Glenn Wiener - IR Pat Lavelle - President and CEO Michael Stoehr - SVP and CFO Jim Demitrieus - CEO, EyeLock LLC

James Medvedeff - Cowen & Company

Good day, ladies and gentlemen, and welcome to the VOXX International Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to introduce your host for today's conference, Mr. Glenn Wiener. Sir, please may begin.

Thank you, Liz and good morning everyone. Welcome to VOXX International's fiscal 2016 second quarter results conference call. Today's call is being webcast on our website, www.voxxintl.com and can be accessed in the Investor Relations section of the site. We also have a replay available for those who are unable to join us this morning and the detailed information was issued in our press release which was issued again after market close. We filed our Form 10-Q with the Securities and Exchange Commission and issued our press release over PR Newswire. Both documents can be found on our Investor Relations website in the News Release section and other SEC filings respectively. Speaking for management this morning will be Pat Lavelle, President and CEO; and Michael Stoehr, Senior Vice President and Chief Financial Officer, both of whom will be available for questions after our prepared remarks. Also joining us for the Q&A portion of the call is Jim Demitrieus, CEO of EyeLock LLC. Before I turn the call over to Pat, 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. 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 2015 period, ended February 28, 2015. I'd like to thank you all for your support and at this time, I'd like to turn the call over to our CEO, Pat Lavelle. Pat?

