Resideo Technologies Inc. Q1 2023 Earnings Call
Good afternoon. My name is Abby and I will be your conference operator today at this time I would like to welcome everyone to the <unk> first quarter of 2023 earnings Conference call.
Oh mine's had been placed on mute to prevent any background noise.
After the speaker's remarks, there will be a question and answer session if.
If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
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Star one on your telephone keypad.
Thank you Miss.
Mr. Jason Willey, Vice President of Investor Relations you may begin your confidence.
Good afternoon, everyone.
Johnny Aspergers Idiots first quarter of 2023 earnings call.
You call will be Jacob.
Chief Executive Officer, and Tony Trump, our Chief Financial Officer, a copy of earnings release related presentation materials are available on the Investor Relations page of our web site and investors.
<unk> Dot com.
Like to remind you that this afternoon's presentation contains forward looking statements statements other than historical facts. During this call may constitute.
David.
Not guarantee of future performance or results and involved a number of risks and uncertainties.
Actual results may differ materially from those and forward looking statements as a result of a number of factors, including those described from time to time and Brazilians violence, but the Securities Exchange Commission the.
The company assumes no obligation to update any such forward looking statements. We identify the principal risks and uncertainties that affect our performance and their report or 10-K and other violence.
I will turn the call over to check.
Thank you Jason Good afternoon, everyone I'm pleased to stay in the first quarter, we delivery results at the upper end of the outlook, we outlined back in February .
Over the past several months, we've seen improvements in a number of areas related to supply chain and logistics.
Our teams are focused on taking advantage of these improvements to drive gross margin and cash flow improvements.
2023 progresses.
While macro signals and our end markets remain mixed we see opportunities for improved volume trajectory as the year progresses as customer inventory trends normalized and we leveraged the opportunities we've created over the past 18 months by being a reliable partner to our customers.
But first quarter 2023 products and solutions delivered revenue of $658 million up 6% year over year is the addition of first alert and continued price realisation helped offset lower volumes, particularly in our security and energy products.
Two one Arab product revenue was relatively stable year over year, we continued to see our HVAC distribution channel manage inventory levels in the corner.
We expect this channel to continue to manage inventory down is 2023 progresses.
Channel, we believe customer inventory levels have largely normalized and order activity is generally tracking and demand.
Which is returned to historical trend levels falling stronger activity in like 2021 and early 2022.
Building unreason momentum, we introduced a number of exciting new products during the quarter that we expect will grow our position in the market.
This includes R. L. One wifi water leak and freeze detector and L. Five Wifi water shut off valve.
These first alert Brandon connected devices provide realtime water leak notifications, an automatic water shut off capabilities.
The D T for digital thermostat for a media markets, which we introduced in Frankfurt F. I S. H.
Leading trade fair for H back in water feature.
Features a slimmer modern design and extensive application support including eight pumps, highbridge zoning and integrates with our underfloor heating solutions.
We introduced the H P C or an indoor control unit for heat pumps. This is part of our component portfolio supports the growing Emilia hip hop market.
We also launched.
One video doorbell at the I S C West Security Conference.
This product will be available in Meg and offers AI based intelligent event detection with video verification.
Also carry the first of all our branch.
The first corner was a productive period of Tradeshow activity kicking off in January at C. B S.
Disappeared and a number of activities focused on home energy management and industry standards, including the home connectivity Alliance and matter.
I S. H in Frankfurt March we showcased several of the new products I have previously highlighted.
And the F. B I S C West Security show in Las Vegas, when connected with a large cross section of our security dealer customers as we watch the the X one video doorbell.
In the first quarter, we saw improvements in our supply chain and the overall logistics environment relative to reason periods.
Availability of key electronics semiconductor components have improved what we experienced over much of the past 18 months.
This enabled us to limit our broker by activity during Q1, and we currently expect limited broker activity over the remainder of 2023.
While we are still carrying higher than usual delinquent backlogs levels have shrunk meaningfully from a year ago with supply chain beginning to normalize resources can be shifted from short term tactical initiatives that have consumed disproportionate engineering time over the past 18 months.
This allows our operations and engineering teams to return more of their focus to structural value creation initiatives around new products and value engineering.
