Good day and thank you for standing by. Welcome to the Universal Electronics First Quarter 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode. [Operator instructions] Please be advised that today's conference is being recorded. [Operator instructions] I would now like to hand the conference over to Kirsten Chapman, LHA Investor Relations. Please go ahead.

Thank you, Catherine. And thank you all for joining us today for the Universal Electronics first quarter 2022 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 will be available for one year at www.uei.com. Any additional updated material nonpublic information that might be discussed during this call will be provided on the company's website, where it will be retained for at least one year. You may also access the information by listening to the webcast replay. During this call, management may make forward looking statements regarding future events and 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 timely develop and deliver new technologies and technology updates and related products introduced this year, including our expanded software capabilities around our world-leading QuickSet platform, comprehensive suite of smart thermostats, and our groundbreaking line of ultralow power and energy harvesting remote controls designed for sustainability that will be accepted by our existing customers and attract new customers, our ability to manage the global supply chain issues, which includes material shortages that our industry has been dealing with, as well as lockdowns occurring in China due to the COVID-19 pandemic, both of which continue to have a direct and indirect impact on our sales, the continued successful collaboration with existing and new customers in developing and introducing new – next-generation products, operating systems and technologies, which result in increased sales opportunities for the company, particularly during the second half of 2022, the…

Good afternoon and thanks for joining us. Driving toward our mission of creating smarter living, UEI continues to nurture a culture of innovation, to develop award-winning patented technology, and to leverage our strong financial foundation to support the company through all economic cycles. While supply chain headwinds have persisted, our team has worked hard to overcome them. During the first quarter, we continued collaborating with world-leading companies in all of the markets we serve to bring new innovative products and technologies to consumers. Going forward, we expect to see incremental improvements in our supply chain, combined with increased demand from existing and new customers, particularly in HVAC, security, and home automation. We expect sales in the second half of 2022 to exceed any half year period since 2019. With that in mind, I will review the first quarter. We launched more home entertainment and automation control solutions. We fostered relationships, yielding new projects in home automation that are expected to fuel revenue growth in late 2022 and into 2023. And we controlled costs. We reported EPS of $0.47 with net sales of $132.4 million. Bryan will review the financials in greater detail in a moment. Regarding innovation and product development, we started the year strong, unveiling many of our latest products at CES in January. We continue to lead the industry by creating solutions to help our customers differentiate themselves. We supply the user experience. We create whole home coverage across ecosystems and protocols. And most recently, we introduced technology to foster sustainability. I'll reviews some examples. Our latest control platform, Eterna and its related technologies are a groundbreaking line of ultra-low power control solutions that reduce energy use and eliminate battery waste. By using ultra-low power connectivity systems on a chip, our control solutions harvest energy already present in…

Thank you, Paul. First, I'll review the results for the first quarter of 2022 compared to the first quarter of 2021. Net sales were lower than we expected, a $132.4 million, compared to $150.7 million for the first quarter of 2021. While we expected sales to be affected by global supply and logistics issues, we did not anticipate the lockdown in China that occurred during the last months of the quarter. This lockdown caused a shortage of workers at our Southern China factory, resulting in a decrease of more than 50% in our utilization rate during the last two weeks of the quarter, yielding a loss of approximately $4 million of revenue. All of our lines at our Southern China factory were back to normal production rates in early April and labor issue caused by the lockdown has not resurfaced in the second quarter of 2022 Our gross profit was $38.3 million or 28.9% of sales, compared to $47.3 million or 31.4% in the first quarter of 2021. During the first quarter, we began phasing in price increases to offset inflationary pressures on component and logistics costs. These price increases will continue to be implemented to the second quarter, resulting in a partial impact for the first half of the year and a full impact for the back half. In addition, the U.S. dollar was weaker versus the Chinese yuan compared to the prior year. Operating expenses were $30.4 million, compared to $31.7 million in the first quarter of 2021. SG&A expenses decreased to $23 million from $24.1 million in the prior year quarter. R&D expenses were consistent at $7.4 million, compared to $7.6 million in the prior year quarter. Operating income was $7.8 million or 5.9% of sales, compared to $15.7 million or 10.4% of sales in the first…

