Q4 2023 Resideo Technologies Inc Earnings Call

Speaker Change: [music].

Hello, Ladies and gentlemen at this time I would like to welcome everyone to the residual technology's fourth 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. It is now my pleasure to turn today's call over.

Operator: Hello, ladies and gentlemen. At this time, I would like to welcome everyone to Resideo Technology's fourth 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.

Jason Willey: It is now my pleasure to turn today's call over to Mr. Jason Willey, Vice President of Investor Relations. Mr. Willey, you may now begin. Good afternoon, everyone, and thank you for joining us for Resideo's fourth quarter 2023 earnings call. On today's call will be Jake Elbacher, Resideo's 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.resideo.com. We would 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 and 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 Resideo's filings with the Securities and Exchange Commission. The company assumes no obligation to update any such forward-looking statements. We identify the principal risks and uncertainties that affect our performance in our annual report on Form 10-K and other SEC filings. With that, I will turn the call over to Jay.

Jason Willey: Mr. Jason Willey.

Jason Willey: Vice President of Investor Relations, Mr. Willie you May now begin.

Jason Willey: Good afternoon, everyone and thank you for joining us for <unk> fourth quarter 2023 earnings call on today's call will be Jay <unk>, 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> Dot com.

Jason Willey: We would 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 facts.

Jason Willey: Including those described from time to time in Brasilia as filings with the Securities and Exchange Commission. The 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.

Jason Willey: That I will turn the call over to Jay.

Jay: Thank you, Jason and thanks, everyone for joining us today.

Jay: Thank you, Jason, and thanks, everyone, for joining us. We will finish 2023 on a strong note. Q4 revenue and profitability were above the midpoint of our outlook, and cash generation was strong, with full-year operating cash flow of $440 million. We've built momentum throughout the year and increased order activity within products. We also made significant progress on our key strategic operational initiatives and in meaningfully reducing structural costs. During 2023, we made substantial progress reshaping our portfolio and operations, with the divestiture of Genesis and the outsourcing of our casting facility in San Diego.

Jay: We finished 2023 on a strong note.

Jay: Q4 revenue and profitability were above the midpoint of our outlook and cash generation was strong with full year operating cash flow of $440 million.

Jay: We built momentum throughout the year and order activity within products and solutions. We also made significant progress on our key strategic operational initiatives, and then meaningful reducing structural costs.

Jay: During 2023, we've made substantial progress reshaping our portfolio and operations.

Jay: The divestiture of Genesis and the outsourcing of our casting facility in San Diego.

Jay: Work continues on rebalancing our product portfolio, manufacturing operations, and ADI footprint to help position the business for profitable, long-term growth. We expect to have more to share on both fronts as we move through 2024. We also advanced the ball on the partnership front, strengthening our relationship with major insurance providers, establishing new relationships in the energy management market, including our recent announcement with Ford, and meaningfully expanding the depth of homebuilder relationships. We have spoken previously about our progress building content with HomeBuilder.

Jay: Work continues on rebalancing, our product portfolio manufacturing operations, and ATI footprint to help position the business for profitable long term growth.

Jay: We expect to have more to share on both fronts as we move through 2024.

Jay: We also advanced the ball on the partnership front strengthening our relationship with major insurance providers, establishing new relationships in the energy management market <unk>.

Jay: Including our recent announcement with Ford.

Jay: And meaningfully expanding the depth of homebuilder relationships.

Jay: We have spoken previously about our progress building content with homebuilders.

Jay: This work is led by our FirstAlert and BRK Professional brands, with expanded content with existing builders, and an increase in the number of partners we're selling to, adding over 20 new builder partners in 2023. We believe we are well-positioned to drive growth in this channel as the new construction market recovers. We also expect this additional content will have positive long-term benefits to our potential replacement base. Through our innovation within products and solutions, we significantly improved our new product introduction cadence. This included new video doorbell and outdoor camera products for our professionally monitored security office, launching Pro Series for the EMEA security market, First Alert branded connected water leak detection and shutoff products, and the rollout of UL 8th edition smoke detectors.

Jay: This work is led by our first alert and be RK professional brands with expanded content with existing builders.

Jay: Increase the number of partners, we're selling to.

Jay: Adding over 20, new builder partners in 2020 three.

Jay: We believe we are well positioned to drive growth in this channel as the new construction market recovers. We also expect this additional content will have positive long term benefits to our potential replacement base.

Jay: Our innovation within products and solutions, we significantly improved our new product introduction cadence. This included new video doorbell and outdoor camera products for our professionally monitored security offering.

Jay: Watching pro series for the EMEA security market first alert branded connected water leak detection and shut off products and the rollout of UL eighth edition smoke detectors.

Jay: We are seeing results based on all these actions. We are encouraged by order trends within products and solutions, which have stabilized year over year and grown sequentially in Q3 and Q4, through executing on new product introductions and taking effective cost control actions. We are achieving gross margin expansion despite volume headwinds and continuing to invest in key long-term initiatives. At ADI, we continue to grow our digital capability; building a leading digital experience is critical to customer engagement and is expected to be margin-attritive over time. For 2023, e-commerce sales were up 8% year over year. Total touchless sales, which include e-commerce, electronic data interchange, and email automation, now account for 38% of ADI's total sales. We made significant investments during 2023 in our product information management and data asset management system. This work helps to enhance the usability of our web experience with a focus on speed.

Jay: We are seeing results based on all of these actions.

Jay: We're encouraged by order trends within products and solutions, which have stabilized year over year and grew sequentially in Q3 and Q4.

