Glenn Wiener Patrick M. Lavelle - Chief Executive Officer, President and Director Charles Michael Stoehr - Chief Financial Officer, Senior Vice President and Director.

Michael Fawzy Malouf - Craig-Hallum Capital Group LLC, Research Division Lee J. Giordano - Imperial Capital, LLC, Research Division R. Scott Tilghman - B. Riley Caris, Research Division James Medvedeff - Cowen and Company, LLC, Research Division.

Good day, ladies and gentlemen, and welcome to the Second Quarter 2014 VOXX International Corporation Earnings Conference Call. My name is Jackie, and I will be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to Mr. Glenn Wiener.

Please proceed..

Thank you, Jackie, and welcome to VOXX International's fiscal 2014 second quarter 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.

We had a very active quarter on the IR front, presenting at Imperial Capital and Craig-Hallum, and we're going out on the road each month.

Tomorrow, we'll be in Boston and next week in Chicago, and we've -- we are slated to produce at the Wedbush Securities Conference in December; and following the Consumer Electronics Show in Las Vegas, we'll be presenting at the Needham & Company conference in January.

We feel good about the future direction of the company, and on behalf of the team here at VOXX, we'd like to thank you for your continued interest and support.

Before we begin, today, I'd 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, and the company assumes no responsibly 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, 2013. And at this time, I'd like to turn the call over to Pat Lavelle, President and CEO of VOXX International.

Pat?.

Andrew Luck and Robert Matthes of the Indianapolis Colts; Pacers star, Roy Hibbert; Toronto Raptors star, DeMar DeRozan, as well as IndyCar racers Graham Rahal and Josef Newgarden. We expect these promotions to broaden our reach and expand Klipsch's awareness worldwide. In Consumer Accessories, sales were down 4.4%.

Half of this shortfall is attributed to our transition at lower margin consumer product categories. The other half is due to lower sales in our Schwaiger operations, where we did not anniversary sales of set-top boxes. If you recall, last fiscal year, we benefited from the analog to digital conversion in Germany.

We expect sales to be in line with the prior year, with new products driving second half of the year numbers.

For example, we should see an improvement in sales due to expanded retail distribution, as well as from new 3Q product launches such as our 808 CANZ Bluetooth speakers, RCA Soundflow product, new RCA and 808 headphones and expanded line of RCA charging products and our new champ lineup of safety products.

In closing, what I said last quarter remains true today. We have a lot of activities ongoing that should boost sales and increase margins both near and longer-term. We're generating good cash flow, approximately $37 million for this year, and we are paying down debt.

Assuming no acquisitions are made in the balance of this fiscal year, we should exit the year under $100 million in debt and our strategy remains to pay this down further, while remaining opportunistic in the M&A market. We continue to look at deal flow, and we're going to manage our cash wisely.

The state of the markets today give us a number of financing opportunities. We continue to do our due diligence to ensure that the company maintains the right financial structure and have access to capital as needed. And with that, I will now turn the call over to Mike, and then we'll open up it for questions.

Michael?.

$7.6 million in net settlements, $2.7 million FX change adjustments, $1.7 million of acquisition-related costs, $789,000 of Asia warehouse adjustments and $129,000 [ph] of stock based compensation.

Looking at the 6-month period a bit closer, we had an $11.6 million swing in net settlement adjustments and approximately a $1 million swing in warehouse relocation expenses.

Taking everything into account, there were $4 million adjustments in EBITDA in 2014 versus approximately $400,000 adjustments in 2013 second quarter, and for the 6-month period, there were $3.4 million adjustments in fiscal '14 and $12.8 million in fiscal '13 6 months to date.

As we have indicated, we are reiterating our EBITDA guidance of $62 million. The reason is that the net patent settlements for the most part offset onetime -- excuse me, the reason is that the net patent settlements for the most part offset one-time charges for R&D, severance pay and closures.

We anticipated in our forecasting process that the R&D expenses would be matched with against future revenues, and after subsequent review with our auditors, we are accounting for the expenses as they occur.

