Good day, and thank you for standing by. Welcome to the Universal Electronics First Quarter 2023 Financial Results Conference Call. At this time, all participants are in listen-only mode. After the speakers' presentation there will be a question-and-answer session. [Operator Instructions]. Please be advise that today's conference is being recorded. I would now like to hand the conference over to the speaker today, Kirsten Chapman. Please go ahead.

Thank you, Jules, and thank you all for joining us for the Universal Electronics 2023 first quarter financial results conference call. By now, you should have received a copy of the press release. If you have not, please contact LHA Investor Relations at 415-433-3777 or visit the Investor Relations section of the website. This call is being broadcast live over the Internet. A webcast replay of this call, including any additional updated material non-public information that might be discussed during this call will be available on the company's website at www.uei.com for one year. During this call, management may make forward-looking statements regarding future events and the future financial performance of the company and cautions you that these statements are just projections and actual results or events may differ materially from those projections. These statements include the company's ability to timely develop and deliver new technologies and technology upgrades and related products introduced this year, including meeting the demand of interoperability across devices platforms and ecosystems in the home; the timing and extent of the recovery of the consumer electronics channel as believed by management; achieving the new product development successes as anticipated by management; including in the HVAC market and its groundbreaking line of ultra-low power and energy harvesting controls, products designed to address the growing demand for more sustainable solutions in electronic devices. The continued successful collaboration with existing and new customers in developing and launching next generation products; software solutions and technologies into existing and new growing markets, which results in increased sales and market grows share for the company; the ability to optimize the company's manufacturing operations on a time line and to the extent expected by management; management's ability to continue to manage its business, inventories and cash flows to achieve its goals of net…

Thank you for joining us today. For the first quarter of 2023, while we met the high end of our guidance for net sales and earnings, neither of these measures reach our standards for long-term financial performance. So we are executing strategies to diversify our markets and realign our global operations, in particular, optimizing our manufacturing footprint. While we are experiencing headwinds in our home entertainment channels, we continue to see growth in sales and market share in the connected home market. As we have discussed previously, we are leveraging our foundational competitive advantages. Our innovation and device control and connectivity technology, our excellence in new product development and our commitment to providing a great customer service. Solving the consumer demand for interoperability across devices, platforms, and ecosystems in the home is a core foundation of enabling a truly smart home experience, which is exactly what we are bringing to our customers in the climate control, automation and security markets. These areas will continue to grow in the long-term, driven by underlying macro trends such as global warming, rising energy costs and the need for smarter and more sustainable product solutions. However, near-term, our new product and customer successes have yet to fully offset the sales decline due to subscriber loss in subscription broadcasting, particularly in the U.S. Additionally, our consumer electronics customers are also experiencing near-term order declines driven mainly by economic weakness in the consumer or retail channel. We believe the impact in the consumer electronics channel is temporary, and we expect television sales to recover as the battle for the primary operating system for entertainment and information in the home escalates. In this regard, we are extremely well positioned with our key accounts and are working to help bring new features and more sustainable solutions to the…

Thank you, Paul. First, I'll review the results for the first quarter of 2023 compared to the first quarter of 2022. Net sales were $108.4 million at the high end of our expectations. This compares to $132.4 million for the first quarter of 2022, reflecting headwinds in the video service channel as well as an uncertain economic environment, which have led to household spending less on discretionary goods and ultimately affecting our end user markets. Gross profit for the first quarter of 2023 was $27.6 million or 25.4% of sales compared to 28.9% in the first quarter of 2022. The decrease in our gross margin percentage is due primarily to under absorbed manufacturing overhead and lower royalty income associated with the slowdown in television sales. As Paul mentioned, we're taking steps to restructure our factory footprint and eliminate manufacturing inefficiencies. I'll elaborate. As I mentioned before, for a variety of reasons, ranging from the enactment of certain governmental policies to changes in the global environment, over the past five years, we expanded our manufacturing footprint, evolving from producing finished goods solely in China to expanding and converting our Mexico factory from refurbishment to a full production plan to now ramping up production in Vietnam. Today, as we focus on diversifying our business into higher growth markets and becoming less dependent on the video service channel, we've seen a shift in product mix towards climate control and home automation categories. In these newer channels, the average selling price for thermostats, wireless controllers, and security products is significantly higher than products in our video service provider channel. Consequently, less factory floor space will be required per sales dollar. Our restructuring plan will enable us to lower our concentration risk in China, to eliminate excess manufacturing overhead costs and ultimately return gross margins…

Thanks, Brian. Our strategy to address the new market dynamics and to rebuild UEI into a stronger company, better positioned for growth and profitability is progressing. Although economic pressures and the longer product development cycles in our newer markets inform us that sales impact will likely be gradual in '23 with a greater effect beginning in 2024, our team is innovating, winning business and maintaining UEI's long-standing position as a leader in consumer device control. We are committed to creating products and technologies that help everyday consumers easily discover and interact with the devices and services in their home. We know with our healthy product development pipeline, sales opportunity conversion, and strong customer relationships, we expect to return to long-term growth. 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. [Operator Instructions]. Our first question comes from the line of Gregory Burns from Sidoti. Your line is now open.

