UEIC - NASDAQ

Good day, and thank you for standing by. Welcome to the Universal Electronics Second Quarter 2023 Financial Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Kirsten Chapman, LHA, Investor Relations. Please go ahead.

Thank you, Gerald, and thank you all for joining us for the Universal Electronics' 2023 Second Quarter Financial Results Conference Call. By now, you should have received a copy of the press release. If you have not, please contact LHA at 415-433-3777, or visit the Investor Relations section of the website. This call is being broadcast live over the Internet. A webcast replay of this call, including any additional updated material nonpublic information that might be discussed during this call, will be available on the company's website at www.uei.com for 1 year. During this call, management may make forward-looking statements regarding future events and the future financial performance of the company and cautions you that these statements are just projections, and actual results or events may differ materially from those projections. These statements include the company's ability to timely develop and deliver new technologies and technology upgrades and related products introduced this year, including meeting the demand for interoperability across devices, platforms, and the hybrid systems in the home; achieving new product development and design near and longer-term successes as anticipated by management in the connected home space; and its line of ultra-low power and energy harvesting control products designed to address the growing demand for more sustainable solutions in electronic devices. The continued successful collaboration with existing and new customers in developing and launching next-generation projects, software solutions and technologies into existing and new markets, which results in increased sales and market share growth for the company; the ability to optimize the company's manufacturing footprint on a timeline and to the extent expected by management; management's ability to continue to manage its business inventories and cash flow to achieve its net sales, margins and earnings through financial discipline, operational efficiency, liquidity requirements, manufacturing footprint utilization strategy, including the recording of material impairment and severance charges and product line and business diversification. The continued fluctuation of the company's market capitalization, the impact to the company's financial statements that may experience due to supply chain constraints and inflationary pressures in macroeconomic conditions its consumers are experiencing, and the direct and indirect impact the company may experience with respect to its business and financial results stemming from the continued economic uncertainty affecting consumers' confidence in spending, natural disasters, public health crises, governmental actions or political unrest, including war. The company undertakes no obligation to revise or update these statements to reflect events or circumstances that may arise after today's date and refers you to the press release mentioned at the onset of this call and documents the company has filed with the SEC, including its 2022 annual report on Form 10-K and the periodic reports filed or furnished since then. In management's financial remarks, adjusted non-GAAP metrics will be referenced. Management provides adjusted non-GAAP metrics because it uses them for budget planning purposes and for making operational and financial decisions and believes that providing these non-GAAP financial measures to investors as a supplement to financial GAAP measures help investors evaluate UEI's core operating and financial performance and business trends consistent with how management evaluates such performance and trends. In addition, management believes these measures facilitate comparisons with the core operating and financial results and business trends of competitors and other companies. A full description and reconciliation of these adjusted non-GAAP measures versus GAAP are included in the company's press release issued today. On the call today are Chairman and Chief Executive Officer, Paul Arling, who will deliver an overview; and Chief Financial Officer, Bryan Hackworth, who will summarize the financials. Paul will then return to provide closing remarks. It is now my pleasure to introduce Paul Arling. Please go ahead, sir.

