Q3 2023 Universal Electronics Inc Earnings Call
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Good day, and thank you for standing by welcome.
Welcome to the Universal Electronics third quarter 2023 financial results conference call at.
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I would now like to hand, the conference over to your first speaker today, Kirsten Chapman with L. H a investor Relations. Please go ahead.
Thank you Shawn and thank you all for joining us for the Universal Electronics third quarter 2020.
Our results conference call.
You should have received a copy of the press release.
Please contact.
At 40.
777 or visit the Investor Relations section of the website.
This call is being broadcast live over the Internet 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 future financial performance of the company.
These statements are just projections.
Since may differ materially from those projections.
These statements include the company's ability to timely develop and deliver new technologies and technology.
New products introduced this year, including meeting the demand.
For connectivity.
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 and particularly the climate control market.
And its line of ultra low power and energy harvesting control products designed to address the growing demand for more sustainable solutions and electronic devices.
The continued successful collaboration with existing and new customers and developing and launching next generation products software solutions and technologies into existing and new markets, which result in increased sales and share growth.
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 and operating efficiency liquidity requirements.
Are you factoring footprint utilization R&D spend.
Product line and business management, and other investment spending expectations.
To execute our stock repurchase programs.
The continued fluctuation in the company's market capitalization.
The impact of the company's financial results that it may experience due to the supply chain constraints and inflationary pressures.
Economic conditions in its consumers are experiencing and direct and indirect impact of the company.
With respect to its business.
Stemming from the continued.
Good certainty consumers' confidence and spending.
As public health crises governmental actions, where 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 from today's date and refers you.
To press release, the press release mentioned at the onset of this call and the documents. The company has filed with the SEC, including its 2022 annual report on Form 10-K.
Periodically.
Reports filed or furnished since then.
Management's remarks, adjusted non-GAAP metrics will be referenced management provides adjusted non-GAAP metrics, because it uses them for budgetary planning purposes, and for making operational and financial decision.
Believes that providing these non-GAAP financial measures to investors.
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Measures helps investors evaluate.
Our 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.
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 Arlene, who will deliver an overview and chief Financial Officer, Bryan Hackworth will summarize the financials Paul.
Then return to provide closing remarks, it's now my pleasure to introduce Paul Ireland. Please go ahead Sir.
Thank you for joining us today.
Yes, its technology and products continue to help everyday people easily discover and interact with the devices and services in their home.
We are the clear leader in this area as is evidenced by a growing list of customers and home automation climate control security and even home entertainment.
During the third quarter, our efforts to control costs, and optimize our manufacturing footprint, which Brian will elaborate on in a minute.
Dan to yield benefits for.
For the third quarter of 2023, we increased gross margins to a high for this year.
And combined with lower expenses, we delivered bottom line results in line with expectations.
Over the last three plus decades, the home entertainment market has changed greatly.
Even more so over the last couple of years, our Prime 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 continue to grow we maintain market share and we continued to win new projects in this channel. However.
However, our absolute dollar amount of sales, particularly in subscription broadcasting has discrete as decreased substantially.
Nonetheless, 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.
In 2023, we selectively invested in new home entertainment product developments on a handful of differentiating and innovative applications with our customers.
A few examples of these include new control products for emergency emerging streaming services, such as Sky glass as well as Liberty Global's Babylon Green Ultra low power remote.
These products began shipping recently and will continue to scale in 2024.
Most importantly, our strategy to extend our technologies and wireless expertise in adjacent markets is progressing well and we expect our revenues from the connected home markets to grow substantially in the coming years.
As we have stated over the past few years, we have been repositioning our business to focus on high growth markets in the connected home space the.
The climate control market, which we include in the overall connected home channel represents a significant growth opportunity for us I.
I will provide a deeper dive into this market to better highlight the growth opportunities ahead.
The worldwide thermostat control market today for residential and commercial installations is estimated at $1 8 billion, excluding China and India.
History experts forecast this market to grow at a compounded annual growth rate of more than 10% over the next five years.
You guys have been active in the climate control market for over 10 years building LCD remote controls and wall mounted digital controllers for Daikon, Fujitsu, Panasonic, and Toshiba, primarily targeting Asia Pacific and EMEA consumer markets.