Jay: Through executing on new product introductions, and taking effective cost control actions, we are achieving gross margin expansion, despite volume headwinds and continuing to invest in key long term initiatives.

Jay: At Adi, we continue to grow our digital capabilities building, a leading digital experience is critical to customer engagement and is expected to be margin accretive over time.

Jay: For 2023 E Commerce sales were up 8% year over year.

Jay: Total touchless sales, which includes ecommerce electronic data interchange and email automation now account for 38% of Ati's total sales.

Jay: We made significant investments during 2023, and our product information management and data asset management systems.

This work helps to enhance the usability of our web experience with a focus on speed.

Jay: ADI continues to make progress with its expansion into adjacent categories, particularly in the audiovisual market. ADI acquired BTX in early 2023, adding new capabilities in the professional AV market and outsourcing custom fiber assembly. GrowAV was one of ADI's better performing categories in 2023, growing 6% on an organic basis, and now accounts for 10% of ADI sales. With that, I will turn the call over to Tony to discuss our fourth quarter results and our 2024 outlook. Thank you, Jay, and good afternoon, everyone.

Jay: Two of search and accuracy of availability and delivery information.

Jay: Adi continues to make progress with its expansion into adjacent categories, particularly in the audio visual market.

Jay: Adi acquired B T X and early 2020, three adding new capabilities in the professional market and in sourcing custom fiber assemblies.

Jay: ROE Avi was one of Adi's better performing categories in 2020 three growing 6%.

Jay: On an organic basis, and now accounts for 10% of Ati's sales.

Jay: With that I will turn the call over to Tony to discuss our fourth quarter results and 2020 for outlook.

Anthony L. Trunzo: Thank you Jack and good afternoon, everyone.

Tony: Fourth quarter financial results exceeded the midpoint of our outlook range for a second consecutive quarter, led by continued momentum in products and solutions. We drove sequential improvements and gross margin in P&S for the third consecutive quarter and generated $263 million in cash flow from operations. For the year, cash flow from operations was $440 million, a record since then.

Anthony L. Trunzo: Fourth quarter financial results exceeded the midpoint of our outlook range for a second consecutive quarter led by continued momentum in the products and solutions business.

Anthony L. Trunzo: We drove sequential improvements in gross margin and PFS for the third consecutive quarter and generated $263 million in cash flow from operations.

Anthony L. Trunzo: For the year cash flow from operations was $440 million a record since spin.

Anthony L. Trunzo: Over the past three years, we have converted 89% of GAAP net income into free cash flow demonstrating the strong cash flow characteristics of our business.

Tony: Over the past three years, we have converted 89% of GAP net income into free cash flow, demonstrating the strong cash flow characteristics of our business. Resideo's fourth-quarter revenue of $1.54 billion was 1% lower than Q4 last year, but flat, excluding the sale of our Genesis Wire. Operating income for the quarter was $147 million, an increase of 50% compared to last year. Adjusted EBITDA was $136 million, up 11% compared to Q4 of 2022. Fully diluted earnings per share were $0.56 and $0.48 on a non-GAAP basis, compared with $0.26 and $0.25, respectively, last year.

Anthony L. Trunzo: Brasilia, a fourth quarter revenue of 1.54 billion.

Anthony L. Trunzo: It was 1% lower than Q4 last year, but flat, excluding the sale of our Genesis wire business.

Anthony L. Trunzo: Operating income for the quarter was $147 million, an increase of 50% compared to last year.

Anthony L. Trunzo: Adjusted EBITDA was $136 million up 11% compared to Q4 2022.

Anthony L. Trunzo: Fully diluted earnings per share were <unk> 56.

Anthony L. Trunzo: And 48 cents on a non-GAAP basis, compared with 26 and 25, respectively last year.

Tony: Non-GAP EPS exceeded the upper end of our guidance range for the quarter. Products and Solutions fourth-quarter revenue at $683 million was 1% lower than the fourth-quarter 2022, but up 2% when adjusting for the sale of Genesys. Price realization added approximately $16 million to revenue, and overall volumes, excluding the Genesis impact, were down low single digits. FirstAlert delivered a strong quarter, particularly in residential new construction, and we also saw growth year over year in water products. Orders were up sequentially following the stabilization experience in the third quarter.

non-GAAP EPS exceeded the upper end of our guidance range for the quarter.

Anthony L. Trunzo: Products <unk> solutions fourth quarter revenue of $683 million was 1% lower than the fourth quarter 2022, but up 2% when adjusting for the sale of Genesis.

Anthony L. Trunzo: Price realization added approximately $16 million to revenue and overall volumes, excluding the Genesis impact were down low single digits.

Anthony L. Trunzo: First alert delivered a strong quarter, particularly in residential new construction and we also saw growth year over year and water products.

Anthony L. Trunzo: Orders were up sequentially following the stabilization experienced in the third quarter.

Tony: While channel inventory remains elevated in some areas, we believe order activity and point-of-sale data indicate channel inventory overall is normalized. Products and Solutions gross margin in Q4 was 39.5%, up 110 basis points compared to last. Gross margin improved sequentially in each quarter of 2023 as we achieved reductions in raw material costs, manufacturing headcount, and freight costs, which more than offset the impacts of reduced volumes and labor rate inflation. As unit volumes and factory utilization rates recover, we continue to believe P&S gross margins can further improve. Products and Solutions' fourth quarter operating expense was down $14 million year over year, excluding restructuring costs. Products and Solutions operating income was $147 million in the fourth quarter, up 50% compared with Q4 2022, and up 16% when adjusting for prior year restructuring. Turning to ADI, Q4 revenue was $854 million, down 1% versus the prior year. The business continued to experience pressure on residential security and video surveillance sales, which was partially offset by growth in access control and professional AV categories.

