Glenn Wiener - IR Pat Lavelle - President and CEO Michael Stoehr - SVP and CFO John Shalam - Chairman of the Board

Jim Medvedeff - Cowen and Company Brad Leonard - BML Capital Management Mike Hughes - SGF Capital Thomas Kahn - Kahn Brothers

Good day, ladies and gentlemen, and welcome to the VOXX Fiscal 2019 Second Quarter Results 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 turn introduce your host for today's conference, Mr. Glenn, you may begin sir.

Thank you, Kevin. Good morning, and welcome to VOXX International's Fiscal 2019 Second Quarter Results Conference Call. Our call today is being webcast live on our website, www.voxxintl.com, and a replay is available for those who aren't able to make today's call. Speaking for management this morning will be Pat Lavelle, President and Chief Executive Officer; and Michael Stoehr, Senior Vice President and our Chief Financial Officer. Following their remarks, we'll have a Q&A session for those investors wishing to ask any questions. John Shalam, Chairman of the Board, is also with us today and will be available during the Q&A portion of the call. 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, 2018. At this time, I'd like to turn the call over to Pat Lavelle. Pat?

Thank you, Glenn and good morning everyone. Q2 was impacted by aggressive actions taken to realign our consumer accessory segment, both domestically and abroad as well as our international premium audio operations. These actions resulted in higher losses for the quarter, but when you back out the non-cash impairment charges you’ll see that overall our operations performed significantly better in this fiscal year’s second quarter than in last years. Our Automotive segment is growing and profitable, premium audio sales came in where projected and our margins improved over 400 basis points and pre-tax profitability increased over $2 million. Everything that we are doing is about improving our business for the long-term and driving profitability. First, Automotive, net sales of $40 million were up 22.4% when comparing the fiscal second quarter, as the OEM rear seat infotainment programs we announced in prior quarters with GM, Ford, Nissan and Mazda are in full swing and the OEM remote start program, Subaru is performing very well. Year-over-year second quarter sales in our OEM business increased 55% with OEM rear seat infotainment sales up 75% and OEM remote start sales up over 28%. Our after-market automotive business declined less than $1 million and year-to-date total automotive and net sales are up 14.3% and this momentum should continue into our third fiscal quarter and will likely slow a bit in the fourth quarter, but for the year automotive is expected to be up with OEM driving results. The segment is anticipated to be more profitable and despite possible higher component cost but we are looking at every possible way to reduce expenses where possible managing supply chain cost with key vendors and implementing lean manufacturing across our operations. These are just some of the things we are working on to ensure margins remain strong and pricing remains in line with the market. We are also in discussions with other OEMs beyond the ones I have discussed about EVO as it’s highly differentiated solution from what is currently in market and gives us a competitive edge. We are developing other solutions both for OEs and for the after-market which gives us confidence in our ability to drive value over the next several years. Next is Premium Audio. Sales were essentially flat in the second quarter and down a little over 7% year-to-date. As I mentioned on our year end call, we limited distribution to improve gross margins and profitability for ourselves and also for our customers. 2Q gross margins were up 410 basis points and year-to-date gross margins are up 560 basis points and consistent with our statements to lower overhead, total operating expenses within premium audio year-to-date are down over 16%. The real story is profitability. Pre-tax income improved $2.3 million when comparing the fiscal second quarters and improved by $7.8 million for the six month period. The outlook is good. We will also be allocating more dollars in support of new products in the second half of the year and expect tariff related expenses may lower GP somewhat, but margins should remain strong and the segment will remain profitable with the year-over-year operating profits anticipated to be up over 50%. We are offsetting some of the higher cost by gaining efficiencies and managing inventory, storage and freight, and we continue to look for other ways to lower fixed expenses. In line with this strategy, we will be realigning our international premium audio operations by combining Magnat, Mac Audio and Heco under the Klipsch group umbrella thus operating as one team in Europe, which will lower fixed costs, advanced R&D and improve our market position. In 2Q, we saw the successful launch of our new Reference and Reference premier speakers and subwoofers, products