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 speakers' presentation, there will be a question-and-answer session. 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.

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 haven't, please contact LHA at 415-433-3777 or visit the Investor Relations section of the website. This call is being broadcast live on the Internet. A webcast replay of this call, including any additional updated material, 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 financial performance, and cautions you that these statements are projections and actual results may differ materially. These statements include the company's ability to continue capturing design wins in the connected home and home entertainment markets, particularly in climate control and home automation through unique and innovative solutions and excellent customer service as anticipated. The continued growth of the business with the company's largest customers in climate control, which can attract industry leaders to our product and technology offerings. Management's ability to manage its business through cost-saving initiatives and optimization of manufacturing facilities and cash flows is expected to achieve improved results. The continued successful expansion of the company's IP portfolio and the licensing of technologies, and the company's ability to capture potential opportunities in the traditional subscription broadcasting business due to its strong market share. The impact the company may experience regarding its business and financial results from economic uncertainty affecting consumer spending, natural disasters, public health crises, governmental actions, or political unrest, including terrorist activities or other hostilities. The company undertakes no obligation to revise or update these statements after today's date and refers you to the press release mentioned at the start of this call and the documents filed with the SEC, including its 2023 annual report on Form 10-K and periodic reports since then. In management's financial remarks, adjusted non-GAAP metrics will be referenced. Management provides adjusted non-GAAP metrics for budget planning and operational decisions, believing these measures help investors evaluate UEI's core operating and financial performance and trends. Additionally, these measures aid comparisons in core results and trends of competitors. A full description and reconciliation of these adjusted non-GAAP measures versus GAAP are included in the company's press release issued today. The company will no longer exclude excess manufacturing overhead costs from its adjusted non-GAAP figures, impacting adjusted non-GAAP gross profit, gross margin, operating income or loss, income or loss before provision or benefit from income taxes, and quarterly results for 2023 and 2024, with no impact on 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 Bryan Hackworth, who will summarize the financials. Paul will then return for closing remarks. It's now my pleasure to introduce Paul Arling. Please go ahead, sir.

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 the 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 the 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 in connected home, continue to bear fruit and will drive long-term growth. Now to the financials, Bryan, please go ahead.

Thank you, 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 sometimes sudden changes 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, cord cutting in the video service channel and reduced consumer spending on discretionary durable goods continue 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 2 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 the 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 31, 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 million to $108 million compared to $107.1 million in the third quarter of 2023. We expect EPS to range from $0.01 to $0.11 compared to $0.06 per diluted share in the third quarter of 2023. We also expect the second half of 2024 to be stronger than the second half of 2023.

Thanks Bryan. 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 are making progress favorably once again. First, our differentiating features attract new customers and our innovation wins us new projects. Next, we prove to the customers 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.

Thank you. At this time, we will conduct a question-and-answer session. Our first question comes from Steven Frankel with Rosenblatt Securities. Please go ahead.

Good afternoon. Thank you. Paul. I want to dig in on the comments you made about inventory issues. I think that was in HVAC and tied that to your comments in the last couple of quarters about a back-half ramp in some of these new design wins for Smart Thermostat. So, kind of where are we and what's the outlook for that next couple of quarters with those products?

Yes. There are several factors to consider regarding this question. Firstly, for the existing designs we have released, we have noticed that any inventory they possess may have stemmed from forecasts predicting a stronger second half than what they are currently experiencing. In certain regions, we have observed a slight reduction in incentives for new energy-efficient technologies. However, both we and our customers believe this isn't a long-term issue. These incentives usually exist because heat pumps and other energy-efficient technologies tend to be pricier for consumers. Consequently, governments worldwide have supported them to encourage the shift towards these products, which can both cool and heat homes without relying on fossil fuels. Therefore, these products are incentivized. As some incentives have been scaled back, our customers are concerned about potential impacts on demand for the remainder of the year. Nonetheless, they don't view this as a long-term setback because the trend towards these technologies has been ongoing for several years and is likely to persist for the next decade or two. As I mentioned earlier, all companies are investing significant time, effort, and resources in research and development to enhance the efficiency and affordability of these heat pumps, with the goal of potentially replacing both air conditioning and heating systems in colder climates. Additional incentives are also being introduced, such as a new initiative in Europe expected by the end of 2025 or into 2026, called the Super Climate Fund, which involves around €90 billion to facilitate this transition to more energy-efficient technologies. Such factors are viewed by our customers as real drivers of demand. They may experience temporary fluctuations in inventory levels that could affect us for a quarter or two. However, I believe the overall trend in this market will resemble what we have seen in other technological advancements. While there may be some bumps along the way, progress will occur over a one- to ten-year timeline, indicating that a significant movement is already underway.