As discussed Q for earnings call, we have begun our facility optimization work with announcement up the plan to close or San Diego casting facilities.
Which is expected to be completed in early 2024.
This is our first significant manufacturing facility optimization action.
To a portion of the restructuring charges, we took in queue for 2022 and Q1 2023.
We expect this activity to begin to positively impact financial performance in Q4, 2023 and was completed the San Diego project is expected delivered 12 billion of annual savings.
We've also made significant progress in her ahead of schedule on our El Paso, Texas distribution Center consolidation.
Most importantly, we have accomplished with no meaningful customer disruption.
This project involves exiting a legacy facility and folding those operations into the El Paso location I came across and the first alert acquisition.
We expect annualized savings of over $2 million per year from this project once fully completed.
Overall integration of first alert is progressing well.
We moved the business to R. E. R. P platform in the first quarter and are well on our way to achieving at least 30 billion annualized synergy targets.
We are expanding the first of our brand into nine spoke M. C. Your products.
We view the first of our brand was strong market awareness and reputation.
As a key asset that we intend to utilize more broadly moving forward.
<unk> first quarter reported revenue was essentially flat compared with Q1 2022 with daily average sales up two per cent.
Continues to execute unexplained is e-commerce and digital capabilities enhancing it is exclusive brands offerings and invest in tools to drive sales for sufficiency.
A D. I reached total touch with sales of 39% for the first quarter of 2023 and E. Commerce revenue was 20 per cent of total sales and grew 17%.
Yeah, I saw continued softness in the first quarter and residential a V as security categories of slower growth and several commercial categories.
We saw signs with customers manage your inventory levels of supply changed normalized across categories, particularly in commercial fire and video surveillance.
Over the past several months the 80 I team is actively engaged with suppliers of integrators on the state of the current and expected demand environments.
Direct conversations and our integrators survey kitchen to point to growth in commercial categorized 2023, and a healthy project backlogs.
With that I will turn the call over to Tony discuss first quarter performance in 2023 at outlook in more detail.
Thank you J and good afternoon, everyone.
First quarter revenue of $1.55 billion was up 3% compared to Q1 last year.
Excluding $121 million from acquisitions at approximately $27 million of negative foreign currency exchange impact.
<unk> was down approximately 3% compared to the strong Q1 2022 performance.
Operating income was $138 million in Q1 compared to $172 million last year.
Diluted earnings per share for 38 cents.
Paired with 58 cents in the year earlier period.
Adjusted EBITDA, which includes the impact of the Honeywell reimbursement agreement was $138 million compared to $173 million to Q1 2022.
Products and solutions first quarter revenue $658 million was up 6%.
Excluding $98 million from first alert and approximately $13 million of unfavorable foreign exchange. It packed revenue declined approximately 7% compared to last you won.
Price realisation remains strong and added approximately $28 million to revenue year over year.
Upsetting this was at 12% decline in unit volumes, driven by slower residential and demand compared with last year.
Security revenue was lower due to continue softness in Europe , and lower three G. L. T E radio Sunset migrations in the U S.
R U S General market security sales also experienced declines during the first quarter.
<unk> solutions gross margin Q1 was 38% compared to 43.3% in the first quarter of 2022.
The decline reflects continued you over a year inflation, a labor and certain materials.
The impact of reduced volumes uhm fixed cost absorption.
The inclusion lower margin first alert results.
We have begun to see improvements as some materials and freight costs.
Dynamics had unlimited year over year impact on Q1.
Total operating expenses for products and solutions for $18 million a year over year due to the inclusion first of all it costs, partially offset by initial benefits of restructuring activities.
So solutions operating profit was $117 million or 17.8 per cent of sales.
Compared with $154 million or 24.8% of sales last year.
H E I delivered to on revenue of $891 million essentially flat prior year period.
Commercial categories.
Fluting fire.
Surveillance were up year over year, but at a slower rates compared to recent periods.
Sales and residential security a V categories contracted and a quarter.
Gross margin in the first quarter was 19.2% compared with 19.3 per cent last year.
We were able to offset the expected waning of inflationary marching benefit with ongoing initiatives around pricing optimization and exclusive branch.
