Q2 2022 Resideo Technologies Inc Earnings Call
And that we have generally remained in a better supply position than competitors.
We continue to invest in supporting our distribution partners and professional installers through our active involvement in organizations like the building talent Foundation and the rollout of our brand Ambassador program.
Retail Pos data indicates we are outperforming in the thermostat and smoke and Seo detection categories.
We are benefiting from the breadth of our offering across price points and growing consumer interest in connected and energy management functionality.
Within our OEM channel, we saw growth in the quarter, but also signs of normalization of order rates after several quarters of historically high demand.
Early indications from customers are for a solid heating season, which combined with our backlog are expected to support our OEM business as we exit 2022 and head into 2023.
Our traditional security business continues to face headwinds across several fronts, including supply challenges product transition in Europe , and the run off of three G radio conversions.
Overall market demand is healthy and we continue to see good underlying trends in our general market business in North America.
Additionally, we have reached an agreement in principle with ADT to amend our current agreement to provide ADT with products through 2023, continuing our relationship as we work on other products together.
First of all <unk> had a strong quarter driven by retail demand pricing actions and operational execution.
We are very pleased with how the first alert and residual teams are collaborating and sharing best practices and are enthusiastic about the value creation opportunities that have already been identified.
The semiconductor supply chain environment remains dynamic and continues to constrain our sales.
The team remains an active daily dialogue with key suppliers. We believe this direct and collaborative engagement with suppliers has enabled us to remain in relatively more favorable supply position, allowing us to strengthen our position in key markets.
At Adi revenue grew 5% in the second quarter, driven by North America and growth in key initiatives around E Commerce and private brands.
Supply constraints and numerous product categories restrained Adi revenue growth in Q2 and are expected to remain a challenge in the second half.
Gross margin performance at Adi remains strong.
This is being driven by investment in tools and practices to drive pricing efficiency continued growth in private brands business and the positive market pricing environment.
Top line and gross margin growth are driving an expansion in operating profit and operating margin even as we continued to invest in the business.
At the beginning of July we announced the acquisition of electronic custom distributors, a leading regional distributor of residential audio video automation and telecommunication products.
The acquisition adds significant capabilities to Adi's growing audio visual category.
This is the fifth acquisition Adi is completed since 2020.
In aggregate these acquisitions are expected to contribute over $200 million of sales in 2022.
With that I will turn the call over to Tony to discuss our second quarter performance and 2020 to outlook in more detail.
Thank you Jay and good afternoon, everyone. Our Q2 results reflect another quarter of operational execution as well as our strong market position and continued positive market trends.
We delivered solid organic growth and a significant expansion in margin and profitability, even as we continue to invest across the business.
Second quarter revenue of $1 $69 billion was up 14% compared to Q2 last year and up 6% on an organic basis.
In exchange movements reduced reported revenue growth by approximately 290 basis points during the quarter.
Gross margin for the quarter was 27, 7% an increase of 160 basis points compared to last Q2.
Consolidated operating expenses grew by $16 million or 6%, reflecting $22 million from the addition of first solar as well as continued planned investments in both businesses.
Partially offset by lower corporate costs.
Operating income of $186 million.
54% compared to last Q2, and diluted earnings rose, 62% to <unk> 63 per share.
Products and solutions second quarter revenue of $764 million.
It was up 28% grew 9% on an organic basis.
Nice realization added approximately $60 million year over year.
Aggregate unit volumes increased approximately 2%.
Foreign exchange was a four percentage point headwind compared to last Q2.
First alert contributed revenue of $113 million and operating income of $7 million in Q2.
It was ahead of our plan at acquisition.
Q2 operating income at first alert was reduced by $6 million due to the acquisition related step up in inventory valuation.
The integration has gone well and we remain on track to exit 2022 at an annual cost synergy run rate of $10 million and to achieve run rate annual cost synergies of $30 million by the end of 2023.
Products and solutions began to reduce delinquent backlog during Q2 as the business continues to successfully manage an ongoing difficult supply chain environment.