Anthony L. Trunzo: While channel inventory remains elevated in some areas, we believe order activity and point of sale data indicates channel inventory overall is normalizing.

Anthony L. Trunzo: Products and solutions gross margin in Q4 was 39, 5% up 110 basis points compared to last year.

Anthony L. Trunzo: Gross margin improved sequentially in each quarter of 2023, as we achieved reductions in raw material cost manufacturing head count and freight costs, which more than offset the impacts of reduced volumes and labor rate inflation.

As unit volumes and factory utilization rates recover we continue to believe PFS gross margins can further improve.

Anthony L. Trunzo: Products <unk> solutions fourth quarter operating expense was down $14 million year over year, excluding restructuring costs.

Anthony L. Trunzo: Products <unk> solutions operating income was $147 million in the fourth quarter up 50% compared with Q4 2022 and.

Anthony L. Trunzo: And up 16% when adjusting for prior year restructuring charges.

Anthony L. Trunzo: Turning to Adi Q4 revenue was $854 million down 1% versus the prior year.

Anthony L. Trunzo: The business continued to experience pressure in residential security and video surveillance sales, which was partially offset by growth in access control and professional categories.

Anthony L. Trunzo: Adi gross margin in the fourth quarter was 18% compared with 19, 1% in Q4 last year.

Tony: ADI's gross margin in the fourth quarter was 18%, compared with 19.1% in Q4 last year. Gross margins were negatively impacted by transitory inflationary pricing benefits experienced in 2022. ADI operating profit of $59 million was down 14% compared with the prior Q4, reflecting lower sales and gross margin on flat operating. Corporate costs were $55 million in Q4, down $12 million compared with the prior year.

Anthony L. Trunzo: Gross margins were negatively impacted by transitory inflationary pricing benefits experienced in 2022.

Anthony L. Trunzo: Reduced vendor rebate activity due to lower volumes and more competitive pricing in certain categories.

Anthony L. Trunzo: Adi operating profit of $59 million was down 14% compared with prior Q4, reflecting the lower sales and gross margin on flat operating expenses.

Corporate costs were $55 million in Q4 down $12 million compared with the prior year.

Anthony L. Trunzo: Adjusting for unusual items in both periods, we drove $3 million of structural cost savings versus the prior period.

Tony: Adjusting for unusual items in both periods, we drove $3 million of structural cost savings versus the prior period. Q4 cash from operations was $263 million, up 89%, compared with $139 million in Q4 last year. Improved cash generation and specifically working capital performance was a major initiative throughout 2020, and we more than achieved our objective. For the full year, we generated $440 million in operating cash. During the quarter, we repurchased 719,000 shares of our stock for a total cost of $11 million.

Anthony L. Trunzo: Q4 cash from operations was $263 million up 89% compared with $139 million in Q4 last year.

Anthony L. Trunzo: Improved cash generation and specifically working capital performance was a major initiative throughout 2023, and we more than achieved our objectives.

Anthony L. Trunzo: For the full year, we generated $440 million in operating cash.

Anthony L. Trunzo: During the quarter, we repurchased 719000 shares of our stock for a total cost of $11 million for.

Tony: For the full year, we repurchased 2.6 million shares for $41 million, and our fully diluted share count declined year over year. As we look toward 2024, our guidance is predicated on the following assumptions. We expect residential repair and remodel activity to be flat to down, low single digits year over year, and Residential New Construction starts to grow by low to mid-single digits. We have assumed HVAC channel inventory levels largely normalized in the first half of 2024.

Anthony L. Trunzo: For the full year, we repurchased two 6 million shares for $41 million and our fully diluted share count declined year over year.

Anthony L. Trunzo: As we look towards 2024, our guidance is predicated on the following assumptions.

Anthony L. Trunzo: We expect residential repair and remodel activity to be flat to down low single digits year over year and.

Anthony L. Trunzo: In residential new construction starts to grow by low to mid single digits.

Anthony L. Trunzo: We have assumed a track channel inventory levels largely normalized in the first half of 2024.

Anthony L. Trunzo: We expect to drive 50 to 100 basis points of gross margin expansion year over year within products and solutions moving sustained PFS gross margins close to 40% based on the benefits of ongoing efficiency initiatives and an essentially flat market.

Tony: We expect to drive 50 to 100 basis points of gross margin expansion year over year within products and solutions, moving sustained P&S gross margins close to 40% based on the benefits of ongoing efficiency initiatives in an essentially flat market. ADI gross margin is expected to be flat for the year as we continue to see year-over-year headwinds from inflationary benefits in the first half of 2024. The sale of our Genesis Wire business will reduce 2024 products and solutions security sales by approximately $105 million and operating income by approximately $10 million compared with 2023. At the end of December, we executed an amendment to our contract to directly supply ADT hardware for their North American residential security office.

Anthony L. Trunzo: Adi gross margin is expected to be flat for the year as we continue to see year over year headwinds from inflationary benefits in the first half of 2024.

Anthony L. Trunzo: The sale of our Genesis wire business will reduce 2020 for products and solutions security sales by approximately $105 million and operating income by approximately $10 million compared with 2023.

