Q3 2020 Resideo Technologies Inc Earnings Call

Ladies and gentlemen at this time I'd like to welcome everyone to the Presidio technologies third quarter Twenty-twenty earnings Conference call. Today's call is being recorded all participants will be in a listen only mode until the former formal question and answer portion of the call. If anyone should require operator assistance during the call. Please press storms zero on your telephone keypad.

It's not my pleasure to introduce Mister Jason Willey Senior director of Investor Relations Mister Willie give me now begin sir.

Good morning, everyone and thank you for joining us for videos third quarter Twenty-twenty earnings Conference call on today's call will be Jake Allebach or was it he is chief Executive officer, and Tony Trunzo, Our Chief Financial Officer.

Copy of earnings release related presentation materials are available on the Investor Relations page of our web site at investors that video Dot com.

We would like to remind you that this morning's presentation contains forward looking statements.

Statements other than historical facts made during this call may constitute forward looking statements and are not guarantees a future performance or results and involve a number of risks and uncertainties. Actual results may vary materially there was on the forward looking statements as a result, the number of factors, including those described from time to time and visit you it's filings the security.

And Exchange Commission.

The company it seems no obligation to update any such forward looking statements Adele.

Additionally, during a call today, we will refer to certain non-GAAP financial information. The reconciliation of our gap to non-GAAP results is included in the company's earnings press release and accompanying presentation, both of which can be found on the investor Relations section of our website.

You identify the principal risks and uncertainties that affect our performance in our annual report on one 10-K.

Actually she filings.

I will now turn the call over to J.

Thank you, Jason and good morning, everyone.

During the third quarter, we saw a meaningful improvement in demand across door markets.

This demand enabled us to leverage our extensive product portfolio unmatched relationships with a professional channel and the broad reach of our Adi distribution platform to deliver a significant improvement in a year over year in sequential financial results.

To supplement growth.

We reorganized products and solutions to bring needed operational focus while at the same time better structuring the organization to move quicker to address customer needs product innovation and new market development.

The strengthening and reorganizing of our teams are critical to unlocking long term value at risk video.

In August we added Jeff Frank as senior Vice President of product innovation to create cohesion across the organization around new innovation in our product roadmap and engagement in strategic market development.

Innovation organization is new within reserve, you and Jeff and his team bring fresh perspective to our technology development drawing on a multi decade track track record of successfully bringing new products to market.

The formation of the innovation team and their focus on unifying software platforms and user experience across the business is critical to ensuring our position as a leader in enabling the connected home ecosystem.

In October Phil Theodore who joined residual earlier this year to lead our transformation efforts took on the role of president of our products and solutions segment.

Bill is the hands on operationally focused leader that is essential for executing on the transformation of this business.

Leading the efficiency efforts and positioning the business for sustained growth.

As we look to accelerate product development and bring historically silos product lines together as one business.

We have reorganized products and solutions to integrate engineering and product line management.

These changes are designed to foster collaboration across the entire product portfolio and establish linkage is critical to bringing innovative new products to market quickly and cost effectively.

While ensuring we are aligned with the needs of our customers.

As we make these organizational changes we recognize the need to maintain our focus.

I'm, bringing operational discipline and accountability to the business.

While driving to sustainable long term revenue growth.

Hi view transformation as a continuous journey.

And not a discrete project or program.

Our transformation team now reporting to Tony.

Well continue leading this crucial work residual with a focus on integrating these critical values into the culture of Brazil.

I have focused much of my time over the past few months on directly engaging with senior leadership of our key customers and partners.

I believe building these relationships will allow us to better understand our customers needs identify opportunities for collaboration.

And inform our decisions around product development marketing support and other critical areas.

I have also challenged the team to accelerate our engagement related to partnerships and strategic relationships.

Well, we have a broad suite of products and the residential solutions market. The market is the market itself the substantial.

And there is meaningful opportunity to partner in areas, where we are clearly differentiated where we can leverage the innovations of others to create greater value.

With that I will turn the call over to Tony discuss our third quarter financial performance in more detail.

Thank you Jay and good morning, everyone.

Consolidated revenue for the third quarter was $1.4 billion, an increase of 11% compared to the prior year.

As Jay indicated we saw strong demand across the business during the third quarter.