Maybe I operating profit of $72 million put down 10% compared with prior year.
The decline reflects increased investment in strategic areas around digital.
<unk> initiatives.
Yeah, he has initiated restructuring activities, including targeted headcount reductions.
<unk> rationalization and slower investment spending.
We've identified $7 million in cost savings today can expect to report a 2 million dollar charge at our queue to results related to these actions.
Corporate costs in Q1 for $51 billion down from $61 million and the prior to your first quarter.
Excluding $10 million or one time for a solar transaction costs in Q1 2022.
Costs were flat year over year.
Operating cash flow for the first quarter was it use a $4 million compared with the use of $59 million in the first quarter of 2022.
As a reminder.
First quarter, we make payments on a crude bonuses and customer rebates, which typically makes Q1, our lowest cashflow conversion quarter.
Current levels of working capital or being impacted by inflationary impacts any inventory incremental safety stock.
Favorable changes to some supplier to terms.
As in your Progressive we expect to see improvement in working capital metrics, particularly in the products and solutions business.
Turning to our outlook for the four years, we continue to expect revenue to be in the range of 6.2 billion to $6.55 billion.
<unk> slapped revenue at the bitcoin.
Consolidated gross margin is expected to be in the range of 26.8, 27.8%.
Operating profit is expected to be in the range of 625 million $675 million all unchanged from our outlet provided in February .
We expect GAAP earnings per share to be in the range of $1.80 to $2, which reflects an estimated increase of $24 million.16 per share.
Honeywell reimbursement agreement liability.
A total of $164 million for the year.
Our annual cash payments pursuant to the agreement remain capped at $140 billion per year.
Adjusted EBITDA is expected to be in the range of $610 million to $660 million for the full year of 2023.
Adjusted EBITDA includes the full impact of the 164 million dollar estimated reimbursement agreement expense.
For the second quarter.
Revenue to be in the range of 1.59 billion the $1.64 billion.
Consolidated gross margin in the range of 26.8% to 27.8%.
<unk> operating profit in the range of 150 million to $170 million in.
GAAP earnings per share between 41 cents and 51 cents.
We expect underlying residential demand.
<unk> soft as we move through 2023.
We anticipate improving supply chain dynamics that'd be your progressive which should have a positive impact on products and solutions gross margin.
Working capital metrics and our cash conversion.
Improving our cash cycle overall cash generation is a top priority for the remainder of 2023.
We are targeting a 10 day improvement in our cash cycle by the end of 2023 relative to the 69 days at the end of Q1.
As a reminder, a full year 2023 revenue outlook as soon as <unk> single digit volume declines and prices and solutions.
Partially offset by carryover price impacts and targeted new price actions.
<unk> by 20 twenty-three outlook incorporates low single digit revenue growth.
Modest growth in commercial focused categories is partially offset by slower activity and residential categories, including a V an intrusion.
I will now turn the call back to J for a few concluding remarks before we take questions.
Thanks, Tony.
Remain focused on delivering to our financial targets, improving cash generation, expanding margins and accelerating the momentum and she product and partnership initiatives.
We move into the queue to we expect to see growing benefits from a restructuring activities and we continue to work on incremental cost saving opportunities.
Ah well position to improve our margins and overall profitability, even in an environment, where and market demand remains constrained.
I want to thank the residual cheap for their continued focused on delivering for our customers and ensuring the business's position for long term success.
This concludes our prepared remarks, operator, we are now ready for questions.
At this time I would like to remind everyone in order to ask a question.
Then the number one on your telephone keypad.
Pause for just a moment to compile the question and answer roster.
Your first question comes from the line up Eric <unk> Morgan Stanley . Your line is open.
Yeah. Good afternoon, guys [noise]. Thank you for for taking my question I have to maybe just on the first one I believe last quarter you got into first alert contributing about $120 million of revenue in the March quarter.
And the press release shows that contribute about 100, and so about 20 per cent below plan is that right and if so can you just maybe help us understand what's what's happening with the first solar business anything that you that you believe we should know that you can call out and then the second part of that I'll. Just give you. Both as you were still able to perform at the high end of you.
