Q4 2022 Resideo Technologies Inc Earnings Call
Please standby were about to begin.
Ladies and gentlemen at this time I would like to welcome everyone to their studio technologies fourth quarter 2022 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's now my pleasure to turn today's call over to Mr. Jason Willey, Vice President of Investor Relations Mr. Willie.
Please go ahead, Sir good afternoon, everyone and thank you for joining us or was it. He is fourth quarter of 2022 earnings call on today's call will be Jay Gulf market resilience, Chief Executive Officer, and Tony <unk>, 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 <unk> Dot com.
We would like to remind you. This afternoon's presentation contains forward looking statements.
Other than historical facts made during the call may constitute forward looking statements and are not guarantees of future performance or results and are all 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 and resilient filings with the securities and <unk>.
Strange Commission the company assumes no obligation to update any such forward looking statements. We identified the principal risks and uncertainties that affect our performance on our annual report on Form 10-K, and other SEC filings.
That I will turn the call over to Jack.
Thank you, Jason and good afternoon, everyone.
2022 was a year of historic market geopolitical and macroeconomic conditions.
We navigated these challenges to deliver record full year revenue and operating income however.
However business conditions around our residential end markets softened as 2022 progressed.
Given this we have taken actions to reduce costs and ensure we are both protecting near term profitability and positioning the business for long term success.
While the macro conditions remain dynamic we believe our OEM and distribution customers have made substantial progress in right sizing their inventories. We expect Q1 will mark the low point in terms of Destocking impacts and we expect to build from that base is 2023 progresses.
We expect our cost actions and improving customer inventory situation, coupled with growing momentum in new product activity in products and solutions will position us for improved financial performance as 2023 progresses.
Late in the year, we respond to evolving market conditions by taking action to reduce costs and initiate manufacturing optimization work. This.
This includes actions that are expected to result in an approximate 5% decrease in residuals global workforce.
These measures will further focus resources on advancing our strategic initiatives and better positioning residual to scale with future growth. We are working aggressively to ensure the business is sized and focus appropriately to deliver strong profitability and cash flow.
For 2022 products and solutions delivered record revenue up 13% year over year as we added first alert and drove strong price realization across the portfolio.
We grew our position in the connected thermostat market in both the distribution and retail channels expanded content with builders and the new construction channel and grew our presence at a number of key Oems all positioning the business for future growth.
We saw a significant returns from investments in pricing and sales force tools and training. This is visible in our strong price realization activities throughout 2022, and a meaningful increase in average revenue generated per salesperson.
These investments are further enhanced by the increased customer engagement driven by our brand Ambassador program and business development efforts.
We significantly advanced the ball on our software platforming efforts are critical building block as we look to accelerate partnerships leverage our hardware leadership to support value added services and reduce development time and support costs.
This work is reducing the number of internal backend platforms, our products run on top of and providing a simpler ways to interface with our products.
We acquired first alert, a leading smoke and carbon monoxide sensing provider at the end of Q1 2022, and we are pleased with our financial performance and integration of the business.
We have already driven new commercial opportunities around cross selling into our distribution channel achieved deeper building penetration and improved positioning with key retailers.
Over time, we will add more connectivity into the first alert portfolio and see significant opportunity from further integrating first alert with our traditional security business.
In late December we acquired technique, adding a new Zealand based team of engineers with significant capabilities and sensors optics and AI enabled video solutions.
The team brings a track record of innovations and sensors optics and processors, along with deep relationships with silicon and original design manufacturer partners.
These capabilities will help advance our security video strategy and help accelerate our focus on providing actionable intelligence for end users.
<unk> had another great year in 2022 with revenue growing over 6% gross margin up 130 basis points and operating income up 17%.
2020 to Mark the 12th consecutive year that Adi has grown its revenue year over year, a testament to the execution of the entire Adi organization and the attractiveness of the markets they serve.
Adi saw continued strength in its commercial categories and has worked hard to deliver for customers in a challenging supply chain environment.
At the same time Adi continues to execute unexperienced e-commerce and digital capabilities enhancing this exclusive brands offerings and investing in tools to drive sales force efficiency.
Adi reached total touchless sales of 37% for 2022 and crossed the 20% of total sales threshold for e-commerce revenue in the fourth quarter.
We are also leveraging these digital investments to offer customers and suppliers cloud based AI driven data analytic tools.
These tools provide contractors and suppliers better understanding of their sales and inventory through customized reporting and access to granular data.
This creates a new subscription revenue opportunity for Adi and provides differentiation as we look to drive share of wallet with customers.