As noted earlier, while this negatively impacts operating income to date, it should positively impact our operating income and future earnings once the contracts begin to be realized. Now for our balance sheet.

Our AR turns was 6x in fiscal 2014 6-month period versus 5.7x in the comparable fiscal '13 period due to the shift in our sales mix and customers. Our inventory turns decreased slightly to 2.8 compared to 3 for the same periods due to a slight increase in our OEM inventory positions, as we are purchasing more materials for bigger POs.

Our cash position was $13.4 million as of August 31. Also, as of August 31, our long-term debt stood at $109 million versus $149 million as of February 28, 2013. Our total debt as of August 31, 2013, which is inclusive of all mortgages and capital leases, stood at $132.7 million compared to $180.8 million as of February 28, 2013.

We reduced this by approximately $48.1 million. Our bank debt includes $52.5 million of borrowings under our term loan and $55.4 million under the revolver. As of today, our bank debt is now $105 million.

Our borrowing needs will increase in the third quarter and beginning in the fourth quarter to support the peak selling season, and hopefully a strong retail environment in the quarter four and then taper off. As we have stated previously, we expect to finish the fiscal year with total debt less than $100 million and a leverage ratio south of 2x.

As of August 31, our leverage ratio, which includes bank debt, mortgages and capital leases, is 1.85. As a result, our borrowing spread in the third quarter will be 1.75. We have now dropped our borrowing spread from 2.25 to 1.75. Lastly, for the 6-month period, our CapEx was just under $6 million this year versus approximately $10 million last year.

We still anticipate CapEx for the fiscal year to be somewhere in the like [ph] of $12 million. This concludes my remarks, and Pat will be happy to handle some of the questions..

Okay. Thank you, Michael, and we'll now open it up for questions..

[Operator Instructions] And your first question comes from line of Mike Malouf with Craig-Hallum Capital Group..

I have a couple of questions. First off, on the gross margin side, I know that fulfillment revenue continues to go down and the low-margin commodity consumer electronics continues to be less of a percentage.

And I'm just wondering, when do you think we'll start to get that percentage on gross margins higher than the sort of 29% that it's been stuck at for the last few quarters? And I think you have a target of over 30, so just some comments on that..

As you've heard me say, we continue to see lower satellite radio sales. So that [Audio Gap] [Technical Difficulty].

Okay. The fulfillment business is down. However, we do have a number of opportunities that would add to our fulfillment sales because we do get a good return on it. So basically, what we're looking at is exiting the lower margin commoditized product. When the opportunity presents itself, we will add to our fulfillment group.

And as the mix changes, as we do more and more of our OEM business and more and more Premium Audio, it will start to push the margins up. But in my estimation, as part of our plan, is to continue to acquire companies with stronger margins.

It is part of our criteria when we look at new companies and the combination of all those effects and acquisition at higher margins, a better mix in terms of Automotive and Premium Audio, and that should drive margins north of 30%..

Okay, great. And then a couple of questions on acquisitions since you bring it up.

Can you give us a sense of the environment out there with regards to the opportunities? Are they in any particular area of your three-pronged strategy or maybe something new? And I'm wondering if you get a sense as you look through some of these acquisition potentials, what kind of valuations that people are looking at these days?.

Well, right now, our strategy is to look within the [Audio Gap] of the categories. Our infrastructure can be leveraged against acquired companies. So we are focusing our search for our next acquisition within the 3 segments that we're in.

As far as valuations, you're going to see valuations depending on the company all over the place and depending on who we're competing with, whether we're competing with a strategic buyer or a private equity buyer. But I would say that depending on the company, you're going to see it anywhere from probably maybe 6x to 8 or 9x..

And your next question comes from the line of Lee Giordano with Imperial Capital..

Can you talk a little more about the retail load-ins and the improvements you're seeing in the back half? Do you have visibility both in Q3 and in Q4 for that? And is that the main reason you're confident that the consumer's turning around at least in your categories?.

