Glenn Wiener - IR Pat Lavelle - President & CEO Michael Stoehr - SVP & CFO.

James Medvedeff - Cowen Thomas Kahn - Kahn Brothers Bruce Olephanth - Oppenheimer.

Good day, ladies and gentlemen, and welcome to the VOXX International's Investor Call. At this time, all participants are in a listen-only mode. Later we'll conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to introduce your host for today's conference Mr. Glenn Wiener, Investor Relations for VOXX. Sir, the floor is yours..

Thank you, James, appreciate it. Good morning, everyone. Welcome to VOXX International's fiscal 2017 yearend conference call. Our call today is being webcast on our website www.voxxintl.com and a replay will be available for those who are unable to make the call today.

Speaking for management this morning will be Pat Lavelle, President and Chief Executive Officer and Michael Stoehr, Senior Vice President and Chief Financial Officer. Following their prepared remarks, we'll have a question-and-answer session for those investors wishing to ask questions.

Now before I turn the call over to Pat, 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 and risk factors associated with our business are detailed in our Form 10-K for the period ended February 28, 2017. I would like to thank you all for your appreciation and support of VOXX and I would like to turn the call over to Pat now..

Okay. Thank you, Glenn and good morning to all. Fiscal 2017 was highlighted by the success of our premium audio segment, the growth of our automotive OEM business and new products and distribution within our consumer accessories segment. We posted significant bottom-line improvements and we're well positioned as we move into fiscal 2018.

With respect to the fourth quarter, we reported a modest 1.4% revenue decline, which is largely attributed to our consumer accessories segment as in last year's fourth quarter we had a very strong load in of outdoor wireless speakers, which did not repeat in the same volume.

We also have spring promotions planned for Q4, which were pushed into fiscal 2018 first quarter. However, that was offset by growth in both premium audio and automotive up 18% to 26% and 1% respectively. Klipsch was our biggest success story with new products, expanded globally and overall a better market position.

The investments we made in new offerings are paying off and we have some exciting plans for Jamo this year. In automotive, we saw modest increases in our OEM business, which I will cover shortly. Gross margins are strong over 30% and up 270 basis points.

Our operating expenses declined by 7.5% as we continue to focus on managing costs and allocating dollars towards growth initiatives and we were profitable on an operating income and EBITDA basis. Operating income was up $8 million.

Net income attributable to VOXX was up $5.3 million and adjusted EBITDA was up $6.1 million when comparing the fiscal 2017 and '16 fourth quarters.

The strategies that we put in place to drive innovation, enter new product categories, transition out of older product lines and expand our reach is working and for the first time in several years, we grew organically although modestly. We are confident of stronger growth in fiscal 2018 and I'll touch upon that throughout my remarks.

Looking back at the fiscal year comparisons, net sales of $681 million were essentially flat with last year. Gross margins of 29.6% were up 90 basis points. Operating expenses were reduced by $5.6 million. We had an $11.4 million year-over-year improvement in operating income and a $7.1 million increase in net income attributable to VOXX.

EBITDA grew by $11.3 million and adjusted EBITDA grew by $6 million. Although still not where we believe we could be, we have stayed the course executed our strategy and are confident that VOXX is positioned to generate more meaningful top and bottom-line improvements in the years ahead, while also generating cash and improving our balance sheet.

Within our premium audio group, I've already said that Klipsch is one of our major drivers.

Although successful when we acquired them, it took a major commitment and investment to keep them in the market forefront as the industry transformed from traditional surround sound speakers to sound bars, as headphones where Klipsch had enjoyed strong growth over the years became commoditized and more competitive and as we saw consolidation within the custom installation market.

Over the past two years, Klipsch has experienced a makeover. Older inventories are gone and new technologies have replaced them. Our current offerings of streaming audio Play-Fi and Dolby Atmos are in step with the growing pace of audio files, while staying true to the Klipsch heritage for high quality premium sound.

