Q2 2021 Resideo Technologies Inc Earnings Call
William and partner solutions.
This change better positions us to focus on the needs of our very customers and allocate resources, particularly software development through common initiatives across product categories.
By improving internal collaboration and thinking more holistically across the home when road mapping and developing solutions.
We expect the new integrated home and building solutions structure that better position us for long term connected home opportunity.
During the quarter, we also finalized our decision to relocate our corporate headquarters from Austin, Texas to Scottsdale, Arizona.
This move will allow us to consolidate our real estate square footage and better positions us for engagement with key customers and suppliers.
The headquarters move and resizing, our footprint in Austin are expected to generate ongoing annual savings of approximately $2 million.
During Q2 products and solutions saw strong demand across markets geographies and trade and OEM channels.
This is a continuation of the positive trends, we have seen since the middle of 2020 as investments in home and security solutions remain priorities for many individuals.
Our execution within products and solutions on new product introduction continues to gain momentum.
This includes the release of the latest version of our Pro series Security platform in North America.
This release brings improvements, including increased wireless communication range and enhanced panel support for video from cameras and door bells.
We are committed to further enhancements of our security offering, including the rollout of pro series to our EMEA customers.
At Adi Q2 performance further demonstrates our leadership in the market.
We saw strong year over year growth across all major product categories, serving both commercial and residential customers.
Adi is performing well and meeting customer demand by focusing on having the products their customers need when and where they need them.
Adi is focus on product availability has enabled the business to grab additional sales and deliver strong support to existing and new customers.
This is evident in the growth rates Adi has consistently delivered when compared to competitors and the overall industry.
Adi is making good progress with the integration of our recent north Polk and shore view acquisitions.
We are already seeing great collaboration opportunity between the acquired organizations and Adi.
We expect the integration of both Norfolk, and sharp view to be completed by year end.
With that I will turn the call over to Tony to discuss our second quarter performance and 2021 outlook in more detail.
Thank you Jay and good afternoon, everyone and.
In the second quarter, we again delivered strong growth in revenue and profitability across resilient.
Consolidated Q2 revenue was $1.5 billion.
An increase of 44% compared to Q2 last year, which was negatively impacted by the emergence of COVID-19.
Q2 gross margin of 25, 8% was up 290 basis points from Q2.2020.
Consolidated operating expenses were $260 million in the quarter up just 7% from last year, despite sharply higher revenue and a $16 million expense related to the pending shareholder litigation settlement, we announced on Tuesday.
Operating expenses were 18% of total revenue compared with 24% in Q2 'twenty.
Operating profit from the second quarter was $121 million or 8.2 percentage of sales compared to a loss of $6 million last year.
Products and solutions second quarter revenue of $598 million was up 50% due to continued strong demand across our major product categories geographies and channels.
Products and solutions gross profit margin in Q2 was 38, 6% up from 33, 9% in the second quarter of 2020.
<unk> operating profit was $129 million or 21, 6 percentage of sales compared with $42 million per 10, 6 percentage of sales last year.
The improved margin performance was primarily due to fixed cost leverage and productivity improvements net of the negative impact of a recent materials price inflation of approximately $8 million as well as $20 million of higher freight costs year over year.
Gross profit also benefited from a $7 million reversal of an inventory reserve.
Operating expense was up 10% year over year due to higher sales commissions and incentive compensation as well as incremental investment initiatives.
Adi Q2 revenue of $879 million increased 39% year over year day.
And was strong across commercial and residential markets with over 30% growth in each of Adi 6 largest product categories.
Adi's investments in ecommerce and digital selling tools continued to show results with ecommerce sales up over 65% year over year and accounting for 14% of Adi total sales.
Adi 2 recent acquisitions contributed $15 million in Q2 revenue.
Adi gross profit margin in the second quarter was 17, 3% up from 16% last year.
Gross margin was a result of better mix, including a higher proportion of private brand sales improved product line margin, resulting from our NBC pricing initiative.
And more favorable supplier rebates due to higher volumes.
Adi operating profit was $66 million.
$1 billion at the end of the second quarter of 2020.
As a result of continued strong performance and our current view into the near term demand environment. We are revising our outlook for the full year and now expect 2021 on revenue to be in the range from 585 billion to $5.95 billion imply.
Implying year over year growth in the range of 15% to 17% consolidated gross margin is expected to be in the range of 26% to 28%.
And GAAP operating profit is expected to be in the range of $535 million to $565 million.
For the third quarter of 2021, we expect revenue in the range from 1.5 billion to $1.55 billion.
Consolidated gross margin in Q3 is expected to be in the range of 26, 5% to 28, 5% and GAAP operating profit is expected to be in the range of $140 million to $150 million.
Our revised 2021 revenue outlook anticipates, an increase in products and solutions backlog in the second half due to continuing shortages of certain components.