that are at the heart and soul of the Klipsch brand. We launched new Heritage sound bars to increase our footprint in the custom installation market and Jamo [ph] continues to gain traction and recognition as our Jamo [ph] studio series was awarded the international EISA award as the best buy home theater speaker system for 2018 and 2019. Last month, we launched our new R5 Wireless headphone expanding upon our high quality Bluetooth headphone offerings and this fall, Klipsch will ship its first Google Voice assistant product, the three GVA. These are just some of the few highlights and we can certainly discuss more during Q&A. As for our consumer accessories, and as I noted in my opening remarks and on my last call, we are taking action to monetize certain assets and restructure others within this segments of improved profitability. We’ve recently combined our two German accessory groups into one company operating out of the Schwaiger facility in Germany. We have started a sales process with a goal to evaluate moving forward with the transaction by fiscal year-end. Additionally, we have begun the restructuring of our domestic retail accessory group focusing on products that our retail partner’s move and consumers are purchasing in higher volume, and of course categories that are profitable. We are focusing resources on smart home and security where we have a very strong and diverse distribution and a host of new products coming to market. Reception, where we have leading market share, strong brand recognition and technical innovation. The Project Nursery market, for infants and toddlers, where we are expanding both distribution and shelf space. In 2Q, we added Best Buy to our lineup and just introduced the Wi-Fi monitor that is compatible with Google Home, and Amazon Alexa, and Karaoke where our Singsation line has been met with great reception for this holiday season, and we expect to sell out all inventory brought in for the holidays. For the nonretail product lines within our accessory group, within the healthcare space, our wearable program for United Healthcare’s motion program kicked off the renewal season with wearable devices from Apple, Samsung, Garmin and Striiv and we’ve recently engaged with a leading medical device manufacturer to provide Apple smart watches for their wearable program as well as a Samsung wearable for Reemo Health, whose program targets senior health, well-being and safety. We expect these programs to positively impact our overall performance within this segment. And with EyeLock, where we have already realigned to bring EyeLock from the R&D stage to commercial -- through a commercial entity, while reducing our cash burn with operating expenses down approximately $2 million for the six month comparison. You saw announcements regarding our partnership with ViaTouch and the commercial launch of the VICKI artificial intelligent vending machines we are now delivering the first set of units with more on the way and expect the first order wave to result in over 500,000 in revenue and significantly more volume slated for next year. We will also be debuting EyeLock's technology on slot machines in partnership with IGT at the G2E Global Gaming Expo this week. This is something we've been working on for a number of months and next steps will be determined by initial market reaction at this show. We continue to work with companies in the Defense, Technology, Healthcare, Automotive and Financial services industries, as well as with the U.S. and other international governments. There is a lot of momentum. I cannot provide the details on these just yet but progress is being made and we expect EyeLock to begin generating more revenue and income this year, building into fiscal 2020. Staying in consumer accessories there were expenses in 2Q related to our restructuring and a potential sale process. Due to these restructuring plans, we also took a non-cash impairment charge on assets from our 2008 acquisition of Thompson's AV Consumer Business. By restructuring in this manner, we will free up cash resources to focus on products and categories where we believe we have competitive advantages, opportunities for expansion and of course technology innovation as we have with EyeLock. In summary, VOXX continues to transition, and we are making the necessary moves to strengthen our foundation, generate more profitable sales and improve the overall financial profile of VOXX. In the second half of the year, we will show some lower sales compared to last year due to what I have just discussed but gross margins will improve, operating expenses will decline and our business, excluding impairment charges should be profitable this year. With the changes underway, next year’s profitability should be even greater and more consistent and we remain focused on exploring other avenues including divestitures and certain acquisitions. I’ll turn the call over to Mike now for a brief review of the financials and balance sheet and then we’ll open it for questions. Michael?

