Resideo Technologies, Inc. (NYSE:REZI) Q3 2023 Earnings Call Transcript

Resideo Technologies, Inc. (NYSE:REZI) Q3 2023 Earnings Call Transcript November 1, 2023

Operator: Hello, ladies and gentlemen. My apologies for the technical delay. At this time, I’d like to welcome everyone to the Resideo Technologies Third Quarter 2023 Earnings Conference Call. Today’s call is being recorded. All participants will be in a listen-only mode until the formal question-and-answer portion of the call. [Operator Instructions]

Jason Willey: Good afternoon, everyone, and thank you for joining us for Resideo’s third quarter 2023 earnings call. On today’s call will be Jay Geldmacher, Resideo’s Chief Executive Officer; and Tony Trunzo, our Chief Financial Officer. A copy of our earnings release and related presentation materials are available on the Investor Relations page of our website at investors.resideo.com. We would like to remind you that this afternoon’s presentation contains forward-looking statements. Statements other than historical facts made during this call may constitute forward-looking statements and are not guarantees of future performance or results and involve a number of risks and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including those described from time to time in Resideo’s filings with the Securities and Exchange Commission.

The company assumes no obligation to update any such forward-looking statements. We identify principal risks and uncertainties that affect our performance in our annual report on Form 10-K and other SEC filings. With that, I will turn the call over to Jay.

Jay Geldmacher: Thank you, Jason, and thanks, everyone, for joining us today. During the third quarter, we continue to take actions to improve the business, both structurally and through cost actions, while delivering adjusted results above the midpoint of our guidance range, improving operating cash flow and repurchasing 1.8 million shares. I’m excited by the significant progress over the past several months on key strategic operational and cost initiatives highlighted by new product and partnership momentum within Products & Solutions and digital experience improvements at ADI, which I will discuss further during the business reviews. As part of our portfolio optimization work, we completed the sale of our nonstrategic Genesis Cable business for $87.5 million.

We also acquired Sfty, a small Norwegian provider of life safety monitoring technology for the multifamily market. Sfty will bolster our European life safety services offering with attractive reoccurring revenue capabilities. These transactions demonstrate our commitment to execute value creation opportunities across the organization. We will continue to actively review the products and solutions portfolio and ADI operations against our long-term strategic and financial goals and expect to execute further asset realignment actions in the coming quarters. During Q3, we took further steps to reduce both near-term and long-term structural costs across Resideo. These actions resulted in a $38 million charge in the third quarter. This brings restructuring costs over the past four quarters to over $60 million with an expected annual gross cost savings of at least $125 million.

We have taken these actions against a residential market backdrop that remains challenging. Existing home sales, an important driver for repair and remodel activity, and new security installations remain significantly below recent historical levels. While our efforts within the new construction channel continue to gain momentum, the number of new units built in 2023 is expected to be down from 2022. Despite these cyclical headwinds, there is no change to our view that the outlook for both the creation of new housing stock and increased investment in the home remain very favorable over time and are supportive of growth in our businesses. During this period of near-term macro uncertainty, we continue to be laser focused on what we can control through execution and driving efficiencies.

Turning to the businesses. Products & Solutions delivered solid performance in our retail and new construction channels led by First Alert life safety products. Our new construction sales are outperforming the pace of new housing units as we grow content per home and further expand our smoke and CO products within the builder community. We believe our content per new home has increased by 20% over the past 12 months, positioning us well for outside growth when new home trends turn positive. The environment remained unsettled in the HVAC distribution channel where demand drivers were less favorable relative to 2022 and inventory remains elevated. Our energy products continue to be impacted by declining furnished unit volumes in the U.S. and near-term uncertainty created by regulatory shifts around gas products across Europe.

