Q2 2023 Universal Electronics Inc Earnings Call
Okay.
Good day and thank you for standing by welcome to the Universal Electronics second quarter 2023 financial results Conference call. At this time all participants are in 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 one one on your telephone you.
We'll then hear an automated message advising you. Your hand is raised to withdraw your question. Please press star. One again, please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today Christy.
He Chapman L E K Investor Relations.
Please go ahead. Thank you thank.
Thank you Joe and thank you all for joining us for the Universal Electronics 2023 second quarter financial results Conference call.
Now you should have received a copy of the press release.
Please contact <unk> at four.
For 154333, 777 or visit the Investor Relations section of the website. This.
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.
For one year.
During this call management may make forward looking statements regarding future events and the future financial performance of the company.
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.
<unk> introduced this year, including meeting the demand for it.
Variability 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 and the connected home space.
It's the line of ultra low power and energy harvesting control products designed to address.
Growing demand for more sustainable solutions.
Electronic devices.
The continued successful collaboration with existing and new customers and developing and launching next generation projects software solutions and technologies into existing and new markets, which resulted in increased sales.
Share growth for the company.
The ability to optimize the company's manufacturing footprint.
And to the extent expense expected by management.
<unk> ability to continue to manage its business inventories and cash flow to achieve its net sales margins and earnings through financial discipline.
Liquidity requirements manufacturing footprint utilization strategy.
The recording of material impairment and severance charges.
And.
Suffocation.
The continued fluctuation of the company's market capitalization.
Impact to the company's financial statements that me.
Experience due to supply chain constraints.
Pressures and macroeconomic conditions and 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 and 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 <unk>.
2022.
And 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 GAAP.
As a supplement to financial GAAP measures helps investors evaluate.
Our 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.
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 <unk>, who will deliver an overview and chief Financial Officer, Bryan Hackworth, who will summarize the financials Paul.
I will then return to provide closing remarks.
Pleasure to introduce Paul Ehrlich. 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 and 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 six of the top 10 largest HVAC companies in the world, who together account for about one third 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 <unk>.
Is and has always been about interoperability.
Interoperability is defined as the ability for different systems devices applications, where our products to connect and communicate in a coordinated way.
With minimal effort from the end user.
This core value proposition with 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 a b 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 a home entertainment control experience second to none.
With automated device discovery setup and control over everything in the home Avi ecosystem consumers today are able to enjoy true interoperability and their home entertainment experience.
Our expertise in connectivity protocols from infrared to radio frequency to IP.
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 three 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 is important to note that our technology leadership continue 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 streamed 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 standalone or point.
Point solutions to become more integral to a connected smart home experience with.
With the average U S home now exceeding 20 connected devices the need for interoperability is greater than ever as the smart homes smart home devices bring connectivity and convenience to the whole. However, these devices are often difficult to configure in part due to a variety of often incompatible communication.
Calls and in part because of 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 benefits by enabling intelligent wireless connectivity between their existing wall mounted HVAC controller.
And smart sensors throughout the home.
Sensors, all designed and developed by <unk> include sensors for temperature and humidity.
<unk> windows and doors as well as the presence of people.
These devices communicate to the controller to enable automatic energy management features that turned the HVAC system on or off depending on the status of the various sensors. The 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 <unk> has the expertise products and technologies to deliver these types of solutions.
Similarly in the security space, We recently introduced a comprehensive retrofits 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 UI developed smart home hub that connects to the security panel extending the safety and security features and creating a more feature rich and user experience.
Also in climate control. This month after 18 months of development, we began shipping <unk> touch connected thermostat with Mitsubishi Electric train U S known as medicine.
The first of many new design wins on our newest connected thermostat platform. This product works with Mitsubishi trains existing lineup the systems and brings advanced features including advanced humidity control and built in presence detection for automatic screen wake up.
This offers met as a solution to simplify their overall controller system interface streamline the installation process with onscreen instructions and optimized deployment costs utilizing <unk> modular power pack architecture.
Designed into all are tied comfort family products.
Another example is in the motorized shades area in this space <unk> 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 UI tied touch service staff.
This system intelligently opens and closes blind in the home to deliver a more automated temperature control experience through.
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 with 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 months to 18 months.
