Q3 2021 Resideo Technologies Inc Earnings Call

Log, which remains well above historical levels.

We also experienced supply chain constraints within certain categories at Adi.

Our supply chain team and executive leadership continues to spend significant time engaging with key supply partners.

We believe this proactive and direct engagement has enabled us to better deliver for customers and is benefiting our financial performance.

Against this dynamic macro backdrop, we continued to make significant progress on our transformation work.

Driving margin benefited Adi from investments in pricing tools and digital initiatives.

Within products and solutions value cost engineering efforts are delivering to plan. Additionally.

Additionally, we are seeing benefits within the sales organization from consolidating systems Miller Heiman training and sales operations buildup.

Each of these initiatives have helped enhanced our relationship with and visibility into key customers.

The results of this work and targeted investments are visible in our operating income and 160 basis point expansion in operating margin.

Within Adi investments in digital and pricing initiatives helped drive a 200 basis points year over year gross margin improvement.

As more transactions flow through digital channels, Adi can free up sales associates for more value added selling.

This allows for better leverage of these high value individuals is Adi executes on this long term growth strategy.

At the same time day to day execution at Adi remains strong with average daily sales up 9% year over year.

The business has done an excellent job managing through an increasing tight supply environment.

This execution positions Adi would remain the go to source for customers across its product categories.

Early results from the recent shore view in Norfolk acquisitions are encouraging and integration is progressing according to schedule.

We are actively looking at further inorganic opportunities to expand Adi as offerings, particularly in the data come in Avi markets.

Within products and solutions demand remain healthy across key channels.

As the quarter evolved it became clear that supply chain and global logistic challenges were not easy and in some cases worsened.

The team has done an excellent job navigating these challenges.

We remain aggressive and engaging with key suppliers and partners to ensure we are doing everything possible to deliver for customers.

Please that Megan Murphy has joined the residual team to lead our ESG activities.

She'll be responsible for with videos ESG strategy communications and reporting.

This means working closely across the organization, an alignment of stakeholders and an execution of key milestones along <unk> ESG journey.

With that I'll turn the call over to Tony to discuss our third quarter performance and 2021 outlook in more detail.

Thanks, Jay and good afternoon, everyone.

<unk> was another strong quarter for his video with revenue of $1.5 billion.

Up 10% compared to Q3 last year.

Gross margin for the quarter was 27, 8% up 60 basis points compared to Q3 2020.

Consolidated operating expenses increased by 4% from last year.

<unk> declined 90 basis points relative to sales demonstrating continued operating leverage.

Operating income increased 27%, an operating margin improved by 160 basis points.

Products and solutions third quarter revenue of $631 million was up 10% due to continued healthy demand and the impact of recent price increases.

Third quarter results also benefited from our customer rebate reserve credit approximately $12 million, which positively impacted both revenue and gross margin.

Revenue and gross margin were negatively impacted in the quarter by higher costs for materials and frame as well as shortages for many semiconductor components fly.

July challenges are having the largest impact on revenue and margin in our trade and security channels.

Products and solutions gross profit margin in Q3 was 49% down from 42.3% in the third quarter of 2020.

The decline in gross margin was primarily due to materials price inflation of approximately $3 million as well as $14 million of higher freight costs year over year.

These impacts were partially offset by price realisation of approximately $17 million and the previously mentioned rebate credit.

We instituted an additional round of price increases in September which had a limited impact on Q3 results, but are expected to benefit Q4 and beyond.

Achieving the 2020 for growth and margin targets, we outlined at our Investor day in March.

Adi Q3 operating margin increased 130 basis points from last year.

We continue to direct investment towards Adi, especially in the area of digital channel improvements and sales tools.

As reflected in higher operating expenses.

Adi is two recent acquisitions contributed $16 million to Q3 revenue with no impact on operating profit.

Integration is progressing to plan with both acquisitions on track to be fully integrated by year end.

Corporate costs for the quarter was $63 million or 4% of sales compared with $66 million or 5% of sales in the third quarter of 2020.

This reflects a reduction in spin and restructuring related cost of approximately $19 million as well as $9 million of impairment costs. This year related to our Huston office space.

We do not expect any further charges this year related to Austin.

In August we refinanced our senior unsecured notes further strengthening our balance sheet.

<unk> $300 million of notes mature in 2029, and carry a 4% coupon as well as an investment grade covenant package.

Proceeds from the offering were used to redeem our 600% to 8% notes that were due in 2026.

Included in Q3, other expense was $18 million of debt refinancing costs related to this transaction.

The new bonds together with the refinancing of our senior secured credit facilities in the first quarter will result in approximately $8 million in annualized interest expense savings.

Over the past 12 months, we've made significant improvements in our capital structure. We ended Q3 with cash and cash equivalents of $686 million and total outstanding debt of $1 2 billion.

Net debt stood at $546 million.

Compared to $1 $1 billion at the end of Q3 2020.

During the quarter, we generated $104 million of cash from operations and for the first nine months of the year operating cash flow exceeded $200 million.

