted EBITDA guidance is $54 million to $55 million?

That's not our adjusted, no (multiple speakers) EBITDA and adjusted EBITDA.

Right now, we're starting out with the $55 million.

Okay. So it's the same for both.

Correct.

Okay, great. Then the operating expense increases, you have certainly -- you have seen a meaningful increase in engineering and technology development but you've also had some revenues associated with that, that are a contra expense that I think $6.9 million is most recent fiscal year. Do you expect a similar sort of contra expense in FY15? Or does that potentially grow given the nature of all the development programs that you are working on?

Right now, we're looking -- based on what we're budgeting, those are the numbers that we're looking at. But this is a fluid situation. The technology we're working on is very interesting to a number of different accounts. We expect that during the year, we may win additional awards. If we win those additional awards, we will need to bring on some additional engineering so that we can meet those launch dates.

Okay. But do your total operating expenses contemplate any kind of reimbursed engineering expenses? Or is that just kind of a base case, if you get some, you're going to see an increase in R&D and you're going to get paid for that? I guess that's what I'm --

There's NRE in many of our programs. Yes, in fact, we win a new award, most likely there will be NRE that comes with it.

Okay. Your existing programs, would they support reimbursement similar to the levels that we saw this year of $6.9 million? Or should we be thinking a number more like year before that's closer to $3.5 million?

Probably, you are going -- I would say that you'd probably see something along the lines of what we've had -- a combination of the two. As we get ready to launch, obviously the NRE will change. But we are on programs with a number of different OEMs where hitting milestones of product development will generate an NRE payment for us. Depending on the schedule, I would say that we're going to be somewhere in between where we were between the last two years.

Okay. Great. Thank you.

You're welcome.

Kivi Chen, Manresa Capital.

Just really quick, so I'm also really looking forward to the 360Eye introduction. I think you mentioned in the call, just now, that you expect the introduction of this new product to be in September. Am I understanding correctly?

Yes.

So again I look back to the January call, at that time, I think that the indications was that this product, including the imaging and the biometric products, we might expect to see sales in the April, May or June timeframe. So, there's been a little bit of a delay. I want to understand two things. One, what caused those delays? Two, how sure are we that this time around, we will see things getting sold starting in September? Thank you.

Well, in my call in January, we talked about a June delivery. In that June delivery, we've been talking about the micro cell phone accessory, which we decided that accessory should be launched with the 360Fly all at the same time. That's one of the reasons why we're pushing it out.

But there's no hiccup? I guess I want to understand -- just going to get confirmation, there's no hiccup with the development or the production or anything in the supply chain or whatever it is? But everything is just going on smoothly? Or is there anything that we should be concerned about with this new product introduction?

Nothing ever goes smoothly, but you shouldn't have anything to concern about.

I see. Okay, cool. Thank you very much for your time.

You're welcome.

Thank you. That concludes our question-and-answer session. I would like to turn the conference back to management for any closing comments.

Well, I want to thank you all for listening in on this morning. If we grow our sales more and any of these big opportunities drop our way, we are going to see a nice impact to our EBITDA and cash flow. So I know there's a lot of talk about our expenditures as far as R&D and everything, but believe me, I do think it's well worth the spend. We'll see the benefit in the years ahead. Thank you for joining us. Have a great afternoon.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a good day.