Thank you, Bryan. I'm excited about our opportunities and what lies ahead for UEI in 2022. Even though supply chain constraints, logistical challenges, and most recently unanticipated lockdowns have dampened our ability to achieve our near-term sales targets, our foundation for our long-term growth is strong. We are an industry innovator that is consistently selected by leaders in the industries we serve. Our products and services are repeatedly recognized by our customers and industry associations for their usefulness and ingenuity. This long-standing leadership in innovation has led to an enviable market position in the industries we serve. It is important to remember that we have been through challenging times before and each and every time we have emerged from them stronger than ever. We remain committed to building innovative solutions for an ever smarter home. We remain committed to building strong, long-term customer relationships and building some new ones. We are committed to remaining true to these principles, empowering through any short-term challenges to create an ever more successful company. I am also proud of our team and their perseverance. They are dedicated to solid cost management, working hard to tame the supply chain crisis, building new and deeper customer relationships, and continuing to raise the bar by developing new, innovative solutions. We are confident that all of these actions will yield positive results. We expect that increased demand from existing and new customers combined with anticipated incremental improvements in supply to positively impact sales. In fact, as Bryan stated, we are forecasting the second half of 2022 to be the strongest half year since 2019. As always, stay tuned. We now like to open it up for questions.

[Operator instructions] And we have our first question from Jeff Van Sinderen with B. Riley. You may ask your question.

Okay. Hi, everyone. It's Jeff Van Sinderen. We got the name a little messed up there, which is not unusual. But in any event, I wanted to ask you about gross margin. Great to hear that it looks like the second half is looking up pretty substantially. Wondering sort of what your gross margin expectations are, order of magnitude, as far as you can see out, particularly as we're getting into second half, whether we should see gross margin expansion there.

Well, as you know, Jeff, we don't provide a guidance on gross margin rates, specifically, even in the given quarter, let alone the outer quarters. But I will say that there is definitely potential for expansion. Right now you're looking at, as I mentioned, we've got price increases that are rolling out through the second quarter, which should take a full effect in the back half of the year. And currently the U.S. dollar is strengthening versus the Chinese yuan, which helps us. So there's definitely some positives going our way right now. But gross margin has a lot of variables to it. I don't want to make a prediction, but it's definitely possible for expansion in the back half.

Okay. And then I know you also said second half sales, you anticipate to be the strongest since 2019 second half, I believe, is what you said. Are you anticipating year-over-year growth in both Q3 and Q4 for sales?

Well, what we're saying is the back half. I'm not specifying Q3 versus Q3 or any quarter, Q4 versus Q4 or any prior quarter. I'm saying the back half of the year is going to be – we expect to be greater than any two successive quarters since 2019. So any rolling two quarters since the 2019 time period, whereas you remember 2019 was a very strong year for sales, 2020 and 2021 were lighter and we're starting to see some positives coming through with all the product wins that we have, as Paul mentioned. And we've got orders and forecast coming from customers with – from existing customers that are increasing. We've got product wins in the new categories from HVAC, to home security, to home automation that are scheduled to launch in the back half of the year. So I mean, things right now I know are a little rough, but the back half is looking very promising.

Okay. And then maybe can you guys, just if I can squeeze in one more. Can you tell a little bit more into the HVAC and home automation products, where you're seeing traction, you're seeing pretty good adoption, it sounds like there. Maybe just touch on those and how we should think about contribution to the P&L as the remainder of this year unfolds and then into 2023? And any order of magnitude or progression, thoughts you have around that.

Yes, I can answer that, Jeff. These markets, without exception, HVAC, security, home automation, all of these markets have good growth rates, double digit growth rates as far as markets are concerned. Our share is very high, as you know, in home entertainment. It was our original business that we dedicated ourselves to innovation in and have built a very strong position. But I think our market position there, if you take all of our competitors combined and add them up, it doesn't add up to our position because we've just done a very good job of innovation, customer development, building long-term customer relationships, et cetera. We see that same opportunity in these other markets. We've already began that in HVAC some time ago, as I mentioned in the remarks. Daikin, which is the number one HVAC company in the world, as far as market share, has been a long-term customer of ours and we are now working with others, some of which we have not announced yet because their products aren't out. But we'll in time do that, and they are looking for better solutions. And I'll say generally that all of these areas, home automation, HVAC, are all converging in some ways on protocol. In the old days, it used to be that the AV system, the home entertainment system, ran on infrared, and these other systems worked in many cases in a wired fashion. What's happening now is there's a lot of low cost, two-way, very energy efficient radio frequency methods, Bluetooth, low energy, Zigbee, et cetera, and they are being shared across these various market areas. So today's remote control isn't vastly different technologically. Physically, they're very different, but technologically they aren't extremely different than sensors or the HVAC controllers or other things in the home.…

Okay. Great to hear. Thanks for taking my questions. I'll take the rest off-line.