Anthony L. Trunzo: At the end of December we executed an amendment to our contract to directly supply ADT hardware for their north American residential security offerings.

Tony: Our agreement now runs through early 2025, at which time deliveries of these products will conclude. Based on this agreement, we expect our 2024 security hardware sales to ADT to decline by approximately $100 million compared with 2023 levels, with a similar additional reduction in 2025. The impact of the new agreement is fully reflected in our 2024 outlook and is expected to be immaterial to Products and Solutions' 2025 profitability. Our guidance moving forward will focus on revenue, adjusted EBITDA, non-GAAP EPS, and operating cash. We believe these metrics, in combination, provide the best view into the health of the business.

Anthony L. Trunzo: Our agreement now runs through early 2025 at which time deliveries of these products will conclude.

Anthony L. Trunzo: Based on this agreement, we expect our 2020 for security hardware sales to ADT to decline by approximately $100 million compared with 2023 levels with a similar additional reduction in 2025.

Anthony L. Trunzo: The impact of the new agreement is fully reflected in our 2020 for outlook and is expected to be immaterial to products and solutions 2025 profitability.

Anthony L. Trunzo: Our guidance moving forward, we will focus on revenue adjusted EBITDA <unk>.

Anthony L. Trunzo: non-GAAP EPS and operating cash flow.

Anthony L. Trunzo: We believe these metrics in combination provide the best view into the health of the business.

Speaker Change: With that said here is our outlook.

Tony: With that said, here is our outline. For the first quarter, we expect revenue to be in the range of $1.46 billion to $1.51 billion, adjusted EBITDA in the range of $120 million to $140 million, and non-GAAP EPS of $28 million to $38 million. The first quarter is typically a slower seasonal period for products and solutions due to reduced new construction activity and more limited restocking by our distribution channels. For the full year of 2024, we expect revenue to be in the range of $6.08 billion to $6.28 billion. Adjusted EBITDA is expected to be in the range of $560 million to $640 million, and non-GAAP EPS is expected to be in the range of $1.48 to $1.88.

Speaker Change: For the first quarter, we expect revenue to be in the range of $1 $4 6 billion to $1 five 1 billion adjusted.

Speaker Change: Adjusted EBITDA in the range of $120 million to $140 million and non-GAAP EPS of <unk> 28 to 38 cents.

Speaker Change: The first quarter is typically a slower seasonal period for products and solutions due to reduced new construction activity and more limited restocking by our distribution channel.

Speaker Change: For the full year 2024, we expect revenue to be in the range of $6 8 billion to $6 to $8 billion.

Speaker Change: Adjusted EBITDA is expected to be in the range of $560 million to $640 million.

Speaker Change: non-GAAP EPS is expected to be in the range of $1 48 to $1 88.

Tony: We expect to generate at least $320 million of operating cash flow for the full year 2024. We finished 2023 on a positive note, with strong Q4 results driven by health performance in PNS. While uneven quarter to quarter, our cash generation was excellent in 2023 and has been strong since 2020. We are cautiously optimistic about a more accommodating macro backdrop as 2024 progresses. However, the current interest rate environment and related low housing turnover continue to provide headwinds to our business.

Speaker Change: We expect to generate at least $320 million of operating cash flow for the full year 2024.

Speaker Change: We finished 2023 on a positive note with strong Q4 results driven by outperformance in PFS.

Speaker Change: Uneven quarter to quarter, our cash generation was excellent in 2023 and has been strong since 2020.

Speaker Change: We are cautiously optimistic about a more accommodating macro backdrop as 2024 progresses. However, the current interest rate environment and related low housing turnover continues to provide headwinds to our business.

Jay: Despite market uncertainties, our initial 2024 outlook implies low single-digit sales growth at the midpoint, adjusting for the Genesis and ADT impacts, and higher adjusted EBITDA, adjusted EBITDA margin, and non-GAAP EPS compared to 2020. As unit volumes and factory utilization rates recover, we continue to believe products and solutions margins will further improve. I'll now turn the call back to Jay for a few concluding remarks before we take questions. Thank you. Looking back on 2023, both businesses experienced significant market headwinds, with an almost 20% reduction in existing home sales in the U.S., leading to the weakest housing turnover year since 1995. This had negative implications for our residential security business within both products and solutions and ADI. Consolidated sales fell only 2% in 2023 despite these headwinds.

Speaker Change: Despite market uncertainties. Our initial 2024 outlook implies low single digit sales growth at the midpoint adjusting for the Genesis and ADT impacts and higher adjusted EBITDA.

Speaker Change: Adjusted EBITDA margin and non-GAAP EPS compared to 2023.

Speaker Change: As unit volumes and factory utilization rates recover we continue to believe products and solutions margins will further improve.

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

Jay: Thank you.

Jay: Looking back on 2023, both businesses navigated significant market headwinds with an almost 20% reduction in existing home sales in the U S leading to the weakest housing turnover a year since 1995.

Jay: Is it a negative implications for our residential security business within both products and solutions and Adi.

Jay: Consolidated sales fell only 2% in 2023, despite these headwinds.

Jay: Because of our strong product offering and customer relationships, we were able to drive price realization within products and solutions, and ADI's broad commercial market exposure provided diversification. We finished the year with strong cash generation, improving order trends, and gross margin momentum in our products and solutions business. As Tony noted in his remarks, we'll be winding down the existing contractual hardware portion of our longstanding relationship with ADT. Since I arrived at Resideo almost four years ago, our team has built a collaborative, constructive relationship with ADT from the executive level down.

