Q2 2023 Resideo Technologies Inc Earnings Call
[music].
Ladies and gentlemen at this time I would like to welcome everyone to.
<unk> with Citi go technologies second quarter 2023 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.
At that time, if you would like to ask a question press star followed by the number one on your telephone keypad.
If you would like to withdraw your question again press Star one.
It is now my pleasure to turn.
Today's call overdue, Mr. Jason Willey, Vice President of Investor.
Investor Relations Mr. Willie you May now begin.
Good afternoon, everyone and thank you for joining us for <unk> second quarter 2023 earnings call on today's call will be Jay Gould marker or is it he is chief Executive officer, and Tony Trunzo, 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> com.
I'd like to remind you that this afternoon's presentation contains forward looking statements statements other than historical facts made during this call may constitute forward looking statements are not guarantees of future performance or results and involve 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 in <unk> filings with the Securities and Exchange Commission.
Company assumes no obligation to update any such forward looking statements, we identify the principal risks and uncertainties that affect our performance and our annual report on Form 10-K, and other SEC filings with that I will turn the call over to Jay.
Thank you, Jason and good afternoon, everyone.
We reported Q2 revenue and operating profit within our original range. Despite the ongoing challenging residential market.
We continue to make progress on important long term value drivers and our pace of new product introductions is accelerating.
In the first half of this year, we introduced new products enhancing our video capabilities in security expanding our connected water leak portfolio.
Growing our presence in the European heat pump market.
We are continuing to reduce our cost structure and have further actions identified for the second half of 2023 that combined with our Q4 2022 program are expected to generate at least $115 million of annualized savings.
Cash flow improved substantially in Q2, and we expect continued improvements as 2023 progresses.
Soft end market demand and excess channel inventory levels in a number of our markets impacted second quarter results and we expect these headwinds to continue in the second half of 2023.
And in response to slower demand, we are taking additional actions to cut costs with a focus on structural improvements that are designed to create leverage when market conditions improve.
At the same time, we are progressing on additional portfolio and factory optimization actions within products and solutions.
I look forward to sharing more details on several of these actions before year end.
We also announced today that our board of directors has approved a $150 million share repurchase authorization.
Both management and the board see substantial opportunity for value creation that residual through continued operational transformation and the ability to deliver strong and consistent cash generation.
We do not believe our current share price reflects these dynamics or our unique relationship with the Pearl and the long term opportunity to leverage this across the markets we serve.
We see share repurchase as an important part of our balanced capital allocation plan that includes organic and inorganic investment in the business.
Our current liquidity position is strong and our current leverage level is consistent with our long term target.
Turning to the businesses.
Alex and solutions general market conditions remained challenging during the second quarter with slower retail traffic continued excess inventory in our Hvac's distribution channel.
And reduced new and existing home sales impacted by higher interest rates.
These dynamics negatively impacted both volumes and mix.
Demand in the HVAC market was further impacted by cool spring weather across much of the U S.
Our price realization remained strong while slowing demand likely means incremental price opportunity there will be more limited to date, we have a good success at holding price across most categories.
While U S residential new construction activity is down double digits compared with 2022, we are adding content in this important market.
In Q2, our average product dollar content for new home grew by over 15% year over year, driven by increased penetration of our smoke and <unk> portfolio into the homebuilder channel.
This is a great example of execution on the value creation opportunities of bringing first to work under the residual umbrella.
First alert had a solid Q2 with total sales up sequentially year over year.
We continue to see progress on supply chain and sourcing fronts with much lower broker by activity compared to last year.
We also realized $13 million of year over year freight savings and have aggressively managed our variable labor costs at our factories.
Our new product introductions are going well.
We have more in the pipeline.
The first alert video doorbell and first solar branded Wi Fi water leak detection and shutoff valve and establish themselves in the market and garnered positive initial market feedback.
In the second half our plans include the introduction of a new outdoor security camera, adding to our first alert water leak detection offering and continuing our work with a number of heat pump Oems.
Additionally, we will be launching new first alert smoke and fire alarm products compliant with the upcoming <unk> eighth edition release.
Adi second quarter revenue was essentially flat compared with Q2 2022.
Adi continues to execute on expanding its e-commerce and touchless sales.