Revenue guidance range, and so where did you, perhaps the better than expected improve better than expected <unk> performance to offset that thanks.
So Eric is Tony Thanks for the question. The so there's a couple of things about the first of all their business. It is a little bit seasonal so Q what is typically the lowest quarter.
And we did have some softness in retail and particularly early in the quarter things got better as we rolled through the corner, but we did see a little bit of softness I wouldn't I wouldn't put it at the magnitude you just flagged of of $20 billion. It wasn't pleasant at that scale, but it didn't it was a little bit soft and we thought we saw strength in the other place that was that was soft.
Was the <unk>.
The security business, which we would reflect in our confidence pretty much everywhere else things were relative to our expectations were held up pretty well B O M channel stabilized during the quarter in terms of you know in terms of channel inventory and the the HVAC distribution channel.
It sort of ebbed and flowed during the quarter, we had some periods, where there's pretty strong we have some periods, where it sort of ebbed back.
Back again, which is you know a little bit of.
What we find ourselves in today with respect to our outlook for two two we we haven't seen it.
Directional.
Change there, yet, but pretty much all the rest of the business performed as we expected or a little bit better than we expected.
Okay perfect. That's helpful color and then maybe just a clarification question on on the on the Honeywell payment. So obviously it looks like that picked up a little bit to see her just why do you have more to Honeywell. This year and then can you help us think about the timing of when you expect maybe that incremental payment to come through and that's it for me. Thank you so much.
Thanks, Eric.
On the call I'll attempt to do some Honeywell explaining then obviously, we're happy to follow up with people and provide details but.
This is the first quarter, we've guided too data below operating income and the reason we historically stopped at operating income is there's always been variability in the.
Counting.
Impact of the Honeywell liability at any given quarter versus the.
Stable very predictable $35 million a quarter in cash.
That variability always showed up another income so it was below the operating in a couple of <unk>.
We're talking about <unk> <unk> EBITDA whichever earnings per share of those things start to start to have an impact again and you know we're we're managing at this quarter. We the approval. We took was 41 million I think historically, we've had it in the forties a couple of times in the past it's been that high.
And it really represents a true.
Well their estimate of the five year.
Cost environmental maintenance or remediation. So they'll go through all of the property use all of the overall maintenance costs all of those things on a regular basis and I loved it and get or you can have inflation you can have changes in a given you know and and give insight those kinds of things that will have they'll have an impact on a quarterly basis.
What I wanted to be really clear about is it has no impact on the cash dynamic either in the short term, where it's $35 million a quarter or for the life of the of the agreement, which is for 25 years 20th of half of which still remain so it doesn't point to us having to pay ultimately.
An aggregate more money to Honeywell, either it short term or the long term.
Yeah, when when Tony was talking about <unk> and our remarks.
He made the appointment that's that is capped and that's you know we we know what that is that's predictable.
Fair enough. Thank you so much for us.
Thanks, Sir Thanks, Sir.
Your next question comes to mind at Kearney Gabelli sign your line is open.
Hi, guys. Good evening, Thanks for taking my question.
Right right right right.
The the balance sheet uhm, so I'm pretty good.
Good shape and you know a it sounds like there's some positivity from some of the commercial contractors integrators you interact with can.
Can you talk about you know maybe potential for further 80, I bolt on acquisition opportunities.
Environment are they still available and kind of what's the appetite on your end for doing more.
So they are still available because we've talked about before those guys have a team.
Team has a has a pipeline there are in regular dialogue with Ya.
At any given time, you know a couple to a handful of potential targets. We've done a really good job of being disciplined around price and around frankly around timing and.
As opportunities come up we will we will continue to do those kinds of deals, but you know the reality is with the cost of capital having gone up you know argue evaluations would probably come in a little bit and sometimes when those kinds of dynamics happened when you're trying to do a consolidation play you have to get you.
Sellers to adjust to to a new reality from a pro valuation standpoint, and I think maybe we've seen a little bit of that in terms of in terms of timing, but you know I mean, we we can take a look at them and to the extent that they make financial sense from you know an upfront cost standpoint these things on.
Always make really good sense in terms of being able to consolidate them into.
Tony's comment spot on <unk>.