Jay: Because of our strong product offering and customer relationships, we were able to drive price realization within products and solutions and Adi's broad commercial market exposure provided diversification.

Jay: We finished the year with strong cash generation, improving order trends and gross margin momentum in our products and solutions business.

Jay: As Tony noted in his remarks will be winding down the existing contractual hardware portion of our long standing relationship with ADT.

Jay: Since I arrived a residual almost four years ago. Our team has built a collaborative constructive relationship with ADT from the executive level down.

Operator: While we are wrapping up this legacy contract, we believe these relationships have created a strong shared foundation for continued collaboration and partnership. As we look to 2024, at Products and Solutions, we are focused on executing further portfolio and facility optimization efforts, as well as increasing the velocity of MPI. With our cost actions and transformation work, we believe we are well positioned to drive improved margins and profitability as market conditions improve. At ADI, we will continue to expand our digital initiatives and build upon our adjacent market and exclusive brands expansion opportunities. Our focus remains firmly on executing our key strategic initiatives while driving profitability expansion and strong cash flow. I want to again thank the entire Resideo employee base for their outstanding efforts during 2023, and I'm excited to continue to build on the momentum together in 2024. Operator, we are now ready for questions. Thank you. If you have a question, please press star 1 on your telephone keypad. If you wish to withdraw your question, simply press star 1 again.

Jay: Well, we are wrapping up this legacy contract. We believe these relationships have created a strong shared foundation for continued collaboration and partnership.

Jay: As we look to 2020 for the products and solutions. We are focused on executing further portfolio and facility optimization efforts as well as increasing velocity of MPI.

Jay: With our cost actions and transformation work, we believe we are well positioned to drive improved margin and profitability as market conditions improve at.

Jay: At Adi, we will continue to expand our digital initiatives and build upon our adjacent market and exclusive brands expansion opportunities.

Jay: Our focus remains firmly on executing our key strategic initiatives, while driving profitability expansion and strong cash flow.

Speaker Change: I want to again, thank the entire residual employee base for their outstanding efforts during 2023 and I'm excited to continue to build on the momentum together in 2024.

Speaker Change: Operator, we are now ready for questions.

Speaker Change: Thank you if you have a question. Please press star one on your telephone keypad. If you wish to withdraw your question simply press Star one again.

Tony: Your first question comes from the line of Ryan Merkle with William Blair. Your line is open. Hey everyone, thanks for taking the questions. I wanted to start with the comments about order activity improving and stabilization in the market, but it looks like the first quarter revenue guide is maybe a little softer than we were thinking. So is that just seasonality, or maybe you could talk about the cadence of how you see sales progressing in 24, maybe it's a stronger second half? Hey, Ryan. It's Tony.

Speaker Change: Your first question comes from the line of Ryan Merkel with William Blair. Your line is open.

Ryan Merkel: Hey, everyone. Thanks for taking the questions.

Ryan Merkel: I wanted to start with the comments about order activity, improving and stabilization in the market and it but it looks like the first quarter revenue guide is maybe a little softer than we were thinking so is that just seasonality or maybe talk about the cadence of how you see sales progressing in 'twenty four maybe it's a stronger second half.

Ryan Merkel: Yeah, Hey, Ryan it's Tony.

Tony: So yes, there is an element of seasonality in Q1. But there is also a security sales are going to be lower because of the disclosure we just made about ADT and our expected reduction in revenue from them during Q1. And also the impact of Genesis in Q1, which is $25-ish million somewhere in that zip code. If you look at what I'll call the trade channels, it's still a little bit up and down, but by and large, we've seen inventories begin to work their way down. I think there's still some normalization in some areas that's got to happen in the next couple of quarters, and that's certainly contemplated in our guidance. But then, you know, beyond that, I think things are really starting to settle out a little bit as well. So yeah, all those things are affecting Q1. And that's why you're going to see a little bit of a ramp as we go through 2020.24. Okay, that's helpful.

Anthony L. Trunzo: So yes, there is an element of seasonality in Q1. There is also a security sales are going to be lower because of the.

Anthony L. Trunzo: The disclosure, we just made about its about ADT and our expected reduction in revenue from from them during Q1.

Anthony L. Trunzo: And and also the Genesis of the impact of Genesis in Q1, which is.

Anthony L. Trunzo: 25 ish million dollars somewhere somewhere in that ZIP code. If you look at if you look at the what I'll call the trade channels.

Anthony L. Trunzo: You know, it's it's still a little bit up and down but by and large we've seen.

Anthony L. Trunzo: Seen inventories begin to work their way down.

Anthony L. Trunzo: I think theres still some normalization in some areas. It's got to happen in the next couple of quarters and that's certainly contemplated in our guidance.

Anthony L. Trunzo: But then.

Anthony L. Trunzo: Beyond that.

Anthony L. Trunzo: I think things are really are starting to settle out a little bit as well. So yeah. All those things are affecting Q1, and that's why you're going to see a little bit of a ramp as we as we go through 2000 22024.

Anthony L. Trunzo: Okay.

Anthony L. Trunzo:

Anthony L. Trunzo: And then the gross margin in P&L stood out just curious so youre going to be able to build off the fourth quarter level. As we think about 'twenty four just talk about the pluses and minuses in sort of the direction of gross margin for PFS.

Tony: And then the gross margin in P&S stood out. Just curious, are you going to be able to build off the fourth quarter level as we think about 24? Just talk about the pluses and minuses and sort of the direction of gross margin. Yeah, so, you know, I think the two things we were most excited about in 2023 were our ability to generate significant cash flow. A little choppy, but we certainly did a great job, I think, over the course of the year.