Q3 gross margin of 27.2% was up approximately 200 basis points from Q3 last year, primarily due to improved cost absorption on stronger revenue and cost savings from transformation programs.

Selling general and administrative expenses for the third quarter totaling $239 million down 4% from Q3 last year due largely to net savings generated from our cost reductions initiatives as well as cold 19 related cost savings.

Higher revenue improved gross margin and lower spending resulting in an operating profit of $131 million in the third quarter compared to $59 million in the prior year.

GAAP net income for the third quarter was $75 million or 60 cents per fully diluted common share.

Consolidated adjusted EBITDA of $188 million was up 65% compared to the prior year.

Hi revenue of $790 million increased 11%.

Which included an approximate 2.8 percentage point benefit from acquisitions.

Demand returns across the business, particularly for products, serving the residential market in North America and for large project business.

And cost reductions.

Beginning with Q1 2021, we will report our corporate costs separately. This.

This change will be better aligned accountability in authority gives a clear view into the operational performance of the two segments, an increase accountability to the management of corporate spending.

Consolidated cash from operations for the third quarter was $21 million up $54 million year over year due to improved net income and an increase in accrued liabilities.

130 million to $140 million and adjusted EBITDA in the range of $180 million to $190 million.

October results and the healthy demand, we continue to see across the business support the outlook, we are providing today.

However, rising covid cases around the world create additional market and operational uncertainties are queue for outlook does not factor in new restrictions that could materially impact customer activity industry supply chains are manufacturing facilities or our Adi branches.

As always we will prioritize the safety of our employees overhaul other considerations.

As part of our budget process for 2021, we are evaluating incremental growth investments across residual.

At Adi. These investments will include systems enhancements E commerce initiatives and targeted M&A.

Within products and solutions investment will be focused on driving new innovation and new product development.

Investment in these areas will be reinforced by the recent organizational changes in leadership additions to J discussed.

We will dive deeper into these areas when we report our queue for results and at our Investor Day that we plan to host in early March.

And combined with ongoing transformation efforts and the new talent, we are bringing on board give me tremendous excitement about residuals future.

In closing I would like to thank our employees for their dedication and effort over the past quarter across.

Programs and you see the benefit of those start to take hold it just takes a little bit longer. So the number that you see the number that we just gave you that $40 million to $45 million a significant majority of it is in operating expenses.

So it was a significant majority of the cost by the way when you look at it on a on a GAAP basis and Thats why we that's why we gave the net number.

Moving forward as I said, we're implementing some programs with respect to integrated business planning and some other initiatives that should help significantly on the gross margin line.

And then in terms of sales activation things like our profitability management office and other initiatives.

We think over the next few quarters will that will show momentum as well.

Okay. That's helpful and then the big surprise in the quarter from where we sit at least was at 23.8% product and solutions margin.

And what we're trying to figure out here is sort of the sustainability of that it looks like the fourth quarter. It would imply something north of 20 as well.

So just kind of wanted to dig a little bit more into.

What were the biggest drivers there is this 20% sort of a good sustainable run rate number.

Just wanted to get any thoughts on that would be helpful.

So so John.

That gives me the opportunity to to tell you that we will give a clearer view as to long term metrics and long term expectations with respect to things like margins.

At that Investor day that we referenced in early March we're still grinding through.

The long term plan that would indicate what we think is not only sustainable but overtime trending upward to.

What we think is ultimately achievable the margins you saw this quarter.

There's there's nothing in the quarter given the revenue number that would suggest that it's not sustainable in fact product mix was slightly unfavorable in the quarter.

We got really good operating leverage off of our fixed costs and.

That's a that's a significant benefit in a business like this to the extent we continue to see good revenue.

Good revenue performance, there's nothing to suggest that that margin level isn't sustainable.

Yes, that's encouraging on leveraging also hedge on that.

Yea business to continue to perform at the margin level consistent with what it's done historically.

These investments are designed to really to drive the business forward from the strong foundation that it sits on today.

Great. Thank you very much.

Thanks, John.

Thank you. Our next question that comes from Ian Zaffino with Oppenheimer.

Okay. Great can can you just talk a little bit about you know you mentioned mix on the product side.

Can you just getting a little bit deeper into that or or maybe just you know added security versus comfort and care do thanks.

Yeah. So yeah, we're not going to dive deep deep into kind of cuss.