Exclusive brands revenue grew 25% in 2022 and remains a significant long term revenue and margin enhancement opportunity.
We launched over 250, new Skus and three new brands during 2022.
Capture advanced switching fluids NDAA compliant video a viral for AAV and data comm equipment, and Adi probe for wire access control and accessories.
We will continue to build upon these offerings in 2023 and see meaningful revenue expansion opportunity for new Skus and sales initiatives.
Adi continues to execute on the strategy to expand into adjacent Avi and Datacom markets.
These categories accounted for over $500 million of revenue in 2022 up 20% year over year.
Building on this momentum in mid January of this year Adi added new capabilities with the acquisition of <unk> technologies.
<unk> is a specialist professional avi distributor with datacom capabilities for in sourcing custom fiber assemblies.
Filling a hole in our value proposition to customers in the Datacom and <unk> markets with that I will turn the call over to Tony to discuss fourth quarter performance and 2023 outlook in more detail.
Thank you Jay and good afternoon, everyone.
Fourth quarter revenue of $1 56 billion was up 7% compared to Q4 last year.
Excluding $139 million from acquisitions, and approximately $46 million of negative foreign exchange impact.
Fourth quarter revenue grew by approximately 1%.
Gross margin for the quarter was 27, 6% flat with last year's fourth quarter, while operating income of $98 million compared to $141 million last year <unk>.
Included in our fourth quarter operating expenses was a $35 million charge for restructuring and related asset impairment.
These restructuring actions, which include head count reductions initial factory optimization work corporate functional rationalization reduced third party spend and general G&A cost reductions are expected to generate in year savings of $60 million in 2023.
[noise] associated cash costs in 2023 are expected to be approximately $25 million spread throughout the year.
Products and solutions fourth quarter revenue of $693 million was up 9%.
Excluding $116 million from first solar and approximately $35 million of unfavorable foreign exchange impact revenue declined approximately 5% compared to last Q4.
Price realization added approximately $35 million to revenue year over year.
Aggregate volumes declined approximately 10% volumes were impacted by distribution and OEM customers continuing to adjust inventory levels.
Our security revenue in Europe was down in Q4, and lower year over year <unk> radio migration affected U S security revenue.
After the first quarter of this year radio sales Comparables will begin to normalize and we expect to be in market with new security products in key European countries in the second quarter of this year.
Products and solutions gross margin in Q4 was 38, 4% relatively flat compared to last year.
Operating expenses for products and solutions were up $44 million year over year, due to $18 million and first solar costs and $29 million of restructuring costs.
Products and solutions operating profit was $96 million or 13, 9% of sales compared with $125 million or 19, 7% of sales last year.
Excluding restructuring costs products and solutions operating profit was flat year over year.
First of all Eric contributed revenue of $116 million and operating income of $12 million in Q4.
First of all have exceeded our expectations for both revenue and operating profit in 2022.
We achieved in year synergies of $7 million and remain on track to achieve run rate annual cost synergies and at least $30 million by the end of this year.
<unk> delivered another solid quarter in Q4 with revenue up 6% to $867 million acquisitions, adding $23 million of revenue, which was largely offset by approximately $20 million of unfavorable.
Foreign exchange impact.
Key commercial categories, including fire video surveillance and access control remained strong in the quarter more than offsetting slower activity in residential securities and residential avian categories.
Adi gross margin in the fourth quarter was 19, 1% compared with 19, 2% last year.
Operating profit of $69 million was essentially flat with the prior year.
Corporate costs were $67 million up from $54 million in the prior year fourth quarter.
This increase reflects $4 million of restructuring as well as higher <unk>.
Finance costs, our full year 2022, corporate spend of $229 million was down 8% year over year and over the past three years corporate costs have declined by 18% from five 6% of revenue to three 6% of revenue.
Operating cash flow for the full year was $152 million.
Compared with $315 million for 2021.
Working capital dollars and days rose in 2022.
With the addition of first solar inflationary impacts and inventory.
Incremental safety stock and unfavorable changes to some supplier terms all contributing to the increase.
Before turning to our outlook for 2023 I wanted to discuss the decision we made to begin providing selected non-GAAP measures beginning with our first quarter 2023 earnings report.
This will allow us to discuss EBITDA, a very common measure of financial performance and manner consistent with many other public companies.
As well as provide better clarity on unusual items that may affect our financial results. Our non-GAAP disclosure will include EBITDA.
Adjusted EBITDA to the extent relevant in any given period adjusted net income and adjusted earnings per share.