Speaker Change: Yeah. So.

Speaker Change: I think the two things we were most excited about in 2023 was our ability to generate significant cash flow little choppy, but we certainly did a great job I think over the course of the year and the other was the sequential improvement in gross margin in T N S.

Tony: And the other was the sequential improvement in gross margin in P&S. We expect that to continue if you look at it year over year. Quarter to quarter, again, you might still see some variation.

Speaker Change: We expect that to continue if you look at it year over year quarter to quarter again, you you still might see some some variation, but we've really made a lot of progress underneath kind of all of the volume declines.

Jay: But we've really made a lot of progress underneath kind of all of the volume declines and all that sort of stuff in our fundamental cost structure. We talked a little bit about that in the script in terms of what those things are. And the expectation of half a point to a point of gross margin expansion in P&S this year is predicated on basically flat volumes. So we really feel like there's an opportunity if we see volumes begin to grow again for some really meaningful margin expansion in that business. I would add also, Ryan, that I think we've been talking about even in our last call together, that as supply chains continue to improve, input costs continue to trend in a favorable fashion. And that has continued, you know, including between material components and, of course, freight, which is a good thing. And that's just going to continue.

Speaker Change: And all that sort of stuff in our in our fundamental cost structure, and we talked a little bit about that in the in the script in terms of what those what those things are.

Speaker Change: And the expectation of you know half a point to a point of gross margin expansion in.

Speaker Change: In PFS. This year is predicated on basically flat volumes. So we really feel like there is an opportunity if we see margin I'm sorry volumes begin to grow again for some really meaningful margin expansion in that business. Yeah. I would add also Ryan that I talked I think we've been talking about even though our last call together that is supply chain is continuing to improve.

Speaker Change: The input costs continued to trend in a favorable fashion.

And that has continued.

Speaker Change: Including between material component tree.

Speaker Change: Of course freight which is a good thing and that's just going to continue.

Jay: And, you know, the various actions that we've talked about that you guys have heard us talk about over the last couple of quarters, cost actions, impacts, provide a benefit to us on gross margin expansion. So I think between what I said, as well as what Tony said, that we feel very positive about the opportunity there for further margin expansion. Great. Sounds good.

Speaker Change: And the various actions that we've talked about that you guys have heard us talk about.

Speaker Change: Over the last couple of quarters cost actions.

Speaker Change: Impacts.

Speaker Change: It provides a benefit to us on the gross margin expansion. So I think between what I had said as well as what Tony had said that you know we feel very positive about the opportunity there for further margin expansion.

Speaker Change: Great sounds good thanks, so much I'll pass it on.

Operator: Thanks so much. I'll pass it on. Thanks, Ryan. Your next question comes from the line of Eric Woodring with Morgan Stanley. Your line is open. Hey, guys.

Speaker Change: Thanks Ryan.

Speaker Change: Your next question comes from the line of Erik Woodring with Morgan Stanley. Your line is open.

Erik Woodring: Hey, guys. Thank you for taking the questions I have two maybe one just on the clarification point on ADT just to confirm that the north American hardware business seems to be gone. After 2025 year kind of very clear on the trajectory of that but is there anything else with them because you know J J you meant.

Jay: Thank you for taking the questions. I have two, maybe one just on the clarification point on ADT. Just to confirm, the North American hardware business seems to be gone after 2025. You're kind of very clear on the trajectory of that. But is there anything else with them?

Jay: Because, you know, Jay, you mentioned kind of other areas of collaboration and partnership. And so, just want to kind of understand at one level higher how you think about the relationship with ADT after 2025, if there's anything that you can do that's incremental, or if you still have a relationship, just how that stands. And then I have a follow-up. Thank you.

Erik Woodring: And kind of other areas of collaboration and partnership and so just wanted to kind of understand at one level higher or how you think about the relationship with ADT. After 2025, if theres anything that you can do that's incremental or if you still have a relationship just how how that stands and then I have a follow up thank you.

Tony: Yeah, thanks, Eric. As we indicated, the legacy hardware program that Tony talked about in terms of that, the end of that program into 2025, but as I've not just stated today, but I've indicated for quite some time, our relationship with them is very good, and we spent a lot of time on that, and so we're continuing to talk about other opportunities, and you know we'll keep you guys informed. Okay, yep, that is very clear then.

Speaker Change: Yeah. Thanks, Eric.

Speaker Change: As we indicated.

Speaker Change: Its legacy hardware program that Tony talked about in terms of that.

Speaker Change: The end of that program into 2025.

Speaker Change: But as I've not just stated today, but I've indicated for quite some time our relationship with them is very good and we spent a lot of time on that and so we're continuing to talk about other opportunities.

Speaker Change: And we'll keep you guys informed.

Speaker Change: Okay, Yeah, that's fair.

Speaker Change: Clear then.

Tony: And, you know, this can maybe be for Izzy, but maybe it's for Tony. Any update on how to think about the ceiling for P&S gross margins? Like, if I just think about some of the comments you've made tonight, you've obviously taken cost actions on that business, you're getting leverage in that business, despite flat volumes. You know, it seems like getting rid of Genesis and ADT will be margin-accretive. And I'd imagine that when volumes recover, that it's all positive for P&S gross margins. And so any way to think about the longer term trajectory, or are there any headwinds that I'm missing that I'm that we're not necessarily considering as we think, you know, again, 12345 years out? And that's it for me. Thanks so much.

