Universal Electronics Inc. (UEIC) Q4 2022 Earnings Call Transcript

Universal Electronics Inc. (NASDAQ:UEIC) Q4 2022 Earnings Conference Call February 16, 2023 4:30 PM ET

Company Participants

Kirsten Chapman - Investor Relations

Paul Arling - Chairman & Chief Executive Officer

Bryan Hackworth - Chief Financial Officer

Conference Call Participants

Greg Burns - Sidoti

Operator

Good day, and convey you for opinionated by. Welcome to nan Universal Electronics Fourth Quarter 2022 Financial Results Conference Call. [Operator Instructions] Please beryllium advised that today's convention is being recorded.

I would now for illustration to manus nan convention complete to your speaker today, Kirsten Chapman, LHA Investor Relations. Please begin.

Kirsten Chapman

Thank you, Norma, and convey you each for joining america for nan Universal Electronics 2022 4th fourth and afloat twelvemonth financial results convention call. By now, you should person received a transcript of nan property release. If you person not, please interaction LHA astatine 415-433-3777 aliases sojourn nan Investor Relations conception of nan website. This telephone is being broadcast unrecorded complete nan Internet. A webcast replay of this call, including immoderate further updated worldly non-public accusation that mightiness beryllium discussed during this telephone will beryllium disposable connected nan company's website astatine uei.com for 1 year.

During this call, guidance whitethorn make forward-looking statements regarding nan early and early events and early financial capacity of nan institution and cautions you that these statements are conscionable projections and existent results aliases events whitethorn disagree materially from those projections. These statements see nan company's expertise to timely create and present caller technologies and exertion upgrades and related products introduced this year, including leveraging its wireless connectivity capabilities successful nan ambiance control, location automation, security, hospitality and HVAC channels and its crushed breaking statement of ultra-low powerfulness and power harvesting power products designed to reside nan increasing request for much sustainable solutions successful physics devices. The continued successful collaboration pinch existing and caller customers and processing and launching caller procreation products, package solutions and technologies into existing and caller and increasing markets, which consequence successful accrued income and marketplace stock for nan company. management's expertise to proceed to negociate its business, inventories and rate flows to execute its nett income margins and net done financial discipline, operational efficiency, manufacturing diversification and footprint strategy and statement management. The effect of nan company's financial results that it whitethorn acquisition owed to proviso and waste and acquisition constraints. So semiconductor proviso challenges and inflationary pressures and macroeconomic conditions and its consumers are experiencing. The nonstop and indirect effect nan institution makes acquisition pinch respect to its business and financial results stemming from nan continued economical uncertainty affecting consumers' assurance successful spending, earthy disasters, nationalist wellness crisis, including nan continuation aliases resurgence of COVID-19 pandemic aliases governmental actions, including war. The institution undertakes nary responsibility to revise aliases update these statements to bespeak events aliases circumstances that whitethorn originate aft today's day and refers you to nan property merchandise mentioned astatine nan onset of nan telephone and nan documents nan institution has revenge pinch nan SEC, including its 2021 yearly study connected Form 10-K and nan periodic reports revenge since then.

In management's financial remarks, adjusted non-GAAP metrics will beryllium referenced. Management provides adjusted non-GAAP metrics because it uses them for fund readying purposes and for making operational and financial decisions and believes that providing these non-GAAP financial measures to investors arsenic a supplement to GAAP financial measures helps investors measure UEI's halfway operating and financial capacity and business trends accordant pinch really guidance evaluates specified capacity and trends. In addition, guidance believes these measures facilitate comparisons pinch nan halfway operating and financial results and business trends of competitors and different companies. A afloat explanation and reconciliation of these adjusted non-GAAP measures versus GAAP are included successful nan company's property merchandise issued today.

On nan telephone coming are Chairman and Chief Executive Officer, Paul Arling, who will present an overview and Chief Financial Officer, Bryan Hackworth, who will summarize nan financials. Paul will past return to supply closing remarks. It's now my pleasance to present Paul Arling. Please spell ahead, Paul.

Paul Arling

Thank you for joining america coming to reappraisal our 2022 capacity arsenic good arsenic our outlook for 2023. As we person highlighted galore times before, our beardown committedness to ongoing innovation, merchandise and exertion design, improvement and transportation and ongoing excellence successful customer work continues to garner accolades. Our merchandise designs received CES invention awards successful January and much importantly, our platforms and exertion solutions earned customer nickname successful nan shape of caller merchandise creation wins passim nan backmost half of 2022 and into 2023. As a result, our stock continues to turn successful nan markets we serve. However, macroeconomic challenges and accrued user uncertainty person impacted marketplace dynamics, particularly astatine nan tail extremity of past year.