Thanks Glenn and good morning. Our second quarter sales came in at approximately $5 million below the guidance we provided on our last call. Gross margins were in line at 29.2% and our overhead excluding the intangible asset impairment charge taking into the quarter came in at approximately $1.5 million higher than projections due primarily to a delay in NRE funds that will now be received in the third quarter. Today I will review the 2Q results, cover 3Q product rollouts and then spend a little time discussing our acquisition in EyeLock. So let's start with the second quarter. Sales came in at $154.2 million down $23.2 million compared to the second quarter last year when factoring in the euro conversion it was down $11.9 million. Within this, our Automotive segment was essentially flat with prior quarters, while the prior quarter excluding the euro impact. OEM business was up and we had strong gains domestically in our rear seat entertainment business from VOXX Hirschmann. This was offset by lower aftermarket sales domestically. In Premium Audio sales were down $8.7 million or $7.3 million excluding the euro impact. We not anniversary the launch of our Reference Series which helped drive sales in last year's second quarter, and we had lower sales of sound bars and music systems as we transitioned to new products in the third and fourth quarters. We also grew our custom install business and we'll be increasing our focus here where we have seen over a 20% year-over-year gain. Our Consumer Accessory segment is also experiencing softness at retail in certain categories with sales down $6.1 million or $4.6 million excluding the euro impact. Declines were primarily in the recession category which was anticipated due to a reset of a particular SKU at Wall-Mart. Universal remote controls were also impacted by lower TV sales. On the positive side, our 808 brand continues to grow and expand in distribution. Since we launched the brand less than two years ago we've shipped over 1.5 million 808 brands in units and now hold a meaningful share in the under $100 Bluetooth speaker category. Overall 808 sales are up over 40% versus last year. Our acoustic Research lifestyle and outdoor speaker lines are also doing well flat from the quarter but up 3% year-to-date and of course future quarters will include sales of the 360 action camera and EyeLock's nxT perimeter access products which I'll cover momentarily. Our gross margins came in at 29.2% which were down 30 basis points, but in line with our forecast. As usual the markets are affected by product mix and in the second quarter lower sales of Premium Audio impacted consolidated gross margins. The Premium Audio segment did however have higher margins up 420 basis points. Our expenses of $51.8 million were approximately $500,000 above last year's second quarter, but this includes a $6.2 million intangible asset impairment charge as we revalued our Premium Audio projections. Mike will discuss the impairments in his remarks. Excluding this charge expenses were down $5.7 million or $1.9 million excluding the euro translation impact. We are controlling our expenses while still investing in R&D and adding to our engineering teams to drive technology development particularly in our Automotive segment. Additionally, as I mentioned in my opening remarks, we also anticipated approximately $1.1 million in NRE funds in the second quarter which will now be realized in the third quarter. Moving on to Q3, first in Automotives, we began shipping our multi-digital tuner modules to Jaguar Land Rover in July and we'll begin shipping to Daimler-Benz in December. Collectively these two awards are expected to add over $50 million of in the business annually. Our antenna business continues to grow as more and more wireless technology moves into the vehicle. We have a number of contracts in place for both 3G and 4G antennas. Some of this business is new and some contracts simply replace existing business. We began shipping 4G antennas to Audi and remain in discussions with the VW Audi group to provide 4G antenna programs for Porsche and Skoda as well. Earlier this month, we were awarded new contracts from Daimler-AG for three antenna systems ranging from Bluetooth and Wi-Fi antennas and for our new film [ph] antenna. Additionally, at the end of 2015 we will commence antenna deliveries to Volvo Commercial Vehicle group which also includes Renault [ph] and UD Trucks from Japan. These new antenna contracts combine at a total value of over $65 million during the lifetime of the awards. In rear seat entertainment we announced last quarter our contract with Cadillac for our rear seat entertainment solutions for the Escalade and have new contracts in place for our EVO based RSE system with Mazda, Ford and GM. Mazda shipments will begin in the first quarter of fiscal 2017 and Ford and GM are slated for model year 2018 with delivery in calendar year 2017. Lastly, we recently were awarded our first contract for our wireless keyless entry keypad with GM. This initially will be released as an accessory for the Buick Enclave, Chevrolet Traverse and GMC Terrain vehicles with expected production beginning in the second quarter of calendar 2016. It is a $10 million award over a three-year period and opens up opportunities for us to participate on other GM platforms and potentially for other OEMs as well. As we enter fiscal 2016 Hirschmann had approximately $140 million in booked business. At this point Hirschmann has over $170 million in booked business for fiscal 2017 and this does not include RFPs that are in process or any rear seat entertainment or remote starts business or any business from our solar powered asset tracking module which I have discussed extensively on prior calls. Since our last quarterly earnings call, VOXX- Hirschmann combined has won over $95 million in new contracts bringing the total value of awards won in our OEM group since we acquired Hirschmann to over $575 million. We believe our automotive segment is strong and positioned very well for future growth. In Premium Audio in October Klipsch adds two new on-ear headphones to its Reference line engineered for powerful performance and superior comfort, but at a lower price point to reach the high volume under $100 market. In July they launched two new Pro-Sport in-ear headphones engineered and priced to compete effectively for the fitness enthusiasts at $79 and $59 respectively. Additionally, we will introduce all new Bluetooth in-ear monitors that we expect will strengthen and growth our in-ear line. We will also be launching a new high-end X series model for limited distribution with a focus on fiscal year 2017. Although WiSA Enabled Reference Premiere Wireless Home Theater Speakers were launched this quarter the system represents the next step in high-performance consumer friendly home theater using the WiSA wireless compliance test specifications