Adjustments will be limited in scope and include such items as depreciation amortization share based compensation significant acquisition related costs and other material unusual items.
Turning to our outlook for the full year 2023, we expect revenue to be in the range of $6 2 billion to $6 $55 billion applied.
Implied flat revenue at the midpoint consolidated gross margin is expected to be in the range of 26, 8% to 27, 8% and operating profit is expected to be in the range of $625 million to $675 million, an increase of 6% at the midpoint.
We expect GAAP earnings per share to be in the range of $1 85 to $2 15.
We expect our cash conversion 10 days of working capital to improve in 2023 over 2022.
The magnitude and in your timing of this improvement will be dependent on market and supply chain factors that are still difficult to predict.
As typical Q1 will be our softest cash flow quarter due to annual rebate and incentive compensation payments that were accrued in 2022.
For the first quarter, we expect revenue to be in the range of $1 $5 2 billion to $1 $56 billion.
Consolidated gross margin to be in the range of $26 three to 27, 3%.
GAAP operating profit in the range of $120 million to $140 million and GAAP earnings per share of between 29% and 39.
Our outlook incorporates further customer inventory destocking in Q1, as well as uncertain demand for residential new construction and renovation activity.
We do expect Q1 will mark the low point in terms of Destocking impacts on our financial results.
Our full year 2023 revenue outlook assumes mid single digit volume declines and products and solutions, partially offset by carryover price impacts and targeted new pricing actions product set solutions gross margin is expected to be impacted by lower volumes and continued material cost pressures offset by price realization.
<unk> and efficiency actions.
For Adi our 2023 outlook incorporates low single digit revenue growth and stability in commercial focused categories was partially offset by continued slower activity in our residential categories, including Avi and intrusion.
<unk> gross margin is expected to be roughly flat with 2022 as reduced inflationary benefits are offset by continued progress on pricing optimization and growth in higher margin exclusive brands.
Full year 2023, consolidated operating expense is expected to be down by approximately $60 million year over year.
Corporate expenses are expected to be approximately $210 million down from $229 million for 2022, we.
We are continuing to evaluate further cost actions and manufacturing optimization opportunities that would yield further savings and likely result in additional restructuring costs that are not included in this initial outlook.
Regarding our 2024 financial targets.
As we indicated with our second quarter 2022 earnings despite significant underlying progress the impact of supply chain and inflationary pressures have limited near term products and solutions gross margin progress.
Given the expected continuation of some of these factors as well as near term macroeconomic uncertainty achieving our 2020 for profitability and cash generation targets on our original time frame is unlikely.
We remain committed to substantially improving products and solutions gross margins and believe the business is still positioned to deliver mid single digit top line growth and low teens operating margin over a longer timeframe.
I'll now turn the call back to Jay for a few concluding remarks before we take questions.
Thanks, Tony as we look to 2023, we are focused on delivering to our financial targets, improving cash generation and accelerating the momentum on key initiatives across the business, we are well positioned to be a meaningful player in attractive market trends around home energy management energy transitions.
And the increased focus on physical security and video analytics.
Our newly expanded business development organization will enhance these opportunities and is focused on growing share of wallet with major accounts, while opening new partnership avenues and strategic growth opportunities.
We're also very excited about an increasing cadence of new product introductions within products and solutions as we enter 2023.
This includes several connected water leak detection and shut off products T 10, thermostat enhancements additions to our gas valve portfolio, including entry into the pool heater category.
Under floor heating controller in the pro series security product for EMEA. These.
These launches reflects initial returns from increased investment in our innovation and engineering organizations.
As we move through the year, we expect to build momentum in this key area.
As we drive growth opportunities, we are committed to managing costs and delivering ongoing margin and cash flow expansion and earnings growth.
We are moving forward with manufacturing facility optimization work and product portfolio, pruning, which will help us improve margins focus on core growth areas and maintain supply chain and manufacturing resiliency.
At the same time, we remain focused on leveraging our channel strength product breadth relationship with the professional and exposure to attractive long term structural trends to drive revenue expansion and deliver long term shareholder value.
I want to again, thank the entire residual employee base for their efforts in the quarter and our continued focus on delivering for our customers.
This concludes our prepared remarks, operator, we are now ready for questions.
Thank you Ms Yao Margaret ladies and gentlemen at this time, if you have any questions. Please press star one and if you do find your question has already been addressed you can remove yourself from the queue by pressing star one again, we'll pause for just a moment to assemble the queue.
Well first Stephanie from Erik Woodring at Morgan Stanley .
