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Operator
good day and thank you for standing by welcome to the universal electronics second quarter 2024 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 will need to press star 1 1 on your telephone you will then hear an automated message advising your hand is raised to withdraw your question please press star 1 1 again please be advised that today's conference is being recorded I would now like to hand the conference over to your first speaker today, Kirsten Chapman with LHA Investor Relations, Division of Alliance Advisors. Please go ahead.
Kirsten Chapman
Thank you, Andrea, and thank you all for joining us for the Universal Electronics 2024 Second Quarter Financial Results Conference Call. By now, you should have received a copy of the press release. If you've 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 disclosed during this call, will be available on the company's website at www.uei.com for one 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 continue capturing design wins in the connected home and home entertainment markets, particularly in the climate control and home automation markets through the development and delivery of unique and innovative solutions and excellent customer service as anticipated by management. The continued growth of the business with the company's largest customers in the climate controlled space, which can be leveraged to attract industry leaders to our product and technology offerings. Management's ability to continue to manage its business through cost-saving initiatives and optimization of the company's manufacturing facilities and cash flows to be achieved improved results by expected by management. The continued successful expansion of the company's IP portfolio and the licensing of the company's technologies. The company's ability to capture potential upside opportunities in a traditional subscription broadcasting business due to its continued strong leadership and leading market share, 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, terrorist activities, or other hostilities. 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's file with the SEC, including its 2023 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 financial decisions and believes that providing these non-GAAP financial measures to investors as a supplement to GAAP financial 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 in 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. Also, the company will no longer exclude excess manufacturing overhead costs resulting from the continued transition of its global manufacturing footprint, specifically in Mexico and Vietnam, and the depreciation related to the markup from the cost of fair value of fixed assets in business combinations from its adjusted non-GAAP figures. This impacts adjusted non-GAAP gross profit, gross margin, operating income or loss, income or loss before provision or benefit from income taxes, and income or loss in the quarterly results for 2023 and 2024. There is no impact to GAAP results. A supplemental table of these reconciliations is posted on the website in the Q2 2024 quarterly results section. On the call today are Chairman and CEO Paul Arling, who will deliver an overview, and CFO Brian Hackworth, who will summarize the financials. Paul will then return to provide closing remarks. It's now my pleasure to introduce Paul Arling. Please go ahead, sir.
Paul Arling
Thank you for joining us today. Our innovative wireless control solutions and patented technologies continue to capture design wins from major global household brands in both the connected home and home entertainment markets. We lead wireless device control and our design wins are laying the foundation for a stronger future. We are fortifying our business by building new customer relationships and, as we always have, expanding existing relationships. We are expanding our IP and technology portfolio and importantly reducing our expenses while still investing in the future product and technology solutions that will drive future growth in sales and earnings. We continue to focus our cost management on optimizing our global manufacturing footprint, which has yielded higher margins. In the second quarter of 2024, gross margin increased 580 basis points over the prior year quarter. As a result of these efforts, we were more profitable in the first half of 2024 than we were in the same period in 2023. Looking forward in the second half of 2024, we expect to be more profitable than in the second half of 2023. In addition, we are positioned to deliver consistent sales and earnings growth into 2025, 2026 and beyond. Now I'll review our markets and some recent customer activity. We continue to execute our successful land and expand strategy. Once we get our foot in the door, our design and development expertise, superior technologies, and great customer service continue to deliver new product design wins. We have demonstrated this tactic in home entertainment, building our share to become the global leader in universal control technology. Emulating the same approach in climate control and other markets, we are targeting the largest providers in the industry, and have already secured design wins with seven of the top nine that meet our margin threshold. Now we are scaling with these customers and are in discussions about projects with the remaining two. These relationships tend to be very sticky and we look forward to extending our reach. Our history with Daikin, the world's largest climate control company, exemplifies this strategy execution. Daikin was an account we acquired through an acquisition in 2010. At that time, Daikin represented less than $5 million of our global revenues, and our product solutions were comprised mostly of handheld and Walmart controllers, and we represented less than 10% of Daikin's total controller purchasing. Today, UEI is Daikin's largest climate control solutions provider, and our portfolio of products has expanded to include advanced cloud-connected and Zigbee-enabled thermostats that connect to sensors around the home that deliver a more optimized energy management solution for consumers. As a result of our design, development, delivery, and service quality, we are proud to call Daikin a 10% customer for UEI. Our goal is to scale our existing business with other industry leaders, including Carrier, Trane, Fujitsu, Mitsubishi, Toshiba, and LG, while adding new customers that are world leaders in this important growing market. Looking at the connected home and climate control in particular, we expect continued growth driven by rising demand, government incentives, and a focus on energy efficiency and sustainability. While the industry is still working to clear accumulated inventory, we expect the temporal issue to be resolved by the end of 2024. Meanwhile, there is no doubt that the trend in climate control is to more energy efficient, greener products. Product development amongst the world leaders in this industry are intensely focused on driving this change. HVAC manufacturing providers are introducing