In terms of our outlook fourth quarter revenue is expected to be in the range of 144 billion to $1 $49 billion.

Consolidated gross margin is expected to be in the range of 27% to 28%.

The million dollar Austin impairment caused this quarter.

Additional outlook details can be found on page nine of our earnings slides.

As a reminder, Adi has five fewer selling based on the fourth quarter compared to Q4 of 2020.

I'll now turn the call back to J for a few concluding remarks before we take questions.

Thanks Joni.

The proactive response to the residual gene to ongoing supply chain challenges and the execution across the organization reflects the culture being developed a residual.

The results delivered in Q3 also demonstrates the significant progress made over the past 18 months.

While supply chain dynamics are impacting our ability to fully meet customer demand. We believe are strong relationships with our suppliers position us to remain a go to source for customers.

At the same time, we have demonstrated the agility to execute to our profitability expansion goals.

While supply and logistic headwinds are not expected to abate in the near term.

<unk> team is focused on ensuring that we deliver for our customers at.

At the same time, we are continuing to make the right investments position residual for long term growth.

I'd like to thank the entire <unk> team for their efforts during the quarter and their focus on closing the ear strong.

This concludes our prepared remarks, operator, we are now ready for questions.

At this time, if you would like to ask a question. Please press star followed by the number one on your telephone keypad and your first question comes from the lineup Eric would Wink with Morgan Stanley. Your line is open.

Hi, This is Sabrina how unfair Eric wagering. Thank you for taking the question you know as you look forward what is your outlook for the supply chain, how we'd love to know how long you know you believe Kosovo mean elevated and when do you think it's a five opponents can open up.

All comments and Toni May I have a few words too so he indicated in my remarks that.

The supply chain situation as we see it today is going to extend into 2022 in terms of the exact crystal ball. That's a hard one I wish we all could know that but for planning on that through and into 2022.

It's Shane constraints like semiconductors.

Got it that's Super helpful. And then just a follow up you talked about demand being strong can you talk about how the demand environment has changed relative to three months ago and are there any differences that you're seeing between residential versus commercial demand that you would call out.

I would say the demand is consistent with what we saw three months ago.

See in Aero or any data that really points to acceleration or deceleration in underlying demand.

And I'm sorry, what the second part of the question.

Yes, just if theres any trends between residential and commercial demand that you're rolling out alright, yes. The same I mean, our Adi business is a pretty good bellwether for what we're seeing in the commercial markets and this past quarter. It was actually pretty strong commercially.

And the.

The PFS business is pretty much entirely residential not exact not 100%, but pretty close. So there are two I think things have been pretty stable.

Your next question comes from the line of Amit <unk> with Evercore ISI. Please go ahead.

Hey, This is Michael Fisher on for Amit. Thanks for taking my question.

So just to start with if we kind of look a little bit into 2022, and I know there are a lot of moving pieces with supply probably the limiting factor but.

So some tough comps to start the year, but should be think about.

The growth rate kind of working back towards that 6% year over year model as we go through 2022.

You know Mike.

Michael It's Tony Thanks for the question we are.

Still in the midst of our budgeting process for 'twenty two I don't really have anything to offer at this point with respect to the outlook that we see.

We're focused on delivering for the remainder of the year, we will have obviously, a fulsome conversation about 2022 when we report in February but at this point.

We're just not clear in terms of our own expectations yet.

Okay that makes sense at this I had to give it a try and then just one.

Well played.

Yeah.

So I'm curious about the Amazon Smart thermostat relationship and maybe if you can provide any color on how that came about and whether maybe that's something you could see expanding into other products over the long term.

Well as I mentioned this is an exciting new program.

We I think we indicated even going back to our Investor day back in March that we would partner with key players out in the industry that makes that could leverage our strengths along with theirs and that's exactly how that played out here with Amazon leveraging our technology our history.

Along with their capabilities in the channel to the DIY market that Oh.

It is not something that we've been focused on you know as you know, we're very focused on the pro and the channels through the <unk> and.

Amazon of course is a different channel model that.

Where we can leverage their capabilities. So it was a really nice partnership and as I said is consistent with with what we're looking at out there in the market globally and we're excited about.

Michael.

Everything Jay said, but in addition, we've.

We've talked about this since our since the new leadership team showed up a year and a half ago. I mean this is the market that we operator operate in is complex.

And it's fragmented and nobody has the answer for the whole solution.

We've really been focused on is.

Executing where we can bring real value, whether it's direct whether it's through an OEM whether it's through.

Our big professional channels, we're focused on delivering value, where we can best do it and partnering with people.

How much have you raised prices in total and what are your plans kind of the remainder of the year.

Yeah.

So Brian it's Tony.

Your the first part of your commentary cut outside what I heard was your question about how much we raise prices and kind of where do we go from here.

I don't have a specific percentage to give you because it varies by channel it varies by product. It varies by geography as you guys know we have a very broad.

But broad product suite, so I don't I don't have a.