Second quarter orders were relatively flat year over year across product categories, except for security, where we saw an expected decline due to product transitions in Europe , and the winding down of <unk> radio swaps.
Even with the reduction in delinquent backlog in Q2, our overall backlog remained strong relative to historic levels, which helped support our outlook for continued organic growth in the second half of 2022.
While we expect a further reduction in delinquent and overall backlog through the rest of the year, we still anticipate exiting the year with backlog well above historic levels.
Products and solutions gross margin in Q2 was 37, 3% down from 39, 3% in the second quarter of 2021.
While pricing actions have offset inflationary impact for similar results reduced gross margin.
Excluding the impact of first solar products and solutions gross margin was essentially flat compared to last Q2.
Products and solutions operating profit was $154 million or 22% of sales compared with $129 million or 21, 6% of sales last year.
Operating expenses for products and solutions were up $25 million year over year due to $22 million in first solar costs as well as planned increases in R&D investment.
We continue to closely manage operating costs, while ensuring we are investing in key initiatives to drive innovation in our core portfolio and support development efforts around our products and services ecosystems.
Q2 revenue of $922 million was up 5% year over year, despite supply constraints, particularly in the video surveillance category.
Adi again saw good activity in categories, serving commercial markets, including fire and access control.
Commerce sales were up 29% year over year accounting for 18% of total Adi revenue.
With touchless revenue sales, reaching 36% of revenue.
Private brands' revenue grew by over 35% in the quarter.
The two acquisitions, we've completed at Adi since the beginning of the second quarter of 2021 added approximately 170 basis points to revenue growth in the quarter.
Foreign exchange reduced revenue growth by approximately 200 basis points compared to the prior year.
Adi gross margin in the second quarter was again strong at 20% up from 17, 4% last year, reflecting improved product line margin increased private brands' contribution and the strong pricing environment.
Adi Q2 operating margin increased 180 basis points from last year to nine 3%.
This increase came even as Adi grew operating expense, 13% year over year as we continue to direct investment to support M&A, It infrastructure and digital sales enablement tools.
Corporate costs for the quarter were $54 million or three 2% of sales compared with $74 million in the second quarter of 2021.
Included in the second quarter 2021 number was $16 million of net costs associated with a legal settlement.
Excluding these costs from last year corporate spending still decreased by approximately 7%.
During the quarter, we generated $35 million of cash from operations compared to operating cash generation of $94 million in Q2 2021.
2022 cash from operations reflects higher working capital to support growth and to manage the dynamic supply chain environment.
We expect significantly stronger cash flow in the second half.
Also at quarter end, approximately 70% of our $1 2 billion of net debt is fixed and as a result, the impact of higher short term interest rates on <unk> has been and is expected to remain minimal.
Turning to our outlook for the full year 2022.
To expect revenue to be in the range of $6 45 billion to $6 six 5 billion.
Implying year over year growth of 12% at the midpoint.
Consolidated gross margin is expected to be in the range of $27 five to 28, 5% and.
GAAP operating profit is expected to be in the range of $690 million to $720 million.
For the third quarter, we expect revenue to be in the range of $1 67 billion to $1 $72 billion.
Consolidated gross margin is expected to be in the range of 27% to 28%.
And GAAP operating profit is expected to be in the range of $165 million to $175 million.
Our full year outlook includes revenue from first alert, a approximately $340 million and operating profit of approximately $17 million.
For the third quarter, we expect first solar to contribute revenue of approximately $115 million and operating profit of approximately $5 million.
As previously indicated we expect to incur approximately $10 million of first solar related integration cost during 2022.
We also expect intangible amortization costs of approximately $10 million for the full year, including the $3 million incurred in Q2.
All of these costs are included in the first pillar outlook provided here.
Our outlook contemplates the continuation of supply constraints at those products and solutions and Adi through the remainder of 2022.
The outlook also incorporates a low single digit year over year headwind to reported sales from the stronger U S dollar with minimal net impact to operating income.
Additional outlook details can be found on page 10 of our earnings slides.
Okay.
Before handing the call back to Jay I wanted to make a few comments on the 2024 financial targets, we laid out at our Investor day in March of 2021.