As a result, Q4 2022 capacity was beneath expectations pinch nett income of $122.8 cardinal and EPS of $0.44. We expect that effect will besides beryllium felt successful nan first 4th of 2023. Regardless, our connected location solutions, which are sold successful our higher-growth markets that attraction connected ambiance control, location automation and information proceed to summation momentum. In fact, merchandise creation wins secured 12 to 18 months ago, successful immoderate cases, successful nan connected location transmission are starting to ship, giving america assurance nett income will amended starting successful nan 2nd 4th of 2023 and build momentum into 2024. For example, we are shipping our first precocious thermostat pinch Mitsubishi Electric train for nan U.S. marketplace toward nan extremity of nan first 4th of 2023 and person already been awarded our 2nd smart thermostat pinch Mitsubishi that we expect to motorboat globally.

In addition, we won caller thermostats and power platforms astatine 1 of nan largest U.S. HVAC strategy providers astatine nan opening of 2023 and are closing different world leader successful nan HVAC abstraction pinch our caller TIDE platform. In nan location automation space, we proceed to turn our business pinch power solutions astatine Hunter Douglas and Somfy and we person expanded our footprint pinch aggregate sensors, controllers and location automation products pinch U.S. information provider, Vivint. We expect these wins to lend to our gross starting adjacent quarter.

In nan meantime, we person been taking further actions to reside nan marketplace dynamics. First, complete nan past fewer years, arsenic mentioned, we person deliberately been shifting improvement walk connected caller products and technologies from our marketplace challenged halfway video work supplier transmission to higher maturation channels successful nan connected location space, wherever complete nan past years, we person seen growth. Second, to mean fixed costs, we proceed to move ongoing attraction and improvement support activities to lower-cost regions. We person besides tasked our section invention and improvement teams to create exertion that tin standard crossed each our channels, focusing connected wireless connectivity, interoperability, sustainability and end-user support solutions that are cardinal to differentiating our solutions successful these increasing markets.

Third, we person already begun diversifying and optimizing our manufacturing guidelines extracurricular China pinch nan building of a caller mill successful Vietnam, which will beryllium afloat operational later this year. While this will initially summation our wide accumulation footprint, nan extremity by nan extremity of 2024 is to rightsize our world footprint, enabling manufacturing elasticity to service our world customers, to optimize costs efficiencies and to create a accumulation footprint that is successful statement pinch our caller higher maturation merchandise categories.

Finally, our merchandise improvement process continues to prioritize allocating world improvement resources to projects pinch nan highest imaginable gross and business impact. This January, our acquisition and customer guidance astatine CES was highly positive, confirming that our improvement of differentiated products is connected nan correct way and offers ample impervious that we are successful a beardown position to make semipermanent growth. For almost 40 years, we person delivered industry-leading power solutions for our customers. Our inventions for illustration QuickSet person go nan de facto power modular for smart connected location intermezo devices. As such, starring brands from astir nan world progressively move to UEI for vanished products, embedded SoCs and package solutions to powerfulness nan sensing and power functions of their systems.

Our strategy of increasing successful caller markets and our thrust to consistently meet and surpass customer expectations will, successful time, output semipermanent growth. Our customers count connected america to create innovative solutions focused connected IP connectivity, greater location power automation, including amended and much intuitive low-power wireless control, resulting successful a greater tie-in pinch different smart location systems. Since 2020, income successful our ambiance control, information and location automation abstraction person grown. In 2022, these connected location solutions accounted for complete 25% of our nett sales. And these markets are already larger and are increasing astatine a faster complaint than location intermezo markets. So we expect their publication to beryllium moreover much meaningful going forward. Our circumstantial addressable marketplace successful ambiance power unsocial represents astir $1 billion, which is increasing astatine a 10% compound yearly maturation rate.

I will concisely reappraisal a fewer of nan highlights from our merchandise introductions astatine CES. We demonstrated our expanded connectivity solutions for full location wireless power pinch enhanced security, sustainability and scalability. We emphasized our publication to a sustainable early by addressing nan request for much power ratio successful nan location pinch UEI's TIDE smart thermostats and by reducing artillery discarded pinch UEI's Eterna power harvesting remotes. I'm proud to denote that Eterna was honored pinch a CES 2023 Innovation Award amongst nan excavation of complete 2,100 applicants. We demonstrated our smart location dashboard solution, QuickSet 5, arsenic a reference creation presently shipping successful millions of LG smart TVs worldwide. As smart TVs proceed to germinate successful features and functionality, nan request to clasp nan afloat imaginable of nan largest surface successful nan location to present a smart location power acquisition is becoming a reality. Customers ranging from work providers and broadband level owners to a increasing database of smart TV brands reacted positively to our QuickSet Smart Home package solution. This confirms nan imaginable to standard our enhanced QuickSet package and services offering that blends location intermezo and smart location experiences connected a azygous screen.

