Universal Electronics Inc.

Good day and thank you for standing by. Welcome to the Universal Electronics 4th Quarter 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. 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 begin. Thank you, Norma, and thank you all for joining us for the Universal Electronics 2022 Fourth Quarter and Full Year 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, non-public information that might be discussed during this call, will be available on the company's website at uei.com for one year. During this call, management may make forward-looking statements regarding the future events and future financial performance of the company and caution to 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 leveraging its wireless connectivity capabilities in the climate control, home automation, security, hospitality, and HVAC channels, and its groundbreaking 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 new generation products, software solutions, and technologies into existing and new and growing markets, which result in increased sales and market share for the company. Management's ability to continue to manage its business inventories and cash flows to achieve its net sales margins and earnings through financial discipline, operational efficiency, manufacturing diversification and footprint strategy, and line management. The impact to the company's financial results that it may experience due to supply and trade constraints, semiconductor supply challenges, and inflationary pressures and macroeconomic conditions it and its consumers are experiencing. 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, including the continuation or resurgence of COVID-19 pandemic, or governmental actions, 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 the call and the documents the company has filed with the SEC, including its 2021 annual report on Form 10-K and the periodic reports filed 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 GAAP financial measures helps 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 Brian Hackworth, who will summarize the financials. Paul will then return to provide closing remarks. It's now my pleasure to introduce Paul Arlen. Please go ahead, Paul.

Thank you for joining us today to review our 2022 performance as well as our outlook for 2023. As we have highlighted many times before, our strong commitment to ongoing innovation, product and technology design, development and delivery, and ongoing excellence in customer service continues to garner accolades. Our product designs received CES Innovation Awards in January, and more importantly, Our platforms and technology solutions earned customer recognition in the form of new product design wins throughout the back half of 2022 and into 2023. As a result, our share continues to grow in the markets we serve. However, macroeconomic challenges and increased consumer uncertainty have impacted market dynamics, especially at the tail end of last year. As a result, Q4 2022 performance was below expectations with net sales of 122.8 million and EPS of 44 cents. We anticipate that impact will also be felt in the first quarter of 2023. Regardless, our connected home solutions, which are sold in our higher growth markets that focus on climate control, home automation and security, continue to gain momentum. In fact, product design wins secured 12 to 18 months ago in some cases in the connected home channel are starting to ship, giving us confidence net sales will improve starting in the second quarter of 2023 and build momentum into 2024. For example, we are shipping our first advanced thermostat with Mitsubishi electric train for the U.S. market toward the end of the first quarter of 2023 and have already been awarded our second smart thermostat with Mitsubishi that we expect to launch globally. In addition, we won new thermostats and control platforms at one of the largest US HVAC system providers at the beginning of 2023 and are closing another global leader in the HVAC space with our new Tide platform. In the home automation space, we continue to grow our business with control solutions at Hunter Douglas in Somfy. and we have expanded our footprint with multiple sensors, controllers, and home automation products with US security provider Vivint. We expect these wins to contribute to our revenue starting next quarter. In the meantime, we have been taking additional actions to address the market dynamics. First, over the past few years, as mentioned, We have deliberately been shifting development spend on new products and technologies from our market-challenged core video service provider channel to higher growth channels in the connected home space, where, over the past years, we have seen growth. Second, to moderate fixed costs, we continue to move ongoing maintenance and development support activities to lower-cost regions. We have also tasked our local innovation and development teams to create technologies that can scale across all our channels, focusing on wireless connectivity, interoperability, sustainability, and end-user support solutions that are key to differentiating our solutions in these growing markets. Third, we have already begun diversifying and optimizing our manufacturing base outside China with the construction of a new factory in Vietnam, which will be fully operational later this year. While this will initially increase our overall production footprint, The goal by the end of 2024 is to right size our global footprint, enabling manufacturing flexibility to serve our global