Sure.

[Operator instructions] And we now have our next question from Greg Burns with Sidoti and Company. You may ask your question.

Good afternoon. Can you just start off with the 10% customers for the quarter?

Sure. Comcast was at 15% and Daikin was at 12.9%.

Thanks. And then when we think of the traditional cable market, during the pandemic, I guess, the – thought was, they couldn't get access to houses and that was part of the reason sales were being impacted. But now, are they just ordering less more? Like what – or is it strictly supply chain or is any kind of demand dynamic changed in the industry? Because my understanding was that there is kind of a natural flow and the amount of orders – amount of remotes that they ordered in any given year, given the number of subscribers they had, but I don't know if that's changed at all. But can you just talk about maybe the dynamic there and maybe some of the back end is like some of the pent-up demand there coming through. But I just wanted to better understand the demand dynamics in the cable industry a little bit.

Sure, yes. It's a mixed situation. And we can't speak about specific customers, but we have seen – you're definitely right. During the 2020 timeframe, even into 2021, there were companies that had not yet gone to a self-configuring system were probably hurt more than those who didn't. Because obviously when you have a self-configuring system, you could still market your service and have it delivered to consumers without having to have any human being enter their home because that's the very definition of a self-configuring system. It could be placed on your front doorstep and you could bring it in the house and connect it yourself. And companies that did that, we saw this during the pandemic. Customers that had adopted that, their volumes may have been hurt a little bit, not as much as companies that had systems that needed to be manually configured. What we're seeing now is, of course, there's – here in the U.S. anyway, there's opening up. But you've now got the complexity of supply chain, not just for us, but for companion products. So we have had some customers tell us that while their demand is a little greater than what they forecasted, they are not forecasting more because another vendor was unable to get them the quantities they would like to have. Now, it doesn't mean they've been zeroed out, but they may not be getting 100% of what they were forecasting from that other vendor. And as we are a companion product, they won't order as much because they – it won't do them any good to have the companion product when they don't have the other product. So we've continued to see that a little bit beyond the pandemic. And as we've gotten into the supply chain issues. We are seeing, though, that many customers, many more than before, look to be recovering. So as we talk to them about their orders for the remainder of this year, they are forecasting greater volumes either because some of the supply chain issues that they're having with other vendors are clearing up and their demand is good and therefore they are forecasting to us greater volumes in Qs three and four.

Okay. Thanks for that color. And then the – I guess, just the commentary around the second half. You're not saying that you're going to get back to 2019 levels. We're just going to be somewhere in between 2019 and kind of the highest you've seen over the last two years? Is that…

Yes. If you take 2021 and so far in 2022, disregarding 2019, which was a record year for us, that was a long time ago, pre-pandemic, as we all vaguely remember. But as you go into 2021 and thus far in 2022, our forecast today would be that the back half will be the highest level of sales that we've had in any six-month period since 2019.

Got it. Okay, all right. Thanks. And then lastly, any update on Nevo Butler, progress there or feedback from the customers that have launched it?

Yes, it's gone well so far. It's only in a limited area that one customer so far has launched. The results have been good so far. So we'll probably talk more about that as time goes forward.

That customer, are they giving it out, like – or is it an add-on service that the customers…

Yes, it's for a premium subscriber. Yes.

Okay. All right. Thank you.

Yes.

And speakers, there are no more questions on queue. I will now turn the call over back to Paul Arling for closing comments.

Okay. Thank you for joining us today and your continued support of UEI. A couple of logistical things we plan to present at B. Riley's Annual Institutional Investor Conference in L.A. in May. So look for announcements on that. And our Annual Meeting of Stockholders is scheduled for June 7 in Scottsdale. Hope to see you soon. Everybody, have a great day.

This concludes today’s conference call. Thank you all for joining. You may now disconnect.