VOXX International Corp (VOXX) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the VOXX International year-end conference call. (Operator Instructions) As a reminder, today's conference may be recorded.

I'd now like to introduce your host for today's conference, Mr. Glenn Wiener. Sir, please go ahead.

Thank you, Liz, and good morning, everyone. Welcome to VOXX International's fiscal 2016 results conference call. Our call today is being webcast on the website, www.VOXXintl.com and can be accessed in the Investor Relations section. We also have a replay available for those who are unable to join us this morning.

We filed our Form 10-K with the Securities and Exchange Commission and issued our press release over PR Newswire yesterday. Both copies can be found on our website in the IR section under SEC filings and news releases, respectively.

Speaking for management this morning will be Pat Lavelle, our President and Chief Executive Officer, and Michael Stoehr, our Senior Vice President and Chief Financial Officer, both of whom will be available for questions after our prepared remarks.

Before I turn the call over to Mike, 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 2016 period ended February 29, 2016.

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

Good morning, everyone. I think this time on this call we were going to report the numbers first, and I would have Mike go through that; and then I'll follow up with some thoughts on the 2017 fiscal, where we see opportunities, where we see growth within the categories that we're in.

So we'll start this morning with Mike. So, Mike?

Okay, Pat; thank you. Good morning, everyone. I'll begin today with a review of our financial results and balance sheet; and as Pat said, he'll cover the business segments and our outlook.

Net sales for both the fourth quarter of fiscal 2016 and fiscal 2015 were approximately $170 million. The euro averaged 1.09 versus 1.18, down 7.6%; and when you exclude the euro conversion impact, net sales were up approximately 2.4%.

Within our business segments, before adjusting for the euro, our Automotive segment was down $6.1 million, but roughly half of that decline was attributable to the euro conversion. Our aftermarket sales were down $3.9 million for the quarter, principally as a result of licensing our Jensen business, which approximated $3.2 million. When adjusting for the euro our OEM business was up.

Premium Audio sales declined by $400,000. Again, adjusting for the euro, newly introduced products are having a positive impact on our performance and, as you can see from our results in the second half of the year, declines have been reduced significantly.

We had strong growth this quarter in our Consumer Accessories segment, which was up approximately $7.8 million, again excluding the euro, and up $7.1 million overall. This was primarily due to the higher sales of wireless and Bluetooth speakers and 360fly action cameras.

Gross margins came in at 27.6%, down 150 basis points. The principal cause of this was a shift in product mix within our Consumer Accessories and Automotive business segments.

Regarding Automotive, margins declined as we are nearing the end of certain OEM programs. We would expect margins to increase as new programs begin this fiscal year.

Additionally, in quarter four of fiscal 2016 we had two one-time events that adversely affected margins by 80 basis points and which will not repeat in fiscal 2017. Without them, gross margins would have been 28.4%. The decline in our margin was partially offset by improvements in tooling, obsolescence, and warranty.

Operating expenses were $54.3 million or up $4.2 million, all of which was a result of the EyeLock transaction. I would like to point out that almost 60% of our total R&D expenses are EyeLock-driven, as we continue to invest in building out the next generation of iris authentication products.

Also during the quarter, we had a noncash impairment charge of approximately $2.9 million. When looking at the pure overhead of the Company, without EyeLock and related expenses and the impairment, core overhead was down $2.9 million as we continue to institute cost control measures throughout our global footprint.

We reported an operating loss of $7.5 million versus a loss of $700,000 in last year's fourth quarter. Excluding the noncash impairment and the costs associated with EyeLock, which totaled $7 million combined, the operating loss would have been $500,000 from the core business.

Other expenses for fiscal 2016 fourth quarter totaled $2 million, compared to $10.7 million in last year's fourth quarter. Interest and bank charges increased $1.3 million as a result of our amendment to the older loan agreement.

In the fourth quarter of fiscal 2015, there was a lot of activity in Venezuela, which we've covered on prior calls, with expenses totaling $10 million. Our JV income related to ASA increased $300,000 for the quarter.

Based upon all of the above, this resulted in a net loss of $7 million inclusive of EyeLock, or a net loss attributable to VOXX of $5.4 million in the fourth quarter of fiscal 2016 versus a net loss of $14.4 million for the comparable period in fiscal 2015. Lastly, we reported EBITDA loss of $1 million versus an EBITDA loss of $6.2 million in the fourth quarter last year. Adjusted EBITDA was $2 million versus $5.2 million for the comparable fourth-quarter periods.

Now for the fiscal-year comparisons, though I'll keep my remarks brief as information in our Form 10-K and the euro impact is broken out in our press release. Net sales of $680 million were down close to $77 million or roughly 10%, with the euro conversion accounting for $40 million of the decline.