Hey, guys. Thank you for taking my questions I have two.
Maybe the first one just on the on the last comments you made about Pms thinker.
Thinking about it as mid single digit growth is still achievable.
I guess I look outside of the 2021 and say you know Pms has been kind of flat to down organically in most here since 2019 and I realize it's been a very unusual kind of three to four years with COVID-19 in supply chain and macro but.
I guess my question is what actions do you believe need to be taken to get this to get this business kind of back into that more sustainable again kind of low to mid single digit growth range and then I have a follow up thanks.
Hey, Eric This is Jay how are you.
I made a comment towards the latter part of <unk>.
Our call about the introduction of new products.
I'm really excited about that because that is one of the pieces of the puzzle that you did to answer your question the velocity and cadence of new products for PFS is very important.
And that's why I wanted to highlight that in today's today's call.
That will continue as we move forward and that is one of the big areas of focus between the introduction of the cadence and velocity of new products as well as opportunities there along with it for margin expansion.
Yes.
Eric It's Tony.
Good question.
I'd add that when you when you look across our portfolio, we see pockets of really strong growth in pockets.
<unk> opportunity, where we're adding market share our OEM business, we are growing market share pretty clearly in the in our air products thermostats and filters and zoning equipment, we're adding market share we have room momentum in a number of places and over the last few quarters. We have had some headwinds, particularly in the security business associated with that.
It arrives and then decline of the <unk> radio migration that I think probably distorts what is the underlying inherent growth rate that we've seen across the business over the last over the last two or three years.
So I think I think the underlying growth rate is probably a little stronger maybe than what youre seeing just looking at trailing four quarters kind of trends, which is which is one of the things that I look at.
But clearly in order for us to grow faster than the market across the entirety of our portfolio NPI is going be the crucial component of that.
The thing is that on the security thing that.
You brought up.
And we're going to be introducing a new guy the pro EMEA. The pro series that we introduced in North America has been a strong new product for us and that the pro EMIR. One comes out in a few months and that addresses some of the issues that we had added in Europe .
We have several other new products go into the security portfolio over the next six months that we're excited about the acquisition of technique that we've talked about that gives us some additional capabilities beyond our innovation technology and existing engineering organizations is going to provide some really cool things from.
From the standpoint of video analytics, AI and other capabilities that helps accelerate some opportunities there.
Awesome that was super helpful. I really appreciate that color.
I guess, maybe the second question is just on gross margins. Obviously I know this has been a big point of emphasis for you guys and again certain certain specific headwinds in terms of volumes in 2023.
Can you maybe rank order for us kind of what has the most significant or what's the most significant headwind versus what the potential tailwind as we think about 2023 and I imagine most of this is on the on the PFS side, but just correct me if I'm wrong there.
Yeah, Eric I'll address both.
I'm doing this a little bit off the top of my head, but I think this is I think this is probably the single biggest factor in 'twenty three as factory deleveraging, even though we're seeing.
Expanded price, we're going to see.
We're going to see unit volumes come down we've responded to that in this restructuring by addressing some direct labor and some other inefficiencies, but we have not.
We have not yet been able to really achieve a lot of the factory optimization that we've been pursuing over there we've been talking about over the last couple of years. We did just say that we're doing our first one now and I think we'll be doing more but we do have somewhat of a rigid cost structure. So the factory deleveraging I think is the is the biggest one.
Second is we're still seeing some inflation in 2023, we're factoring in some element of increasing in place some element of higher material costs and while we are responding to that with some targeted price actions were not going to get sort of incremental margin on top of the price that we're putting through at this level at this stage.
The cycle versus the inflation that we're seeing.
Also add Eric that we'd be a little careful because of the fact that even though a 'twenty one 'twenty two as everybody in the world knows was really challenging on the supply chain and material costs and the inflation that increase last year.
Aspects of that are in certain pockets are getting better.
In 2023, but theres, others that aren't yet as such.
I think most everyone knows and so we're being careful in terms of the speed of that I personally think and I'm sure.
So the question that you have as well as some of the other folks that I think that this will continue to improve throughout the year, but timing is going to be when we everybody has to watch closely as part of that so that's all tied to that along with what Tony said.
And then also maybe to add with respect to Adi.
The <unk>.
They benefited last year from some inflationary trends in there.
And they're in their business and that was about half of that margin expansion for the year. The other half was really through a lot of the initiatives that we've been investing in.
With respect to that business.
Our outlook for this year kind of incorporates plus or minus flat margins for Adi.
And we see that probably is maybe better than some of the some.