Speaker Change: And just maybe for you to think about it maybe it's for Tony is any any update to how to think about the ceiling for PFS gross margins like if I. If I just think about some of the comments you've made tonight, you've obviously taken cost actions on that business you are getting leverage in that business. Despite flat volumes it seems like getting rid of.

Speaker Change: Genesis and ADT will be margin accretive and I'd imagine that when volumes recover that that's all positive for PNM gross margins and so any way to think about the longer term trajectory or are there any headwinds that I'm missing that I'm that I'm that we're not necessarily considering as we think you know again 12345 years.

Speaker Change: Without them and that's it for me thanks, so much.

Speaker Change: Thanks, Thanks, Eric So yeah, obviously.

Speaker Change: Obviously I don't have a number for you in terms of a long term gross margin target for for PFS and and the reason we don't have one is because of the long list of things you. Just you just laid out and the puts and takes around them.

Tony: Thanks, thanks, Eric. So, obviously, I don't have a number for you in terms of a long-term gross margin target for P&S. And the reason we don't have one is because of the long list of things you just laid out in the puts and takes around them. From where we sit today, there are more from a market perspective and from our own execution and our own sort of position in the market. I think the balance is certainly looking out over a few years with more tailwinds than headwinds. We've done a really good job maintaining prices, which was, if you recall, back during the inflationary surge, we were basically matching increased input costs with our price increases. And, you know, that was dilutive to margin because we weren't getting margin on top of it.

Speaker Change: From where we sit today.

Speaker Change: There are more from a from a market perspective and from our own.

Speaker Change: Execution in our own sort of position in the market.

Speaker Change: The balances certainly looking out over a few years more tailwind than than headwinds we've done a really good job maintaining price, which was if you recall back during the inflationary surge we were basically matching.

Speaker Change: Increased input costs with with our price increases.

And that was dilutive to margin because we weren't getting margin on top of it.

Speaker Change: But we really felt like as input costs abated.

Tony: But we really felt like as input costs abated, we were going to be able to hold prices, and that has proved to be true. We have made substantial progress in a number of other manufacturing efficiency areas. We have divested some businesses that are lower margin, and we feel like there are opportunities to grow in some higher margin areas. And all of that is happening against a backdrop of the past, I guess, five or six quarters of declining volumes.

Speaker Change: We were going to be able to hold price and that has proved to be true.

Speaker Change: We have made substantial progress in a number of other manufacturing efficiency areas. We have divested some businesses that are lower margin.

Speaker Change: And we feel like there are opportunities to grow in some in some higher margin areas and all of that is happening against the backdrop over the past I guess five or six quarters of declining volumes.

Speaker Change: As volumes as the decline slows and as volumes flatten out youre seeing that in the in the gross margins youre seeing a little bit more benefit and to the extent that you begin to see mark.

Tony: As the decline slows and as volumes flatten out, you're seeing that in the gross margins, you're seeing a little bit more benefit. And to the extent that you begin to see volumes expand again, I think there's a real opportunity for us to see significant margin expansion. And I'd also add just a couple of things. This is a summary, of course, of the input cost.

Speaker Change: Volumes expand again.

Speaker Change: Theres, a real opportunity for us to see significant margin expansion.

Speaker Change: And I'd also add just a couple of his summary of course, the input costs I talked about that before and they'll let in the last call or cost actions that we've been taking the.

Jay: I talked about that before in the last call or cost actions that we've been taking, the price piece that Tony just talked about, and, of course, the leverage opportunity when the market begins to come back. But just a couple of additional comments, the portfolio optimization piece that we've been talking quite a bit about, and the proof of the pudding is things like Genesis, as well as operational optimization, like when we closed off the San Diego facility and moved that to an offshore third party. We have other opportunities there, and we'll share more of those. And the other that I wanted to just mention is because of our heavy focus on MPI, just in terms of bringing more new products to market, but also, as with that, looking at opportunities with more growth tied to MPI, but also margin expansion with new products.

Speaker Change: The price piece that Tony just talked about and of course, the leverage opportunity when the market begins to come back, but just a couple of additional comments the portfolio optimization.

Peace that we've been talking quite a bit about that and then the proof of the pudding is things like Genesis as well as our operational optimization like when we closed off the San Diego facility and move that towards offshore third party.

Speaker Change: We have other opportunities there.

Speaker Change: And we will share more of those and the other that that Ah I wanted to just mention is because with our heavy focus on M. P. I just in terms of bringing in more new products to market, but also as we as with that then looking at opportunities with more growth tied to M. P. I, but also March margin.

Speaker Change: Expansion with new products. So all of those wrapped together I think is a great way of summarizing.

Speaker Change: Not just relying on one or two pieces.

Speaker Change: We have a good plan of attack with all the different items that we've mentioned here between Tony and I.

Jay: So all those wrapped together, I think, is a great way of summarizing. We're not just relying on one or two pieces. I think we have a good plan of attack with all the different items that we've mentioned here between Tony and I. Nope, that is super helpful. I totally realize there's a lot of moving pieces, so I appreciate all that color and honesty.

Speaker Change: No that's super helpful. Tom totally realize theres a lot of moving pieces. So I appreciate all that color I mean honestly still thank you.

Speaker Change: Sure.

Speaker Change: Once again, ladies and gentlemen, if you have a question. It is star one on your telephone keypad.

Speaker Change: Our next question comes from the line of Cory Carpenter with Jpmorgan. Your line is open.