The Automotive segment declines were primarily due to the euro conversion, lower sales of remote starts, our licensing of the Jensen brand, lower satellite radio product sales, and the continued phaseout of older product lines, offset by increases in our OEM business. Both the Consumer Accessories and Premium Audio segment changes were similar to what I discussed in our fourth-quarter remarks.

Gross margins of 28.7% were down 90 basis points. Again, the overall discussions in the fourth quarter for Automotive and Consumer Accessories holds true.

Premium Audio margins increased 130 basis points, again reflecting higher margins associated with our newer offerings. The fourth-quarter events impacted gross profit margins by 20 basis points.

Total operating expenses were flat for both periods at approximately $207 million. We had $17.6 million of expenses related to EyeLock and noncash impairment charges, offset by $12 million in lower expenses related to the euro in fiscal 2016 and $1.1 million related to restructuring charges in fiscal 2015.

Core overhead on an apples-to-apples basis declined roughly $4 million. You can refer to our Form 10-K for information regarding other income and expenses, as the fourth-quarter comments are consistent. The close to $19 million variance primarily relates to Venezuela, as I discussed previously.

The effective tax rate in fiscal 2016 was an income tax benefit of 22.3%. Details can be found in our 10-K.

As a result of all the transaction charges that occurred, we reported a net loss inclusive of EyeLock of $6.1 million, and a net loss attributable to VOXX of $2.7 million, versus a loss of $900,000 last fiscal year. On an EBITDA basis, we reported EBITDA of $18.8 million versus $23.1 million last year, and adjusted EBITDA of $24.8 million versus $41.5 million in fiscal 2015. Please refer to our press release and Form 10-K for the adjustments.

Moving on to the balance sheet. Our cash position as of February 29, 2016, was $11.8 million versus $8.4 million on February 28, 2015, an increase of $3.4 million. Accounts receivable reduced by $15.7 million and our inventory positions decreased by $12.6 million.

Our total debt as of year end, which includes mortgages and capital leases, stood at $100.9 million compared to $86.2 million at fiscal year 2015 year-end. This includes financing for our Lake Nona OEM facility of $9.2 million, and acquisition in support of EyeLock of $29.3 million. Exclusive of these events our total debt would have declined by approximately $24 million.

Lastly, in April the Company closed on its second amended and restated credit agreement, which provided a total facility of $155 million composed of a $140 million asset-based loan and a $15 million four-year term loan. This facility, which expires in 2021, was secured by certain assets, real estate, and trademarks of the Company, details of which are in our Form 8-K.

This concludes my prepared remarks and I'll turn the call over to Pat. Pat?

Okay. Thank you, Mike. We knew coming into this year that it was a challenging environment, and for the most part we planned for it. The biggest impact came from a decline and Premium Audio sales due to ongoing product transitions throughout the year and product launch delays.

However, moving into fiscal 2017 we have some encouraging signs. Premium Audio is stabilizing, now that we have fully transitioned to the newer products that carry higher margins.

Our OEM business performed well, and we have a number of new contracts across all OEM product categories -- and sizable ones, which I will speak about momentarily. We consolidated our aftermarket business, and we believe this will help that group on a go-forward basis.

Consumer Accessories grew this past quarter, and we should see better performance this year with the addition of EyeLock products, the new 360fly 4K action cameras coming to market this month, and with expanded distribution. Additionally, we expect to see continued strength in wireless speakers and in reception products and our new Project Nursery cameras.

As for fiscal 2016, needless to say, we are not pleased with the losses. As we move into the new fiscal year, in addition to our normal new product focus we have also taken even more aggressive steps to align the organization and leverage resources more efficiently with an end goal of lowering our SG&A while continuing to invest in technology. I'd like to talk about our business segments, what we have in the works, and what specifically is behind our optimism.

Within our Automotive group VOXXHirschmann, our OEM operation, continues to build momentum. I discussed new contracts awarded in the third quarter valued at EUR35 million on our last call. During the fourth quarter and in roughly two and a half months since year-end, we were awarded new contracts totaling over $300 million.

VOXX Hirschmann Germany received awards of $99.6 million; VOXX Hirschmann Solutions of $44 million; and VOXX Hirschmann North America of $168.4 million. Some are completely new and others are new awards but replace existing contracts. They are all multiyear awards, and the biggest impact will be in fiscal 2018 through fiscal 2021.

Some of the highlights are: new antenna and tuner contracts with multiple OEM partners, a trend we believe will continue as more and more wireless technologies move into the vehicle; new asset tracking contracts within the transportation industry; a new contract from Mazda Mexico for rear-seat entertainment; and other contracts with GM for our new EVO-based system we debuted at CES; new contracts for a minimum of eight vehicle models with one OE customer for our wireless entry keypad accessory, which we also debuted at CES and will launch in July. We also received several contracts with Subaru and Ford for our new 900-megahertz ultra-range remote start system, with programs that should run several years.