Okay, basically, what we see is, obviously, we see the load-ins for the third quarter because we're bringing the merchandise in we're delivering now. As far as fourth quarter, we're still working off of projections that we're getting from our customers, and they appear to be good and that's why we're quite bullish about the third quarter.

But it is not only driven by the consumer stepping up and buying more. We have a lot of new product that we've introduced for this quarter. Our Bluetooth speakers are being very well-received by the market. Our music centers are being well-received. The sound bar business is growing for us.

So we anticipate when we get a little combination of strength with the consumer, but the success of the introductions that we have in some of our newer products for retail that it should shape up to be a decent quarter..

Great.

And can you provide any updates on Venezuela as far as timing of when that might -- that situation might improve and the potential going forward?.

Well, if you look at any of the articles that are being written, they are really starting to decay as an economy. I do not -- I cannot see how long the existing government can stay in power with the problems that are going on in the country, whether it be shortage of materials [Audio Gap].

When that's going to change, I would say it's anybody's guess..

And your next question comes from the line of Scott Tilghman with B. Riley..

Wanted to touch on some timing issues. One, if we go back to last year, there was sort of an acceleration, it seemed, of some of the product exits, and obviously, that's continued this year.

When does that begin to slow down, knowing that there's always some exiting taking place, but there was a concerted effort to get rid of some of that lower margin commoditized product? And related just from a timing issue, you're thinking about the set-top box component in Germany, when does that begin to fall out of the numbers from a year-over-year comparison?.

Okay. The first, as far as exiting the categories that we had focused on because of their commoditization, I would say that that's going to end this year, and that's why we're looking at some stronger organic growth in the balance of our product lineup because we're not eliminating sales and then coming up with new sales.

There are certain categories that we're pretty much out of now. So we won't see that happening as much. I think you will see a normal end-of-life process as we move into next year. As far as the set-top boxes, pretty much true. All of our fiscal '13, we had good set-top box sales and the comparison will last through all of our fiscal '14..

Okay. And then follow-up and sort of an accounting or bucket issue for Mike.

Looking at the ERP and consolidation expense of this quarter and a favorable recovery last year, how does that hit the various line items?.

I think, actually, if you look at it on the charges for Klipsch, we had -- some was in warehousing costs, a large portion was in the G&A. About $400,000 was up in warehousing and the rest of it was in G&A..

And then just thinking about the R&D spend that you called out, obviously, a number of products coming to market, planned on coming to market.

When do you expect the normalization there?.

Well, the thing is if we continue to win new opportunities and new business, we're going to continue to have some R&D expense associated with new business. Right now, we expect that some of the new projects that we're working on, we'll start to see sales in 2015. We have a number of opportunities that we're assessing right now.

So R&D expenses, as we move into next year, could come up a little bit as we win new business..

And my last question, just on a related front, obviously, you had the Mercedes contract signed last year on the tuner program.

Any updates in terms of other manufacturers that are looking at that and are interested, and where you might stand in signing some new contracts?.

It's a little too early to say, but there's interest throughout the industry on what we're doing there. We've been able to secure an additional program with Jaguar, Land Rover for the same concept. So as our -- as the product gets developed and our teams bring it out to the market, I think that we'll see wider acceptance..

And your next question comes from the line of James Medvedeff with Cowen & Company..

Most of mine have been answered, but let me just ask, are you able to provide any additional color on the new products that might be shown at CES?.

We have a number of new products that we're introducing this year. You'll see iterations of different versions of them at CES.

Our new antenna with wireless streaming in there will be shown at the show, but there's a host of different products that will be presented by each one of our segments, and I expect that it will be a very exciting show for us..

Great.

And would you just run through exactly how big Venezuela is to each of the 3 segments?.

Venezuela is primarily Automotive and we had indicated -- I believe we indicated that it was $12 million to $14 million on my last call..

As of this moment, we have no further questions..

Okay. Well, I want to thank everyone for joining us this morning, your support of the company, and I look forward to this coming quarter and the introductions of all our new products at CES. Have a good day, and stay dry..

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