In nan area of interoperability, we clasp nan emerging matter modular pinch nan preamble of 4 caller matter enhanced solutions crossed our portfolio, ensuring our customers tin span betwixt nan existing smart location devices consumers person successful their location and nan caller matter enabled devices they will bargain successful nan future. Due to nan competitory quality of our customers' businesses, I americium erstwhile again constricted by confidentiality requirements and cannot talk circumstantial customer and caller creation triumph opportunities. What I tin opportunity is that our existent creation wins, bid opportunity pipeline and task backlog correspond a important number of caller business opportunities for UEI. These opportunities are powerfully weighted to our newer, higher-growth markets, highlighting our expertise to efficaciously penetrate these caller markets and execute connected our marketplace diversification strategy.

Although nan related income are not expected until later successful 2023 into 2024 and beyond, these definitive wins underpin our semipermanent maturation projections. Interestingly, while nan connected location transmission has exhibited signs of longer income and improvement cycles than our accepted location intermezo channel, nan benefits see importantly longer merchandise life cycles. This intends that while awesome caller merchandise developments and ambiance control, information and location automation are taking longer to launch, these merchandise platforms person importantly longer gross cycles that past 5 aliases 7x longer than nan products developed successful location entertainment.

In summary, our caller innovative products were good received astatine CES and our creation wins proceed to build nan instauration for a beardown future. What is important now is that we successfully execute connected nan galore caller merchandise introductions that we already person been awarded by our customers. We proceed to unafraid caller business connected nan outstanding bids we will beryllium addressing successful nan coming months and years and that we stay vigilant successful executing our costs savings initiatives. We will proceed our commitment, successful fact, our obsession to bring customers continued invention arsenic good arsenic merchandise and exertion solutions that thief amended user experiences and alteration our customers to turn their businesses. We proceed to instrumentality nan aforesaid strategy that has made america successful galore times earlier and will erstwhile again bring UEI to ever higher levels of success.

Now I'll move nan telephone complete to our CFO, Bryan Hackworth, for a reappraisal of nan financials. Go ahead, Bryan.

Bryan Hackworth

Thank you, Paul.

First, I'll reappraisal nan results for nan 4th fourth of 2022 compared to nan 4th fourth of 2021. Net income were $122.8 million, beneath our expectations and compared to $143.9 cardinal for nan 4th fourth of 2021. There's a awesome woody of uncertainty successful nan existent economical environment, which has led to households spending little connected nan discretionary goods, and this is affecting our extremity personification markets. In turn, definite customers, chiefly successful our video services channel, submitted acquisition orders that were little than their antecedently submitted forecast, impacting our 4th quarter. Customers successful nan user electronics and ambiance power channels besides reduced orders for nan first 4th of 2023, which will beryllium reflected successful nan guidance I'll supply shortly.

These decreases successful request resulted successful 4th fourth accumulation being little than forecast, yielding manufacturing inefficiencies arsenic overhead was absorbed astatine a little complaint and unfavorable labour variances were incurred owed to nan inability successful nan short tally to flex nonstop labor. Although gross separator for nan 4th fourth of 2022 of $37.7 cardinal aliases 30.7% of income accrued compared to 28.4% successful nan 4th fourth of 2021, it was little than expected.

Operating expenses were $29.4 cardinal compared to $30.2 cardinal successful nan 4th fourth of 2021. SG&A expenses were $21.7 cardinal compared to $22.6 cardinal successful nan anterior twelvemonth quarter. R&D expenses were $7.7 cardinal compared to $7.6 cardinal successful nan anterior twelvemonth quarter. Operating income was $8.3 cardinal aliases 6.8% of income compared to $10.7 cardinal aliases 7.5% of income successful nan 4th fourth of 2021. Our 4th fourth 2022 effective taxation complaint was 27.3% compared to 16.1% for nan 4th fourth of 2021. For nan 4th fourth of 2022, nett income was $5.6 cardinal aliases $0.44 per diluted stock compared to $9 cardinal aliases $0.68 per diluted stock successful nan 4th fourth of 2021.

Next, I'll reappraisal our rate travel and equilibrium sheet. We ended 2022 pinch rate and rate equivalents of $66.7 cardinal compared to $60.8 cardinal astatine December 31, 2021. Cash travel from operations for nan 4th fourth of 2022 was $10.8 million.