Our pipeline is building, and we have now received in excess of $800 million in new awards since we acquired Hirschmann and across all OEM operations. As you know, the lead-time within OE business is long, but I'm pleased to say that many of the awards that we won in fiscal 2015 and 2016 are now shipping, and more will begin during fiscal 2017. We expect OEM to continue to grow this year and well into the next several years.

In the aftermarket we expect to see modest declines, as we are continuing to phase out end-of-life products. And we will not repeat approximately six months of Jensen sales, as we licensed this business in August of 2015.

Aftermarket satellite radio sales continue to be affected by the increasing trend for these products to be standard on more and more vehicles. Additionally, we will be shipping our new CarLink Bluetooth solution later this month, which could help offset some of the aftermarket softness.

Turning to Premium Audio, the new Klipsch products that we launched in our fiscal third quarter are beginning to reverse the declining sales trend I spoke about on our last call. New Bluetooth in-ear monitors, Bluetooth headphones, Dolby Atmos speaker systems, and new streaming music systems are all placed well at retail. We have delivered the new high-res WiSA theater system, and our new DTS Play-Fi multiroom systems will be coming to market soon, which should positively affect the top line in our second fiscal quarter.

Our new product offerings are resonating at retail and with media. In the last few months we have gotten great reviews in trade, consumer, and business publications.

You can read more on these and other reviews and ratings on the Klipsch website, but there is a key takeaway here. The new products launched by Klipsch will have a positive impact, and we believe fiscal 2017 will show a return to growth in this category.

Consumer Accessories should continue to grow this year, we believe, building on the 46% increase across our outdoor lifestyle speaker lines in fiscal 2016 and our number-one market share position in this category. Our 808 portable Bluetooth speakers, launched only three years ago, also showed double-digit growth and now rank number six by volume according to NPD.

The antenna category, where we maintain our number-one unit share position, is slated for growth due to a number of promotions at major retailers for cord-cutters and cord-nevers. These are people who choose an over-the-air HD antenna and a WiFi connection for free Internet TV and programming, eliminating costly cable.

We also have some new products. In July Project Nursery, which we debuted at CES, will launch a new line of monitors and a sight-and-sound projector targeted at the lucrative baby/infant market, which is a first for us.

The new 360fly 4K action camera ships later this month. This higher end product features 4K higher resolution, still pictures, live streaming, and has double the memory capacity to 64-gig. We've opened up distribution and have added independent sports marketing retailers and national retailers, with more coming on throughout the year.

Turning to EyeLock, we believe our investment in EyeLock will be a strong value generator for our Company and our shareholders. Biometrics is here to stay. It's forecast to be a $30 billion market within the next four years.

Now, we know there will be multiple form factors. But in EyeLock we're confident we have the best iris authentication solution in the industry, with close to 80 patents or patents pending.

Since we acquired our majority interest in them, we have allocated more resources to support R&D innovation. We are already working on next-generation algorithms for all elements of the iris process, including advanced concepts that have pushed the limits of what's possible with optics, computer vision, and machine-learning techniques.

EyeLock technology currently resides natively on the four largest access-controlled computer systems, representing approximately 80% of the access-control market. In addition to Stanley and Tyco, EyeLock now has a nationwide rep network and has expanded distribution with the additions of Anixter, ADI, PSA Network, some of the largest value-added resellers in the security market.

In addition, we anticipate delivering a fourth-generation iris module that is faster, cheaper, and smaller than anything on the market today. And we see limitless applications for the smart mobile, automotive, computation, and financial service industries.

Next month the embedded products group will be moving into their new location, establishing their IoT Center of Excellence in Austin, Texas, where they will be working to embed technology into CE device networks, network appliances, automobiles, and other IoT endpoints. Over the past six months, EyeLock has doubled their pipeline, and they remain in advanced discussions on several large multiyear contract opportunities.

However, much like OEM relationships, these programs have long development cycles and take time to come to market, with launch timing largely controlled by our partners and potential customers. That said, based on recent conversations we believe several of these opportunities will materialize in the coming quarters as we convert our pipeline into revenue.

Now, while we still have some global economic headwinds, normal product transitions, and there can always be some unexpected event, we have every reason to believe that fiscal 2017 will show organic growth on a dollar-to-dollar basis. We believe margins will hold, and we continue to take costs out of our business through refined procedural programs that increase productivity on a lower cost basis.