Can I just get the 10% customers to start off?

Yes, sure. Daikin and Comcast. Daikin came in at 18.1% and Comcast came in at 13.6% for the quarter.

All right. And then it seems like with the -- where the quarter landed and where you're guiding for the second quarter, a little level of stability in the -- a little more stability in the subscription broadcast market. How do you feel about the outlook there now based on what you're seeing in terms of what the customers are communicating to you? And where are the inventory levels in that channel like do you feel like we've reached kind of a near-term plateau?

Yes, Greg, it's a difficult one to answer because, obviously, it will vary customer-by-customer. We did have some customers whose purchases were lower than what they've communicated to us their needs were, which means what they did was they were using inventory for deployment. So they were ordering less than they would otherwise need for deployment. But as we all know, you can't do that forever. A company needs to buy enough to deploy. Over the long-term, your purchases are equal to your deployments. So we did have a few of our customers that we noticed that and spoke with them, and they, in fact, confirmed that that was going on. Certainly, subscriber counts, though, are down. This has hurt our business over time, because new additions are the biggest source of volume for us. New additions, of course, take multiple units per installation. There is repair and replacement business. People do break or lose their remotes. We love dogs and children, because they like to carry remotes off and chew them. But -- so there is a repair and replacement business. We have seen some customers reach what we believe to be probably a longer-term, more stable level of volume. In other words, the subscriber accounts have been less impactful on them because they've already gotten to a point where they've dropped off in purchasing, and it's leveling off. So it varies by customer. But one thing we would say is that over the next couple of years, where growth is likely to come from is these new channels. And as I highlighted in the prepared comments, we now have one business with -- it's again, strangely reminiscent to the home entertainment business. We've aligned with seven of the largest in the world. I think it's actually five of…

All right. Thank you.

Sure.

All right. Thank you so much. Please standby for our next question. Our next question comes from the line of Brian Ruttenbur of Imperial Capital. Your line is now open.

Great. Thank you very much. First question I have is about your cash and balance sheet and what you expect it to look like in the second quarter, the end of the second quarter, cash was obviously down. In the first quarter, your debt was down a little bit. Where do you see things shaking out in the second quarter?

I think it's going to be similar. I think when you deal with cash flow on a quarterly basis, sometimes it could be difficult to forecast and one of the reasons why we don't give quarterly forecast on it, because you can have a customer that -- here's an example that will pay you $5 million, $6 million on at the end of the quarter, and they can evenly push out a couple of days next that falls into the following quarter. So on a quarterly basis, it's difficult. But overall, I'd say I expect it to be similar in Q2 as in Q1.

Great. And then in terms of demand, typically seasonally you have your best quarters in the third quarter. What are you seeing in terms of third quarter? I know that you're only getting through second quarter. Can you give us any kind of visibility into that third quarter, that key quarter?

Yes. As Bryan said, we expect -- we don't give that forward guidance. We, of course, did provide a range of guidance for Q2. So we don't provide -- we never have really -- actually, it's been more than a decade, I think. Since we've provided guidance out further. But -- so I can't say we've never done it, but we haven't in probably at least 10 years, I think. But Bryan did say that we -- right now, what our forecasts say, based on customer wins and customer forecasts that Q3 and Q4 will be better than Q2.

Right. And with those -- I guess I'm going to ask one more question that you're probably not going to answer. But do you see those down significantly year-over-year. Can you give us any kind of color on as a percentage, first and second quarter were down X, therefore, third and fourth quarters will probably be down a similar amount year-over-year. I didn't know if you could give us any kind of color for the rest of the year?

Yes, I really couldn't give you any numbers. I -- because we -- again, we don't provide that guidance. To be fair, last year's Q4 wasn't as good. So it would be an easier comp speaking from your perspective. But look, our goal here is we have many parts of our business. Home entertainment has struggled. The video service provider business has come down. The consumer electronics business is fine, but it goes through temporal changes. It just so happens that early this year, when we've seen the downturn from the video service provider, we've also seen one of the probably every five years or eight years declines in TV sales due to economic difficulties and retail issues that some of our customers are experiencing. So that part of our business has been tough. We, of course, have a different opinion on each part. But the smart home area, we -- as we outlined, we've got a lot of new customers there. We've got a lot of design wins. They take a little longer. Some of them will come out this year, but we'll have lower volumes when they start. We're really trying to build for a better future at UEI at this point. If we could do something to have a huge amount of sales next quarter, we'd of course do it. But I think that building this back in these new areas takes a little bit of time, but we're looking towards a better 2024 based on the wins we're getting right now. And we've gotten over the last six months. And the sales pipeline is pretty full right now in terms of the number of projects that we have to architect/design, architect/engineer and then build. We've got a lot of work to do to get that done,…

Great. Thank you.

