Good day, and thank you for standing by. Welcome to the Universal Electronics Third 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. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the comments over to your first speaker today, Kirsten Chapman at Alliance advisor of Investor Relations. Please go ahead.

Thank you, Julie, and thank you, all, for joining us for the Universal Electronics third quarter 2024 financial results conference call. By now you should have received a copy of the press release. If you have not, please contact Alliance Advisors 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 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 continue capturing design wins in the connected home and home entertainment markets, particularly the climate control, HVAC and home automation markets, through the development and delivery of unique, innovative solutions, including the company's TIDE platform and excellent customer service, as anticipated by management; the continued growth of the company's business in the climate control space by attracting OEM industry leaders to our products and technology offerings; management's ability to continue to manage its business through cost-saving initiatives and optimization of the company's manufacturing facilities and cash flows to achieve improved results as expected by management. The continued strategic expansion of the company's IP portfolio and monetization, including licensing of the company's technology; the company's ability to capture potential upside opportunities in traditional subscription broadcasting business due to its continued strong leading market share and the importance of the company's QuickSet differentiation and innovative remote control and one for all brand design wins; and the direct and indirect impact the company…

Thank you for joining us today. As projected, our customer product development and footprint optimization initiatives are beginning to deliver growth and profitability. Q3 2024 net sales were $102 million, solidly within guidance. Gross profit increased 380 basis points year-over-year and our bottom line continued to improve with Q3 EPS reaching $0.10. We expect these positive trends to continue with top and bottom line growth over the prior year period for Q4 of 2024. Our outlook also includes continuing this successful trend of sales and earnings growth into the full year 2025 and beyond. I'll review some of the elements driving our optimism and supporting our outlook. In the Connected Home, we continue to foster relationships in climate control with many of the top OEM brands in North America, Europe and Asia. The HVAC industry has not been as robust as prior years due to temporal challenges, such as lower housing starts and tempered government incentives, but it clearly has the potential for latent demand to build over the next few years. As the markets return, we expect to expand new product opportunities with our existing accounts. In the meantime, we are continually making progress to build our market share, working to qualify new product opportunities and build on our existing sales pipeline for 2026, 2027 and 2028, which accelerate future growth. In Q3, we continued to garner share. With Carrier, we began shipping our first advanced smart thermostat. We have been working collaboratively with Carrier to ensure our first product together, delivers the full capabilities that their consumers demand. While we are excited about this new product launch, we are equally enthusiastic that Carrier has expressed strong desire to expand our business and we are already actively engaged in discussions about several new climate control products that they would…

Thank you, Paul. I'll review the results for the third quarter of 2024 compared to the third quarter of 2023. As noted last quarter, 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. For the third quarter ending September 30, 2024, costs associated with the aforementioned items amounted to $1.1 million, equivalent to 110 basis points of gross margin or $0.07 per share. For the third quarter of 2023, costs for these items were $2.2 million equivalent to 210 basis points of gross margin or $0.13 per share. Please keep these figures in mind when reviewing our quarterly results. For the third quarter of 2024, net sales were $102.1 million within guidance compared to $107.1 million in the third quarter of 2023. Although, we are still facing headwinds from cord cutting and less consumer spending on discretionary durable goods, the negative effect on year-over-year comparisons has been waning. As a matter of fact, we expect sales in the fourth quarter to grow year-over-year but more on this later. Gross profit for the third quarter of 2024 was $30.8 million or 30.1% of sales compared to 26.3% in the third quarter of 2023. This significant improvement reflects the successful execution of our manufacturing footprint optimization plan over the past two years. The final phase of our plan is near completion and involves our Monterrey Mexico factory where we are transitioning to a smaller more efficient facility. For the third quarter of 2024 operating expenses were $28.2 million compared…

Thanks, Bryan. We're in the best position we have been in for a couple of years. Our persistence, quality, service and innovation continue to foster strong relationships. The work we did 12 to 24 months ago is beginning to yield new product revenue and we tirelessly continue to focus on developing technology-driven features to attract new customers, as we have consistently done for decades. Our recent efforts in footprint optimization are certainly helping but the most important thing we have always done and will continue to do is create great products with innovative features that improve the users' experience and enhance our customers' business. As we have done in the past, this is paving a path for future sales growth and improved profitability. We believe we are reaching a turning point. As I said when I opened the call and Bryan provided in our guidance, we expect Q4 2024 to be stronger than Q4 of 2023 and we expect this growth trend to continue into 2025 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 [Operator Instructions] Our first question comes from the line of Steven Frankel of Rosenblatt Securities. Your line is now open.