Thanks, Pat. Good morning, everyone. First, I’ll cover the non-cash impairment charges. During the fiscal 2019 second quarter, as Pat mentioned we re-evaluated certain areas of our accessory business and projections, and reported a 9.8 million impairment which was recorded in total operating expenses. Excluding the impairment, total operating expenses for the comparable second quarters declined by $6 million or 15.4% versus last year, reflecting a continued emphasis on our expense management. Without the impairment, our operating loss was $1.7 million versus an operating loss of $10.3 million in last year's second quarter, an improvement of $8.6 million. Our total operating loss including the impairment was $11.5 million. Other income and expenses. As a result of the economic deterioration of Venezuela, the currency devaluation in the ongoing political climate, it was determined that a non-cash impairment on our rental properties was needed of approximately $3.5 million. It has no impact on our cash. We still own the investment properties and they are generating some rental income. We do expect at some point in the future an improvement in these assets. Our interest and bank charges declined by approximately 700,000 as we have no outstanding balances on our domestic credit facility. Please keep in mind, interest in bank charges consist principally of mortgage interest, interest on the euro asset based loan, factoring charges, credit card charges, bank fees and amortization of debt instrument charges. For the three and six months ended August 31, 2018 the company recorded an income tax provision of $8.3 million and $7.2 million, a negative effective tax rate of 58.9%, and 40.5%. The company recorded an income tax provision even though the company reported a pretax loss from operations. This income tax provision does not represent cash tax liability. Pursuant to accounting literature, the tax provision was due to the use of an estimated annual effective tax rate of negative 50 -- 52.7% for fiscal 2019 being applied to our year-to-date pretax loss. The calculation of the estimated annual effective tax rate is based on our annual pretax income forecast, which includes, profitable jurisdictions, anticipating income tax provision and loss jurisdictions for which a limited tax benefit can be recognized. The mix of jurisdictions produces a negative effective tax rate, which results in an income tax provision when applied to the pretax losses for the third and six months ended August 31, 2018. If the annual pretax income is achieved for the remainder of the fiscal year, the company anticipates recognizing an income tax benefit in the third and fourth quarters of fiscal 2019. There's a lot of activity going on in our financial statements as we move our plans forward. Excluding the impairment charges and write down of the Venezuela assets, the company had a pretax loss of 877,000 versus a pretax loss of $9.8 million in last year's second quarter. After adjusting for the FX losses related to the Hirschmann transaction. In total, we had $21.6 million of non-cash charges in our business. $13.3 million impairments and $8.6 million in tax provisions, which clouds the underlying and positive changes of the company. We reported adjusted EBITDA of $4.3 million in fiscal 2019 second quarter, an improvement of $5.7 million and for the six-month period, adjusted EBITDA was $5.8 million, an improvement of $8.3 million. Our balance sheet remains strong and as of August 31, we have $44.2 million in cash and cash equivalents. Nothing outstanding on our domestic credit facility and total debt of $18.4 million, of which $11.7 million is mortgages outstanding on properties in the U.S. and Germany and $6.6 million in euro asset based loans used by our German operation. This concludes our prepared remarks and we are now ready to open the call for questions. Glenn?

Operator, please go ahead.

[Operator Instructions] Our first question comes from Jim Medvedeff with Cowen and Company.

Good morning, guys.

Good morning.

Good morning.

Congratulations on the expense controls. It's impressive.

Thank you very much.

So, I'm just going to ask a couple of questions here if it's okay. Are you able to provide any -- on the Oehlbach and Schwaiger, the combined company, the German operations, can you give a sense of sort of what the size of revenue is and the margins that comes out of those businesses?

Yes, that business is running approximately somewhere around 30 million with the $3 million EBITDA.

$3 million EBITDA; okay, good. Thank you. And the Venezuelan rental properties, are they now completely written down to zero?

Yes, they are. Even though we do get – they are all rented, the buildings that we have there. We get little income out of them. But they will be written down with this impairment.

Okay. Thanks. And I'll go with more if that's okay and then I'll get back in the queue. Well, I guess I have to follow-up this with you later on this tax situation, but are you still modeling 32% for the full year?

This is Mike speaking. As I've said in my remarks, the full year unfortunately is at this the NOL [ph] effective tax rate is negative 52%.

Okay.