and comes with speakers utilizing the same driver and horn technology as Klipsch's Reference Premiere series. Additionally in the second quarter Klipsch produced or introduced its new Reference Premiere Dolby Atmos enabled home theater speakers. These are high performance systems used in movie theaters around the world now customized for the home. And finally, Magnat in Europe introduced a new Bluetooth sound deck with built-in HDMI and a new THX home theater system which were received quite well at the recent IFA trade show in Berlin. New products are not the only story in premium audio. Where, what and how people buy audio products has changed and we have modified our strategy in response. Despite a marketplace influx Klipsch has maintained its number one position in premium audio and its heritage for quality, high performing sound and that will not change. The steps we have taken will focus resources and expand our offerings in the new growing audio categories. Our new play like multi-room streaming, our new hi-definition theater solutions and our new digital streaming music centers are all products we believe will help boost our topline performance. We will also be placing more emphasis on the custom installation channel as this continues to be a growth area for us. I covered a number of our new products within our consumer accessories segment on our last call, but we'll briefly highlight some of those and new products coming to market. Acoustic Research has a number of indoor and outdoor Bluetooth speakers and has marketing programs designed to catch early spring buyers, kicking off the season with promotions at Costco U.S. and Costco Canada. 808 audio, as I covered earlier is growing rapidly and retail distribution continues to expand. We have added new customers such as Fred Meyer stores, Target and Meyer, expanded distribution at Wal-Mart and Lowes and have a number of holiday promotions in place at Sam's Club, Wal-Mart, Target and Amazon. Both Best Buy and Wal-Mart will be featuring our Terk and RCA branded digital antennas as part of their cut the cord displays during the holiday season. Singtrix will be features at Sam's Club, Guitar Center, Fry's, and Toys "R" Us and will be expanded to include all Target stores for the holiday season. And 360Fly, the panoramic action camera we've all been waiting for will be launched at Best Buy locations next week. We've already shipped for the September pre-orders and on October 18 it will be available at Best Buy locations nationwide in an exclusive campaign that will run through the holiday season. After that, we intend to open up distribution to select specialty stores and other major retailers. There is a lot more to cover on the product side, but in the interest of time I'll move on to our acquisition of a controlling stake in biometric leader EyeLock. EyeLock has an IP portfolio with over 70 [indiscernible] and 36 issued. With technology that can potentially create the most powerful cyber security solution available as well as logical and perimeter access solutions. We acquired a majority interest in EyeLock and now control all of their IP and substantially all of their assets. Their technology and business model enables them to scale across multiple markets and there was no doubt in our minds that iris biometrics will be one of if not the chosen method for authentication in the future. The market growth has been staggering led by fingerprint biometrics and overall is projected to grow to over 23 billion by 2020 with iris authentication estimated at over 2 billion. Moving forward iris authentication will become commonplace for consumers, enterprise, corporations, infrastructures, financial service institutions, government and defense agencies, automobile manufacturers and for technology companies, who may look to integrate iris authentication into routers, switches, set-top boxes, PCs and mobile devices. EyeLock already has an impressive global network in place and locks will play a role in the sale and marketing of their solutions. Some of their partners include Stanley Black & Decker, Tyco, G4S and Protection One for their access control solutions and to government agencies via MorphoTrust. I'd like to give you a sense of some of the deals that we're pursuing. Blue Chip partners and global brands are either evaluating or have adopted EyeLock's technology in the verticals I just discussed using iris authentication as a means to improve system and infrastructure security and for embedded technology applications. EyeLock is in discussions with leading government agencies and we hope to announce an award prior to year end or sometime in our fourth fiscal quarter. EyeLock is in discussions with leading financial service companies as well and have been awarded a perimeter access contract with one which we hope to be in a position to announce in our fiscal fourth quarter. And EyeLock is also in discussions with leading PC, tablet and laptop makers about embedding their technology in these devices. The Internet of Things has made security a critical part of daily life demanding more efficient means of protecting identities and assets. Jim Demitrieus, CEO of EyeLock is on the call with me today and he will be available during Q&A. We are very excited about EyeLock and look forward to working with Jim and his team to bring their solutions to market and for you our investors to build and enhance shareholder value. In summary, our second quarter came in below plan driven by softness at retail within certain groups. While the euro continued to impact results, we do believe that our topline will show improvement next year, given the booked business we have in Automotive, new products through our premium audio, new products in consumer accessories and new contributions from 360Fly and EyeLock as well and potential awards that we are pursuing which have not yet materialized. In terms of our 3Q outlook we expect revenues to be approximately $200 million. Gross margins to come in around 29.5% and our operating expenses to be approximately $55 million which includes the cash burn associated with EyeLock. Based on these assumptions, operating income should be around $4 million. We are continuing to transition our business and entering into areas where we believe there is strong growth potential for the company. Our Automotive OEM business has a lot of potential as does the biometrics market. And we believe the new products we are showcasing for retail like 360 imaging, digital and streaming audio, digital reception products and others will position us for growth. With that said, our balance sheet remains in good position and we are continuing to look at deal flow to further enhance cash flow, income and EBITDA. I'm going to turn over the call over to Mike now and he will provide just a few comments around our balance sheet and then we will open it up for questions. Mike?