Before I supply guidance for nan first quarter, I'll remark connected our scheme to restructure our manufacturing footprint, and I deliberation it's important to first supply a small discourse and history. The mostly of our equipment are presently produced successful 3 facilities, 2 successful Mainland China and 1 successful Mexico. Our Mexico installation was primitively established arsenic a refurbishment plan. But erstwhile nan China tariffs were enacted successful 2018, we quickly transitioned nan installation into a full-fledged manufacturing mill to nutrient equipment destined for nan North American market. Today, successful an effort to little our attraction consequence successful China, we're successful nan midst of opening a manufacturing installation successful Vietnam, presently scheduled to commence operations later this year.

The description of our mill footprint complete nan past 5 years has been basal fixed nan changes, sometimes abrupt successful governmental policies arsenic good arsenic nan wide world environment. As a consequence of these actions and nan truth that our business has evolved complete clip becoming little limited connected nan video services channel, while experiencing beardown maturation successful caller channels, including ambiance control, information and location automation, we presently person much accumulation capacity than needed. Additionally, nan mean trading value successful nan ambiance power channel, 1 of our strongest maturation categories is importantly higher than our accepted products successful nan video work channel. Therefore, less units will request to beryllium produced to execute income maturation and little mill level abstraction will beryllium required. As such, going forward, we scheme to trim our manufacturing footprint opening successful nan 2nd half of 2023, pinch further modifications to hap successful 2024. These changes will amended manufacturing efficiencies and yet make UEI a much profitable company.

Now turning to our guidance. For nan first 4th of 2023, we expect income to scope from USD100 cardinal to USD110 cardinal compared to $132.4 cardinal for nan first 4th of 2022. We expect a nett nonaccomplishment ranging from USD0.28 to USD0.38 per stock compared to EPS of $0.47 successful nan first 4th of 2022. Looking past nan first quarter, nan existent economical situation remains uncertain arsenic ostentation persists. However, dissimilar past twelvemonth astatine this time, customers person reflected this sentiment successful their near-term and semipermanent forecast pinch Q1's gross expected to beryllium nan debased constituent of 2023. Based connected nan expected timing of our caller merchandise introductions and customer forecast, we expect 2nd quarter's nett income to beryllium sequentially higher than Q1 and for some Q3 and Q4's nett income to transcend Q2's. We person faced respective headwinds complete nan past fewer years, but we judge nan summation successful R&D walk focused connected nan connected location will salary disconnected successful 2023 and beyond.

I would now for illustration to move nan telephone backmost to Paul.

Paul Arling

Thank you, Bryan. Progress is not a consecutive path. Strong companies person nan opportunity to go stronger during times of uncertainty. UEI has many times proven this outage. We expect to do that again. Our business has been beset pinch galore challenges crossed nan past fewer years, arsenic galore have. COVID-19 and its aft effects, proviso concatenation issues, semiconductor shortages to sanction conscionable a few. Industry shifts person caused galore of our customers' request to lessen. Recently, nan continued effect of economical difficulties specified arsenic higher liking rates and ostentation person affected user spending patterns. During this difficult period, nan squad astatine UEI has innovated for illustration ne'er before, begun a important modulation into nan connected location marketplace and accrued our stock successful each nan markets we serve. Over nan past 18 months, we person won important projects and person galore much opportunities successful nan pipeline. While nan near-term results are not astatine each what we would for illustration them to be, we are taking action to amended them and very importantly, create an moreover amended early for UEI.

Our way grounds supports our expertise to navigate different pressures, look stronger and thrust shareholder worth successful nan agelong term. Based connected our merchandise improvement pipeline, creation triumph backlog, our intelligence spot and our traction successful caller markets and customer engagements, this is genuinely a caller beginning. As always, enactment tuned. Operator, we tin now unfastened up nan telephone for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And nan first mobility comes from nan statement of Greg Burns pinch Sidoti.

Greg Burns

Can we conscionable excavation into nan guidance, I conjecture nan gross miss for this 4th and nan guidance for nan first quarter, conscionable possibly immoderate circumstantial colour connected what's driving nan magnitude of nan decline? Is it chiefly coming from nan accepted benignant of SVOD channels? Or is it much consumer-centric channels successful nan automated home. Could you conscionable thief america understand what's driving nan magnitude to nan decline? Because if we look backmost to for illustration nan bosom of nan pandemic, gross was acold higher here. So what's acold higher than what you're guiding for nan first quarter. So tin you conscionable benignant of fto america cognize what's changed? Or what's truthful dramatically different astir this situation that's driving nan decline?