more energy efficient heat pumps that are becoming more common than the rest of the world. This market change can tend to introduce complexity, however. Many homes still need supplemental heating to handle more extreme cold. And with other smart home products and technologies entering everyday life, there is a growing desire and need to simplify the setup and use of these sometimes disparate systems into a single, simple user interface. This is exactly the type of challenge that has been our hallmark for decades. And our solutions are gaining traction with world leaders in this market because we have long demonstrated our excellence in this challenge of interoperability. In smart home automation, we are at the early stages of building a solid foothold in delivering smart control solutions for major household brands, leveraging a strong pipeline of new product introductions, including smart thermostats, connected remote controls, smart sensors, and more. In addition, our hospitality channel, which includes multi-dwelling unit integrators, is building momentum as we begin to penetrate the major smart home automation service providers in this channel. These customers offer smart apartment systems integrating our turnkey climate control and sensing solutions. This channel represents strong long-term potential for retrofit upgrades and new building opportunities. In home entertainment, We continue to see a level of stabilization in orders across our customer base. While some of our customers continue to experience declines, others are showing some resilience, and we are seeing a level of activity that we have not seen in the past three years. Due to our strong market position and leading product and technology solutions, we are able to capture any potential upside. Our engagements include supplying control devices for hybrid streaming and live services, providing sustainability technologies and solutions, supporting full-service refurbishment programs, as well as engaging with broadband suppliers to bring new functionality to their gateways. Overall, the combination of existing long-term customer relationships in home entertainment and the momentum we are building with new customer relationships and connected home continue to bear fruit and will drive long-term growth. Now to the financials. Brian, please go ahead. Thank you, Paul.
Paul
I'll review the results for the second quarter of 2024 compared to the second quarter of 2023. But first, I'd like to explain a change to our adjusted non-GAAP financials resulting from a recent SEC comment letter. Our adjusted non-GAAP financial statements no longer exclude excess manufacturing overhead costs resulting from our factory footprint transition and depreciation related to the markup from cost to fair value of fixed assets acquired in business combinations. These changes are reflected in the year-to-date 2024 financials as well as the corresponding prior year periods. These adjustments have no effect on our GAAP financials. I'll provide a more detailed manufacturing update in a minute, but just as a quick reminder, the expansion of our factory footprint in recent years has been necessary given the changes, sometimes sudden, in governmental policies as well as the overall global environment. These changes have led to duplicative factories in the short run and consequently temporal excess manufacturing overhead. For the second quarter ending June 30, 2024, costs associated with the aforementioned items amounted to $1.4 million, equivalent to 160 basis points of gross margin, or $0.09 per share. For the second quarter of 2023, Costs for these items were $2.7 million, equivalent to 250 basis points of gross margin, or $0.18 per share. Please keep these figures in mind when reviewing our quarterly results. Net sales were $90.5 million within guidance, but near the low end of the range provided, as certain customers pushed out orders from the second quarter to the beginning of the third quarter. In addition, court cutting in the video service channel and less consumer spending on discretionary durable goods continued to act as headwinds. sales in the prior year quarter were $107.4 million. Gross profit for the second quarter of 2024 was $26 million, or 28.7% of sales, compared to 22.9% in the second quarter of 2023 and 28.3% in the first quarter of 2024. The continuous improvement in our gross margin rate, both year over year and sequentially, is attributable to our operations team's efforts on optimizing our global manufacturing footprint. This multifaceted transition has resulted in a much more efficient global footprint coupled with a lower cost structure. This effort is nearing completion. We closed 2023 strong, completing the first two phases ahead of schedule, commencing operations in our new Vietnam facility and closing our factory in southwestern China. Our Vietnam factory continues to scale and meet or exceed our expectations. Recently, the Vietnam facility successfully completed an RBA VAP audit and received recognition for demonstrating a high level of compliance. In the second quarter of this year, we moved into a smaller, more efficient facility in Monterrey, Mexico that supplies product for certain North American customers. We continue to analyze and balance production for products destined for North America between Vietnam and Mexico in order to maximize efficiencies. The rebalancing of our production is scheduled to be completed in the first quarter of 2025, and at this point, our annualized gross margin rate should approximate 30 points. For the second quarter of 2024, operating expenses decreased to $27.1 million, compared to $29.2 million in the second quarter of 2023, reflecting our cost savings initiatives. SG&A expenses decreased to $19.7 million, compared to $21 million in the prior year quarter. R&D expenses decreased to $7.4 million compared to $8.2 million in the prior year quarter. Operating loss was $1.1 million compared to $4.5 million in the second quarter of 2023. Net loss for the second quarter of 2024 was $1.2 million or $0.09 per share compared to $3.1 million or $0.24 in the second quarter of 2023. Next, I'll review our cash flow and balance sheet. At June 30, 2024, cash and cash equivalents were $23.1 million, compared to $42.8 million at December 31, 2023. For the six months ended June 30, 2024, net cash provided by operating activities was $2.7 million, which includes a mandatory $5 million security deposit relating to a contract dispute with a former labor agency in China. Year to date, we repurchased 122,000 shares in the open market for 1.1 million and reduced our outstanding line of credit by 14 million from 55 million at December 31st, 2023 to 41 million at June 30th, 2024. Now turning to our guidance for the third quarter of 2024, we expect sales to range from 98 to 108 million compared to 107.1 million in the third quarter of 2023. We expect EPS to range from one cent to 11 cents compared to six cents per diluted share in the third quarter of 2023. We also expect the second half 2024 to be stronger than the second half of 2023. I'd now like to turn the call back to Paul.