Thank you for joining us today. Our market diversification strategy is starting to take hold, and we are confident it will drive long-term growth and profitability for several reasons. First, our quality, innovation and service continue to be valued by our customers and end users, and our market share continues to grow in all the markets we serve. Next, the connected home market, which includes HVAC, home automation and security, approaches $2 billion in size and is growing at a compound annual growth rate of nearly 10%. It represents a significantly greater revenue growth opportunity than the home entertainment market. Finally and most importantly, we have quantifiable evidence that the product and technology solutions that brought us much success in home entertainment bring tangible value to our customers in the growing connected home market. In this market, we have secured design wins for over 30 products currently in development. We have expanded our list of customers to include 6 of the top 10 largest HVAC companies in the world who together account for about 1/3 of the global HVAC market, and we are confident of more to come. I'll provide more context to each of these critical points as we talk a little about our history, where we are now and where we expect to go from here. First, UEI is and has always been about interoperability. Interoperability is defined as the ability for different systems, devices, applications or products to connect and communicate in a coordinated way with minimal effort from the end user. This core value proposition was central in our growth and ultimate market share leadership in home entertainment. Our engineers created world-leading products that delivered seamless interoperability to all devices in the AV stack. We solved our customers' challenge to gain control over these disparate devices and systems, not just some devices, but all devices and all brands. Our solutions delivered to home entertainment control experience second to none. With automated device discovery set up in control over everything in the home AV ecosystem, consumers today are able to enjoy true interoperability in their home entertainment experience. Our expertise in connectivity protocols, from infrared to radio frequency to IP, and our ability to make those devices work better together gives us a competitive advantage that continues to create unique and differentiated solutions. These strengths translate beautifully to the connected home space. Over the last 3-plus decades, the home entertainment market has changed greatly and even more so over the last couple of years. Since our net sales peaked in 2019, our primary home entertainment market customers, the video service providers, have experienced dramatic net subscriber losses, which were exacerbated by the impact we endured since the pandemic began. Even with this market decline, it is important to note that our technology leadership continues to grow, and we continue to win new projects in the channel. In fact, today, our market share in home entertainment is as high as it's ever been. However, our absolute dollar amount of sales, particularly in subscription broadcasting, has decreased substantially. We remain committed to this market and continue to support our customers with next-generation solutions, including many hybrid systems that combine linear and stream content and our new line of low-power sustainable energy harvesting products. While we lead the industry with innovative home entertainment control technologies, we continue to invest in growing our position in connected home applications. As noted, our customers and end users value our quality, innovation and service. And our patented leading wireless control technology creates interoperability that is highly desired by customers seeking to extend the reach of their stand-alone or point solutions to become more integral to a connected smart home experience. With the average U.S. home now exceeding 20 connected devices, the need for interoperability is greater than ever as these smart home devices bring connectivity and convenience to the home. However, these devices are often difficult to configure in part due to a variety of often incompatible communication protocols and in part because their value of operating collectively is not yet fully explored. Today, we are actively engaged with the leading brands in various smart home applications to explore how their devices and features can work together to bring additional comfort, convenience, safety and security to the home. By way of example, in the climate control space, we developed a solution with a global HVAC brand to bring more product value and consumer benefit by enabling intelligent wireless connectivity between their existing wall-mounted HVAC controller and smart sensors throughout the home. These sensors, all designed and developed by UEI, include sensors for temperature and humidity, CO2, windows and doors, as well as the presence of people. These devices communicate to the controller to enable automatic energy management features that turn the HVAC system on or off depending on the status of the various sensors. These sensors, working together through software, create a truly smart home as they can provide better comfort and energy savings automatically with no user intervention the very definition of interoperability. We believe all future HVAC control systems will evolve to offer this level of sensing capability, and UEI has the expertise, products and technologies to deliver these types of solutions. Similarly, in the security space, we recently introduced a comprehensive retrofit smart lighting control system with a leading security brand that brings their installers a new smart home product category to their portfolio without requiring installers to touch the home's electrical wiring. The smart lighting system communicates through a UEI-developed smart home hub that connects to the security panel, extending the safety and security features and creating a more feature-rich end user experience. Also in Climate Control this month, after 18 months of development, we began shipping the UEI-tied touch connected thermostat with Mitsubishi Electric Trane U.S., known as METUS. The first of many new design wins on our newest connected thermostat platform, this product works with Mitsubishi Trane's existing line of ductless systems and brings advanced features, including advanced humidity control and built-in presence detection for automatic screen wake-up. This offers METUS a solution to simplify their overall controller system interface, streamline the installation process with on-screen instructions, and optimized deployment costs utilizing UEI's modular power pack architecture designed into all our [ tied ] Comfort family products. Another example is in the motorized shades area. In this space, UEI is uniquely positioned to connect disparate devices in the home to enable a higher degree of energy management by connecting smart motorized shades with a climate control system, namely our UEI-tied touch thermostat. This system intelligently opens and closes blinds in the home to deliver a more automated temperature control experience. Through these examples and many more, we are excited about our progress. The connected home markets on which we focus, again, are nearly $2 billion in size, growing quickly and represent fertile revenue growth potential, not that different from our early days in the home entertainment channel, when our market share was small and our desire and belief in the value of our technology innovation was big. While we cannot disclose details of our other design wins in this market, these developments represent significant potential new product revenue that will add to our top line in the coming 12 to 18 months. As noted, we are working on developments with 6 of the world's leading HVAC OEMs, and we expect to introduce over 30 connected home products currently in development between now and the end of 2024. We estimate that most of the new customer design wins in this market will launch by mid-2024 with the remainder likely to follow later in the year, driving year-over-year net sales growth in 2024 and more revenue growth into 2025. This is just the beginning, as we have approximately 100 projects, new and replacement, at the quote and qualification stage, as well. In summary, I'm confident that, on the evidence of new design wins and the customer momentum we have right now, that we are already on the path to long-term sales and profitability growth. Now I'll turn the call over to our CFO, Bryan Hackworth, for a review of the financials.