You're seeing the results this past year and we believe they will continue. Premium audio sales in fiscal 2017 grew both domestically and in the international markets. Speaker systems were up 65% with our expanded sound bars assortment launch of Klipsch streaming products. Bluetooth neckbands and reference headphone lines drove mobility sales up 48%.

The Reference Series, one of our most successful launched drove home separate revenues which were up 17% and the custom installation channel was up over 20%, but the real story is the return to profitability. We generated pretax income of $8.3 million a $17.3 million improvement from fiscal 2016.

Moving into this year, there will be new Klipsch component speakers, new all-in-one sound bars, new power floor speakers and we are expanding the heritage product line.

Best Buy will be doubling the number of Klipsch fuse and sound bars and are increasing displays of other products and in Magnolia, we will be adding both the Klipsch sound bar and Heritage wireless speakers in July. In Europe, Magnat will be concentrating activities in the mid-to-high end traditional audio products and new technologies.

Wireless products including traditional speakers, sound bars, Wi-Fi speakers, audio components and headphones. Mac Audio will be extending their offering to modern entry-level home and portable products like Bluetooth speakers, party and DJ style all-in-one electronics and procedure speakers.

Echo will concentrate on traditional higher-end audio speaker products including lines of retro-style speakers and Bluetooth-based home speakers. We also expect 2018 to be year of Jamo, as that line gets a complete makeover with new styling.

Though the Atmos capabilities and new compact sub woofers and two new sound bar offerings that signal new market possibilities for this line.

There will also be a new Jamo custom installation solution in landscape, route and surface form factors and finally, we have added new distribution in Germany, France Italy, the Netherlands, Asia and various Middle Eastern markets.

Based on our assortment, retail placement and various e-commerce initiatives underway, we expect continued growth within our premium audio segment in fiscal 2018. As for the automotive segment, net sales were up 1% for the quarter and down 4.1% for the year, which was anticipated and had been discussed previously.

Year-over-year, our aftermarket business was down $16.1 million and of the $6.5 million was related to the sale and licensing of our Jensen brand. Remote start sales were also lower as many of our customers had carryover inventory from the previous season and we had a milder winter, which always results in lower aftermarket remote start sales.

Satellite radio sales also declined as expected. Our OEM business grew modestly in fiscal 2017, driven by higher international tuner sales and new OEM programs that began throughout the year. With contracts in place with GM, Ford and Mazda for Evo, our new rear seat infotainment product, we believe this will continue.

We also had an uptake in OEM remote starts as a result of some of the newer technologies we brought to market last year. Additionally, in the fourth quarter, we were awarded over $28 million in new OEM contracts, which builds upon our past momentum.

We will continue to focus on innovation, telematics, e-mobility or autonomous driving and connectivity in the car. These are the hot areas within the industry and what should be key drivers for our OEM business. Within the aftermarket, we are diversifying into new technologies that we believe will reverse the aftermarket sales decline.

Most recently, we took over Rosen, an aftermarket rear seat entertainment supplier, strengthening our distribution and intellectual property. We have an exclusive distribution partnership with Gentex to distribute their aftermarket full display mirror in North America.

We will also distribute the complete Gentex line of automatic dimming rearview mirrors and electronics through our extensive aftermarket channel. We launched the first aftermarket power liftgate system, which is a new solution for car dealers in the lucrative accessory side of their business.

This summer, we will launch an expanded CarLink program that includes longer-range transmitters and we launched a new blind spot detection system for the aftermarket, a CES award winner under our Adzen brand.

All in all, the automotive segment should grow in fiscal '18 with much of that growth back-ended in the third and fourth fiscal quarters due to the start of the new OEM programs. And now our consumer accessories segment; total sales in fiscal 2017 were down 5.9% and the biggest reason was Q4 due to the reasons I discussed earlier.

We entered the year projecting modest growth as we had new products, categories and distribution channels driving are optimism. What we saw throughout the year was a stable domestic accessory business with growth coming from Project Nursery, 360Fly action camera, select digital audio product lines and some added sales from EyeLock.