Paul Arling
Thanks, Brian. We are quite positive about the future. Even while cutting SG&A costs, we have continued to invest in product development and our intellectual property. Now we have more than 730 issued and pending U.S. patents as well as many foreign counterparts. Our differentiated features and technology continue to secure new projects and the customers we are winning in the connected home are beginning to enter the next stage of their journey, expansion. We have run this path before and it is progressing favorably once again. First, our differentiating features attract new customers. and our innovation wins us new projects. Next, we prove to the customer we can deliver high-quality solutions that delight the end user. And of course, we deliver high-quality products and solutions on time. Then our customers award UEI more and more projects. This pattern is reminiscent of our growth in home entertainment, where we are now the undisputed leader in wireless control. It's true that HVAC, security, and other channels in the connected home have longer product cycles than home entertainment. This may elongate our land and expand timetable, yet we also believe it will make our wins stickier. While this transition has taken longer than we or anyone else would have liked, we are making great progress towards building strong, long-term customer relationships with the leading companies in the industry. We are doing it similarly to how we have done it before. We are building momentum with new customer relationships in the connected home that will drive long-term growth, strengthened by our continued focus on creating products and feature enhancements that bring value and innovation to the markets we serve. These exciting new product technology and associated customer developments combined with our cost reduction efforts make us confident that we are positioned to deliver consistent long-term sales and earnings growth into next year and beyond. As always, stay tuned. Operator, we can now open up the call for questions.
Operator
Thank you. At this time, we will conduct a question and answer session. As a reminder, to ask a question, you will need to press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again.
spk03
Please stand by while we compile the Q&A roster. Our first question comes from Stephen Frankel with Rosenblatt Securities.
Operator
Please go ahead.
Steve
Thank you, Paul. I want to dig in on the comments you made about inventory issues. I think that was in HVAC and tie that to your comments in the last couple of quarters about a back half ramp in some of these new design wins for smart thermostats. So kind of where are we and
Paul Arling
what's the outlook for the next couple of quarters with those products yeah yeah a couple a couple elements of that question one on existing designs uh that we have out we have seen uh and i think any inventory that they have may have been for them forecasting a better second half than they're seeing we have seen in certain parts of the world some of the incentives for these new energy efficient technologies drawn back a little bit. We and our customers who have experienced this do not think it's long term. These incentives are typically put in place, not to get into more detail than we should here, but the heat pumps and other energy efficient technologies are typically more expensive to the consumer. So governments across the world have incentivized them. We've even done some of that here in the U.S. because they want to incentivize the movement towards these products. They can cool your home and heat your home without using any fossil fuels at all or natural gas. So essentially they're incentivized. Those incentivized were drawn back, so some of our customers feel that that will will be impacting demand as we go through the rest of the year. But they don't think it's long term because, again, the movement towards these technologies has been happening for some years and will probably continue into the next decade or two. All of the companies, as I said in the prepared remarks, are spending a great deal of time and effort and money on R&D in making these heat pumps even more efficient, even more affordable, and maybe even get them to the point where they could replace, even in the northern climates, the combination of AC and furnace, which is really what they're attempting to do long term. So those incentives are also being put in place. There's another one in Europe that's coming. I think it's at the end of 25 or into 26. I think it's called the Super Climate Fund. It's about 90 billion euros. to help this transition to these more energy-efficient technologies. So it's things like this that they, our customers, see as a real prompting for demand. They may see temporal shortfalls or drawdowns of inventory or buildup of inventory. That can affect us for a quarter or two. But I think the movement in this market is like movements we've seen in others. where the movement of technology forward happens. Sometimes it's bumpy, but it will happen over a one to 10-year period with bumps along the way, but it's a movement that is underway.
Steve
All right, well, let me go at it a different way. Of your seven HVAC partners, with how many of those are you in market today with product?