Is it because of some of the dynamics of the market out there that.
A little bit more of a sense of reality in terms of valuations and so hope it gives us an opportunity to.
To scrutinize it and determine if it makes sense now versus hold on for a period of time for redo it but the city I teams. The bottom line you don't really know.
This job.
Selecting.
<unk> they were pleased with the progress.
Great very helpful. Thanks, so much guys.
Right.
Again, if you would like to ask a question.
<unk> one on your telephone keypad your.
Your next question.
It comes from the line Paul from J P. Morgan Your line is open.
Hi, Thanks for taking my question. So just on free cash flow you know after heavy investments in inventory or over the past two years.
Kind of fund growth you know how should we think about.
Inventory levels as we exit.
23, and as the channel continues to get leaner and.
And then you also mentioned cash cycled the school of around 60 days.
Which may I suggest you know rebounding back to 21 levels in the <unk>.
Free cash will arrange there is that the right way to think about it and can you expand on you know what steps you're taking that drive cash.
Cash cycle days lower.
Hello.
Paul well thanks for the thanks for the question I guess the short answer is in order for us to get to that target that we just laid out in terms of bringing that cash cycle with him. The significant majority if not all of that has to come from inventory.
We're disciplined about how we pay suppliers. So the you know the a P. Lever is not one that we that we pull our you know.
R. D. So are a relatively stable they've picked up a couple of days here, but they're relatively stable. So the focus is on bringing inventory down in dollars between now and the end of the year to get to that level and you're.
You're right that gets us down to those kind of 2021 levels.
It doesn't give us all the way to the.
Late twenties early 21 levels that were that were lower than that.
I guess that highlighted you know those were probably artificially low we were coming out of Covid. We had our fill rates were low lower than we want them to be our delinquent backlog was higher than we wanted it to be and you know it was it was sort of the beginning of the supply chain challenged you. We just we just leaned out very heavily.
At that point, so I'm not sure at least in the short or intermediate term you know, we could expect to get back to those levels, but you know I.
I think to be able to take the 10 days out of the cycle between now and the end of the year. He was his doable and and were as I said, we're et cetera really focused on it yeah.
There's no doubt about it we have a heavy focus on that the organization does and as we've indicated not just today, but it didn't in February we talked about too.
I'm very pleased to say that with.
The supply chain situation, becoming significantly better <unk>, all cleared up and gone, but much much better more predictability that we were able to to run our <unk> our operations that little differently, because we don't want to head inventory hung up.
And so I'm excited about the opportunity here and you know we wouldn't have put that target out if we if we didn't feel pretty strongly about this and we know how important it is.
Variety of reasons, so the James Hi, Billy focused on it.
You'll you'll hear more about it.
Yeah that would put your cash in a in a great place that'd be fantastic and then just to follow up on the.
Lower component costs, you mentioned were kind of minimal in the quarter.
How do we think about the coming quarters can we see more meaningful improvement throughout the year in terms of realizing that on the margin front.
And then separately you know that's wonderful.
Oh I'm sorry.
Yeah, and then separately can you expand on some of the pricing power you've had.
Environment do you still have those opportunities to raise prices for certain product lines and that's it for me. Thank you.
Thanks, Paul Yeah, I mean, we're going to continue to see opportunities and there'll be able and be able to obtain.
Things on price in terms of our input costs that we have.
Been able to do for probably closer to two years.
Paying a lot higher price because of the way the supply chain. So there's definitely.
That's in our grasp and I think that'll continue to improve further his ear goes on we've also talked about free trade is significantly less than it was because of all the dynamics of took place what's the last two years. So that's.
That's important.
We had to spend a lotta money as many companies do it a broker buys last year.
As I indicated.
We had a much much less and continue that trend throughout the year. So there's a whole variety of opportunities there.
That you'll have to say this obnoxious places, but I can tell you my supply chain team is very excited about the opportunity Sir yeah.
Yeah, Paul a couple a couple of things maybe the input costs in Q1, both in turn it from an inflationary perspective, both in terms of material costs and frankly labor.
Where significant compared to last Q1, and that's you know that's what you saw.
Price realization was able to offset.