customers, to optimize cost efficiencies, and to create a production footprint that is in line with our new higher growth product categories. Finally, our product development process continues to prioritize allocating global development resources to projects with the highest potential revenue and business impact. This January, our experience and customer reaction at CES was extremely positive, confirming that our development of differentiated products is on the right track and offers ample proof that we are in a strong position to generate long-term growth. For almost 40 years, we have delivered industry-leading control solutions for our customers. Our inventions, like Kwikset, have become the de facto control standard for smart connected home entertainment devices, As such, leading brands from around the world increasingly turn to UEI for finished products, embedded SOCs, and software solutions to power the sensing and control functions of their systems. Our strategy of growing in new markets and our drive to consistently meet and surpass customer expectations will, in time, yield long-term growth. Our customers count on us to create innovative solutions focused on IP connectivity greater home control automation, including better and more intuitive low-power wireless control, resulting in a greater tie-in with other smart home systems. Since 2020, sales in our climate control, security, and home automation space have grown. In 2022, these connected home solutions accounted for over 25% of our net sales, and these markets are already larger and are growing at a faster rate than home entertainment markets. so we expect their contribution to be even more meaningful going forward. Our specific addressable market in climate control alone represents nearly a billion dollars, which is growing at a 10% compound annual growth rate. I will briefly review a few of the highlights from our product introductions at CES. We demonstrated our expanded connectivity solutions for whole-home wireless control with enhanced security, sustainability, and scalability. We emphasized our contribution to a sustainable future by addressing the need for more energy efficiency in the home with UEI's Tide smart thermostats, and by reducing battery waste with UEI's Eterna energy harvesting remotes. I am proud to announce that Eterna was honored with a CES 2023 Innovation Award amongst a pool of over 2,100 applicants. We demonstrated our smart home dashboard solution, Quick Set 5, as a reference design currently shipping in millions of LG smart TVs worldwide. As smart TVs continue to evolve in features and functionality, they need to embrace the full potential of the largest screen in the home to deliver a smart home control experience is becoming a reality. Customers ranging from service providers and broadband platform owners to a growing list of smart TV brands reacted positively to our Kwikset smart home software solution. This confirms the potential to scale our enhanced Kwikset software and services offering that blends home entertainment and smart home experiences on a single screen. In the area of interoperability, we embraced the emerging matter standard with the introduction of four new matter enhanced solutions across our portfolio, ensuring our customers can bridge between the existing smart home devices consumers have in their home and the new matter-enabled devices they will buy in the future. Due to the competitive nature of our customers' businesses, I am once again limited by confidentiality requirements and cannot discuss specific customer and new design win opportunities. What I can say is that our current design wins bid opportunity pipeline and project backlog represent a significant number of new business opportunities for UEI. These opportunities are strongly weighted to our newer higher growth markets, highlighting our ability to effectively penetrate these new markets and execute on our market diversification strategy. Although the related sales are not expected until later in 2023 into 2024 and beyond, These definitive wins underpin our long-term growth projections. Interestingly, while the connected home channel has exhibited signs of longer sales and development cycles than our traditional home entertainment channel, the benefits include significantly longer product life cycles. This means that while major new product developments in climate control, security, and home automation are taking longer to launch, these product platforms have significantly longer revenue cycles that last five or seven times longer than the products developed in home entertainment. In summary, our new innovative products were well received at CES and our design wins continue to build the foundation for a strong future. What is important now is that we successfully execute on the many new product introductions that we already have been awarded by our customers and We continue to secure new business on the outstanding bids we will be addressing in the coming months and years, and that we remain vigilant in executing our cost savings initiatives. We will continue our commitment, in fact our obsession, to bring customers continued innovation as well as product and technology solutions that help improve consumer experiences and enable our customers to grow their businesses. We continue to implement the same strategy that has made us successful many times before and will, once again, bring UEI to ever higher levels of success. Now I'll turn the call over to our CFO, Brian Hackworth, for a review of the financials. Go ahead, Brian. Thank you, Paul.