As noted we are working on developments with six 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 am 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 gross profitability.
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 are 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 and 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 TV sales as well as under absorbed manufacturing overhead.
During the prior two 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 the 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 to file permits in Vietnam that would authorize us to begin operating on.
I'm pleased to announce these permits are received.
Manufacturing and our newly built Vietnam facility commenced in June .
Operations, Vietnam are progressing as expected and our production targets are achieved as planned. We will proceed to shut down our southwestern China factory by the fourth quarter, reducing our footprint in China from two factories to one.
The final phase of our optimization effort will be to streamline operations and 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 downsizing 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.
The second quarter of 2023 operating expenses were $29 2 million.
Impaired to $30 4 million in the second quarter of 2022.
SG&A expenses reduced to $21 million compared to $22 1 million in the prior year quarter.
R&D expenses remained consistent at $8 2 million compared to $8 3 million in the prior year's quarter.
Operating loss was $1 9 million compared to operating income of $10 1 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 recorded a net loss of approximately 800000 or six cents per share compared to net income of $8 4 million or 66 cents 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 32023, 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 32023.
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 <unk> 12 per diluted share.
Compared to $1 per diluted share in the third quarter of 2010 in 2022.
I would now like to turn the call back 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 better interoperability across devices platforms and ecosystems in the home.
He 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 and new product development and our commitment to providing great customer service to truly enable.
A smart home consumer experience.
<unk> has been doing this for over three decades and home Entertainment now we are beginning to replicate that success in the climate control home automation and security markets.
We have been rebuilding UI 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.
<unk> as well.
As always stay tuned.
Operator, we can now open up the call for questions.
Thank you.
We will now conduct a question and answer session.
As a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again please.
Please stand by while we compile the Q&A roster.
Our first question.
Comes from the line of.
Okay.
Greg Burns from Sidoti. Your line is now open you May proceed.
Good afternoon can we just start off with the 10% customers for the quarter.
Yes, I can it was our 10% customer for the quarter at 12, 6%.
Okay.
And.
When we look at the.
The guide you are.
Pointing to I guess, a little bit of a.
Improvement in the top and bottom line.
Maybe a little bit lesson.
We were thinking so when we look at some of the.
The projects that you announce our wins with like Hunter Douglas Sofia vitamin.
Those rolling out as fast as you expected or has that been a little bit slower.
Yes.
I guess why is the back half of the year.
Strengthening to a greater degree given some of these projects that you've talked about in the past.
Oh 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 are 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 and connected home, but there are also projects in in home Entertainment.
On top of that.
As we look into next year, we see.
A much better.
The 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 is 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 as the quarters progress.
Okay.
Okay.
Can you just give us an update on what youre seeing in the.
The home entertainment market, because it seems like Comcast fell off pretty significantly this quarter. So.
That's an indication of what's happening more broadly, but if you could just maybe give us an update on that.
What's going on there.
Sure Yes.
Yes.
Don't comment specifically as we never do on specific customers, but as an industry I guess I would explain it this way.
That one is simplify the.
Video service provider market simply look at subscribers.
And the change in subscribers.
Our business is driven more off of two main things one.
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.
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 two 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 'twenty 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 two they used to add back to now there are 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 though.
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 wouldnt warranty.
Our product performance against.
Consumer calls and says I need a new remote the last thing they want to do is tell them no. Because if you have a subscriber that is paying you 80.
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 flat meaning.
They've gone through the transition to a new model of not.
<unk> promoting.
Or are they a sense that demand just isn't there so they haven't promoted to it.
Right because the demand isn't there they're not going to promote.
Some combination there in though they've had fewer new additions.
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 haven't.
They fell from there once high four years ago, but they're settling down to a maintenance mode at this point.
Okay.
Changes in how they affect us longer term.
Alright, Thanks for that and then just lastly.
Immersion or.
Investment arm connected to them took a large stake they've 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 we there is shareholder so like all of the shareholders, we will communicate with them.
Okay.
Alright, thank you.
Thank you.
Again as a reminder to ask a question. Please press star one one on your phone.
Alright.
One moment in fact promote the next.
Okay.
Okay.
Our next speaker is Jeff Van <unk> from B Riley. Your line is now open.