Where each fact OEM brand controllers have the dominant share of the thermostat market.
In the U S. The market for smart thermostats today, it's mostly served by third party and aftermarket brands.
While these aftermarket products offer convenience and connectivity they only offer basic control of HVAC OEM equipment and limited control of more advanced and energy efficient features in existing and new equipment, such as heat pumps variable refrigerant flow and dual fuel systems.
As a result, many of the existing consumer branded smart thermostats missed the optimal control experience.
And lacks the features to operate the HIV HVAC equipment in the most energy efficient manner.
With increased consumer focus on energy consumption optimization, and greater emphasis on smart grid utilization HVAC Oems are now strategically prioritizing connectivity and interoperability in their controllers to deliver a better climate control experience for their customers.
Leveraging our long history in user centered product design expertise in wireless device connectivity and universal interoperability, we have been developing and commercializing a new line of advanced smart and connected thermostats and related sensors.
The new portfolio, which targets North American and European customers includes a comprehensive line of tactile and touch interface controllers with a smart home hub built in supporting standard for wire and proprietary control protocols for all of the major HVAC brands. Additionally, the <unk>.
Lineup includes a bridge product that can be wired to an existing HVAC system and wirelessly communicates to any of our tactile and touch thermostats mounted on tabletop stands that can be located anywhere in the home.
Truly modular solution that can be mounted on the wall or conveniently placed anywhere in the home.
The functionality of our climate control products is further enhanced with a built in smart home hub that connects to our lineup of Zigbee sensors that include temp temperature humidity flooding freeze occupancy sensing door and window sensors and monitoring.
These products working together through software create a truly smart home experience.
Systems that sense presence can bring both greater comfort and more efficiency.
Creating a much smarter home environment.
For example, our devices are sensing terms anywhere in the home determining who is in the home and verifying whether doors, our doors and windows are open we enable a range of control experiences, including smart lighting smart shade and blind control from the same smart thermostat screens as well as blending some.
Mark home and entertainment experiences like whole home audio.
Bottom line, we are meeting the user where they are in the home and offering solutions they care about.
The software designed into our new product line is powered by quickset cloud for secure connectivity and our knievel virtual agent to simplify device onboarding and provide ongoing troubleshooting and support throughout the lifetime of the product, including sensors setup and configuration.
Our user centric approach and focus on delivering a truly connected experience for our HVAC customers brings new opportunities beyond energy management, including HVAC and control system telematics to improve system design user experience and predictive maintenance.
Climate control lineup has received rave reviews from our customers as evidenced by numerous.
Customer design awards, ranging from HVAC OEM brands, such as such as Mitsubishi Trane U S called Metis, which was announced earlier this week Toshiba carrier and LG as well as smart home utility and energy companies.
Through our investments in innovation in this market and product category. We believe that there is a window of opportunity for us in the next few years to double our revenues in climate control by focusing on penetrating and growing our footprint in North America.
These products take time to define design develop and test and we expect to see sales results to slowly improve in 2024 and grow substantially in the years thereafter.
Now I'll turn the call over to our CFO Bryan Hackworth for a review of the financials. Please go ahead, Brian Thank.
Thank you Paul first I'll review the results for the third quarter of 2023 compared to the third quarter of 2022.
Net sales of $107 1 million slightly below our expected range has a few customers order less than their submitted forecast.
This compares to $148 5 million for the third quarter of 2022.
Core cutting and the video service channel continues to be to be a headwind and an uncertain economic environment with inflationary pressures as likely causing households to spend less on discretionary goods.
Gross profit for the third quarter of 2023 was $30 4 million or 28, 4% of sales compared to 38% in the third quarter of 2022.
We're executing on our factory footprint optimization plan and these efforts are starting to pay dividends as this transition coupled with a stronger U S. Dollar contributed to sequential improvement in our gross margin rate of 300 basis points.
I'd like to take a moment to provide an update on our footprint optimization plan.
During the prior few calls we've 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 build operation in Vietnam.
These expansions coupled with lower demand in our video service channel and projected growth in the connected home, which requires fewer square feet of manufacturing space per sales dollar that resulted in having excess capacity and the need to streamline our factory footprint.