<unk> line.

Yes, that's right.

Okay.

And then can you maybe just give us a.

What are your thoughts on AI in products, how they're working together is there a greater concerted effort to to have them work together you talked about breaking down silos and I know you mentioned before that on the product side, but also what unlike business divisions as well like is there any opportunity there.

Or anything we should expect.

And factory direct customers and can you maybe comment on whether or not some of this might've been catch up spending foot projects that were delayed in the covid environment, we experienced starting this this past March.

Sure jail.

I'll start and then you can you can pop in Israel.

In terms of breaking it down by by channel in that in that way. It Craig we're not we're not in a position to to do that.

I think as I said earlier, when you look across the business. The OEM business is somewhat less profitable than the.

Then the.

And the aftermarket business have somewhat less profitable than some other parts of our business.

Going deep into the channel is something we are in a position to do in.

Mainly that's because we continue to really try to drive a unified view within pnas of their.

Of their product development of their innovation as we do that.

Those those.

The silos, they're gonna, they're gonna blurring well.

As it relates to how much of this was.

He was driven by sort of channel restocking and all that sort of thing. We it's obviously, it's an imprecise science to.

To try to figure that out, but what we're seeing right now after.

Five months for four or five months of sustained strong demand across the board pretty clear, it's well beyond channel restocking and that there is a.

There's a fundamental increase in demand throughout the.

Basically throughout the entire home connected ecosystem that that we're serving so.

That's why the comment was made that we see durability here beyond just the next quarter or two in terms of the level of demand because we think there's there's really been a fundamental change theirs.

There's a there's a real strong indications if that's the case in one of the strongest is or is the fact that we continue to maintain a significant backlog.

Alright, I would agree I agree I agree with Tony on that and and you know we tried to triangulate what's gone on the market. Just like you guys do and look at how everyone's performing that that services the space and I think that that that and when you look at that data and <unk> and those types of results across the board I think that just reinforces every.

Until he just said.

The EPS Shannay side margins are obviously coming through.

I, just really I'd I'd appreciate it if you can give us some more color on some of the specific projects or specific actions that are driving that leverage and what should we look for as milestones to see.

Similar execution over the next over the next number of months and quarters.

Sure so.

I see where you're going I haven't done exact the exact math, you're talking about that it doesn't it doesn't surprise me at all.

And kind of goes back to the to the first comment I made when you do these kinds of transformations yeah. The first the first level of savings comes from SGN, a and fixed overhead.

And a lot of those actions were taken.

Every video this this past spring.

And into the summer and we're seeing the benefits of them now and Thats why the.

On a net basis the benefit of our transformation programs was skewed towards the second half of this year.

But it really sort of is concentric circles of opportunity that the first is that SGN a the second is.

In the EPS is in factories, and just getting getting you're getting the profitability and the gross margins up and then the third piece is that sales activation.

That I spoke about.

The factory piece.

Right now is benefiting from the from the reality of strong demand absorption is a.

Its powerful thing and we're seeing the benefits of that the.

That's not the end of that story by any stretch of the imagination, though because as I said the.

Theres, an initiative going on inside of PNM EPS.

We're referring to is integrated business planning.

Long term DNA of fish, a transformation that just becomes part of everyone's.

What way of doing business is whats really exciting for me in the organization because it's it'll be continually transformational for the business for not just margin enhancements, but many it really all the functional areas the entire business.

And just that way of thinking that way of operating on a day to day basis and that will be you know we're look we'll look forward to being able to share more of that with you as we go on but it's not going to be just one discrete program and then overall done and then we don't worry about that anymore, it's going to be part of what we're all about and and we're driving that in the organization as I said, you know we pray that transformation.

In an office to help champion that.

So I'll I'll jump in and then Tony. Please add you know we are as Tony mentioned as well as I did that we're going to have an investor day in March and we will talk about our really our total product strategy, then and we'll be able to share we're going to answer a lot of the questions are behind what you just what you just asked and you know I and II, but also but I also will say.

Congratulations on the solid progress.

Thank you.

I appreciate that.

Thank you that concludes our time for Q&A and with that we'd like to thank you for attending there were city Oh technologies third quarter Twenty-twenty earnings Conference call. You may disconnect your phone lines and thank you for joining us today.

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