Percentage to offer you, but as we've said we were pretty slow out of the gates at the beginning of this year in terms of price increases, we rectified that with some fairly meaningful price increases in the summer and then another one in September I believe.

That's September increase isn't really there wasn't much of what you saw in Q3.

We indicated that youll see meaningfully more in Q4 and.

We expect that realization to to hold in 2022.

This year's this year's price increases have been in response to a pretty dynamic marketplace right. I mean, we haven't seen inflation like this in a long time, we've had commodity and supply chain.

Freight cost increases that.

We just had to pass on.

With all of the different channels and all of the different products and all of the different geographies.

There's no specific spot and I would not say that the cadence. This year. When we did it is something you should expect moving forward at all.

The timing of this year was pretty unique to a very.

Challenging to say, the least and unpredictable supply chain market as well as freight market I think a lot of us who've been around this electronics industry for a long time will say that this was one of the ones that was.

Is extended for one and two a little bit unpredictable and so I agree with Tony.

Great. Thank you very much.

Thank you Brian.

Your next question comes from the line of Ian Zaffino with Oppenheimer. Your line is open.

Hi.

Maybe a little bit of a follow up to the last question, but can we look at this differently and maybe walk us through volumes that you saw maybe on different product lines.

Any of that you actually saw.

Negative volumes on because you aren't able to get the components.

And were there any areas, where you saw really super amount of strength on the positive side.

Again, I mean, you can.

So the question is Tony you can you can get pretty granular and start looking at things that are pretty small.

In our portfolio and you'll see some variance on volume, particularly quarter to quarter that looks pretty big but overall, if you step back and you look at sort of the big buckets of the markets that we play in volume was up in Q3.

It would have clearly been up more had we been able to deliver more and keep the backlog down.

But we in general sort of across the board for both businesses. We saw volume unit volume expansion in Q3, and there aren't any meaningful categories that I'd call out that are you know that are different from that pretty much all of them, you know where to some degree or another a green arrow.

It just doesn't make sense to try to layer that kind of a transition on top of what we're seeing.

What we're seeing in the world in terms of freight and supply chain I hate to keep saying those words, but that's the reality of it. So I think that is that opportunity is still available for us it's certainly.

It's not one that we have moved as quickly on as we may be originally thought we were going to the the other thing I want to I want to mention about all of this and it's a little bit of an unasked question, but I think it's important to.

To understand the.

Supply chain, certainly affects how our manufacturing operations and it affects our resulting financials, but it really affects every part of the organization everybody is adjusting and adapting in a way that.

Really prevents us from getting all of the traction we want and a lot of areas. Another example, I'll give you his engineering and.

Our NPI kittens I mean, the Amazon announcement, the hydrogen work, we're doing it certainly we're making really good progress in a number of different areas, but we've had substantial engineering resources diverted to devote to requalify and components because one component isn't available and another is in in or.

For us to put it in the product we've got qualify it so I just sort of set the tone in terms of our performance, which I think was terrific. This quarter I think that.

<unk> did an unbelievable job.

There's not an area of our organization that isn't in some way shape or form impacted by the challenge we're seeing out in the out in the marketplace I agree and I mean, the the teams is an incredible job in those areas in our results show that and and so the team been able to pit and I think there's only the keys there has been able to pivot fan.

To be able to react quickly and as we saw the various.

Dynamics, which changed quite frequently over all over this year.

Alright, Thank you very much for the color.

Second.

As a reminder, that you would like to ask a question at this time. Please press star followed by the number one on your telephone keypad and your next question comes from Paul Dirks with William Black. Please go ahead.

Hi, good afternoon, everyone.

The ball. So just just a couple for me first of all on supply chain, which I realize covered a lot of ground by just won't take one more step at it in the prepared remarks, you guys mentioned that some of the supply chain challenges, we're still worsening coming out of the third quarter and presumably here into the fourth quarter was that.

I'm a product because they have demand out there.

Who they're servicing so that's.

Yeah, it's disappointing that we cancel all all that demand, but it's it's you know what we're seeing still right now the demand is pretty good and then you look at are you looking at revenue growth and Adi that revenue growth.

I didn't ask Rob the specific question, but I think this is probably the first quarter that it was.

Noticeably constrained by stock outs, and you know and challenges of that nature and the business still groove, yeah really nicely.

I don't think there's any evidence that and demand is being affected here I think there's just clearly a backlog of projects yep.

Understood. That's probably also a tribute to some of the work you're doing an e-commerce and some of the other initiatives as well last quite a degree.

Very good last question for me, obviously, the Amazon announcement as exciting are there any other opportunities that you could point to either conceptually or specifically regarding either do key partners that you could work with or perhaps efforts that the city is taking on its own to improve its branding in the marketplace. It seems.

It seems that this is one area, where perhaps there isn't quite as much of an impact due to the supply chain challenges and perhaps presidio could you know exert more control over its branding efforts here near term. So maybe could you talk a little bit about what the company's doing here.

It over the coming weeks and months to cure.

This concludes today's conference call. Thank you for joining you may now disconnect.