As stated in our last call we commenced operations at our newly built Vietnam facility in June and mentioned the closure of our southwestern China factory was contingent on our Vietnam facility, reaching certain production targets.
I am pleased to announce manufacturing operations in Vietnam have exceeded our expectations, enabling us to cease operations and our southwestern China factory in September.
Approximately one quarter sooner than expected.
Furthermore, our Vietnam facility successfully completed the responsible business Alliance factory audit and received a passing score.
Upon reaching one year manufacturing anniversary in June 2024 will be eligible and expect to achieve full accreditation.
The next and final phase of our optimization effort is the streamlining of our operations in Monterrey, Mexico, which will result in a smaller and more efficient factory to meet production volumes for certain North American customers.
This transition is currently in progress and we expect to complete it in the first half of 2024.
Cost savings relating to these efforts combined with cost reductions at the corporate level, which we executed in the third quarter 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 project wins and the connected home channel to ultimately yielded utilization rate exceeding 90%.
With the flexibility to expand as needed.
For the third quarter of 2023 operating expenses were $27 5 million compared to $30 2 million in the third quarter of 2022.
SG&A expenses were reduced to $20 1 million compared to $22 5 million in the prior year quarter.
R&D expenses remained consistent at $7 4 million compared to $7 7 million in the prior year's quarter.
Operating income was $2 9 million compared to $15 5 million in the third quarter of 2022.
In the third quarter of 2023, we recorded a tax reserve relating to incentives received at our southwestern China entity.
Resulting in an additional $500000 of tax expense.
Earnings per diluted share were eight sales for the third quarter of 2023 compared to one dollar in the third quarter of 2022.
Next I'll review, our cash flow and balance sheet on September 32023, cash and cash equivalents were $60 1 million compared to $66 7 million at December 31, 2022.
For the first nine months of 2023 cash flows provided by operating activities were $20 1 million, which we used to reduce our outstanding line of credit from $88 million at year end to 75 million at September 32023.
Lowering our net debt position to only $15 million.
Based on our modeling supported by a strong balance sheet.
Listing project wins.
Expected continued positive cash flow in 2020 for management and the board believe significant.
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Therefore, our board of directors recently authorized the stock repurchase plan of up to 1 million shares.
We expect to take advantage of this opportunity now by initiating a buyback in the fourth quarter of 2023.
Now turning to our guidance, we expect sales to range from $95 million to $105 million compared to $122 8 million in the fourth quarter of 2022.
We expect EPS to range from a loss of five cents per share to earnings of five cents per share per diluted share compared to 44 per diluted share in the fourth quarter of 2022.
I would now like to turn the call back to Paul.
Thanks, Brian.
Our expansion into the growing connected home markets continues to be successful our innovative products and technologies to ensure we are capturing new customer wins and broadening relationships, which is helping create new revenue streams. We continue to be by far the leading company in home Entertainment control, we are building a growing position with enormous.
Long term potential and the connected home space.
While we cannot share significant details of our product plans with specific customers. We have design wins with five of the top eight H back OEM brands in North America.
That represent nearly 70% of the total HVAC market.
These new projects along with other connected home project wins represent over $80 million in new annualized revenue.
And we are actively qualifying and quoting opportunities that can lead to significantly more revenue potential.
I wanted to be clear that we are not at this time, providing detailed numbers for next year.
However, this level of project activity clearly demonstrates that we have a very healthy pipeline of new business and an exciting and significant growth opportunity ahead of us.
We are very confident in our ability to succeed and return <unk> to growth in sales and earnings.
Just on this conviction as Brian stated earlier, our board has authorized a stock repurchase program for up to 1 million shares.
The fact remains our technology leads in home control and our opportunities are abundant.
We are all confident in our growth strategy and our long term success as always stay tuned.
Operator, we can now open the call for questions.
Thank you at this time, we will conduct a question and.
To withdraw your question. Please press star one again.
Please stand by while we compile the Q&A roster.
And our first question comes from Steve Frankel with Rosenblatt Securities. Your line is now open.
Good afternoon, Paul I appreciate the transparency around the new opportunities in things like HVAC and.
Last quarter.
You also talked about that and you talked about some of those products coming to market in the back half yet revenue was shorter.