Paul Arling

Sure. Yes, there's varied effects. And we obviously, we don't waste a batch of our products straight to consumers, Greg, arsenic you know, but nan customers that we waste to do because our products typically extremity up successful homes, which evidently nan determination makers successful those homes are consumers. So we trust upon nan user markets. And arsenic you've astir apt seen from galore companies, and we would opportunity nan aforesaid because our customers are trading often straight aliases done nan unit transmission to consumers. So TV business, arsenic an example, during nan pandemic, they astir apt did okay because group were astatine home. In fact, it was astir apt a formation to value wherever they were buying amended TVs during that period. I deliberation conscionable nan semipermanent effect of nan inflation, higher liking rates has made middle-class consumers a small little reluctant aliases a small much reluctant, little apt to spell retired and bargain items. And you've astir apt seen this arsenic we person from different products successful nan user marketplace category. There are exceptions to that, but I deliberation wide consumers conscionable aren't parting pinch their dollars arsenic easily. And successful galore cases, it mightiness conscionable simply beryllium because a middle-income family erstwhile much of your paycheck is going to higher costs of food, higher costs of gasoline, higher costs of utilities, et cetera, there's little near complete to spend.

So our customers are telling america that they're seeing less orders and expect to spot lightness of orders for a clip here. So we saw that successful Q4. In fact, during nan quarter, we had immoderate customers who had forecasted orders that past did not fulfill them because they saw lightness inventory build, et cetera. And of course, different parts of our business person conscionable seen difficult request patterns. So it's been crossed nan board. I would opportunity that location automation information is simply a small easier only because, again, caller projects, our marketplace stock location is lower, overmuch lower. As you know, successful nan video work supplier channel, our marketplace stock is rather high. So there, erstwhile nan market's down, we're down because we can't offset it pinch stock gain. We've already sewage a comparatively precocious share. In markets for illustration HVAC, our marketplace stock is respectable, but still comparatively low, and we person awesome offerings there. So we tin offset weakness pinch growth. The problem for nan past fewer years has been that, that marketplace was overmuch smaller, and our location intermezo business was truthful ample that immoderate shrink successful it was difficult to offset pinch maturation from that smaller business. As we highlighted during nan prepared comments, that smart location portion of our business is now 25%. So we deliberation it's getting to a level of scale. We triumph a fewer much SKUs location and present them. It tin statesman to present immoderate maturation for UEI contempt immoderate location intermezo difficulties.

Greg Burns

Okay. What percent, I guess, nan 10% customers, tin you conscionable springiness america that number?

Paul Arling

Yes, Nike [ph] was our largest customer astatine 15.5% and Comcast was our 2nd largest astatine 11.2% for nan 4th quarter.

Greg Burns

Okay. So I conjecture pinch Comcast, obviously, that's indicative, I guess, of nan diminution there, what you were talking about. But conscionable truthful I understand for illustration TV sales, for illustration a user electronics merchandise income declining, but this feels for illustration there's much to it successful your accepted channels than conscionable user discretionary spending being lower. Like is location much of for illustration this is for illustration nan impacts of for illustration cord cutting aliases much secular issues beyond that.

Paul Arling

Well, yes, that would surely beryllium portion of it. I mean nan request from those customers has been little for sure.

Greg Burns

Okay. And past pinch nan manufacturing footprint, really overmuch of a use to margins will that be? Because I cognize you're excluding immoderate of these expenses successful your adjusted numbers. So does that conscionable spell distant astatine immoderate constituent successful time? Like really should we deliberation astir nan use of this footprint rationalization? Because you already are excluding immoderate expenses from your adjusted numbers. So what's nan effect going to be?

Paul Arling

Yes, that's correct. I mean erstwhile we transitioned our Mexico installation from a refurbishment works to a full-fledged manufacturing facility, it accrued our capacity. So what I did was I said, okay, if I were to creation it today, we person excess capacity. So what would it look like? What's happening now is pinch america trying to derisk our attraction consequence successful China, and we're spinning up Vietnam, we're going to person moreover much capacity than needed. So correct now, pinch nan shortfall successful demand, we conscionable person excessively overmuch capacity. And truthful there's you benignant of looking astatine 2 layers. One, you're right, I do pro forma a portion of it. But nan magnitude that nan imaginable savings is really greater than that. So eventually, erstwhile we restructure everything and we're presently analyzing astatine all, nan savings are going to transcend what's presently being included successful nan pro forma. So there's much savings to beryllium had is astir apt a elemental measurement to opportunity it.

Operator

Ladies and gentlemen, this concludes today's convention call. Thank you for your patience. You whitethorn now disconnect. Everyone, person a awesome day.