While we do not feel it is practical to provide a full update to 2024 targets given the fluid macro environment and lack of clarity on when supply chain costs will normalize.
We have spent considerable time reviewing the assumptions and progress underlying the model we outlined at the Investor day.
Overall, we've made significant progress across all metrics.
Our revenue is tracking ahead of what we outlined there will be further enhanced by the acquisitions completed in the past 16 months.
We continue to believe the segment revenue growth rates, we outlined our appropriate through a cycle.
We're also tracking ahead of plan to the gross and operating margin targets, we outlined at ABF.
Same is true for our corporate cost targets.
At PNM, despite significant underlying progress the impact of supply chain challenges and inflationary cost pressures have been headwinds to short term gross margin.
Taken as a whole we're likely trending to the lower end of the corporate margin targets, we previously outlined.
However, we believe we are tracking to deliver at or above the aggregate level of operating income and operating cash generation implied in the targets.
I'll now turn the call back to Jay for a few concluding remarks before we take questions.
Thanks, Tony our continued strong financial performance reflects the unmatched relationships, we have developed over decades with professional installer customers and attractive structural trends across many of the markets we serve.
This is being supported by the operational improvements, we have driven across the business over the past two years.
The team is excited to be back out on the road engaging directly with customers suppliers and partners across the globe.
The work done over the past two years to build and reestablish relationships with key stakeholders has already paid dividends in our results and will only be enhanced by increased face to face engagement.
We remain focused on delivering sustained long term margin improvements across the business and see ample opportunity to achieve these ambitions.
At Adi, we see existing progress is sustainable with longer term opportunity to build upon recent performance. We expect the progress already made it products and solutions will become more visible as the supply chain and inflationary environments begin to normalize.
As we look to the remainder of 2022, we expect to deliver year over year growth in our underlying businesses.
<unk> remained solid in the key residential and commercial markets we serve.
As we work down backlog. This provides additional support for the business over the coming quarters, even in a potentially more challenging macro environment.
We plan to continue to invest organically in the business and look for attractive opportunities to deploy capital through acquisitions.
I want to thank the entire residual employee base for their dedication to supporting our customers.
<unk> focus on execution this.
This concludes our prepared remarks, operator, we're now ready for questions.
At this time I would like to remind everyone in order to ask a question. Please press Star then the number one on your telephone keypad well pause for just a moment to compile the Q&A roster.
Your first question comes from the line of Amit Dawn Jani with Evercore ISI. Your line is now open.
Great and this is Michael Fisher on for Amit. Thanks for taking my questions. So to start with I just wanted to dig in a little bit into the private label business.
And maybe give some details.
The margin profile, you're seeing there would that be comparable to what you get in the P&L business and then also are there any specific categories, where youre having.
A lot of success with the private label.
Yeah, Hi, Michael It's Tony Trunzo.
The short answer to your question is yes, the gross margins overall in our private label business at Adi are plus or minus consistent with what we see in the in the products and services business.
The the we've been selective about the categories that we've entered most of them have been in that we now have we have.
Southern video, but most of them have been in.
<unk> smaller more sort of ancillary products as opposed to really being in the in the meat of a lot of the Big third party brand area.
And you can see we continue to grow it pretty fast its still a small percentage of the business overall, but even with those relatively limited skus and product lines. We've got significant room for growth there and the margin as you said as you hint to that and as I said the margin profile. There is is really attractive.
And I would add also that.
Part of our.
Adi is review strategically on where they go with the with their private label they've been very disciplined and.
Where they think is the most critical areas for them to expand and Tony's correct about the particular areas that you mentioned, but also they are expanding in lets say further into datacom. So theyre picking some things there to that might be applicable in the product.
Divot label area. So I think they've done a really nice job on this.
Great Yes.
Our results certainly seem to speak for themselves.
I was curious.
First of all art deal yet it's still early days somewhat.
I was hoping maybe you guys could reflect a little bit.
Great, Yeah, and whether the deal with kind of gone in line with your expectation.
I'm kind of getting at here is has.
The integration of this deal in any way changed your outlook.