Thank you, Paul. First, I'll review the results for the second quarter of 2023 compared to the second quarter of 2022. Net sales were $107.4 million, within our expected range, compared to $139.1 million for the second quarter of 2022. This reflects the uncertain environment we're currently facing, which is more than likely causing households to spend less on discretionary goods, ultimately affecting our end user markets. In addition, [ core cutting ] the video service channel has been a significant headwind. Gross profit for the second quarter of 2023 was $27.3 million, or 25.4% of sales compared to 29.1% in the second quarter of 2022. This decrease reflects lower royalty income associated with the slowdown in television sales as well as under-absorbed manufacturing overhead. During the prior 2 results calls, we explained how over the past several years the enactment of certain governmental policies and changes in the global environment necessitated the expansion of our Mexico facility and influence our decision to establish manufacturing operations in Vietnam. These expansions, coupled with lower demand in our video service channel and projected growth in the home automation space, which because of a much higher average selling price requires fewer square feet of manufacturing space per sales dollar, have resulted in us streamlining our manufacturing footprint. I'd now like to provide an update on our footprint optimization. As of last quarter, we were waiting for 2 final permits in Vietnam that would authorize us to begin operating. I'm pleased to announce these permits were received and manufacturing in our newly built Vietnam facility commenced in June. Operations in Vietnam are progressing as expected and, if production targets are achieved as planned, we'll proceed to shut down our Southwestern China factory by the fourth quarter, reducing our footprint in China from 2 factories to 1. The final phase of our optimization effort will be to streamline operations in Monterrey, Mexico, resulting in a smaller and more efficient manufacturing footprint to meet production volumes for North American customers. We initially expected this phase to occur in the back half of 2024 but, given the overall progress made to date, we're able to accelerate this transition up to the first half of next year. Cost savings related to these efforts, combined with cost reductions at the corporate level, are expected to range from $15 million to $18 million on a fully annualized basis. Moreover, we expect the downsize of our factory footprint, coupled with increased production volume associated with project wins in the HVAC and home automation channels, to ultimately yield a utilization rate exceeding 90% with the flexibility to expand as needed. [ For ] the second quarter of 2023, operating expenses were $29.2 million compared to $30.4 million in the second quarter of 2022. SG&A expenses reduced to $21 million in the second quarter of 2022. In the second quarter of 2023, we received approximately $1.6 million of tax incentives in China relating to programs involving R&D spend. The second quarter of 2023 we recorded a net loss of approximately $800,000, or $0.06 per share compared to net income of $8.4 million, or $0.66 per diluted share in the second quarter of 2022. Better-than-expected gross margins and solid cost management delivered a bottom line exceeding expectations. Next, I'll review our cash flow and balance sheet. On June 30, 2023, cash and cash equivalents were $55.8 million compared to $66.7 million at December 31, 2022. For the first half of 2023, cash flows provided by operating activities were $13.3 million, which we used to reduce our outstanding line of credit to $75 million at June 30, 2023. Now turning to our guidance. For the third quarter of 2023, we expect both sales and bottom line to improve sequentially. We expect sales to range from $108 million to $118 million compared to $148.5 million in the third quarter of 2022. We expect EPS to range from $0.02 to $0.12 per diluted share compared to $1 per diluted share in the third quarter of 2022. I would now like to turn the call over to Paul.

Thank you, Brian. As I said before, we are very excited about the progress we are making with new customer design wins, the reactions to our product and technology solutions and the potential growth in the new market opportunities. By solving the consumer need for better interoperability across devices, platforms and ecosystems in the home, we became the global leader in wireless universal control. We utilize our foundational competitive advantages. Our patented innovation and device control and connectivity technology, our excellence in new product development and our commitment to providing great customer service to truly enable a smart home consumer experience. UEI has been doing this for over 3 decades in home entertainment. Now we are beginning to replicate that success in the climate control, home automation and security markets. We have been rebuilding UEI into a stronger company, better positioned for growth and profitability. As we move through this year and into the next and deliver the many new projects we have won, we expect to drive year-over-year net sales growth in 2024. And with our footprint optimization, we expect to improve margins and operating efficiencies as well. As always, stay tuned. Operator, we can now open up the call for questions.

[Operator Instructions] Our first question comes from the line of Greg Burns from Sidoti.

Can we just start off with the 10% customers for the quarter?

Yes. Daikin was our 10% customer for the quarter at 12.6%.