While market conditions continue to negatively impact Products & Solutions revenue, we are driving actions to improve the performance of the business. In Q3, we expanded Products & Solutions gross margin by 250 basis points, reducing operating expense by $11 million and grew operating profit by $8 million versus last year, excluding restructuring. We are also driving momentum within our new product introductions. In the fourth quarter, we will be introducing our new outdoor security camera and launching First Alert smoke and fire alarm products compliant with the upcoming UL 8th Edition release. We are also seeing increased customer engagement in EMEA around our recently introduced ProSeries security products. On the partner front, we are excited to have expanded our relationship with two leading insurance providers, USAA and Nationwide, to help enhance homeowner comfort and safety and reduce insurance claims.

We see significant opportunity in working with insurance providers who value the breadth of our product portfolio and channel presence, particularly in key life safety and water leak categories that address major customer claim areas. Lastly, we are honored to have been recognized by Lowe’s as their Vendor of the Year for the electrical category, competing against a number of large, well-known brands. This recognition is the result of significant work from across the Resideo team, including sales, customer experience, product management and supply chain and underscores the value proposition of our products and brands. We see significant additional opportunity within the retail channel, particularly as we grow First Alert offerings across connected life safety and water products and build partnerships and programs with insurance companies and utilities.

ADI is continuing to drive investment in digital initiatives aimed at enhancing customer experience. Much of this focus is on improving the speed of our online experience and reducing friction for customers. ADI is focused on providing the information and support customers need to manage their projects where the purchase ultimately takes place online or at the branch. E-commerce grew 5% in the third quarter versus Q3 last year, representing 19% of total ADI revenue, and overall, touchless sales were 38% of ADI sales in the quarter. ADI’s large and diverse commercial exposure have helped to insulate from many of the negative market trends discussed earlier. ADI does, however, continue to see headwinds in the residential intrusion market which has historically accounted for around 20% of ADI sales.

In September, ADI announced the opening of its new Super Center distribution center in Dallas. The site has over 400,000 square feet of distribution space and the capacity to house more than two million units of inventory. This site is equipped with advanced warehouse automation technologies and provides real-time and advanced inventory management. This investment will optimize supply chain operations for ADI enhance customer service and provide capacity for long-term growth. Before turning the call over to Tony to discuss third quarter performance and outlook, I wanted to highlight our second annual ESG report which was published in late August. The report showcases the progress Resideo has made in the areas of increased transparency, products sustainability, strong company culture and development of the next-generation of leaders.

More information about Resideo’s sustainability journey can be found at resideo.com/sustainability. With that I will turn the call over to Tony.

Tony Trunzo: Thank you, Jay, and good afternoon everyone. Third quarter operating results were above the midpoint of our expectations when adjusting for restructuring costs, driven by our Products and Solutions business, which posted a 250 basis point year-over-year gross margin improvement and $11 million reduction in operating expenses, excluding restructuring. Resideo consolidated third quarter revenue of $1.55 billion declined 4% versus Q3 last year. Operating income for the quarter was $109 million, including $38 million of restructuring compared to $155 million last year. Adjusted EBITDA was $138 million compared to $160 million in Q3 of 2022. Fully diluted earnings per share were $0.14 and $0.41 on a non-GAAP basis compared with $0.42 and $0.48, respectively last year.

Products and Solutions third quarter revenue of $654 million was down 7% compared with the third quarter of 2022. Price realization added approximately $25 million to revenue but was more than offset by low-double-digit unit volume declines. Our First Alert product revenue was flat compared to Q3 last year as was our traditional security business revenue. Year-over-year volume declines were mostly attributable to air and energy product categories, reflecting slower end demand for HVAC products and continued inventory management in the HVAC distribution channel. The end market demand and volume trends experienced in the quarter were broadly in line with our expectations entering the period. Orders were down approximately 2% compared to the prior third quarter, but were up sequentially and orders picked up in September and October compared to the prior several months.