Adi saw continued softness in residential Avi and security categories, while commercial categories showed more stability.
Led by continued strong growth and access control.
With that I will turn the call over to Tony to discuss second quarter performance and 2023 outlook in more detail.
Thank you Jay and good afternoon, everyone.
We reported consolidated second quarter revenue of $1 6 billion.
A decline of 5% compared to the record levels experienced in Q2 last year.
Paired with Q2 2021 revenue was up 8% and has grown at a 7% compound annual rate since the second quarter of 2019.
Operating income for the quarter was $153 million compared to $186 million last year.
Fully diluted earnings per share were <unk> 34.
Paired with <unk> 63 last year, and adjusted EBITDA was $149 million.
Compared to $180 million a year earlier.
Q2 cash from operations was strong at $121 million.
Compared with $35 million last Q2.
We expect improvements in working capital will enable us to generate at least $280 million of cash from operations for the whole year of 2020.
Overtime, we expect inventory turns to be the largest driver of improved working capital.
The pace of progress on inventory should accelerate in 2024, as we manage through committed inventory related to agreements signed during a tighter supply environment.
Ultimately, we expect products and solutions to reduce their inventory days from the current level in the low nineties to a target of around 70 days, which if successful would generate approximately $150 million in cash.
We expect cash from operations in 2023 to be affected by approximately $25 million cash restructuring charges.
Products and solutions second quarter revenue of $677 million was down 11% compared with record second quarter 2022 performance.
Compared with Q2 2021 revenue was up 13% and has grown at a 6% compound rate over the past four years.
Price realization added approximately $30 million to revenue year over year, but was more than offset by a 15% decline in unit volumes.
Slowing retail traffic accelerating efforts by our HVAC distribution customers to reduce inventory levels and weak OEM volumes for furnace and boiler components all contributed to the unit volume drop off.
Impacting Q2 performance was less favorable weather across major markets in the U S and continued challenges in our traditional security markets.
Sequentially products and solutions revenue was up 3%, primarily driven by growth of smoke carbon monoxide detector products.
Products and solutions gross margin in Q2 was 38, 3% up 100 basis points from last Q2.
The increase reflects more favorable freight raw material and component costs, partially offset by the impact of reduced volumes on fixed cost absorption.
Air products sales and unfavorable mix within energy products.
Total operating expenses for products and solutions were flat year over year as cost reduction efforts offset labor and services inflation and continued investment in software development.
Products and solutions operating profit was $128 million.
Were 18, 9% of sales compared with $154 million or 22% of sales last year.
Adi Q2 revenue was $925 million.
Essentially flat to the prior year Adi.
CDI revenue has grown at a 7% compound rate over the past four years.
In North America of 2% was offset by declines in EMEA as well as the sale of our India operations in late 2022.
We saw strength in the access control category and continued softness in residential intrusion AAV categories.
Adi gross margin in the second quarter was 19, 2% compared with 20% last year. When we saw the peak impact of transitory inflationary pricing benefits.
We believe the margin levels, we have seen over the past three quarters are sustainable driven by pricing optimization exclusive brands and growth in touch list sales.
Adi operating profit of $79 million was down 8% compared with record performance in the prior year.
During the second quarter, Adi initiated restructuring activities, including targeted head count reductions slowing investment spending.
This resulted in a $2 million charge for our Q2 results.
Second quarter corporate costs were $54 million flat with the prior year second quarter.
Consistent with external forecasts indicators, we expect residential market conditions to remain soft through the remainder of 2023.
Continued year on year volume declines, creating both revenue and margin headwinds in our products and solutions business.
As a result, we are taking additional aggressive action to reduce costs we.
We anticipate taking a restructuring charge of at least $25 million in Q3 with actions across the company that are expected to generate additional in year savings of at least $15 million and $45 million on an annualized basis.
For the full year, we now expect revenue to be in the range of $6 $1 9 billion to $6 29 billion implying.
Implying revenue down 2% at the midpoint.
Holidayed gross margin is expected to be in the range of 26 to 27, 2% and operating profit is expected to be in the range of 530 million to $570 million, including $29 million of restructuring charges.
We expect GAAP earnings per share to be in the range of $1 15 to $1 35.