How aggressive youll be with M&A.
Whether or not you can.
Be ready for another sizeable deal.
In the near future.
Yeah, I'll make a couple of comments on that Tony.
Follow up but knock on wood, we were very pleased with how the integration has gone and you're right I mean, we.
We basically now have one quarter or any of our belt with first alert, but we've been very pleased with the team's between both.
The first alert team and then the residual teams in terms of how they have worked together the collaboration has been superior and being able to get out and about again like Tony mentioned in what he said before not just with customers, but operationally in a way that we couldnt do a year ago.
For any of these from my chair from any sizable acquisitions, that's super helpful. Because you're able to get onto the plants and really get into it to understand every all the opportunities the opportunities that we identified as part of our our own business plan, but also other opportunities both.
<unk> and commercially so I think the team is very pleased with the progress.
And the integration team you know everybody always asked and I think we may have talked about last time around last earnings call.
The key to success for M&A as <unk> companies that really have had a lot of experience in integration of acquisitions and the teams that we have in place and the people that we brought in are very versed in this and that makes a big difference Tony any added comments from your chair.
Yes, I guess Michael to your question.
Kind of what does this mean for potentially other significant deals moving forward.
We've intentionally taken a bit of a slow roll toward.
Completion of this integration.
Jason right, we've got a lot of depth of experience on M&A on the team, but this is our first reasonably significant deal as a team and we've purposely.
The ramp to be.
So the synergy number we laid out is.
Six months to 12 months longer than what I'm used to frankly, so we've been really careful about making sure that we bring the team along here.
But I will say from a from an execution standpoint, we've also learned a lot.
Lot, obviously about the about first alert and they bring some capabilities that we knew about but they bring some capabilities to the table that we can really leverage across the business.
Around their manufacturing strategy with significant automation around their experience at retail and how to how to drive that business. We think that brings significant value and really just kind of an entrepreneurial spirit being.
Relatively small business with a variety of different owners over the years, they've really got an entrepreneurial approach to.
Business, Thats pretty exciting and frankly, a number of their senior leadership.
Are finding their way into pretty senior positions at <unk> as a result of that.
Yeah, and I'd add to that my experience with doing acquisitions of my career I think it's super important that at the end of the day that you fully understand that.
It's not just the products of the plants you are buying but the people.
And their own individual experiences and making sure that.
You look at it from the standpoint of two plus two equals six that youre leveraging the various strengths of both organization and if you do that to the fullest you really get the maximum our maximum maximization out of deals out of any type of acquisitions and Tony you hit it right in the head in terms of the things that he listed there.
Great. Thanks for taking my questions guys.
You bet.
Again, if you would like to ask a question. Please press Star then the number one on your telephone keypad. Your next question comes from the line of Paul <unk> with William Blair. Your line is now open.
Hi, good afternoon, guys, a nice quarter.
Hey, Paul Thank you.
Thanks. So first question. The first question for me is at Adi The last four quarters, it's been a very impressive gross margin trajectory right. We've seen gross margin step up from the low <unk> now it's hitting about 20%. My question is while appreciating. The fact that there are new tools and processes Dev and <unk>.
<unk> and we have seen ecommerce and private label step up.
Are you getting an outsized benefit from positive price costs and if so will we see inventory profits start to roll off here in the back half of the year and into 2023 I'm trying to get a sense of the gross margin erosion. We will see just because things have been so good here over the last few quarters.
Sure Yeah. Thanks, Paul So the short answer is the the margin expansion has been a combination of our sort of proactive efforts around all the things that we've talked about.
As well as yes, some tail winds from the inflationary environment.
And at some point, we do anticipate that they're going to abate.
It's hard to exactly quantify for you but.
<unk> something in the ZIP code of half of that margin expansion has been the result, we think of.
Of the.
Of the increase in prices and inflation is the other half has been a result of our efforts in that that have has really accelerated in terms of.
Progress over time, and we've talked about the growth in private brands at double the gross margin not quite but pretty close to double the gross margin of the.
Of the the third party business that growth trajectory.
<unk> is going to continue to expand to help us expand.