We are also forecasting higher cost of goods in the second half of 2021 as a result of an estimated $20 million of additional year over year freight costs incremental volume growth.
As well as inflation in the cost of certain components of approximately $25 million.
Offsetting these higher costs are expected pricing benefits above our typical baseline of approximately $50 million in the second half.
Corporate expenses for the year are expected to be approximately $260 million compared with $290 million in 2020.
This includes the $16 million litigation settlement in Q2.
Also included in our outlook is up to $12 million in 1 time lease hold impairment costs related to the subleasing, our former Austin headquarters office.
We expect approximately $7 million of this cost to fall in the third quarter.
Additional outlook details can be found on page 10 of our earnings slides.
As a reminder, Adi will have 5 fewer selling days in the fourth quarter compared to Q4.2020.
I will now turn the call back to Jay for a few concluding remarks before we take questions.
Thanks, Tony.
We continue to take advantage of the positive business performance and market momentum to increase our investment in the business.
We're focused on building out systems and tools to better understand and support our customers.
We believe these investments will better position us for future growth and profitability expansion.
While we expect supply and logistics headwinds to continue to create short term challenges. Our teams are focused on ensuring that we deliver for our customers and turn these macro challenges into long term opportunity per residual.
This concludes our prepared remarks, operator, we are now ready for questions.
Thank you.
To ask a question at this time, thank you Beth.
Hi, Dan day number 1 on your telephone keypad.
If you would like to withdraw your question. Please.
Your first question comes from Brian ask Ian Zaffino with Oppenheimer. Your line is open.
Great.
Can you just maybe talk a little bit about <unk>.
Positioning in the market now year on year.
On inflationary environment.
With the benefit from that.
Similar to maybe some of the other distribution peers.
And then how do you think about pricing and.
And recouping margins.
Margin dollars do you think about margin percentage do you think about just.
Just maybe a discussion on that would be helpful. Thanks.
Sure Good afternoon, Ian it's Tony so.
Thematic Lee in terms of how a distribution operations work, yeah, I mean inflation should be something that.
Ideally youre able to pass along the cost plus margin on the incremental cost our approach at Adi really isn't focused on that.
We're really focused on execution in that business.
To the extent that we see some benefit because we're passing through price and able to leverage.
Leverage a little bit on margin out of that debt.
We will certainly take that but thats not part of the outlook that we're laying out here and it's part of the strategy.
We do think about that business from the standpoint of the margin percentage because that's always reflective of your execution capabilities in the business.
For example, I talked on the script about.
About the MDT pricing initiatives that we've undertaken about digital selling about E. Commerce those kinds of things should support above market revenue growth, but over time. They should also support some reasonable amount of margin expansion and that all tracks back to what we talked about at our Investor day back in March where we think.
Business has has a ways to go there.
And we talked about the fact, we're putting investment against it this year and that's clearly impacting margins we knew it would it was in the guidance.
And the returns that we're seeing on those investments thanks to the Adi team and has been a.
<unk> been a terrific. So we're going to continue to do it.
Okay Perfect and then just another question can you just.
And I know in.
In your prepared comments, you mentioned a lot about technology, leading with technology I think we're there.
Or maybe not but.
Either way can you help us understand what media product lineup looks like as far as what's out there that that you might not have talked about that will be introduced or maybe the areas.
Where you will find that and does that mean, you need more M&A or can you do it.
Would you resources from Keith on the apps.
So I'll start day may have something to offer here too but.
We've been pretty clear that we'll talk about new products when they when they are ready for the market and when theyre hitting the markets and we really don't want to get out over our skis on talking about things that are that are coming some period.
Yes.
We're really going to be focused on execution in terms of our NPI and driving.
And driving that and talking about that when it.
When it becomes real.
The MTI process to make it more efficient.
I've talked to Bob we've talked about that during the Investor day and.
What we talked about what I talked about during my are opening comments about the alignment on product management into 2 groups with the integrated home on building solutions annoying as a partner solution is another big step there because we really do believe that in the area pianist since I'm, taking things look at taking a look at things on holistically on it.
On a total ecosystem across all the different products, we have we're going to bring more value to our customers and there's more opportunities to bring more products to market. So customers look to us for.
<unk> basket of goods as this the entire this particular space evolves and growth.
Perfect. Thanks from all the kind of accounts.
Your next question comes from.
Diana Martin Okay perfect.
<unk>.
This is Michael Fincher on for Ahmed.
Wanted to dig in a little into your comments on some price increases.
Sure and we've done as a response to cost inflation, you're seeing or is this more you guys, taking a look at the portfolio and <unk>.
Maybe identifying some areas, where you're not really being properly compensated for the value provided.