This helped to offset declines in some of the legacy categories like hook-up products and year-over-year declines in reception, remotes and wireless speakers.

While certain categories were down we did maintain our market-leading position most notably in remotes and reception products and either way audio in less than four years since the brand was launched as movements of the six largest unit volume position added over 200 brands.

Internationally, our business declined by approximately 3.7% though we did see higher sales related to the digital broadcasting platform upgrade in Europe, which drove sales of our DBBT2 antennas and satellite boxes. To address the international markets, we are investing in new technologies.

Some of the new direction will include rebranding various product lines, adding to our Oehlbach product mix to include wireless transmitters, receivers and portable amplifiers to both headphones and smartphones as well as a new phone accessory product line.

In addition, we will add some international products under the very successful 808 and we will be extending our antenna product lines both domestically and internationally. We will also be introducing wireless surveillance cameras at Schwaiger and will be focusing on expanding the Schwaiger home automation line.

Domestically, 808 audio will see an expanded assortment with new products for the karaoke and big audio market segments, a new turntable scheduled for the fall and our new dual slim offering for iPhone 7, which just launched and a new 808 Alexa products scheduled for the fall.

Project Nursery demand has been growing since its launch less than a year ago. Our assortment had been very well-received by key baby retailers that represent new distribution channels, including the largest placement in the new baby section in approximately 1,000 Best Buy stores nationwide.

We have launched a number of promotions planned for 360Fly in the action camera market and we have a new body camera scheduled for full launch that will also open new distribution channels. We will be announcing a new partnership for the health and fitness category, another new market opportunity, which we will initiate later in the year.

We will be introducing a line of RCA surveillance cameras as we see opportunities in this market segment. And finally, there is EyeLock. There is no doubt that the Iris technology presents exciting opportunities.

At Mobile World Congress in March, we demonstrated our Iris Solution on the new Qualcomm 835 Snapdragon chip and demoed its use on smartphones. The response was very positive and we continue to work with Qualcomm to commercialize this technology.

We also just introduced the outdoor version of our NXT solution called EXT, which we are targeting for a Q3 or early Q4 launch. And just last two months, we announced three new patents for EyeLock, one for sequentially linking Iris matching with facial imaging, one for mobility identity platforms and another for predicting timing for quality images.

EyeLock has now been issued 47 patents with another 30 plus applications in process. I have no doubt that EyeLock has the most advanced Iris biometric on the market and our standoff distance doubles our nearest competitor, which is essential for accurate and convenient consumer use for smartphones and IOT devices.

On our third quarter conference call, I stated that we expected to finish the year with growth, flat to better gross margins and lower overhead compared to last year. Though sales were a bit lower than forecast, we accomplished all three. The real story was bottom-line improvements.

We're even more optimistic about fiscal 2018 and expect we will generate topline growth and improved profitability. Our foundation is strong. We have opportunities to continue to drive efficiencies and savings and we are investing in technology, the key to long-term success.

I'll now turn the call over to Michael and we will then open up the call for questions, Mike..

Thanks Pat. Good morning, everyone. As Pat covered our results in detail and we have everything documented in our Form 10K, I'll just provide a few updates with respect to the income statement and then discuss our balance sheet.

Starting with Q4 comparisons, the $8 million favorability in operating income was driven by the improvements in gross margins and lower total operating expenses, the latter of which was due primarily to lower R&D expenses and the prior year's impairment charge.

We reduced expenses within our automotive and consumer accessories segments and increased investments in premium audio to support growth. There are additional projects underway and we're focused on improving processes and generating additional savings in fiscal 2018.

Other income/expenses were approximately $800,000 or $1.3 million reduction compared to Q4 of fiscal 2016. Within this interest expense and bank charges declined by $1.2 million and that was the primary driver. Our joint venture ASA generated income of $1.5 million in both periods.