While orders remained below peak 2022 levels, we are encouraged by the signs of stabilization we are seeing in key channels. Products and Solutions gross margin in Q3 was 38.7%, up 250 basis points compared to last year. The increase reflects progress on managing raw material, component, labor and freight costs, all partially offset by the impacts of reduced volumes and less favorable mix. We realized over $15 million of year-over-year freight cost reductions in the quarter and saw limited broker buy activity. Our labor efficiency continues to improve with direct labor headcount in North America down over 20% since the middle of 2022. This allowed us to reduce fixed labor expenses in Q3 as a percent of sales despite ongoing wage inflation. Total operating expenses for Products and Solutions was down $11 million year-over-year, excluding $25 million of restructuring costs.

Cost reduction efforts were partially offset by labor and services inflation and investments in software development. Excluding restructuring costs, operating profit was $132 million or 20.2% of sales and up 8% compared to Q3 2022. Turning to ADI. Q3 revenue was $900 million, down 1% to the prior year period. A 2% decline in North America was partially offset by 8% growth in EMEA. Category trends were consistent with recent quarters with strength and access control, double-digit declines in residential intrusion and relatively flat performance in other key categories such as commercial fire, video surveillance and wire. ADI gross margin in the third quarter was 18.3% compared with 19.3% in Q3 last year. Margins were negatively impacted by transitory inflationary pricing benefits experienced in 2022, reduced vendor rebate activity due to lower volumes and more competitive pricing in certain categories.

ADI operating profit of $60 million was down 23% compared with Q3 last year and includes $10 million of restructuring costs. During the third quarter ADI accelerated restructuring activities, including headcount reductions and consolidating its physical and geographic footprint. Corporate costs were $58 million, up $11 million compared with the prior year third quarter. The increase reflects $3 million in restructuring, timing of certain costs and an $8 million non-recurring benefit in the prior year period. Q3 cash from operations was $60 million compared with $37 million in Q3 last year. During the quarter, we repurchased 1.8 million shares of our stock for a total cost of $30 million. We expect to remain active in executing against the repurchase authorization as we see a significant disconnect between our share price and the underlying value of the business.

Including the restructuring activity undertaken in Q4 of 2022, we have taken over $60 million of restructuring charges over the past four quarters. We expect these actions to generate at least $125 million of gross savings in 2024. Approximately 60% of these savings are in operating expense with the remainder expected to benefit COGS. Moving to our outlook. Note that the completion of the sale of Genesis in mid-October reduces our previously communicated 2023 outlook by approximately $25 million of revenue and $4 million of operating income. Genesis historically generated sub 20% gross margin and sub 10% EBITDA margins. We expect to record a gain of approximately $24 million in other income in the fourth quarter related to the sale. For the fourth quarter, we expect revenue to be in the range of $1.495 billion to $1.545 billion; consolidated gross margin to be in the range of 26% to 27%; and GAAP operating profit to be in the range of $135 million to $155 million.

For the full year, we now expect revenue to be in the range of $6.2 billion to $6.25 billion. Consolidated gross margin is expected to be in the range of 26.6% to 27.2% and operating profit is expected to be in the range of $535 million to $555 million. In conclusion, we delivered Q3 results that met or exceeded our expectations adjusting for restructuring. Driving this was better than expected performance at Products and Solutions where gross margins expanded by 250 basis points year-over-year. We are encouraged by the pickup in Products and Solutions order activity experienced in September and October. As we look to cyclical improvements in our end markets, we expect our cost and efficiency initiatives to be helpful to Products and Solutions profitability moving forward.

I will now turn the call back to Jay for a few concluding remarks before we take questions.

Jay Geldmacher: Thanks, Tony. While we navigate short-term cyclical market headwinds, we are taking important steps to position the business for long-term sustainable growth and structurally higher profitability. We remain focused on driving positive change in the areas we can control across the businesses. We have made progress reducing input costs within Products and Solutions and are driving gross margin improvement despite challenging volume conditions. We are rightsizing our portfolio and operations to fit our long-term strategic and financial goals and managing operating costs to protect near-term profitability, while also ensuring critical long-term value-driven investment continues. Later this week in Scottsdale, we will host our annual CONNECT event showcasing our product innovation and capabilities and offering networking opportunities for over 700 professional contractors and partners.