I would say, yes, [laughter], it's it's a combination of both I mean this is.
There are chunks of our.
There are chunks of our business, where it's difficult to move price because contracts.
Contracts are limiting but in terms of places where we can take a critical opportunity to look at what we're bringing in terms of value and driving that through the marketplace. This is in an environment, where we would focus in those areas in terms of price increases right because you have.
If you have a market that is generally oriented towards seeing more price inflation.
So some of it is strategic in the sense that we feel like we're maybe not getting.
Fully compensated for the value that we were bringing in some of it has to do with the fact that people understand that our costs are going up and they are gone up substantially and.
Our customers have been.
Our customers have been partners with us in terms of supporting that.
The implications of that for our business stood on average.
Through this the challenges that are going on out there in this in the global supply chain, which is really started towards the very end of last year and is and of course all of this year and as soon as I mentioned in my comments that will continue forward into and probably in the beginning of 2021, So what Tony how Tony phrase I think it's perfect.
Thanks, and then kissed on revenue guidance I think if I plug in new <unk> guidance kind of implies the December quarter revenues, maybe around flat year over year, obviously, some pretty tough costs looking against December 20, but I'm just curious if that.
Maybe being a little bit more cautious given the tough comparison or is there something specific you're seeing that.
There is nothing specific other than the fact that.
We've got a plan for a supplier constrained dynamics with respect to revenue rather than a demand constrained dynamic with respect to revenue from there.
We have seen our backlog increase.
Our outlook calls for our backlog to continue to grow I made a reference submitted to go about our customers partnering with US I think that's 1 of the.
Meaningful steps that we've made in the last 12 months is.
We're very engaged with all of our customers about what's happening in the marketplace doing everything we possibly can to satisfy their needs.
Making them aware of where we have some time constraints.
That are preventing our ability to strive more revenue.
I'd like to add to that I mean, I really come on in the organization of being the Super close to a customer.
Really I mean, it's always important.
The depth of relationship their customer service to grow together, but during these times, it's even more so maybe you can work together to help from the standpoint to make sure you're going to the best job you can't on supply and to them, but also dealing with there is that.
Tony was talking about.
And closer to that business suppliers, how important it is to be working with our suppliers through this on the depth of relationships, there and as I mentioned.
It isn't just the supply chain organization Thats myself personally involved bill Theodore R. Scott ZIP for the head of engineering and many others in the organization to help make that happen and.
We have been on that.
1 other 1 other thing I've mentioned and it's not trivial from the standpoint of revenue dollars.
Adi has 5 fewer selling days in queue in queue for yeah. Good point.
Okay. Thanks for taking my questions.
Your next question comes from.
Morgan Stanley.
Hi, This is Sabrina how on for Eric when again, thanks for taking the question.
First can you just talk on a high level about some of the demand trends you saw on net you inquire byproduct so.
Vs Security vs residential saaremaa anything that noticeably tech out to you it would be helpful. In that I have a follow up.
The short answer Sabrina is there really isn't anything we call out.
That's <unk>.
Differentiated from the portfolio as a whole we saw strength pretty much everywhere.
Really really across the board.
The other comment I'll make is.
We're spending less time focused on the.
The comfort Rts and security business lines on his J men can we've taken the the business and we've been talking about breaking down on silos and really getting collaboration across the business moving forward. The conversation we're going to have is going to be around the the overeating homes on building solutions and the only on his partner.
Solutions. So they are a little bit of a different paradigm.
Got it that's helpful and just looking into the second half Ah, what's giving you confidence that demand will hold up are there any key pin's that you evaluate and it's how can you help us understand what they are and what you're seeing there.
Yeah I mean, this is mostly it turns business right.
J and myself and.
Scott.
<unk> and Rob and we look at look at sales every day, we will get bookings every day and we are I think meaningfully closer to our customers and we were.
345 quarters ago, and we're in consistent dialogue with them and everything we see from all of those indicators is the demand continues to be strong and mentioned the fact that our outlook calls for us to be to be the same backlog grow between now and the end of the year and that's it.
Indication of the strength in the market that we see.
Nearly we'd be able to be able to satisfy all of that backlog, but.
Turns business like this you're not really going to have kind of.
Yeah, I can see backlog and things like.
New housing starts in those kinds of things.
We're going to be affected by that on that at some level, but on a quarter by quarter basis.
That's on something that we really track as an indicator of where we see demand headed in the short term.
Great. Thanks, so much for the question and the answers.
Okay.
I ask a question.
Italy is.
It was benefited by that I mean, 1 on the market remarkable things about Adi during the during the height of the pandemic.
Does that they posted really strong.
Revenue growth in the face of some pretty significant constraints to the to the commercial business and now seeing.
<unk> commercial kind of come out of that wilderness is definitely it's definitely been a plus for them.