Paul Arling
I don't think we're with all of them yet. With the majority of them, we are. Of course, with Daikin, it's a long-term relationship, so we've been in the market with them for quite a long time. Many of the other customers in the regions of the world, like the US and Europe, we are brand new. So those projects are still on track. Some of them got delayed by months. The testing regimens for these products are both more stringent and take longer. So we have seen some month-long or a few month delays in those testing regimens for those companies. But it doesn't affect our long-term view. Two months on a product is, we don't like it, but it doesn't affect our long-term view of either that product or our relationship with that customer. So we're in the field with most of them. We do have some projects on a few of them that haven't launched yet. So they're still at the early stage of this customer development where typically, as I was saying, customers start with one, maybe two SKUs or projects. then you go through lessons learned with them, just like we did in home entertainment. And then what happens is if you do well, which we have been so far with each of these customers, they typically will award you more of their portfolio of business. It happened in consumer electronics with televisions. It happened in subscription broadcasting. In that regard, it's not that dissimilar here.
Steve
Okay, and in the script, Brian talked about some orders that were pushed from Q2 to Q3? Were those in the HVAC space, or was that in another part of your business?
Paul
A little bit of both, Steve, that transfer from Q2 to Q3.
Steve
Okay. And then to understand this new gross margin accounting treatment, you're basically now the only thing that comes out of gross margin or things like stock-based comp. And did your EPS guidance for the quarter contemplate this change or was it done under the prior method?
Paul
Q2's guidance was done under the old method. And if not for... We ended up with a new method at $0.09 loss. Now, to quantify the effect of the excess manufacturing overhead, it was equivalent to $0.09. So, I'll let you do the math. And then, for Q3, obviously, we took into consideration the new methodology.
Paul Arling
So this quarter, Steve, the guidance did not include this effect, but going forward, as it is our new method, the guidance is provided on the new method.
Steve
And is that 9 cents kind of the number we should think about adjusting in our models, or do we think about, well, take where the gross margin is now and just say, okay, you made a comment that it's going to hit 30 and sometime in early 25, Jeff, draw a line between those two points?
Paul
Yeah, more the latter. I think, you know, we're at 28.7 in the second quarter. I expect Q3 to be slightly better than that, and then I expect Q1 to be better than that. So, you know, what we're seeing is, especially since we're not including the excess manufacturing overhead, every, in the pro forma, on a go-forward basis, any improvement we see at the factory, we're seeing it drop into the bottom line. So, right now, we're pretty far through the transition. We spun up Vietnam. We shut down GTQ. We streamlined Mexico. We're doing some rebalancing now. So we're probably 80%, 90% through the transition of the manufacturing footprint optimization. So we're probably a couple quarters away from getting to the full call of 30 points that we expect to be at.
Steve
Okay. Very helpful. Thank you.
spk02
Thank you. Our next question comes from Greg Burns with Sedoti. Please go ahead.
Greg Burns
Just to follow up on the orders that were pushed out from the second quarter, could you quantify the amount that was delayed? Okay. Paul, I think in the past couple quarters ago, maybe you quantified the pipeline of HVAC and home automation opportunity. And I think the number was like 80 million of annualized new project wins with maybe a total pipeline value of 200. When you look at your third quarter guidance, are you starting to deliver against that 80 million? And has there been any changes? Has either the one contract number increased or the total pipeline value increased at all?
Paul Arling
Yeah, no, they're similar to before. The pipeline we track and there are hundreds of millions of projects. I think I did, of course, explain that those are the projects we aren't working to develop to ship. We have multiple categories of leads. We have qualification quotes and then one. One is where we do the most work because the customer at that point is committed to buying the product on a certain time schedule. So that's where the – we do engineering work before that on leads, qualifications, and quotes, of course, because we have to define the product and work with the customer to define it. But the most work happens after you've won the project. And then there are usually dates set for it and et cetera. So the pipeline still is very strong. There are hundreds of millions of dollars in it. We will, of course, strive to win all of it, but probably will not win all of it. And so that's what we're trying to get across. There's a lot of business in this market that's out there. The size is even bigger than that. Those are only the projects we've identified so far. This market is almost $2 billion and growing. So there's a lot of business out there for us to go gain, and we are doing that. We expect next year and the years after, as we said in the prepared comments, to be layering on business, new projects, hopefully every quarter, new projects that are driving revenue.
spk02
Okay, thank you. Thank you.
spk03
I'm showing no further questions at this time.
Operator
I'd now like to turn it back to Paul Arling for closing remarks.
Paul Arling
Okay, thank you for joining us today. We will be at the Sudoti virtual conference in September and look forward to seeing you there. or meeting with you there. Thank you for your continued support of Universal Electronics. Have a great day.
Operator
Thank you for your participation in today's conference. This concludes the program. You may now disconnect.
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