Short of the market in Q3.
It's down sequentially again in Q4, so could.
Could you help us understand whether that's incremental deterioration in your core subscription broadcast customers or are some of these newer projects taking longer to get to market.
Yeah, well I think we said we had 30 more than 30 projects.
We only had a couple of them launch.
And we'll probably have more I mean as time goes on as each month progresses, more and more of them will layer on.
We have projects going out now into 2005.
And as I alluded to we've got over 100 projects at the qualification and quote stage.
And the revenue from them is much greater than that which we've won already now we won't win all of those projects. When they are in the qualification and quote stage. We don't win them. All we have a pretty good hit rate, though so we think there is theres a lot of business out there as we described in what was probably a deeper dive than some have heard from us on.
HVAC I wanted people to understand the dynamics of that market.
It's changing much like other markets have home entertainment included.
It's becoming much more.
Energy conscious, it's becoming much smarter and the products that our customers there are building.
Much more capability.
Than the current ones on your wall. Most people on this call probably have service staff. They may have connected thermostat that has an app on their phone.
But it's just turning your system on and off to get to 72 degrees or whatever you've set it at these systems are capable of doing much more and we're working with companies in this market as I said five of the top eight are already actively working on projects with us project wins with us for.
For products to be introduced so and yes.
Some have held in but others have have reduced further.
As far as the future on that its difficult to precisely predict.
It's probably safe to say that our future plans won't include any significant growth from that market. We do think there are a lot of players there, though that get it and are seeing that what consumers want.
Is they still watch linear television for sports and other things, but then they want to go to streaming services and what what the solution that has to be provided them as a combination of those two things what we call a hybrid system.
And many of the major companies here have invested in streaming boxes, and even TV OS is.
To power those types of products.
To give the consumer the ability to have one device that.
They then turn on and can watch linear television last night, they could've watch the Arizona Diamondbacks lose the last game of the World series.
And then when they were discussing with that they could go to a streaming service prime Netflix Hulu Youtube.
All in one interface.
This is what consumers want.
Our TV customers are CE customers understand that they are building such things and the subscription broadcasters. So I think that's a little bit of an offset Steve to some of the shrinkage, but for sure.
That shrinkage over the last four years has hurt us more than it's less than half what it was four years ago.
So that is certainly hurt.
And we are building a different business we've been in HVAC control for 10 years as I said, we're building better and better products there.
The good news is that again five of the top eight in the U S have already signed on to do projects with us.
Reminiscent of where we were in home Entertainment 20 years ago, where we were relatively low share around 10% respectable, but not very big.
And again, we declared our God given right to have it all in.
Going out to pursue that we think we made great products for that market, we're presenting them to customers and they are signing on for these design wins, we think it's a significant growth opportunity over the next couple of years.
Okay, a couple of questions for Brian what were the customer concentration numbers in the quarter.
We had 110% customer in daikin at 14, 2%.
Okay.
To your pro forma gross margins.
Reflect.
In essence, the full a full quarter impact of not having that.
Western China factory or is there incremental improvement that's implied in your Q4 guidance.
There is incremental improvement implied the answer to the first part is yes, I do pro forma some of the overhead inefficiencies, but the way we've been trending.
I believe the actual reduction will exceed what ive been pro forming the last thing I want to do is pro forma or more than that when we ultimately are able to reduce so that was a little bit conservative with that and thats proven to be true and that's one of the reasons. We have some upside in the gross margin rate and then the.
FX is helping us the stronger U S dollar.
Versus the Chinese renminbi is helping us as well.
Great. Thank you I'll jump back in the queue.
One moment for our next question.
And our next question comes from Greg Burns with Sidoti.
Good afternoon, just to follow up on the gross margin discussion.
With the rationalization nearing completion do you expect to get the gross margins above 30% again is that the target do you have a do you have a target in mind I guess for where you think gross margins can get I know it'll be volume and mix dependent but.
What are you what are you.
What do you think the business can sustainably operate yes.
Yeah. What we've said is we believe we can get back to historical levels and that's been the 28% to 30 plus range as you noted.
There are a lot of variables that go into the gross margin rate. So any given quarter. There are many factors.