Not a lot of commercial really on the on the P&L, there's some but there's not a ton.
Right and just to follow up on that on the commercial side with Adi is it any specific products that are leading the charge.
And their debt.
Schools are looking for X versus government versus retail.
Total solution is it.
Upgrade on the old system can you give us give me some kind of data point.
It's clearly upgrades, but our 6 largest.
Our sixth largest product lines all grew more than 30% this past quarter. So it's pretty much across the board intrusion fire video all of them are.
All of them are showing strong growth.
Okay perfect. Thank you very much.
Your next question comes from Paul.
Your line is open.
Hi, good afternoon, and thank you for taking my questions.
Hey, Paul.
So.
A couple from me first 1.
On the price increases can you remind us of the dates of implementation for the different price increases you've instituted.
And also how much of your business is on the long term contracts that may be subject to a lag here.
So.
The majority of the price increase to date has been that has been in May June.
There is some more pending now but those have been kind of the 2 the 2 big moves I don't have a percentage to offer you but.
A meaningful amount of our OEM business is.
Has effectively negotiated prices in it that don't contemplate price increases for the for the term of a contract.
So I don't like I said I don't have a percentage.
To really offer you, but it's a meaningful chunk.
Got it that's helpful.
And then just on a different day following up on the Adi discussion is there any way to quantify some of the share gains that youre, achieving here and specifically drilling in on the fact that e-commerce being up so strongly here for the last several quarters and the fact that there would be debt free at the sales associates with.
The healthier commercial backdrop across verticals is there a way that.
I mean, perhaps you could just speak to a qualitatively, but if theres a way to quantify the share gains I'd be interested to know.
There is not really.
And open source or sort of a public source that is looking at share.
We have our views as to where the market is growing we certainly think that we're outgrowing the market by a pretty healthy amount I mean through the through the pandemic. We think the market was probably flat to down.
And we grew that business pretty meaningfully.
And kind of it feels like we're continuing to do that based on what we see I wish I had a quantitative measure for you, but we really don't.
On the.
Alright fair enough and then maybe lastly.
Maybe you could touch upon your conversations with the pro channel specifically as it relates to labor we've heard a lot of comments across industries about the significant shortage of labor and from some places it seems to be getting worse than ever.
I know Thats part of your strategy is to help enable and empower the pros, but maybe you could talk about what you've observed here in the last 60 to 90 days with the channel and then also are there any new tools or resources that youre looking to implement here to help keep the channel vibrant.
So.
I think on buyer Youre right that there are labor constraints with the.
With a lot of the contractors and they they have struggled to keep the volume of people that they want and Youre also right that.
Our involvement with the building talent foundation and with some other partnerships with some of our major.
Our major customers is this focus on helping them source.
Source talent really helping them rebuild the pipeline of.
On the technicians that has kind of been depleted over over some number of years.
A bigger factor frankly, though is the supply constraint.
I think if you had.
Regular flow of goods and we were able to satisfy all of the product demand. Then I think you might see sort of the Mexican strength being J I don't have a crew to go do that job.
Don't think that's the if you look at it as a per radio I don't think that's that's the driver there.
But we are focused on that I mean, that's.
Our view is if we can support.
Growth of technicians in young technicians getting into the.
Getting into the trades and there'll be a supporter of them early in their current we get customers for life and Thats something that again is new in the past year or so, but we've really been healthier.
<unk>, who is president of our products and solutions has been a big driver of that and done a lot with his organization to make sure that we are deeply involved in and training.
The type of people, we're talking about here and not just United States, but global training and then the gentleman who heads up our service organization. He also that's 1 of those big focuses so training is a big deal and it's going to help fuel the pipeline for future installers, and then that helps us deepen our relationship even further with the Pearl installed base. So a lot of.
Benefits from doing that and I'll just add a comment on the labor thing I mean as you said.
Many places and many different industries that are all being impacted in different ways on labor shortages and we're seeing that on the installed base like what Tony said, but also even seen it in on some of our distribution price is also but.
No.
Good news is we're grinding through that and we've been able to.
Help overcome some of those issues.
This training piece as I mentioned before back on the D&S Thats, a big deal and we're going to be sharing more information with you about that because I think it's fairly meaningful and impactful on what we're doing there.
Very helpful. Thank you guys.
Thank you.
Further questions at this time I will now turn the call back to Jay for closing remarks.
Thank you very much operator, I wanted to close off things today and.
Thank all of the resilient global employees for their very hard work and really great execution during Q2 and really the first half of 2021 as well as they're really passionate commitment to serve our customers throughout the world. So I want to thank them very very much in business as part of my closing remarks.
Thank you everyone for your participation today, and we look forward to speaking with you over the coming months have on the rest of your day.
This concludes today's conference call you may now disconnect.
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