Resideo Technologies, Inc. (NYSE:REZI) Q4 2023 Earnings Call Transcript

Resideo Technologies, Inc. (NYSE:REZI) Q4 2023 Earnings Call Transcript February 13, 2024

Resideo Technologies, Inc. beats earnings expectations. Reported EPS is $0.57, expectations were $0.34. Resideo Technologies, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello, ladies and gentlemen. At this time, I’d like to welcome everyone to the Resideo Technologies Fourth 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. It is now pleasure to turn today’s call over to Mr. Jason Willey, Vice President of Investor Relations. Mr. Willey, you may now begin.

Jason Willey: Good afternoon, everyone, and thank you for joining us for Resideo’s fourth 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 the 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. We finished 2023 on a strong note. Q4 revenue and profitability were above the midpoint of our outlook and cash generation was strong. With full-year operating cash flow of $440 million. We built momentum throughout the year in order activity within products and solutions. We also made significant progress on our key strategic operational initiatives and in meaningful reducing structural costs. During 2023, we made substantial progress reshaping our portfolio and operations. With the divestiture of Genesis and the outsourcing of our casting facility in San Diego. Work continues on rebalancing our product portfolio, manufacturing operations, and ADI footprint to help position the business for profitable long-term growth.

We expect to have more to share on both fronts as we move through 2024. We also advanced the ball on the partnership front, strengthening our relationship with major insurance providers establishing new relationships in the energy management market, including our recent announcement with Ford and meaningfully expanding the depth of homebuilder relationships. We have spoken previously about our progress building content with home builders. This work is led by our First Alert and BRK professional brands. We have expanded content with existing builders and increased the number of partners we’re selling to, adding over 20 new builder partners in 2023. We believe we are well positioned to drive growth in this channel, as the new construction market recovers.

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Q&A Session

We also expect this additional content will have positive long-term benefits to our potential replacement base. Our innovation within products and solutions, we significantly improved our new product introduction cadence. This included new video doorbell and outdoor camera products for our professionally monitored security offering, launching Pro Series for the EMEA security market. First Alert branded connected water leak detection and shut off products and the rollout of UL Eighth edition smoke detectors. We are seeing results based on all these actions. We are encouraged by ordered trends within products and solutions, which have stabilized year-over-year and grew sequentially in Q3 and Q4. Through executing a new product introductions and taking effective cost control actions, we are achieving gross margin expansion despite volume headwinds, and continuing to invest in key long-term initiatives.

At ADI, we continue to grow our digital capabilities. Building a leading digital experience is critical to customer engagement and is expected to be margin accretive over time. For 2023, ecommerce sales were up 8% year-over-year. Total touchless sales which includes ecommerce, electronic data interchange and email automation now account for 38% of ADI’s total sales. We made significant investment during 2023 in our product information management and data asset management systems. This work helps to enhance the usability of our web experience with a focus on speed, intuitive search, and accuracy of availability and delivery information. ADI continues to make progress with its expansion into adjacent categories, particularly in the audiovisual market.

ADI acquired BTX in early 2023, adding new capabilities in the professional AV market and in-sourcing custom fiber assemblies. ProAV was one of ADI’s better performing categories in 2023, growing 6% on an organic basis, and now accounts for 10% of ADI sales. With that, I will turn the call over to Tony to discuss our fourth quarter results and 2024 outlook.

Tony Trunzo: Thank you, Jay, and good afternoon, everyone. Fourth quarter financial results exceeded the midpoint of our outlook range for a second consecutive quarter led by continued momentum in the products and solutions business. We drove sequential improvements in gross margin in P&S, for the third consecutive quarter and generated $263 million in cash flow from operations. For the year, cash flow from operations was $440 million, a record since then. Over the past three years, we have converted 89% of GAAP net income into free cash flow, demonstrating the strong cash flow characteristics of our business. Resideo fourth quarter revenue of $1.54 billion was 1% lower than Q4 last year, but flat excluding the sale of our Genesis wire business.

Operating income for the quarter was $147 million, an increase of 50% compared to last year. Adjusted EBITDA was $136 million, up 11% compared to Q4 of 2022. Fully diluted earnings per share or $0.56, and $0.48 on a non-GAAP basis, compared with $0.26 and $0.25 respectively last year. Non-GAAP EPS exceeded the upper end of our guidance range for the quarter. Products and solutions fourth quarter revenue of $683 million was 1% lower than the fourth quarter 2022 but up 2% when adjusting for the sale of Genesis. Price realization added approximately $16 million to revenue and overall volumes excluding the Genesis impact, we’re down low single digits. First Alert delivered a strong quarter particularly in residential new construction. And we also saw growth year-over-year in water products.

Orders were up sequentially following the stabilization experienced in the third quarter. While channel inventory remains elevated in some areas. We believe order activity and point of sale data indicates channel inventory overall is normalizing. Products and solutions gross margin in Q4 was 39.5%, up 110 basis points compared to last year. Gross margins improved sequentially in each quarter of 2023, as we achieved reductions in raw material costs, manufacturing headcount and freight costs, which more than offset the impacts of reduced volumes and labor rate inflation. As unit volumes and factory utilization rates recover, we continue to believe P&S gross margins can further improve. Products and solutions fourth quarter operating expense was down $14 million year-over-year, excluding restructuring costs.