The way we are trending the way.
Factory optimization plan is coming along in the project wins that Paul illustrated I think we're going to be at 90 plus percent utilization.
And that will enable us to be running efficiently and will have capacity, we could expand it if needed.
With that.
I expect to be back in the 20% to 30% range and we're already there this quarter or you know were over 28%. So it's it's.
It's coming to fruition.
Product mix comes into play as well as you pointed out the royalties play a role right now TV sales are down they won't be forever, we benefit from TV sales as we sell our technology when we license it which is at 100% gross margin because it's a royalty.
So things of that nature also play a factor, but I do like where that gross margin rate is right now I like the way that our operation team is.
Is operating and the Vietnam is a great Testament to their performance.
We're able to shut that down one quarter ahead of schedule.
And these aren't are we've done it a few times now so we're getting pretty good at it but they are not easy transitions.
So overall I think things are going well from an operational perspective.
Okay, and Paul you've mentioned.
Trying to or thinking you could maybe double.
Your revenue from climate control over the next couple of years, how much what's the trailing 12 month revenue from climate control right now like what's the base of that doubling.
It's under 100.
We don't give the specific number but it's well under 100.
Okay.
Yeah.
And climate control specifically.
Okay.
And.
The $80 million of that project pipeline of annualized revenue and I know you mentioned some of this extending out to 'twenty four but I guess.
How much of that do you expect to get in 2024.
I know the timing of these projects that are specific number yet there is a lot of variables as I said last quarter. The number of project wins is over 30%.
That data is reliant on both our development of the control item, which were usually pretty good at.
But also the customer's goal of often the companion product that goes with it.
Which we don't have control over and sometimes they're done on time, sometimes even early <unk>.
Sometimes they are a month or two late.
So we try to shy away from giving too specific too specific a guidance across 30.
In the mid <unk> projects.
Because theres a lot of variables in there.
I would say, though is that this is the nature of our business. It was in subscription broadcasting it wasn't Tvs It wasn't home entertainment generally.
And it is in HVAC security.
Home automation.
We're selling <unk>.
We sell to a much wider breadth of customers.
Right because we go to the industry leaders as I said five of the top eight our goal will be to have eight of eight.
And we're working on a few extras.
Or I Shouldnt say extras, a couple of the three that we don't have we are in qualification or quote on so we're looking to close everyone. Just like we did in the other market.
Once we do that every project adds another layer of revenue.
Sometimes those layers are a half a million to $1 million.
Half a year.
But each one of them when it comes on can often be.
Five debt in HVAC it can be a five to eight year project.
Where it gives regular revenue from that project. So that's the goal build those layers. We've got 30 plus projects that they estimate on the revenue from the connected home projects that we spoke about last time at this time have given a little bit more breadth of detail on last time. It was number of projects. This time, it's the annualized.
Revenue of.
That was disclosed as $80 million.
So those are one projects.
When they are already to ship.
It will add $80 million.
Alright, alright, great. Thank you projects won't launch until late 'twenty four.
But again, we're just going to keep adding them layer by layer and as I said I think earlier, we have I think another 100 projects.
That we're working on.
The not fervently yet when we start it's a little bit of work to define the product and then we take it through qualification and quote stage define the product.
Quote the product and then once you want it that's when the real engineering development starts.
Alright, great. Thank you.
Yes.
I am seeing no further questions at this time I would now like to turn it back to Paul for closing remarks.
Okay. Thank you everybody for joining us today and for your continued support of <unk>, We plan to present at Imperial Capital's 20th annual Security Investor Conference in December and.
And Needham's 26 annual growth conference in January.
I think they are in New York, that's in the middle of winter, but nonetheless.
And we will be at the international CES in January 2024 in Las Vegas. In addition to launching our complete line of comp.
Comfort climate control products, we will demonstrate use cases around our long term commitment to the HVAC market and a view of what we hope to achieve in this new product category, we call. It climate climate control re imagined.
I hope some of you are able to make it there. Please let us know we can schedule meetings or our visits and demos.
We look forward to seeing you there if you can be at any of those conferences or a core CES.
Thanks, again and have a great day.
Thank you for your participation in today's conference. This does conclude the program you may now disconnect.
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