A fair chunk of those costs, but we didn't get margin on that price realisation are.
Outlook for the second half of the your appointment to improved.
Margins and improve profitability and it's driven by what we see is sort of the lapping of some of that some of those some of those headwinds and the opportunity to maybe get a little bit more from the you know in terms of value engineering in terms of you know some.
Flyer management, those kinds of things that should help us to bring some of those some of those costs down to the second half of the year.
Oops.
The only thing I was gonna add was that supplier lead times on <unk>.
Significantly redfin redo so it helps in terms of our management of our inventory or on your journal.
No nine or forecast improving I think is really important.
Excited about that.
You know you've heard US talk that's just in recent months, but really for the last two years.
How important an upfront and our customers are with us in our relationship building that we've done the last few years. So we're much closer to our channels that I think we've ever been and it's just continue to improve so that's.
Why is that important to this discussion because we're that much closer to the finger on the pulse of what's going on out there with our customers are getting good feedback from them.
Great. Thank you very helpful.
Thanks, Paul.
Your next question comes from the line of Brian <unk> from Imperial Capital. Your line is iPhone.
Yeah. Thank you very much just a couple of cleanup questions. You stated I think in the last quarter of that.
That inventory and the and the channels should level out and first quarter and I didn't know if you could maybe comment on that that you're still very confident that the channel has leveled out and that second quarter, we should see at least stability and then third quarter recovery, maybe you can give us a little more color on that.
So so I'll make a make a few points first of all.
The the the appointment for making the last quarter was that the financial impact on us of the shake out of patriotic distribution channel inventory to be precise was likely to kind of trough out in terms of the negative impacts and headwinds in Q1, we still think that's the case the that channel as I as I am.
Mentioned in answer to another another question you know, it's kind of ebbed and flowed we'd have some like I said the last four months, we've had some strong periods and we've had some periods where.
Where orders of have slowed again, and so it's a little bit hard and it always gets to a customer by customer level in terms of where people are relative to their desired inventory and sort of how they are <unk>.
Yelling about the market.
<unk> more dynamic maybe the redfin has been and we haven't I wouldn't say that we've seen that consistent up arrow, yeah in terms of consistent kind of <unk>.
<unk>, they're having said that we don't expect.
Tori sort of an eight track distribution channel impact that would be significant in terms of of our outlook for Q2 for the remainder of the year.
The other point I want to make is the channel, which also had excess inventory that does appear to have leaned out and reached the levels that we and our customers expected them to get to so we do see a little more sort of dynamic flow clean from you know our order book to the customer without any any.
Dynamics embedded in that channel.
Also and you know I think <unk> continued to level out.
Q too.
So like I think I made mention of it.
R. R. G bedroom Lakeland backlog is coming out and it's not quite where we want it to be up with this come down significantly so that that helps in taking a look at the <unk>.
At the picture that's out there.
Uhm, so all those things along with Tony said I think.
Hopefully helps you understand a little further.
Yeah. Thank you and then just one other follow up question briefly roughly at least in my notes residential is about of your end customers about a third and commercials about two thirds roughly have you seen that kind of change recently where commercial.
Everything that I'm picking up on his driving very fast bell and residential seems to be going in the opposite direction can you talk a little bit about the mix of your kind of in customer.
Yeah. So so that that makes relates to relates to the 80 I business the distribution business and commercial his elder meaningfully better than the more residential really focused parts of that business. The residential focused parts or the you know the residential a V and the and the residential security and they have.
<unk> you know they were down they were down in Q1, while our commercial business did grow into one it was slower than what we'd save it. It it did grow in Q1, but just as a reminder to everybody the products of solutions business is.
Maybe the mix that you're thinking about as we've pointed to new construction being somewhere in the 20 per cent Zip code and repair remodel and more in the in the 80 per cent Green, that's right, but it's but it's heavily residential that's right.
Right.
Great. Thank you.
Thanks correct.
Alright are no further questions at this time.
Some really I'll turn the call back over to you.
Thank you everyone for your participation today and there's always if you have any additional questions or follow ups. Please feel free to reach out to everyone have a good rest of your day. Thank you.
This concludes today's conference call you may now disconnect.
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