Speaker Change: Hey, this is Daniel <unk> on for Cory Carpenter. Thanks for the questions on the first given the uncertain timeline of the broader macro recovery do you think you have any further room to take price if necessary and maybe if so any color on kind of what that cadence could look like throughout 2024, and then on the second maybe on the pace of product innovation.

Operator: So thank you, course. Once again, ladies and gentlemen, if you have a question, it is star one on your telephone keypad. Your next question comes from the line of Corey Carpenter with J.P. Morgan. Your line is open. Hey, this is Danny Van Fron for Cord Carpenter.

Danny: Thanks for the questions. On the first, given the uncertain timeline of the broader macro recovery, do you think you have any further room to take price if necessary, and maybe, if so, any color on kind of what that cadence could look like throughout 2024? And then on the second, maybe on the pace of product innovation within products and solutions for 2024, are there any specific verticals to call out for having kind of the most runway? Thanks. Sure. So, thanks, Danny. So on price, our outlook for 2024 assumes basically 1% on price, so not a significant factor in our 2024 outlook.

Speaker Change: Within products and solutions for 2024 are there any specific verticals to call out for having kind of the most runway. Thanks.

Speaker Change: Sure.

Speaker Change: So thanks, Danny so on on price our outlook for 2024 assumes basically 1% on price.

Speaker Change: So not a significant <unk>.

Speaker Change: Factor in in our 2020 for outlook.

Speaker Change: I think we'd be cautious about taking us more assertive position there just as you know as.

Speaker Change: As the market has been a little bit soft and we want to remain competitive and all that all those sorts of things, we're not losing price, which I think is really important because we did achieve a significant amount of price.

Speaker Change: Incremental leverage on the price line is probably going to have less of a factor on our results then.

Tony: I think we'd be cautious about taking a more assertive position there just as the market has been a little bit soft and we want to remain competitive and all those sorts of things. But we're not losing price, which I think is really important because we did achieve a significant amount of price. Incremental leverage on the price line is probably going to have less of a factor on our results than, you know, operating leverage as we see expansion in volume. I would agree with that.

Speaker Change: Then that operating leverage as we see them.

Speaker Change: As we see expansion in volumes.

Speaker Change: Yes.

Speaker Change: I would agree with that and I would just say that.

Not losing prices is a very important piece as well and as the market.

Speaker Change: No we're all watching what's happening out there in the world in terms of inflation.

And with supply chains that have normalized.

Speaker Change: Then you are going to be and as you know we're in a situation than that.

Speaker Change: There's a little more competition competitiveness out in the marketplace that we see for both businesses.

Speaker Change: And Danny you also asked about I think Danny right on security MPI.

Jay: And I would just say that not losing prices is a very important piece. And as the market, you know, we all know, we're all watching, you know, what's happening out there in the world in terms of inflation. And with supply chains that have normalized, then you are going to be in a situation then where there's a little more competition, competitiveness, out in the marketplace that we see for both businesses. And Danny, you also asked about, I think, Danny Wright on security for MPI and for MGI in general. Yeah, yeah, yeah. So maybe, Sorry, go ahead.

Speaker Change: And for our MDI in general.

Speaker Change: Yes, yes, yes.

Speaker Change: Maybe.

Speaker Change: Sorry go ahead.

Speaker Change: No I was going to say.

Speaker Change: I'll make a comment on MPI in general.

Speaker Change: I've said it before but it's worth saying again I mean, we have.

P. I assume is very important to us in terms of capturing additional market share looking at opportunities to expand and expand our total reach of the market in terms of share with new products. We mentioned you know, but at this time and before about content in a home and we also mentioned about being able to act a bunch of additional.

Jay: No, I was going to say, I'll make a comment on MPI in general, and I've said it before, but it's worth saying again. I mean, MPI is very important to us in terms of capturing additional market share and looking at opportunities to expand our total reach in the market in terms of share with new products. We mentioned this time and before about content in a home, and we also mentioned about being able to add a bunch of additional wins with our R&C building community. One of the reasons for that is the expansion of our footprint in each one of those new homes. And as we continue to do that, we will have more new products that will be able to expand our footprint there. So our focus on the velocity of new products in each one of the segments we serve is a big focus for us.

Speaker Change: Wins with our RNC builder community one of the reasons with that is the expansion of our footprint in each one of those new homes and as we as we continue to do that we will have more new products that we're able to expand our footprint. There. So are focusing on the velocity of new products in each.

Speaker Change: One of the segments. We serve is top of his big focus for us and.

Speaker Change: And that's why I have highlighted not just today, but through the past few quarters.

Speaker Change: The number of new products that we are bringing to market and there'll be more to share.

Speaker Change: Thanks.

Speaker Change: There are no further questions at this time I will turn the call back to Jason for closing remark.

Jason Willey: Thank you everyone for participating today, and we look forward to speaking with you over the coming weeks and months.

Jay: And that's why I have highlighted, not just today, but over the past few quarters, the number of new products that we are bringing to market. And there will be more to share. Thanks. There are no further questions at this time. I will turn the call back to Jason for his closing remarks. Thank you, everyone, for participating today. We look forward to the rest of your day. Take care. This concludes today's conference call. We thank you for joining us. You may now disconnect your line.

Jason Willey: The rest of your day.

Speaker Change: This concludes today's conference call. We thank you for joining you may now disconnect your lines.

Okay.

Speaker Change: [music].

Speaker Change: Yes.

Speaker Change: [music].