Products and solutions operating income was $147 million in the fourth quarter, up 50% compared with Q4 2022 and up 16%, when adjusting for prior year restructuring charges. Turning to ADI, Q4 revenue was $854 million down 1% versus the prior year. The business continued to experience pressure in residential security and video surveillance sales, which was partially offset by growth and access control and professional AV categories. ADI gross margin in the fourth quarter was 18% compared with 19.1% in Q4 last year. Gross 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 $59 million was down 14% compared with prior Q4, reflecting the lower sales and gross margin on flat operating expenses.

Corporate costs were $55 million in Q4, down $12 million compared with the prior year. Adjusting for unusual items in both periods, we drove $3 million of structural cost savings versus the prior period. Q4 cash from operations was $263 million, up 89% compared with $139 million in Q4 last year. Improved cash generation, and specifically working capital performance was a major initiative throughout 2023, and we more than achieved our objectives. For the full year, we generated $440 million in operating cash. During the quarter, we repurchased 719,000 shares of our stock for a total cost of $11 million. For the full year, we repurchased 2.6 million shares, or $41 million and our fully diluted share count declined year-over-year. As we look toward 2024, our guidance is predicated on the following assumptions.

We expect residential repair and remodel activity to be flat to down low single digits year-over-year. And residential new construction starts to grow by low to mid-single digits. We have assumed HVAC channel inventory levels largely normalized in the first half of 2024. We expect to drive 50 to 100 basis points of gross margin expansion year-over-year within products and solutions, moving sustained P&S gross margins close to 40%, based on the benefits of ongoing efficiency initiatives, in an essentially flat market. ADI gross margin is expected to be flat for the year, as we continue to see year-over-year headwinds from inflationary benefits in the first half of 2024. The sale of our Genesis wire business will reduce 2024 products and solutions security sales by approximately $105 million and operating income by approximately $10 million compared with 2023.

At the end of December, we executed an amendment to our contract to directly supply ADT hardware for their North American Residential security offerings. Our agreement now runs through early 2025, at which time deliveries of these products will conclude. Based on this agreement, we expect our 2024 Security hardware sales to ADT to decline by approximately $100 million compared with 2023 levels, with a similar additional reduction in 2025. The impact of the new agreement is fully reflected in our 2024 outlook and is expected to be immaterial to products and solutions 2025 profitability. Our guidance moving forward will focus on revenue, adjusted EBITDA, non GAAP EPs and operating cash flow. We believe these metrics in combination provide the best view into the health of the business.

That said, here is our outlook. For the first quarter. We expect revenue to be in the range of $1.46 billion to $1.51 billion. Adjusted EBITDA in the range of $120 million to $140 million and non-GAAP EPS of $0.28 to $0.38. The first quarter is typically a slower seasonal period for products and solutions due to reduced new construction activity and more limited restocking by our distribution channel. For the full year 2024, we expect revenue to be in the range of $6.08 billion to $6.28 billion. Adjusted EBITDA is expected to be in the range of $560 million to $640 million. Non-GAAP EPS is expected to be in the range of $1.48 to $1.88. We expect to generate at least $320 million of operating cash flow for the full year 2024. We finished 2023 on a positive note, with strong Q4 results driven by outperformance in P&S while uneven quarter-to-quarter, our cash generation was excellent in 2023, and has been strong since 2020.

We are cautiously optimistic about a more accommodating macro backdrop as 2024 progresses. However, the current interest rate environment and related low housing turnover continues to provide headwinds to our business. Despite market uncertainties, our initial 2024 outlook implies low single-digit sales growth at the midpoint, adjusting for the Genesis and ADT impacts and higher adjusted EBITDA, adjusted EBITDA margin and non-GAAP EPS compared to 2023. As unit volumes, and factor utilization rates recover, we continue you to believe products and solutions margins will further improve. I’ll now turn the call back to Jay for a few concluding remarks before we take questions.

Jay Geldmacher: Thank you. Looking back on 2023, both businesses navigated significant market headwinds, with an almost 20% reduction in existing home sales in the U.S., leading to the weakest housing turnover year since 1995, with that negative implications for our residential security business within both products and solutions and ADI. Consolidated sales fell only 2% in 2023, despite these headwinds, because of our strong product offering and customer relationships, we were able to drive price realization within products and solutions and ADI’s broad commercial market exposure provided diversification. We finished the year with strong cash generation, improving order trends, and gross margin momentum in our products and solutions business.

As Tony noted in his remarks, we’ll be winding down the existing contractual hardware portion of our longstanding relationship with ADT. Since I arrived at Resideo almost four years ago, our team has built a collaborative constructive relationship with ADT from the executive level down. While, we are wrapping up this legacy contract, we believe these relationships have created a strong shared foundation for continued collaboration and partnership. As you looked at 2022, the products and solutions, we are focused on executing further portfolio and facility optimization efforts, as well as increasing velocity of MPI. With our costs, actions and transformation work, we believe we are well positioned to drive improved margin and profitability as market conditions improve.

At ADI, we will continue to expand our digital initiatives and build upon our adjacent market and exclusive brands expansion opportunities. Our focus remains firmly on executing our key strategic initiatives, while driving profitability, expansion and strong cash flow. I want to again thank the entire Resideo employee base for their outstanding efforts during 2023, and I’m excited to continue to build on the momentum together in 2024. Operator, we are now ready for questions.