This event highlights the thought leadership position we have in the industry with dealers, integrators and installers across the HVAC, security, water and smart home landscape. Our positioning with the professional contractor remains a unique asset and much of the work the business has and continues to undertake is centered on positioning us to better leverage these relationships. I want to again thank the entire Resideo employee base for their work during the quarter and a continued focus on delivering for our customers. Operator, we are now ready for questions.

See also 10 Best Biofuel Stocks To Buy Now and 25 Most Liked Countries In The World In 2023.

Q&A Session

Operator: [Operator Instructions] Your first question comes from the line of Erik Woodring with Morgan Stanley. Your line is open.

Erik Woodring: Hey guys. Good afternoon and thank you for taking my questions. Maybe if we just start at the top. Both Tony and Jay, you guys both in your prepared remarks alluded to headwinds from whether it’s residential home sales, less home turnover, new home construction, they are all related by a common thread here. So, just based on your conversations with customers and integrators, how should we think about kind of the inning of the residential downturn that we are in? How do we think about the longevity of that headwind? Just trying to better understand how these trends could – can evolve over the next, again, two months, but really into early next year. And then I have a follow-up. Thank you.

Tony Trunzo: Hey, Erik, it’s Tony. Thanks for the question. We track, as I know you all do as well. We track new home starts, we track – and we track existing home sales. And both are off pretty significantly. Existing home sales are off more significantly than starts. And that’s obviously a bigger driver for a big chunk of our business. As we said in our comments, the market is, it seems to have – order rates seem to have stabilized. Does that mean that we’re at the bottom? We’re not in a position to call that. But certainly things seem like they have gotten somewhat better in those marketplaces. It’s just really difficult for us to call a clear bottom given that – given where we are in the value chain.

Jay Geldmacher: And as we said also Erik, there are some encouraging signs that we’ve seen in terms of orders in the last month or so. And so I think it’s a mix. And so, Tony is right, I think it’s pretty difficult to call the bottom.

Tony Trunzo: I guess…

Jay Geldmacher: Sorry. Go ahead, go ahead.

Tony Trunzo: No, I was just going to say, I guess, one thing that we pointed out that I’d underscore Erik is we are making really solid strides in the new construction market, particularly with some of the First Alert brands. So our content in that market is, is growing even though the market itself is still trending down.

Jay Geldmacher: Yes, I would agree with that. That’s a really important piece and something that we’ve talked about in the past of expanding our footprint and overall contribution into every new home that we do that we’re able to sell into, as well as the teams have done a nice job of gaining new wins with new builders.

Erik Woodring: Okay. That is really helpful. Thank you for all that color. And Tony maybe – can only give you the downfall here, because you made a comment in your prepared remarks about a disconnect between the current stock price and the value of the business and that’s kind of driving some of the buyback activity. But what do you think that the market is underappreciating today or doesn’t understand about the Resideo business today? And what efforts are you taking to kind of change that understanding that the market has of the underlying value in Resideo?

Tony Trunzo: So thanks for the question. A number of things. Look, I mean, obviously, as we said, we’ve been active in the market buying back the shares, which does indicate that we think the valuation is lower than it should be. Look, it’s been – we’ve had a number of quarters where things have been soft and the results have been down. I think as always our focus is on execution and to the extent that we continue to execute. We’re going to see that valuation gap close at least in my – from my perspective. A lot of the things that we talked about today are really demonstrating some underlying progress operationally and functionally within the business. We’re realigning the portfolio, we’re focused on cash generation, the P&S results this quarter, they showed significant margin expansion, lower operating expenses and after taking out the restructuring charges higher profitability than Q3 of last year on lower revenue and significantly lower volume.