Thanks Pat. Good morning everyone. Pat provided the details around our second quarter results and our six-month results are detailed in both our earnings release and our Form 10-Q. If you have any questions on our media performance, we can cover this during the Q&A portion of our call. What I'll do similar to last quarters to cover other income expenses and then transition to the balance sheet. Interest and bank charges of both the three and six-month periods were virtually unchanged, $1.6 million for the quarters and $3.2 million for six-month comparisons. Equity and income of equity investees was $1.5 million in both the fiscal 2016 and fiscal 2015 second quarter and $3.1 million for fiscal 2016 six-month period versus $3.4 million in the compatible period last year. The modest decline in the six-month period was principally due to a change in ASA's product mix. The biggest variance is related to Venezuela [ph] which I covered on prior calls. Venezuela currency valuation net for the three and six months ended August 31, 2014 was $6.7 million representing the re-measurement losses related to our Venezuela bonds. The bonds were subsequently mature during the first quarter of fiscal 2016 and repaid. Additionally, other net increased $500,000 for this quarter and $800,000 for the six-month comparisons principally due to foreign currency gains, interest income and rental income. This resulted in total other income of $23,000 for the quarter versus total other expenses of $5.7 million and $350,000 for the six months compared to $4.8 million in fiscal 2015. As noted in our Form 10-Q the effective tax rate for the fiscal 2016 second quarter was 35.8% compared to 42.2% in the comparable period last year and for the six-month period the effective tax rate was 29.9% compared to 46.3%. The effective tax rate is different than the statutory rate primarily due to a change in Indiana state tax law which resulted in our Indiana R&D credits no longer being realized. The resulting tax provisions you see is a non-cash item which I covered in detail in our prior conference calls. The company recorded an impairment charge during the second quarter of $6.2 million and as a result reported net loss of fiscal 2016 second quarter of $4.4 million and a net loss for the six-month period of $5.1 million compared to a net loss of $2.7 million and $2.2 million for fiscal 2015 three and six-month periods. I would like to now discuss briefly the impairment charges. We evaluate the current carrying value of long life and intangible assets when event and the circumstances warrant such a review. Fair value is determined by primarily using discounted cash flow methodology that requires considerable management and judgment of long-term assumptions. Our estimate of net future cash flow is based upon historical experience and assumption of future trends which may be different from actual results. As a result of this type of analysis, based on the current results within our Premium Audio segment, we took an impairment charge of $6.2 million related to the indefinite life trademark, where we believe we have adjusted accordingly for current periods there is always a potential that future periods would include further impairment charges based upon facts and circumstances as they occur, not just those related to the premium audio segment, but for all our business segments. As Pat has discussed, we have made some changes within the Premium Audio segment and have several new products coming to market in the second half of the year. We believe it will help stabilize sales and improve operational efficiencies. As for EBITDA, we report an EBITDA loss of $1.7 million or adjusted EBITDA factoring in the impairment of $4.8 million. As compared to fiscal 2015 second quarter we reported EBITDA of $1 million and adjusted EBITDA of $7.8 million. For the six month periods, EBITDA was $3 million and adjusted EBITDA was $9.7 million taking into account the impairments as compared to $7.1 million and $14 million for fiscal 2015 six-month periods. Now fiscal 2015 also included the Venezuela bond re-measurement. Now to our balance sheet, our cash position as of August 31, 2015 and February 28, 2015 was $8.5 million. Accounts receivable declined by $21.9 million and our inventory increased by $6.3 million. The decrease in AR was principally due to one, lower sales, two, change in foreign exchange rates and three, the company has several supply chain financing agreements, factoring agreements for the purpose of accelerating receivable collection and better management of cash flow. Our inventory was up primarily due to increases for seasonal programs and additional inventory for both Singtrix and 360Fly. Our total debt as of August 31, 2015 which is inclusive of all mortgages, capital leases stood at $98.1 million compared to $102.3 million as of August 31, 2014. The change relates primarily to capital lease obligations which were $1.7 million as of August 31 and $6 million for the corresponding year ago period. Our domestic bank obligations were $71.2 million versus $74 million at the end of last year’s second quarter, a decline of approximately $2.8 million. The $71.2 million includes advances from our domestic bank lines for obligations related to EyeLock and Florida construction projects during the second quarter. In July we closed on a $10 million industrial development revenue tax exempt bond to finance part of the construction of our manufacturing facility and executive offices in Lake Nona, Florida. We will begin to make principal and interest payments beginning March 1, 2016 through March of 2026. The construction loan is considered revolving loan during the construction and will become a full mortgage when the building is completed and ready for occupancy. Further details can be found in our Form 10-Q on the footnote 14B. Additionally, last fiscal year we made our initial investment in our IP 360 with $3 million and in the second quarter of fiscal 2016 increased this investment to $4.5 million as we acquired additional deferred stock shares bringing our converted ownership position to 9.3% as of August 31, 2015. Similarly, we invested $3 million in EyeLock in fiscal 2015 and during the six months ended August 31, 2015 prior to the completion of our acquisition we loaned an additional $3.1 million to EyeLock in the form of secured short term promissory notes. These notes are reported within our other assets on our balance sheet. On September 1, we announced a successful close of our acquisition of controlling stake in EyeLock. The total purchase price inclusive of all prior investments was $20.2 million and this provided us with a majority owning interest in newly formed partnership, EyeLock LLC. As of today our bank lines inclusive of EyeLock is approximately $95 million. We are reaching our high point for all seasonal products being brought in for the third quarter and our debt position will come down in future periods. We currently have $200 million senior secured credit facility available to the company. Total leverage at the end of fiscal 2016 second quarter was $2.88 versus $2.66 at the same period last year. We continue to look at potential acquisitions and it is our intent to use cash from operations to either be the pay down debt or continue to pursue complementary acquisitions. This concludes my remarks and I will open up the call for questions.