Hello. This is Richard Magnuson for Jeff that syndrome. Thank you for taking our call first can you give us more detail on what the Vietnam facility stands at this point, maybe speak to the longer term plans with manufacturing these respective business segment there.
Sure Yes.
Vietnam is up and running and commenced operations in the latter part of June so.
As of this time last quarter, we were still.
Waiting for two final permits, which we received so we were able to commence operations.
So far things are operating as planned is going well.
And assuming that it continues to go as planned.
What we'll do is we will and 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 one of our again, it's contingent on Vietnam being able to to hit production targets, which I have no reason to believe they will not.
But there is there is that contingency because its a newly formed entity.
But things are going well, so once that happens and they reached their targets were going to shut down.
GTK, which I expect to be in the in the fourth quarter. Then as you fall 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.
More optimized level too.
With.
The production volumes.
And so any other details about.
Regarding the.
The different segments of the manufacturing across the different segments irrespective of the well, yes, we still have we still have we still have the tariffs. So anything that's destined for the North American market will be they are produced in Mexico or in Vietnam.
And then when it comes to the actual sales channels honestly is that we don't we don't manufacture by sales channel. So it's not as if you have a factory that is more by destination.
We're not for the North American market again, because of the tariffs were not going to manufacture in China.
And incur the tariff charge, so and then from a product line perspective, you have each of our factories will produce it can be HVAC and R modes for the ADC market et cetera.
Okay. Thank you and then.
We know it's been challenging to predict the magnitude of decline in the legacy BD business. So I'm wondering what gives you confidence in your internal projections about the future sales progression.
Business and then further what prevents you from breaking out the metrics for the HVAC and home control and automation segment.
Sure. Yes, there is I think two general questions. 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 month's progress we've already begun that so with existing programs.
Existing customers that conversation has begun.
And then on top of that we've gone through the projects as I mentioned earlier.
There is.
Hundreds of them.
Now again somewhere in the quote stage or qualification, which means we're in we're not in development for MTI as we call. It new product introduction, we do have over 30 in the connected home area that will hit some time between the product will launch sometime between now.
And next year at most of them will launch in the next 12 months.
We've looked at each of those products to determine again are they knew as their 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 distributed as the easy distributed the prior one.
And unless there is a price increase which in some cases there are because it's a more advanced product that would be partially.
<unk>.
So we've gone through that level of detailed analysis to determine what do we think next year is beginning to look like.
And Thats, 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.
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.
Alright, Thank you and the last question was.
What would prevent you from breaking out the metrics for the HVAC.
On control and automation segment.
Yes.
We are contemplating.
Never say never right.
Right now we haven't done it.
But I think in the past we disclosed it.
As an AD hoc as a couple of years ago I believe.
But it's something that as it continues to grow at something that will we will continue to reviewed and determine if we should disclose it or need to disclose it publicly right now we do not need to yes.
Yes, Richard there is a little bit of Grayness in it because we.
We have the issue we could do it by customer type.
But because we are selling in some cases, we're selling HVAC products to security providers in other cases, we actually have programs now where we're selling HVAC products too.
Video service providers.
These worlds are beginning to collide, where customers are moving across home product types.
So I suppose we would have to be very definition really clear about what whether it was the product cut for the customer cut we were looking at so that's something that makes it a little bit more difficult.
<unk>.
Fine and we want to make sure that those definitions were clear so that 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 might.
They may be interested in because again.
All of these home protocols are converging.
As 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.
Those many types of RF.
Including IP communication Wi Fi.
<unk> are being shared across these product platforms home entertainment security HVAC and home automation.
So, it's becoming more and more difficult as these.
As these product types converge, but we will we will look for a way to make this clear.
Whether it be through product or customer type or some other definition.
Alright, thank you.
Thank you at this time I am showing no other questions and I would like to turn the conference back to chairman and CEO , Paul Arlen the floor is yours.
Thank you. Thank you all for joining us today and for your continued support of <unk>.
Two things we plan to present at Rosenblatt annual virtual technology Summit later this month.
And we will attend Sidoti small cap virtual conference in September .
Hope to see or hear from you.
Those.
Thanks, again and have a great day.
Hi.
This concludes today's conference call. Thank you for participating you may now disconnect.
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