As Pat indicated in his opening remarks, we reported significant year-over-year improvements in operating income, net income attributable to VOXX and both EBITDA and adjusted EBITDA.

There were only $185,000 of adjustments in fiscal 2017 fourth quarter associated with stock-based compensation, whereas in quarter four of last year, we had adjustments totaling over $3 million $2.9 million of which was related to intangible asset impairment charges.

As for our fiscal year comparisons, please refer to our Form 10K, which was filed after market closed yesterday. I'll make I will make just a few comments before turning to the balance sheet. Operating expenses declined by $5.6 million year-over-year and fiscal 2016 included intangible asset impairment charges of $9.1 million.

Removing this from the mix, total operating expenses increased by $3.5 million. The increase however was on engineering and technical support as we increased our R&D spend by $6.2 million to support new product development initiatives at VOXX Hirschmann and within our premium audio segment both of which are anticipated to grow in fiscal 2018.

While we intend to continue investments in these areas, we also expect modest declines in the coming year. We have a $5 swing in other income expenses. The big shift relates to the gain on bargain purchase of $4.7 million in fiscal 2016, which we have discussed previously.

Interest and bank charges declined by approximately $600,000 and this was principally due to the $1.3 million write-off of deferred financing cost associated with a credit facility abonnement in January 2016. Effective tax rate in fiscal 2017 was an income tax provision of $1.7 million or 121.9%.

On a pretax loss from operations of $1.4 million as compared to a benefit of 22.3% on a pretax loss of $7.7 million from continuing operations in the prior-year. The effective tax rate in fiscal 2017 differs from the statutory rate of 35% primarily due to the impact of the reversal of uncertain tax positions under ASC 740.

We maintained evaluation allowance against the U.S. deferred tax assets and certain foreign jurisdictions and any decline in evaluation allowance could have a favorable impact on our income tax provision and net income in the period in which such determination is made.

The effective tax rate of 22.3% in fiscal 2016, differs from the statutory rate of 35%, primarily due to the impact of the bargain purchase gain, the noncontrolling interest related to EyeLock and the U.S. effective on foreign operations, including tax rate differences and foreign jurisdictions.

As for the balance sheet, our cash position as of February 28, 2017 was $7.8 million compared to $11.8 million as of February 29, 2016. Accounts receivable net were $90.6 million up $3.6 million and accounts payable net were $61.1 million up $5.4 million.

Inventory of $153.1 million increased by approximately $9 million and this was principally due to product load ins within our consumer accessories and premium audio segments.

As Pat mentioned, consumer accessory revenues were down in Q4 or are anticipated to increase given new product lines, added SKUs and new distribution and we are planning according.

Our total debt as of February 28, 2017, less our current portion of long-term debt and less debt issuance costs stood at $97.7 million compared to $88.2 million as of very February 29, 2016. The increase was in our domestic credit facility, up over $20 million to support our working capital needs.

I will add that our total debt position was down $7.6 million since our fiscal third quarter end. Other variances when comparing our debt position year-over-year is as follows. Our euro ABL obligation declined to approximately $1.5 million and our mortgage associated VOXX Germany declined by approximately $800,000.

Fiscal 2016 also included a $5.1 million related a VOXX Trace mortgage, which was paid in full as we purchased a building housing, Klipsch and RCA. You can find a breakout of our debt position in Footnote 7 of our Form 10K. We are well within our financial covenants and have a working capital needed to support our operations.

With improvements made this year and our outlook for both growth and increases in our bottom line, we anticipate the company will be in a position to generate cash, fund all working capital requirements and pay down debt, thus lowering our interest payment further. This concludes my prepared remarks and at this time I'll turn it over to Pat..

Thank you, Mike and operator if we have any questions, we can take it now..

Thank you. [Operator instructions] Our first question comes from James Medvedeff with Cowen and Company. Your question please..

Hi guys. Thanks for taking my question..

Good morning, James..