Thank you, Mike. Operator?

[Operator Instructions] Our first question comes from the line of [Shaun McCullum] [ph] with Oppenheimer. Your line is now open. Please go ahead.

Good morning guys. I have a couple of questions. I want to start with one I have asked before Pat on the automotive contracts, as you describe new business and what that is going to contribute, can you give us some sense of what the net effect is of old contracts that are running off and basically can you expect the Automotive segment to show growth this year in local currencies?

Yes we do expect to see growth in local currencies. One of the reasons why we showed the book business, you can see we are winning $50 million roughly in new awards that are starting this year between the Daimler program and the Jaguar Land Rover program, yet our booked business is up $30 million, $35 million. So that is the natural trend of some business falling off as contracts come to the end of life and new contracts coming on. What we do see is that we are winning new business and as this business comes on and as we look at what is coming off we are seeing growth.

So are you winning more than is rolling off?

Yes absolutely.

Okay, thanks. Second area I think there was an announcement recently of some key figures at Klipsch leaving, was that expected?

I’m sorry, Klipsch…

Key people...

Oh, well part of the strategy that we are employing now is obviously to look at some of the emerging categories and emerging markets and we had to adjust to make sure that from an engineering standpoint we had the teams in place to build the products that are necessary, but also from marketing, sales standpoint to make sure that we had people that are familiar with these different market segments, had contacts and things like that, so that we can enter them and be successful.

Okay. And the last question and for Mike is, is the quarter that we are in now, the fiscal third quarter, is that the quarter where you expect to see the biggest negative currency impact during this fiscal year?

Well it depends on what happens with the Euro over the quarter. If the Fed raises rates, I think we are going to see an impact on the Euro, but yes it would have the biggest impact because it is our biggest quarter.

And it is even at this time last year or September last year when the Euro collapsed the most, so it seems like this is the biggest headwind, I’m just trying to get a sense of when does this abate, assuming rates stay where they are should the fourth quarter be less of a drag than the third quarter?

Yes.

Okay. All right, thank you very much.

Okay. Thank you, Shaun [ph].

Our next question comes from the line of James Medvedeff with Cowen & Company. Your line is now open. Please go ahead.

Thank you. Good morning guys.

Hi James.

Hi couple of questions about the guidance are you able to, so that $200 million revenue for Q3 works out to down 10% or 10.5% year-over-year. Are you able to describe which segment aside from the Euro impact which segments are seeing weakness what is impacting that?

Well the Euro was the biggest impact on it and it is going to impact all three segments with the Automotive segment being the biggest one that gets weaker in the buy because we do most of our business in the Automotive segment in Europe. The accessory segment is expected to be up primarily because of the introduction of our new 360 camera. We have inventory this year of Singtrix that is greater than we had last year so we are projecting higher sales there. And then within our EyeLock program which is falling into the accessory category we are expecting to see some improvement there. So the area that we think maybe still impacted will be Premium Audio, but not as what we have seen during the first half.

Okay. Thanks. So that decline of about $23 million year-over-year is that – is the Euro impact similar like it was this quarter like half of it?

Yes the Euro stays where it is right now, it is about down about 18% from its high, but the Euro started to dip a lot last year in the third quarter, so we got to look at the spread. But a big portion of any topline revenue decrease is going to be attributed to the drop in the Euro and especially if it gets worse as we go into October and whenever the Fed meets again and makes a decision.

Right. Then so organically we are still down 5% or so from the weakness carrying through that in the products category and from that domestic aftermarket and that sort of thing, right?

Yes, we continue to see weakness there. Until such time as some of the new products come out.

Yep. All right. I want to ask about the additional pipeline in the automotive market, you signed $95 million with contracts in the quarter, actually I had two questions about that. First of all when do those kick in and how long do they last? And then secondly, what is the pipeline for additional, like have you burned up the pipeline or is the pipeline still growing?

No, no, no, the pipeline is still growing and we are winning more business than contracts that are coming to end of life. The contracts start anywhere in the latter part of calendar year 2016 and run right through calendar year 2022 and depending on the contract it will run anywhere from three to five years. So that is one of the areas that we like about the OEM business as we can project that our business three to five years out based on the contract wins that we get.

Okay. And then one final one in that same area, you noted in the press release that OEM margins were a little bit down and you mentioned that might have something to do with timing, could you just talk about that a little bit?

It is timing within a lot of the contracts that we have with OEMs as you get towards the latter part of the program there is a discount structure from the beginning of the contract through the end of the contract. So as some of the contracts get to close to end of life the margins will come down because of the discount structure we built into it. But as new business is won and as we replace older contracts with newer, we expect to see margins improve.

Okay, thank you very much.

Okay, you are welcome, James.

I’m showing no further questions in queue at this time. I would like to turn the call back to management for closing remarks.

Okay, well if there are no more questions I would like to thank you for your interest in VOXX. We believe we are positioned well to expand the business in the coming quarters and years and we look forward to seeing some of the plans that we have laid out come to fruition. So once again thank you and have a good day.

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.