Mathematically that's the way its working out; two negatives are creating a positive.

And that's due to jurisdictional things?

Yes. And this impairment charges that we're facing.

Right. Understood. Okay. Thank you. That will do it for me for now. Thanks.

Just one point to make out; we still have approximately 43 million of NOLs in tax credit, so that we will not be paying any tax credits in the United States – tax in the U.S.

Okay. That's helpful. Thank you.

Our next question comes from Brad Leonard with BML Capital Management.

Hi. Thanks for taking my question. Did you say that you expect to be profitable in the second half of the year excluding charges or for the full year?

For the full year.

For the full year; okay. On the 360 Fly, if you guys have, you guys have a note receivable from them that's moved into the current assets. What is – I mean, is that business profitable? Do they have – or do you expect to be paid on that this year?

That business right now they have a number of potential customers that they're doing business. They have a number of customers, they doing business with right now on the different 360 cameras whether they are DVRs or body cams primarily for the public safety sector. They have just completed testing of a threat assessment system that is being evaluated right now by one of the largest security companies. And our position there is that – although we're one of the senior secured creditors and if at any point in time we feel that it's to our advantage to convert because it's all convertible debt, and convert our debt into equity and own the company, we would consider to do so. And that all depends upon how well they do with the potential new business that should be coming in their way.

How much of the company would you own if you converted it?

I don't have the exact number, but it would be substantial. We would definitely have controlling interest.

Okay. And currently we have no equity ownership?

None.

Okay, okay. All right. So the divestitures you talked about that, 30 million in revenue, 3 million in EBITDA. What about EyeLock? If you converted your loan on EyeLock, how much additional equity would you own of EyeLock?

We probably come up into the high 70s somewhere around there.

So this loan is due in April of 2019, I think on EyeLock. So you could either extend it, change the terms, could demand a payment of one and half times the loan amount. Is it correct?

Yes.

But they would have to do a sales transaction to pay you in that?

Yes. if the company was sold, we would get a multiple of one and half times the debt, so its favorable no matter how we look at it if we decide that the new business that is – that we expect that they will generate we could decide to convert into equity, take a bigger share of the company or if the company we sold, we can – we'll do very well with the multiple on the debt.

Okay. Do you – on the last call you mentioned that you had won some new – you had some new business that you expected to come in the next 12 to 15 months. And I'm assuming that you ran through some of those on today's call. And what is the partnership with the -- on the slot machines? Can you explain a little bit more?

IGT is one of the largest slot machine manufacturers in the world. And at the show which is going on right now, they have – they are demonstrating a bank of four machines whereby the iris technology is used in those machines to authenticate and identify the player.

Okay. So you don't – you would need to – I'm not a slot player. This would save you from…?

Currently, it eliminates cards and thing like that that they use now.

Okay, that's interesting. And you mentioned that you expect 500,000 in revenue from the vending machine?

The vending machine company is just getting started. They're just starting to deliver and we would expect that 500,000 in revenue this year and that ramping up based on their projections to us as to the number of machines that they have orders for and plan to sell next year to be a very significant number for EyeLock.

Okay. And then could you just run by some of those other – you mentioned few other things for the EyeLock that you didn't go into the detail but besides the IGT?

We just supplied number of our [Indiscernible] machines which has a very high throughput count to one of the government agencies. And that contract will be filled in the third quarter. There are companies in the healthcare space, pharmaceutical companies that are looking and evaluating our technology. There are companies in the automotive space that are evaluating our technology. So – and then there is also banking, you know we have Stanley and Tyco as some of our largest security partners. And the interest in iris we believe is growing as the shortfalls of facial start to be realized. There was an article not too long ago in the newspapers. Some of the facial systems are only picking up 85% of the time. It can be spoofed by or fooled by beards or makeup or things like that. And that's our confidence in iris. The iris is the most secure biometric short of DNA. And that we believe is what wins the day for the EyeLock team because it's just as fast and is as competitive on a dollar basis as any of the other biometrics out there. And I think when people realized the security level, the increased security level of iris I think that we'll see more and more companies, governments gravitating toward iris.