Paul congratulations on the return to growth. I'm just trying to get a feel for how much of this is driven by let's call it an unlocking of frozen designs and you talked a little bit about that versus a combination of a bottoming pay TV business and some new momentum in end demand that's driving higher volumes?

Yes. Good question and it's a combination therein. There are many projects that we're working on, which is we're thankful for that customers have placed their trust in us. Some of them were delayed by them for a variety of reasons, resources or other things on their end but they've reengaged on those projects. So that obviously, helps because in one month's time – some number of months' time we can complete the project and get it launched and have it in the revenue stage. We also of course, have won projects, some of which we've won almost two years ago, that not because of our development path but our joint development path with customer and testing has taken 1.5 years, in some cases maybe even a little longer, but they eventually again make it to the revenue stage. And we are seeing in home entertainment a tapering, while we still won't say that there are parts of it that won't continue to wane. The level of wane I guess you could say is lessening. So – and of course it would because the number was once so large that – the shrinkage was large until it got a lot smaller. So the percentage at this point that it can shrink is beginning to taper and our growth efforts can then pay off because the projects that we're putting out can overwhelm any continued flat or shrinking volumes that we have from specific customers.

Okay. And then from a high level kind of how does the business split this year between your legacy home entertainment businesses and this new kind of smart device world?

Yes. We don't break that out but I will say that the growth that we're starting to experience is primarily in the connected home channel. So going from year-over-year, it's primarily all connected home. And as Paul talked about, the home entertainment business it's still – we still are experiencing some decline. It's starting to wane but there is decline. So the growth really from a connected home perspective is even greater because you're offsetting – not only you're offsetting the decline in the home entertainment channel but you're – we're still growing.

Yes. And I think it's probably important to state here Steve that, home entertainment is clearly still a very sizable market and it's still there. And there are a lot of players there that are looking at interesting new models because the industry has changed pretty significantly and we're involved with them. I did mention one on the call. Unfortunately, I can't give names yet and a lot of detail. We'll be able to do that early next year. But there is – there are companies of both existing customers and some new ones that are looking at new versions of their products that take advantage of streaming more, but are interesting concepts that will be very attractive to consumers, one of which we're working on and should be out within the next six to eight months. I believe -- and it is a really interesting concept, I think people will be impressed with what the company has done. And it's along the lines of what has been happening in television for some time now with streaming and ARPU-driven advertising ARPU-driven products. So that's about all I can say about it. But home entertainment is still a pretty thriving market. People are watching as much TV as they ever have. And I think we're working on transition products there as well that could bring some offset to the shrink in any cord cutting as it's been known for a long time now such that home entertainment is still a very active market.

Okay. And on gross margins obviously, very impressive progress. From here, should we expect any material improvement to require a step-up in volume or are there other things that might help grow gross margins like mix even if we don't see sales kind of lift materially off Q4 levels?

Yes. I think I'm really happy with where we're at and the progress we've made with the gross margin rate. We're over 31 points in the third quarter. Now Q4, I expect it to be a little less than that, because we -- 30.1% I'm sorry for Q3. Now Q4, as I mentioned, the -- with the increased rates freight rates related to the Red Sea issues, it's going to -- it is causing an adverse effect temporarily. But overall, I'm really happy with where we're at. From the get-go, I felt like when we completed the transition over the last two years, we're going to be in that 30-point range and that's where we're at. And I think it's sustainable. Again, we have some temporary issues with the Red Sea but I think the 30 points is sustainable and we're always striving to improve. So I would never say we can't continue to improve. I think we can. From a mix perspective, as you know we sell -- we have royalties as part of our revenue stream and that becomes a higher mix then it could put northbound pressure on the margins. And then we're always looking to rebalance between jurisdictions to maximize efficiencies from a manufacturing footprint perspective. So we're always looking to improve. But right now, we're at where we expected to be in that 30-point range. And we -- again, I would never say we can't improve. We're always striving to.