Some of the other news is that in the distribution space largely because of the levers that we can pull still around price optimization and as importantly around our exclusive brands those those products have dramatically higher margins than our than our average and they continue to grow at a much faster rate than the overall business.
By the way on.
That's one thing I neglected to mention is we continue to see direct labor inflation as well.
We have we have pretty significant factory footprint in Mexico, and Mexican wage rates have definitely trended up and that's continuing in 2023.
Okay Super Thank you for the color.
You mentioned the the Adi performance is very strong for you guys in rubber tip my cap to you guys.
They do a great job. Thanks.
Thank you and just a reminder, ladies and gentlemen star one please for questions well go next now to Ian Zaffino of Oppenheimer.
Hi, great. Thank you.
Just wanted to kind of build on that last question or last answer.
What do you what are you assuming for pricing into 2023, and how do you also think about pushing price in the face of declining volumes.
I know you are trying to get.
Material and inflation recovery, but maybe also talk about the competitive environment, maybe your ability.
And that environment. Thanks.
Yes.
Clearly I think we our expectation is for.
Less in the way of price increases this year than we saw last year in the latter part of 2021 there'll.
There'll be targeted there'll be focused in areas, where we're seeing underlying increases in our in our cost structure and we're always going to be attuned to the competitive environment and making sure that we put ourselves in a position to to remain competitive.
I think there is.
There's still a lot of inflation in the world right I mean, today's inflation numbers, we're not we're not awesome and I think the I think theirs.
General recognition that while maybe getting a little bit better inflation hasn't hasn't really gone away.
But I think I think you are right, we want to make sure that we're focused on the competitive environment.
When we look at that dynamic the data points that we see indicate that we are incrementally gaining market share. So we feel we feel good about our execution in the market and the environment as well.
Okay. Thank you and then.
I wanted to talk or.
Unless you guys about some of the new products a lot of them are in the monitoring.
Gory and.
What should we expect as far as maybe revenues or how is a lot of these new pricing youre trying to introduce on the monitoring side, how does that kind of tracking to your expectations or what you could get maybe recurring revenues too.
Yes.
I'll make a couple of comments I suspect Jay probably have some some input as well so.
Jay kind of gave a little bit of a laundry list. The majority of the products that we talked about just now are connected or connector bowl, which means that as we build out our overall ecosystem, which has frankly been a significant effort internally over the last year and a half with respect to investment.
The chunk of our investment in R&D going to that direction.
So the thermostat and water leak detection.
All sort of early pieces of what we are working to develop in terms of fully connected ecosystem, there's always going to be new products that are going to come in that are.
That are outside of that ecosystem, but the primary thrust is really the it's really on the connected products.
Given that we are building that out sort of.
<unk> piece, there's going to be we think a network effect as we get to a certain critical mass of products, where youll see.
More meaningful contribution of revenue.
I wouldn't point you to the products that we just talked about today as being a key driver to the revenue performance. This year, but I think as we look further out and we look to have more and more of our products on that platform.
I think a lot of the focus is really going to be on driving revenue across that platform and with more products on it we think that in and of itself will help to accelerate the revenue, yes, I would say also in.
This expansion on the ecosystem that Tony mentioned and as you know we've been talking about that in particular quite a bit over the last year.
And even as we built that out both from a software platform standpoint, when you the hardware to be it helped drive that and to expand that and in terms of the total offering and then what does that provide gives us opportunity as you've just asked a few minutes ago for RMR opportunity as well as things that we're doing that we'll talk probably more about this in the months ahead in areas of services. So I think.
That's why I told as I mentioned on the previous question of the other caller.
Im excited I am that now I really see.
Velocity change increasing of the cadence of new products coming out and that is how it is so important in terms of the total ecosystem play that I think helps differentiate us in the marketplace.
Alright, great. Thank you very much.
Thank you we'll go next to Paul Chung of Jpmorgan.
Hi, Thanks for taking my question so just on the <unk>.
Manufacturing initiatives. So are you looking to outsource more of the PFS portfolio or.
If you could kind of expand on some of the cost initiatives you are thinking about.
The respective impact on longer term margins and.
And cost savings et cetera.
Sure I mean, it's.
Going from in source to outsource is part of it but there's sort of a range of activities going from trying to be more efficient in our factories, we have to.
The efforts that we have going on at.
At first solar initially around factory automation, which we think is going to is going to create some really great leverage in the <unk> and the cost environment in those factories to certain areas, where we will look to household outsource I wanted to I want to make clear that.
<unk>.