What I'll call the secular margin opportunity and our objective we laid out when we talk about 2024 targets a little bit I mean, our objective for 2024 for Adi was gross margins in that 20% range are our objective over the next few quarters is to achieve enough progress in these other air.
Again that we can control to expect to to basically offset anything that.
That we see in terms of our rollout of inflationary benefit.
I think Tony really to capture that well because.
As we are talking here on this particular question.
<unk>.
Success in execution on their digital expansion in their private label private brands expansion.
We're on a very good trajectory and can help.
In a big way manage that as we when the time comes that we started to see things change.
Inflationary front, so I think Tony did a really nice job of explaining that there and I know the Adi team is very confident in their abilities to do that.
Okay.
No absolutely encouraging to hear I appreciate that.
Other question I wanted to ask is.
Maybe you could shed some light on the tone of your most recent discussions with with the Pro Channel and then also within retail just as we get through July and the risk of retail destock over the next year or so.
Have the tones of your conversation changed if so how.
And perhaps maybe it's by by market or by vertical but can you shed any light on how those conversations with your pros and retail are trending here early in the third quarter.
Okay.
Yes.
I'll start and then John will have some comments. So you are right I mean at some level the tone is going to vary by the channel.
Our execution at retail indicates that we are gaining share so.
And the feedback that we're hearing from our retail partners is our execution is very strong.
I can't I'm, not close enough to be able to comment on what implications there might be for for destocking or weather destocking is going to occur but from an execution standpoint of retail I think I think we've done a great job.
The same is true when you look at the when you look at the OEM market and the trade market.
Doing all the parts of the weekend.
We're adding Oems, we think we're adding market share we're really focused on providing support to the pro we've talked about building talent Foundation, we've created a brand ambassador program to to support our professionals.
The only place that I can definitively say that.
But we've seen softness is in the is in the water heater market in terms of tone everywhere else I think.
The tone is steady as she goes people still see a lot of demand the HVAC world is still strong.
But I think underlying all of that.
Is the is the point of our execution and the progress that we're making.
From our own execution from our own strategy and building share and really positioning ourselves to be a significant and growing part of that market.
I would add.
When Tony just so we're clear when Tony if it talks about execution, we've been able to provide product.
To our retail customers.
And that's a big Big deal as you all everybody knows on this call. The company that are able to manage better through the supply chain get materials Buildout product.
Going to benefit by that and we talked about that as part of our earnings script to all of you today and I'm very.
And I'm Super proud of this team for being able to do that and we also mentioned in there that this is not just <unk>.
Said this to you guys before.
So these last 18 months.
This crazy supply chain market isn't just been our supply chain group a procurement group that's been senior leadership, including Phil who runs P&L, It's Rob who runs Adi myself personally I've spent a lot of our personal time and calories on that with our lead supply partners and Thats, a differentiator out there I mean I'm going to be do I got the next two weeks on the road in them with.
How many different suppliers because youre one of your other natural questions for you or one of the other folks on the line is how do I see the future there.
<unk> generally is asking for the same crystal ball as we indicated earlier I think youre going to find that the rest of this year is still going to be a grind and someone will get a little bit better in terms of some of our supply base. While others are really it's into the spring of 'twenty three because of capacity being brought online in particular in the semiconductor markets.
But again it comes back to who has got the relationships who spent the time with them to help make that happen. So we're pleased with the execution on the retail front and the comments that joining me on the pro side is also it's all of the additional time and effort face to face interaction with our pros and you know the extensive nature that we have reached that we have in the <unk>.
Probe.
<unk> base, that's out there and doing the things that are tied to the different training and what have you is it helps them make it stickier with our relationships and helps build business.
Yep understood appreciate the color thanks, guys.
Thanks, Paul.
Yeah.
Thanks, Paul.
And there are no further questions at this time, Mr. <unk> I turn the call back over to you.
I just thank everyone again for your participation today and as always if you have any follow up questions. Please don't hesitate to reach out.
Thank you take care everyone have a good day.
Thanks, everybody.
Thanks, everybody.
This concludes today's conference call you may now disconnect.