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. [Operator Instructions] 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've not, 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, non-public information that might be disclosed 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 continue capturing design wins in the connected home and home entertainment markets, particularly in the climate control and home automation markets through the development and delivery of unique and innovative solutions and excellent customer service as anticipated by management. The continued growth of the business with the company's largest customers in the climate control space, which can be leveraged to attract industry leaders to our product 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 be achieved improved results by expected -- expected by management. The continued successful expansion of the company's IP portfolio and the licensing of the company's technologies, the company's ability to capture potential upside opportunities in the traditional subscription broadcasting business due to its continued strong leadership -- strong leading market share. And the direct and indirect impact the company may experience with respect to its business and financial results stemming from the…

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…

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 changes sometimes sudden 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, core cutting in the video service channel and less 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…

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 or beginning to enter the next stage of their journey, expansion. We have run this path before and is progressing favorably once again. First, our differentiating features attract new customers and our innovation wins us new projects. Next, we prove to the customer 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. [Operator Instructions] 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 tie 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. A couple of elements to that question. One, on existing designs that we have out, we have seen -- and I think any inventory that they have, may have been, for them, forecasting a better second half than they're seeing. We have seen in certain parts of the world some of the incentives for these new energy-efficient technologies drawn back a little bit. We and our customers who have experienced this do not think it's long-term. These incentives are typically put in place -- not to get into more detail than we should here, but the heat pumps and other energy-efficient technologies are typically more expensive to the consumer. So, governments across the world have incentivized them. We've even done some of that here in the US because they want to incentivize the movement towards these products. They do not -- they can cool your home and heat your home without using any fossil fuels at all or natural gas. So essentially, they're incentivized. Those incentivized were drawn back, so some of our customers feel that that will be impacting demand as we go through the rest of the year. But they don't think it's long-term because, again, the movement towards these technologies has been happening for some years and will probably continue into the next decade or two. All of the companies, as I said in the prepared remarks, are spending a great deal of time and effort and money on R&D in making these heat pumps even more efficient, even more affordable, and maybe even get them to the point where they could replace, even in the northern climates, the combination of AC and furnace, which is really what they're attempting to do long-term. So those incentives are also being put in place. There's another one in Europe that's coming -- I think it's at the end of 2025 or into 2026. I think it's called the Super Climate Fund. It's about €90 billion to help this transition to these more energy-efficient technologies. So it's things like this that they, our customers, see as a real prompting for demand. They may see temporal shortfalls or drawdowns of inventory or buildup of inventory. That can affect us for a quarter or two. But I think the movement in this market is like movements we've seen in others, where the movement of technology forward happens. Sometimes it's bumpy, but it will happen over a one- to 10-year period, with bumps along the way, but it's a movement that is 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 think we're with all of them yet. With the majority of them, we are. Of course, with Diken, it's a long-term relationship, so we've been in the market with them for quite a long time. Many of the other customers in the regions of the world, like the US and Europe, we are brand new. So, those projects are still on track. Some of them got delayed by months. The testing regimens for these products are both more stringent and take longer. So we have seen some month-long or a few-month delays in those testing regimens for those companies, but it doesn't affect our long-term view. Two months on a product is -- we don't like it, but it doesn't affect our long-term view of either that product or our relationship with that customer. Most of them, we do have some projects on a few of them that haven't launched yet. So they're still at the early stage of this customer development, where typically, as I was saying, customers start with one, maybe two SKUs or projects, then you go through lessons learned with them, just like we did in home entertainment. And then what happens is you -- if you do well, which we have been so far, with each of these customers, they typically will award you more of their portfolio of business. It happened in consumer electronics with televisions that happened in subscription broadcasting. In that regard, it's not that dissimilar 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 done under the old method. And if not, for -- we were -- we ended up with a new method at a $0.09 loss. Now the to quantify the effect of the excess manufacturing overhead, it was equivalent to $0.09. So I'll let you do the math. And then for Q3, obviously, we took into consideration of the new -- the guidance includes the new methodology. Yes. So this quarter, Steve, the guidance did not include this effect. But going forward, as it is our new method, the guidance is -- is provided on the new method.

And is that $0.09 kind of the number we should think about adjusting our models? Or do we think about will take where the gross margin is now and just say, okay, you made a comment that it's going to hit 30 and sometime in early 2025 -- draw a line between those 2 points?

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 better than that. So what we're seeing is, especially since we're not including the excess manufacturing overhead, every -- in the pro forma on a go-forward basis, any improvement we see as the factor you're seeing drop them to the bottom line. So right now, we're pretty far through the transition. We spun up Vietnam, we shut down GTQ, we streamlined Mexico. We're doing some rebalancing now. So we're probably 80%, 90% through the transition of the manufacturing footprint optimization. So we're probably a couple of quarters away from getting to the full call it, 30 points that we expect to be at.

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 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 the -- either the one contract number increased or the total pipeline value increased Paul?

Yeah. No, they're similar to before the pipeline we track and there are hundreds of millions of projects. I think I did, of course, explain that those are the projects we aren't working to develop to ship. We have multiple categories of leads. We have qualification, quotes and then One [ph]. One is where we do the most work because the customer at that point is committed to buying the product on a certain time schedule. So that's where the -- we do engineering work before that on leads, qualifications and quotes, of course, because we have to define the product and work with the customer to define it. But the most work happens after you've won the project. And then there are usually date set for it and et cetera. So the pipeline still is very strong. There are hundreds of millions of dollars in it. We will, of course, strive to win all of it, but probably will not win all of it. And so that's what we're trying to get across. There's a lot of business in this market that's out there. The size is even bigger than that. Those are only the projects we've identified so far. This market is almost $2 billion and growing. So there's a lot of business out there for us to go gain and we are doing that. We expect next year and the years after, as we said in the prepared comments, to be layering on business, new projects, hopefully, every quarter, new projects that are driving revenue.

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.