We've been cautious and are going to continue to be cautious about how and where we outsource being mindful of supply chain resiliency.
We have some rigidity and our cost structure, but we also have pretty good supply chain resiliency today because of that because we've got a lot of end market factories, and we're going to continue to work to balance the transition to a lower a lower cost footprint, while keeping in mind that resilience, but there is there is any number of steps to one though.
<unk>.
Reserved for in Q4 is is the first and I think clearest opportunity but.
There'll be there'll be more as we roll through 2023 and 24, Yeah. I think I may have mentioned, Paul maybe just at a high level in the last call that.
There was a number of the backdrop to optimization projects that we actually kind of had had built the plans for but during COVID-19 and during supply chain craziness, we were very cautious not to impact ourselves by moving forward on some of those because of the risk it provided for the risk that it would have created and now.
US coming out of that of course now it gives us the opportunity to really exercise our playbook in terms of a variety of different things factory cost optimization. The automation piece that Tony just talked about for first alert, but automation opportunities in other parts of the company and.
I'm excited about that too because it gives us levers that we have to kind of put on the sideline for a while until we're in the position. We are now in the folks that we've brought in over the last few years that are very good at that and have got a lot of experience in doing that kind of work.
Great. Thanks for that and then just a follow up on first alert I mean, you mentioned the asset kind of performing better than expected this year. So.
What in your mind kind of drove that incremental upside to your original projections and then.
How do we think about the momentum of this asset heading into Q.
'twenty three and then.
Are there assets you may be looking at to kind of complement the portfolio. Thank you.
Yeah, I'll comment, Tony well too because I see them over here waiting to be down.
But the integration I think what.
Better than expected.
No. When you when you do any acquisition I don't care, if its 10 million $400 million 4 billion of some of the things that are somewhat unpredictable, but I am very pleased to say that the teams. Both from the first solar team people are resilient worked super well together.
And Thats part part of the reason why we've been able to outperform some of the things that.
We had laid out in our original business case.
And then from a standpoint of.
Your question about opportunities moving forward in the future.
As you know.
The types of products in the first solar portfolio. There there are types of smoke carbon dioxide et cetera, they're in the house.
In small business offices and there is many many different places.
So it's additional sensors that are in the building and this comes back to the ecosystem comment that we were talking about before and it gives us opportunity to to connect all of this and in certain products and then incorporate new types of things with the off of the base platforms of those as we move forward. So we're excited about the opportunities our innovation and technology.
The group has come up with some pretty cool ideas that.
Product ties over the over the years ahead.
To help US and then of course, leveraging our channels that we have that are really super important and thats one of the big things that were tied to the on the commercial side of things with leveraging the strength of <unk> very strong commercial channels, our pro network.
And so you can hopefully you can tell by my voice I'm pretty excited about what we've done.
Less than a year and where we are the future holds.
The only thing I'd add to all that is.
There is a transition in the in the standards requirements for smoke smoke carbon monoxide detectors that are coming out in the middle of 2024 that we're pretty excited about our position in terms of being able to capitalize on that.
We're pretty excited about the the product offerings will have in that in that category that should should drive some continued growth as we basically enhance the technology.
And.
The point Jay made about the additional sensors in real estate in the connected ecosystem, there's a fair bit of work underway now to capitalize on the.
First of all our products to bring them into that into that ecosystem. So.
Looking forward I think that this is this is an area of real meaningful growth for us.
Okay, great. Thank you.
Those guys I'm going to say one other thing about that at J I don't know.
That team has done a great job.
That team has been in place for a really long time.
<unk> been executing in this marketplace for a really long time.
I think we said this early on after the acquisition when you make acquisitions one of the things you're really count on us having a solid management team to lead it and we definitely got that with first solar.
100%.
Thank you well go next now to Paul Dircks of William Blair.
Hi, good afternoon. Thank you for taking my questions.
Okay.
So first question for me within products. The BNS business can you remind us here at the end of 2022, what percent of sales or by channel OEM versus distribution et cetera, and maybe you could tie into that comment what gives you confidence that first quarter will in fact be the destocking a low point.
Sure.
Let me, let me try to answer the second part of that question, because youre going to send us scrambling for for numbers here.
Try to provide some context.
<unk>.
We track I think we talked about this last quarter, but for our top 26.
Trade customers, we get information from them and collaborate with them and we get.
Not only our sell in but their point of sale and they're not in their inventory levels in terms of in terms of days as well as their sort of inventory level objectives and.
What we've seen particularly in January is there.