Yes.

Thank you so much. [Operator Instructions]. Our next question comes from the line of Gregory Burns of Sidoti. Your line is now open.

I just wanted to follow-up on some of that pipeline commentary that you just made, Paul. Can you just give us an idea of some of these more recent project wins or program wins? Like what types of applications those are for, not necessarily specific customer details or anything, but just an idea of kind of what applications you're winning projects for?

Yes. The ones I can mention, I will, of course. We mentioned Daikin and Carrier. We also mentioned we called METUS or Mitsubishi Electric Train, which is a joint venture here in the U.S. And as far as the products and technologies we're selling here, they are typically smart climate control devices. So we have -- we also have wins on products that those out there who have been the CES have seen TIDE Dial and TIDE Touch. We have some standardized products that we've done this in home entertainment as well. We build standardized products and then customers can either take them as that standard product or modify them slightly the design of them. But the inherent value in them is the technology behind them. So these are the types of products clearly in HVAC that we're winning. And therefore, in many cases, a full smart thermostat.

Okay. Was -- have there been any more incremental wins of the Hunter Douglas kind of Vivint flavor like in more home automation?

There have. There are no new customers I can name right now, but even of the names we mentioned, we've added to the number of projects that those customers have awarded us, because, again, as our strategy is, we win a product or a project or two, but then we are in at that customer. And if the customer is happy with the performance they're getting, they'll give us opportunities for other products. And in some cases, we pitch products that they may not have considered before, and they will consider us for that. And we have been winning projects with in that market as well. There's no new names I can mention yet. But as I said, the pipeline has gotten pretty active right now for these projects and PIs as we call that we're working on. So -- and again, it gives us a lot of real positive thoughts about both later this year, because they'll start to fold in some of them, but really for next year.

Okay. And then just to understand the timing with some of the -- that you've announced already, like Hunter Douglas and Somfy. Are you shipping for those customers yet? Or are those still like kind of second half?

Well, we have a couple of projects with these customers, yes. We had one that I can't mention that was delayed, but it wasn't delayed due to us. They had approval processes. Sometimes customers have to go through an approval process that can take months. So if you forecasted it in a specific quarter, it can slip to the next. But our view on that is longer-term, it's not good when that happens, obviously. But over the long-term, it's not as relevant, right? If you're performing on a product and the customer continues to give you new SKUs, that's what really matters.

Okay. And then lastly, I know you sized kind of the total market if you mentioned a few billion. But specifically for the HVAC market, how do you size the opportunity there? And can it be as big as like the Legacy Home Entertainment business over time? Or is it a fraction of the size? Like how should we think about that HVAC opportunity specifically?

Well, HVAC alone is probably almost as large now. Now we're not considering our served market to be just like we did in home entertainment, by the way, places like China because the HVAC systems there are often run with lower level controllers. There's not as good a margin opportunity there. So we did the same in home entertainment by the way. We do not have really any exposure to the Chinese market for subscription broadcasting, because it's just -- it's different economics. So similarly, in HVAC, we do not consider that part of our near-term served market. So when you look at global estimates of HVAC volume, they might be higher than I'm about to state because we're -- I'm excluding that from our market estimates. But that market today is over $1 billion. Home entertainment total between consumer electronics and video service provider is over $1 billion. It's probably in the mid-$1 billion range. And the HVAC market is growing faster. It has a growth rate of high single-digits, maybe even close to double-digit. It's a growth market. And there's a lot of action there, because the controllers are becoming much more sophisticated and because they're making them smart as most people out there are very aware of. But in addition, they want to become a more important part of the smart home architecture. And there's a lot of things that you can do with these products that you weren't able to do before. They're not just about temperature management, they could be part of a home automation system, right? Smart product would know what the temperature is outside. It would know the desire temperature inside, and it may be even able to know presence of humans. So presence of humans could mean different temperature control mechanisms or…

All right. Perfect. Thanks.

Thank you so much.

[Operator Instructions]. All right. At this time, I would like to turn it back to Kirsten for closing remarks.

Well, that would be me. I'll do that. I'm Paul Arling. Thank you for joining us today and for your continued support of Universal Electronics. We plan to present at the B. Riley Annual Investor Conference later this month. Hope to see some of you there. If you have any questions, don't hesitate to reach out to us. Have a great day.

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