Good morning. The first thing I would like to ask about is the growth, the sustainability of these gross margins, so auto particularly strong right.

What's driving that gross margin strength in the quarter and how sustainable is it?.

Within the consolidated group, the fourth-quarter sales are impacted by higher sales of Klipsch, which is our highest margin category. The premium audio space is the highest margin category that we have.

We also have some new programs that started within the OEM business and they always start a little bit higher than where we are normally tracking because over the life of the contract, they do tend downwards during the contract period..

So, OEMs, the beginning of the commencement of OEM programs in automotive that drove the big increase there in gross margin and how sustainable or how long can those gross margins continue?.

It's a mix of -- when new programs start like I said they normally start at higher margin and they may trend downwards.

So, depending on how many new programs that you have starting versus how many programs that you have that are two or three years into their contract, we have a number of new programs that are scheduled for this year, both in Hirschmann in Germany and in the U.S.

But then again there's also depending on the product category that you're introducing, also affects the margin, whether it's remote start or rear seat entertainment, or a tuner, or an antenna.

So, depending on the product mix of what we're introducing, what contract we're starting and how many new contracts we're starting versus existing contracts, that has an effect on the margins. I would tend to say that our margins would come in pretty much where they have been over the past few years within the automotive segment..

Okay.

So, it sounds like Q4 was maybe a little above not sustainable at that high level?.

Yes..

And then sort of a same question for premium auto, which ticked down a little bit on gross margins, you said Klipsch was up in the overall mix, the whole company, what would drive that decline in premium audio in gross margin for the fourth quarter?.

The fourth quarter decline will come primarily from promotions that are conducted for Black Friday and fourth-quarter promos.

Some of the fourth-quarter business as you know we ended February, some of the fourth quarter business has a sales of products that we're exiting because we're moving into new products and any holdovers from Christmas that need to be moved out.

So, you get -- there are some deals that are done to clean up the inventory towards the end of fiscal year, but what we anticipate to see in the premium audio category is probably not in the first quarter, but for the year better gross margins overall..

Okay. And then the same question for the consumer accessories business. They did they include….

That is purely mix depending on what we're selling, depending on whether it's a reception product or a 360 camera that has a big impact on the numbers.

The more we sell some of the lower margin products, you will get that impact and I would think that as we look into the new year based on the new products that we're introducing, that we may see a slight improvement on the overall margins within the accessory group..

Okay. So, congratulations on reaching the 30% consolidated gross margin target.

It sounds like with the puts and takes in automotive and some of the others that you may dip back down below 30% for the next quarter or two, but how I think about it for the full year?.

I would think that we're going to track close to what you've seen us track close to what you've seen us track over the last few years..

Okay. Thanks. The final question that I have for now is on expenses, for the run rate of operating expenses, adjusting out the non-cash, I am sorry, the run rate on expenses as continued, it's down year-over-year and its down quarter-over-quarter.

Does it continue to its $50.3 million for the quarter? Does it continue to drift down from here or has it of stabilized and what's driving?.

Again, we have multiple operations. So, some have -- we brought the overhead down to where we think it sustainable and where we think it's correct. So, you're not going to see much further improvements in some of the different subsidiaries that we run.

In some cases, due to R&D expenditure, you may even see a slight increase, but within certain categories or some subsidiaries, we do have some targets to bring down overall overhead..

Okay. All right. Thanks..

Thanks James.

Operator? James?.

Yes, I am back. All right. There was one other question that I had, looking at the -- let me split that up, looking at the -- sorry, it looks as though EyeLock was pretty much breaking..

No. I don't know what you're looking at..

Yes, the net loss that was -- I'm sorry, net loss attributable to noncontrolling interests of $2.2 million, does that suggest that EyeLock lost $2.2 million in a quarter..

In the quarter, yes. So, if you're looking at the minority interest, no that's the minority interest that goes out to our partners..