We talked about this last quarter too I think at that time, I think we were a little uncertain as to the the slope of the decline and just how far it was going to go and how long it was going to take I think we're coming out with the feeling that.
Q1 is going to be the low point and the point of sale data that we're seeing is still pretty darn good.
Inventory levels have come down not to the desired levels that as point of sale continues to hold up I think we feel like maybe there'll be a little less destocking than we had originally anticipated as well.
Okay got it that's helpful.
Okay, I guess, maybe I can follow up offline well regarding the no I got that sales guide.
Alright.
Roughly trade plus or minus 40% OEM somewhere in the 25% Zip code.
Okay I appreciate that thank you.
Next question for me speaking about the manufacturing optimization plans.
Go back I realize is a different market, but in early 2021 at your Investor Day, obviously manufacturing optimization. There was one of the key components behind the 2024 operating margin target of 20%, 30% in PFS. So I guess, maybe today can you help me walk through what the right read is thinking about what's realistic.
<expletive> for an operating margin target.
Exiting 2023, and I guess related to that as well is there an internal appetite I'm almost sensing there is to start fast forwarding.
Beyond the manufacturing optimization plans, you have announced here today.
To accelerate this plants and to try to bring some of those savings to our to the P&L here exiting the year.
Let me make a couple comments Tony.
Follow up on it.
As I was mentioned a few minutes ago.
We have I think a really good playbook of things beyond what we even at the time of the 'twenty one.
The Investor Day, and again, we were very cautious during 'twenty, one 'twenty two because of the world We're all living in.
But there is definitely opportunities there.
And it isn't just factory optimization and spec optimization and automation is a variety of different things that we have access to and levers on as far as the playbook for this and what does that as I've said before I am excited about being able to leverage the strength of my operations group that we have to take a look at these opportunities to even though we've thought through.
A variety of different dynamics as Tony has talked about before that we have the opportunity to take that and move those levers.
And benefit by it.
Tony.
I mean, I guess, so so Paul from my perspective.
We are there are clearly other actions to follow on beyond what we've reserved for in Q4.
The cadence of those we're going to we're going to manage I would say somewhat more carefully.
The business cases remain at least as strong as they were two years ago. So the opportunity is at least as good as it was then and we did not have the another callout to first of all we didn't have to do to the factory item is it factory automation opportunity.
In those plans in 'twenty, one and we think we're going to we're going to learn from first solar over the next year year and a half, but we think that's pretty real as well so that the opportunity suite. There is is significant and probably bigger than it was in 'twenty, one the cadence at which we unwind it.
We're going to be patient because we were successful over the last couple of years, making sure that we were able to meet our customer demand better than others and to be a good supplier and to build those relationships and.
I would say that we have a more of a focus on supply chain resilience today that we may be did that so we're going to balance those two things as we kind of proceed through what's going to be a multiyear process.
Got it very helpful color last one for me and.
Switching to the Adi business I agree with your comments that the performance in the.
The outlook into 2023 is quite a bit better certainly from the margin side than many other distributor peers.
I think part of that has to relate to your investments internally and expanding the business increasingly into the digital world. So my question is could you remind us of the margin difference for your business touchless versus traditional and also maybe could you talk briefly about.
Some of the other investments, whether it's into increasing multichannel business.
Sure.
Perhaps expanding into adjacent categories or.
Into further exclusive brand sales that you think will be powerful drivers here in 2023.
You just you just gave an excellent list.
Go ahead, Sir I guess, so so a few things.
The difference in margin between touchless and sort of in branch is just is not huge it's there, but it's not huge the real motivation behind our migration to touchless.
Relates to some other initiatives, which is around sales enablement, and creating and enabling our branch associates to do what they do best which is to be collaborative consultative sales folks and to work and build relationships with our customers that are enduring but also provide the appropriate level of margin for us.
So it's a.
Maybe that's a little bit of a different view then.
Then maybe just we want to push it all to touch list, because we want to drive costs out of the branch or because we wanted to get margin just exclusively from that action.
As a more nuanced approach that in.
If our outsourcing he probably thinks I butchered that explanation, but it is a it is a nuanced approach.
The exclusive brands piece is that.
That margin differential is significant and the growth trajectory in that business has been significant and.
As we've talked about we are very focused on being a great partner with our third party suppliers and we are not going to stop that but we have found that there is an ability to grow that exclusive brands business.
Ways of that.
They don't harm the third party relationships at all and in some cases, they're fine with it.
So I think Thats I think those two things are really the critical investments, but I'd also call out that aim.
We.
Sure.