Overall, we expect to show significant improvements in operating income, net income, and adjusted EBITDA and be in a position to generate positive cash flow while reducing our debt. We do, however, have approximately $16 million to $18 million of annualized expenses for EyeLock that are geared towards R&D and innovation as we develop business with that group. We are encouraged and excited by the inbound interest we have received for licensing or acquiring the EyeLock technology.

As in years past, our first quarter is not projected to be our strongest as programs, particularly in Automotive, have a bigger impact in the second and third quarters and load-ins with Premium Audio and Consumer Accessories are also planned for those periods. We look forward to updating you on our progress; and at this time we will open the call up for questions.

(Operator Instructions) James Medvedeff, Cowen and Company.

Hi, good morning. I have a couple of questions here. One jumps out at me.

You cite newer products up and coming in the Consumer Accessories segment, and yet the mix somehow lowered the gross margin. So can you reconcile that?

Well, we had some one-time adjustments. The adjustments that Mike was talking about affected the Accessory group primarily, those one-time adjustments. And that was 80 basis points for the overall in the quarter.

The 360 action camera is a lower margin than what we would normally do within the Accessories space, primarily because we are not responsible for all the expenses within that category, because we work with 360fly. So as far as the bottom line, we think the bottom line is consistent with what we have within the Accessory group.

Just digging into that a little bit further, can you say how much 360-degree fly contributed it in the quarter?

We would normally not report. We're only reporting on the top-line numbers.

Can you give a little more detail on those one-time items that -- I guess they lowered total gross margin by 80 basis points, but a significantly more amount (technical difficulty).

What would gross margins have been in this segment without those charges? And what were they?

One was a duty payment; the other was a royalty adjustment and settlement. Those are one-times that won't repeat. I'd have to have -- I'd have to get back to you on exactly what the impact is for the Accessory group.

Okay. In the same vein, the Automotive gross margins were also lower. So that's a mix issue between aftermarket and original equipment, is that right?

Yes. One of the impacts that we've had there is that we had an amortization program where we were amortizing expenses to the end of a particular contract. The manufacturer had taken more than what was projected, so the amortization ended earlier; and therefore, the margins on that product dropped, and that impacted us for the quarter.

Now, that program will eventually be replaced by a newer program where what happens is you reestablish your margins. But that, and then the lower sales in the aftermarket of our remote starts due to a warm winter, that's what was the majority of what affected the margins within the Automotive group.

So we should expect those to recover? Is that one contract now finished, completely sunsetted?

No, no, no; we're still shipping on it. It should finish later this year.

Okay. So excluding that sort of thing we should be back a couple hundred basis points or so higher on gross margin by the end of the year?

Again, I would have to look at it. There are some other things that may be affecting it as we start some of the newer programs.

We have new programs that we'll be starting. We have the Accessory program that starts in July of this year; that should have a positive impact on it.

Then again, I couldn't tell you right now how long the program that's set to sunset goes into 2017. I can check that for you.

Okay. And I just want to make sure I've got the right concept on expenses. SG&A, you are going to try to keep flat year-over-year, even including EyeLock?

Yes, we had a lot of one-time expenses in the year that will not repeat. We think that those expenses could go a long way covering the added expense we have from EyeLock.

Now, that being said, as EyeLock gets closer and closer to launch of some programs, we may see an uptick in overhead in EyeLock, as we may have to rush to meet launch dates set by the customer, which means bringing on more software engineers and things like that.

Okay. Final question then -- oh, well, I guess I have two more. On EyeLock, when do you expect to launch those products?

We have won the RFQs at one of the major financial institutions. They are in the process of getting their systems ready for it. We check with them every month.

Tyco is the integrator, so it's really up to them. They've indicated that we would see it within the next few quarters; but it's largely up to how well they do in getting ready for a total revamp of their security system, of which we're a part of it, and that's what the major holdup there is.

With one of the big government agencies, we have delivered on the three-part authentication process that they've been asking us to build. They are in their approval process. That is again something that is largely controlled by them; but we have delivered on what they've asked us to build for them.

Okay. Then my final question, returning to expenses, is: How should we think about expenses in fiscal 2017 relative to fiscal 2016? Higher, lower? Total expenses including EyeLock, all-in, higher or lower?

Well, I can tell you we had about $9 million in one-time expenses that had come in through noncash impairment charges. So I would say that we're looking at EyeLock $16 million, $18 million, somewhere around there; that we'd see somewhere around $215 million, $216 million in overall expenses for the year.

Perfect. Thank you very much.

You're welcome.

(Operator Instructions)

Liz, we'd like to thank you. And for all participating, if you have any follow-ups, by all means please feel free to contact my office.

We do appreciate the support and look forward to better days ahead. With that, Liz, we will conclude today's call.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program, and you may now disconnect. Everyone have a great day.