And non-GAAP EPS to be in the range of $1 29 to $1 49 adjust.
Adjusted EBITDA is expected to be in the range of 538 million to $578 million for 2023.
For the third quarter, we expect revenue to be in the range of 151 5 billion to $1 56 5 billion.
Consolidated gross margin in the range of $26 one to 27, 1%.
GAAP operating profit in the range of $105 million to $125 million, including $25 million of restructuring costs.
We expect GAAP earnings per share of between 14 and 24.
And non-GAAP earnings per share of 27% to 37.
Adjusted EBITDA is expected to be $124 million to $144 million.
In February when we provided our annual outlook. We noted that 2023 presented unusual market factors to make revenue forecast challenging and that we would respond to market dynamics by managing costs to preserve margin, while continuing our focus on new product initiatives and overall business transformation.
Cost actions, we took late last year combined with our planned Q3 actions are in response to this dynamic in aggregate. We expect these programs to generate at least $115 million in annual cost savings.
We're also focused on achieving greater functional efficiency and anticipate further savings beginning later this year as part of that process.
As Jay noted we are also pursuing larger projects around portfolio optimization and manufacturing efficiency.
While the timing of any individual project is difficult to predict we hope to have further news on both fronts during Q3.
Additionally, as a component of our budgeting and strategic planning work. This fall, we anticipate being able to provide updated long term margin frameworks for both of our businesses.
I will now turn the call back to Jay for a few concluding remarks before we take questions.
Thanks, Tony.
Respond to the challenging market conditions by cutting costs, improving cash flow and continuing our focus on new products and building strong relationships with customers and partners.
We believe these activities will have a meaningful impact on performance and margins as market conditions improve.
We remain focused on our long term vision of helping create a world where homes and buildings are good for the planet and we are a technology works is simplify everyday life.
To accomplish this and drive value for our stakeholders, we will continue to leverage our unique position with professional contractors are unsurpassed residential product breadth and our leading Adi distribution platform.
Thank you to the entire residual team for their continued focus and commitment to delivering for our customers.
This concludes our prepared remarks, operator, we're now ready for questions.
At this time I would like to remind everyone.
Order to ask a question.
Press Star followed by the number one on your telephone keypad.
We'll pause for a moment to compile a Q&A roster.
Your first question is from.
Eric Woodring with Morgan Stanley .
Your line is open.
Hi, Thank you this is <unk>.
<unk> on for Eric Woodring.
Just as my first question, how should we think about kind of the timing and cadence.
The inventory.
Channel inventory work down.
I know you mentioned like those challenges persist until year end, but is this something that you kind of think we'll be back to normalized levels by year end.
Hi, Mike It's Tony.
Thanks for the question no I don't.
We are.
Our target for inventory levels in the products and solutions business is 70 days, we're currently running in the low nineties.
And to get from where we are to that to that target is going to take some time for a couple of reasons.
The first is during the pan her during the supply chain challenges to secure supply of certain components, we entered into some agreements that they.
And that will continue on through this year and into next year with firm commitments. So we're going to have an inflow of some of that inventory that we've committed to it's all going to be good inventory. Because these are long live products and will eventually.
<unk> use it but.
We're going to have inventory flowing in at the same time that we're seeing volumes decline.
So the recovery to that.
Improvement to that target of 70 days is going to carry us.
It's hard to say exactly how long because it's going to be dependent on how quickly our volumes rebound, but it'll be well into 2024 before we get to those to those kind of levels and I would add Tony you said already that the.
The target of 70 that we've laid out there I think it's very doable.
At this time is it's hard for a lot of people to predict exactly.
In terms of some of the market recovery, but we have specific teams on this to manage this and manage this down and.
And feel good that.
We can move the ball forward to that target that we've laid out and just to give a little more clarity in terms of what Tony said.
Most companies that were buying electronic components during the very severe supply chain problems had to enter into a variety of agreements to guarantee supply.
As you guys have heard in our past earnings call I think we did a very very good job of being able to do that as we were moving through.
Probably one of the worst supply chain periods anybody's experienced in 50 years, so, but so we know what it is I think we know how to manage it is tied to our managed in that as well as the market beginning to recover I guess, one other thing I should say since I focused answer on P&L.