The operating expenses in that business relative to sales have not gone down and we could have driven them down and we did and we are in the position that we're in today, because we because we made those investments and this year, there's going to be another chunk, because where we're building out the new ERP system.
I think there is going to drive sort of the next wave of initiatives and enablement around.
Around the business.
I would add.
You mentioned it.
As the adjacent space and I think we've talked about what adjacencies that they've moved into amid successful successful with still growing like datacom.
And so there are continued as part of their own strategy for continuing to look at that as other opportunities. There that that's not a complete adjacency like slip out in left field that they match up well with the rest of the products that they offered so they've done a nice job with that.
I appreciate the color. Thank you guys.
Thank you thanks Paul.
Thank you we'll take our next question now from Brett Kearney Gabelli funds.
Hi, guys. Good afternoon, Thanks for taking my question.
You bet Hey, Brett.
I've.
<unk> talked about this some in your prepared remarks.
I was curious how you are I guess, what about finding that.
Looks like an interesting engineering acquisition and I believe you said New Zealand.
Obviously, it sounds like it fits with the.
The software platforming initiative, you have underway, but just kind of broadly what your vision is I guess longer term you've talked about the actionable intelligence.
Might be able to offer to contractors and customers kind of what you see these capabilities unlocking for yourself and customers over medium term.
Yes, and I would say Brett that software for opportunity, but also the hardware. The hardware work that these guys have done up to this point in time, what it provides us now in terms of new products or accelerating new products, along with what we have internally before the acquisition that we're really excited about and we believe they can.
Really two plus two equals eight and the innovative capability of this group is very impressive.
And in terms of.
I believe we're just talking about it in a meeting earlier this morning of where they can provide a lot of additional capabilities to many of our other products too. So I think on hardware software opportunities AI I mentioned in.
Particular books were talked when followed up on a question that came up on security, but the video analytics thing some of the new video cameras that we have coming out this year.
To do some really cool stuff for us. So we're really excited to share a lot more with you guys on that as we move forward, but now that we've got wrapped up brightcove right. After the Christmas timeframe.
And.
I spent time with the.
The founder and CEO of the company at CES with a bunch of our teammates brainstorming ideas and things together and they've integrated very quickly into the into the company which is great.
It's a good cultural fit so we're excited about it.
Great. Thanks, so much guys.
Thank you well go next now to Brian <unk> of Imperial capital.
Right.
Okay.
Yes. Thank you very much quick question first of all hopefully.
Price increases you talked about potentially in 2023, what were your total price increases on average in 2022 and were there any pushback from 2022 and do you anticipate any pushback on price increases potentially in 2023, given the market.
So.
The 22 price number was plus or minus $200 million I think we're looking this year at price increases substantially less than that a fraction of that.
I don't know exactly what number.
But it's going to be substantially less.
<unk>.
In large part because of the collaborative way that we tried to do the price increases they stock.
Nobody US included is happy what we see increases in costs right.
But we've worked collaboratively collaboratively with our customers and our channel and by and large they stuck.
This year the price changes like I said are going to be much much more modest and they're going to be targeted to areas, where our costs are increasing.
And where the channel is going to be in a position to support. It. So we've really tried not to get out over our skis and take advantage of this environment in any way shape or form.
I would just add that Charlie mentioned, it but then the opportunity for the price to be more sticky.
The way that we did it the way that Tony has explained.
That's how you do that now.
We're now 18 months from now.
It gets back to more of a normalcy up inflation Thats all different you know, we'll see how that goes but I think thats I think.
Tony spot on for this year in his comments.
Is there just as a follow up is there a seasonality to your standard price increases.
Spring is that the fall if you could just remind me of normally when you would impose those price increases.
Sure.
Usually I mean, historically, we thought we did something in the spring over the last couple of years, it's been there hasnt been that that level of seasonality tied.
Tied to some of the dynamics of the unique dynamics that we've all gone through together the last two years.
So say that strong brands that allow us to to help also on the price too. So I think that that's been a another factor for us.
Great. Thank you.
Thanks, Brian Thanks, Brent.
Thank you and gentlemen, it appears we have no further questions. This afternoon, Mr. Willie I'll hand things back to you for any closing comments.
I'd like to thank everyone for their participation today, and we look forward to speaking with you over the coming weeks and months everyone have a good day. Thank you very much.
Everybody thanks, everybody.
Again, ladies and gentlemen that does conclude today's Presidio technologies fourth quarter 2022 earnings conference call, we'd like to thank you all so much for joining us and wish you all a great goodbye.
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