And when we look at the guide, you are pointing to, I guess, a little bit of an improvement in the top and bottom line, maybe a little bit less than we were thinking. So when we look at some of the projects that you announced, or wins with, like, Hunter Douglas [ Sanfi ], Vivint, are those rolling out as fast as you expected? Or has that been a little bit slower? I guess why is the back half of the year not strengthening to a greater degree, given some of these projects that you've talked about in the past?

Well, sure. Yes. There are many projects, so I can't report on each one. As projects go, some might launch a month after, some maybe multiple months after we had planned. So that has happened on some. Other projects are right on time. In fact, most of our projects are right on time. As far as improvement, we're seeing some in Q3. And our expectation based on we've looked forward into next year at the many projects we've won, 30-plus of them in connected home, but there are also projects in home entertainment on top of that. As we look into next year, we see a much better situation as the quarters improve as the quarters progress. Some of these projects will come out before the end of this year. As I said on the call, one of them just launched recently. Sometimes projects start slow and ramp. The initial orders are smaller, and then they ramp as the project goes on. It varies by project. And again, there are so many at this point, as I said, over 30 in connected home. There's about 30 more in home entertainment. And then we have 100 projects in the hopper, either at the qualification stage or quote stage. So we've got a lot of customer activity right now, probably more weighted to connected home than ever before. And again, when we layer these on to our forward forecast, things look pretty good as the quarters progress.

I guess could you just give us an update on what you're seeing in the home entertainment market? Because it seems like Comcast fell off pretty significantly this quarter. So I don't know if that's an indication of what's happening more broadly. But if you could just maybe give us an update on what's going on there?

Sure. Yes. While I won't comment specifically, as we never do, on specific customers, but as an industry, I guess I'd explain it this way. People that want to simplify the video service provider market simply look at subscribers and the change in subscribers. Our business has driven more off of 2 main things: #1, cable and satellite providers have been losing customers since the beginning of time. Churn has been talked about for a long time. Some customers in that industry would lose 20% of their customers every year. Some years ago, when their subscribers were flat to growing, what that meant is they had about 20% new additions every year. That was a rich source of product for us because, as you might imagine, when they install a new customer here in the U.S., they were averaging over 2 of our products per install. So when the additions have fallen off, the churn is still occurring, but they're having fewer additions. So if they were to lose, let's just say in that example, 20% of their customers, they used to add back at least 20 to get back to flat in number of subscribers. If they add 10% back, that cuts that part of your business in half right, because they were at 10 and they lost 2. They used to add back 2, now they're only adding back one. That cut that in half. There is also a maintenance business, as you might imagine. If you're losing, let's just use the example I just gave, if 80% of your customers stay with you, those customers -- as I've said for many years, remotes live a hard life. They get thrown. They get eaten by dogs. They get hidden by children. They get beer spilt on them. These are all things we wouldn't warranty our product performance against. Consumer calls and says I need new remote. The last thing they want to do is tell them no because, if you have a subscriber that is paying you $60 to $120 a month, you send them a new product. So that maintenance business was always there and still is. So these customers are still buying product. We have seen some of them flatten, meaning they've gone through the transition to a new model of not aggressively promoting, or they've sensed that demand just isn't there, so they haven't promoted to it, right, because if demand isn't there, they're not going to promote. Some combination therein, though, they've had fewer new additions. They still are adding customers, but much fewer than in the past, and they still have that maintenance business. So in certain of our customers' situations, we've seen it be roughly what it was last year, meaning they fell from their once-high 4 years ago, but they're settling down to a maintenance mode at this point. I hope that explains about changes in how they affect us longer-term.

And then, just lastly, Immersion, or investment arm connected to them, took a large stake. Have they been in contact with the Board or management team? Have you spoken with them? Or has it just been more of a passive investment on their part?

Well, they've reached out, and they're a shareholder. So like all shareholders, we will communicate with them.

[Operator Instructions] Our next speaker is Jeff Van Sinderen from B. Riley.

This is Richard Magnusen for Jeff Van Sinderen. First, can you give us more detail on where the Vietnam facility stands at this point, maybe speak to the longer-term plans for the manufacturing [indiscernible] [ respective ] business segments there?