We should address it globally.
<unk> runs inventory in the low Sixty's days range.
It did spike up in Q1 of this year it since kind of come back down pretty close to where we ultimately expect it to be in the low <unk> and that's a that's a balance for a distributor between how much inventory they want to carry the commitments I want to make in terms of on time delivery and thats sort of thing to their customers and we've spent a fair bit of time.
Looking about where we want inventory levels to be vis vis our service levels and our objectives with our customers and that that level, which we're getting close to today is pretty much where we're going to work.
Where we think we're going to say they've solved also for not all but most of their supply chain issues with some of their primary suppliers. They saw a few lingering ones, but it's much better than it was but there is we feel like there is potential $150 million of cash that can be released from PFS inventory as we get down to that $70 level exactly.
Great. Thank you and then just one quick follow up question I know, we're seeing the benefit of the pricing actions taken in prior quarters and you guys talked about some further cost actions as we look through the rest of the year, but how should we think about additional pricing power as we look into the back half of the.
Is there any room, there or do you kind of expect today's levels to hold.
Well I guess I guess the news the.
The good news is we have seen pricing hold by and large which.
We expected, but that's definitely been the case in terms of additional pricing actions, it's going to be pretty limited, obviously, a soft volumes.
The market dynamics of the inflationary pressure that drove a lot of price increases have abated. So our outlook doesn't contemplate meaningful additional price action at this point.
Great. Thank you.
Thanks, Brian Thanks, Pat.
Yes.
Your next question comes from the line of.
Ryan Kearny.
GAAP relief funds.
Your line is open.
Hi, guys. Thanks for taking the question.
Of course.
First alert was.
A strong point in the quarter. Just curious you can provide more color on some of the initiatives you've been executing there.
For penetration of the builder channel and also maybe the potential for broader pull through other parts of the residual portfolio into that channel over time.
It's a great question and you're right we've had some really nice wins with with.
With the in the RMC channel with first solar we have added several exclusive agreements with pretty meaningful homebuilders and thats added to our content and RMC went up about 15% in the quarter and there is real momentum there there's definitely more to go with respect to first alert.
So your question about pull through is super important because those those first solar products gave us entre.
And sort of a right to engage with the homebuilding community and.
In a broader and deeper way and I would say we are just underway with.
Some of the momentum that would that would be related to related to that it's given us an entree much much in the same way as it hasnt retail where we were present in retail we're pretty good we thought at retail, but they were at a different level and it's really been a benefit and I would agree I would add a couple of things.
<unk> our content.
With that addition.
And the fact of our brand you've heard US talk about our brand Ambassador program that deals a lot with the with the RNC market as well as other places, but the RNC in particular, and so when new wins have been able to be generated there with the expansion of <unk> products with that so it's really got some.
Great pull through as well as we continue to expand our total ecosystem and what we can offer.
Part of the content, we can tie type things and with smoke and Seo and then it gives us all or from a technology standpoint, other opportunities and what we can add products as we move forward.
And operator.
If I may apparently we answered an unasked question by buyer when we were talking about our inventory levels.
I think the question was really on channel inventory and when we would see the channel inventory.
Levels begin to normalize and I would tell you that our that our outlook similar to what I said with respect to our.
To our own inventory outlook for our expectation is that channel inventory does not go down meaningfully in Q3, it's a little hard to tell what's going to happen in Q4, but.
<unk> had meaningful declines in sell through which is.
Even though.
Even though dollar inventories, maybe coming down a little bit.
The days are going up because the sell through and the volumes are still are still negative it's going to take a point for that to turn before we're going to see.
To see the sell through go positive and then sort of work down to inventory levels that they feel that they want to target before we actually start to see.
See our sell through or sell and improve.
And back on with Frank Frank did we fully answered your question, thereby first alert.
Hey, Frank drop Academy.
Yeah.
Okay.
There are no further questions at this time.
I will now turn the call back to Mr. Jason Willey.
Yeah, thank everyone for their participation today, and we look forward to speaking with you in the coming days.
Have a good rest of your day, thank you very much.
Ladies and gentlemen, thank you for participating. This concludes today's conference call you may now disconnect.
Ladies and gentlemen, thank you for participating.