Okay. And the last question, customer concentration in the quarter?

Customer concentration, Daikin and Sony Daikin was at 12.4% and Sony was at 10.6%.

Great. Thank you.

Thank you. Our next question comes from the line of Greg Burns of Sidoti. Your line is now open.

Good afternoon. At what point do you expect to not be recording any of these excess manufacturing costs? And what is contemplated in the guidance for the fourth quarter? Is it a similar like $1 million number?

We no longer record the excess manufacturing overhead. I only stated in the -- in my remarks, just to let you know what they were but they're not included in the financials. We stopped that last quarter. And we made -- they're not in our financial statements. All the numbers we read do not include -- included in the EPS number, do not include anything related to excess manufacturing. I only stated what they were, just so you could compare.

Right. Well, I guess, I meant to ask then at what point do they go away? So when are we going to converge between kind of the adjusted and the GAAP number?

We're basically -- we're near completion. From a physical standpoint, we moved into the smaller facility in Monterrey, Mexico. I would say at the end of this year, we're done. So we're in the final -- the very final days of this two-year long project.

Okay. And then in the fourth quarter, is it going to be like a $1 million number or something similar to this third quarter?

Well, there'll be some charges coming through. I don't have the exact number yet, because we're still working through that. But there'll be some charges coming through.

Yes. Okay. And when we look at kind of the outlook for growth next year when you're looking at the pipeline of some of these new projects that are getting to the revenue recognition stage or the production stage, is it going to be kind of ratable? Is it more back-end loaded? Do you have visibility on kind of the timing of when some of the stuff is going to be coming to market in -- maybe in terms of the cadence throughout 2025?

We do. We're always careful though to not provide forward guidance Greg, because we're sitting now in November. We have projects scheduled to launch throughout next year Q1, Q2, Q3 and Q4. In fact we have some scheduled for 2026 already with customers. And as we go through the year, obviously, we look at status of each project and will some of them ship early, will some of them ship late. So we're reluctant to provide guidance on that. But there are quite a few projects as I mentioned in the prepared remarks that are coming, some early in the year, some later. And as these things go each layer -- each project as many of them get introduced, they'll introduce revenue in the period they're first shipped and then they typically order every quarter. So every new project that comes on provides another layer of revenue. So as time goes on these new projects usually layer on top of one another. In our historic growth in home entertainment that's exactly what happened. As we won each project and each customer with multiple projects, the layers just kept building. And then we would win what we call replacement products or derivatives. You win those and the revenue just continues, right? So layer after layer, you build it and that's where we're at now. Q4 is partially the result of the projects and sometimes they're small projects, sometimes they're slightly larger. But every quarter the customer that once they start ordering, they continue to order on those projects. And as long as you don't lose them, which we typically do not, they layer on top of each other. So we think that we're in a place now where these projects can start to pay off. And like I said, we're not done in home entertainment. There's some interesting things happening there. We have growth areas to offset some of the shrinkages we've had. And we think we're at a point now where Q4 over last year's Q4 will be up, our guidance. Even the lowest end of our guidance range is a growth. The midpoint is a decent growth and the high end of our range is a pretty good growth rate for year-over-year quarter. And earnings obviously are up. Last year, we lost money in Q4. This year we're targeting a profit.

All right. Great. Thank you.

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

Okay. Thank you for joining us today. Thanks for your continued interest and support of Universal Electronics. As we said in the prepared remarks, we will be at CES. I hope at least some of you will be able to come. If you do reserve time early with us, because we'll be pretty busy at the show, major customers from all of our different business lines will be there. But look forward to seeing you there I hope and you can see some of the new stuff that we're going to be introducing. Otherwise thanks and have a great day.

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