James, the minority interest represents the ownership from our percentage ownership that goes to our partners. Inside the 10K I can't give you the exact page. There is the footnote that shows you the financial operations for EyeLock, which was a loss for the year..

Okay. I'll check there. Thanks again..

Okay..

Thank you. Our next question comes from Thomas Kahn with Kahn Brothers. Your question please..

Thank you, Mike. What's the unused line of credit.

How much room do we have on the line of credit please?.

We're in the mid 8s..

Okay. So, like $50 million, the $40 million, $50 million, $60 million..

We're in the $30 million, $20 million to $30 million..

$30 million is the unused line of credit, okay. One more, on my neutrality eight comes in about a week, on Hirschmann products will be on that car, in other words….

Most likely there will be antennas on that vehicle, multiple antennas on that vehicle. I couldn't tell you..

Current Audi 8 has lane -- going out of the lane and back up and if you get too close to the car in front, it break you, is that stuff Hirschmann in her current Audi 8..

No, it would be audio product, it would be multiple antennas and things like that. We do not have any driver assistance products in the Audi 8..

So, what's the multi-antenna because I am old, I don't know what that means?.

Well you have AM, FM, satellite radio, GPS. So, we would antennas to bring in all that..

Okay.

So, for radio, the antenna wouldn't all likely be a Hirschmann antenna?.

Yes, most likely yes..

Okay. Thank you very much..

Okay..

Thank you. [Operator instructions] Our next question comes from Bruce Olephanth with Oppenheimer. Your question please..

So, good morning, I would really like to know what these current order backlog is?.

The current order backlog for what..

I remember last quarter, you we're saying that your backlog was like $400 million..

The $400 million we were referring to was the businesses, the business that we have won within our OEM business over the last number of quarters.

When we look at our business in the automotive space and one of the reasons why we like it, we can look out one and two years and get a good feel for where the business is based on the contracts that we've won.

I would have to at this particular point look to see what we call our book to business is looking into this year, but I can tell you it's as good as it has been in previous years and we will and do expect to see an increase in our OEM business and most of the business that we do this year especially at Hirschman, is business that is considered already booked because the contracts have been won.

The production for that vehicle has started and we are on that vehicle..

And also, can you go ahead and give us, EyeLock seems to be a part of the company that's growing and really exciting, can you give us some example of some of the EyeLock customers?.

On the perimeter access side, we do business with pretty much all of the major security companies, Stanley, Tyco, we have pretty much worked out all the software with all the major back end security programs so that adding a EyeLock door reader, one of our NXTs would be very simple. There is no more -- there is no additional work that has to be done.

So, within the perimeter access space, we're doing business with pretty much all the majors.

On the embedded side, we are working with a number of different companies that produce various products whereby that they're looking to increase the security surrounding that product as to whether or not someone is getting into a cabinet that is a high secure cabinet like a drug cabinet within a hospital.

We're working with a number of manufacturers that produce those types of products.

When you look at some of the new very sophisticated vending machines, where the machine actually remembers who you are and your preferences, we're working with companies in that field as well whereby it's very important that the machine knows who you are when you get there..

And also, being that we're well into the first quarter, it's the middle of May, could you give us any color at all on the first quarter?.

First quarter is again something that we don't really project on the quarters. I'm not giving guidance, but we are running according to plan as far as the quarter sits right now..

Because I know last year in the first quarter, you lost I believe $0.17, could we make the assumption, well into the quarter that you would be profitable?.

First quarter is always a difficult quarter for us. So, I would think that you would see more of the same, I am not saying that the numbers are going to be where they were last year. We are looking at this year and we believe that we're going to see an improvement this year in fiscal '18 over fiscal '17..

All right. Thank you very much..

Welcome..

Thank you. I am not showing any further questions in queue. At this time, I would like to conclude today's conference. Thank you very much for your participation ladies and gentlemen. You may all disconnect. Everybody have a wonderful day..

Thank you all, and thank you for your support. Have a good day..