Vietnam is up and running, and it commenced operations in the latter part of June. So as of this time last quarter, we were still waiting for 2 final permits, which we received, so we were able to commence operations. So far, things are operating as planned. It's going well. And assuming that it continues to go as planned, what we'll do is we will, by the fourth quarter, ultimately shut down our Southwestern China factory, and we'll transfer those units to our remaining facility in Northern China as well as to Vietnam. So again, it's contingent on Vietnam being able to hit its production targets, which I have no reason to believe they will not, but there is that contingency because it's a newly formed entity, but things are going well. So once that happens and they reach our targets, we're going to shut down again, [ GTG ], which I expect to be in the fourth quarter. Then as you follow into next year, the next phase will be to streamline our Mexico operations. And right now, we have too much capacity. So it's still going to exist. We're just going to streamline it to get it to a more optimized level commensurate with the production volumes.

And so any details regarding the different segments in the manufacturing across the different segments with respect to [indiscernible]?

Well, yes. We still have the tariffs. So anything that's destined for the North American market will be either produced in Mexico or in Vietnam. And then, when it comes to the actual sales channels, honestly, we don't manufacture by sales channel. So it's not as if you have a factory, that it's more by destination, not by -- we're not [indiscernible] the North American market again because of the tariffs. We're not going to manufacture in China and incur the tariff charge. And then from a product line perspective, each of our factories will produce, it can be HVAC and/or remotes for the AV market, et cetera.

And then we know it's been challenging predicting the magnitude of decline in the legacy video business. So I'm wondering what gives you confidence in your internal projections around future sales progression of that business? And then, further, what prevents you from breaking out the metrics for the HVAC and home controlled automation segment?

There's, I think, 2 general questions in there. What gives us confidence in the future, I think I alluded to this earlier, we have begun the process of discussing with customers their plans for next year. They often plan ahead because they want to make sure that we are ready for the demand that they have. So we do have those discussions with them. It's early at this stage because we're only in early August. But as the next months progress, we've already begun that. So with existing programs with existing customers, that conversation has begun. And then on top of that, we've gone through the projects, as I mentioned earlier. There's hundreds of them. Now again, some are in the quote stage or qualification, which means we're not in development for NPI, as we call it, New Product Introduction. We do have over 30 in the connected home area that will hit -- the product will launch sometime between now and next year. Most of them will launch in the next 12 months. We've looked at each of those products to determine, again, are they new. If they're new products with new customers, then they would be additive to sales. If they are derivative products, they typically can be partially or not at all additive to sales. So there are cases where a customer will change its product and distribute it as they distributed the prior one. And unless there's a price increase, which in some cases there are because it's a more advanced product, that would be partially additive. So we've gone through that level of detailed analysis to determine what do we think next year is beginning to look like, and that's where we have the confidence in saying, because we've looked at both of those. Now again, it's subject to review as we go through the rest of this year. But at this point, given the level of velocity we should see from these new programs, we feel very good about what sales will look like next year at this point.

And the last question was what would prevent you from breaking out the metrics for the HVAC and the home control and automation segment?

Yes. It's something we're contemplating. I mean, I would never say never. Right now, we haven't done it. But I think in the past, we disclosed it as an ad hoc a couple of years ago, I believe. But it's something that, as that continues to grow, it's something that we'll continue to review it and determine if we should disclose it, or need to disclose it publicly. Right now, we do not need to.

Yes. And Richard, there's a little bit of grayness in it because we have the issue of we could do it by customer type.

But because in some cases we're selling HVAC products to security providers, and in other cases we actually have programs now where we're selling HVAC products to video service providers, these worlds are beginning to collide, where customers are moving across home product types. So I suppose we'd have to be very definitionally clear about whether it was the product cut or the customer cut we were looking at. So that's something that makes it a little bit more difficult to define, and we want to make sure that those definitions were clear so that everyone could understand it. So that's one of the tricks where we would have to work through, are we doing it by product type or by customer type. Some of them are simple. We don't yet have HVAC companies buying home entertainment controllers. But I won't tell you that that isn't something that they may be interested in because, again, all of these home protocols are converging. There's many flavors of radio frequency control in the home that are being shared across these product types. It's one of the reasons we feel very confident in our capabilities here, because those many types of RF, including IP communication, Wi-Fi, are being shared across these product platforms, home entertainment, security, HVAC and home automation. So it's becoming more and more difficult as these product types converge. But we will look for a way to make this clearer, whether it be through product or customer type or some other definition.

Thank you. At this time, I'm showing no other questions, and I would like to turn the conference back to Chairman and CEO, Paul Arling. The floor is yours.

All right. Thank you. Thank you all for joining us today and for your continued support of UEI. Two things - we plan to present at Rosenblatt's Annual Virtual Technology Summit later this month, and we will attend Sidoti's Small Cap Virtual Conference in September. Hope to see or hear from you at those. Thanks again, and have a great day.