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?

I don’t believe we’re engaged with all of our partners yet. We have a strong relationship with Daikin, as we have been collaborating with them for a long time. However, many of our other customers in areas like the US and Europe are new to us. While we have projects in progress, some have experienced delays of several months due to more rigorous testing requirements that take longer to complete. Despite these delays, which can span a month or more, we remain confident in our long-term outlook. A couple of months of delay is frustrating, but it does not change our overall perspective on either the product or our relationship with the customer. We have several projects with a few customers that are still in the early stages. Typically, customers begin with one or two products, and through this process, similar to our experience in home entertainment, we learn valuable lessons. If we perform well, which we have so far, customers often give us a larger share of their business over time. This has been true in sectors like consumer electronics and subscription broadcasting, and the situation is not much different here.

Okay. And in the script, Bryan talked about some orders that were pushed from Q2 to Q3. Were those in HVAC space or was that in another part of your business?

It was a little bit of both to see if that transfer from Q2 to Q3.

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?

Q2 guidance was based on the previous method. If it had been under the new method, we would have reported a loss of $0.09. To understand the impact of the excess manufacturing overhead, that amounted to $0.09. You can do the calculations. For Q3, we certainly accounted for the new methodology in our guidance.

Is $0.09 a number we should consider for adjusting our models, or should we focus on the current gross margin and note that you mentioned it will reach 30 by early 2025?

Yes, more of the latter. I think we're at 2.7% in the second quarter. I expect Q3 to be slightly better than that, and then I expect Q1 to be even better. What we're noticing is, especially since we're not factoring in the excess manufacturing overhead, any improvement we see will positively impact the bottom line. Right now, we're quite advanced in the transition. We ramped up operations in Vietnam, shut down GTQ, and streamlined production in Mexico. We are currently undergoing some rebalancing. We are probably 80% to 90% through optimizing our manufacturing footprint. We expect to be just a couple of quarters away from reaching the full 30 points we anticipate.

Okay. Very helpful. Thank you.

Thank you. Our next question comes from Greg Burns with Sidoti. Please go ahead.

Just to follow-up on the orders that were pushed out from the second quarter. Could you quantify the amount that was delayed?

That's a few.

Okay. Okay. And Paul, I think in the past a couple of 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 million. When you look at your third quarter guidance, are you starting to deliver against that $80 million? And has there been any changes as either the one contract number increased or the total pipeline value increased, Paul?

Yes, the situation is similar to what we've seen before in terms of the pipeline we track, which includes hundreds of millions in projects. I mentioned earlier that these projects are not currently in development for shipping. We have various categories of leads, such as qualification and quotes, with the most effort concentrated in the category where the customer has committed to purchasing on a specific timeline. This is when we do our engineering work, but we also engage in defining the product during the leads and qualification stages with the customer. The bulk of our work happens once we've secured the project, at which point we have definitive dates set for delivery. The pipeline remains robust, containing hundreds of millions of dollars' worth of opportunities. While we aim to win every project, it’s likely we won’t secure them all. We're conveying that there are significant business opportunities in this market, and the total potential is even larger than what we've identified so far. This market is approaching $2 billion and continues to grow. There are many opportunities for us to pursue, and we are actively doing so. We expect to add new projects that contribute to revenue on a quarterly basis in the coming year and beyond.

Okay. Thank you.

Thank you. I'm showing no further questions at this time. I'd now like to turn it back to Paul Arling, for closing remarks.

Okay. Thank you for joining us today. We will be at the Sidoti 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.

Thank you for your participation in today's conference. This concludes the program. You may now disconnect.