Okay. So you expect based on what you're seeing that the losses are going to be continuing to get smaller in EyeLock going forward?

Yes. We're down. We expect as revenue increases, I mean, our overhead is down and our actual spend by 2 million this quarter. We expect that to continue, but also we expect to see revenue increase as we move along and as some of these programs get implemented.

Okay. Very good. That's all I have. Thank you.

Thank you. You're welcome.

Our next question comes from Mike Hughes with SGF Capital.

Good morning, couple of questions for you. Just starting on the consumer side, if we exclude the EyeLock losses for the last two quarters, it looks like the EBITDA a negative $2 million per quarter, the last two quarters? And you're indicating, you're selling or potentially selling the business in Europe that's profitable? So from an EBITDA perspective will the consumer business turn even more negative?

No. The changes we're making. The first off, the EBITDA has improved in our European operation because of the consolidation of the two entities, okay. Oehlbach is operating in Pulheim, Germany and Schwaiger is a standalone operation further south in Germany. We are combining the two. There's a tremendous amount of synergies in that combination and that is adding to the profitability of the European accessory group, okay? The other expenses that we have had over the past few quarters within the accessory group domestically has been the buildup of our program for the healthcare industry. We expect that business to start to generate in the next few quarters based on the activity that's going on, the decisions that are being made, and the launches that are planned. And then finally, with the changes that we're making domestically to our operation, we expect that the domestic accessory operation based on a reduction in overhead and elimination of some categories and SKUs through SKU rationalization program on products categories that are reaching end of life that we will be able to generate profitability within our domestic consumer accessory group.

Okay. And then just a follow-up question. What percentage of the products in that division are sourced out of China?

Most products, let's see, EyeLock is not but most other products are sourced in China.

Okay. So are you -- at 10%?

We expect to have increases. Most of the products within those categories and within the competitive field that we faced do come from China. I don't see anybody having a real distinct advantage based on where they're getting their product. Most of it comes out of China. So as the tariffs come through we will adjust our prices, our selling prices and you'll see increases in prices. That is the game plan.

Okay, okay. And then just on audio, just your consolidation plans there. You said they'll be some savings from that. Can you potentially quantify that for us?

At this particular point we have an evaluation of combining the German operation that we have selling off the building that we had there. We anticipate that we will increase the EBITDA of the German group by at least 1.5 trillion [ph] and that would be then added to the Klipsch group overall.

Okay. Thank you very much.

You're welcome.

Our next question comes from Thomas Kahn with Kahn Brothers.

Hey, Pat. Congratulations, you're making substantial progress.

Thank you, Tom.

I'm curious you have an M&A consultant, your consumer accessories business. And in the past I had recommended to you that you hire a consultant to review the whole company to see what changes can be done because I remember John a number of times saying, the company's worth $20 to $30 a share. And I know that John is a truth teller, so I don't have a problem with that. I just have a problem in what's happening. We're moving in the right direction, but don't we need an overall consultant? Are we little too close to the forest to see the trees. So sometime in my lifetime we can get closer to the numbers that John has mentioned? So, what I'm saying to you again is you hired an M&A advisor for the consumer electronics business, but I had recommended a number of times was you hire a consultant to evaluate all of our businesses, all of them and give a fresh set of eyes to all of our businesses and how we can improve things. And I've mentioned it a number of times. I never see any release saying that yes you have hired a consultant to review all of your businesses. Doesn't mean you have to take consultant's advice, but to get to get us closer to the numbers that John has mentioned over the years. That's interrogatory.

Tom, we've heard you over the years in looking at our businesses. We have brought in people to look at the different operations as you've indicated. And one of the decisions that we've made based on that is number one, separating the -- combining the two European accessory groups for greater synergies in savings and moving our European operation into one group. So yes we have brought in people look at the operation. We will continue to do so.

Thank you.

You're welcome.

And I'm not showing any further questions at this time.

Okay. If there are no further questions, I'd like to thank you for your interest this morning and I wish you all the good day.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect. Have a wonderful day.